Direct listings – a viable alternative to the traditional IPO?

What is the appeal of a direct listing for the issuer?

A direct listing or introduction, in theory, gives the issuer a chance to get the benefits of having its shares traded on a public market – access to capital, higher profile of the company, and an exit for its existing shareholders and/or early backers – without the broking and underwriting fees and restrictions such as lock-in periods that are usually associated with an IPO.

Is a direct listing/introduction a viable option for all companies?

No, a direct listing or introduction may not be a viable option for most companies.

Firstly, a number of companies carry out a fundraise linked with IPO to provide capital for a specific reason or for general working capital purposes, but with an introduction they would not receive this injection of cash. Looking at the above examples, although MetroBank did not carry out a public fundraise associated with its listing, it did carry out a private placement immediately prior to listing, the proceeds of which contributed to meeting its working capital requirements. A fundraise would also contribute to a company’s free float, being shares held in public hands, which forms part of the eligibility requirements for a Main Market listing.

Further, the lack of associated fundraising and pre-marketing to attract interest in the shares on IPO means the price of the shares is not set at the time they start trading, and it may take a few hours or days of trading for the price to settle. In addition, without the institutional investors usually approached by brokers as part of a placing to promote trading activity, there could be little or no initial trading volume.

What about lock-in arrangements and prospectuses?

Whilst the absence of lock-in arrangements may appeal for shareholder directors or major shareholders, the prospectuses published by both MetroBank and Pennpetro Energy detail lock-in arrangements with the shareholder directors and major shareholders respectively, suggesting that lock-ins are often given even if not required, in order to limit volatility and demonstrate commitment to the company.

It is worth noting that, while an introduction doesn’t exempt an issuer from publishing a prospectus and complying with eligibility requirements, it does provide a low cost route to trading, with potential to raise additional capital once listed, and the benefit of increased liquidity and enhanced profile.

Is a Standard Listing the answer?

A Standard Listing in London can be achieved without a fundraise on IPO as a company can be admitted with a ‘qualified’ working capital statement – something that isn’t possible with a Premium Listing – making it particularly suited to introductions. Combined with less stringent eligibility requirements and no requirement to appoint a sponsor, saving significant upfront and ongoing costs, an introduction to the Standard List is a good middle ground for those companies looking for a straightforward, low-cost route to listing in London.

Memery Crystal is a specialist international law firm based in London with a well-established history of acting for companies listing on the Main Market. Clients include Rainbow Rare Earths, Petra Diamonds, Tharisa, Green Dragon Gas and Gulf Keystone Petroleum. To see if your business is eligible for the Main Market, read our guide here.