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SEC opens debate on finding alternatives to IPOs

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Via Financial Times

The US Securities and Exchange Commission has held exploratory discussions on alternatives to initial public offerings for companies that want to raise capital and list on the public markets.

Silicon Valley investors and advisers are pushing for more companies to follow Slack and Spotify’s lead and choose a direct listing, in which pre-existing shares are released to public investors without offering any new equity.

But some supporters of direct listings are lobbying the US markets regulator to allow companies to raise new capital when taking this route.

Representatives from Morgan Stanley, the Nasdaq stock exchange and the law firm Latham & Watkins met SEC officials in Washington earlier this month to discuss ways companies could sell primary shares in direct listings, people with direct knowledge of the meeting said. 

William Hinman, director of the SEC’s division of corporate finance, was among the officials present at the meeting, one of the people said. They cautioned discussions are at an early stage, and any proposals to raise capital in direct listings could take months to finalise. 

The SEC declined to comment on the meeting but said it has an “open door for issuers and their advisers if they have questions in general, and in particular about novel offerings or procedures”.

At the Washington meeting, SEC officials raised questions about proper investor disclosures in the new direct listing format, people with knowledge of the discussions said. IPO prospectuses, for instance, require companies to establish a price range for their share offerings, and it is unclear how that would be handled in the new procedure.

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The topic also came up during a Goldman Sachs conference in Las Vegas this month. Greg Rodgers, a partner at Latham, said that there are still “hurdles” to raising capital in a direct listing, though regulators are “very happy” with the precedent set by Slack and Spotify.

“The SEC’s mandate is to have as many public companies as possible. And I think they do recognise that the inability to raise primary capital [in direct listings] is a limiter,” Mr Rodgers said, according to a transcript. “So I think in the long term, I like our chances here.”

The Washington meeting was partly organised and attended by Joseph Grundfest, a Stanford University law professor and former SEC commissioner, people with knowledge of the matter said. Mr Grundfest did not respond to messages seeking comment.

Discussions around direct listings have increased following a series of high-profile stock market flops. Shares in fitness equipment maker company Peloton and dentistry provider SmileDirectClub got off to a sluggish start when they made their debuts as public companies last month, while property group WeWork shelved its planned IPO entirely after facing questions about its business model and corporate governance.

The travel site Airbnb is said to be leaning towards a direct listing that stands to be the largest to date, according to people briefed on the company’s plans.

Morgan Stanley plans to host its own direct listings conference in San Francisco next week, which will include speakers from Slack, Spotify and the New York Stock Exchange, according to an email invitation.

More than 100 companies attended a San Francisco conference led by Bill Gurley, a partner at the venture firm Benchmark Capital, and dozens of other venture capitalists earlier this month, which featured speakers touting the benefits of direct listings.

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