SEC Expands Direct Listing Options On NYSE As IPO Alternatives Abound
The SEC has approved a new type of direct listing on the New York Stock Exchange which allows companies to sell new shares, adding yet another route to public markets outside of traditional IPOs.
The approval came just days after the Nasdaq filed a similar request with the SEC, which would also allow companies to sell new shares in a direct listing.
Historically, the NYSE and Nasdaq have allowed existing investors to sell shares in a direct quote, but companies could not use the process to raise new capital.
“It’s really big” Reference General partner Bill Gurley tweeted the SEC decision. “We could take a modern approach in which Silicon Valley companies, founders, employees and investors would not have a 40% cost of capital to enter public markets. “
A vocal critic of traditional IPOs and associated underwriting fees from banks, Gurley argued that direct listings are a superior option for companies that don’t need to raise additional capital.
“What we’re trying to do is provide option and flexibility,” said Jay Heller, head of capital markets at Nasdaq. “What you have now are different paths you can travel in.”
The changes come at a time when companies have been rushing for another alternative to the IPO: PSPCs. Mergers with blank check companies have been all the rage this year, as they allow companies to raise capital from investors and go public without the typical IPO process.
Direct listings are distinct from IPOs and PSPC mergers in that public investors, not institutional investors or big banks, determine the value of a company’s shares from the start.
The format has attracted well-capitalized tech companies like Asana and Palantir, both of which pursue direct listings on the NYSE. Despite these notable examples, the IPO alternative remains rare. In theory, the new rules should broaden the scope of companies that can pursue one beyond those that already have liquidity.
“It remains to be seen whether or not people start knocking on the door to start raising capital through direct listings,” Heller said.
Some commentators on the changes made by the NYSE fear the new rules may weaken investor protection and erode the due diligence that goes into an IPO. The SEC ultimately disagreed that the changes created a “loophole in the regulatory regime,” according to its ruling.
The new NYSE rule and the Nasdaq proposal require companies to meet certain criteria to pursue direct listings. To qualify under the guidelines of either exchange, the company must demonstrate that its market value is greater than $ 250 million. Alternatively, a company could qualify by selling new shares above a certain threshold – $ 100 million on the NYSE and $ 110 million on the Nasdaq (or $ 100 million if a specific criterion is met).
One notable difference between the way the two exchanges approach new direct listings is the price of the shares. The NYSE has stipulated that stocks with a direct quote must be listed within the expected range. The Nasdaq’s proposals are more flexible, allowing the stock price to fall 20% below the expected range. The stock market would also not cap the share price, so it may well exceed the range if there is strong investor demand.
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