IPO vs Direct Public Offering: What’s the Difference?

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Take stock of your success. 

Your private business has grown. You want the public to know about your business, and you want to raise a little more capital. There’s no better way than to let the public own stocks in your business. 

When business owners think of equity financing, they think of IPOs. Nearly 5,000 businesses have performed an IPO since 2000. But there’s another option you can consider: the direct listing also known as a direct public offering (DPO). 

What’s the difference between the two? Figure it out, and you can make money in no time. Here’s a guide to the IPO vs direct listing debate.

What Is an IPO? 

IPO stands for initial public offering. A company creates new shares that the public can buy. An intermediary underwrites these shares, deciding the price and helping with regulations. 

A company chooses an intermediary with a strong distribution network. This network contains prominent investment banks, mutual funds, and independent dealers. The underwriter can be a business financial consultant, an investor, or someone else.

The company and its underwriter perform a “roadshow,” presenting their stock options to members of the network. If potential investors offer suggestions, the company can adjust its price and stock options. 

Most initial distributions of stocks occur through bookbuilding. A company awards shares to investors. The investors can be contributors to the company or outsiders. 

A few distributions occur through auctions. If a pool of investors wants to bid above the offer price, a company can run an auction for its stocks. This is a great option for companies with high press attention.

An underwriter performs their services for a fee. Most get a commission for every share that they sell. Once the roadshow is over, the remaining stocks go public. 

What Is a Direct Listing? 

A direct listing, also known as a direct public offering, does not involve an underwriter. The company proceeds without a roadshow. The company prepares an offering memo, submits to audits, then sells its stocks.

Most companies who perform a direct listing are small. They are new in the industry, lacking connections to prominent underwriters. They don’t have the resources to pay per share, and they need capital right away.

DPOs have no cost. It allows a little more transparency because investors sell directly to the public. The company gets to sell its stocks at a fast rate.

But it is a risky approach. Without a roadshow, companies with direct listings are not prominent. Acquiring growth capital will be more difficult.

Without the reliable network of an underwriter, investors may be less trustworthy. Though the SEC allows direct listings, Nasdaq does not.

IPO vs Direct Listing

Seek an opening. It’s time for the public to buy stocks in your company. But before you do, consider the IPO vs direct listing debate. 

An IPO involves an underwriter who vouches for your initial offerings. They take your company on a roadshow, selling stocks to different investors. 

IPOs generate a stable group of initial investors. But IPOs take time and underwriters ask for high fees. 

A direct listing is an expedited process. It uses no underwriter, taking stock options right to the public. 

A direct listing speeds up the stock process and avoids fees. But it lacks the marketing found in an IPO roadshow. Investors may ask questions about why an IPO wasn’t pursued. 

Go to the experts to find out the best options for you. The Solomon RC Ali Corporation has decades of success in business consulting services. Contact us today.