What’s going on?

US regulators approved a ruling that will allow companies to raise money by listing directly on the NYSE.

In a direct listing, a company floats its shares on an exchange without hiring IBs to underwrite the transaction as an IPO. In addition to saving on fees, companies that follow the direct listing process may avoid the usual IPO restrictions, including lockup periods that prevent insiders from selling their shares for a defined period of time.

What does this mean?

• Unlike an IPO, a direct listing avoids IBs with heavy fees and instead lets investors decide for themselves how much a company’s shares are worth.
• Up until now, direct listings were rare: most have been to sell existing shares. This ruling, then, gives companies another way to raise money and gives investors even more fast-growing, high-potential companies to pick from.

Why should I care?

For markets: It could have been higher

• The traditional IPO has been criticized lately, especially after a series of high-profile first-day share price pops (e.g: Airbnb, DoorDash) – proved that investors were willing to pay a lot more than the companies’ advisers thought.
• That means those firms could’ve sold their shares for more if they’d let investors set the price via a direct listing.

The bigger picture: Watch out for regulations

• Direct listings also allow individual investors to buy shares at the same time as institutional counterparts: The traditional IPO process involves offering shares to an exclusive group of heavy-hitters before the company hits the stock market, but a direct listing skips that step.
• There are also drawbacks: no IB means
  • there’s no one to vet the company’s financials in detail, and
  • no one to keep the share price from getting too volatile in the early days of trading.

Content source: 
1. Finimize. (2020) No More Middleman. Available at: https://www.finimize.com/wp/news/cutting-out-the-middleman/ [Accessed on December 24, 2020]
2. SHOBHIT SETH. (2020) IPO vs. Direct Listing: What's the Difference?. Investopedia. Available at: https://www.investopedia.com/investing/difference-between-ipo-and-direct-listing/ [Accessed on December 24, 2020]