Mobile gaming company Roblox (NYSE: RBLX) it recently went public, but they chose not to take the traditional IPO route. And despite the wave of SPAC IPOs over the year or so, Roblox didn’t use that approach anymore. Instead, Roblox used a less common method of publicity called direct listing. Here Amadan Beò video, recorded March 11th, Fool.com contributor Matt Frankel, CFP, gives investors an overview of the direct listing process, how it differs from a traditional IPO, and why several companies with big names on it used to be public in recent years.
Mata Frankel: There are a few major differences that we will introduce. In a traditional IPO, that is it Airbnb and DorasDash last year, companies hire subscribers, charge an IPO price, determine a certain amount of new stock they want to sell to the public to raise money. That is the traditional IPO.
The direct listing, the company and the investors, are just listing the existing shares on the public markets. They do not have to hire subscribers. They hire some financial advisors, but it’s a lot less of a process. They confirm the day one price of the stock, that is the reference price, which will come in a little later. It’s not the same thing when a company sets an IPO price.
Listings are only available on the New York stock exchange, which is another interesting thing. In general, tech stocks list on the NASDAQ as most investors know. If you want to invest in a broad tech index, you can buy the NASDAQ-100, something like that. So if you see some of those technical stocks on the New York stock exchange, Slack one of them, Spotify is another good example, it is because that is the only exchange that offers them. Next slip, please.
Who sells the shares? Where are they from? One of the biggest differences is that new capital is not usually built in direct listing. The New York Stock Exchange just recently changed where a company can raise money in direct listing, but that is usually not the case. It’s usually just the stock. One major difference is that locking time is not required.
When a company goes public, there is usually a lock-in period, a period during which existing shareholders will not be allowed to sell their shares. It usually ends a month or two later. As Airbnb insiders could not sell shares on the first day of that IPO, it was not allowed. This is called locking. In direct listing, existing shareholders, early investors, founders of the company, the VC companies that supported it, can choose to sell some of their stock or not on the first day. It is really just a model of supply and demand. It does not depend on some new sections being created. It does not depend on some shares being traded. Only the existing segments are coming on the market. Some people want to sell them, great. They can get money on the first day. It democratizes the process, not only for investors like you and me, as we talk about in a second, but also for company intellectuals and things like that as well. Next slip, please.
How is direct list stock price determined? We mentioned something called reference price, and it is different than IPO price. In an IPO, subscribers determine a price at which the company is going to sell its shares to the public. The shares at IPO price, anyone who tried to get into the Airbnb or DoorDash IPOs, I don’t know if Brian has shares of either of those, but if you wanted to get his -in at IPO price, you were pretty much out of luck. The shares are typically sold at an IPO price for large investors, causing retail investors to buy on the open market regardless of supply and demand that allows them to do so. once the shares start trading freely. In direct listing, since you are not selling new shares, everyone has an equal opportunity to buy. As soon as shares become available for public trading, you may pay more for the IPO or reference price, but so do the big investors who want to get in.
We saw that Ark Invest bought some Roblox yesterday. They paid a base price just like everyone else. They didn’t get in at that $ 45 reference price. The reference price is a starting point determined by financial advisors. It is usually based largely on what the company’s shares have been trading on the secondary market, the valuation used by the companies the last time they raised money, things so. This is not what any investors pay, including the big investors. The reference price of Roblox was $ 45.
As Brian said, the stocks are trading for a lot more than that right now. $ 60.50 is the lowest any Roblox shares have traded on the public markets since it went public yesterday. The reference price is just a starting point for an auction, in other words. Think of it as the reference price was what the market makers are putting out there as an auction. As supply and demand demands, it usually goes up from there. By the time Roblox actually opened, it was in the 60s, so no one was paying $ 45 for it. Not the big investors, not the retail investors. It really gives access to the playing field. It’s not just supply and demand on the sales side, it’s supply and demand on both sides. If you pay $ 60-something for Roblox shares, that means the big investors are willing to pay those prices.
One more. Here is an Airbnb chart. The price of an Airbnb IPO was $ 68. That’s what big investors actually paid. Large investors who pledged to buy shares at IPbn Airbnb paid $ 68. What do you see as the lowest share price it has traded at? Just over $ 120. The cheapest investor a seller has ever found is able to get on the Airbnb at about twice what the big investors paid. That’s just a good example of how lists just give the playground the right level. Everyone has been paying between $ 60 and $ 75 for Roblox shares the past two days. Everyone who wants to invest, such a big difference between direct listing and a traditional IPO, especially for a popular stock like these.
On the next slide, I broke down some of the pros and cons from direct listings. Just to break it down is pretty easy. Some of the benefits, they are cost effective for the company. They don’t have to hire subscribers, they don’t have to do an IPO road show. They have to hire some consultants, but it’s generally a much cheaper process. Locking times are not required for intellectuals. It democratizes the public listing process for both investors and for inward investors. Even if the company is raising capital, this is an interesting point, the interests of the company are in line with the public. The company will not set their IPO price. If they decide to sell 10 million new shares, the price of these 10 million new shares will be determined by how interesting investors are to buy their stock, not at what price the sell subscribers to lose money for it. He really is an interesting model.
Disadvantages, just very quick, and then I close up and let Brian talk. They are incredible. Like I said, it democratizes the capital building process and things like that, but it’s also unbelievable for the company. If the company has to raise $ 100 million, they do not know how many shares are for sale because the price is going to be hit by supply and demand. It can be hard to get a lot of interest for listing just because like I said, there is no roadshow, no construction. If little is known about the company, these are usually only used by large established brands. I mentioned Slack, Spotify. Coinbase is another one that is going to do direct listing. These are big companies that people are already interested in investing in. The first price is governed by supply and demand. That could be good or bad for investors in the company, it just makes it invisible, and they still have the same disclosure requirements as an IPO. They still have to cash out, open the books for real. SPAC IPOs avoid this to some extent.
This article represents the opinion of the writer, who may not agree with the “official” recommendation position of the Motley Fool chief consulting service. We are motley! Questioning an investment dissertation – even one of our own – helps us to think critically about investing and make decisions that will help us become softer, happier and richer.