IPO vs Direct Listing – An interview with Marcus New, CEO, InvestX

What are the key differences between the two?

In a traditional IPO, a company is raising capital at the IPO, with new shares being issued by the company and sold by the underwriters, who facilitate and create a share price to price the sale.  They are responsible for finding the investors (their clients) and charge a commission for their work. In a direct listing, the company is not raising capital at the IPO, but rather listing all the shares of the company giving existing investors the opportunity to sell shares to willing buyers, as such no new shares are created.  Direct listing is a less-expensive option than an IPO, as it eliminates the intermediaries.

What are the risks of a direct listing?

During a traditional IPO there is an investment bank who is selling the shares.  Those shares are the only ones typically available to be sold, so there is usually little supply (selling) pressure, which creates price support.  During a direct listing, all shareholders are able to sell, so there is typically a lot of sellers looking for liquidity, when an investment bank issues new shares to institutions, there is usually more institutional share support which helps to stabilize the initial supply imbalance. With the highly anticipated Coinbase listing, the benefits of an investment banking firm that facilitates an IPO is expected to be unnecessary, due to the overwhelming market demand.

Why does a company undertake a direct listing instead of an IPO?

Having a large retail following and overwhelming market demand, as Coinbase does, existing shareholders are theoretically able to liquidate their company shares at a full value based on market supply-demand vs. the underwriting price, which investment bankers set at lower prices to create profits for their clients. A direct listing allows the early investors to potentially make the maximum profits.

What benefits does a direct listing have?

A direct listing saves the company a lot of money, as it eliminates underwriting commissions and share dilution. It is a fairer process for the pre-IPO shareholders by allowing them to keep most of the profit made in the IPO process. Direct listing can only be done by issuers with a large market demand.