Direct Listings on NYSE Approved by SEC as IPO Alternative

IPOs have been all the rage in 2020. At the end of December, the Securities and Exchange Commission (SEC) approved a rule that the New York Stock Exchange (NYSE) proposed. The new rule allows companies to raise new capital through direct listings, an alternative to traditional IPOs. The NYSE plan could help startups more easily access the capital markets by lowering bank fees and other regulatory barriers to going public.

New Capital Can Be Raised via Direct Listings

An influential trade group, the Council of Institutional Investors, set forth arguments strongly rejecting the NYSE’s proposal. The main focus of their arguments was that it would erode essential investor protections provided by the traditional IPO process. They argued that underwriters act as gatekeepers to help prevent mismanaged or fraudulent companies from going public, and cutting out these middlemen from the process could be perilous. Despite the trade group’s efforts to block the NYSE direct listings plan, the SEC approved the new type of direct listing process. In its approval order, the SEC asserted that the NYSE plan is consistent with the protection of investors.

Direct Listings SEC
Direct Listings SEC

Game Changer for Capital Markets

The SEC further commented on the approved NYSE plan in an order posted on its website: “The Commission finds that the New York Stock Exchange’s proposal will facilitate the orderly distribution and trading of shares, as well as foster competition.”

Directs Listings Less Expensive Than IPOs

Bill Gurley, a general partner at venture capital firm Benchmark, speculates that the SEC’s approval of the new type of direct listing will “unquestionably” lead to the end of traditional IPOs. Long critical of the traditional IPO process, Gurley contended, “I can’t imagine, when you can do a primary offering through a direct listing, why any board or CEO or founder would choose to go through this archaic process that has resulted in massive one-day wealth transfers straight from founders, employees, and investors to the buy side.”

Most companies go public in order to raise new capital. The NYSE plan is likely to make direct listings more common. In a traditional IPO, investment banks often purposely underprice IPOs so that the stock price will pop once listed on the public market. This delivers huge gains for institutional investors such as the mutual funds or hedge funds that bought shares in the company before the IPO. The NYSE’s new type of direct listing opens the door to all investors. However, this could also mean more volatility in the stock prices of companies that elect to use a direct listing over a traditional IPO. If there is robust public demand for the company’s stock, more money could potentially be raised. In contrast, lackluster public demand could result in steeper price declines.

Direct Listings Allow A Streamlined Process

Ryan Carpenter serves as Attorney and Managing Director of Carpenter Wellington. Ryan advises clients across a broad set of corporate and commercial matters.