How does a direct listing differ from an IPO?

, went public on the New York Stock Exchange the same way last month. But what exactly is a direct listing, and why is it increasingly popular?

A direct listing eschews many of the usual trappings of going public. An IPO serves two main functions: raising new capital for the firm in question, and providing a smooth entrance to trading on public exchanges. The process is managed by investment banks, which drum up the interest of investors, underwrite newly issued shares, find buyers for them and guarantee a floor for the listing price—but charge huge fees for the service, usually between 3.5% and 7% of the proceeds.

Direct listings work differently: existing shares are simply switched to being tradable on an exchange. No new capital is raised, and few, if any, investor roadshows are organised. Direct listings also do not come with lock-ups, so existing shareholders can sell immediately . The fees are much lower, too.

Direct listings are not about to replace IPOs. For starters, few young firms can afford to shun new capital. And there are even fewer that already have a relatively broad shareholder base, rather than a narrow one of select few large owners who want to offload their shares. Investment bankers argue that only firms that already have a well-known brand familiar to a broad range of investors and consumers can pull off a direct listing.

It's not the cheap and easy way! It's the Spotify way! :)

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