Venture Capital: VCs And Startups Rejoice – The NYSE Has An Alternative To IPOs
The SEC has approved a proposal by the NYSE to allow private companies to raise capital through direct listings.
In a ruling Wednesday, the SEC gave the New York Stock Exchange the green light to let companies raise capital through a “Primary Direct Floor Listing” process. Before this decision, private companies could use the direct method to list their shares on the stock exchange but did not themselves receive any of the proceeds from the IPO. That’s because this route allowed existing investors in those companies to sell their shares on the market (“Selling Shareholder Direct Floor Listing”), with no new capital being raised by the company itself. (Yahoo Finance)
Under the Primary Direct Floor Listing process, the exchange conducts an opening auction on the day the company lists. The opening auction matches buy and sell orders to arrive at a market-determined offering price.
Big win for venture capitalists and the NYSE
The SEC’s decision is a shot in the arm for the NYSE and venture capital firms. The latter have long sought an alternative to the traditional IPO process.
The proposal was welcomed by VC Bill Gurley after John Tuttle, Vice Chairman & Chief Commercial Officer at NYSE tweeted the news of the SEC’s decision.
No more hurdles
The new Primary Direct Floor Listing process does not need underwriters to price shares such as in a usual IPO.
Also missing are the marketing roadshows and share lockups. Best of all, the new route is much cheaper because investment banking fees are much lower than in an IPO.
However, in a telephonic interview with Reuters, Tuttle said: “We are not trying to displace the IPO. We are trying to create more options for companies and investors seeking to tap into the public markets.”
According to the FT, the new process also answers a long-standing grievance of venture capitalists regarding the pricing of IPOs. Often these are priced too inexpensively, resulting in a substantial gain on the listing. This opening gain or “pop” goes to new investors or speculators rather than the company.
The SEC’s remarks
In its order, the SEC quoted a commenter on the NYSE’s proposal. “Allowing for multiple pathways for private companies to achieve exchange listing would encourage more companies to participate in public equity markets. It would also provide investors a broader array of attractive investment opportunities.”
The SEC also noted the following advantages of NYSE’s Primary Direct Floor Listing:
- some investors may be able to purchase securities in the auction who might not otherwise receive an initial allocation in an underwritten offering
- the opening auction provides for a different price discovery method for IPOs. This could result in more appropriate pricing for the offered shares, a potential benefit to existing and potential investors. (In a firm commitment underwritten offering, the offering price depends upon negotiations between the issuer and the underwriters for the offering)
The SEC said:
“The commission believes that the proposed rule change, by providing an opening process in which buy and sell orders are matched, in accordance with the proposed rules, to determine the offering price, may allow for efficiencies in the way IPOs are priced and allocated without sacrificing investor protection.”
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