Back in 2019, an anticipated tech company called Slack decided to debut their shares to the public through a direct listing onto the New York Stock Exchange. Slack is the second major tech company behind Spotify to do a direct public offering (DPO). Currently, Slack has 10 million active users with a considerable amount of paying subscribers and has a value of $7.1 billion as of August 2019.
Usually, when a company goes public, they typically complete an IPO where one or more investment banks serve to underwrite the issuing stock. When the company goes public with an IPO, it can make it hard for all investors to gain access to the IPO due to the underwriters distributing shares among select brokerages who then impose restrictions in participating with the IPO.
Despite the fact that DPO’s are rarely utilized when a company is trying to go public, there are still several benefits for both large companies and small companies to employ this process. Although, most companies don’t prefer to use the direct listing, or DPO process, there are preeminent examples of companies going public through direct listings, including Spotify, Ben & Jerry’s, and Annie’s Homegrown. Nevertheless, because it is a scarce process, there are several important considerations.
Benefits of a Direct Listing (DPO)
Companies have more control over the entire process when using a DPO, and underwriting is not necessary. A DPO is not subject to market conditions and is directly handled by the company. There is no need for a company to use brokerage services and purchase or use expensive outlets. Newspapers, magazines, social media platforms, and public meetings are all alternatives that can be used during this process. Affordable options are called up and some risks bypassed.
Investors can have an opportunity to get in on exciting investment opportunities and can participate in high-risk/reward venture-stage funding. DPOs may serve as a formal listing event (using a resale registration statement) before a company raises money through traditional underwriters in later secondary offerings. For example, Ben & Jerry’s followed its DPO with successful underwritten public offerings which resulted in high returns for early investors.
Individuals get a chance to invest in companies with whom they have shared values, or whose products they like and appreciate. As an investor, you are supporting the success of your investment. With that, shares can be sold immediately upon registration effectiveness 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.
The process of a DPO is more cost-efficient than an IPO, as there isn’t a need to pay investment bankers commission to help sell the IPO.
There are innovative tools to help with the sale of DPO offerings, allowing companies to raise money through an on-going raise under Regulation A+ up to $75 million through a “do it yourself” crowdfunding campaign. Through the Cloudraise® Platform by Equity Track, it is easier than ever to allow issuers to manage their equity crowdfunding campaign on their own website. This allows issuers to raise money from their investors directly and gain access to capital by doing a direct public offering.
Concerns of a Direct Public Offering
Because of the lack of use by companies, there is not a lot of evidence or experience that shows that this process is the most effective in taking a company public. The lack of knowledge of this process presents challenges such as not knowing what a company’s shares will be worth and how it could create issues in shares being over or undersold. However, with an IPO, underwriters are able to protect the stock price and shares.
Since a direct listing onto NASDAQ or NYSE skips the underwriting process, it means issuers have more risk if the offering does not go well. In order to balance this risk, issuers would have to obtain a higher share price. Stocks sold through a DPO go to a limited number of investors who tend to have a long-term orientation, which oftentimes has less pressure on the company’s management to deliver short-term results. Wall Street underwriters will not conduct any due diligence on the company, and the company issuing shares may set an arbitrary price.
Slack, the cloud-based tool that helps communication and collaboration amongst groups predominantly in the workplace decided to go public through a DPO because they didn’t need to raise funds, as the company has been financing its growth from its current operations. This path allows Slack to allow its investors and insiders to cash out while not actually raising any money for the company. Like Slack and Spotify, Airbnb is considering directly listing their stock on an exchange. Large tech companies using direct listing are still in the experimental stage, but if DPO’s continue to be successful then we will see tremendous growth in using this method.