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Why Do Companies Do Direct Listings?

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As Roblox goes public via a direct listing, you may be asking, "What is a direct listing?"

A direct listing, or Direct Public Offering (DPO), is when a private company sells shares to the public without a financial intermediary, or an investment banker.

Usually, a DPO happens when employees, executives, or other shareholders are looking to quickly find a buyer for their existing shares. And generally, it’s not a capital raise, which is when a company raises cash by issuing brand new shares.

So what are the advantages of a DPO?

For one, existing shareholders enjoy liquidity, which is a fancy way of saying they may be able to access the market quickly. If the market is trading at high price levels and the sellers can find buyers quickly, maybe the sellers will be able to sell close to their preferred price. As a reminder, investment bankers can be expensive. So skipping the banker part means skipping the transaction fee that goes to them.

But a key disadvantage is that bankers can be really helpful. They know how to price an asset and they’ll set up a fair market. Bankers also run a roadshow, in which they market the stock of the company, pitch investors, and build a book of demand for the stock, so that when the listing happens, the buyers are all lined up for the shares. 

To see which companies have done or may do a direct listing, watch the quick video above. 

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