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Direct listings: The IPOs of the new decade or a passing phase?

With Airbnb and other unicorns potentially following the example of Slack and Spotify, are direct listings set to take off?

Disruptive technology startups, such as Spotify, Slack and Airbnb, have made it their mission to break with tradition. It is only fitting that some of these businesses are rejecting the conventional firm-underwritten initial public offering (IPO) model in favor of the direct listing approach.

The trend began when music streaming service Spotify conducted its direct listing on the New York Stock Exchange (NYSE) in April 2018 and continued with the direct listing of the messaging service Slack in June 2019. Travel and hosting business Airbnb and food delivery service DoorDash are rumored to be planning to take the same route in 2020.

In the current direct listing model, a company does not raise capital in a public offering. Instead, it lists on a stock exchange shares held by its existing shareholders to permit such holders to sell their shares directly to the public via the exchange.

This contrasts with a traditional IPO where investment banks act as intermediaries between the company and shareholders selling in the IPO on one hand and investors on the other. In a direct listing, all investors are free to buy from the selling shareholders, and the stock price is determined by supply and demand. This is different from a traditional IPO, a carefully choreographed exercise in which a company works with one or more investment banks to underwrite the share issuance, setting the price in advance of the listing, and selling the shares principally to institutional investors through the banks’ distribution networks. In both a direct listing and an IPO, the company must file a registration statement with the Securities and Exchange Commission (SEC) that includes detailed information about the company and its financial results, and go through the SEC review process.

 

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