Initial Public Offering (IPO) vs Direct Listing: What’s the Difference?

Selling stock shares is one of the primary ways in which companies raise capital. All companies have stock shares. It’s a form of equity that denotes ownership. To raise capital, companies can sell some of their stock shares to investors. There are different ways to execute these stock transactions, however. Some companies perform an initial public offering (IPO), whereas others perform a direct listing. What’s the difference between an IPO and a direct listing exactly?

Initial Public Offering (IPO) vs Direct Listing: What’s the Difference?

What Is an IPO?

An IPO is an equity financing strategy in which a company creates and sells new stock shares on a stock exchange. Also known as “going public,” it allows companies to raise capital. Companies in need of capital may partner with a financial institution, known as an underwriter, to perform an IPO. The underwriter will work closely with the company to determine an appropriate share price while also ensuring all regulatory requirements are met.

What Is a Direct Listing?

A direct listing is similar to an IPO but with a few caveats. Also known as a direct public offering (DPO), it involves individuals within a company selling their stock shares to the public. Executives, employees and existing investors may own stock shares of their respective company. Even if the company isn’t public, these individuals can sell their stock shares by performing a direct listing. It’s similar to an IPO, with both methods involving the sale of stock shares to the public. Nonetheless, IPOs and direct listings aren’t the same.

Differences Between IPOs and Direct Listings

IPOs are typically more common than direct listings. Statistics show that 159 companies performed an IPO in 2019. There are typically fewer direct listings performed each year.

One of the biggest differences between IPOs and direct listings is that the former creates new stock shares, whereas the latter does not. When a company performs an IPO, it will create new stock shares to sell on a public stock exchange. In comparison, direct listings simply involve selling some of a company’s existing stock shares, which are owned by individuals within the company.

Because it essentially creates new shares out of thin air, an IPO can dilute the value of a company’s existing stock. Direct listings don’t have this effect. With a direct listing, a company will sell its existing stock shares without creating new ones.

Direct listings also eliminate the need for an underwriter. Only IPOs require an underwriter, making direct listings a faster and more convenient form of equity financing for many companies.

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