Please ensure Javascript is enabled for purposes of website accessibility

SPACs vs. Direct Listings: Key Differences Investors Should Know

By Matthew Frankel, CFP® - Feb 1, 2021 at 6:47AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Here's what investors need to know about these two ways companies go public without an IPO.

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]

Jason Moser: Well, still, a direct listing, something like a Spotify (SPOT 1.42%) or Slack (WORK).

Frankel: Yes, Slack went public that way.

Moser: Yeah. Yeah.

Frankel: Palantir (PLTR -2.77%) 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.

Moser: Yeah.

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.

Moser: Yeah.

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.

Moser: Yeah.

Frankel: That's my comparison with that. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Spotify Stock Quote
Spotify
SPOT
$107.27 (1.42%) $1.50
Slack Technologies, Inc. Stock Quote
Slack Technologies, Inc.
WORK
Palantir Technologies Inc. Stock Quote
Palantir Technologies Inc.
PLTR
$8.08 (-2.77%) $0.23

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
331%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/20/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.