The New York Stock Exchange (NYSE) is trying to address the major hurdle for companies aiming to follow Spotify and Slack into the public markets, which is, the direct listing process they pursue does not allow businesses to raise new capital.
As a result, Nasdaq and the New York Stock Exchange are proposing to let companies raise capital through direct listings on their exchanges, in what could be a cheaper alternative to the Initial Public Offerings pitched by Wall Street banks.
For some time, direct listings have only been used to offer existing shares to public investors, leading to lower fees than traditional IPOs. Spotify, the music streaming company popularised the process with its NYSE listing in 2018, followed by the workplace chat service, Slack in June 2019.
On Tuesday, the NYSE filed with the Securities and Exchange Commission to change the rules so that companies can simultaneously go public through a direct listing and raise cash from public market investors. It is the latest sign that direct listings, as an alternative to traditional IPOs, are gaining momentum and that market experts expect to see more such offerings in the coming years.
In its proposal, The New York Stock Exchange wrote, "The proposed change would allow a company that has not previously had its common equity securities registered under the Act, to list its common equity securities on the Exchange at the time of effectiveness of a registration statement pursuant to which the company will sell shares in the opening auction on the first day of trading on the Exchange."
As currently structured, when companies choose the direct listing path, they go public after publishing the same type of prospectus that is required for an IPO. But rather than issuing new shares, they allow existing private shareholders to sell stock to public investors.
According to CNBC, because many companies go public as a way to raise money that can further fuel their growth, creating a way to bring in new capital could attract more businesses to the direct listing. Last month, Benchmark's Bill Gurley hosted a seminar on direct listings in San Francisco, which included sessions with top Spotify and Slack executives. Morgan Stanley and Goldman Sachs, the leading tech IPO underwriters, have also held events to educate companies and investors on direct listings.
"These proposed NYSE rules will allow companies to take advantage of the benefits of a direct listing while, at the same time, taking away the biggest disadvantage of a direct listing — the inability to raise capital," said Ran Ben-Tzur, a partner at the law firm Fenwick & West.
The NYSE said in the filing that, "the proposed amendments would not impose any burden on competition, but would rather increase competition by providing new pathways for companies to access the public markets."
The filing further said, "the SEC can approve or disapprove of the proposed rule change or institute proceedings to determine whether the proposed rule change should be disapproved."