While companies are going public at one of the fastest rates in history, many are choosing not to use the traditional IPO process to list their shares on the public markets. Two ways we're seeing companies go public these days are through direct listings and special purpose acquisition companies, or SPACs.
In this Jan. 25 Fool Live video clip, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss the differences between these two non-traditional ways of going public and what they mean to investors.
Matt Frankel: "Can you compare direct listing in SPAC sometime?" I'm not a fan of direct listings. I'll compare them right now. [laughs]
Frankel: Yes, Slack went public that way.
Moser: Yeah. Yeah.
Frankel: Palantir (NYSE:PLTR) is a recent one that went public through direct listing where the shares just start trading. There's no IPO process, there's no underwriting. They just go. One day they're trading; one day they're not.
Frankel: One of the big arguments in favor of SPAC IPOs, is it gives the general investing public a chance to buy something at its IPO price. If I get in a SPAC at $10 a unit, I'm getting in for whatever the sponsor of that SPAC is getting it. I'm getting it for whatever the big guys are investing at. When a direct listing, it's really tough to get into the initial price on a really hot IPO. When Slack or Spotify went public, day one, their shares took off pretty good. It's still tough to get in on the IPO price, so it doesn't really alleviate that pain point. A direct listing is more of a benefit to the company. A direct listing is appropriate because it's not an IPO, they're not offering any new shares.
Frankel: It's a really easy way to go public if a company doesn't need to raise any more capital, where they just take the shares that already exist, they're going to list them on the public market. Period. They don't have to pay underwriters, they don't have to create new shares, they don't have to price their IPO, they don't have to do a roadshow or any of that. It's a more cost-effective way for companies to go public if they don't need to raise capital. It's not to benefit the investor. There's an argument to be made that SPACs are in a bubble right now. But SPACs are generally made to level the playing field between investors and the institutional buyers. That's why I'm a proponent of the SPAC market. I don't mind direct listings, but they're not a benefit to the investor.
Frankel: That's my comparison with that.