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Home / Business / What investors need to know about direct listings – The Motley Fool

What investors need to know about direct listings – The Motley Fool



The workplace messaging software company Slack Technologies has filed for a listing, but it does not use the traditional method of publishing. Instead, Slack – a service that aims to promote efficiency and collaboration between colleagues through chat rooms – chooses to pursue a direct listing of its shares and become the second major company to do so in the past year. Spotify Technology (NYSE: SPOT) used the same method when it was published in 2018.

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What is a Direct Listing?

What is a direct listing?

In general, when a company wants to make an initial public offer, or IPO, they will employ one or more insurers. Think big banks with investment banking like Goldman Sachs or JPMorgan Chase . These guarantors essentially simplify the process – determine the initial bid price, handle regulatory issues, and sell the shares to the first investors.

On the other hand, a direct listing, also known as a direct public offer, or DPO, is a process where the company sells its own shares directly to the public. There are no authors involved. In English, the company's existing shares are listed on a stock exchange, and people who own them, like the company's existing investors, can choose to sell their shares directly on the public markets.

By using a direct listing instead of a traditional stock exchange listing, companies do not increase any new capital, as they do in a traditional listing. Instead, it only creates a public market for existing investors.

Why can Slack pursue this route?

According to The Wall Street Journal, people cite acquaintance with the business, Slack has substantial money on the balance, which explains why it would not need to raise capital in a stock exchange listing.

If a company does not need to acquire new capital, there are some important benefits of a direct listing, for example:

  • No need to pay guarantee authorities or other third parties. This can be a huge money saver compared to the traditional IPO route. The company still hires some advisors – actually Slack works with Goldman Sachs, Morgan Stanley and Allen & Co. on the agreement (the same advisors when Spotify directly listed its shares). However, the costs are significantly lower.
  • There is no lock-in period, which means that insiders do not have to wait a certain amount of time after the IPO before selling shares. Existing investors can pay for free and sell their shares to the public on day one if they choose to do so. Slack was last valued at $ 7.1 billion after an August funding round, and insiders have suggested that the company's public listing may result in a similar valuation, so it is reasonable to assume that insiders may be on a hefty payday when the listing is completed.

To be clear, there are some risks involved in a direct listing. In a traditional listing, guarantees market shares to investors and help create a starting price. With a direct listing, the share price is largely governed by simple demand and demand dynamics.

When Spotify went this route in 2018, the process went smoothly and its efforts gave solid results as the company shares roughly maintained stock market price. But Spotify was already a brand known to the public, making it easier to sell to retailers and institutional investors.

So why can Slack have chosen the direct entry route? Most likely, it is because the company's immediate capital requirements are met, and the management feels that there is enough public demand for their shares to support the share price. And the opportunity for early investors and other insiders to cash in any of their shares probably doesn't hurt. It is not yet seen whether the company will be able to capitalize on its unicorn status.


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