Should a company go public after raising capital?

A successful funding campaign via either equity crowdfunding or a Regulation A offering offers entrepreneurs the ability to quickly raise capital using their own network, advertising, social media and other public relations efforts. The process is a fast and efficient way of gathering cash.

Many companies move with relative speed from having raised capital via either Regulation A or equity crowdfunding to a direct listing on the stock exchange. This does nothing to add funds to the company’s coffers, but there are plenty of good reasons to make this move — and good reason to opt for crowdfunding as a way to bypass the IPO route.

From an economic, pragmatic standpoint, it costs significantly less money to pursue a Direct Listing than to pursue an IPO. IPOs come with underwriting fees, and though there’s no doubt that the expertise that the underwriters provide in both process and investor information has value, it comes at an expense. By comparison, a Direct Listing costs substantially less than half the amount, mostly charged as a flat fee. Though both the IPO process and Direct Listings command their fair share of regulatory compliance, there are a significant number of steps demanded for an IPO that Direct Listings avoid.

Direct Listings don’t require the time-consuming roadshow that forces the company to accompany its underwriter for weeks of meet-and-greets with potential investors. The roadshow — though important — can be arduous.

Pricing bounces around based on feedback and the company’s own internal needs, and is uncertain for many reasons, including the fact that financial guidance cannot be provided until after the IPO has already taken place. The importance of reaching the right investors cannot be underestimated.

By contrast, companies that have already raised capital through crowdfunding or Regulation A don’t need to conduct a roadshow. Not only do they avoid the solicitation of orders that goes on in these meetings, the information that they are required to publicize prior to their listing doesn’t require a face-to-face presentation. The information being conveyed can include forward-looking financial guidance because in a Direct Listing the S-1 registration is already declared effective, and it can be communicated simply and is accessible to a broader audience to ensure that anybody who might be interested in the company has all of the information that they need.

The individuals who invest in an equity crowdfunding or Regulation A funding campaign do so because they are true believers, but they are also interested in getting a return on their investment and then returning their original outlay plus profits into their own pockets. The Direct Listing gives those shareholders the opportunity to turn their shares into stocks, which they can choose to hold onto or can sell.

While a crowdfunding investor is restricted from selling their shares during the first year of ownership, once a company transfers their shares via a Direct Public listing they are able to get their cash out. The beauty of the process is that because the company is already well capitalized, the purpose of the offering is less about fundraising and more about providing liquidity to those who originally took a chance on them. Those individuals are able to decide for themselves whether to list their shares, without the constraints of a lock-up period, and whatever their decision is will have a direct impact on the stock’s value and price based strictly on a supply and demand basis rather than by diluting ownership. Should they choose to hold onto their shares, early crowdfunding investors also get the benefit of the company being subject to additional disclosure rules regarding earnings releases, insider trading, executive compensation and the like.

Choosing to go public via a Direct Listing rather than an IPO provides start-up owners and management the ability to maintain control over the way that their listing is marketed and promoted, thus ensuring their ability to maintain continuity of their branding in the same way that they held firm to their operational freedom by fundraising without angel investor or Venture Capital involvement.