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THREAD: Direct listings, plus a primary capital raise.
The SEC approved this concept put forth by the NYSE today, removing one of the biggest deterrents for going public via direct listing previously (the inability to actually fundraise).
But how does it actually work? /1
The SEC approved this concept put forth by the NYSE today, removing one of the biggest deterrents for going public via direct listing previously (the inability to actually fundraise).
But how does it actually work? /1
Since the rule was approved this afternoon, I've chatted with IPO advisers, bankers and lawyers, and currently, there's no clear consensus on the best mechanism for doing a direct listing with a concurrent primary capital raise.
There are a few hurdles... /2
There are a few hurdles... /2
First of all is pricing. If you target an IPO fundraise with a, say, a $500 million offering size, worth 20% of market cap. But the direct listing/market wants to price the stock at half the level you expected. You're looking at double the dilution to get the deal done. /3
To get around that uncertainty, you might opt for a private placement ahead of your DL. But that defeats the purpose of democratizing the process because it would involve selling stock to a select group of investors at an agreed upon price and then opening it up to the masses /4
This would also mean you pay double the fees...fees for the private placement and fees for the direct listing. /5
And speaking of fees/bankers...what do you lose by issuing primary stock without an underwriter? Well, there's some liability protection for an issuer if the banks are the ones selling the stock. But you also forego the greenshoe, which can serve as a stability mechanism /6
So, then, what does a company gain from opting for a direct listing plus a primary capital raise? In theory, the company will be able to sell stock at a market-based price, discovered through the most-efficient channel: real-time demand relative to supply of shares /7
But right now, this involves a LOT of uncertainty. Someone smart will figure out a way to give issuers more control and diminish some of that uncertainty. But it isn't immediately clear how...and which constituents in the process will be winners vs. losers.
Suggestions welcome!
Suggestions welcome!
