Direct Listings vs. Traditional IPOs, Explained

In August 2021, digital analytics company Amplitude filed for a direct listing in the US. What's that really mean? If you're eyeing public offerings, you ought to know the difference between direct listings and traditional IPOs.

What is a direct listing?

Direct listings (or direct public offerings) are when companies offer existing shares to the public without any intermediaries. By offering current stock, direct listing companies can bypass the lock-up period found in traditional IPOs, increasing liquidity for existing shareholders in a more cost-effective way.

Comparing direct listings to traditional IPOs

There are some fundamental differences between direct listings and traditional IPOs. For one thing, companies executing direct listings focus on the sales of existing shares in the company (owned by investors and employees) directly to the public, without intermediaries.

In traditional IPOs, companies focus on selling brand new shares in the company to raise initial capital.

Direct listings are not focused on raising additional capital and don’t require underwriters the way IPOs do. Using underwriters and selling new shares in an IPO increases the time and expense to go to market.

Unlike IPOs, direct listings also don’t have the lock-up periods, meaning a company's existing shareholders can sell shares in the public market off the bat. This means the stock's value could deflate quickly if existing shareholders get out of dodge.

While direct listings are common in the American markets, other regulators in different markets (like Saudi Arabia’s Capital Market Authority) are still figuring out whether direct listings can work for Arabic markets.

Why companies choose to take the direct listing path

The goals for companies who choose to do direct listings vs. traditional IPOs differ significantly. IPO-raised capital is usually used for R&D or expansion. Businesses that opt for direct listings are looking for other benefits, like increased liquidity for existing shareholders.

However, it’s important to note that companies going the direct listing route need to fit a particular profile. The company itself has to be well known and exciting for the market to invest in— typically consumer-facing with solid brand identities, sound business models, and profitable ventures.

Red flags to be aware of in direct listings

Be aware of possible red flags raised by companies doing direct listings. For example, Palantir (NASDAQ:PLTR) recently did a direct listing that raised some eyebrows:

• Palantir c-suite execs have high compensation, accounting for a large chunk of losses.

• The percentage of founder ownership is high and will be for a long time. The class of stock the founders have gives them a lot of control over the company's future.

• Palantir has low customer concentration, meaning only three main customers make up a majority of revenue.

Famous examples of direct listings

Some notable examples of direct listings include:

• Roblox (NYSE:RBLX)

• Spotify (NYSE:SPOT)

• Coinbase (NASDAQ:COIN)

• Palantir (NYSE:PLTR)