How a direct listing will facilitate the procedure of entering an exchange
The American stock exchange NYSE offered an alternative to the IPO procedure – direct listing. However, in this case, companies will be able to raise capital.
An initial public offering on the exchange allows companies to sell their shares. For this purpose, additional securities are issued and the whole procedure is carried out through investment banks. The latter undertakes the formation of demand for shares in the market, and the investors involved buy the securities at a cost, which is announced in the IPO process. After that, the shares may be sold at the stock exchange at the price set by the market.
The IPO procedure itself has a number of drawbacks, including a large commission fee, which must be paid to the investment bank. In addition, the distribution of shares in the initial public offering process is also criticized by market participants due to its opacity. A large share of securities is in the hands of a narrow circle of investors, including large customers of the investment bank itself. The rest of those willing to buy securities are already in the market at a higher price.
The only alternative to IPO is direct listing, where companies go to the exchange without the participation of banks. However, this option is rarely used, as during this process the company cannot issue new shares, which limits the attraction of investments. Therefore, direct listing is acceptable only for those participants who do not intend to receive large financing. Only two companies – Spotify and Slack – have recently entered the U.S. stock exchanges through direct listing.
The NYSE requested the government regulator to make changes to direct listing. These innovations will allow companies to issue new shares and sell them without intermediaries, excluding high commissions. In addition, the new rules increase the opportunities for investors who are now banned from selling securities within 6 months after the start of official trading on the exchange.
However, after the regulator gave permission to change the terms of direct listing, it suspended the process. The reason was the intention of the Association of Institutional Investors to protest the change of the rules. This organization consists of investment funds with total assets of 4 trillion dollars. According to the association members’ statement, the updated rules for direct listing may carry some risk for investors as well as increase market volatility. Therefore, while the application is being considered, the only option for companies will be IPO.
If the direct listing procedure is improved, it will significantly simplify market entry for many companies and make the process more financially beneficial.