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Comment by sixhobbits | Hacker News Reader

> In an IPO, SEC rules typically restrict shareholders from selling shares until six months after the offering. A direct offering makes it much easier for employees and early investors to cash out as soon as the first day of trading. This can be a big help for investors in companies that have waited to go public, which many of the best-known tech companies have been doing for years

Is it wrong to interpret this as other people expecting the bubble to pop soon and wanting to pass the bag sooner rather than later?

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I don’t know, but I do think you can take the recent spate of high profile IPOs as an indicator that a lot of people want to “cash out” (sell their shares) or “cash in” (raise money whilst the market is bullish) right now. Presumably they think the market won’t get much better.

It seems pretty obvious that we’re in a bubble, given the excessive valuations and obvious signs such as the incredible rise of WeWork and “me too” startup culture. But the nature of a bubble is that such things are normalised and rationalised. What’s particularly difficult about this bubble is that economic conditions have conspired to maintain it far longer that the .com boom, which has meant predictions of the burst have been premature.

I definitely think we’re in a better place than the late 90s, but it’s still a bubble. Perhaps such cyclic swings are inevitable; just wish we’d done more constructive and positive things than Uber, Airbnb, Facebook, Twitter, with this era of cheap money. Could have had more Teslas and SpaceXs.

My understanding is as follows:

In a traditional IPO, the company finds a bank to underwrite the deal and that bank gets shares. That bank is then taking on the risk of the shares flopping and tries to sell. The SEC rules protect the underwriting bank from competition during that time.

In a direct listing, the shares are coming from the current shareholders, so there is no need to stop competition because there is no third party to compete against.

A Cynic might say the bank expects a bubble 6 mo out, but I'd assume that's either baked into the fees/cost (4-7% as per the article) or they believe the shares of the company will be worth more eventually.

That is possible, but in theory there has been due diligence to verify the company as an on-going concern. Normally the goal of going public is to let those who took the risk in the beginning to get a payout, given that they have had their funds locked up all this time. Those who choose to invest now are taking the risks for access to future returns.

Normally the point of an IPO is to raise cash.

No, it used to be the point. Now a large portion of the point is to cash out existing investors. I do not claim it is the sole purpose, and this is largely true among unicorns, but it is certainly a shift. Look at Facebook: they kept raising huge series of private equity.

That is only true with a very small, very richly valued group of technology stocks. You're talking about a few dozen companies max per year. Using that small group to extrapolate a claim that therefore IPOs are now primarily used to exit shareholders, is clearly a dramatic overreach.

Pharma & biotech companies as one example (the market has seen far more IPOs in that sector over the last year than it has large tech companies using their IPO as an exit), are still very frequently doing IPOs so they can raise operational cash to burn and to use their public stock for funding and acquisitions later.

Investors can usually cash out during the IPO itself, they are only banned from trading between the IPO and the end of the lock up period.

Sounds wrong. First of all, I'm pretty sure it's not the SEC which forbids selling the first 6 months. It's the underwriting banks that enforce this on pre-ipo shareholders in order to protect the price volatility of the offering.

No. Employees presumably hold a lot of the stock and would like some form of liquidity, as would investors, etc.

Making the stock immediately valuable is very important

Yes. You are imputing intent from action, which is often wrong.

Another interpretation: they don’t care for the terms underwriters are offering, and think a better price can be set offering shares directly to investors. And that a good price serves everyone well.

Google had a rough go of it, IIRC, and there is some risk that institutional investors will sit the round out without their banking partners running the show.

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