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Traders working on the New York Stock Exchange (NYSE)
NYSE
Don’t expect an increase in initial public offerings now that the Securities and Exchange Commission has approved a new type of direct listing, two bankers said.
Earlier this week, the SEC approved the rule change proposed by the New York Stock Exchange to allow direct floor listings that allow companies to sell shares in a single large transaction directly on the exchange without subscribers. The approval, which is expected to democratize access to IPOs, is seen to further align the NYSE with Silicon Valley while providing an alternative to traditional offerings.
“This is a game changer for our capital markets, leveling the playing field for day-to-day investors and giving companies another path to go public at a time when [companies] we are looking for precisely this kind of innovation, ”said Stacey Cunningham, president of the NYSE, in a statement.
Direct listings are not new.
Palantir Technologies
(ticker: PLTR) and
Asana
(ASAN) both were made public this year through a direct listing, while
Loose
(Works and
Spotify technology
(SPOT) also used it for their IPOs. But those deals did not allow the companies to sell new shares. Instead, shareholders only sold what they already had. The new SEC-approved direct floor listings allow companies to sell new shares and raise fresh capital.
“The decision to include the primary equity raised in a direct listing gives our clients more options, which is great and some clients will benefit from it. However, I anticipate that the majority of our clients will continue to follow the path of the traditional ipo that continues to modify and innovate with recent structural changes, ”said Neil Kell, president of equity markets for Bank of America, in a statement.
“We welcome the SEC’s decision as we see great benefit in companies that have multiple avenues to access public markets and continue to drive innovation in partnership with our clients,” a Goldman Sachs spokeswoman said in a statement. .
The SEC’s direct listing decision is not expected to lead to further IPOs. The biggest driver of the IPO market right now is Special Purpose Acquisition Companies, or SPACs. There were 242 IPOs from SPAC as of Dec. 18, valued at $ 80.5 billion, according to Dealogic. The 242 are more than half of all initial public offerings this year. More so-called blank check companies are expected to go public in 2021 and generally use the traditional IPO model.
The approval of direct floor listings does not necessarily mean that investment banks will lose business. Banks are heavily involved in direct listings, providing many of the same services that they would offer in traditional IPOs, the bankers said. This includes approaching and engaging investors, writing the history of stocks and advising on which investors companies should speak to, one of the bankers said.
In a direct listing, the investment bank also helps establish the benchmark valuation for the market maker. For example, Goldman Sachs (GS) led Spotify’s direct listing, which included Morgan Stanley (MS) and Allen & Co. The banks served as financial advisers on Spotify’s offering, according to a regulatory filing. “Ninety percent of what is done in a traditional IPO happens with a direct listing anyway,” said the banker.
Direct listings also carry risks. The biggest benefit of a traditional IPO is that it allows companies to control where their shares go, the banker said. Underwriters in a traditional initial public offering will “build the book,” which generally refers to investment banks determining the price of an offering by measuring interest. Banks, along with management teams, will allocate that demand, allowing investors, typically mutual funds and hedge funds, to buy shares in a company the night before it goes public. In a direct listing, companies sell shares directly to the public. This could generate more money for the company but less control.
For investment banks, IPOs are an important step in the client relationship and represent an entry point to the public market. Investment banks want IPOs, direct or traditional, to be successful because they will likely lead to other deals. “We want to participate from the beginning. We don’t care as long as it is done well, ”said the banker.
Direct listing also doesn’t necessarily mean less money for subscribers. In a traditional IPO, commissions are shared between a syndicate of banks.
Airbnb
(ABNB) went public through a traditional initial public offering earlier this year. Its prospectus lists 37 investment banks working on the deal. In a direct list, not so many banks participate.
The “pie may be smaller, but it is divided among fewer people,” said the banker. “It is still good business for investment banks.”
Write to Luisa Beltran at [email protected]
