TL;DR. A company can go public three ways: a traditional IPO, where investment banks underwrite the sale of new shares to institutional investors at a negotiated price; a direct listing, where existing shares trade on an exchange at a market-determined opening price with no underwriter and (usually) no new capital raised; or a SPAC merger, where the company combines with a publicly traded shell that already raised cash in its own IPO. Each path trades off cost, control, speed, dilution, and disclosure burden. This guide explains how each one actually works and why a company would pick one over the others.
Path 1: The traditional IPO
A traditional initial public offering is the path most readers picture when they hear “going public.” The company hires an underwriting syndicate led by one or more investment banks, files a registration statement (Form S-1) with the SEC disclosing financials and risk factors, and embarks on a roadshow to pitch institutional investors. The bookrunners build a demand book, set a price the night before the open, and the company sells newly issued shares — raising fresh capital — at that price. Shares then begin trading on NYSE or Nasdaq the following morning.
The mechanics that matter:
- Underwriting fee (gross spread). US IPOs almost always pay underwriters about 7% of gross proceeds — a remarkably sticky number documented in Chen and Ritter’s landmark paper “The Seven Percent Solution” (Journal of Finance, 2000). On a $500 million offering, that is $35 million in fees.
- Greenshoe. The issuer typically grants underwriters an “over-allotment option” to sell up to 15% additional shares if demand is strong. This is the standard mechanism for stabilizing the stock in early trading.
- Lockup. Insiders and pre-IPO shareholders are contractually restricted from selling for typically 180 days after the IPO, with the exact terms disclosed in the S-1.
- Price discovery. The IPO price is negotiated between the company, the bankers, and the anchor institutional buyers — not set by the open market. This is why “first-day pops” exist: a 20-50% jump on day one usually means the deal was priced below clearing value.
Reference reading on the full mechanics: see our explainer How an IPO Actually Works: S-1, Bookbuilding & Greenshoe.
Path 2: The direct listing
In a direct listing, the company files with the SEC and lists on an exchange — but does not hire underwriters to sell new shares to a pre-set list of institutions. Existing shareholders (founders, employees, VCs) simply have the option to sell their shares once trading opens. The reference price is set by the exchange the morning of the listing based on indications of interest, and the opening cross is a true market-clearing auction.
Direct listings only became viable for large companies in 2018, when the NYSE’s rules were broadened. The marquee examples:
- Spotify — listed on NYSE April 3, 2018. Reference price $132. Stock opened at $165.90, more than 25% above the reference. Morgan Stanley acted as adviser, not underwriter.
- Slack Technologies — listed on NYSE June 20, 2019 under ticker WORK. Reference $26; the stock traded above $41 in the opening hours.
- Palantir and Asana — both direct-listed on NYSE on September 30, 2020.
- Roblox — direct-listed on NYSE in March 2021 (initially planned as an IPO, then re-routed).
- Coinbase — direct-listed on Nasdaq April 14, 2021, ticker COIN. Reference $250; closed first day at $328.28.
Why a company picks this path: no underwriting fee, no forced 180-day lockup (so employees and early backers get immediate liquidity), and a transparent market-set opening price. The catch: traditionally, a pure direct listing did not raise primary capital. The SEC in 2020 approved a new variant — the “primary direct listing” — that lets the company sell newly issued shares in the opening auction, but adoption has been slow.
Path 3: The SPAC merger
A Special Purpose Acquisition Company is a shell with no operating business. The SPAC’s sponsors IPO the shell — usually selling units at $10 — and park the cash in a trust account. They then have a finite window (commonly 18-24 months) to identify and merge with a real private company. When the merger closes (often called a “de-SPAC”), the private company becomes public by absorbing the shell. Shareholders who do not want to be part of the new combined company can redeem their shares back to the trust at $10 plus interest.
The structural quirks that make SPACs distinctive:
- Trust account. Per the SPAC framework, 85-100% of IPO proceeds sit in trust earning Treasury yields until either a merger closes or the trust is returned to investors.
- Sponsor promote. Sponsors typically receive ~20% of the post-IPO equity (the “founder shares”) for a nominal price. This dilution is paid by the target company’s existing shareholders in the merger.
- PIPE financing. Because SPAC shareholders can redeem, the cash that actually reaches the target is uncertain. Many SPACs raise a Private Investment in Public Equity alongside the merger to lock in committed capital.
- Disclosure leniency (historical). SPACs historically allowed companies to publish forward-looking projections in merger filings that would not be permitted in an S-1 — a major reason loss-making, pre-revenue businesses chose this route during the 2020-21 boom.
The SEC tightened the rules with a final rule adopted January 24, 2024, requiring more detailed disclosures on sponsor compensation, dilution, conflicts of interest, and projections — narrowing the disclosure gap with traditional IPOs.
Side-by-side comparison
| Feature | Traditional IPO | Direct Listing | SPAC Merger |
|---|---|---|---|
| Underwriter | Yes (lead bookrunners) | No (advisers only) | SPAC IPO had one; de-SPAC does not |
| Typical banker fee | ~7% of proceeds | Flat adviser fee (small) | SPAC fees + sponsor 20% promote |
| Raises new capital? | Yes | Usually no (primary variant allowed since 2020) | Yes — trust cash (less redemptions) + PIPE |
| Price set by | Bankers + anchor investors night before | Exchange opening auction | Pre-negotiated merger valuation |
| Lockup | Typically 180 days | Often none (immediate liquidity) | Varies by merger agreement (usually 6-12 months) |
| Forward projections in filings? | No | No | Yes — but tightened by 2024 SEC rule |
| Speed to listing | 6-12 months | 3-6 months | 3-6 months once a SPAC is found |
| Best suited for | Most companies that need new capital | Cash-rich, brand-recognized companies | Pre-revenue / projection-heavy stories |
When each path actually makes sense
Traditional IPOs remain the default for one reason: they reliably raise capital. A company that needs $500 million to fund growth, accept dilution at a market valuation, and get marketed by a syndicate of bankers will almost always take this path. The 7% fee is the price of certainty.
Direct listings make sense for companies that don’t need the money. Spotify, Slack, and Coinbase were all cash-flow-positive (or close to it) with massive consumer brand recognition. The “price discovery” benefit of a true opening auction can outweigh the underwriting service, and skipping the lockup lets long-term employees realize gains without a six-month wait. Direct listings essentially weaponize a strong brand — if institutional investors will buy your shares without a roadshow, why pay 7% for one?
SPACs make sense (or did) for companies that are too early-stage, too capital-intensive, or too narrative-driven to survive a traditional bookbuild. EV makers with no revenue, space-launch companies, and pre-clinical biotechs all migrated to SPACs during 2020-21 because they could publish 2025 revenue projections that an S-1 would never allow. The 2024 SEC rules have narrowed this advantage substantially.
Common misconceptions
- “A first-day pop is good for the company.” It is good for the bankers’ institutional clients who got the IPO allocation. It represents money the company left on the table. Direct listings can mitigate this because the opening price is set by the full market, not by an anchor list.
- “SPACs are cheap.” They are not. After SPAC IPO fees, the 20% sponsor promote, redemptions, and PIPE discounts, target shareholders can end up materially diluted. Stanford professor Michael Klausner’s widely cited analysis found target companies effectively retained only about half of the gross cash raised by the SPAC’s investors after all economic frictions.
- “Direct listings can’t raise capital.” No longer strictly true. The SEC approved primary direct listings in 2020, allowing companies to sell new shares in the opening auction. Adoption has been limited because the mechanic is operationally complex.
- “All three are roughly the same after the first day of trading.” Largely true — once a company is public, the path it took to get there matters far less than its business performance. The path mostly affects who captured value during the listing.
Historical context: SPACs vs traditional IPOs
Concept diagram: how each path moves a company to “public”
Related concepts
- How an IPO Actually Works: S-1, Bookbuilding & Greenshoe — deep dive on the traditional path.
- Venture Capital Explained: Seed Round to IPO — the funding rounds that precede any public listing.
- Private Credit vs Bank Loans vs Syndicated Loans — alternative capital sources for companies that stay private.
Sources
- SEC, “SEC Adopts Rules to Enhance Investor Protections Relating to SPACs, Shell Companies, and Projections” — final rule adopted January 24, 2024.
- Wikipedia, Special-purpose acquisition company — historical SPAC IPO counts and structural overview, citing SPACInsider and SPAC Research.
- Wikipedia, Initial public offering — over-allotment / greenshoe mechanics and underwriter roles.
- Wikipedia, Spotify — April 3, 2018 NYSE direct listing details.
- Wikipedia, Slack Technologies — June 20, 2019 NYSE direct listing details.
- Wikipedia, Coinbase — April 14, 2021 Nasdaq direct listing details.
- Hsuan-Chi Chen and Jay R. Ritter, “The Seven Percent Solution,” Journal of Finance, June 2000 — documents the persistent 7% underwriting spread on US IPOs.
- Michael Klausner, Michael Ohlrogge, and Emily Ruan, “A Sober Look at SPACs,” Yale Journal on Regulation, 2022 — analysis of SPAC dilution and target-company economics.
Disclosure: This article was produced with AI assistance and reviewed before publication. It is for informational purposes only and is not investment advice.