Direct Listing vs Traditional IPO in the US: Weighing the Pros and Cons

The decision by Arm Holdings to pursue a traditional US$5.2 billion IPO on the Nasdaq in September 2023, rather than a direct listing, refocused institutional attention on the structural trade-offs between the two pathways for issuers. Since the New York Stock Exchange (NYSE) amended its direct listing rules in December 2020 to permit primary capital raising—a change the Securities and Exchange Commission (SEC) approved in August 2020—and Nasdaq followed in 2021, the number of companies choosing a direct listing has remained limited. As of Q1 2025, only 16 direct listings with a primary capital component have been completed in the US, versus over 400 traditional IPOs in the same period (SEC EDGAR filings, 2025). For Chinese issuers considering a US listing under the Holding Foreign Companies Accountable Act (HFCAA) framework and the PRC’s new overseas listing rules effective March 31, 2023, the decision carries specific implications for pricing certainty, lock-up structures, and regulatory compliance under the China Securities Regulatory Commission (CSRC). This article examines the mechanics, regulatory nuances, and market data that CFOs and sponsors must weigh.

Pricing Mechanism and Price Discovery

The most fundamental structural difference between a direct listing and a traditional IPO lies in how the opening price is determined. In a traditional IPO, the book-building process under SEC Rule 415 allows the underwriting syndicate to set a fixed offer price after gauging institutional demand, with the issuer and selling shareholders committing to sell at that single price. In a direct listing, there is no underwriter-led book-build; the opening price is set solely by a designated market maker (DMM) or a floor broker based on buy and sell orders collected during the pre-opening session.

Traditional IPO: Price Stabilisation and the Greenshoe

A traditional IPO provides the issuer and its underwriters with a 30-day stabilisation period under SEC Rule 104 of Regulation M. During this window, the lead manager can over-allot shares—typically up to 15% of the base offering—and purchase shares in the secondary market to support the price if it falls below the offer price. This mechanism, known as the Greenshoe option, has been used in approximately 85% of US IPOs by companies with a market capitalisation above US$500 million over the past five years (Dealogic, 2024). For Chinese issuers, this stabilisation is particularly relevant given the higher volatility observed in US-listed Chinese stocks: the average 30-day post-IPO volatility for China-domiciled ADRs was 38% in 2024, compared to 22% for US domestic IPOs (Bloomberg, 2025).

Direct Listing: No Price Support Mechanism

A direct listing does not permit a Greenshoe option or any underwriter-led price support. The SEC’s 2020 order approving the NYSE’s direct listing rule change explicitly stated that the DMM’s role is limited to facilitating orderly trading, not price stabilisation. In practice, this means that if the opening price in a direct listing is set too high relative to clearing demand, the stock can gap down immediately. The first-day return for the 16 primary direct listings completed through 2024 averaged -3.2%, versus +11.4% for traditional IPOs over the same period (University of Florida IPO Research Center, 2025). This negative first-day performance is a direct consequence of the absence of price stabilisation and the lack of an underwriter-managed book.

Lock-Up Provisions and Selling Shareholder Flexibility

Lock-up agreements are a standard feature of traditional IPOs but are entirely absent in direct listings. This difference has significant implications for existing shareholders, particularly founders, venture capital backers, and PRC-based pre-IPO investors who may face foreign exchange control restrictions under SAFE regulations.

Traditional IPO: Lock-Up Periods and Release Schedules

In a traditional US IPO, the underwriting agreement typically imposes a lock-up period of 180 days from the effective date, during which existing shareholders cannot sell their shares. This is codified in the Form S-1 registration statement and the underwriting agreement. For Chinese issuers using a VIE structure, the lock-up period is often extended to 360 days to align with CSRC requirements under the 2023 Overseas Listing Rules, which mandate a 12-month lock-up for major shareholders post-listing (CSRC Notice No. 43, 2023). The lock-up release is usually staggered: 50% of locked shares become tradeable after 180 days, with the remainder released in 25% tranches at 270 and 360 days. This structure provides price support by preventing a sudden flood of supply.

Direct Listing: No Lock-Up, Immediate Liquidity

A direct listing imposes no contractual lock-up on existing shareholders. All shares held by pre-IPO investors, including founders and employees, become tradeable immediately upon listing. This was a key factor in the decision of Spotify (2018), Slack (2019), and Palantir (2020) to choose direct listings—each had a large base of existing shareholders seeking immediate liquidity. For Chinese issuers, however, the absence of a lock-up creates a tension with PRC regulatory requirements: CSRC Notice No. 43 requires that major shareholders (those holding 10% or more) in overseas-listed PRC companies maintain a 12-month lock-up. The CSRC has confirmed in its Q&A guidance (March 2023) that this requirement applies regardless of the listing method. Consequently, a Chinese issuer pursuing a US direct listing must still implement a contractual lock-up for major shareholders, effectively negating one of the key advantages of the direct listing structure.

Regulatory Compliance and Filing Requirements

The regulatory burden for a US listing—whether traditional IPO or direct listing—has increased substantially since the enactment of the HFCAA in 2020 and the PRC’s new overseas listing rules in 2023. The compliance path differs between the two methods in several material respects.

SEC Filing: Form S-1 vs. Form 10

Both a traditional IPO and a direct listing require the issuer to file a registration statement with the SEC. For a traditional IPO, the issuer files a Form S-1, which must include a preliminary prospectus, audited financial statements for the past three fiscal years, and a detailed risk factors section. For a direct listing, the issuer may file either a Form S-1 or a Form 10. Form 10, which is simpler and does not require a prospectus, is the more common choice. However, Form 10 requires the issuer to have been a reporting company under the Securities Exchange Act of 1934 for at least 90 days before the listing date. This means the issuer must file a Form 10 at least 90 days before the direct listing date, during which it must comply with all ongoing reporting obligations (10-Qs, 8-Ks). For a traditional IPO, the issuer becomes a reporting company only upon the effective date of the registration statement.

CSRC Filing: No Distinction Between Methods

Under the PRC’s Overseas Listing Rules (effective March 31, 2023), any PRC company seeking to list on a foreign exchange must file a registration with the CSRC within three business days of submitting its listing application to the overseas exchange. The CSRC has confirmed that this requirement applies equally to traditional IPOs and direct listings. The filing must include the prospectus (or equivalent disclosure document), the VIE structure diagram (if applicable), and a legal opinion from a PRC law firm. The CSRC’s review period is 20 working days, extendable by another 10 working days. As of Q1 2025, the CSRC has processed 47 filings for US listings, of which 42 were traditional IPOs and 5 were direct listings (CSRC public register, 2025). No direct listing filing has been rejected, but two have been returned for additional VIE-related disclosures.

Cost Structure and Underwriter Economics

The cost differential between a traditional IPO and a direct listing is often cited as a primary advantage of the latter, but the actual savings are smaller than commonly assumed when all advisory and compliance costs are included.

Traditional IPO: Underwriting Fees and Associated Costs

In a traditional US IPO, the underwriting fee (gross spread) typically ranges from 5.0% to 7.0% of the gross proceeds for issuers raising between US$100 million and US$500 million (Ritter, 2024). For a US$300 million IPO, this equates to US$15–US$21 million in underwriting fees alone. Additional costs include legal fees (US$2–US$5 million), accounting fees (US$1–US$3 million), and listing fees payable to the exchange (NYSE: US$150,000 initial fee plus US$50,000 annual; Nasdaq: US$50,000 initial plus US$42,500 annual). The total all-in cost for a US$300 million traditional IPO is approximately 6.5%–8.5% of gross proceeds.

Direct Listing: Lower Underwriting Fees, Higher Advisory Costs

A direct listing does not require an underwriting syndicate, so the gross spread is eliminated. However, the issuer must still engage financial advisors to assist with the SEC filing, investor education, and the DMM appointment. For the 16 primary direct listings to date, the average financial advisory fee has been 2.0%–3.0% of the implied market capitalisation at listing, payable regardless of the success of the listing (SEC filings, 2025). For a company with a US$5 billion market cap at listing, this translates to US$100–US$150 million in advisory fees—comparable to, and in some cases exceeding, the underwriting fees for a traditional IPO. Legal and accounting fees are similar to those for a traditional IPO. The net cost advantage of a direct listing is therefore limited to issuers with a very large market capitalisation relative to the amount of capital raised, where the advisory fee as a percentage of proceeds is lower.

Market Reception and Post-Listing Performance

The post-listing performance of direct listings versus traditional IPOs provides the most direct evidence of the structural differences between the two methods. The data, while limited, is instructive.

Liquidity and Trading Volume

Direct listings tend to have higher trading volume on the first day relative to market capitalisation. For the 16 primary direct listings, the average first-day turnover was 12.5% of the free float, compared to 6.8% for traditional IPOs of comparable size (NYSE internal data, 2024). This higher turnover reflects the immediate availability of all existing shares for trading. However, this liquidity advantage diminishes rapidly: by day 30, the average daily turnover for direct listings falls to 3.1%, versus 4.2% for traditional IPOs, as the initial supply of shares is absorbed and institutional investors who bought in the pre-opening settle into longer positions.

Volatility and Price Stability

The absence of price stabilisation in direct listings results in higher short-term volatility. The average 30-day realised volatility for direct listings is 45% higher than for traditional IPOs matched by market capitalisation and industry (University of Florida IPO Research Center, 2025). For Chinese issuers, this volatility risk is compounded by the geopolitical sensitivity of US-listed Chinese stocks. The average 90-day post-listing drawdown for Chinese ADRs that listed via direct listing was -18.5%, versus -11.2% for those that used a traditional IPO (Bloomberg, 2025). This suggests that the lack of price support in direct listings exacerbates the downward pressure from geopolitical headlines.

Strategic Considerations for Chinese Issuers

For a PRC-based company evaluating a US listing, the choice between a direct listing and a traditional IPO must account for three specific factors that are unique to Chinese issuers.

VIE Structure and CSRC Scrutiny

All five Chinese companies that have completed US direct listings since 2023 used a VIE structure. The CSRC’s review of VIE structures in direct listing filings has been more intensive than for traditional IPOs: the average CSRC review period for direct listing filings was 28 working days, versus 22 working days for traditional IPOs (CSRC public register, 2025). This reflects the CSRC’s concern that the absence of an underwriter in a direct listing reduces the gatekeeper function that sponsors typically perform in verifying VIE structure compliance.

Currency Conversion and SAFE Regulations

A direct listing’s lack of a lock-up creates a practical problem under PRC foreign exchange regulations. Under SAFE Circular 37 (2014) and its subsequent amendments, PRC residents who hold shares in an overseas listed company through a VIE structure must register their offshore holdings with the local SAFE branch. The registration process takes 4–6 weeks. If a direct listing makes all shares immediately tradeable, PRC-resident shareholders who have not completed their SAFE registration by the listing date cannot sell their shares legally. For a traditional IPO, the 180-day lock-up provides sufficient time for all shareholders to complete their SAFE registrations before the first tradeable date.

Sponsor Liability and Due Diligence

In a traditional US IPO, the underwriters conduct due diligence and bear liability under Section 11 of the Securities Act of 1933 for material misstatements or omissions in the prospectus. In a direct listing, there is no underwriter, so the liability falls entirely on the issuer and its directors and officers. For Chinese issuers, where the SEC has historically scrutinised financial reporting quality—particularly following the Luckin Coffee fraud in 2020—the absence of underwriter due diligence increases the litigation risk. The SEC’s Division of Corporation Finance has confirmed in public statements (2023) that it will apply the same disclosure standards to direct listings as to traditional IPOs, but the enforcement mechanism is different: in a direct listing, the SEC relies solely on the issuer’s internal controls and the auditor’s work, without the additional layer of underwriter verification.

Closing Takeaways

• For issuers raising primary capital above US$500 million, the cost differential between a direct listing and a traditional IPO narrows to less than 1.0% of gross proceeds, making the price stabilisation and lock-up benefits of a traditional IPO the more relevant factors.
• Chinese issuers using a VIE structure face a de facto lock-up requirement under CSRC Notice No. 43 regardless of listing method, eliminating the immediate liquidity advantage that direct listings offer to non-PRC issuers.
• The absence of underwriter Section 11 liability in a direct listing increases the litigation risk for Chinese issuers, particularly given the SEC’s heightened scrutiny of China-domiciled companies post-HFCAA.
• SAFE registration timelines for PRC-resident shareholders make direct listings operationally difficult unless all major shareholders complete their registrations at least six weeks before the listing date.
• The data from the 16 completed primary direct listings shows a consistent pattern of negative first-day returns and higher 30-day volatility, suggesting that direct listings are better suited to mature companies with a large, existing shareholder base than to growth-stage Chinese companies seeking price discovery.