Silicon Valley wins as SEC allows direct IPOs to raise cash

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 an NYSE Group Inc. plan for so-called primary direct 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 it starts trading. Instead, companies will now be able to sell shares directly on the exchange to raise capital — which has not been previously been allowed.

Direct-listing IPOs have been limited to date, as they’ve mostly been used by businesses that wanted to create liquidity events for early investors or management to cash out by selling stock, as opposed

to issuing new shares that attract billions in fresh money. In September, workplace management software maker Asana Inc. and Palantir Technologies Inc., the data-mining company founded by billionaire Peter Thiel, used direct listings to go public.

The SEC sign- off of N YSE’s plan 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.