Silicon Valley bankers, lawyers and investors are pushing for the direct listing process used by Slack and Spotify when they joined the public markets to be expanded as a way for start-ups to raise money without undergoing a traditional initial public offering.
Bankers at Morgan Stanley and Goldman Sachs and lawyers at Goodwin Procter and Latham & Watkins have held talks about how to change the current rules, according to people familiar with the discussions.
While the pool of fees generated by direct listings is smaller, these advisers hope to control the market even further, having already taken the lion’s share of fees generated by Slack and Spotify’s listings.
Unlike an IPO, where banks offer new shares to selected buyers at a set price before trading begins, direct listings see companies release a tranche of existing shares on to the market to allow private investors to sell their stakes. They have not been used by companies to raise new funds.
Critics of IPOs argue that bankers often price shares too cheaply, depriving companies of potential gains. They point to the price “pop” that many companies see on their first day of trading.
Bill Gurley, a partner at the venture firm Benchmark Capital, and Michael Moritz at Sequoia Capital have advocated for direct listings. Mr Gurley, who called for venture capitalists to discuss direct listings in San Francisco next month, also said he would support introducing the ability to raise new capital in a direct listing.
“The time is ripe to have direct primary offerings,” said Joseph Grundfest, a Stanford university law professor and former head of the Securities and Exchange Commission. “If the commission is interested in increasing the number of exits through IPOs rather than through mergers and acquisitions, this is the smartest thing they could do.”
Goldman and Morgan Stanley, who along with Allen & Co advised on the direct listings of Spotify and Slack, see a chance to corner the market. The Slack IPO saw the three divide fees of about $22m, compared with the $106m of fees from Uber’s IPO that had to be split between 29 banks.
Capital raising through a direct listing would likely avoid the underwriting process entirely and allow issuers to immediately sell new shares to the highest bidders. The closest precedent for the manoeuvre is an at-the-market offering, a type of follow-on transaction where companies gradually sell new shares to investors on the open market.
As one fundraising alternative, venture capitalists have proposed that companies sell private convertible notes to raise money ahead of direct listings. Latham produced a template for the transaction that has been circulating among investors in recent weeks.
Any changes to direct listing procedures would likely require approval from the SEC, which greenlighted Spotify’s public debut in 2018 after the Swedish music streaming company said it would not immediately sell new shares or employ bank underwriters.
Advocates said allowing new share issues through direct listings would align with stated efforts by Jay Clayton, SEC commissioner, to increase the number of publicly traded companies. An SEC spokesperson declined to comment on efforts for direct listings to involve primary capital raises.
Some IPO advisers warned that raising capital during direct listings could exacerbate first-day price swings in a company’s shares. “It strikes me as certainly more risky than what Spotify and Slack did,” said one person familiar with the discussions. “The problem with the primary is once you’ve announced publicly you’re going to do it, you’re sort of committed.”
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