My buddy Jake works in finance. When Spotify went public in 2018 without underwriters, he called me up, freaking out. “They can’t do that! That’s not how this works!” Except it did work. Spotify just picked a different path than everyone else, and suddenly a bunch of companies started asking why they’re paying investment banks millions when they don’t have to. Direct listing vs IPO matters way more than it sounds. Two totally different ways to go public, and knowing the difference helps whether you’re investing or just curious why some companies do things weird.
How IPOs Actually Work
Traditional IPOs have been the standard forever. The company wants cash and hires investment banks as underwriters. Banks create brand new shares, set a price range, take executives on roadshows to pitch institutional investors, and sell those shares before the stock hits exchanges. Investment banks charge 3.5% to 7% of gross proceeds for this. On a $500 million IPO, that’s $17.5 million to $35 million in fees. For showing up and making some calls. Banks also set the initial share price using interest from roadshows.
Then there’s usually a 180-day lockup where existing shareholders can’t sell. Founders, employees, and early investors are all stuck holding shares for six months. This prevents flooding the market with supply that would crash the price. When trading starts, there’s often an “IPO pop” where shares jump way above the offering price. Sounds awesome but actually means the company priced shares too low. They left money on the table that investment banks and their favorite clients grabbed instead.
Direct Listing Process Just Eliminates the Banks
Direct listing process works totally differently. No new shares created. Existing shareholders just sell their shares directly to the public when trading starts. No underwriters means no underwriting fees. No roadshow dog and pony show. No lockup period. Shareholders can sell immediately on day one. The market figures out the stock price based purely on what buyers and sellers actually do, not some negotiated range.
Direct listing companies still work with investment banks, but banks just give advice rather than underwrite anything. They help with SEC filings and maybe provide analyst coverage. Their role is way smaller, and so are their fees. Companies file an S-1 with the SEC at least 15 days before listing, the same as IPOs. Once approved, shares start trading. Market makers work with financial advisors to set a reference price, but the actual trading price depends completely on buyer and seller activity.
What the NYSE Requires
The NYSE’s direct listing requirements were updated just recently. Companies must have a minimum of 400 round-lot holders and either $250 million in market value or $200 million in revenues over the preceding 12 months and $150 million in market value. In 2020, the S.E.C. adopted changes to its rules allowing direct listing N.Y.S.E. companies to raise capital by selling new shares, as opposed to just existing ones.
This solved one of the major complaints over direct listings: that they couldn’t raise fresh money. But most companies going the direct-listing route aren’t trying to raise tons of money. They’re already profitable or well-funded. They desire liquidity for the existing shareholders, greater ability to tap public markets for future capital needs, or simply the credibility that comes from being a public company.
Companies That Actually Did This
Direct listing examples include some massive names. Spotify kicked everything off in April 2018 on the NYSE. They didn’t need capital. They had plenty of cash, and everyone already knew Spotify. Why pay banks millions for services they didn’t need? Slack went public this way in June 2019. Roblox did it in March 2021. Coinbase chose a direct listing in April 2021, valued at around $86 billion on opening. These weren’t sketchy startups cutting corners. These were billion-dollar companies making calculated decisions that traditional routes didn’t make sense.
How This Compares to SPACs
Direct listing vs SPAC became relevant when SPACs got trendy during 2020-2021. SPACs are shell companies that raise money through IPOs, then merge with private companies to take them public. SPACs avoid some IPO hassles but come with their own garbage. Sponsor fees, warrants that dilute shareholders, and redemption structures that get messy fast. Direct listings are cleaner.
No blank-check companies, no merger complications. Just existing shares are hitting the market. SPACs had their moment when everyone was using them. Most have performed horribly since, making direct listings look genius in hindsight.
What You Need to Pull This Off
Not every company can just show up and do a direct listing. You need specific things going for you. Strong brand recognition helps massively. If people already know your company, you don’t need banks spending months marketing you to institutional investors. Spotify, Slack, Coinbase? Everyone already knew those brands. Solid financials matter too. Your business model needs to make sense to regular investors without heavy explanation.
Consumer-facing companies with straightforward operations work better than complex B2B businesses nobody’s heard of. You also gotta accept more volatility. Without underwriters stabilizing pricing, your stock could swing wildly on opening day. Some companies love that transparency. The market sets a real price instead of banks manipulating it. Others find it terrifying.
The Money Part
Direct listing requirements don’t eliminate costs entirely, just reduce them significantly. You still need lawyers, accountants, and advisors. But you’re saving millions in underwriting fees and avoiding the discount banks typically demand when buying IPO shares. Companies also avoid dilution since no new shares get created unless they choose the newer capital-raising option. Existing shareholders keep their ownership percentages.
The immediate liquidity is huge. Employees with vested stock options can sell shares on day one instead of waiting six months. Early investors can cash out whenever. This flexibility attracts talent and keeps everyone happy.
Why IPOs Still Dominate
Despite advantages, direct listings remain rare compared to IPOs. Most companies still prefer the traditional route. Raising fresh capital is the main reason. Even though SEC rules changed, IPOs remain the primary method for companies needing significant cash for expansion, acquisitions, or paying down debt. Marketing support from investment banks matters too.
Roadshows generate buzz, analyst coverage drives interest, and underwriters bring institutional investors to the table. For companies without massive brand recognition, that support is crucial. Price stability is another factor. Underwriters prevent extreme volatility by managing supply and establishing support levels. For companies worried about wild price swings scaring investors, that stability provides comfort.
Which One’s Actually Better
There’s no universal answer to direct listing vs IPO. Depends entirely on what a company needs. Already profitable with strong brand recognition? Don’t need to raise capital? Want to save millions in fees and give employees immediate liquidity? Direct listing might work great. Need significant cash for growth? Want bank support for marketing your stock? Prefer price stability over market-driven discovery? A traditional IPO probably makes more sense. Spotify made the right call for Spotify. Doesn’t mean every company should copy them. Different situations need different approaches.
What Investors Should Actually Know
For investors, both paths end up in the same place. You’re buying shares of a newly public company. But timing and opportunity differ. With IPOs, institutional investors get first crack through underwriters. Retail investors usually buy shares after trading starts, often at inflated prices if there’s an IPO pop. Direct listings put everyone on equal footing. No preferential allocation to big investors. The market opens, and everyone competes for shares at whatever price supply and demand create. More democratic, potentially more volatile. Price discovery happens differently, too.
IPO prices get set through negotiation and institutional interest. Direct listing prices emerge purely from market forces on opening day. Neither method guarantees better returns. It just depends on the actual company performance over time.
Where This Is Headed
Direct listings are still relatively new. Spotify only kicked things off in 2018. But they’re gaining credibility as a legitimate alternative, not just a weird experiment. More companies are asking investment banks about direct listings now. Banks themselves are adapting, offering advisory services for direct listings instead of fighting the trend. The NYSE and Nasdaq both support direct listings and keep refining their rules.
Will direct listings replace IPOs? Probably not entirely. But they’ve created options where none existed before. Companies don’t have to accept the traditional playbook anymore if it doesn’t fit.
Bottom Line
That, in a nutshell, is direct listing versus IPO. I.P.O.s issue new shares and rely on underwriters to create capital. Direct listings offer existing shares to the market without banks as middlemen. IPOs are more expensive but provide capital, marketing support, and price stability. Direct listings save money, offer instant liquidity, and allow the market to set prices without banks getting in the way. Neither is inherently better. Spotify proved direct listings work for the right company. Thousands of other companies still choose IPOs every year because that approach fits their needs better.
Understanding both options matters, whether you’re running a company, considering going public, or just trying to figure out why some stocks debut differently. The more you know about how companies reach public markets, the better equipped you are to evaluate them as investments. Jake eventually came around after watching Spotify succeed. Still thinks most companies should stick with IPOs but admits direct listings have their place. Sometimes telling Wall Street to take a hike works out just fine.
