IPO vs. Direct Listing: What's the Difference?

When companies are ready to raise equity capital by selling shares to the public, they can choose to do so through an initial public offering (IPO) or a direct listing. The process for each is different, and one may be better than another, depending on the business’s goals and performance.¹

This article will outline direct listings vs. IPOs, including the benefits and disadvantages of each.

Understanding the difference between a direct public offering vs. an IPO can help you figure out which method of “going public” is best for specific situations. Both provide a method for a private company to begin selling shares to the public, but the process is different for each.

Regardless of which method a company chooses, as soon as it lists the stock, it’s subject to the same reporting and governance requirements as all other publicly traded companies.¹

Businesses usually issue an IPO in order to raise capital to pay off debts, expand, or let their existing shareholders cash in on their holdings. The IPO process is governed by strict security regulations and is overseen by an underwriter who helps with the registration and distribution of the initial shares to the public. The underwriter works with investment banks and brokers to determine an appropriate price to sell the shares directly to investors.²

Also called a direct public offering or direct placement, a direct listing allows people who already hold shares to sell them directly. In this model, companies don’t have to deal with (and pay) underwriters. It also lets them avoid creating new shares and diluting ownership. There are no intermediaries involved.¹

The main differences between an IPO and a direct listing include the underwriting process, pricing, and timing.

The New York Stock Exchange (NYSE) plays a vital role in facilitating both IPOs and direct listings. As one of the most prominent stock exchanges globally, the NYSE ensures compliance with the Securities and Exchange Commission (SEC) regulations and provides the infrastructure necessary for private companies to transition into public ownership.

For initial public offerings, the NYSE serves as the stage for the debut of a company’s shares, often after a carefully managed IPO process involving investment banks. These institutional investors generate interest during roadshows, helping establish a strong market presence from day one.

In a direct listing process, the NYSE offers a streamlined approach, enabling existing shareholders, including company insiders, to sell their equity without creating new shares. This approach allows companies to maintain control over the listing process and avoid the traditional costs associated with underwriters.

Whether a company seeks to raise capital through an IPO or provide liquidity for its current stakeholders through a direct listing, the NYSE remains a trusted platform for ensuring transparency, credibility, and efficiency.

With an IPO, companies hire an underwriter to manage the entire process. The underwriter helps navigate the complexities of the process by preparing the required documentation and setting the initial stock price. Underwriters typically charge 3.5% to 7% of the gross proceeds from the IPO.³

In a direct listing, there are no underwriters involved. An investment bank may provide advice, but it has a limited role. Shareholders sell their stock directly to the public.³

Underwriters set the price of IPO shares based on interest garnered during “roadshows”—a period during which underwriters present the company to potential investors. The price is negotiated and set before trading is opened to the public. This pre-negotiated price often results in an “IPO pop,” which is an increase in the price on the first day of trading.³

With direct listings, the price of each share is determined by the market on the day trading opens. This method can provide a more accurate initial valuation and is based on real-time supply and demand.³

With an IPO, existing shares are usually locked up for 180 days. This prevents insiders from selling their shares during this time. Stocks are typically sold to investment banks initially.

With a direct listing, shares can be sold immediately. There’s no lockup period, and existing shareholders have immediate liquidity.³

The biggest advantage of an IPO is that it offers a well-trodden path to raising equity. It comes with the potential for a higher valuation because experts shop the company around to gauge interest before setting the price. An IPO can also bring a company significant publicity. By working with underwriters, companies are guided through the process, which can be overwhelming otherwise.⁴

However, IPOs are more expensive since companies have to pay an underwriter. Another disadvantage can be the lockup period, which limits insiders’ ability to liquidate their shares. An IPO also dilutes ownership by breaking the company up into more shares.⁴

Direct listings are not as common as IPOs, but for the right company, they can be a good choice. They cost less than IPOs since you don’t have to pay an underwriter. The process is also much simpler because there’s no roadshow aspect. However, shares may be undervalued, and there’s no way to predict what they’ll sell for.³

Either an IPO or a direct listing can be a successful method for transitioning to public ownership. Some factors to consider include the following.

For companies that need to raise additional capital, an IPO will likely be a better option. Because direct listings allow only existing shareholders to sell their equity, there are no new shares to sell.⁵

IPOs are more expensive than direct listings. Underwriters charge a percentage of the gross sales, and there are additional expenses related to roadshows and publicity. Direct listings are much less expensive and have a simpler process.⁵

With an IPO, the company’s leadership surrenders a lot of control to the underwriter and their partners. Direct listings offer more hands-on control, and business leaders have more say in the timing and execution of the public listing.⁵

If existing shareholders are anxious to divest their stock, they may not want to go with an IPO. The lockup period means they can’t sell their shares for 180 days. Because there’s no lockup period with a direct listing, insiders can sell their equity immediately.⁵

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