How to choose a reference price for a direct listing
March 29, 2021

How to choose a reference price for a direct listing

Forge Team

No matter how you take your unicorn to market, identifying an accurate listing price – aka reference price – is not for the faint of heart. But there’s a new strategy more and more companies are leveraging to set a reference price through a direct listing that is proving to benefit unicorn companies and their shareholders.

Direct listings

Many companies view direct listings as the least expensive, and most efficient way to get to the public markets. Direct listings minimize costs by cutting underwriters out of the process. And by doing so, they give a broader swath of investors the opportunity not just to participate but to benefit from any IPO pop. Direct listings also eliminate many of the restrictions and fees associated with traditional IPOs, as well as some of the risks associated with SPACs.

The SEC also recently approved a new rule that allowed companies who go public via direct listings to issue new shares (not just sell existing shares) and therefore raise fresh capital through those offerings. The rule change has only served to make the direct listing more interesting to many companies, and as a result there are several high-profile unicorns rumored to be considering a direct listing now, including Coinbase and Robinhood.

Reference price discovery

Those companies will have the benefit of the direct listing pioneers who came before them, including early entrants Spotify and Slack.

The more robust trading on the private markets becomes, the better data – and therefore better insight – unicorn companies get to help accurately price their companies.

To that end, Palantir pulled off a major win with its direct listing, leveraging the insight from more than $500 million in private market trades of its stock to set its reference price. Palantir’s reference price landed within a range of what investors on the private markets were paying – the last secondary activity on Aug. 29 was at $9.40, and the close on the first day of public trading was $9.50.

Palantir Secondary Market and Public Market Performance

While some market-watchers declared the Palantir debut a bust, they failed to correlate that the stock’s debut price accurately reflected the stock’s value, and that it was stakeholders that reaped the benefits of that accurate pricing.

In traditional IPOs, a big pop on day one benefits the institutional investors who got the early go at the stock the day before the debut. When it jumps, employees and executives don’t see those benefits. See Airbnb and DoorDash for good examples.

Roblox, which went public via direct listing in March, had a reference price of $45/share set by NYSE – but no shares actually sold at that price. Instead, Roblox opened at $64.50 – with that increased value filling Roblox equity holders’ pockets.

Benefits of a marketplace

Insights from the Forge marketplace allow companies to control their own destinies in timing and pricing their public listings. The platform serves as a window for strategic decision making that caters to every unicorn’s specific needs, designed to help companies and investors better understand pricing and get ahead of rising market trends.

Forge Board Director, and President of Figure, Asiff Hirji said that “leaning in on the secondary private market for pricing insights gives companies an anchor and a more accurate reference point as they prepare to exit. Using a marketplace provides insights that then allow companies to price closer to the actual market price.”

It’s likely that companies will continue to go public outside of the traditional IPO route. For those considering direct listings, SPACs or even the hybrid auction method, having the right data to inform pre-exit decisions is a must. Connect with Forge today to learn more.

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