Recently, we received a question from an issuer wondering what “direct listing” means. In short, a direct listing, also sometimes referred to as a direct public offering, is an offering in which an issuer raises capital directly from investors without a third-party intermediary like a broker-dealer or funding platform.
Direct listings can occur in both the public and private markets. In the private market, companies raising capital often do so under JOBS Act exemptions for SEC registration, such as RegA+ or RegD. Companies may opt for a direct listing because it lowers the costs of capital as there are often fewer fees that would otherwise be paid to an intermediary. Issuers can also use a direct listing to allow investors to invest through the issuer’s website, which can prevent investors from being directed to other offerings. This often gives issuers more control over the investment. In contrast, RegCF offerings cannot be conducted without using an SEC-registered intermediary.
However, there are significant downsides to opting for a direct listing. Some states require issuers to utilize an intermediary like a broker-dealer or funding portal to sell securities. Additionally, some Tier I RegA+ direct listings require the issuer to register the security in every state that it intends to sell the security, making the offering more burdensome and costly. Additionally, a direct listing can make it easier for companies to miss essential aspects of regulatory compliance, creating additional risks for themselves and investors. This, offerings made via a direct listing require a higher level of due diligence from investors to ensure they aren’t falling victim to fraud.
When using a registered intermediary like a broker-dealer or a funding portal, these entities often have defined processes and compliance requirements that ensure capital is being raised in accordance with securities regulations, protecting both issuers and investors. An SEC-registered intermediary ensures that an issuer has gone through due diligence like bad actor checks to validate that it is eligible to be listed on a portal.
Ultimately, any company seeking to raise capital through a JOBS Act exemption should talk to a broker-dealer and a securities lawyer to understand how they can compliantly and successfully raise the capital they need to grow in the private market.