Originally, only shareholders of the private company could sell shares during a DPO and the company was not allowed to issue new shares. But in December 2020, the Securities and Exchange Commission (SEC), approved a proposal from the New York Stock Exchange (NYSE) for a primary direct listing, which includes newly issued shares in the DPO in addition to existing shares. Although the mechanism for direct listings has existed for many years, strict eligibility requirements by exchanges such as the NYSE and NASDAQ made them a rare occurrence. A change of rules in 2018 opened the doors for large technology companies such as Spotify and Slack to tap the markets with direct listings. Spotify went public in April 2018, and Slack followed a year later in June 2019.
Alternate term: Direct Public Offering (DPO)
How Do Direct Listings Work?
The direct listing process begins with hiring a financial advisor, typically an investment bank. The firm then undertakes a series of steps such as regulatory filings, price discovery and investor communication before its shares can make their debut on the stock exchange. Let’s understand the process a little more by looking at the example of Spotify’s direct listing.
How Spotify’s Direct Listing Happened
According to law firm Latham & Watkins, Spotify approached the firm with the idea of a direct listing in May 2017. Around the same time, it hired Goldman Sachs, Morgan Stanley, and Allen & Co. as financial advisors for the DPO. The financial advisors, according to the law firm, helped Spotify define objectives for the listing, advised on regulatory filings, and assisted in preparing presentations and other public communications. The initial role of the financial advisor is to assist the company in valuing the shares that are not held by officers, directors, and affiliates. The value of these shares helps meet the listing requirements of the exchange the shares will eventually trade. Spotify held DPO discussions with the SEC for a few months during 2017 and finally made its first public filing for a direct listing in February 2018. Its second public filing happened in March that year. Typically for DPOs, next steps include the company meeting all the regulatory and exchange requirements, and hosting a call for investors to educate those investors about its business and the share offering. Spotify held its Investor Day on March 15, 2018, and the SEC declared its registration statement effective on April 3, 2018. Before the stock opens for trading on listing day, the financial advisor works with a market maker assigned by the exchange to set an initial reference price. Morgan Stanley played that role for Spotify. Exchange market makers assign a reference price to the direct listing based on demand; that is, the buy and sell orders for the shares of the company. For example, for Spotify shares the reference price was set at $132 per share based on demand prior to markets opening for trade on the listing day of April 3, 2018. When the markets did open, the opening price for Spotify shares on the exchange was $165.90.
Direct Listing vs. IPO
While both IPOs and direct listings help a private company bring its shares to be traded on the stock market for the first time, the two routes have many stark differences. This means all you need to do to participate in buying shares in a direct listing is to place your buy orders through whichever channel you normally use to trade other stocks— a broker or an app. Investor days held by companies prior to direct listing are open to everyone and allow retail investors to understand what the company has to offer, getting the exact same information offered to other investors.
