Joseph Lucosky is the Managing Partner of Lucosky Brookman, a leading law firm in the world of microcap IPOs and Nasdaq/NYSE listings.
For years, the IPO has been considered the gold standard for many microcap and emerging growth companies seeking to list on senior exchanges like Nasdaq. However, Nasdaq’s recent regulatory changes to reshape its listing standards, placing greater emphasis on net income and excluding legacy shareholders from public float calculations, have made that path more difficult, and a growing number of entrepreneurial companies are turning to direct listings as a strategic, founder-friendly alternative.
The Rule That Changed Everything
As of April 11, Nasdaq’s updated listing standards require companies without positive net income to raise a minimum of $15 million in an IPO to qualify for the Capital Market tier. Factoring in the typical overallotment requirements imposed by many investment banks, companies often need to target a raise closer to $18 million, frequently at valuations that are less than ideal.
Previously, microcap companies could count certain shares of their legacy shareholders, including friends, family and other early-stage investors, toward satisfying the $15 million public float requirement, with the balance, typically only $7 to $10 million, coming from the IPO shares.
This change means the entire $15 million public float must come exclusively from the IPO, effectively forcing companies to raise more capital than they might want or need, often at the cost of greater dilution at less than desirable valuations, assuming that the issuer’s bank is able to raise $15 million.
Enter The Direct Listing
Direct listing offers a viable alternative in many cases, in which, instead of issuing new shares through an underwritten IPO, the company registers its existing shares for resale and begins trading directly on the exchange. There is no capital raise, no underwriter and no lock-up period, making for a more streamlined, less dilutive path for companies with a substantial shareholder base.
For companies with clean capitalization tables and strong legacy shareholder bases seeking liquidity, a direct listing can offer a smart, strategic alternative.
Direct Listings Are Gaining Ground
Founders of microcap and emerging growth companies are increasingly turning to direct listings to avoid the heavy dilution often associated with being forced to raise up to $18 million in an IPO, particularly at compressed valuations.
Direct listings provide a path to market that can be slightly faster and more efficient—without needing roadshows, underwriting coordination or waiting for perfect market conditions, companies can often complete a direct listing on a tighter timeline.
Additionally, direct listings provide founders and early investors with liquidity opportunities unrestricted by traditional IPO lock-up periods, meaning that founders and early backers can participate in the listing event without having to compete with institutional allocations, facing the selling pressures associated with a conventional IPO or being forced to wait to sell until a lock-up period has expired.
Finally, direct listings eliminate the cost of underwriting fees, preserving more value for the company and its shareholders.
Who would be a good candidate?
Not every microcap company is built for a direct listing, but for the right company, it can be the optimal play. Ideal candidates tend to have a widespread shareholder base, a large number of outstanding shares and no immediate need to raise capital as part of the listing, although raising capital in connection with a direct listing is becoming more common. Companies with a clear growth story, strong historical performance, a disciplined financial structure and a solid investor relations strategy are best positioned to succeed.
What’s often overlooked, however, is that the very shareholder base built over years of early-stage growth, often viewed as a liability under Nasdaq’s IPO float rules, can actually become a strategic advantage in a direct listing, where existing investors count toward the public float. Smart founders recognize this as an opportunity to leverage their loyal investor base to meet listing requirements, maintain greater control and preserve long-term value. Of course, execution is critical. Companies must also have the internal readiness and the right advisory team in place to navigate the realities of public company life: financial disclosures, governance, compliance and market communication.
Capital Raising Around A Direct Listing: Cutting-Edge Strategies
While a direct listing does not raise new capital, many companies strategically plan private financings around the listing to ensure sufficient cash on the balance sheet once they are public.
One common approach is raising capital through a private placement shortly before the direct listing, where the shares are registered alongside legacy shareholders in the direct listing registration statement. These funds can be held in escrow pending Nasdaq or NYSE listing approval, such that once the listing becomes effective, the escrowed funds would be released, providing shareholders with freely tradeable shares and the company with immediate working capital without raising money under pressured public market conditions.
Another approach is executing a private investment in public equity (PIPE) transaction concurrent with the direct listing. In a concurrent PIPE, the company enters into purchase agreements with private investors who agree to invest contingent upon the successful listing. After the direct listing becomes effective, the company typically files a resale registration statement to register the shares issued in the PIPE, allowing those investors to sell their shares freely into the market upon effectiveness of the registration statement.
These capital strategies give companies flexibility: they can access growth capital without compromising valuation through a traditional IPO structure and without delaying the timing of the listing. For operationally ready companies that still need a financial boost, properly structured pre-listing placements or concurrent PIPEs can be an essential part of the direct listing playbook.
A direct listing doesn’t mean a company has to forgo raising capital; it means raising it with a more creative structure with less pressure and perhaps less immediate dilution.
Choosing The Right Path For Your Company
The traditional IPO is not the only path to a senior exchange. For the right microcap companies, with strong shareholder bases, operational readiness and a strategic mindset, a direct listing can offer a cleaner, smarter and more founder-aligned route to public markets.
Not every company should force an IPO just because it’s the traditional playbook. Great founders know that success is about doing it the right way, at the right time and on the right terms. And a direct listing might just be the best way to meet it on your terms.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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