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Direct Listing

Going Public Via a
Direct Listing

Helping growing companies (also referred to as small caps, mini caps and nano caps) take their company public through a direct listing. Our advisers provide end-to-end support, assembling a top team of professionals to chart out the right strategies and approach.

What is a Direct Listing?

A direct listing is a way for privately held companies to go public by selling existing shares directly to investors on a stock exchange without conducting an initial public offering (IPO).

In an IPO, new company shares are created to raise funds for the firm, expand its public profile and fund growth initiatives. An intermediary manages the process, typically an investment bank, which underwrites newly issued shares, finds buyers for them, settles the initial share price and handles legal and compliance issues. However, they charge huge fees for their services, typically between 3% and 7% of the proceeds. There is also a lock-up period of between 90 and 180 days in which shareholders cannot sell their shares.

Direct listings work differently. Companies can go public by selling only existing shares. No additional shares are offered to the public. Therefore, no underwriting is required, so fees are lower. With a direct listing, no new capital is raised, and there are no lock-ups. So, shareholders are free to sell their shares on the first day of trading.

Ultimately direct listing is a cheaper and simpler way for companies to go public.

Direct Listings Come to the Fore

Direct listings have been around for decades as a relatively underutilised route to market, garnering little attention. That changed in 2018 when music streaming service Spotify went public by directly listing its shares for trading on the New York Stok Exchange. Rather than issuing new shares, the company let existing shareholders sell their shares directly. This meant the proceeds went to the sellers, such as employees and initial investors and not Spotify. The high-profile listing was soon followed by others, including the business communication platform Slack, which completed a direct listing in June 2019.

How Does The Direct Listing Process Work When You Engage Swordblade & Co?

We typically provide services to growth stage small and medium-sized companies. Our experienced team will help you navigate every step required for a private company to become publicly traded via a direct listing. We’ll identify and manage all the service professionals such as corporate and financial advisers to advance the process. While we don’t raise capital, we can also help promote your offering to potential investors.

Step 1: Before floating on a stock exchange, a private company must create a holding company that cannot be an empty shell because it has no value. We will set up a corporate structure, typically a UK PLC and transfer ownership and assets from your operating company. Now it will have substantial value and can be used to raise funds. We may also obtain an ISIN (International Securities Identification Number) from the exchange. This 12-digit code identifies your specific securities.

Step 2: We help you select a financial adviser to advise on regulatory filings, value your shares and prepare presentations and other public communications.

Step 3: If your company is going public, we will help you choose a solicitor to create your prospectus. This legal disclosure document has to be approved by the FCA (Financial Conduct Authority) and contains a lot of information about your business, including a detailed financial report. A prospectus is not needed if you’re not going public. For example, if you only want to raise funds from a limited number of investors.

Step 4: This is when you start raising funds from investors, a process that can last up to two years or more. We cannot help you raise funds, but we can arrange a roadshow of meetings with investors to educate them about the business and your share offering. The shares are sold by private placements, which means they’re sold to pre-selected investors and institutions.

Many of our clients have an existing network of potential investors, but they don’t have the right corporate structure to invest. We can advise your investors and create the most appropriate structures for them to use. There is no one right structure because everyone’s circumstances are different.

If you don’t have any investors lined up and no way of approaching potential backers, we may be able to recommend your company to our network of high-net-worth individuals. This is something we offer free of charge.

Step 5: When you’re ready to direct list, we hire a corporate adviser with a relationship with the stock exchange where you want to be listed. The adviser writes the application to go public, performs due diligence and will arrange a meeting with the exchange to discuss your offering.

After meeting all regulatory requirements and receiving approval, the offer is sold. Before trading starts, the financial adviser works with the market maker assigned by the exchange to set an initial reference price based on investor demand.

Important: Note that direct listing is not like an IPO where many shares are issued on the first day. Your existing shareholders may not want to sell immediately, preferring to wait and see what happens.

How Much Does A Direct Listing Cost?

Typically, the cost of a direct listing for a small enterprise such as a micro cap or nano cap is approximately £100,000 to £120,000. The cost is much lower than an IPO and includes:

Advantages of Direct Listings

Offers greater liquidity for existing shareholders: In a traditional IPO, existing shareholders need to wait a certain amount of time before selling their shares. This lock-up period typically ranges from 90 to 180 days. Since the only shares in a direct listing are existing shares, the shareholders are free to sell them immediately.

Saves money: During an IPO, the fees paid to investment banks constitute the highest direct costs a company incurs. While a business will still engage financial advisers to assist in a direct listing, the fees will be much lower than traditional IPO.

No dilution of ownership: With no new shares listed, existing shareholders maintain control over their business.

Market demand determines share price: With IPO, the initial share price is determined by demand from a small number of investors for a limited supply of shares. This scarcity doesn’t necessarily reflect what a purchaser would pay if more stock were available. By contrast, in a direct listing, all the company’s shares are available for sale and purchase on the opening day of trading and the price is determined by the buy and sell orders from a broader investor pool. In theory, this should be a more accurate market value than the one set via the IPO process.

Equal access for all buyers and sellers: In a traditional IPO, shares are allocated to a small number of participants. With a direct listing, all types of investors can participate at the same time. Any prospective purchaser can place an order with their broker of choice and offer a price they deem appropriate, while shareholders are free to sell their shares whenever and for whatever amount they want.

Disadvantages of Direct Listings

No New Capital: Unlike a traditional IPO, direct listing does not raise additional funds. Therefore, it is not a good option for small cap companies seeking a capital injection to grow and capture market share.

There’s no support or promotion for share sales: In a typical IPO, underwriters take the company’s representatives on a one or two-week “roadshow” series of meetings with potential investors. By contrast, with a direct listing, a company has to build interest from the investor community on its own. When Spotify and Slack went public, they hosted live publicly streamed investor day presentations.

Can Be More Volatile: With a traditional IPO, major investors and institutions set the company’s value at a specific price, creating a guide for its worth. With a direct listing, the trading price is subject to the whims of the market and potential market swings. Moreover, companies do not have a say in the allocation of shares.

Uncertainty: In a traditional IPO, companies know who the buyers are, while banks have an excellent understanding of investor trading patterns in the after-market. These certainties are lost with direct listings because it is unclear who will buy and sell shares on the first trading day. If nobody wants to sell their shares, no transactions can occur. This could create an illiquid market, which could hurt the stock price.

Direct Listings at A Glance

Next Steps

If your company is planning to go public and raise funds on the capital markets, we look forward to hearing from you.

The easiest way to get started is to request a free evaluation. By providing minimal information about your company and capital needs, we will be able to provide you with a quick assessment by email. In most cases we can tell you if your business is ready to go public, or not yet.

We’ll also let you know if we think that Swordblade & Co are a good fit for your flotation plans, and anything else that we may think can help you.

Alternatively, if you are ready to talk in depth about floating your company, we recommend you arrange a paid consultation with one of our partners. It can usually be scheduled within a few days and is the fastest way to get detailed advice.