The New York Stock Exchange (NYSE) said on Tuesday it had filed with the U.S. Securities and Exchange Commission to allow companies going public to raise capital through a direct listing, instead of an initial public offering.
This new hybrid model comes after criticism by venture capital investors of the traditional IPO, which for decades has been the route to the public markets for companies such as Amazon.com Inc, Apple Inc and Microsoft Corp .
“Will this displace the traditional IPO? No, but is it another pathway we are providing companies to come to the public markets and to have investors participate and (have) growth opportunities? Yes,” Vice Chairman and Chief Commercial Officer John Tuttle said in a telephone interview about the plan by NYSE, which is owned by Intercontinental Exchange Inc.
A direct listing has so far differed from an IPO because it does not raise fresh funds; rather, it is a way for existing investors to monetize their shares.
In 2018, music streaming business Spotify Technology SA pioneered direct listing followed in 2019 by communication platform Slack Technologies Inc. Both had successful market debuts but their share prices have since struggled.
Venture capital investors have backed direct listings as a better way to price newly public shares. Direct listings also avoid restrictions on stock sales by insiders, which often includes venture capitalists, and are less costly than an IPO, in which companies pay banks to underwrite a share offering and to stabilize their share price if needed.
In this new direct model, all of the shares being offered by a company - so-called primary shares - are to be sold in the first trade to a variety of buyers. Stock owned by existing investors - referred to as secondary shares - can be sold throughout the first day of trading.
The new model will make a direct listing more attractive to companies but it will not dislodge the IPO overnight as the most popular route to the public market, according to Greg Rodgers, a partner law firm Latham & Watkins who worked on the Spotify and Slack offerings.
“For the foreseeable future, issuing primary capital in this way will be quite novel,” Rodgers said.
Bill Gurley, a partner at venture capital firm Benchmark Capital and one of the biggest proponents of direct listings, has complained banks have been “fleecing” companies by pricing shares low so that they pop on their first trading day.