Wall Street’s Nasdaq and NYSE stock exchanges are set to adjust their listings rules in a way that will be expected to mean direct listings are a more common future alternative to the traditional IPO. Direct listings, which see the shares of a new company on the stock exchange selling at a market-defined free-floating price from the beginning, rather than a pre-sale at a determined price as is the case through an IPO, are a cheaper alternative.
A number of high profile tech companies, most notably Spotify in 2018, have opted for a direct listing in recent times. It’s riskier for companies than an IPO, that they can pull out of if it becomes clear that investors do not share the same value as being targeted. However, a direct listing also offers listing companies more upside if investor demand is high.
Beyond Meat, for example, saw its share price soar after its shares started trading freely following its IPO earlier this year. A direct listing would have meant the company raised much more capital for the same share of equity sold. On the flipside, Uber’s share price dropped from its IPO price over its first few weeks of trading. That means the ride-hailing app company would have lost out if it had pursued a direct listing instead of an IPO.
The much lower expense of a direct listing, compared to an IPO that Wall Street banks rake in a fortune in fees for, makes it a potentially attractive options for companies that are confident of market demand at their target share price. On Tuesday of this week, the NYSE made regulatory filings to change its rules to make direct listings on the exchange easier and the Nasdaq is expected to follow suit.
NYSE’s filing requires SEC approval but looks to set a $250 million minimum for ‘primary direct floor listings’. That’s the level believed to be necessary to ensure enough liquidity to trading. The filing does, however, not contain details on how companies will sell new shares issued via a direct listing. Nasdaq has already commented that it does not believes its rival’s filing “fully considers the complexity of the issue”.
The Nasdaq will propose its own rule changes after it conducts “extensive conversations with potential issuers and their advisers, financial institutions and the SEC about the possibility and mechanics”.
Venture capitalists and high growth start-ups are increasingly questioning the requirements and expense involved in launching an IPO. That’s being reflected in fewer companies listing, and those that do waiting for longer before taking the step. Fewer public companies and new listings is obviously something the major Wall Street exchanges are keen to address. And facilitating direct listings is obviously seen as a part of the solutions.
John Tuttle, the NYSE’s vice-chairman and chief commercial officer commented:
“In a period of time where fewer companies have been going public [and] companies are waiting longer to go public, we wanted to make sure we’re continuing to create pathways for companies to the public markets.”