Direct Listing vs IPO vs SPAC: Three Ways a Company Goes Public
The three routes to a stock exchange differ in who sets the price, whether new money is raised and how soon insiders can sell. Here they are side by side, with real examples.
A private company can go public through a traditional IPO, a direct listing or a merger with a SPAC. In an IPO, underwriters sell new shares at a price set the night before trading. In a direct listing, existing shares open in an exchange auction with no underwriter. In a SPAC merger, the company joins a listed shell.
All three end with shares on a US exchange and the same ongoing reporting duties. The differences are in the first day: who sets the price, whether the company raises cash, and who is allowed to sell.
How do the three routes compare?
| Traditional IPO | Direct listing | SPAC merger (de-SPAC) | |
|---|---|---|---|
| New money for the company | Yes, from selling new shares | Usually none; exchange rules allow a primary direct listing that sells new shares | Cash left in the SPAC trust after redemptions, plus any PIPE investment |
| Underwriters | Banks buy the shares and resell them to investors | Financial advisers, no underwriting of shares | Banks advise; the SPAC’s own IPO had underwriters |
| How the price is set | Bookbuilding during the roadshow, final price set on pricing night | Opening auction on the exchange, from buy and sell orders | Negotiated value in the merger agreement, usually expressed at $10 per SPAC share |
| Main SEC document | Form S-1 (F-1 for foreign issuers) and final prospectus | Form S-1 registering existing holders’ shares | Proxy statement and Form S-4 or F-4 |
| Lockup on insiders | Usually yes, set by the underwriting agreement | Not required; some companies set their own limits | Usually yes, for sponsor and target holders, set in the deal documents |
| Who can buy at the start | Mostly institutions allocated shares at the IPO price | Anyone, from the first trade | Anyone who held or bought SPAC shares |
How does a traditional IPO work?
The company and its underwriters file an S-1, answer SEC comments, market the shares on a roadshow, then agree on a final price and sell the shares to investors the night before trading begins. Underwriters usually have an overallotment option (the greenshoe) to sell extra shares and support trading.
Reddit used this route: it priced its IPO at $34 a share and began trading on the NYSE on March 21, 2024. The full timeline, from confidential filing to first trade, is in our guide to how an IPO works.
How is a direct listing different?
In a direct listing, the company registers shares that employees and investors already own, and the exchange opens trading with an auction. No bank buys the shares in advance, and there is no IPO price for allocated investors.
Spotify made the first major direct listing on the NYSE on April 3, 2018. Coinbase followed on Nasdaq on April 14, 2021. Neither company sold new shares in its listing; the point was to let existing holders trade.
For years a direct listing could not raise new money. In December 2020 the SEC approved NYSE rules for a primary direct listing, in which the company sells new shares in the opening auction, and Nasdaq later adopted similar rules. Few companies have used it so far.
Direct listings work best for companies that are well known, do not need cash and have enough existing holders willing to sell on day one. Without a lockup, many shares can trade immediately, which can make early prices volatile.
How does a SPAC merger compare?
In a de-SPAC, a private company merges into a SPAC that already trades on an exchange. The company’s valuation is negotiated with the SPAC sponsor, much like a private sale, instead of being set by IPO bookbuilding.
DraftKings took this route, completing its merger with the SPAC Diamond Eagle Acquisition in April 2020 and listing on Nasdaq. The cash a company receives depends on how many SPAC holders redeem their shares, which can leave far less than the trust held at the start. Our guide to what a SPAC is covers the trust account, redemptions and the SEC’s 2024 rules, which brought de-SPAC disclosure and liability closer to an IPO (SEC fact sheet).
What does each route mean for employees with stock?
Employees care most about when they can sell. That depends on lockups and company trading policies, not just the listing method.
- IPO: employees are usually locked up, often for 180 days, under agreements described in the prospectus. See how IPO lockups work.
- Direct listing: registered shares can often be sold from the first day, subject to insider trading policies and blackout periods.
- SPAC merger: target company holders, including employees, are often subject to lockups in the merger documents, and options and RSUs convert into the combined company’s equity.
Whether and when to sell is a personal decision; the company’s stock plan administrator and a tax professional can explain the rules for a specific grant.
Why do most companies still choose an IPO?
A traditional IPO remains the most common route because it raises money in a single, managed sale, and underwriters bring institutional buyers and support trading after the listing. Direct listings save underwriting fees but require strong demand without a marketing process. SPAC deals can move faster and allow projections in marketing, but redemptions make the cash raised uncertain.
Bottom line
To see which route a company used and what it means for its shares, find its registration statement on SEC EDGAR: an S-1 with underwriters on the cover is an IPO, an S-1 with no underwriters and a list of selling holders is a direct listing, and an S-4 or proxy filed by a SPAC is a de-SPAC. The “Shares Eligible for Future Sale” section of any of them shows when insiders can sell.
FAQ
Does a direct listing raise money for the company?
Usually not. Most direct listings only register existing shares, although NYSE and Nasdaq rules now permit a primary direct listing in which the company sells new shares in the opening auction.
Is a direct listing cheaper than an IPO?
It avoids the underwriting discount on new shares, which is the largest IPO cost, but the company still pays financial advisers, lawyers, auditors and exchange fees.
Can retail investors buy at the IPO price?
Rarely. Most IPO shares are allocated to institutions, and a few brokers offer small allocations to customers. In a direct listing there is no IPO price, so everyone buys at market from the first trade.
Are SPAC mergers riskier than IPOs?
They carry different risks: sponsor shares and warrants dilute each share, and the target’s projections may not be met. The 2024 SEC rules require that dilution and the projection assumptions to be disclosed.
