What is the difference beetween Direct Listing (like the one of Spotify) vs Secondary Offering (where the existing shareholder decides to cash in by selling part of its holdings). Hope anyone can help me with this
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A direct listing is an alternative to a standard IPO process. A regular IPO determines the listing price by meeting with HFs and large institutional long-only funds, while a direct listing just starts trading on an exchange and allows market demand determine price. A direct listing can be less stable once it starts trading because demand is unknown, but it is also less costly in terms of fees paid to the investment banks underwriting the deal. Typically you must be a pretty well known private company to direct list so that investors understand its business model and are comfortable buying it when it hits the market. A follow-on offering is simply any subsequent equity offering after the IPO. It may be a PE firm selling down its position, or just the company rasing more capital for various other reasons. There can be multiple follow-on offerings throughout a company's history.
thank you for the response!! I was a little bit confused because in Brealey and Myers finance book its stated:
"IPO - This may be a primary offering, in which new shares are sold to raise additional cash for the company. Or it may be a secondary offering, where the existing shareholders decide to cash in by selling part of their holdings"
according to this there is no raising capital in the secondary offering, thats why I assumed that the only difference between Direct Listing vs Secondary offering was the Underwriter.
When a company decides to issue a follow-on offering, it can be for two different reasons. One reason is that the company needs to raise additional capital (for various reasons) and thus creates new shares to issue to investors. This is dilutive because respective ownership stakes are altered. The second reason is a large investor(s) looking to sell down their stakes, in which case no additional shares are created.
A note on follow-on offering:
It's my understanding that a follow-on offering is a new round of stock issuance (thus dilution to current shareholders) to the markets. Conversely a secondary offering (or secondary market offering) is meant to offer liquidity to current investors or founders in a company - since no new stock is being issued there is no dilution.
https://corpgov.law.harvard.edu/2018/07/05/spotify-case-study-structuri…
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