The Direct Listing Bailout for Unicorn Investors

*UPDATE* On Friday, December 6, the SEC rejected the NYSE's proposal to expand direct listings by allowing them to raise new capital. A NYSE spokesman said that the company "will continue to work with the SEC on this initiative."

Instead of our planned final installment of the “Hijacking the IPO Market” series, we published the following in response to the NYSE's stealth filing with the SEC to expand direct listings to companies issuing new stock, the latest attempt to create a fake IPO alternative to traditional IPOs.

The NYSE has proposed an expansion of its direct listing offering that, if approved by the SEC, is nothing more than a giant bailout for technology unicorn insiders at the expense of public investors. 

Direct listings, according to the NYSE’s website, allow large numbers of existing shareholders “to monetize their shares on day one.” In other words, direct listings are designed for technology unicorn insiders to dump large amounts of shares on the public in one orchestrated fell swoop. What falls by the wayside are transparency, fairness, and sufficient price discovery.

NYSE Direct Listing Quote 1
Current Rules on Direct Listings

Proposal to Expand Direct Listings

Why Direct Listings are Bad for Public Investors

  • No Lock-up. In a traditional IPO, insiders are contractually prevented from selling shares for 180 days or more. This is not true for direct listings. Lock-ups exist to force insiders to wait for one or two quarterly reporting periods before they can sell. Lock-ups discourage insiders from offering overly optimistic guidance and then failing to deliver.

  • Lack of Transparency on Pricing. In the Spotify offering, the company had a NYSE “reference price” of $132 determined by an internal valuation. Private market trading in the company preceding the listing ranged from $49 to $132.50 from January to March 2018, providing potential investors with no reliable frame of reference.

  • No Real Price Discovery. In a traditional IPO, the proposed offered has a price range, which is based on internal valuations, comparisons with publicly traded comparables and feedback that the bankers get from potential investors. In a NYSE direct listing the initial trading price is set by market makers based on order flow at the opening of trading. Yet, the track records of Slack, which is down more than 40% since its opening trade, and Spotify, which is down 13%, suggest that this process gives insiders the chance to sell at or near the high on the first day of trading.

  • No Set Number of Shares. In a direct listing, selling shareholders (or the company) register a specified number of shares to be sold, but the number of shares that are actually sold could be more or less. In the Slack listing, for example, 118 million shares were registered, but another 164 million shares were eligible to be sold. In the Spotify listing on the NYSE, 55.7 million shares were registered, but another 106 million were eligible to be immediately traded.

  • No Roadshow. In a traditional IPO, the company meets with investors in one-on-ones and group lunches and posts a publicly-available net road show. In a direct listing, the company has an “investor day,” which in practice has been a single web cast.

The bottom line

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Questions the SEC Needs to Answer

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Next Up

Hijack Series
How the IPO Market Is Being Hijacked
How Government Regulations Nearly Killed the IPO Market
How the JOBS Act Abuses Most Public Investors
How the IPO Market went from Dot.com to Unicorn Bubble
Why Direct Listings Are Fake IPOs

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The Direct Listing Bailout for Unicorn Investors

Investment Disclosure: Renaissance IPO ETF (symbol: IPO) Renaissance International ETF (symbol: IPOS)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.