“Direct Listing” New Form of Fund Raising for Startups

     In June 2019, Slack Technologies, Inc., an American software startup company, went public through a direct public offering in June 2019, known as a “Direct Listing”. It is an alternative source to Initial Public Offering (IPO) that few large companies considered when considering investment. Slack was not the first company to register through Direct Listing. In 2018, Spotify Technology, a music streaming company, was the first to enter in the stock market by Direct Listing; later, several startups planned to go public through use of Direct Listing. Airbnb is one example of Direct Listing where by an online marketplace for hospitality services was established. Unlike an ordinary IPO, a direct listing means the company does not find it necessary to purchase on sell new shares nor does it need to raise additional capital. It is the primary way for company investors to sell some of their holdings to other investors while bypassing the formidable fees and requirements that one ensured by using an underwriter.

     A major benefit to startup companies is that this new form offers lower underwriting fees, which generally run up to approximate 7%  and as low as 2% of the total proceeds raised in IPO. However, direct listing can involve more risk, which may entail losses as a result of the volatility of the stock prices that lessens profits, and impact the selling of shares by big investors in the stock market. These risks are likely to occur as a result of absences of a distribution manager (Underwriter) who is responsible for setting the criteria to standardize the stock prices. Moreover, there is no set guidelines during the “Silent Period” for the existing shareholders to follow; in so, stock market prices movement are predicated on the needs of market participants.

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