The biggest hurdle for companies aiming to follow Spotify and Slack into the public markets is that the direct listing process they pursued doesn't currently allow businesses to raise new capital. The New York Stock Exchange is trying to fix that.
On Tuesday, the NYSE filed with the Securities and Exchange Commission to change the rules so that companies can simultaneously go public through a direct listing and raise cash from public market investors. It's the latest sign that direct listings, as an alternative to traditional IPOs, are gaining momentum and that market experts expect to see more such offerings in the coming years.
"The proposed change would allow a company that has not previously had its common equity securities registered under the Act, to list its common equity securities on the Exchange at the time of effectiveness of a registration statement pursuant to which the company will sell shares in the opening auction on the first day of trading on the Exchange," the NYSE wrote in its proposal.
As currently structured, when companies choose the direct listing path, they go public after publishing the same type of prospectus that's required for an IPO. But rather than issuing new shares, they allow existing private shareholders to sell stock to public investors.
Spotify and Slack went that route, in 2018 and 2019, respectively, because they had sufficient capital on their balance sheets and opted to avoid further dilution and the lockup period that typically keeps insiders from being able to sell on the open market for six months.
Because many companies go public as a way to raise money that can further fuel their growth, creating a way to bring in new capital could attract more businesses to the direct listing. Last month, Benchmark's Bill Gurley hosted a seminar on direct listings in San Francisco, which included sessions with top Spotify and Slack executives. Morgan Stanley and Goldman Sachs, the leading tech IPO underwriters, have also held events to educate companies and investors on direct listings.
"These proposed NYSE rules will allow companies to take advantage of the benefits of a direct listing while, at the same time, taking away the biggest disadvantage of a direct listing — the inability to raise capital," said Ran Ben-Tzur, a partner at the law firm Fenwick & West and a capital markets expert, in an email. "If approved, these rules will likely fundamentally change how technology companies go public."
The NYSE said in the filing that, "the proposed amendments would not impose any burden on competition, but would rather increase competition by providing new pathways from companies to access the public markets."
The proposal now awaits public comments. The SEC can approve or disapprove of the proposed rule change or "institute proceedings to determine whether the proposed rule change should be disapproved," the filing said.