Slack Technologies used a direct listing to go public last year but didn’t raise new capital.
Photo: Michael Nagle/Bloomberg NewsThe New York Stock Exchange’s plan to let companies raise capital through direct listings is on pause after an influential group of institutional investors took an unusual regulatory step in a last-ditch effort to block it.
The Council of Institutional Investors, which was behind the maneuver, raised concern that the NYSE’s plan would let companies circumvent protections built into the initial public offering process, ultimately harming investors.
The council filed a notice with the Securities and Exchange Commission on Monday that it would petition for a review of the plan by the SEC’s commissioners. The SEC’s staff approved the plan last week, opening the door to a new, cheaper alternative to the IPO for companies seeking to go public.
But the council’s maneuver has at least temporarily closed the door again. The SEC notified the NYSE in a letter posted on the agency’s website that its approval of the NYSE’s plan had been stayed until further notice.
The council must submit its petition in the coming days. The SEC’s rules don’t spell out how long the SEC’s commissioners have to review the petition, but similar reviews in the past have dragged on for months. Potentially the commissioners could reverse last week’s decision and prevent companies from using the new type of direct listing to go public on the NYSE.
An NYSE spokesperson said Tuesday that the exchange would ask the SEC to move quickly and allow its proposed expansion of direct listings to go forward.
“The ability to raise capital with an NYSE direct listing represents an innovative new path to the public markets, and we intend to ask the SEC to lift its stay to make this important resource immediately available to issuers and investors,” the NYSE spokesperson said.
In a direct listing, a company floats its shares on a stock exchange, but without hiring banks to underwrite the transaction as in an IPO. Music-streaming company Spotify Technology SA used the process to go public in 2018, followed by Slack Technologies Inc. last year.
In those transactions, existing shareholders of Spotify and Slack sold their shares, but the companies didn’t raise new capital. The NYSE’s plan would create a new type of direct-listing process in which companies can issue new shares and sell them to public investors in a single large transaction on the first day of trading, much like the first trade in an IPO.
That would effectively create a cheaper alternative to the IPO in which companies could go public without paying underwriting fees to investment banks.
Opponents of the plan had raised concerns that companies going public through direct listings would use the process to dodge shareholder lawsuits, drawing on quirks in U.S. securities laws that were written with more-traditional share offerings in mind. Other groups voiced concern that direct listings could lead to volatility on the first day of trading.
“Many commentators have raised a variety of concerns with the use of direct listings to conduct a primary offering,” Jeffrey Mahoney, general counsel at the Council of Institutional Investors, said in an email Tuesday. Legal experts consider the NYSE’s plan a game changer, he said.
The council represents pension funds, foundations, endowments and other large investors with combined assets under management of around $4 trillion, and it often weighs in on corporate-governance issues. It is perhaps known as a critic of dual-class listings, in which certain shareholders of a company have greater voting rights than ordinary investors.
Write to Alexander Osipovich at alexander.osipovich@dowjones.com
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Appeared in the September 2, 2020, print edition as 'NYSE’s Direct-Listing Plan Is Put on Hold.'
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