What is a direct listing and why did Roblox choose it over an IPO?

We take a look at what a direct listing is, how it’s different from an IPO and why Roblox chose to make its shares publicly available in this way.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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Online gaming company Roblox recently announced that it was going public through a direct listing instead of an initial public offering (IPO), as earlier planned.

But what exactly is a direct listing and how does differ from an IPO? Why did Roblox choose to go public this way? Let’s find out. 

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What is Roblox?

Roblox is one of the world’s most popular gaming platforms for children and teens, offering a wide range of games across PCs, mobile devices and games consoles.

Business has been good for the company in recent times. As people seek more home entertainment options for them and their children because of Covid-19 lockdown measures, the demand for online gaming has risen.

Naturally, the main beneficiaries have been companies like Roblox.

What’s a direct listing and how’s it different to an IPO?

Previously, we’ve looked at what an IPO is and how it works.

A direct listing is a relatively new and innovative structure that provides companies with an alternative path to going public.  

Here are the basics of how it works.

Just like an IPO, a company that intends to sell shares to the public files its registration statement with a regulatory authority, like the FCA here in the UK or the SEC in the US.

Its outstanding shares are then listed on a stock exchange.

So, no new shares are issued like in an IPO. Rather, existing shareholders such as founders, employees, and early-stage investors simply become free to sell their shares to the public. The company, therefore, does not raise any new capital.

Apart from no issuance of new shares, the other main difference between an IPO and a direct listing is the lack of investment banks serving as underwriters.

In a typical IPO, investment banks are hired to underwrite the process. This includes setting an offering price for shares before they start trading on a stock exchange.

In a direct listing, a company may still hire one or more investment banks. But this is mostly to serve as financial advisers and not as underwriters.

At the moment, direct listing is still a relatively new method of going public. But it’s one that’s becoming increasingly popular, if Roblox latest decision is anything to go by.

Which notable companies have chosen direct listing over IPO?

A few other companies that have successfully undergone direct listing in recent times include:

  • Spotify (music streaming) in 2018
  • Slack (workplace messaging) in 2019
  • Palantir Technologies (data analytics) in 2020

What are the advantages of direct listing?

  • Allows companies to avoid hefty underwriting fees
  • Makes it easier for existing shareholders to cash out more quickly (as there is no lockup agreement period for shares like in an IPO)
  • Provides a fairer market for everyone (including institutions and members of the public) to participate and buy shares at the same price when they start trading

What are the disadvantages?

  • No new capital for companies
  • Potential for more volatility since there are no underwriters and large institutional investors to help set the value of a company and its share price
  • There is no allocation process to ensure participation of target investors
  • It’s a relatively new and less proven model

Why did Roblox choose direct listing?

Roblox actually planned to go public through a traditional IPO in December 2020. However, the IPO was postponed, with Roblox saying that it wanted to try to improve the process first.

Several news outlets like Bloomberg and the Wall Street Journal suggested that Roblox was concerned after staggering first-day gains in the IPOs of Doordash and Airbnb.

These huge gains raised questions about the system of pricing IPOs and whether companies could be leaving money on the table through current pricing models.

After the postponement, Roblox initiated a funding round that saw it raise $520 million, which ultimately increased the company’s valuation to $29.5 billion.

These new funds and the consequent decision to go public via direct listing suggests that Roblox is currently not concerned with raising new capital. It will simply allow those who own shares to start trading them to the public.

This is not to say that things might not change in the near future. After all, the date of the company’s direct listing has not yet been announced.

So there’s still a chance that Roblox could change its mind and opt for an IPO in order to raise capital, if necessary. But we’ll have to wait and see.

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