The Securities and Exchange Commission doesn’t mind when companies go public using a cheaper “direct listing” on exchanges instead of a traditional offering, where investment banks underwrite the deal, the agency’s chairman said.
“If a direct listing is providing the same kind of fair information and fair access to the market as your more traditional underwritten IPO, who are we to judge if one is better than the other?” Chairman
said at a CNBC conference Thursday. The SEC was initially concerned in 2017 that direct listings could open the door for riskier and less-seasoned companies to access public investors, without giving them as much information or providing some safeguards. In an IPO, investment banks perform a gatekeeping function in which they are responsible for due diligence on the company selling shares. Banks also help stabilize prices on the first day of trading by intervening to buy shares. Companies such as
Slack Technologies Inc.
and Spotify Technology SA have listed existing shares directly on U.S. stock exchanges. The direct pathway saves tens of millions of dollars in investment-banking fees, while still giving employees and early investors a chance to cash out. In Spotify’s case, the SEC asked the company in 2018 to add a disclosure that said the “company’s direct listing of its ordinary shares on the NYSE is a novel method for going public, and as a result, the trading volume and price of the ordinary shares may be more volatile than if the ordinary shares were initially listed in connection with a traditional initial public offering.” Direct listings are one consequence of the growth of private capital markets, in which younger companies get most of the money they need from venture capitalists and institutional investors. Many of these companies have deferred public offerings until they need a way to sell stock to the broader public and enable insiders and early investors to cash out. Airbnb Inc. is weighing a direct listing for its offering, which is expected to take place in 2020, according to people familiar with the home-sharing company’s plans. Mr. Clayton has lamented the trend of companies staying private longer, saying it walls off some of the most promising investments from ordinary investors. Only the wealthiest households and institutions, such as pension funds, are allowed to invest in private markets. Direct listings provide another option for companies that have different reasons and needs to go public, Mr. Clayton said. At the same time, they can provide another way for shares to get into the portfolios of ordinary investors. “The growth opportunities have shifted, not all the way, but to a substantial extent into our private markets,” he said. “Ordinary investors don’t have access to them. That’s not good.” Mr. Clayton has said the SEC is considering ways that investment funds managed by professionals could give private-deal access to retail investors. “Can we have some kind of fund structure where we ensure that ordinary investors are getting the same deal as the institutional investors?” he asked Thursday. Write to Dave Michaels at email@example.com
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