{{item.videoDuration}}
{{item.title}}
{{item.text}}
{{item.videoDuration}}
{{item.title}}
{{item.text}}
With revised direct listing rules, who will want a traditional IPO?
03 April, 2023
What's new?
The risk to companies seeking a capital raise through a direct listing (DL) may be dramatically lower as a result of the Nasdaq and New York Stock Exchange updating their DL rules at the end of 2022. The new rules could expand the options for companies that want to go public.
A short history of direct listings
DLs trace their short history back to April of 2018 when Spotify priced its initial public offering (IPO). It wasn’t a traditional IPO with primary proceeds going to the company. Instead, Spotify pursued a novel approach where pre-IPO investors, including mostly venture capitalists and employees, offered shares to new investors using auction-based pricing. As a result, the company’s first day of trading was created with new institutional investors buying from private company investors.
The company didn’t raise any capital. Other differences compared to a traditional IPO included some of the following:
- The lack of a lockup on existing investors
- Lower fees to advisors
- No traditional underwriters
- No greenshoe clause to provide an over allotment option to underwriters
The structure attracted the attention of other technology companies with well-known consumer brands, many existing investors and high valuations. Several other notable tech companies followed this path, although there were some differences — one company used a voluntary lockup, for instance.
Yet, of more than 850 traditional IPOs that priced in the past five years, only 14 DLs — less than 2% — came to market.
Most companies seeking to go public are not profitable and want to raise capital. Companies have for decades used the IPO market as a liquidity event (also a key driver of a DL), but more importantly these IPOs were capital-raising transactions seeking to fuel a longer runway for product viability, growth and eventual profitability. But the original Securities and Exchange Commission rules prohibited companies from raising capital in a DL. A select few companies were fine with that either due to existing cash levels or the belief they could raise capital in the future as a public company at a potentially higher, less dilutive valuation.
Direct Listing rules were first updated to allow capital raising in December of 2020. But many companies considered the accompanying requirements too cumbersome and risky.
Could more companies consider the DL approach?
With the rule changes at the end of 2022, more companies may consider the DL approach. The lack of a lockup requirement will remain very attractive to existing shareholders, and fees could still be lower than those of traditional IPOs.
The changes occurred during a sluggish time for the IPO market. Traditional IPOs may need to come to market to create some positive data points regarding valuations, execution and trading before we see the next DL. But if a new DL prices and trades well, many companies could ask themselves if a traditional IPO still makes sense.
{{filterContent.facetedTitle}}
{{contentList.loadingText}}
{{contentList.loadingText}}
Follow us
