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Broker group warns of investor risks posed by U.S. direct share-listing proposal

By Joshua Franklin and Michelle Price
FILE PHOTO: The U.S. Securities and Exchange Commission logo adorns an office door

By Joshua Franklin and Michelle Price

NEW YORK/WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission risks weakening investor protections if it allows companies to raise money in the public market through a direct listing without the support of underwriting banks, an influential broker group said on Friday.

The warning by the American Securities Association (ASA), a Washington-based group representing regional financial firms, highlights brewing tensions between the stock exchanges that are pushing for direct listings and financial firms that stand to see their fees cut in the capital-raising process.

The New York Stock Exchange (NYSE) has filed an application with the SEC to allow companies going public to raise capital through a direct listing, instead of an initial public offering. Nasdaq has said it also intends to file changes to its rules that would allow companies to raise funds, so-called primary capital, through a direct listing.

Currently, a direct listing does not involve the selling of any new shares and prices the newly public shares on the day they start trading, without the company having to hire investment banks to underwrite the transaction as with a traditional initial public offering.

"While direct listings to raise primary capital may sound good in theory, the reality is that the practice circumvents the diligence process, many of the most important investor protections set forth in the Securities Act, and the very reason the SEC was formed: to protect America's retail investors against fraud," the ASA's chief executive, Christopher Iacovella, wrote in a letter to SEC Chair Jay Clayton on Thursday evening, which was seen by Reuters.

Venture capital investors have been pushing for direct listings, saying they are a better way to price newly public shares, while the exchanges say the new mechanism would give companies more flexibility in how they go public after a 20-year decline in listed companies.

But the ASA said in its letter that underwriting banks are important gatekeepers for stocks coming onto public markets, helping to spot fraudulent would-be issuers.

"If the new rule proposals were approved by the SEC, they would fundamentally alter the IPO market, likely increase the number of companies that forego the traditional IPO process, and significantly increase the risks for America's retail investors," Iacovella wrote.

The SEC has not commented on whether it would grant the exchanges' request, although Clayton has previously said investor protection is a priority.

To date, there have been two high-profile direct listings, music streaming business Spotify Technology SA <SPOT.N> in 2018 and communication platform Slack Technologies Inc <WORK.N> last June. Both had successful market debuts, but their share prices have since sagged.


(Reporting by Michelle Price in Washington and Joshua Franklin in New York; Editing by Leslie Adler)