Joseph Stone Capital Insights: Direct Listings, SPACs and Traditional IPOs Compared

Companies that decide to become publicly traded have more than one route. Each route changes who sets the opening price, whether new money is raised, and what early shareholders can do after trading begins.

Traditional IPO. The company works with underwriters who help prepare the registration statement filed with the SEC, gauge demand from institutional investors, and set an offering price the day before trading opens. The company usually sells new shares and raises capital. Insiders and early holders are commonly subject to lock-up agreements, often around 180 days.

Direct listing. Existing shares begin trading on an exchange without a traditional underwritten offering. The opening price is set by buy and sell orders on the first day rather than by an offering price. Since 2020, the NYSE and Nasdaq have permitted primary direct listings, in which a company can also sell new shares in an opening auction. Lock-ups are typically not required in the same way, so more shares may be available to trade early.

SPAC merger. A special purpose acquisition company raises money in its own IPO and later merges with a private operating company, which becomes public through the merger. SEC rules adopted in January 2024 expanded disclosure requirements for these transactions, including on sponsor compensation, conflicts of interest, dilution and projections.

What the differences can mean for investors. Each route carries its own risks. First-day prices can move sharply in any listing. Direct listings can see wider early price swings because there is no underwriter-set price. SPAC transactions can involve meaningful dilution from sponsor shares and warrants, and redemptions can reduce the cash a company actually receives. In every case, newly public companies may have limited trading history, and investors can lose some or all of their investment.

Where to read primary documents. Registration statements (Form S-1 or F-1), SPAC proxy and registration materials, and later periodic reports are available free on the SEC's EDGAR system at sec.gov.

Sources: SEC Investor.gov, "Investing in an IPO" and SPAC investor bulletins; SEC final rule on SPACs, shell companies and projections (January 24, 2024); NYSE and Nasdaq direct listing rules approved by the SEC (December 2020 and May 2021).

Disclosure: Joseph Stone Capital, LLC, member FINRA/SIPC, 585 Stewart Avenue, Suite L60C, Garden City, NY 11530. This material is for informational and educational purposes only and is not an offer to sell or a solicitation of an offer to buy any security, nor a recommendation of any security or strategy. Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results. Check the background of any firm or registered representative on FINRA BrokerCheck.