Spotify recently drew attention from a controversial decision to go public without an initial public offering (IPO) in April. Spotify said they wanted to go public this way, through a direct listing or direct public offering (DPO), because the company could provide equal access to both buyers and sellers, while making the entire process more transparent.
When a company goes public they typically complete an IPO, where investors are offered shares from the company as part of the IPO. In the instance of a direct listing, a resale registration statement is filed to the SEC, allowing existing investors to sell shares to new investors in the open market without underwriters setting an initial price.
This rarely utilized process is referred to as a direct listing and offers several benefits for both large companies, like Spotify, but also for smaller companies as well. Although it is rarely utilized, there are several notable examples of companies going public through direct listings, including Ben & Jerry’s and Annie’s Homegrown. However, because it is a seldom used process, there are also several important considerations.
Benefits of a Direct Public Offering
Going public through a direct public offering is much faster than an IPO. Companies listing on OTC Markets don’t have to wait for the offering to be closed to start the listing process with a market maker (through 15c211) after the registration statement is effective, speeding up the time to trading greatly. For companies listing on NASDAQ and NYSE, the process is even quicker — companies can begin trading upon effectiveness of the S-1 and 8-A filings.
Insiders can also sell their shares immediately, as there is no usual waiting period. Direct listings also present less of a risk of a run-up in price on the first day, so the likelihood that the stock will fall in value later is lessened.
The process is more cost efficient as well, as you do not have to pay for someone to help you complete your IPO and related filings.
Considerations of a Direct Public Offering
Because this is a rarely used process, there is not a substantial amount of experience regarding the process. However, some important considerations are that short-sellers could try to exploit direct listings, because they know the company is uncertain about the price of their stock. With an IPO the underwriter typically helps to protect the stock.
The lack of knowledge presents additional challenges, as it is unclear what a company’s shares will be worth and could create issues in shares being under or over-sold.
Spotify going public without an IPO raises lots of questions about if other companies will follow suit. It is currently unclear if this is more beneficial to investors and companies alike.