What is a Direct Listing?

The ultimate goal for a startup is to go public through an initial public offering, IPO. In recent years, there has been a trend of going public through a direct listing, direct public offering.

What is a Direct Listing?

A direct listing is going public with existing shares. When a company goes public through a traditional IPO, they work with investment banks, called underwriters. The investment banks issue new shares of the company for distribution to their shareholders.

For a direct listing, companies work with banks, but they get an advisory fee. Instead of new shares. The goal of a direct listing is for the current shareholders to sell their shares to the public. Allowing banks to create new shares defeats the purpose of a direct listing.

The types of listings on the market using direct listings are ETFs and REITs.

Benefits of a Direct Listing

No Lock-Up Period

In an IPO, existing shareholders need to wait 180 days before selling their shares. Since the only shares in a direct listing are the existing shares, there is no lock-up period. Shareholders are free to sell from the first day.

No Stock Dilution

For this exercise, Revenue Research is a public company, and there are 10 million shares. Brendan, David, Ross, Josh, and I each have 2 million shares at a value of $1 (hopefully in the future😂). Everyone owns 20% of the company. But now, I want to bring Warren Buffett to help us take Revenue Research to the next level. Instead of reading about Christmas tree farms then writing about them. He wants to buy us a Christmas tree farm to write about our experience running it.

A secondary offering adds more shares for Warren Buffett. We create 2 million shares for him to buy at $1. (If anyone at Berkshire Hathaway is open to this deal, please email me).

Everyone owns 16% of the company, but the company is worth $12 million. The new shares diluted the ownership of current investors. This happens in an IPO, new shares get issued, and ownership equity gets lost.

In a direct listing, because there are no new shares, then ownership equity is not lost.

A Direct Listing is Cheaper than an IPO

The cost of an IPO is dependent on the number of new shares. A company has to pay underwriters a percentage for every new share issued. The company might pay 1% on the initial sale of every share issued. Imagine if there are 10 million shares issued, and they get sold for $100. The IPO costs the company $10 million.

The banks act as advisors in a direct listing. They do not get paid on a percentage basis. Which makes a direct listing cheaper than an IPO.

Direct Listing Process

Step 1: Paperwork

A company needs to file paperwork. They need to submit their marketing strategy. The marketing strategy is the method the company will use to convince people to buy shares.

The other paperwork a company needs for a direct listing is an offering memorandum. An offering memorandum is a document which states a company’s finances, risks, and details.

Step 2: Compliance

A company needs to be compliant with the Blue Sky Laws before going public. Blue Sky Laws are anti-fraud laws that differ from state to state.

Then, a company needs to provide more paperwork. They need to give the SEC the articles of incorporation, 10K, 8K, and a statement of ownership equity.

Step 3: Exemptions

There are requirements that a company needs to comply with if they want to IPO. The companies doing direct listings are exempt from some requirements. But they need the exemptions in formal writing.

Traditional Initial Public Offering Process

Since this blog post is about direct listings and not IPOs, I will only give an overview of the IPO process.

Step 1: Underwriters

A company looking to go public will visit different banks to choose its underwriters.

Step 2: Decide IPO Price

The underwriters will decide the “proper” price for the IPO.

Step 3: S-1

The document allows potential investors to do due diligence on a company going public.

Step 4: Meet Requirements

A public company has different requirements than a private one. After the S-1, a company needs to take action to meet the requirements.

Step 5: IPO Date

The shares get issued. RING THAT BELL!!!🔔

Step 6: Post-IPO Activities

After the IPO, companies need to make payments.

My Opinion

I am surprised direct listings are not more common. A direct listing is cheaper, involves fewer parties, and has less paperwork. I understand that companies want to raise money in a traditional IPO, but there are other options.

Going public in the traditional sense might become irrelevant for Gen-Z or millennials. Why would I go public when I can launch a social token that has the same function? But without the trouble and paperwork of going public. Someone might say, “ Alex, what if someone wants Warren Buffett to invest in their company?” I say they do not need Warren Buffett. Even then, if he wants to invest in a product, he will pay someone to do it.

Some people might take their company public for the picture of ringing the bell for Twitter. At the same time, these companies have taken money from private investors. The investors need to get their money back AND more!!

But the internet makes everything small. An alternative for going public is raising from a company's true fans. The true fans want the company to succeed without getting a 100x return.

Going public is large-scale crowdfunding.😂


Each method has its advantages and disadvantages. A $10 billion company has different needs from a $1 billion company. The end result is the same, becoming available on a stock exchange.