Important new trends have emerged in the latest listing boom. A traditional IPO used to be the only game in town. Now SPACs (Special Purpose Acquisition Companies) are back in fashion and more companies say they want to list directly rather than go through a traditional IPO process. Treasury teams weighing the best option need to consider the benefit of banks drumming up investor interest and if their own brand is strong enough to go it alone. Greg Rodgers, a partner in the New York office of global law firm Latham & Watkins explains the ins and outs of going direct.
The current trend in listing directly began when Spotify went direct in 2018. Back then, executives at the streaming music provider made much of how the company was “re-imagining” the traditional IPO process by ditching the services of big syndicate banks to go it alone on the NYSE. Since then, a small but growing group of companies including Slack, the workplace messaging application, and software companies Palantir and Asana, have also avoided costly investment banking fees to offer shares to institutions and retail investors on an equal basis, allowing them to buy as much as they want and not be held back by allocations. In March, Roblox, the video game company, listed directly on the NYSE rather than via a conventional IPO.
A direct listing has a few specific characteristics. Companies listing directly aren’t raising more capital – Spotify was only listing its outstanding shares (such as those held by employees and early-stage investors) with no plans for either a primary or secondary underwritten offering. Hence there is no need for the services of big syndicate banks responsible for selling shares and drumming up investor interest. This in turn means none of the traditional IPO characteristics like a limited float and preferential treatment for some investors, lock ups and price stabilisation – or the traditional share price “pop.”
Crucially, listing directly on an exchange means the opening share price is established by straight market forces, explains Greg Rodgers, a partner in the New York office of global law firm Latham & Watkins who represented Spotify and the financial advisors in the Asana and Slack direct listings. “Direct listing candidates really value setting the initial trading price at the most efficient price possible. In a traditional IPO, the sale to the public is agreed upon between the company and its underwriters and the market only speaks when the listing on the exchange occurs. Even then, it is somewhat artificial in that the only supply is from the company and the rest is locked up for a traditional 180 days.” In a direct listing, all the available shares for sale and all potential buyers participate in a two-sided price and volume-dependent market, he says. “It is like a normal trading day for a mature public company.”
New regulation in the US could boost the number of direct listings. The Securities and Exchange Commission recently approved rules that allow companies to sell shares in the opening auction when they list directly on NYSE. It gives the green light to raise capital in a direct listing and opens that method of going public to companies also needing to raise capital for the first time. “As with the direct listings we’ve seen to-date, the price for the company shares will be set by pure market forces and the primary sale will make the process more attractive to companies wanting to raise capital,” explains Rodgers, who cautions that details like disclosure and the correct role of the company’s financial advisors in the process still need to be worked out before a “pioneering company” takes the plunge.
The Council of Institutional Investors has also cautioned that allowing primary direct floor listing could allow companies to sidestep the typical vetting that comes with a traditional IPO, raising investor risk. “As you can see from Spotify, Slack and Asana, listing directly works best for companies that are fairly large, already have a cross section of investors in their private company investor group, and are going to be well followed by Wall Street analysts and picked up in research coverage,” concludes Rodgers.
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