The SEC just greenlighted the NYSE’s proposal to allow companies to raise capital through direct listings. This is a big win for entrepreneurs, venture investors, as well as retail investors.
It’s not such good news for the big banks that underwrite most of America’s initial public offerings, taking a criminal 7% of the proceeds in most cases and too often mismatching supply with demand.
Big institutional investors also won’t like this news as it may eliminate the first-day IPO pop that few small investors can gain access to.
The WSJ has more:
The SEC approved the new kind of direct listing—which could help startups save on bank fees and capture more of the gains in their share price when they go public—in an order posted on its website Tuesday.
The decision was a victory for the New York Stock Exchange, which had been seeking to change its rulebook to make the new process available to companies going public.
The commission rejected arguments by an influential trade group, the Council of Institutional Investors, that had sought to block the NYSE’s plan from taking effect. The council had warned that the new kind of direct-listing process would circumvent the investor protections of traditional IPOs, and it petitioned the SEC’s commissioners to review the NYSE’s proposal after staffers at the commission gave it an initial green light in August.
In a direct listing, a company floats its shares on a stock exchange, but without hiring banks to underwrite the transaction like in an IPO. Until now, companies have only been allowed to use direct listings to sell existing shares, which means their founders and early investors could cash out of their stakes, but the company couldn’t raise new capital. That has limited the process to a small number of cash-rich companies such as Palantir Technologies Inc., which went public via a direct listing in September.
Now, with the NYSE’s new type of direct listing, a company will be able to issue new shares and sell them to public investors in a single, large transaction on the first day of trading, much like the first trade in an IPO. That could make direct listings more common since most companies go public to raise capital.
“This is a game changer for our capital markets, leveling the playing field for everyday investors and providing companies with another path to go public,” NYSE President Stacey Cunningham said in a statement.
Compared with a traditional IPO, a company doing a direct listing with a capital raise would save on underwriting fees typically paid to Wall Street banks. The company could also potentially benefit more from a first-day pop in its share price. In a standard IPO, the main beneficiaries of such a pop are the professional investors—often mutual funds or hedge funds—that buy shares from the company before they start trading publicly.
Read more here.