By expanding the Direct Listing Process (DLP) that both Spotify and Slack utilized, entrepreneurs would be able to step up funding while sidestepping the standard IPO.
Sources told the FT that Goodwin Procter, Latham & Watkins, Morgan Stanley and Goldman Sachs held meetings to discuss modifying existing regulations.
While an IPO offers shares at a pre-determined price, the DLP lets business release shares directly to the public without the help of any intermediaries. The DLP currently isn’t utilized as a funding tool.
Benchmark Capital partner Bill Gurley and Sequoia Capital’s Michael Moritz are both pushing for a DLP discussion in Silicon Valley.
Stanford University law professor Joseph Grundfest, a former commissioner at the Securities and Exchange Commission, told the FT that “The time is ripe to have direct primary offerings.”
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“If the commission is interested in increasing the number of exits through IPOs rather than through mergers and acquisitions, this is the smartest thing they could do,” Grundfest said.
IPO opponents contend that under-priced shares shortchange startups.
Goldman, Morgan Stanley and Allen & Co. supervised the DLP for Spotify and Slack and “see a chance to corner the market.” The three shared $128 million in fees from Spotify’s listing. The $106 million in fees from Uber was divided among 29 banks.
It is expected that the SEC would have to approve any DLP modifications.
Most companies don’t use direct listings because they are untested — and when Spotify did it, the main worry was that because there’s no initial price, there’s no way to know where shares would start. There was also the fact that there was no lockup period, so all of the stock was available. This potential volatility led many to worry that the listing would be chaotic.
However, that wasn’t the case. Spotify set a reference price of $132 based on recent trades done in private. The stock hit the market at $165.90 and closed at $149, which is an increase of around 12 percent.
