To sell shares to the public, a formerly private firm can either have an IPO (Initial Public Offering) or go through a Direct Listing. An initial public offering (IPO) is the conventional method of a firm selling shares to the public through the use of an investment bank. The investment bank sets the initial stock price, plans a roadshow to attract potential investors, and executes the sale of shares. Yet, with a Direct Listing, a firm can only go public by raising cash or hiring an investment bank as an underwriter. Direct Listings allow current shareholders, such as employees, insiders, and VCs, to sell their shares to the general public through a stock exchange. Instead of an underwriter setting the stock price, supply and demand in the market do so.

IPO Vs. Direct Listing: What's The Difference?

There are two ways for a formerly private firm to sell shares to the public: an Initial Public Offering (IPO) or a Direct Listing. While the end aim of both is the same—public trading of the company's shares—the paths to it are very different. In this article, we'll compare and contrast initial public offerings (IPOs) with direct listings (DLs), discussing the pros and cons of each and discussing which style of offering is best for specific businesses.

Traditional Public Offering (IPO)

In the past, private companies have typically gone public through an initial public offering. A firm may go public by using the services of an investment bank to underwrite and sell the company's shares to the general public. The investment bank sets the initial stock price, plans a roadshow to attract potential investors, and executes the sale of shares. An initial public offering (IPO) entails the following steps:

Preparing For The IPO

A company's financial statements, disclosures, and prospectus must be ready before it can go public. The prospectus is a legally binding document that describes the company's operations, financials, risks, and management and is submitted to the SEC for public viewing (SEC). In addition, the firm must select an underwriter, often an investment bank, to assist in marketing and to sell the shares to the general public.

Determining The IPO Price

The IPO price, or initial public offering price, is set by the underwriter in consultation with the company's management. Financial performance, market conditions, and investor demand are all factors that go into determining the initial public offering price.

Roadshow

The underwriter organizes a roadshow to meet with potential investors as soon as the IPO pricing is determined. The roadshow aims to give the company's management team a chance to present their company to potential investors and field any questions they may have.

Advantages Of An IPO

• Funding: By offering shares to the general public, a corporation can raise a sizable sum of funding. This money can be put towards expansion projects, debt reduction, or the purchase of other companies.
• Going public is an excellent way to boost a company's profile and reputation because it shows it has succeeded thus far and can develop further
• Existing shareholders gain liquidity from an IPO because they can sell their shares on the public market.

Disadvantages Of An IPO

• Underwriting fees, legal fees, accounting fees, and other charges are just some of the costs a company incurs when it goes public through an initial public offering (IPO).
• Going public usually involves issuing new shares to the public, which can dilute the ownership of existing shareholders.
• As a public corporation, we must follow the Sarbanes-Oxley Act and other regulations, file quarterly and yearly reports with the SEC, and disclose significant occurrences.

Conclusion

The primary distinction between an initial public offering and a direct listing concerns how firm shares are offered to the general public. Natural Listings allow current shareholders to sell their shares directly to the public without any lock-up period or underwriter, unlike IPOs, which entail an underwriter and an initial public offering price. A company can raise a set amount of money through an IPO, but the process is expensive and subject to stringent regulations. However, Direct Listing requires the company to have solid brand recognition and a sizable existing shareholder base to reap the benefits of increased flexibility, transparency, and cost savings. The specifics of a business's situation, objectives, and investor interest will determine whether it should pursue an initial public offering (IPO) or a direct listing. Companies should weigh each approach's benefits and drawbacks before deciding.