By the MFI Editorial Team | Last verified: June 2026
Traditional IPO: The Standard Process
In a traditional IPO, the company hires investment banks (underwriters) to manage the process of going public. The underwriters help the company file an S-1 registration statement, conduct the roadshow (presenting to institutional investors), set the IPO price based on institutional demand, and allocate shares to institutional investors before trading begins.
The company raises new capital — the IPO proceeds go to the company's treasury, not to existing shareholders. Existing shareholders (founders, early investors, employees) are subject to a lock-up period, typically 90–180 days, during which they cannot sell their shares.
For retail investors, the practical implication is that the standard IPO provides the most complete information (full S-1 filing) and a defined period before insiders can sell. The downside is that the IPO price is set to favor institutional investors, and retail investors typically buy at the market open at a premium to that price.
Direct Listing: No New Capital, No Lock-Up
In a direct listing, the company goes public without raising new capital and without investment bank underwriting. Existing shareholders — founders, employees, early investors — can sell their shares directly to public investors on the first trading day with no lock-up restriction.
The price is set entirely by market supply and demand on the opening day, rather than being set by investment banks in a pre-market book-building process. This means there is no institutional pre-allocation, no IPO price advantage for institutional investors, and theoretically more equal access for all investors.
Spotify and Coinbase used direct listings. The structure favors companies that don't need new capital, have high brand recognition that generates organic investor demand, and want to avoid the dilution of issuing new shares.
For retail investors: direct listings eliminate the institutional allocation advantage, but also mean that insiders can sell immediately on day one — creating potential supply pressure that traditional IPO lock-up periods avoid.
SPACs: The Backdoor IPO
A Special Purpose Acquisition Company (SPAC) is a shell company that raises money in an IPO with the stated purpose of merging with a private company and taking it public. SPAC IPOs raise capital first, then find a merger target — typically within two years.
The SPAC structure became extremely popular in 2020–2021 and has since declined sharply due to poor post-merger performance data. Key structural features that retail investors should understand:
- Less disclosure before the merger vote. A traditional IPO requires a full S-1 with audited financials. A SPAC merger requires a proxy statement with financial projections — which are often more optimistic and subject to less regulatory scrutiny than IPO disclosures.
- SPAC sponsor dilution. SPAC sponsors typically receive 20% of the shares (the “promote”) for little or no consideration. This dilution is paid by the investors who hold the stock post-merger.
- Redemption rights. SPAC investors who don't like the proposed merger target can redeem their shares at the trust value (typically $10) before the merger closes. This creates a floor but means that the investors who hold through the merger are those who couldn't or didn't redeem — not necessarily a quality filter.
The academic data on SPAC performance post-merger is consistently negative relative to traditional IPOs and the market. This doesn't mean all SPACs fail — it means the average SPAC investor outcome has been worse than the average traditional IPO investor outcome, after accounting for the sponsor dilution and disclosure differences.
Which Structure Is Most Favorable for Retail Investors
From a structural standpoint, traditional IPOs provide the most information (full S-1), defined lock-up protection, and the most scrutiny from underwriters who have reputational skin in the game. Direct listings provide equal access pricing but immediate insider selling. SPACs provide the least favorable structural terms on average for retail investors.
None of this means a specific SPAC or direct listing is necessarily a bad investment — it means understanding the structural terms before investing rather than being surprised by them afterward.
Last verified: June 2026 | Category: IPOs & Hidden Gems | Investor Guides