Direct listings are becoming increasingly popular at time when the cost of going public is higher than ever. Workplace-messaging app and distinguished member of the startup “unicorn” class, Slack Technologies Inc. is the latest company to forgo the IPO in favor of a direct listing(Spotify was another high-profile example).
In a direct listing, private companies issue stock directly on a public market exchange without raising any money. Doing so saves the company from having to pay hefty underwriting fees, which are around 4-7% of gross proceedsand often in excess of $1 million. Additionally, companies can avoid restrictions on lock-up periods, which limit when shareholders can sell their shares – you might remember the devastating impact that had on Facebook stockafter it went public.
Thanks to the infrastructure built by Templum, IPO’s are no longer the only way for companies and investors to seek liquidity. While IPO’s are often considering important branding/milestone events, they are, for many companies, an unnecessary expense and actually a huge deterrent from going public. Instead, companies can simultaneously raise capital and satisfy the liquidity needs of their investors through private market transactions, while also maintaining the efficiencies and control of staying private.
One can draw an obvious line here to how smart securities and digitized assets can help make these transactions more secure and efficient. If a company were to conduct a direct listing, they could use a secondary transaction with smart securities to enable early investors to sell their position prior to hitting the public market (where such a move could drive down the stock price). Additionally, because smart securities help provide better transparency into the underlying asset at significantly lower costs, they could help inform price discovery prior to the direct listing.
At the end of the day, whether companies choose to go public or stay private indefinitely, the need for liquidity and capital raising will be there. Smart securities and direct listings are two prime examples of how the old paradigm of public-to-private is fast becoming irrelevant, as companies look for more efficient and cost-effective ways of growing and maintaining their businesses.