In a major move to encourage more companies to go public, the U.S. Securities and Exchange Commission has approved a New York Stock Exchange plan to allow issuers to raise new capital through a “direct” listing.
The rule change announced on Tuesday will give companies an alternative to the traditional public offering, enabling them to list their shares without having to pay hefty fees to Wall Street underwriters.
Previously, the SEC only allowed companies to sell existing shares through a direct listing, not raise new capital.
NYSE President Stacey Cunningham said the SEC had approved a crucial innovation for private companies breaking into public markets.
“Some of them will continue to choose a traditional IPO but others will have this as an alternative if they want to reduce their cost of capital and they want to have a democratized access to their company on the first day,” she told CNBC. “I do think there’s an improvement that is welcome in the IPO arena.”
Said venture capitalist Bill Gurley: “I can’t imagine, in my mind, 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,”
The SEC rejected arguments by the Council of Institutional Investors, which warned that the new kind of direct-listing process would circumvent the investor protections of traditional IPOs.
Commissioners Allison Herron Lee and Caroline Crenshaw dissented, saying the SEC had “not candidly assessed the potential benefits and drawbacks of retail investor participation in primary direct listing IPOs. We should have engaged in a deeper debate and analysis to consider options for mitigating the risks to investors before approving today’s order.”
According to the dissenting commissioners, “investors in primary direct listings under NYSE’s approach will face at least two significant and interrelated problems: first, the lack of a firm-commitment underwriter that is incentivized to impose greater discipline around the due diligence and disclosure process, and second, the potential inability of shareholders to recover losses for inaccurate disclosures” because in a direct listing it is difficult to trace a trade directly back to the issuer.
According to The Wall Street Journal, a company doing a direct listing “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 institutional investors that buy shares from the company before they start trading publicly.