Going Public: How Are Direct Listings Different from IPOs?

This week, Craig Siminski, of CMS Retirement Income Planning, shares an article discussing the two paths companies can take to go public:

An initial public offering (IPO) is the first public sale of stock shares by a private company.

IPOs are important to the financial markets because they help fuel the growth of innovative young companies and add new stocks to the pool of potential investment opportunities.

When a company files for an IPO, new shares are created, underwritten by a bank, and sold to the public. But that’s not the only way for a company’s stock to become publicly traded. When a company uses a direct listing, typically only existing shares are sold to the public on a stock exchange — no new shares are issued, and no underwriters are involved.

Going public is a fraught process that few companies dare to navigate on their own. Even so, several well-known companies have sparked media coverage and investor curiosity when they chose to bypass the traditional IPO process.

Two Roads, One Less Traveled

The path a company takes to the stock market generally depends on its business goals. Companies that pursue a traditional IPO often want to raise as much money as possible for expansion purposes. Direct listings, on the other hand, give company founders, employees, and early investors a way to cash out some of their equity without diluting the value of the company’s stock.

The underwriters that facilitate the IPO process typically organize a “roadshow” to market the stock and gauge the interest of institutional investors. They also guide the company through regulatory requirements, help set the initial offer price, and may…

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Craig Siminski is a CERTIFIED FINANCIAL PLANNER™ professional, with more than 24 years of experience. His goal is to provide families, business owners, and their employees with assistance in building their financial freedom.

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