SEC Approves Direct Listing Plan, Are Investment Banks In Trouble?


On Tuesday, the SEC approved a plan to allow companies to raise funds directly from the public.

Companies can now list on the New York Stock Exchange and raise capital directly from individual investors without the help of investment banks, the U.S. securities regulator said on Tuesday. For decades investment banks have organized IPOs, doing road shows to gain interest, doing the due diligence and setting the price.

“This is a game changer for our capital markets, leveling the playing field for everyday investors and providing companies with another path to go public at a moment when they are seeking just this type of innovation,” NYSE President Stacey Cunningham said in a statement.

Lev Bagramian, an advocate of the Washington-based Better Markets, said “while many have falsely blamed certain pro-investor regulations as too costly for companies that are considering going public, the real cost has been the average 7% - or higher for smaller issuers - that issuers pay to big Wall Street firms to underwrite the IPO.”

The new form of direct listings has the potential to “democratize the IPO process” when done in a responsible way that maintains strong investor protections, he added.

“The lack of a traditional underwriter means investors will lose a key protection: a gatekeeper incented to ensure that the disclosures around an initial listing are accurate and not misleading,” said SEC Democratic Commissioners Caroline Crenshaw and Allison Lee, who voted against the approval of NYSE’s rule.

The SEC said it found the NYSE proposal will “facilitate the orderly distribution and trading of shares, as well as foster competition.”

The plan was designed to “prevent fraudulent and manipulative acts and practices and to protect investors and the public interest,” it added (previously companies could list directly if it did not also raise capital).

Peter Thiel-backed Palantir Technologies and Asana are some of the high-profile, cash-rich private start-ups to choose the direct listing route this year.

Under the NYSE plan, issuers can sell shares directly on the exchange in an auction (this means individual investors will be able to get in at a lower price instead of being frozen out until it jumps).

Nasdaq Inc has a filed a similar direct listing proposal with the SEC.

“It was not a quick process to get this change through the SEC, which put a lot of effort into balancing the rights of investors versus the desire of more companies to have direct listing as an option,” said Michael Hermsen, a Chicago-based partner at law firm Mayer Brown.

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Economics, Finance and Investing