The New York Stock Exchange wants to give the companies the ability to raise capital through direct listing. Today, companies are permitted to list their shares directly on the exchange for existing shareholders to liquidate, but not raise additional capital.
Direct listing are quite uncommon with only 2 major companies opting to debut their shares this way in the past 2 years. Spotify (SPOT - Free Report) was the first company to use this method of public listing in April of 2018 and Slack (WORK - Free Report) followed earlier this year.
This move would give companies the option to sidestep the kings of Wall Street, the investment banks (IB). Investment banks have been taking a piece of every IPO since the beginning of the modern financial system. Investment banks rule over Wall Street may be coming to an end
NYSE’s new proposal would allow companies to raise capital on the world’s largest exchange without the help of IBs. Investment banks charge up to 7% to underwrite a public share offering. Their job is to set a price, ensure that there is sufficient interest in the shares, and provide liquidity. Companies are paying for a secure and safe offering that will prevent share prices from plummeting on day one.
Directly listing shares on an exchange would reduce the cost of capital but increase the risk of not receiving sufficient funding. NYSE said that they would ensure that there is adequate interest and liquidity for the stock before listing the shares.
This is another avenue of publicly debuting shares that I believe could gain popularity in the tech sector if the SEC approves it. A direct listing is far from the norm, but if this method gains traction, this could spell trouble for the investment banking industry.
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