PHILLIP ARENCIBIA—Currently, a private company that wishes to sell shares directly to the public must go through a difficult and expensive process, the Initial Public Offering (“IPO”). The company would have to pay investment bankers, called underwriters, sizeable fees to facilitate a successful IPO. To help companies trying to avoid the high cost of an IPO, the New York Stock Exchange (“NYSE”) is fighting to expand a more efficient alternative: the Direct Listing. This process allows companies to go public at a significantly lower cost than the traditional IPO because it cuts out expensive underwriters. Recently made famous by Spotify and Slack, Direct Listings currently allow private company stockholders to sell shares directly to the public through a Secondary Direct Listing; however, a private company itself cannot take advantage of these savings by selling shares directly to the public because Primary Direct Listing are not permitted. The NYSE proposed a rule that would encourage more public investment opportunity by allowing Primary Direct Listings. Despite concern that Direct Listings are less stable than traditional IPOs, the massive savings that would result from Primary Direct Listings would provide a benefit of increased investment opportunity that is well worth the risk.
IPO underwriters offer meaningful protection to public investors and businesses, but this security comes at a prohibitive cost. To carry out an IPO, a private company must go through the expensive process of paying an underwriter to create a stable market for its shares. For a fee of up to 7% of stock sales, the underwriter facilitates the entire process by selling shares to its own clients, who then sell the shares to the public. In addition to creating healthy demand for the stock, the underwriter often provides added security to the transaction by guaranteeing shares will be sold. This guarantee helps ensure a stable IPO, but it often costs millions. The excessive costs of going public could be effectively reduced by only requiring an underwriter’s guarantee when truly necessary.
Although fundamentally similar to IPOs, Primary Direct Listings reduce the excessive cost of going public by cutting out underwriters when they are unnecessary. The Direct Listing process allows a company capable of creating public demand on its own to save money by cutting out underwriters. Although this process lacks an underwriter’s guarantee, the tremendous savings justify the added risk for many companies capable of minimizing risk on their own by creating healthy public demand. The savings continue to encourage increased use of Secondary Direct Listings, but this process has been stifled by the prohibition of Primary Direct Listings.
The NYSE has been working (unsuccessfully so far) to expand the use of Direct Listings by allowing companies to sell shares directly to the public through Primary Direct Listings. The NYSE’s proposed rule would allow businesses to sell shares directly to the public without underwriters if it creates sufficient demand for its shares. If the private company manages to sell at least $250 million in shares (or the company is worth $350 million in total), it has 90 days to meet the standard requirements for healthy stock demand (which typically involves having 400 shareholders with 100 or more shares and at least 1.1 million publicly held shares). These requirements ensure only a company that successfully creates a healthy market for its stock, the underwriter’s task in a traditional IPO, can take advantage of Primary Direct Listings. Thus, the effective cost-saving process would be limited to situations where there is not enough risk of insufficient demand to require an underwriter’s guarantee.
The NYSE’s Primary Direct Listing idea should be adopted because it effectively cuts costs without imposing significant risk on public investors. Although an IPO with underwriters minimizes risk of market volatility, the substantial cost of the traditional process deprives public investors of opportunity by imposing excessive cost on companies trying to go public. Limiting the use of underwriters, the NYSE rule would benefit both businesses, which would have easier access to public markets, and public investors, who would have more investment opportunity. When a company can create a healthy market for its stock without help, the increased risk of cutting out underwriters would be worth the additional opportunity fostered by Primary Direct Listings.
