You might want to take a look at this interesting column from Bloomberg’s Matt Levine, talking about some recent developments in the IPO market. Apparently, a second company is contemplating conducting an IPO through a direct listing, a listing process run outside of the conventional underwritten offering in which the company files with the SEC to allow certain of its outstanding shares to be sold directly into the market, without the traditional help from the underwriters in marketing the deal. Although the company does not raise any funds itself, it becomes a public company and provides a market in which shares may sold by selling shareholders at prevailing market prices. The process may be particularly appealing to companies that are very well known and well funded, but want to trade publicly, since the costs of going public are generally lower and the process can be somewhat quicker than a traditional IPO.
Levine notes that unusual IPO structures or processes have been attempted in the past, but haven’t necessarily caught on. However, with a second direct listing, he suggests, it may well “become a thing.” But what’s particularly interesting in his piece is his conjecture about the potential for marrying and blending of both IPO processes (assuming, that is, that the SEC re-opens at some point). Both the standard IPO and direct listing processes have developed sets of features—why not try to “mix and match” them?
“Why not do a direct listing and then raise money a week later? (Why not do a direct listing and combine it with a buyback?) Or part of the reason that companies are interested in direct listings is that IPO bankers normally require a ‘lockup,’ preventing the company and its major shareholders from selling shares for several months after the IPO. Why not just do an IPO without the lockup? The theory of the lockup is that investors won’t buy shares in a newly public company without protection against the overhang of more selling, but direct listings sort of prove that that isn’t true. Why not do an IPO without a greenshoe? Without a roadshow? The possibility of a direct listing just gives a company more leverage and flexibility to negotiate with its bankers, and with investors, about what is really necessary in an IPO.”
And it’s not only the IPO process that has been be in flux; as Levine asserts, it’s also other kinds of equity financings, resulting in a blurring of some of the characteristics of public- and private-company status. As he observed, historically, there were private markets and private financings and public markets and public financings, and never the twain shall meet. You could raise a limited amount of money privately from VCs and still largely retain control of the company (although the VCs typically do require board seats and preferred rights as part of their terms), but largely avoid having to make public financial disclosures, meet quarterly analyst expectations and fight off activists. Because the shares privately issued were not freely tradable in an established market, the employees and investors would get antsy after a point, and encourage the company to provide some opportunity for liquidity. Alternatively, companies could go public and raise funds from anyone and offer the liquidity of the public markets. However, as a public company, you would likely give up
“voting control of your company to strangers and you’d be subject to the whims of short sellers and high-frequency traders and Wall Street analysts focused on quarterly earnings. Now everything is mixed up. Private companies can raise limitless billions of dollars from mutual funds and retail(ish) investors, and can often have pretty good secondary liquidity, but they also sometimes suffer activist coups. And public companies can have non-voting stock, so that they don’t have to give up control to strangers and can perhaps focus on the long term. Companies no longer make a single choice—public or private—with a bunch of implied tradeoffs; they can make direct choices about each of the tradeoffs.”
The same thing seems to be going on with IPOs, he concludes, and, predictably, it’s being led by those disruptive tech companies: “The story is that there was a big old legacy business that comfortably sold a standard package of features for a lucrative price, and then a bunch of tech startups came in and questioned everything; they unbundled the service so customers could get what they wanted rather than what the legacy players wanted to sell. It’s just that the tech companies didn’t do it as competitors, by offering the disruptive unbundled product, but as customers, by demanding it.”