Direct Pricing in the Saudi Financial Market: Concept, Application, and

Direct pricing is a mechanism for offering company shares in financial markets based on a fixed and predetermined price set by the company, relying on independent valuations and financial reviews, without going through the order book-building phase or depending on supply-demand interactions during subscription. Thus, direct pricing stands as a middle ground between private placements targeting specific investors and traditional public offerings that use open subscriptions and market-driven pricing via order books. The core of this mechanism lies in transparency and clarity, as both the company and investors know the final offering price before trading begins. Globally, this method is also known as "Direct Listing" or "Fixed Price Offering." Direct pricing requires companies to provide an independent valuation justifying the proposed price, along with full disclosure of material information to investors. Although its application is new to the Saudi market, it is seen as a promising option to enhance offering flexibility and attract startups and small companies.

Over the past decades, the Saudi financial market has witnessed gradual development in share offering mechanisms, starting from simple public subscriptions, moving through book-building techniques, and now discussing the potential application of direct pricing. Historically, companies relied on investment banks and financial advisors to manage offerings, where these institutions gathered investor orders and set the offering price based on supply and demand. The need for more flexible and transparent mechanisms grew with the increasing number of startups seeking to raise capital efficiently and at lower costs. With the government’s focus on supporting economic diversification and empowering SMEs, direct pricing has come under consideration, though it has not been officially implemented as of the end of 2025. This mechanism is expected to improve the investment environment and expand the base of listed companies in the future.

Book building is the most common method for share offerings in both the Saudi and global markets, where the financial advisor collects investor orders at various prices, then sets the final price based on demand volume and distribution. In contrast, direct pricing eliminates this phase and sets the price in advance, granting the company speed in execution and reducing costs related to marketing and order collection. Advantages of direct pricing include reduced time complexity, price clarity for investors, and protection from sudden demand fluctuations. Its main drawbacks are the risk of mispricing—either above or below fair value—due to the absence of real demand testing during the offering. Book building, on the other hand, allows for precise measurement of investor appetite but can be more time-consuming and costly, with heavy reliance on investment banks.

Until the end of 2025, the Saudi Capital Market Authority has not officially activated the direct pricing mechanism for share offerings. All IPOs have been conducted via book building, private placements, or traditional public offerings. However, official and economic reports confirm that the Authority is seriously considering introducing this mechanism into the regulatory framework, especially as markets seek to keep pace with global developments and facilitate access to capital for startups and medium-sized companies. Future regulations are expected to require independent financial valuations, set a maximum percentage for shares offered via direct pricing (e.g., 5-10% of capital), and mandate full transparency in disclosing material information. If adopted, direct pricing will be subject to strict oversight to ensure fairness and protect the rights of both individual and institutional investors.

Direct pricing offers several advantages for companies and investors. First, it allows companies to reduce offering costs, as there are no significant expenses for promotional campaigns or investment bank fees. Second, it provides complete clarity on the issue price, making decision-making easier for investors without concerns about price changes during subscription. Third, it significantly speeds up the offering process by eliminating the order collection and analysis phases. Fourth, it is ideal for companies with clear independent valuations or those wishing to offer a limited share percentage. Fifth, it reduces the likelihood of market manipulation or speculation on the offering price, as the price is announced and fixed in advance. These benefits make direct pricing attractive to startups and small companies seeking fast and transparent financing.

Despite its advantages, direct pricing comes with challenges and risks that must be considered. First, if the offering price is set above the true market value, the subscription may fail or the share may drop sharply upon trading. Second, if the price is set below fair value, the company loses significant capital and existing shareholders may be harmed. Third, there is less information about actual demand strength, which may lead to sharp price fluctuations after listing. Fourth, there are regulatory risks related to ensuring fair valuation and transparency in disclosure. Finally, companies may find it difficult to attract major investors without market indicators of demand. Therefore, the success of direct pricing requires strict adherence to governance and professional valuation.

A fundamental pillar of direct pricing is the independent financial valuation conducted by a neutral party (such as a licensed financial consultancy or independent investment bank). The valuation is based on asset analysis, future growth rates, financial performance, sector conditions, and comparisons with similar companies. The goal is to reach a fair price that reflects the true value of the company and protects investor rights. In Saudi Arabia, it is expected that the Capital Market Authority will require an accredited valuation report detailing the pricing methodology and the basis for the fixed price. This report should be available to investors in the prospectus, enhancing transparency and reducing the risk of misleading or inflated pricing.

Startups and small companies face significant challenges in raising capital from the financial market, especially due to the high costs and procedural complexities of traditional offering methods. Direct pricing is a promising financing tool for this segment, enabling them to reach investors quickly and at reasonable cost, without expensive promotional campaigns or reliance on large investment banks. It also offers flexibility in determining the offering percentage and timing. In the Saudi market, sectors such as technology, renewable energy, and healthcare are expected to benefit most from this mechanism, given their dynamic nature and need for rapid funding to support growth.

Global studies indicate that applying direct pricing can enhance market liquidity by introducing new shares quickly, providing investors with additional opportunities to diversify their portfolios. At the same time, the absence of a demand-testing phase may lead to price volatility in the early days of trading, as the market corrects the price based on actual supply and demand. In Saudi Arabia, with the expansion of the investor base and rising liquidity levels, the long-term impact of direct pricing is expected to be positive, especially if implemented under strict regulatory controls ensuring fairness and transparency. This mechanism will also attract new categories of investors, particularly individuals and venture capital funds.

Many global markets have successfully implemented direct pricing, with notable examples in the New York Stock Exchange and Nasdaq, where companies like Spotify and Coinbase used this mechanism. Experience shows that direct pricing reduces costs and accelerates listing but requires precise pricing to ensure share stability post-offering. In Europe, the approach is less common but highlights the importance of transparency and comprehensive information for investors. In Arab markets, Dubai has begun exploring similar models, adapting them to local market specifics. Key lessons point to the importance of regulatory readiness, investor education, and effective monitoring tools to limit post-listing price volatility.

With technological advancements and increased competitiveness in the Saudi capital market, direct pricing is expected to become a strong option in the coming years, especially after the Capital Market Authority announced its study of this mechanism. Implementing direct pricing would enhance Saudi Arabia’s position as an attractive destination for startups and both local and international investors. It also supports the government’s drive to diversify funding sources and strengthen the private sector. Clear legislative updates are anticipated, enabling companies to choose the most suitable offering mechanism for their needs and giving investors new opportunities to participate in national economic growth.

For practical illustration, let’s assume a hypothetical company "Alif" wishes to offer 10% of its shares via direct pricing at a fixed price of SAR 100 per share. If the total shares are 100 million, the company will offer 10 million shares worth SAR 1 billion. The market capitalization after the offering will be SAR 10 billion (100 million × SAR 100). If the company achieves annual profits of SAR 100 million (SAR 1 per share), the price-to-earnings ratio at offering is 100x. If it decides to distribute dividends at 5% of the offering price (SAR 5 per share), the dividend yield is 5%. This model highlights the importance of independent valuation in setting the appropriate price and shows how to calculate key financial indicators relevant to investors. It also illustrates the impact of direct pricing on capital structure and share attractiveness upon listing.

Full transparency and disclosure are essential requirements for the success of any share offering, and their importance increases in direct pricing, where investors rely heavily on information provided in the prospectus and the independent financial valuation. The prospectus should include details on the company’s financial performance, future growth plans, dividend policy, potential risks, and justifications for the set price. It should also clarify the percentage of shares offered and the allocation mechanism. Adhering to disclosure standards boosts investor confidence and reduces the risk of misinformation or misunderstanding, positively impacting share stability post-listing and encouraging more companies to adopt this mechanism.

The process of adopting direct pricing in Saudi Arabia is expected to go through several steps: starting with the Authority issuing a draft regulation outlining conditions and controls, followed by opening consultations with companies, financial advisors, and investors. After reviewing feedback, the Authority will issue final regulations, including requirements for independent valuation, offering limits, disclosure standards, and monitoring mechanisms. It is also likely that digital platforms will be developed to enable regulators to monitor offerings in real time. Additionally, awareness campaigns will be organized for investors and companies about the advantages and risks of this mechanism, ensuring market readiness and avoiding unexpected volatility upon actual implementation.