Tech wins as direct listings get SEC nod

Hot tech companies and other startups will soon be permitted to raise money on the New York Stock Exchange without paying big underwriting fees to Wall Street banks, a move that threatens to upend how U.S. initial public offerings have been conducted for decades.

The Securities and Exchange Commission announced Tuesday that it had approved the NYSE's plan to allow so-called primary direct floor listings. The change marks a major departure from traditional IPOs, in which companies rely on investment banks to guide their share sales and stock is allocated to institutional investors the night before a listing. Instead, firms will be able to raise capital by selling shares directly on the exchange.

The SEC sign-off follows months of wrangling, including a decision made earlier this year to halt consideration of the proposal at the request of the Council for Institutional Investors, a group that represents major pension funds and endowments. CII had argued that the plan eroded investor protections and might make if more difficult for shareholders to sue over material misstatements or omissions made during the IPO process.

NYSE rejected those criticisms and disputed that the changes will increase risks to investors — arguments that ultimately won out. Getting the rule done under SEC chairman Jay Clayton, who was appointed by President Donald Trump, might prove important for the exchange and Silicon Valley. That's because there's no guarantee an SEC chief picked by president-elect Joe Biden would approve NYSE's proposal.

To date, direct listings have been limited as they were really only an option for companies that wanted to give early investors or management the opportunity to cash out by selling stock. In September, workplace management software maker Asana Inc. and Palantir Technologies Inc., the data-mining company founded by billionaire Peter Thiel, used the strategy to go public.

Now that the SEC is allowing firms to raise fresh capital through direct listings, both critics and backers agree that they could become much more popular.

One reason why startups and their venture capital backers might favour direct listings is that there could be less of a gap between the offering price set by bankers and the pop that often ensues on the first day of trading. For instance, Airbnb Inc. opened at US$146 a share during its IPO earlier this month, a much higher valuation than its US$68 listing price. That arguably cost the company and its early investors US$4 billion.

Under NYSE's plan, when stock changes hands once trading commences, new shares will get priority over secondary ones. Venture capitalists have long advocated for direct listings, in part because they don't require investors to wait for lockup periods to expire before they can sell their shares.