IPO vs Direct Listing
Yesterday, premium members of Finimize community attended a session about IPOs (Initial Public Offerings) and Direct Listings. The session offered great insights, I will discuss some of them here. The company presented as an example was Wise, the payment transfer company, which will be listed on the London Stock Exchange in early July 2021. It is probably worth doing some research about it ;)
Both IPO and direct listings are methods for a company to raise capital by going public and listing shares on a public exchange. Let’s discuss next some of the differences between the two.
With an IPO, new shares are created, underwritten, and sold to the public. However, when it comes to direct listings, no new shares are created, only already existing shares are sold, with no underwriters (intermediaries, such as investment banks, that facilitate the IPO process and charge a commission for their work) involved. Direct Listings are also called Direct Placements / Direct Public Offerings, because the company sells directly to the public, without the help of any intermediaries.
Another major difference between IPOs and public listings is that with public listings, the price of the stock will not be known until the day when the company gets listed. However, with IPOs, the price is disclosed before the listing. When it comes to IPOs, their process follows the following workflow: first, the company chooses its underwriters, then, together with the underwriters, the company meets big investors and tries to convince them to buy some of their shares. After that, the prospectus of the company gets released (all the financial and business information about the company), such that analysts can determine how much the company is worth. Next, the offer period starts, when investors (usually large institutional investors) request shares. Based on that information, the underwriters then set the actual price at the level at which all shares will be sold immediately. The large investors who expressed an interest during the offer period to acquire shares will get them, and on the listing day when markets open trading can begin. That is the moment when retail investors (regular people) will finally have access.
Tip: once a company goes public, it must be by law more transparent than a private company because it becomes subject to public reporting requirements. Those requirements include sharing with the public earnings, reports, various results, etc. All this information can be accessed online by searching <the name of the company> investor relations.