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Some don’t want to deal with the pressure and reporting requirements. Others are avoiding the hassle and expense of an IPO. And a lucky few just don’t need the money.
Now, the New York Stock Exchange is trying to lure more companies back to the public market, even if it involves taking a less traveled route.
“We think companies should go public. We want to create as many pathways as possible to help achieve that goal,” John Tuttle, NYSE’s vice chairman, told CNN Business.
Direct listings have their skeptics, but Tuttle said “a lot” of companies from various industries are considering the same route as Spotify and Slack.
“In response to the demands of the marketplace, we are working to evolve our offering,” Tuttle said.
The SEC declined comment on the proposal, which the agency must approve before it can take effect. Tuttle expects the approval process to take at least 90 days.
Dwindling number of public companies
David Weild, the former vice chairman of the Nasdaq Stock Market, said the NYSE is smart in attempting to evolve.
“The New York Stock Exchange is catering to the companies. Frankly, it needs to,” said Weild. “I applaud them.”
At the same time, Weild, who now leads his own boutique investment bank, argued that these developments show that the current system isn’t working for US companies, who are the customers in this case.
“This is a shot across the bow of Wall Street. It’s an indictment of the market structure that we currently find ourselves in,” Weild said. “Obviously, the customer base is increasingly distrusting Wall Street — because Wall Street isn’t delivering the goods any longer.”
‘They are trapped’
Countless billion-dollar unicorns in Silicon Valley would be prime candidates to go public, yet many of them see no need to face the accompanying hassles, expense and pressure.
“Once you’re public, scrutiny goes up,” said Jeffrey Pontiff, a finance professor at Boston College.
No lock-up period
Yet that doesn’t mean a direct listing is necessarily the answer.
“The conclusion we had from the last two direct listings was: Why would anyone want to buy these things early on?” Smith said.
Of course, these two companies may eventually prove to be strong investments.
Direct listings can be tricky. Avoiding underwriters can save companies a lot of money when they list their shares. But the absence of underwriters can make it difficult to discover a fair price for the stock, which in turn can create volatility.
Another potential drawback is that direct listings allow early investors and employees to sell their shares immediately. There is no so-called lock-up period that prevents sales for several months. And that can rub investors the wrong way.
“Lockups make a whole lot of sense,” said Smith. “There is a lot the market doesn’t know about the company. Before insiders bail out, the marketplace wants to see management deliver results.”
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