IPO vs SPAC vs direct listing: Explaining Wall Street’s hot trends

Not too long ago, most big startups looking to debut on Wall Street chose to sell new shares through an initial public offering. But IPOs are no longer the only viable way for a privately held companies to start trading their stock.

Many high-profile businesses are increasingly using so-called blank check mergers with special purpose acquisition companies, or SPACs, to go public.

That’s how the fallen unicorn angel WeWork is set to finally make its way to Wall Street. And Southeast Asia’s Grab, a top global ridesharing firm, is set to list shares in the United States through a nearly $40 billion SPAC deal — the biggest blank check merger ever.

Other companies are going public simply by listing existing shares directly to an exchange instead of doing a more traditional IPO.

That’s how cryptocurrency giant Coinbase plans to come to Wall Street. Video game platform Roblox and Big Data firm Palantir are other examples of companies that recently chose such direct listings to go public.

So if you are interested in buying new stocks, what are some of the major differences between an IPO, SPAC and direct listing?

IPOs aren’t going away

An initial public offering is still the preferred choice for many private companies. That’s how Airbnb, DoorDash and dating app Bumble have all made their way to Wall Street in recent months.

Brokerage giant Robinhood recently filed to go public through an IPO — even though some investors are wary of it in the wake of how it handled the mania of meme stock GameStop.

Going public through an IPO has several advantages. Companies work with top Wall Street firms to price the stock appropriately and find the right buyers.

IPOs also typically wind up receiving favorable coverage for their stock from the investment banks that helped bring them public.

And, given that companies have to file numerous financial documents with the Securities and Exchange Commission before the stock can begin trading, IPOs give prospective investors lots of time to pore over all the intimate details about a company before deciding if they want to buy the stock.

Although new stocks often enjoy big gains on their first day, that hasn’t scared away investors either. Many IPOs continue to do well after splashy debuts.

The Renaissance IPO exchange-traded fund, whose top holdings Uber, Zoom, Pinterest, CrowdStrike and Peloton have all gone public in the past few years, has more than doubled in the past 12 months.

SPACs’ growing popularity

The knock on SPAC companies used to be that they were only good for companies that couldn’t get the more traditional blessing from Wall Street through a lucrative IPO.

But following successful debuts from companies like Richard Branson’s Virgin Galactic and gambling giant DraftKings, that’s no longer the case.

The Grab and WeWork SPACs are another clear sign that larger mature startups have other options to go public. Many companies using SPACs also wind up raising money from large institutional investors like Fidelity through private investments in public equity, or PIPE, deals.

But many smaller private companies that are less seasoned — particularly in younger emerging industries like electric vehicles and crytpocurrencies — may still need to go public via SPACs instead of an IPO. That’s because SPACs tend to have fewer regulatory hurdles to jump through.

“There are many advantages to the ability to go public more quickly through a SPAC. That was a factor to consider,” said Tyler Page, CEO of Cipher Mining, a US-based firm that plans to merge with a SPAC named Good Works Acquisition.

Page said the company doesn’t anticipate that it will start generating significant revenue until later this year and hopes to be profitable in 2022.

Direct listings for mature companies

Some companies, albeit a rare few, are able to bypass the IPO and SPAC markets and just list shares directly to an exchange like the New York Stock Exchange or Nasdaq.

The allure of listing directly is fewer fees paid to bankers and more control over setting the stock price. But direct listings are mainly good for companies that already have a strong following and may not need Wall Street to drum up support.

Spotify and Slack (which is getting purchased by Salesforce) are examples of companies that did direct listings before Palantir, Roblox and Coinbase.

More big unicorns may choose direct listings as a way to capitalize on the growing level of cynicism that many smaller investors have for big Wall Street firms.

“The trust between pure retail investors and banks that have underwritten IPOs has broken down,” said Hugh Tallents, partner with consulting firm cg42. “Because of that, a direct listing makes a ton of sense for Coinbase and some other companies.”