Getting your business or company listed is not a difficult task to do these days. The real challenge is to choose the method that would be more effective for getting your company listed. You can go with the IPOs (Initial Public Offerings) if your company is well established. On the other hand, a company can opt for direct listing by selling its shares directly to the public. So, which method is the right one for you? In this article, we are going to give you an intro to direct listings vs. IPOs and explain which process is better.

Direct Listings VS IPOs: What is the Difference?

A company's choice to go with either direct listing or IPOs may vary depending on their financial goals. With the traditional IPOs, stakeholders are bound to complete a 180-day lock-up period before they can sell the shares to the public.

On the other hand, direct listing lets the stakeholders sell the shares right away without any restrictions or time limits. The stakeholders can sell the shares of the company even on the first day of trading using the direct listing method.

Another major difference between IPOs and direct listings is the supply and demand structure. With the IPO method, companies have to set a fixed pricing range for their shares. In contrast to IPOs, the direct listing method brings a more flexible approach to the table where the market sets the price.

What is an IPO?

IPO is one of the most applicable methods for businesses to raise capital with the help of the broader investing public. The shares of the company are listed for the public so that the investors can purchase them. A leading investment bank makes the IPOs it's underwritten.

The investment bank hires multiple broker-dealers and further investment banks to sell and distribute stocks in the market. The purpose of an underwriter is to analyze the valuation of the company to discover the appropriate price value and share price of the company.

The pricing range is defined before selling the shares to outside investors. This process leads a private company to become public so anyone from the public can purchase the shares on the exchange where they're traded.

Key features of an IPO

• The typical intent of selling the company's stocks is to raise money for the company.
• Savvy banks and brokers underwrite the IPOs instead of listing by the company.
• Underwriters charge a huge fee for just leading an IPO and selling shares.
• Methods like greenshoe are typically used by the underwriters to help prop up the stock price in the days after the IPO.
• Underwriters of your company set the initial IPO prices.
• Best clients or large institutional investors often get preferential access to buying stock as part of the IPO.
• A first-day pop is experienced by the oversubscribed IPOs, which raises the expectations for future growth. It is beneficial for the investor who is ready to buy pre-IPO shares.
• The underwriters verify the company's financial situation and provide some assurance to investors that this research is done before selling the shares to the public.
• All the company's legal and financial data is available to investors on Form S-1 before and after the actual stock offering.
• IPO dilutes the ownership shares of the existing investors in the company when new shares are sold in public.

Introduction to Direct Listings

A direct listing is also known as direct placement, in which a private company lists their shares on the exchange without involving any intermediary. The shares are sold directly to the public; however, the company can decide to sell the stocks to raise capital.

Direct listing has become really popular for high-profile companies. Unlike in IPOs, a company has to file a prospectus with financial and legal details of the company to list it directly. Direct listings are much more cost-effective, and they allow companies to go public without even diluting private investor's shares.

Unlike the IPO process, insiders are allowed to sell their stocks instantly on the exchange without the lock-up of shares. In most cases, the direct listing of stocks comes from the insiders for the available stocks. The success of the direct listing process can be ensured if listing is prevented by insiders.

Key Features of Direct Listing

• In direct listings, the company stocks are directly sold to the public through the exchange.
• The process of direct listings bypasses the traditional hurdles of the financial markets, such as investment banks and underwriters.
• There might be a possibility of the unavailability of enough stocks right after they debut to meet the demand, which means that the stocks are volatile.
• Most of the companies or insider do not raise capital in direct listing while selling their share to the public.
• Companies that are not interested in raising capital through an IPO find direct listing ideal.
• Unlike the IPO process, using the direct listing process is very cost-effective.
• It is more cost-effective than the traditional IPOs because it does not involve intermediaries, investment banks, and underwriters.

IPOs vs Direct Listing: Which Process Works Better?

If you look at it from an investor perspective, then you will realize that there is not much difference between direct listings and IPOs. No matter which method you prefer, an investor only wants to buy or sell shares on the stock exchange. This is the only thing investors are interested in, not the method.

If a company cannot afford underwritings, dilute the shares, or want to avoid lock-up periods, then they will go for direct listing, which is cheaper than IPOs. However, it does not ensure the selling of all shares.

Conclusion

It's vital for investors to know the difference between IPOs and direct listing to opt for a method that is in the best interest of their company. Before choosing between IPOs and direct listing, a company must analyze its financial situation. We hope this article has provided you with a brief comparison between IPOs vs direct listings.