The Strategist

SEC rejects NYSE's suggestion on alternative to traditional IPO

12/11/2019 - 08:57

The Securities and Exchange Commission (SEC) rejected the offer of the New York Stock Exchange (NYSE) to create a new type of direct listing that would allow companies to raise capital.

Meutia Chaerani / Indradi Soemardjan
Meutia Chaerani / Indradi Soemardjan
The NYSE spokesman confirmed that the SEC rejected the proposal to create a new alternative to the traditional IPO, which was published on the exchange’s website in late November. He noted that the NYSE will try to get SEC approval once again. “We are committed to developing a direct listing project,” he said, adding that the NYSE will continue to work with the SEC in this direction.

Now companies can become public through direct listing, but are deprived of the opportunity to attract additional capital. The NYSE proposal provides that not only shareholders but also the companies themselves will be able to sell shares.

The difference between direct listing and the traditional IPO model is that companies do not issue new shares, which means they do not attract new capital. Instead, shareholders are given the opportunity to sell their securities on the open market as part of a less formal procedure, unlike what is usually run by investment banks. Under the traditional IPO model, companies must use the services of underwriters to sell shares and raise funds.

The new hybrid model provides that companies can issue new shares, called primary, which can be immediately sold to market participants on the first day of trading. However, this process does not exclude the sale by shareholders of their or secondary shares.

The first company to use the direct listing method on the New York Stock Exchange was Spotify, which entered the public market last year. Earlier this year, Slack followed suit. Since the companies did not raise additional capital during the placement of shares, they should have had enough funds on their balance sheet to arouse the interest of investors on the stock exchange.