Could a Nontraditional IPO Be Right for Your Company?

These reasons may help you consider whether a nontraditional IPO could work for your company.
April 13, 2018

When music streaming company Spotify recently launched a nontraditional IPO, the market paused to see how this unusual direct listing approach would play out. While the final results remain to be seen, there are obvious benefits to filing a nontraditional IPO that you can learn from as a business owner.

An initial public offering (IPO) refers to the first time a private company offers its stock to the public. Companies seeking capital to expand generally issue IPOs, as well as privately owned companies aiming to become publicly traded.

Features of a Nontraditional IPO

The unique feature of Spotify's IPO is its nontraditional nature. During the event, the company didn't use investment bankers or sell any company-owned shares. No banks underwrote the offering and there wasn't a set price. Rather, investor demand resulted in the publicly listed price.

"Nontraditional IPOs like Spotify's spurn the traditional underwritten IPO route for a 'direct listing,' which means company stockholders (including management) are able to sell directly to the public and no new money is being raised for the company," says attorney Christopher Tinen of the business and litigation law firm, Procopio, Cory, Hargreaves & Savitch LLP.

According to Tinen, the approach is unique. "Most traditional underwritten IPOs result in a large influx of capital to the company and a 'lock-up' of sales by company stockholders for 180 days while the market settles," says Tinen. "Typically, underwriters lock up founders and other insiders for 180 days to avoid an immediate price collapse."

Benefits of a Nontraditional IPO

There are several upsides to a nontraditional IPO, according to Tinen's colleague, attorney William Eigner, a partner at Procopio, Cory, Hargreaves & Savitch LLP. "The pros of a direct listing include no dilution to existing stockholders, immediate liquidity for selling stockholders and reduced costs of going public," he says.

"Typically, IPOs are not an exit for insiders in a normal IPO, but a direct IPO does indeed provide an exit," says Eigner. "Underwriters that facilitate most IPOs also charge a hefty fee for handling the IPO, but a direct listing avoids that cost."

A nontraditional IPO can save a company a great deal of money, agrees certified financial planner Rockie Zeigler III. “A direct listing IPO can save companies an untold amount of costs by getting rid of the middlemen, which includes investment bankers, brokers and the normal IPO roadshow that occurs so that the company can really whip up support for the shares."

For shareholders, not having to wait out the lock-up period before selling is another pro.

Drawbacks of a Nontraditional IPO

As with any business maneuver, a nontraditional IPO has its drawbacks. "The stock may not have a huge run up in price fresh off the listing, as there aren't the usual players involved hyping the stock to their large institutional clients," says Zeigler. "Early performance of the stock may suffer as well—but time will tell."

While a direct-listed IPO may not get all of the hype and fanfare as companies launching traditional IPOs, the cost savings may be substantial. For a new publicly traded company, those cost savings cannot be overlooked.

—Rockie Zeigler III, certified financial planner

Volatility is also an issue, believes Tinen. "The lack of underwriters makes the offering highly volatile in the sense that there aren't typical parties stabilizing the market or buying and holding shares in the company," he says.

"In addition, the ability of essentially all stockholders to immediately sell to the public puts more selling pressure than usual on the company's stock," continues Tinen.

Despite the drawbacks of the nontraditional IPO, Zeigler sees the trend continuing. "Going forward, I think we may begin to see more companies list their IPOs in this manner. While a direct-listed IPO may not get all of the hype and fanfare as companies launching traditional IPOs, the cost savings may be substantial. For a new publicly traded company, those cost savings cannot be overlooked."

Tips for Going Public

If you're thinking about eventually going public, either with a traditional or nontraditional IPO, Eigner offers the following advice. "It's a good idea to get accountants and audit firms involved as early as possible. Often, audits hold things up with the SEC or otherwise."

Eigner also recommends that private companies mirror public company accounting and disclosure controls, corporate governance and other requirements before going public to ease the transition to being public.

And Eigner advises accessing well-respected institutional investors into your company as early as possible. "This will help increase interest from underwriters and the investing public when you decide to take your company public," he says.

Photo: Getty Images

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