On June 20, 2019, Slack listed its shares on the New York Stock Exchange under the symbol WORK. Slack did this through a direct listing versus the traditional initial public offering (IPO). How are the two different?
A direct listing is exactly that: a direct listing of company shares on a public stock exchange. Let’s understand the major differences between this and a traditional IPO.
No capital raised for the company: In a direct listing, existing shares are traded on the stock exchange. This means no new shares are issued and no new capital is raised for the company, as it happens in a traditional IPO. Generally, only companies with enough capital to grow and a strong balance sheet will do a direct listing.
No lockup period: In a traditional IPO, existing shareholders, management and investors agree on a lock-up period of 90–180 days. This means they cannot sell any shares until the lock-up period is over. In a direct listing, this period does not exist, which means that early investors, management and employees can sell their shares immediately. By doing this, they may put selling pressure on the stock early on.
No bankers, no fees: In a traditional IPO, the banker's role would be to coordinate a road-show with potential investors to gauge demand for the newly issued shares and build a book of orders (“building the book”), which determines the IPO price. In a direct listing, the road show is replaced by an investor day, on which the company speaks with a group of investors. However, there is no solicitation of orders since no new shares are issued. The banker does not determine the price; the market does. Consequently, the fees of a direct listing are a fraction of even the lowest IPO fees.