Direct Listing vs. IPO: Know the Difference

Dozens of companies have gone public since the beginning of 2021. 

But not all of them go public in the same way. Some start selling shares to the public through a traditional initial public offering (IPO). Others will go public through a direct listing. The gaming company Roblox is a recent example of a direct listing. The workplace collaboration software company Slack used one in June 2019 when it decided it wanted to list its shares. The music streaming service Spotify also used a direct listing to go public in 2018.¹

As an investor, you may want to find out about newly public companies. It’s important to do your research on companies before you buy their stock. You can find out about how to research stocks here. Remember, you can always lose money in the stock market. 

Read on to find out more about IPOs and direct listings.

IPO

Companies begin trading on a public stock exchange through a process called an initial public offering (IPO). 

A company might go public for many reasons, including to raise money, expand the company, to build new locations, or hire more people. Going public can allow the company to raise a lot of money quickly. 

When a company decides to go public, it’ll work with an investment bank such as Goldman Sachs or J.P. Morgan in a process called underwriting. The bank will make sure all of the proper documents are prepared and find people who want to invest in the company through initial shares or IPO shares. Before the company goes public, it must file with the Securities and Exchange Commission (SEC), which is a federal agency in charge of regulating the company and keeping the company informed on those regulations and rules. Once the company goes public with SEC approval, it has to issue quarterly financial statements on the health of the company so that investors can stay informed. 

Following an IPO, stock exchanges such as the New York Stock Exchange (NYSE) or the Nasdaq will list the stock so that investors can purchase shares of the newly listed stock.

Direct Listing

A direct listing—sometimes called a direct offering—is a way for a company to sell its shares to the public without involving any middle men, or intermediaries.

It’s different from an initial public offering (IPO), where the company relies on an investment bank to take it public. Such a bank is called an “underwriter,” because it assumes much of the risk associated with the IPO.

With a direct listing, company executives, early investors, and employees who own equity, or shares, are given the option to convert them into a public stock and then sell it to the public through a stock exchange such as the New York Stock Exchange or the Nasdaq. (These stakeholders are not obligated to sell their shares, however.)

With a direct listing, the stock exchange sets the starting trading price. It’s called an “initial reference price,” and it’s based on new investor demand for the shares. In contrast, the underwriters set what’s known as an “opening price” in a traditional IPO, through a process called a roadshow.

Stash’s IPO calendar

You can find out about companies that had traditional public offerings and direct listings in Stash’s March IPO calendar.