WASHINGTON • Hot technology companies and other start-ups will soon be permitted to raise money on the New York Stock Exchange (NYSE) without paying big underwriting fees to Wall Street banks, a move that threatens to upend how US initial public offerings (IPOs) have been conducted for decades.
The United States Securities and Exchange Commission (SEC) announced this week that it had approved an NYSE Group plan for so-called primary direct listings.
The change marks a major departure from traditional IPOs, in which companies rely on investment banks to guide their share sales and the stock is allocated to institutional investors the night before it starts trading.
Instead, companies will now be able to sell shares directly on the exchange to raise capital – something previously not allowed.
Direct-listing IPOs have been limited to date, as they have mostly been used by businesses that wanted to create liquidity events for early investors or management to cash out by selling stock, as opposed to issuing new shares that attract billions in fresh money.
In September, workplace management software maker Asana and data-mining company Palantir Technologies, which was founded by billionaire Peter Thiel, used direct listings to go public.
The SEC sign-off of the NYSE’s plan follows months of wrangling, including a decision made earlier this year to halt consideration of the proposal at the request of the Council of Institutional Investors, a group that represents major pension funds and endowments.
The council had argued that the plan eroded investor protections and might make it more difficult for shareholders to sue over material misstatements or omissions made during the IPO process.
NYSE rejected those criticisms and disputed that the changes will increase risks to investors – arguments that ultimately won out.
Getting the rule done under SEC chairman Jay Clayton, who was appointed by President Donald Trump, might prove important for the exchange and Silicon Valley. That is because there is no guarantee that an SEC chief picked by President-elect Joe Biden would approve the NYSE’s proposal.
Now that the SEC is allowing companies to raise fresh capital through direct listings, both critics and backers agree that they could become much more popular.
“This is a game changer for our capital markets, levelling the playing field for everyday investors and providing companies with another path to go public at a moment when they are seeking just this type of innovation,” NYSE president Stacey Cunningham said in a statement.
One reason why start-ups and their venture capital backers might favour direct listings is that there could be less of a gap between the offering price set by bankers and the pop that often ensues on the first day of trading.
For instance, Airbnb opened at US$146 a share during its IPO earlier this month, a much higher valuation than its US$68 listing price. That arguably cost the company and its early backers US$4 billion (S$5.3 billion), with professional investors who were allocated shares reaping the benefits.
“This is huge and will hopefully end 40 years of mispriced IPOs through an old antiquated process,” venture capitalist Bill Gurley of Benchmark wrote on Twitter.
“It’s very exciting to see the SEC enable innovation in this way.”
Even if banks do not underwrite direct listings, they would still be expected to make fees from advising companies that go public. As an example, Palantir paid out tens of millions in consulting fees as part of its offering, according to a regulatory filing.
Under NYSE’s plan, when stock changes hands once trading commences, new shares will have priority over secondary ones.
This will give companies a better chance at reaching their fund-raising goals.
Venture capitalists have long advocated greater use of direct listings, in part because the arrangements do not require investors to wait for lock-up periods to expire before they can sell their shares.
Some advisers to companies are sceptical that the change will deter businesses from pursuing traditional IPOs.
Ms Lise Buyer, a managing partner at Class V Group, said there are better ways than a direct listing to minimise big gains on the first day of trading, if that is a company’s intention.
“It’s a construct that doesn’t solve any problem for anyone,” said Ms Buyer, whose firm helps start-ups prepare for public listings.