Question

Spotify went public on April 3, 2018 on NYSE through a direct listing procedure, rather than a standard IPO. In direct listing a stock starts trading on an exchange without a formal offering. IPO price is determined by buy and sell orders submitted by market participants before the first day. Some of direct listing advantages include lower costs of going public (no underwriters) and process transparency which is good for both buyers and seller of stock. Please discuss disadvantages of going public through a direct listing.

Answer 1

In a direct listing the firm's stock will start trading on a secondary market like the NYSE .There will not be an IPO, instead the firm will use existing shares.Some of the major disadvantages of doing so are:Lack of underwriting support.In the case of an IPO there will be underwriting support offered by investment banks.The underwriting process done by investment banks helps the firms by providing a valuation of the firm and assists in pricing the issue.This in turn will help the firm to have some sense of control over the price if the shares.The absence of this leads to the second disadvantage which is less control over the price of the stock.The price of the stock will be based on demand and supply and the sense of control the firm has will be lower compared to an IPO where there was a price discovery process prior to the offering.Another disadvantage is that by going the direct listing route the firm might miss out on large institutional investors who take part in IPOs.Another disadvantage is the absence of a road show A roadshow refers to a series of presentations that a firm might do with the draft prospectus prepared by the underwriting bank, and is often an opportunity for investors to get to know more about the company.So the absence of a roadshow would lead to investors having less knowledge about the company's vision,its history ,the management etc.