There comes a time in a thriving private business’ life when the question is popped- to IPO or not to IPO. Maybe business is booming, and more offices are needed. Maybe a company might want to offer stock options to potential employees to attract the crème of the crop. Or maybe a company might want to generate publicity through a listing.
There are many reasons, but whatever they may be, most private companies would probably head down the IPO path to achieve their goals. After all, that has always been an age-old tradition. However, getting a business ready for an IPO is no small feat. In fact, the process brings with it some daunting challenges.
The IPO process will cost a company in more ways than one.
On the monetary front, it costs a company six-figures and up to be publicly listed. Moreover, the underwriters- usually investment banks- price the shares at a huge discount relative to the market price.
The shares that a private company creates are usually only initially issued to a small, select group of institutional investors. With only a small group of institutional investors involved, the company that’s trying to sell their shares to them wouldn’t have bargaining power. After all, if the small group of investors reject the pricing, who else is the company going to turn to?
The result: heavily discounted shares. Not to mention, 3-7% of the funds a company raises for an IPO will go to the underwriter. Quick math: for example, a company that raises USD 100 million in capital might have to pay the underwriter up to a whopping USD 7 million!
The IPO process would also cost a company a substantial amount of time. The process of getting institutional investors interested (roadshows), will take around 6 to 9 months. On top of this, the public listing process would see owners giving up control of their business to corporate governance and compliance.
Some other notable challenges include:
If you’re a company that can’t bear the costs of going public just yet, but you need the benefits (liquidity, investor access and a boost in corporate profiling etc.), there is an exciting new middle-ground for you to explore. Direct listing.
Direct listing isn’t a new process. However, it has only garnered media attention recently, after unicorn companies like Spotify and Slack had successful direct listings in 2018 and 2019 respectively. Tech Crunch published an article praising the efficiency of direct listings, and Bloomberg published an article that spoke about how at a private Silicon Valley summit, there wasn’t any love for IPOs or banks.
Why all the rave about direct listing? (Our affiliate company CapBridge has a webinar that’s jam-packed with information about direct listing that would make perfect lunch-break entertainment!)
Essentially, direct listing platforms, like 1exchange, create a gradual, phased approach for companies to go towards a full listing when they are ready. Think of direct listing as a bridge between you and a potential IPO. Put bluntly, direct listing brings companies the benefits of an IPO, without the downside that comes with an IPO (albeit with less liquidity, of course).
Only 10-30% of a private company can be listed on a private exchange, like 1exchange, for instance. This allows 70-90% of a company to remain private. This means the owners continue to retain control and flexibility in day-to-day business operations will not be affected. As if that’s not good enough, with a direct listing, a company’s value doesn’t get diluted because new shares aren’t issued. Rather, existing shareholders will become investors of the tradeable shares after they are privately listed. It generally only costs approximately USD 20-30 thousand for the direct listing process and it generally takes 2 to 3 months.
There are 3 eligibility criteria for private companies that want to do a direct listing with us.
If you’re a business that would benefit from a direct listing, or if you would simply like to know more, our team at 1exchange will be delighted to get in touch with you through a call.
The opinions expressed in this publication do not purport to reflect the opinions or views of 1exchange (1X).