Definition and Examples of Direct Listings
Direct listings allow private companies to list and sell their shares on a stock exchange to investors without having to conduct an IPO. On the day of the direct listing, shares of the company are available to be bought and sold on the stock exchange by any investor.
Originally, only shareholders of the private company could sell shares during a DPO and the company was not allowed to issue new shares. But in December 2020, the Securities and Exchange Commission (SEC), approved a proposal from the New York Stock Exchange (NYSE) for a primary direct listing, which includes newly issued shares in the DPO in addition to existing shares.
Although the mechanism for direct listings has existed for many years, strict eligibility requirements by exchanges such as the NYSE and NASDAQ made them a rare occurrence. A change of rules in 2018 opened the doors for large technology companies such as Spotify and Slack to tap the markets with direct listings. Spotify went public in April 2018, and Slack followed a year later in June 2019.
- Alternate term: Direct Public Offering (DPO)
How Do Direct Listings Work?
The direct listing process begins with hiring a financial advisor, typically an investment bank. The firm then undertakes a series of steps such as regulatory filings, price discovery and investor communication before its shares can make their debut on the stock exchange.
Let’s understand the process a little more by looking at the example of Spotify’s direct listing.
How Spotify’s Direct Listing Happened
According to law firm Latham & Watkins, Spotify approached the firm with the idea of a direct listing in May 2017. Around the same time, it hired Goldman Sachs, Morgan Stanley, and Allen & Co. as financial advisors for the DPO.
The financial advisors, according to the law firm, helped Spotify define objectives for the listing, advised on regulatory filings, and assisted in preparing presentations and other public communications.
The initial role of the financial advisor is to assist the company in valuing the shares that are not held by officers, directors, and affiliates. The value of these shares helps meet the listing requirements of the exchange the shares will eventually trade.
Spotify held DPO discussions with the SEC for a few months during 2017 and finally made its first public filing for a direct listing in February 2018. Its second public filing happened in March that year.
Typically for DPOs, next steps include the company meeting all the regulatory and exchange requirements, and hosting a call for investors to educate those investors about its business and the share offering.
Anyone can participate in an Investor Day held by a company before the direct listing.
Spotify held its Investor Day on March 15, 2018, and the SEC declared its registration statement effective on April 3, 2018.
Before the stock opens for trading on listing day, the financial advisor works with a market maker assigned by the exchange to set an initial reference price. Morgan Stanley played that role for Spotify.
Exchange market makers assign a reference price to the direct listing based on demand; that is, the buy and sell orders for the shares of the company.
A direct listing’s reference price is not binding, and the opening price of shares as they trade on the exchange can be different.
For example, for Spotify shares the reference price was set at $132 per share based on demand prior to markets opening for trade on the listing day of April 3, 2018. When the markets did open, the opening price for Spotify shares on the exchange was $165.90.
Direct Listing vs. IPO
While both IPOs and direct listings help a private company bring its shares to be traded on the stock market for the first time, the two routes have many stark differences.
|What kind of shares are offered?||Company issues new and existing shares during the IPO, which leads to shareholding dilution for existing shareholders. Number of shares on offer specified.||Until recently, only existing shareholders could sell shares in DPO. SEC December 2020 rule allows for newly created shares. No dilution if no new shares issued.|
|Who can buy shares?||Based on demand for IPO shares and broker’s criteria for allotment. Preference to institutional investors, retail investors may not get shares.||DPO shares are bought and sold on the stock exchange like any other shares. All investors get a chance to trade.|
|Role of Investment Bank||Acts as an intermediary between company and investors. Responsible for the distribution and pricing of newly issued shares.||Only acts as financial advisor.|
|Underwriting||IPO underwriters, typically investment banks, help sell shares. Commit to raising capital for the company by buying IPO shares.||No underwriting for direct listing. Shares trade on stock exchange.|
|Initial Share Price||Predetermined by investment banks and company.||Exchange market makers set a reference price based on investor demand.|
|Shareholder lock-up||Prevents existing company shareholders from selling shares for a certain period (typically 90-180 days) immediately after IPO.||Prevents existing company shareholders from selling shares for a certain period (typically 90-180 days) immediately after IPO.|
|Investor communication about offer||Investor roadshow by invitation, typically for institutional investors.||Online investor day open to everyone.|
What Direct Listings Mean for Individual Investors?
From the average investor’s perspective, direct listing offers more opportunity. Investment banks use a series of "roadshows" to promote and sell IPOs to institutional investors and clients.
Retail investors often lose out to these large investors and don’t get shares allocated in IPOs. In a direct listing, stock becomes available to all investors at the same time.
This means all you need to do to participate in buying shares in a direct listing is to place your buy orders through whichever channel you normally use to trade other stocks— a broker or an app.
Investor days held by companies prior to direct listing are open to everyone and allow retail investors to understand what the company has to offer, getting the exact same information offered to other investors.
- Direct listings are a way for private companies to go public without an IPO.
- Both direct listing and an IPO are routes for a company to bring shares to the stock market for the first time, but they have stark differences.
- Unlike in an IPO, shares in a direct listing trade immediately on the stock exchange.
- Before December 2020, only existing shareholders could sell shares in a DPO. Now newly issued shares can also be a part of the offering.
- Retail investors who often did not get IPO share allocation may have a better chance at investing in direct listing shares.
Latham & Watkins. “Latham & Watkins Advises Spotify on Groundbreaking Direct Listing." Accessed May 6, 2021.
Latham & Watkins. “Spotify Case Study: Structuring and Executing a Direct Listing.” Accessed, March 15, 2021.