Evaluation: New direct listings is not going to spell the demise of IPOs

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(Reuters) – The U.S. Securities and Exchange Commission’s acceptance of money raisings by direct listings will be seized on by some startups, nevertheless most organizations will continue to decide for original general public choices (IPOs), funds industry insiders say.

FILE Image: Perspective of the NYSE creating all through snowfall in the Money District of Manhattan, New York Metropolis, New York, U.S., December 17, 2020. REUTERS/Jeenah Moon

The economical regulator greenlighted the New York Stock Exchange’s request very last week to allow providers to raise money in inventory market place debuts as a result of direct listings, with out working with underwriters as is customary with IPOs.

The transfer was celebrated by Silicon Valley buyers, who complain that expenditure bankers usually do a lousy work of evaluating demand for their IPOs in spite of charging hefty charges. They position to the choices this month of property rental company Airbnb Inc and foods shipping app DoorDash Inc, whose shares rallied 92% and 142%, respectively, on their to start with day of trading and lifted concerns that they still left money on the table in their IPOs.

Bankers say the pop is brought about by the minimal quantity of shares out there for buying and selling immediately after an IPO, producing a big gap involving the selling price Wall Street’s elite pay out to purchase into the presenting and what stock industry traders pay back to order the shares once they begin trading.

Direct listings will not pose such a challenge, mainly because stock market place buyers are authorized to buy shares right issued by the corporations on the 1st day of trading.

“I’m thrilled to see the SEC having a progressive solution to the topic. Everyone would like to locate extra equilibrium among the listing value and the price the place it trades, and a bit additional fairness around lockups,” said Jeff Richards, a associate at GGV Cash.

Still, direct listings current a trade-off that will carry on to make IPOs attractive to a lot of businesses, funds market place industry experts say. Whilst underwriters give providers certainty of how a lot they will about increase in advance of their IPO, organizations that go after money raises by immediate listings will not know how significantly they have lifted till their shares get started investing.

“The SEC move is an extra reward, but I feel numerous businesses will nevertheless go on to select an IPO they will need to have the underwriters and their introductions to institutional investors,” explained Anna Pinedo, co-head of legislation company Mayer Brown’s world capital markets follow.


IPOs have been on a tear this 12 months, as providers rode the inventory current market rally that adopted the coronavirus-induced slump. They totaled $220 billion globally, up 25% year-to-date.

Direct listings that do not allow providers raise funds have been currently authorized by the SEC, even though couple of providers have opted for them. The most high-profile examples of immediate listings this calendar year had been people of details analytics corporation Palantir Technologies and place of work application maker Asana Inc.

A person reason lots of providers may possibly adhere with IPOs is that experienced non-public companies are inclined to make significantly less buzz amongst buyers than purple-scorching startups, so their chances of an outsized 1st-working day buying and selling pop are slimmer, money current market gurus say.

Providers also like becoming ready to pick their trader foundation in the course of their underwriting, allocating a lot more shares to very long-time period buyers, these as mutual funds.

“I think the bulk of companies will however endure the classic IPO course of action, but with likely innovation in the framework,” stated Lender of America Corp’s Neil Kell, chairman of fairness cash marketplaces. “The capacity of the administration crew to decide on a distinct shareholder base at day one particular is nonetheless a must have.”

Recent tweaks to the IPO procedure deployed by firms these as DoorDash concerned employing a “hybrid auction” during the underwriting, in which buyers are questioned to specify just how considerably they are willing to shell out for the stakes they search for. Still this was not ample to eradicate large 1st-day investing pops, typically fueled by retail investors buying and selling on apps this sort of as Robinhood.

Another tweak entails the potential of insiders to market stock. While IPOs normally appear with lock-ups protecting against present shareholders from cashing out just after the initial stock sale, some companies, such as Airbnb, have negotiated exceptions for their personnel.

“Largely mainly because of the obstacle of the immediate listing structure, we are observing actual innovations in IPO apply,” reported Greg Rodgers, a cash markets husband or wife at legislation firm Latham & Watkins LLP.


A big driver behind the press for immediate listings is suspicion between some enterprise funds traders of investment bankers, whom they watch as pushing chummy specials to allocate the most shares in an IPO to their leading purchasers.

Even though firms that use direct listings do not have to pay back underwriting expenses, they however have to transform to investment bankers for tips on how much they could be worthy of and how to market place their choices. Bankers will also suggest on money raisings as the new direct listings are rolled out.

Whilst this price pool will be smaller sized than in IPOs, it will also be shared by fewer banking companies, so any one lender could continue to be compensated handsomely for an presenting.

For case in point, tunes streaming company Spotify Engineering SA, which went general public in 2019 by a immediate listing, used $35 million on advisory fees to Goldman Sachs Team Inc, Morgan Stanley and Allen & Enterprise.

Goldman Sachs and Morgan Stanley also participated in the IPOs of organization application business Snowflake Inc and Airbnb this calendar year, which compensated their underwriters $122 million and $74 million, respectively, but experienced to share these expenses with a a lot greater group of financial institutions.

Reporting by Krystal Hu in New York Modifying by Greg Roumeliotis and Dan Grebler

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