Dissecting the Direct Listing Die-Out

When weighing options for going public, savvy entrepreneurs sometimes consider using the Direct Listing method instead of opting for a traditional IPO. While the gutsy move is alluring and has its advantages, it is often abandoned by those who were initially tempted by its charms. Those who use this method often find that it results in a significant loss in share value from the reference price in the offering.

The Lure of Direct Listing

Direct Listing is a streamlined approach to become a publicly traded company. While still requiring a prospectus, valuation, and sales requirements, companies can raise funds, gain liquidity for existing shareholders, and attract public attention much more rapidly than if they were to go the more traditional IPO route.

• Faster Process – From ideation to execution, qualified companies can buy, sell, and trade shares on day one of being listed.
• No Lock Up Period – Existing shareholders are not subject to a typical IPO’s 90 to 180-day period during which company insiders and early investors are not able to sell their shares.
• Cost Savings – Companies participating in a Direct Listing avoid the costly and time-consuming underwriting process required of an IPO.
• True Market Price – Direct Listed companies bypass courting institutional investors. Their trading price may better reflect the company’s value in the marketplace, rather than it being artificially inflated or deflated based on pre-opening sales.

Historically, businesses could only sell previously issued stock in a Direct Listing. The Security and Exchange Commission’s (SEC) revised their stance in 2020 and began allowing Direct Listed companies to sell new stock to raise capital. This change was expected to re-invigorate the Direct Listing method, but it remains sparsely used even with the advancement of hybrid options now being offered.

Direct Listing Drawbacks

Few companies have been able to overcome what’s needed to have a successful Direct Listing. While some of the challenges are practical in nature, the bulk of them hinge on the ability to transcend a buyer’s perception enough to sustain a strong opening day and the ongoing lure of them cashing out as their attention wanes.

• Meeting Exchange Requirements – Both the New York Stock Exchange (NYSE) and Nasdaq have minimum sales thresholds that issuers must meet. These can include exclusively newly issued shares or a combination of newly issued and existing shares. Additional exchange standards are also required.
• SEC Regulations – A Direct Listing brings shares to the exchange floor faster than an IPO, but issuers are still obliged to meet the same governance and ongoing reporting standards and requirements post-transaction.
• Name Recognition is a Must – While companies save on offering costs by not having an intermediary or underwriter facilitating the sale, they miss out on the promotion and sales assistance that relationship brings. Without an IPO roadshow, only businesses who are already instantly recognizable—at least within their field (think Roblox)—stand a chance of being noticed when the trading bell rings.
• Reduced Due Diligence and Transparency – Companies that haven’t gone through a rigorous underwriting process and don’t have the backing of institutional investors may find themselves lower on the list of ‘buys’ where both larger and individual investors are concerned.
• Greater Risk with Lower Investor Damage Recovery Potential – As borne out in the recent Supreme Court decision of Slack v. Pirani, in a Direct Listing, investors have a diminished ability to link their purchases to registered stock shares. They need that before they can make a case that their reliance on a misrepresentation in the prospectus persuaded them to buy the stock.

Direct Listing’s Legacy

The first Direct Listing was a modest capital raise of less than a million dollars. Ice cream duo Ben & Jerry’s put Direct Listings on the map in 1984 when they raised their desired $750,000 without the backing of an underwriter or investment bank. Eschewing tradition was a hallmark of the company and the novel way to go to market was fitting.

After being passed over for years, Spotify reinvigorated the Direct Listing option when it became the first corporation using the method to trade on the New York Stock Exchange (NYSE) on April 3, 2018. The enviable position of not needing to raise capital put Spotify in the driver’s seat as the company cashed in on its name and avoided millions in underwriting fees and roadshow costs.

Since Spotify brought Direct Listings back to life in 2018, 15 companies have taken that journey, including the latest in September 2023 —Courtside Group (PODC)—whose PodcastOne platform utilized the Direct Listing as a spin-out of it’s parent company, LiveOne Inc. It ended its first day 46.25% down from the NASDAQ reference price of $8.00, which lead to a LiveOne announcement that it was increasing its stock repurchase program which will likely include the new PODC shares that its CEO said are severely undervalued.

The Death of Direct Listings?

The novel approach of using Direct Listings to quickly raise capital without the incumbent roadshows and underwriting of IPOs is likely to continue to be a rare occurrence.

While the heady achievement of being listed on one of the world’s most prestigious stock exchanges is often a goal for many entrepreneurs, the risks and volatility of the Direct Listing process remains too high a barrier for most issuers in today’s economic climate.

Weaver’s Public Company practice offers assurance and advisory services for public companies of all sizes. For more information about options to enter the capital markets, contact us.

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