Draft:Direct Listing

A direct listing is a method for a private company to go public by listing its shares without conducting an underwritten initial public offering. In the United Kingdom, this method of listing was called an "introduction" for many years before changing the name to "direct listing". The first direct listing in the United States occurred in April 2018 when music streaming company Spotify Technology conducted a direct listing. Other prominent companies that have conducted a direct listing include Slack, Asana, Palantir Technologies, Roblox, Coinbase Global, SquareSpace, ZipRecruiter, Amplitude, and Warby Parker. The average trading volume for these 10 direct listings on the first day of trading was 77 million shares, according to data from https://bigcharts.marketwatch.com/historical/

In most iniital public offerings (IPOs), the company sells stock to the general public and raises cash in the process, with existing shareholders also frequently selling some of their shares. To date, the direct listings in the U.S. have not raised capital for the issuing company, although as with traditional IPOs, public trading has followed. Instead, all of the shares sold in the opening trade have come from existing shareholders. Most of the prominent companies that have used a direct listing have been concerned that with a traditional IPO, the offer price of the stock would be below the price that trading would open at, thus "leaving money on the table." In December 2022, the U.S. Securities and Exchange Commission relaxed its rules to make it easier for a company to raise capital at the same time when it does a direct listing. As of May 2024, however, of the 16 issuers that have used a direct listing in the U.S., none have rasied capital at the time of the direct listing.

A prominent proponent of direct listings has been Bill Gurley, a general partner at venture capital firm Benchmark Capital.

With a direct listing, the issuer typically hires one or more investment banking firms as financial advisors. For Spotify, for example,Morgan Stanley was the primary financial advisor. As with a traditional IPO, the financial advisor assists with the regulatory paperwork, preparing a registration document that must be approved by the U.S. S.E.C., and generally provides analyst coverage after the stock has started to trade. Similar to a "road show", the company typically conducts a marketing campaign, making presentations to potential institutional investors. Unlike with an underwritten IPO, where the main underwriter, known as a bookrunner, would collect indications of interest to assist in setting an offering price and allocating shares, no shares are allocated and no offer price is set. Instead, on the day that trading starts, existing shareholders who have registered their shares can offer them for sale, and potential buyers can submit orders to buy. A designated market maker than determines the price at which supply equals demand and an opening trade occurs.

With a traditional IPO, there is an offer price that investors can observe. With most direct listings, a "reference price" is chosen to guide investors regarding what price the stock might start trading at. The reference price is typically chosen by the listing exchange based on prior private-market transactions. Sometimes, however, there have been no recent transactions, in which case a reference price is chosen ex post based upon the opening market price. With most direct listings, the reference price has been below the opening trade price.

In 2023, there were several direct listings of very small companies, one of which had extreme price fluctuations on low volume. reAlpha Tech (ticker symbol AIRE) opened at $23.01 and closed at $406.67 on the first day of trading, October 23, 2023, with 32,339 shares traded. As of December 15, 2023, the price had fallen to $2.48 per share.

Some of the legal issues associated with direct listings are discussed in a University of Chicago Law Review article.