SEC Approval Of A New Rule May Change The Way Companies Go Public


In 2020 we have witnessed several companies using alternative routes to go public and grasp the benefits of the public markets. Companies have traditionally chosen to go via an initial public offering (IPO). In an IPO, new shares are created (existing shareholders are diluted) and the company uses investment banks as underwriters to facilitate the IPO process and help with the regulatory requirements in exchange for a commission.


However, there are alternative ways to tap the public equity markets and they’re becoming increasingly common. For example, in the direct listing process (DLP) companies go public without using any intermediaries. Some notable examples include Spotify (NYSE: SPOT) in 2018 and Slack (NYSE: WORK) in 2019.


At the end of August, the SEC approved the NYSE’s proposal to allow companies to raise capital by issuing shares in direct listings as compared to the past, when companies could not create new shares during the process. This decision is expected to result in a surge in companies preferring the DLP over an IPO to go public. This week alone, Asana (NYSE: ASAN) and Palantir (NYSE: PLTR) used the direct listing process to make shares available to the public. Both were well received, as their stocks were trading up 37% and 50% respectively.


Only time will tell whether direct listings will become the norm for companies wishing to raise capital by going public, but it’s certainly a strong possibility considering the ability to save on underwriter costs and not have to worry about the hassle of the IPO process.