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New IPO Alternative rule faces challenge from Council of Institutional Investors

posted onSeptember 8, 2020

The US Securities and Exchange Commission (SEC) approved on Wednesday (Aug. 26) a proposal by the New York Stock Exchange (NYSE) to allow firms to hold direct listings without the expense of a traditional IPO. The approval came just days after the rival Nasdaq filed a similar request with the US  regulator which would also enable companies that debut on the stock market through a direct listing to raise capital.

Historically, direct listings have been permissible for years on the NYSE and Nasdaq, but companies couldn't use the process to raise new capital. 

The move has the potential to transform the market for initial public offerings (IPOs), widening the options available to private companies that are looking to go public but are wary of associated underwriting fees from investment banks. The direct listing route bypasses the cost and regulatory controls of a typical IPO.

Both the NYSE's and the Nasdaq's proposals require that companies pass certain criteria to pursue direct listings. To qualify under either exchange operator’s guidelines, a company would have to provide a valuation showing a market value of publicly held shares of at least $250 million. 
Alternatively, a business could qualify by selling new shares above a certain threshold—$100 million by the 228 year old, Wall Street based organization  and $110 million on the Nasdaq (or $100 million if a specific criteria is met). 

Silicon Valley insiders, such as prominent venture capitalist Bill Gurley, have encouraged companies to pursue a direct listing rather than a traditional IPO. 

Gurley welcomed the ruling on Twitter on Wednesday:

Bill Gurley VC IPO

(Venture Capitalist Bill Gurley)

"This is really big,"he tweeted. "We could get to a modern approach where Silicon Valley companies, founders, employees, and investors don't have a 40% costs of capital to enter the public markets." 

The SEC's ruling comes at a time when US capital markets are in the middle of an extended resurgence after the Covid-19 crisis delayed IPOs earlier this year. There were 109 U.S. IPOs so far (as of Aug. 21) excluding special purpose acquisition company (SPAC) listings, according to IPOScoop and have delivered an average first-day pop of 35.7%, according to Reuters.

However, on Monday (Aug. 31) the Council of Institutional Investors (CII) filed a notice with the SEC that it intends to petition for a review of the NYSE’s proposed change.

“CII is concerned that companies may attempt to limit their liability to investors for damages caused by false statements of fact or material omissions of fact within registration statements associated with direct listings” the Washington-based investors group said. 

In response, the SEC issued a notice to the NYSE  staying the approval until further notice

As a result of the notice, the new rule is now on hold until the SEC orders otherwise. The SEC did not specify a timetable for completing its review of the petition, creating uncertainty about if, when and in what form direct listings with a primary offering may be ultimately approved. 

The CII is a nonprofit association of U.S. public, corporate and union employee benefit funds, other employee benefit plans, state and local entities charged with investing public assets, and foundations and endowments with combined assets under management of approximately $4 trillion. The CII frequently takes positions on issues that it considers important to investor protection and governance.

Companies eager to pursuit direct listings will have to wait longer...