What Does Direct Listing Mean?

Recently, we received a question from an issuer wondering what “direct listing” means. In short, a direct listing, also sometimes referred to as a direct public offering, is an offering in which an issuer raises capital directly from investors without a third-party intermediary like a broker-dealer or funding platform. 


Direct listings can occur in both the public and private markets. In the private market, companies raising capital often do so under JOBS Act exemptions for SEC registration, such as RegA+ or RegD. Companies may opt for a direct listing because it lowers the costs of capital as there are often fewer fees that would otherwise be paid to an intermediary. Issuers can also use a direct listing to allow investors to invest through the issuer’s website, which can prevent investors from being directed to other offerings. This often gives issuers more control over the investment. In contrast, RegCF offerings cannot be conducted without using an SEC-registered intermediary.


However, there are significant downsides to opting for a direct listing. Some states require issuers to utilize an intermediary like a broker-dealer or funding portal to sell securities. Additionally, some Tier I RegA+ direct listings require the issuer to register the security in every state that it intends to sell the security, making the offering more burdensome and costly. Additionally, a direct listing can make it easier for companies to miss essential aspects of regulatory compliance, creating additional risks for themselves and investors. This, offerings made via a direct listing require a higher level of due diligence from investors to ensure they aren’t falling victim to fraud.


When using a registered intermediary like a broker-dealer or a funding portal, these entities often have defined processes and compliance requirements that ensure capital is being raised in accordance with securities regulations, protecting both issuers and investors. An SEC-registered intermediary ensures that an issuer has gone through due diligence like bad actor checks to validate that it is eligible to be listed on a portal.


Ultimately, any company seeking to raise capital through a JOBS Act exemption should talk to a broker-dealer and a securities lawyer to understand how they can compliantly and successfully raise the capital they need to grow in the private market. 

Who Does Due Diligence on Companies Using RegCF?

When it comes to raising capital using Regulation Crowdfunding (RegCF), due diligence is an essential part of the process. Due diligence helps ensure that the company offering securities complies with all applicable laws and regulations and that investors are fully informed about the risks that come with investing. We are going through who does due diligence on companies using RegCF


Conducting Due Diligence for Reg CF


The responsibility for conducting due diligence on companies using RegCF lies with a variety of parties. To offer securities through a RegCF raise, companies must use an SEC and FINRA-registered Broker-Dealer or crowdfunding platform. The broker-dealer or crowdfunding platform needs to ensure that the issuer provides accurate company information and complies with securities regulations at both the federal and state levels. These parties also ensure that any investors pass KYC and AML checks to ensure they are not bad actors or other people unable to invest.


The issuers themselves also have responsibilities when it comes to due diligence. They must provide investors with accurate and complete information about the company, its securities offering, and the risks associated with investing. Investors also have an obligation to thoroughly review any information regarding the investment opportunity so that they can understand its potential risk and determine if it is an appropriate investment.


Types of Information Gathered During Due Diligence


When conducting due diligence on companies using RegCF, there is an information-gathering process, notably from your Form C, such as:


  • Business plans
  • Background checks on key officers
  • Financial statements and tax returns
  • Intellectual property registration filings
  • Proof of ownership in any subsidiaries of the company
  • Legal documents related to the business, such as contracts and bylaws


This information provided during the due diligence process allows investors to better understand the company and its business operations. 


Protecting Investors and Issuers 


Performing due diligence on companies using RegCF is an important part of protecting investors. It helps ensure that only qualified and legitimate businesses can raise capital. It also provides investors with the information they need to make informed decisions about their investments.


Due diligence is important for companies raising funds through RegCF because of the number of new-to-the-space investors. Issuers will demand their broker-dealer to complete all due dilligence. Raises can be successful and investors need to be sure of that, as well. Additionally, platforms should also have procedures in place to collect information from companies and investors before they are allowed to raise funds, such as background checks. By doing so, platforms ensure that investors are protected and companies meet all necessary criteria before raising funds.


Proper due diligence has clear roles: From broker-dealers and the platforms that facilitate the RegCF transactions to issuers and investors themselves. Accurate and complete information about companies using RegCF protects issuers and investors. For investors, it allows them to make better-informed decisions about their investments. For issuers, it provides an opportunity to demonstrate commitment to compliance and build credibility with investors for a successful raise.