Instacart maybe one of the newest companies to go public, and it’s using a new popular method called direct listing that gets around some of the traditional requirements of IPOs.
Reuters reports, according to anonymous sourcing, that Instacart executives are afraid a traditional IPO might “leave money on the table” in the form of low initial share prices.
Reporters Joshua Franklin, Anirban Sen and Krystal Hu note that the company, which recently raised $265 million in private fundraising, could have a value of $50 billion after going public, analysts estimate.
Insiders say Instacart has not made a final decision, and spokespersons are staying mum about the process.
However, there are some evident values to using a direct listing. Aside from the idea of value pricing raised by Franklin, Sen and Hu, there are also certain paperwork requirements that can be eliminated in a direct listing process.
“In a direct listing there are no underwriters,” writes an expert at Corporate Finance Institute online. “Underwriters work for investment banks to help sell stocks of a company that is going public. They make large purchases which adds value to companies as those shares are taken off their hands. However, the shares are typically sold at a discount to their true value. The process of using underwriters and selling at a discount increases the time and cost for a company that is issuing new shares. The practice of investment banks buying stocks and then selling the stock themselves is not as common now. Instead, the investment banks will use their network to help market the stocks and drive sales.”
“Companies that want to do a public listing may not have the resources to pay underwriters, may not want to dilute existing shares by creating new ones or may want to avoid lockup agreements,” adds Shobhit Seth at Investopedia. “Companies with these concerns often choose to proceed by using the direct listing process, rather than an IPO.”
In chronicling Instacart’s effort, reporters Franklin, Sen and Hu also cite similar potential for the financial firm RobinHood (of Gamestop fame) but did not acquire comment from anyone there, either.
The New York Stock Exchange accommodates direct listings since US SEC approval in December. Look for this to become a more common method of ushering a company toward public trading.
