Is Direct Listing the Smart Way to go Public for Silicon Valley?

Practice Areas

By: Pooja Keshan

Should you be considering Direct Listing?

If you are making headway to the markets anytime soon and fall under either of the following, the answer is probably “Yes.”

Venture capital backed startups no longer in the nascent stage and ready with the minimum viable product

Generally, at this stage the venture capitalists and early investors are looking to liquidate their stake to potential buyers and make outsized gains in the most efficient manner.

Cash-rich startup

Ideally, the company might just be looking to attach the liquidity attractiveness to their stocks which comes while trading on primary markets, but not at the cost of diluting the existing shareholder’s holding.

Why Direct Listing as Opposed to Traditional IPOs?

The Big “O”: no Offerings by the company

The only shares that are being traded to the public are by existing employees/investors. Since no additional shares are being issued for cash, the holding proportion of the owners is intact, which is a win-win.

Basic economics principle restored

Unlike the Investment Bankers coming in to price the stock, the market forces – supply and demand – determine the stock’s worth. Investors are given a reference price based on what the stock was valued in private markets prior to being listed.

Cost-effective

The Direct Listing method limits the role of Investment Bankers to mere advisors. Not only do the companies save huge amounts on the hefty commissions they need to shell out, but they also are able to enjoy a greater portion of the profit pie.

No lock-in periods

Anyone who holds the shares can sell them almost immediately.

Smart alternative

Direct Listing is being hailed as the alternative which will enable more companies to go public since it removes the hassles of a traditional IPO. The company does not fall prey to the IPO-pop situation as the prospective investors have access to the forward-looking guidance before the stock starts trading.

Can you resort to direct listing even if you do not want to raise capital?

Of course! Direct Listing is ideal for companies who do not want unnecessary dilution at the outset. Once listed on the stock exchange, companies can still solicit additional funds from the public as per their requirements and can offer additional shares at the desired dilution level.

What are the downsides to direct listing?

While there are many benefits to Direct Listing, there are a few things to be aware of.

  1. The no lock-in period clause can quickly turn into a disaster given that shareholders might dump in huge volumes of shares all at once causing massive price moves.
  2. With no Investment Banker in the picture, there is virtually no ‘stabilization agent’ and thus the company is unguarded against price swing volatility.
  3. Volume volatility is one thing which might throw a hiccup in the plan given that on the day of the listing, if employees/investors are unwilling to sell their shares at the price that is determined, there may be no transactions at all.

Please contact your local Chugh LLP Office to get in touch with our expert advisors who can help you decide whether Direct Listing is in the best interest of your business.