Direct Listing vs. IPO: What's the Difference?

When a company goes public, it allows investors to buy shares, or pieces of ownership, in the business. Companies have multiple options for going public. They can enter the stock exchange through a direct listing or work with underwriters to have an initial public offering (IPO). Alternatively, they can go through private placements or use a special purpose acquisition company (SPAC).

IPOs and direct listings are similar, and investors need to know how a company entered the stock market before deciding to invest in it. Learning about the stock market from reliable sources can help people make smart moves with their money. This guide will dive into the differences between IPOs and direct listings, including the pros and cons of each.

What Is a Direct Listing?

A direct listing occurs when a company lists its existing shares on the stock market. Any current shareholders can sell their shares if they so desire. While companies might work with investment advisors to complete the required listing paperwork for the Securities and Exchange Commission (SEC), they don’t need to work with underwriters to review their finances first.

The use of direct listings was limited for years under SEC guidelines. The most common way for companies to use direct listings was to have an already established trading market. When SEC rules changed in 2018, more companies started going public through this option.

Key Characteristics

There are a few key characteristics that differentiate direct listings from IPOs. Here are a few signs that a company is using a direct listing:

• There aren’t any underwriters involved.
• The company’s stock is sold directly on the public exchange.
• There might not be enough shares to meet demand.
• Stock prices might be more volatile.
• Companies do not need to raise capital beforehand because existing investors are selling their shares.

Direct listings are cheaper than IPOs because companies don’t have to go through beleaguered underwriting and marketing processes. These listings can also be faster.

Examples

You don’t have to be a seasoned investor to recognize some of the companies that have used direct listings. Here are a few brands that went public through this method:

• Spotify was one of the first companies to use this option after the SEC rules changed in 2018, causing the music streaming service to make history.
• Slack went public through a direct listing but faced criticism in the courts for submitting incorrect or misleading documents.
• Warby Parker used the direct listing option in 2021, with stocks of the eyewear startup soaring from $40 to $54.05 by the end of the day.

Each of these companies felt it was more advantageous to choose a direct listing option instead of a traditional IPO to enter the public market.

Pros

There are multiple benefits to choosing to go public through a direct listing instead of an IPO. Here are a few:

• Direct listings are much more affordable than IPOs.
• This process is considered easier because there aren’t underwriters involved.
• Existing shareholders can sell their ownership of the company on the public market.
• Due to the limited number of shares, demand could soar as investors try to buy them before anyone else.

While some companies like Slack have experienced issues with their direct listings, many others have been successful.

Cons

Despite the benefits, this option comes with drawbacks. Here are a few reasons companies should reconsider direct listings:

• There’s no guarantee of shares. If no one wants to sell their stock, there won’t be any shares to buy.
• Stock prices are often more volatile because they aren’t backed by underwriter analysis.
• SEC rules were written for IPOs but adjusted for direct listings. This could create legal challenges in the future because there aren’t direct listing-specific guidelines.

If companies take steps to mitigate risk, they should be able to have a successful direct listing.

What Is an IPO?

An IPO is one of the most common ways for a company to go public. An IPO differs from a direct listing because companies work with underwriters to understand the value of their shares, drum up excitement before entering the market, and then go live with new and existing shares for investors to purchase. None of these characteristics are found in direct listings.

Key Characteristics

There are a few key characteristics that define IPOs and make them identifiable against direct listings. Here’s what to look for:

• Companies going through IPOs work with underwriters to complete the valuation process. This provides educated estimates of what the shares are worth.
• Companies have roadshows where they promote their IPOs and drum up interest with investors.
• Companies provide ample shares to investors. However, popular IPOs can still sell out of shares.

The underwriting process involves taking a deep dive into the company’s finances and operations. This information becomes public and the company needs to continue reporting to shareholders after the IPO.

Examples

Because IPOs are more common than direct listings, it is easier to find examples of public offerings. Here are a few recent IPOs:

• Reddit went public in March 2024 with a lucrative debut for a social media platform.
• Viking went public in May 2024 following an increased demand for cruises in recent years.
• Cava went public in June 2023, introducing many customers to this Mediterranean restaurant chain.

Companies across all industries can go public on the stock exchange after completing the IPO underwriting process.

Pros

There are several reasons to consider IPOs instead of direct listings. Here are a few benefits of this option:

• The general public is more familiar with IPOs and might trust this listing option more.
• There is greater awareness. IPOs market themselves through roadshows to attract investors.
• The stock prices might be more stable because they are backed by underwriter research.
• There are often enough shares to meet the interest of investors.

Companies that want a safer route to go public may benefit from choosing an IPO. This option offers more stability.

Cons

While there are benefits to this option, there are also drawbacks to choosing IPOs compared to direct listings. Here are a few limits:

• IPOs cost more than direct listings.
• An IPO can take longer between the underwriting and roadshow processes.
• Companies going through IPOs need to be transparent with underwriters, potentially making operational secrets public.

Despite the stability that comes with IPOs, some companies might want to move forward with direct listings, especially as they become more common.

What Is a Registered Direct Offering?

A registered offering refers to a sale of shares that meets Securities Act requirements. A registered direct offering occurs when securities are marketed or sold to a handful of specific investors. For example, cybersecurity company SuperCom had a registered direct offering of $2.9 million from a single investor in April 2024. A registered direct offering differs from a standard direct listing because it is more targeted and limited in who can buy the shares.

Though the public can buy shares from companies that complete both direct listings and IPOs, knowing the differences between the two can help you understand the volatility of the investment. It can help with your risk management as you develop a diverse portfolio.