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How direct listings could 'transform' the market


2020 is shaping up to be a strong year for initial public stock offerings. 

“As we look out to this year, we have a healthy IPO market at least for the first half of the year,” New York Stock Exchange Vice Chairman, John Tuttle told Yahoo Finance at the World Economic Forum in Davos, Switzerland.

“If you look at the deal pipeline, they’re companies from across geographies and across industries that are looking to come to market.”

Those companies will have a tough act to follow. Despite a string of disappointing market debuts last year from household-name unicorns, including Uber (UBER), Lyft (LYFT), Chewy (CHWY), and Pinterest (PINS), the Renaissance IPO Index climbed 35%, beating the S&P 500’s 30% gain. 

Despite all the hype, WeWork had to pull its IPO plans because of serious concerns about its business model and corporate governance.

“Investors are focusing more on a sustainable pathway to profitability,” Tuttle said. “They’re looking at other metrics aside from rapid top line growth when thinking about valuing and investing in companies.”

The year of the ‘direct listing’

For a select group of unicorns, the traditional IPO track is not as desirable as a direct listing, which allows a company to avoid hefty bank fees and sell only existing, outstanding shares to investors without issuing new stock and thereby diluting its share price. 

Slack CEO Stewart Butterfield, second from right, is applauded as he rings the New York Stock Exchange opening bell, before his company's IPO, Thursday, June 20, 2019. NYSE President Stacey Cunningham is at right. (AP Photo/Richard Drew)

The NYSE helped pioneer the concept of the direct listing with Spotify (SPOT) in 2018 and Slack (WORK) in 2019. 

“We expect in 2020 anywhere from 4 to 6 companies to realistically take that direct listing path,” said Tuttle.

It’s becoming a popular alternative for companies that don’t necessarily need to raise cash, but are looking to give early investors and employees an exit strategy. Unlike with an IPO, direct listings don’t have “lock-up” periods, so insiders can sell shares of the company as soon as it lists rather than wait up to 180 days to do so.

Home-rental matchmaker Airbnb and open source software company GitLab are among the companies widely expected to do a direct listing later this year.  

But for most companies, going public is still about tapping new capital from public investors – something current direct listings don’t allow. The NYSE is trying to change that. It recently submitted a proposal with the Securities and Exchange Commission that would allow companies going public through a direct listing to raise capital. If approved by the SEC, Tuttle said this new product offering has the potential to “transform the marketplace.” (The NYSE made changes to its proposal and resubmitted it to the SEC in December.)

Alexis Christoforous is co-anchor of The First Trade at Yahoo Finance. Watch The First Trade each day here at 9:00 a.m. ET or on Verizon FIOS channel 604. Follow Alexis on Twitter @AlexisTVNews.

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