![]() ![]() In the Spotify and Slack direct listings, no fixed number of shares were sold to the public and no allocations were available at a set public offering price rather, prospective purchasers of shares could place orders with their broker of choice, at whatever price and size they believed was appropriate and that order would be part of the opening trade price-setting process on the stock exchange. Institutional buyers tend to feature prominently in the initial allocation. The traditional IPO process includes a limited set of participants: a company and possibly certain existing stockholders who are offering to sell their shares in the IPO, an underwriting syndicate of investment banks that builds an order book of indications of interest from potential investors, and the investors who receive the initial allocation of shares being offered in the IPO at the price to the public appearing on the front page of the prospectus. Provides unfettered access to buyers and sellers of shares, allowing existing stockholders the ability to sell their shares immediately after listing at market prices. ![]() In a direct listing, a company is able to provide liquidity to existing stockholders without lockup agreements, and, as a result, the stockholders are free to sell their shares immediately. These agreements are meant to help manage post-offering supply and reduce volatility, but come with the downside of preventing sales by the pre-IPO stockholders, the group that has born the risks of ownership the longest. As part of a traditional IPO process, lockup agreements typically restrict additional sales of shares outside of the IPO by certain existing stockholders and the issuer for 180 days post-listing. Offers greater liquidity for its existing stockholders. ![]() In theory, due to the increased size of the market and the fact that bids can be more exactly calibrated for size and price, the resulting stock price set by this public market should be a truer market-driven price than one set through the book-build process. By contrast, in a direct listing, the price per share in the opening trade on the first day of trading is determined based on buy and sell orders submitted from a much broader pool of potential investors and sellers through the facilities of a stock exchange. Based on this order book, discussions with investors, and the company, a price is set for sale to investors in the IPO. In a traditional IPO process, during the “road show,” the underwriters build an order book by collecting indications of interest from potential investors. Importantly, unlike a traditional IPO, due to regulatory limitations, the direct listing process has not been used by companies to concurrently raise capital however, as discussed below, companies in need of capital have alternative means of receiving debt or equity investments before or after listing, subject to certain limitations.Įnables market-driven price discovery. Why a Direct Listing?Ī direct listing can allow companies to achieve several important objectives as part of becoming a public company. This article explores certain characteristics and roles involved in this approach to becoming a public company, and incorporates insights from the Spotify and Slack direct listings, which Latham & Watkins worked on and were completed in April of 2018 and June of 2019, respectively. This means that certain features that are typical of a traditional initial public offering-such as lockup agreements and price stabilization activities-are not present in a direct listing. Since there is no underwritten offering, a direct listing does not require the participation of investment banks acting as underwriters. Existing security holders become free to sell shares on the stock exchange at market-based prices. In a direct listing, a company’s outstanding shares are listed on a stock exchange without a primary or secondary underwritten offering.
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