SEC Approves NYSE’s Plan for New IPO Alternative | Hacker News Reader

SEC Approves NYSE’s Plan for New IPO Alternative

wsj.com

521 pointspseudolus177 comments

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WSJ has a much, much better article.

Unlike Reuters, it actually includes a link to the SEC release that the entire article is about.

https://www.wsj.com/articles/sec-approves-nyses-plan-for-new...

WSJ is great, and also paywalled for most

Since there are workarounds, it's ok for HN purposes. Users usually post workarounds in the thread.

This is in the FAQ at https://news.ycombinator.com/newsfaq.html and there's more explanation here:

https://hn.algolia.com/?dateRange=all&page=0&prefix=false&so...

https://news.ycombinator.com/item?id=10178989

Honestly, I wish social media had a way to filter for paid media. All the free news feels like a race to the bottom.

... I agree? It sounds like you believe I'm saying they shouldn't be posted or that wSJ breaks guidelines (of which I've said neither), rather than provide an explanation as to why this may have been chosen over another source?

Sorry, I think I misunderstood you - usually when people post like that they're complaining about such sites or advocating for not allowing them here. (Moderation is pattern matching and a short comment will tend to get matched as the most common pattern in a bucket unless there's enough information to establish otherwise.)

web archive:

https://archive.is/20201222204815/https://www.wsj.com/articl...

https://archive.is/Se7W0

Ok, we've changed to that from https://www.reuters.com/article/us-usa-sec-nyse/u-s-approves.... Thanks!

(I'm sorry about the paywallness, but as long as there are workarounds it's ok, and people have posted workarounds in this thread.)

People don't realize that a day 1 "pop" in share price of an IPO (sometimes 100% or more, like some of the recent ones) benefits only wall street, not the company itself. Big banks are, therefore, incentivized to underprice IPOs as much as they can get away with. And employees themselves are subject to long lockup periods. With the recent success of direct listings, cutting them out of the process is a logical step.

I don’t want to defend the traditional IPO process too much, but “only” is a strong word. One possible benefit from a “pop” is that it makes it more likely for investors to want to participate in future IPOs. That is, the pop from an earlier IPO makes it easier for a later IPO to occur. Of course this isn’t benefitting the first company, but it is benefitting companies at large.

I’m just trying to offer some explanation, I still believe the process deserves modernization.

Strangely reminiscent of Aposematism.

https://en.m.wikipedia.org/wiki/Aposematism#Behaviour

How does the listing status affect employees with lockups? If you can't sell for a month (or whatever), wouldn't you benefit from any increase in price immediately after listing? If the price when the lockup period ends is the same, why would an employee care?

(I don't know how it works, I'm actually asking)

The volatility may not directly impact employees with lockups, though there are two potential outcomes. First, the volatility could cause issues even after the 'cooling off' that would take place over that month. Second, the 'lost capital', which was captured by the investment bank is lost to the company, so the company is in a weaker state, both because having a weaker balance sheet is bad, and because it could have used the money.

The lockup period for an IPO is usually 6 months. That means that institutional investors have the opportunity to realize their gains any time post IPO, while employees have to count on the price to hold for that long before that can get any liquidity. Two or more earnings calls in the period add to the risk.

In a direct listing employees can sell on day 1, since there are no obligations to underwriters.

lockups aren’t specific to IPOs. Palantir shareholders are also subject to a lockup. They were only able to sell some fraction of their shares on Day 1.

> banks are, therefore, incentivized to underprice IPOs as much as they can get away with.

But don't banks compete for the IPO business by telling the company what a high price they will list it for? That doesn't solve the problem of a bank saying they'll list for a high price, winning the bid, and then coming back later and saying that intervening events cause them to think it should be listed lower.

But presumably companies that are about to IPO have advisors/lawyers who can see these sorts of shenanigans coming and fight against them?

The company's attention may well be on its actual business, and the bankers will put a lot of time and effort into positioning themselves as someone the company thinks of as a partner (not always in a "fake" way - often the bank will genuinely do a lot of free work for the company in other areas as a kind of gift economy action).

I think the perverse incentive may be in the other column of signatures.

It's not always the case that all of the shares are sold in the IPO. Some are allocated to board members and investors. Those people will negotiate a share count based on the IPO price. I may feel entitled to 5% of the company, they may offer 3%, but might only be able to negotiate 4%. But if the shares will double in value after the pop? I'm perfectly fine with that. I know that. I expect that.

There's an incentive for me to fight for shares as if there is no pop, but then agree to the IPO term sheet knowing that there will be.

I think it is more a supply and demand issue. There are less people that can buy shares pre-IPO. If the IPO was accessible to everyone the price would be the market price.

Banks do compete but it's not really an iterated game - a company only goes public once.

This is a good idea, why do you have to sell the whole company, why not trade 10% on the market every year. This would allow the market to actually function to set the price of a company... you could also instead of dumping the company at some made up price let the market decide weeks before the IPO in some sort of pre-purchase trading. Why we allow banking institutions to steal in broad daylight like this is beyond me.

> Why we allow banking institutions to steal in broad daylight like this is beyond me.

Because in almost all countries politicians have been bought off one way or the other by banks.

Almost all companies do not "sell the whole company" in their IPO. 10% is closer to the average than 100%.

Interesting, do you have some examples of this, I was under the impression that you wouldn’t be allowed to keep some of the company private and some of it public at the same time. I’ve tried Google and it’s difficult to find information about this, the Wikipedia for IPO doesn’t mention this either.

The full company goes public, however existing shareholders keep their shares and don't have to sell them - they now just have shares in the public company.

This is why dilution happens too - new shares are created so that they can be sold.

You can look at individual IPOs. The most high profile one recently was Airbnb. According to the NYT [0], they sold $3.5 billion worth of shares, at a valuation of $47b, so only 6%. For another example, Mark Zuckerberg still owns 30% of Facebook, 8 years on from the IPO.

You're correct that the whole company "goes public" at the same time. But that just means it becomes legal to sell shares to small investors, and the company becomes subject to the reporting requirements, etc. The previous owners still typically own most of the shares, and (almost always) are forbidden to sell them for around 6 months after the IPO.

[0] https://www.nytimes.com/2020/12/09/business/airbnb-ipo-price...

Interesting, I wonder how much of AirBnb YC still own, I guess they get diluted too?

Doesn't the presence of repeat players on the company side (VCs, advisors, attorneys) mitigate this? Any company that is on the cusp of going public — especially these days, where that happens so much later — would have a lot of repeat players on their side.

The parent commenter is wrong. Banks get a percentage cut of the funds raised. They lose by getting the price wrong in either direction. If the IPO is underpriced the bookrunner leaves money on the table for both the company, and by extension themselves.

"Big banks are, therefore, incentivized to underprice IPOs as much as they can get away with."

No, the banks get underwriting fees as a % of the offer, so they are incented for a higher price as well.

The 'winners' are the folks who get to buy from the underwriting bank and that's opaque: it could be 'the same banks clients', and so they get some major favour points for those allocations, and their own private wealth managers would ostensibly get a cut, but that's quasi insider stuff.

The banks 'working with the IPO company' lose money with a price that's too low.

Even if you were to say 'oh, the other parts of the banks are working for some action' the answer to that is, well, bankers are 'very me first' and I don't care who it is, the underwriting team wants to make as much money as they can, it's their personal bonus, and they're going to maximize the price. They don't care about the 'private wealth management teams' bonuses, they care about their own.

AirBnB I guarantee literally had some of the world's best bankers on the case.

There's just a lot of variation in very frothy markets and it's hard to estimate demand from far flung corners.

> No, the banks get underwriting fees as a % of the offer, so they are incented for a higher price as well.

What is the counter balance to this? Obviously banks can value a share at abnormally high prices and take a big fee, but clearly that is not happening.

Counter balance is the free market - if you set the price too high, investors will not buy into it and the price will be adjusted down.

The counterbalance is that they are underwriting the stock, meaning, they are actually buying the stock from the company, and then selling it into the market.

The umderwriters are the one's actually putting money up 'ahead of time' at the 'specific price' for the company, which involves some risk obviously.

So if the underwriters price too high, they are stuck with shares.

The people to first buy shares from the underwriteres are likely other institutional investors, and then large private wealth clients etc..

Understand that this is likely one source of the 'jump' - large institutional investors are not generally buying to flip the stock on the same day, in fact, the underwriters (and even AirBnB) don't want that. They don't want volatility.

Ideally, AirBnB sells to the bank/underwriters, the big funds buy from the underwriting bank and then hold. All of this will have been established/prepared for during the roadshow. AirBnB is huge, Fidelity wants a cut, so they'll take an allocation X shares for $Y on 'the day'.

Nice, clean, straightforward, not a lot of volatility.

Going an 'IPO' is like 'being born' - it's a sensitive time and a lot of money is changing hands you want it to go 'as planned' and 'smoothly'.

So there's likely a smaller number of shares really floating out there on day 1, which may enhance the pressure from the demand curve.

IPOs for banks are repeat businesses: they'll be selling many different companies to the same institutional investors over the years. If you don't get your investors a pop, they'll be less likely to buy the next time around. The incentives are a little more complicated than just the underwriting fees — and the underwriting banks often both get a % fee and a flat fee, the latter of which is less useful for aligning incentives on pricing with the company going public (but useful for aligning incentives with the investors).

That being said, seemingly-paradoxically, despite big pops being bad for the companies, they're actually typically good for employees. RSUs will typically turn into shares at IPO time and the entire bundle of shares will be taxed as income according to the listing price; a giant pop means you get higher dollar value shares while paying less tax, assuming you then hold onto them for a year and pay long-term capital gains tax on the difference between listing and pop price rather than selling immediately and paying short-term tax. Waiting a year to sell isn't that unlikely, since employees often aren't even allowed to sell at all for the first six months.

This is pretty non-sensical. Banks are incentivized to price IPOs at the highest possible price, their comps are directly linked to the proceeds.

If IPO pop was something nefarious, how do you explain IPO pop of Goldman Sachs stock? They ran their own IPO and you can be sure as hell that partners didn't want to leave any money on the table.

In general, IPO pop is an interesting phenomenon and it's not fully explained in the literature.

It's easily explained by accepting that the IPO price is a guess in the first place, and that the negative publicly of guessing wrong and having a significant IPO decrease is more professionally embarrassing than having an increase.

Dont the bankers go through a discovery process where they find buyers pre-IPO? Its not like a blind guess

Those buyers are institutional investors and they get a huge discount.

The answer, like most things in life, lies in between.

Yes, in an ideal world you "price it right" and on IPO day the stock doesnt move up or down from the opening price.

Optically, it looks a lot better to price low and have the stock rise.

Additionally, there is something called an over-allotment option (aka greenshoe) that allows banks to sell more shares than initially allotted, to help stabilize the IPO price. This is usually more $ for the banks.

> They ran their own IPO and you can be sure as hell that partners didn't want to leave any money on the table.

The optimal return for partners probably is giving the institutional investors a pop on even your own IPO so you keep them as investors for future IPOs where you are collecting fees. When the institutional investors lose money on an IPO, are they going to come back to you for the next one?

All the money is made by handing the bank's best customers massive instant gains.

It's a racket, for certain.

The story as it goes is that they need big investors to soak up a lot of the IPO so that they all sell. The brokerages cultivate a set of people who can pony up that money, and part of that cultivation is a history of good (profitable) interactions.

Thinking Fast and Slow asserts that humans use a different weighting system for upside and downside (making $10 does not feel as good as losing $10 feels bad), but it also asserts that people who look at finances and statistics for a living have a bunch less pronounced bias in this respect.

In the same way that it's worth some guy's time to climb into my tree for $250 bucks, and worth $250 to me to not have to make that climb, the investment houses should be profiting off of the difference between my speculative sense of risk in the situation versus their objective sense of risk based on expertise.

But that doesn't seem to be what happens with IPOs. It feels more like an Old Boys' Club, full of people who are as averse to loss as I am, maybe even moreso, demanding an experience that ranges from good to fantastical, instead of fair to excellent.

The good news is, that gap means there's space for competition. The bad news is that many of the people who might participate seem to be more motivated to stretch enough to get an invite to The Club instead. Someone is going to have to defect. A lot of someones...

You hear a lot about the day 1 pop in share price but I really think the price is just the tip of the iceberg. I'm not sure what the trading volume is but I doubt that you could fill the entire IPO at the highest price on the IPO date.

From what I understand, supply is constrained as employees typically can't sell shares, and retail investors who were lucky enough to get in on the action are typically locked up for 60 days. Institutional investors are happy to hold on to alot of their shares because they can mark them to market and make their returns look great.

Edit: clarified first paragraph

I tripped over your first paragraph a bit, but I got it, you mean the market open price ("IPO price" has a specific meaning, the price that the people participating in the offering get, that is usually set by the bank).

Good point. I just edited the comment. Hope it is more clear. The point I'm trying to make is if you are trying to sell $100 million worth of share it is going to be at a lower price then selling $10,000 worth of shares. It seems like critics of IPOs just take the number of shares issued and multiply it by the highest price on the IPO date and say "Look at all the money those bankers left on the table!"

Yes and no. A pop means that shares sold were at a discount to their true value. At the same time, it's usually benefital to a company to have a high stock price for various reasons, and that benefit likely outweighs the downside of having raised capital expensively at the IPO (including having the ability to raise more capital much more cheaply in the future).

Unfortunately because the media gives such fawning press coverage to IPOs that "pop" the companies also want it to happen. No executive wants to have the IPO that dips on Day 1.

Now if they were thinking rationally they'd realize the extra funds raised from a high IPO price are worth much more than the positive media coverage from a pop, but we all know that people response irrationally to media coverage.

I find myself aligning closely with Bill Gurley on this since it sure seems like Wall St. is just siphoning value off of their mispricing of tech IPOs. Bill's been a huge advocate of change and he's really enthusiastic about this, so seems like a really positive change:

https://threadreaderapp.com/thread/1341438991401242625.html

Edited with threadreader link: Thanks toomuchtodo

Bill talks about issues with traditional IPOs here [0] under _DOOR #1: THE STRUCTURALLY BROKEN IPO PROCESS_. Worth a read.

0: http://abovethecrowd.com/2020/08/23/going-public-circa-2020-...

Direct listing is the norm in many countries around the world for decades. In India for example it is called book building and is the norm since ~1998. The average underwriting fee is 1-2% and academic studies have calculated that underpricing came down substantially from fixed price IPOs.

The US is late to this shift but understandable as the US has the some of the oldest and largest markets which are resistant to change. The same process happened in the shift to electronic trading where US exchanges were the last to fully embrace electronic trading - looking at you NYSE ;) Also remember the big banks owned seats on the exchanges and the exchanges in turn and that removed any incentive for the exchanges to push for direct listings. The exchanges are now publicly traded entities so there incentives are no longer aligned.

The pearl clutching by institutional investors at this change is surprising. Perhaps they are chafing at losing preferential access to IPO allocations and having to compete with the rest of the retail investing public.

This post provides great perspective on the issue.

How nice of the SEC to no longer stop companies from doing what was obviously something they should have been allowed to do all along.

When the company is profitable and the eventual price is stable, sure it looks fine. But flip it around and pretend it’s a company like Ripple issuing an IPO (for dollars, not crypto scrip) and you realize the historical existence for these rules.

the historical reason for the current rules was that computers didn't exist when the rules were written and it would have been extremely complex to make a market for a direct listing via humans calling each other on the phone or traders in pits shouting.

There's ways to address this such as an open auction with one day to collect buys and sells. You'll get a pretty stable open price determined by the fair open market.

This is really good. I have been involved in this area of finance for over 2 decades and can attest that this process is broken. The bankers and traders pressure companies to benifit themselves and their clients at the expense of early investors and employees. I've seen cases where the IPO bankers made off with more than the employees themselves.

This is a step in the right direction.

Could someone please explain this for a layperson such as myself? Why was Palantir one of the few companies able to do this before, and does that mean any company now can get listed on the stock exchange?

palantir didn’t raise new money. what they did was a secondary direct listing where existing shareholders just put their shares up for sale to create a public market for shares.

a primary direct listing was not allowed before this ruling. this means that companies can now both list existing shares for sale plus raise new money by auctioning off newly created shares instead of going through a traditional IPO.

Palantir was supposed to be a quiet little listing. The big institutions wanted to accumulate it at rock bottom prices before it's eventual rise into triple digits but the general public has caught on and it's getting pumped up.

Disclaimer: I bought 2500 shares at $11 and am up well over 150%.

Does that mean that anyone will be able to invest at the (initial) initial public offering price?

Yes as is the case with any direct listing. But the opening share price will be based on the order book and the orders that investors place before the first trade executes.

What if the investors pay for the due diligence? The candidate company must be forced to be radically transparent while the auditor will be incentivized to provide value to the investor and be liable if there is missing info due to negligence or corruption.

I think if investors value the third party stamp of approval there are many ways to charge for it. Just because you don't have to pay an ibank doesn't mean you can't pay an ibank.

I agree, just the company under consideration will have to provide comparable level of access to information to enable meaningful analysis and this is hard to happen without regulation.

The other option is if the company does not cooperate because it is free not to which will turn the IPO into a cat in a bag investment. It will attract the risk-seeking, the stupid, and those with insider information. On the other hand, if the company does not have the marketing cloud and is underfunded, it will have to spend some money to attract the investor's attention which might be as costly as paying a dedicated proxy. It would be interesting to watch.

I mean is the S1 with SEC approval to list not enough?

This. Any company listing on the exchange will be required to file an S1 as well as quarterly and annual statements. From that point on, in fact, they will not be allowed to provide deeper diligence to privileged investors - that would be insider trading. The point is, if the company is making the shares available directly to the market, then you don't need to convince underwriters to purchase your shares before you go public.

In all fairness there is a legit service provided by underwriters. Most companies offering IPOs aren't well-known tech companies with an informed market ready to buy. They're more likely totally unknown and lack investor interest. Making a direct sale without underwriter support (who will buy a portion of your offering to act as a market-maker and stabalize the price) can potentially fail to raise the necessary capital. Yes underwriters demand fairly steep fees, but they also take huge risks themselves.

The traditional IPO will still be available; so companies that feel the need for underwriters can do so, and the very public tech unicorns don't need to anymore.

Best of both worlds, no?

It seems like this might be a better approach than SPACs.

Going forward, are there any other benefits to choosing a SPAC over this direct listing approach?

Can't you avoid an S1 filing and all that with a SPAC?

My guess is that the SPAC does the S1 filing before making the acquisition. Therefore they don't need another S1.

Out of curiosity, how onerous is the S1 filing? Is it any more difficult to fulfill than the annual reporting requirements?

No idea on how complicated it is to file an S1. I just type code :)

From my understanding, the SPAC goes public (with an S1) with the intent to acquire "some company". Then the company being acquired doesn't have to file an S1. I would guess that the SPAC's S1 is going to be a lot less complicated, as it's a do-nothing holding company set up to acquire some TBD company.

About time plus plus with audited financials it’s not a trust issue. Don’t think this will massively increase public listings but it will certainly level the playing field and get rid of the first day pop. Especially now that companies are staying private longer this a huge benefit to the everyday investor.

This would be a great step, but an even better step would be ending the centralized gatekeeping of securities-related investment contracts, and respecting the right of grown adults to freely contract with each other.

A recent study on the ICO market on Ethereum found:

"The average ICO has almost 4700 contributors. The median contributor invests a relatively small amount. The ICO market appears to have successfully given access to the financing of innovation to a new class of investors, which is a long-standing public policy issue" [1]

People having the freedom to contract is true accessibility.

[1] https://link.springer.com/article/10.1007/s11408-020-00366-0...

The old rule is reminiscent of:

1. legal restrictions, in some states, prohibiting craft-beer brewers from selling directly to retailers or to the public, and requiring them instead to go through middleman distributors — and of course those wealthy distributors wield lots of political power (via state-legislature campaign contributions) to keep those restrictions in place; and

2. similar auto-dealership laws, in states like Texas, that prohibit car manufacturers (e.g., Tesla) from maintaining in-state showrooms of their own to sell directly to buyers — again, the wealthy middleman car dealers are politically powerful and have successfully lobbied hard to keep those dealership laws in place.

I guess this was inevitable since they started allowing listing by reverse takeover but still... <Countdown to a massive fraud begins>

Edit: Drocer88 correctly points out below that reverse takeovers have always been legal!

Are investment banks truly working that hard to prevent fraud for the inflated fees (~5%) they're charging? The SEC still has a government funded securities regulator role to play.

If net benefit increases, we should celebrate when middlemen are disintermediated. If there's evidence this causes harm to non-accredited investors (any investors of significant amount really), we can strengthen regulator resources (and for likely a lower cost than continuing to shovel money to IBs for these deals).

There’s a difference between a regulator and someone with a financial interest in success.

There is a certain effectiveness for some kinds of problems that being financially interested in truth brings which is harder to do consistently with regulation.

I am not trying to suggest a specific course is better, but pointing out that there is value in aligning doing the right thing with profit motive.

Sure, and I don't think that with this plan, there's anything stopping investment banks from agreeing to purchase direct listed shares at IPO in an arms-length transaction. Given the need to file audited financials, among other components of the regulatory burden to go public, is the investment bank charging a fee to act as a fiduciary really adding much protection?

There can be a sizable gap between complying with regulations to ensure X and trying to do X.

lock picking lawyer had a great video on that topic recently https://youtu.be/DykUXXcJGIw

Writing regulations is hard to achieve the intended effect. Complying with regulators frequently involves a mindset of checking boxes instead of trying to accomplish something.

If, however, an investment bank essentially buys a large chunk of your company, if only temporarily, they have a real motivation to figure out if it is legitimate, and there are real consequences if you screw up, not just legislated consequences but real financial bag holding ones.

You have to think of the everything-is-a-game mindset to help you evaluate situations. The game of being a regulator is different than the game of being an investor. There is value in both.

> If, however, an investment bank essentially buys a large chunk of your company, if only temporarily, they have a real motivation to figure out if it is legitimate, and there are real consequences if you screw up, not just legislated consequences but real financial bag holding ones.

Right, but what I'm saying here is, a bank can still choose to be an arms-length investor. My hypothesis is the market gets as much positive signal from that as it would a traditional underwriting syndicate, without the upside bleed-off.

> You have to think of the everything-is-a-game mindset to help you evaluate situations. The game of being a regulator is different than the game of being an investor. There is value in both.

I'm not conflating the two. I'm suggesting the investor signal doesn't require a traditional underwriting syndicate.

Phrased another way, how many IPOs have canceled due to a failure to form an underwriting syndicate, or because of the due diligence performed by the same? WeWork comes to mind, but I don't think we needed the bank to tell us it was problematic - reading the S-1 would have been sufficient.

I won't pretend I know. That said, the main advantage to these middle men is that they agree to buy and hold (directly and for select clients) shares at IPO. That means they have skin in the game and if the price falls at IPO or soon after, they're burnt. So I guess they're doing at least some due diligence.

Too often regulators only come in (decades) after frauds started (Enron, WorldCom, Wirecard). And frauds fall through cracks between regulators too as it isn't clear who is responsible for what.

I'd actually like to see more of this sort of role elsewhere in finance: having your accounts signed off by a big 4 firm would mean a lot more if they had to payout in the case of fraud. But that's a somewhat different issue I just thought I'd add...

Regarding your first paragraph about directly owning shares for themselves and for clients. That means they are also incentivized to underprice the shares so that they can make a bigger profit. They get to buy in at a lower price and sell at a higher one.

Yes, that's correct. This is why the vast majority of IPOing shares RISE in price early on.

Partly this is countered by the competition between banks, if Morgan Stanley tell you they can IPO you at 50usd but Jefferies say 55usd, you go with Jefferies.

It's also good news for anyone who continues to hold equity (CEOs, founders, early/angle investors etc). Only the initial equity sold goes at this discount. For this reason many companies will start by offering small amounts of equity and later issuing more at the market price.

Of course, its also a very hard question to answer: how much is a share of company X worth? When there is no market to reference. So the discount is also a risk premium both for fraud and for mis-valuation.

I actually think IPOs are one of the hardest parts of finance to fully understand and to do and so are one of the most interesting. That's not to say that there aren't conflicts of interest and dodgy activity. Just that there are 101 moving parts.

That makes sense, I hadn't considered the competition between banks.

Do you mean issuing more as in diluting the number of shares or by early stakeholders selling off their shares? The reason I ask is because on the public markets diluting shares usually pushes the shares price down, because it means they are in need of capital no? So that implies you mean early stakeholders selling their stakes?

Pricing an IPO (or any asset for that matter) is a fascinating topic, at least to a layman like me. It sounds like this should be a perfect fit for some sort of auction, yet that doesn't really seem to be a common strategy. I guess a direct listing is more of an auction type of pricing mechanism.

My impression is their fees are closer to 50%: Somehow, only close friends of the investment banks are allowed to buy shares at the listing price, the rest of us have to wait until after the 2x price pop in the markets... at least that's what has been happening in most recent IPOs.

why do owners of pre-IPO shares care? When people talk about investment banks ripping companies with regards to the IPOs, they're not talking about the public. Moreover, most retail investors aren't going to participate in the pre-market auction in the first place, so the results will be the same

There shouldn't be a pre-ipo auction, the stock market should be the auction. That's what the SEC is enabling here. This is good for the companies and good for the retail investors, bad for the middlemen.

If a company has 1000 shares outstanding, and 2000$ in assets, and it sells another 1000 shares for 1$ a pop, then the owners of pre-IPO shares get diluted. Before this, they had a share of 2$ worth of assets. Now they have a share of 1.5$ worth of assets.

Or, from another point of view. If you own shares in a company, you want that company to do well. Having the company raise more money (for the same dilution) is going to help the company do well.

Or, from yet another point of view, all these new shareholders are going to be taking a share of your dividend. You'd like the company to be able to use the new assets to grow quickly so they can pay out more dividend in total.

My point is, shareholders have reason to care about more than just the share price of a company.

Reverse takeovers have always been legal. There's nothing necessarily wrong or evil in skipping the banks in midtown Manhattan. Nothing wrong in a direct listing , either.

The Wikipedia entry on "reverse takeovers" ( https://en.wikipedia.org/wiki/Reverse_takeover ) cites the 1955 deal between REO and Nuclear Consultants, Inc. The company eventually became Nucor ( https://finance.yahoo.com/quote/NUE ).

Sorry, I thought they were banned by the SEC at some point and then unbanned, but that's wrong! I stand corrected.

There will still be listing standards and audit requirements, no? As far as I can tell, the IPO system was a total racket. Good riddance, I say.

For reverse mergers (with significant foreign assets) the audit requirements are retrospective: you list first then have 6m to audit yourself.

Be careful just dismissing the current system. Being complex isn't always bad...

Complexity prevents those without deep pockets from competing.

As always, Matt Levine has a great explainer on this subject, from Nov 2019: https://www.bloomberg.com/opinion/articles/2019-11-27/soon-d...

First off, how is Palantir "cash rich"? A look at their financials they're losing money just like all the other shit startups on the NYSE.

Their filings state they grew from a 1.43B asset base in 2018 to a 1.59B asset base in 2019.

I guess it doesn't matter how much cash you're bleeding if the underlying product (the company) is increasing in value.

https://finance.yahoo.com/quote/PLTR/balance-sheet?p=PLTR

Total liabilities increased too.

It's not clear if the incoming administration will give them the same federal contracts the current administration has.

I speculate that the direct-listing + SPAC's created by Chamath are at play here.

Bad things happen when you have parties involved in an idea that aren't directly working on that idea, coupled with lots of money.

We've all seen this movie 1,000 times before.

As of their most recent 10-Q, they have about $1.8 billion of unrestricted cash.

Yes, i understand, but where did that cash come from? If it's from investors, it "doesnt count" for our conversation purposes

I don't know him and haven't heard much about him, but from the looks of it the CTO of the United States (yes, the CTO of the United States) is a shill for Palantir/Thiel (https://en.wikipedia.org/wiki/Michael_Kratsios).

As far as I can tell he is not GitHub nor HackerNews, nor does he know how to code, which I think would make someone quite unqualified for that position.

Again though, maybe he's a nice person. Just to me from the outside looks like a Palantir puppet.

So absent a banker, how are they gonna price their offerings? A bank does have Avery large book of institutions who are covered by active reps. A startup does not have a mechanism in place to run a road show, gauge investor interest and ultimately price the deal. While leaving a ton of money on the table is a legitimate complaint, pricing and selling a deal isn’t a simple problem.

Google did an auction: https://www.cnbc.com/2014/08/19/es-took-off-but-the-auction-...

For many pricing problems, auctions are the answer. Doing a roadshow and tickling investor's interest is a separate problem, but many startups already have a size where they are well-known to a big enough share of investors.

There’s a lot of auction theory that comes into play that an individual investor is unlikely to know and I would imagine a startup may not fully comprehend either. I would worry that this is still not a level playing field.

This will force investment banks to have an underwriting fee no greater than the expected loss due to the company not understanding "auction theory." Also, any investor that doesn't think they understand auctions can simply wait a day and receive the exact same opportunity that an investment bank would give.

Google still used Morgan Stanley to run the book, the auction was just for better pricing doesn’t solve the rest of IPO worries at all.

In cases where the direct listing does not raise new capital (all of them so far) this is easy. You conduct the same sort of auction at the beginning of the first trading day that occurs for every stock every morning.

This rule does not forbid the hiring of banks to do all or any of these things. It just gives companies the option not to.

I expect this will improve both service and pricing from banks for work related to IPOs in the long run, as they now have to prove their value in absolute terms, not just vs competing banks.

You could just avoid the big banks and go for a smaller boutique that seeks to maintain its reputation with a companies first policy. The bigger banks are usually chummy with all institutional investors and will certainly pull shit to make a higher profit. An elite boutique bank, or a reputed banker running the show, can work wonders. For tech, one such bank is Qatalyst, for healthcare it's Centerview, like that, for instance. Even better if they can run an auction process for you.

That being said, the number of good "reputable" bankers is increasingly declining as they've soon realized they could make much more money on the investing side. There is a serious dearth of excellent bankers and a lot of mediocre bankers. This policy could not have come at a better time, if not earlier.

It is a simple and solved problem, you run a dutch auction (Google did it).

You can hire the bank to price your shares but still sell them directly. That's what Spotify, Slack, Asana, Palantir did.

Can someone comment on how significant this is, wrt tech startups choosing if/when to go public? My understanding is that tech startups are primarily delaying going public, because of the compliance requirements, and the short-term pressures of reporting their revenues/profits. To what extent are IPO fees holding them back?

I don’t think this changes whether a company decides to go public or not. This mostly helps “hot” private companies, mostly in tech, go public in a way that gives shareholders a chance to sell more shares on Day 1 and prevent bankers and investment banking clients from locking in an immediate return from a pop due to a mispricing at a price that is not available to other public investors.

Doesn't it effect when startups choose to IPO though? The first thesis of this article yesterday (https://news.ycombinator.com/item?id=25493646) put forward that because startups were missing out in the initial pop after IPO, it pushed the average tech IPO to be years later than before in order to try and capture more value privately.

This is at a determent to early employees with options (that then leave) as they have to make investments both in exercising options and the tax liabilities while waiting much much longer for liquidity via an IPO.

I don’t see why delaying an IPO until you “capture more value privately” somehow minimizes the pop. Obviously that didn’t happen with Airbnb or DoorDash which were both pretty late stage at this point.

Don’t think it has anything to do with that.

you're right... misread on my part. the point was more to do with the founders/employees being able to grow the value of their ownership stake longer privately.

a primary direct listing doesn’t change that calculus if that’s what you’re optimizing for.

Sounds rational due to diminishing https://en.wikipedia.org/wiki/Information_asymmetry

Why do IPOs involve guessing about the eventual price of shares? Aren’t there auction mechanisms that could be employed to smoothly discover the price?

Banks have been making out like bandits this past year in IPOs, something needed to change and I'm surprised it happened this quickly

Did a direct listing previously require an underwriter? I guess this change just further diversifies the options a start-up has for an exit.

Perhaps a silly question, but are there sites where I can track IPOs?

And is there a site where I can also see whether they'll be directly listed?

NYSE [1] and NASDAQ [2] each have calendars of recent and upcoming IPOs. Other exchanges around the world should have something similar.

[1]: https://www.nyse.com/ipo-center/filings

[2]: https://www.nasdaq.com/market-activity/ipos

Can someone explain why the SEC is so active during this presidential transition time? Is it something about Trump, Biden, their appointees, or something generically about the transition period?

Speculation: They're often this active, but we didn't notice, because presidential politics was sucking up all the attention.

The SEC press releases page is quite busy. Just on today there is so much. I just checked this one out: https://www.sec.gov/news/press-release/2020-333

Holy cow! It pays to be a whistleblower in securities. Its probably a fairly good career path to seek being a mole in crummy investment banks just for the payout.

This is great. These banks/middleman are less relevant.

What if anything does this mean for SPACs?

"Investor groups, however, warned it could diminish their protections as the banks perform due diligence on the companies."

That's positively hilarious in light of some of the dogs that investment banks have knowingly foisted on the public.

Fear not citizen! I am protecting you from yourself for the price of a small fee. You should be glad I'm here to rubber stamp your investment decisions!

I appreciate your sarcasm, but we all know it isn't just a small fee.

Airbnb lost out on over half the money they could have raised.

edit:

Priced to the banks at $68/share [1], opened to the public at $146/share the next day [2]. Free money for the banks, missed opportunity for the Airbnb balance sheet, and continued shut out of retail investors (even those with a large net worth).

This keeps happening. Snowflake and C3.ai left over 100% on the table to the bankers, and DoorDash left almost as much [3]. Bankers continue to get free money that the companies could use themselves for hiring and other expenses.

[1] https://www.nytimes.com/2020/12/09/business/airbnb-ipo-price...

[2] https://www.barrons.com/articles/airbnb-prices-ipo-at-68-a-s...

[3] https://www.fool.com/investing/2020/12/20/why-i-didnt-go-all...

First I’ve heard of this - do you have a source handy?

I think OP is alluding to the fact there was a big pop on IPO day (which indicates that the IPO was mispriced). Though that is not a "fee", but money left on the table for the company.

And the pop in Airbnb's case was pretty enormous. They priced at $68 and closed on the first day at $144.71

I continue to be flabbergasted any time these companies don't run an auction. Ideally N auctions, spread out through the day.

Google did. The banks liked to release articles saying it was a disaster but they were pricing it lower than that so overall Google came out ahead.

He’s referring to Goldman most likely deliberately underpricing the stock. During the IPO the investment bank gives access to certain folks: Their clients. They doubled their money almost risk free since they know demand.

Right. That's why I always thought buying IPOs is a bit of a mug's game.

Buying anything volatile is a mug's game. An IPO is infinitely volatile since it has no history.

I didn’t know that was a thing.

> They doubled their money almost risk free since they know demand.

They only did double their money if they can sell without pushing the price down. That's not easy to do for institutional investors.

In fact, institutional investors often make informal agreements to not flip the shares in exchange for their allocations.

This is not the same as an underwriting fee, and there is still the possibility that a company underprices their stock offering as well.

This. All to the benefit of the investment bank and their best customers who are rewarded with allocations of “hot” ipo’s.

How I know this: I have been the recipient of allocations in the past.

In return for telling them how much your interested and at what price.

Markets have order books for that kind of thing. In fact, that is what a direct listing is based on.

No, they tell you what the price will be at the last moment. They do indicate a range. They don’t really care what you think about the price.

An IPO pop does not necessarily mean that any money has been left on the table: just because some shares trade at $146 doesn't mean that all of them could have been sold for the same price. The demand curves slope downwards.

However, when the pop is as large as it was in the case of Airbnb, it does seem like they could have raised more cash.

> small fee

A generous 7%. I would like a small cut of this small fee.

They were going to drop WeWork/Wewhatever on the Public.

Independent financial audits of public companies seem to create the most value.

I'm beginning to think that there should be tier's of investor protection that get activated by numbers of complaints or similar metrics. Similar to what we've seen at county-level pandemic restrictions.

Right now all we have are pendulums that swing to overfit against bad behavior, and then swings back the other way because they made it too costly for good actors to participate at all.

The problem with this is it probably would allow the government to pick winners via political favors, which would almost assuredly happen in the present climate if even remotely possible.

I'll elaborate to clear that idea up, the government wouldn't be picking in this model, certain frameworks of investor protections wouldn't apply across the entire industry if certain industry wide thresholds were met.

so instead of only rulemaking and comment periods to change bits and pieces of the protections, there would be the overarching trend to dictate whether it applies or not

To turn the argument on its head, imagine the dogs that even investment banks would have declined underwriting and that will now have a shot with investors.

bitconneeeeeeeect!

This should not be downvoted. It can get this bad somewhat quickly.

Unfortunately the regulation is there to make sure investment decisions can be made fairly and based on factual material. They are not there to tell you if an investment is profitable or not.

Yeah but the marketing material rarely says we always lose money and will likely never turn a profit.

The S-1 is required to say so if this is the case. As are the 10-Ks.

Now that there will be "competition" from direct listings, will due dilly get more or less stringent?

Or will we just look at traditional listing as higher quality, looking more dubiously at companies that choose direct listing? One might look at SPAC as a similar less vetted avenue some companies are taking right now.

I suspect well known companies with good public reputations will not gain much from going the traditional routes. But lesser known companies will need to go traditional to have that extra level of vetting and get a big brand name behind them.

Agree! Let's not think leather shoes and shirt cuffs is always better. There's a long running issue with fee-for-service giving what the client wants. Ok to be fair to banks they could easily be value add but only if they face stiffer down side on fees when fraud, bs, and bad evals happen earning indeed commanding those fees on the upside or average case. It's separating risk from reward that is the issue largely.

You mean packaging up trillions of dollars worth of F rated investments into so many layers of garbage financial twiddling that they become A rated investments? Never happened.

That's the investors' version of the passive-aggressive talk: "you're free to do business on your own, but we'd like to remind you of dangers you'll be exposed to without our protection."

letting capitalists do the regulation seems like not much of checks and balances against corporate power.

How will all the poor rent seekers survive?

What's happening to this country? I thought regulatory capture was the #1 priority, here.

Looks like the ICO craze has at least a positive effect by lighting a fire under the establishment's ass.

As usual, competition FTW.

This has nothing to do with ICOs. A lot of cash-rich tech companies (e.g. Slack, Palantir, Asana) have been foregoing IPOs in the last couple of years and choosing to list shares directly on the market, and so the SEC realized the best way forward is to formalize it.

Kinda awesome that the Roblox delayed IPO may have been the final straw here ;)

Definitely was not the "final straw"

What do you mean?

Finally IPOs for the 99 percent. It's been nine long years since getting the ball rolling on Occupy Wall Street and we're finally seeing reforms that will weaken the enemy.

Id tend to agree with you individual investors in the UK seem to get a much better deal.

Lets hope this is followed up by a root and branch reform on employee share options taxation to make it fairer ie not tax bill unless there is a real world gain

Introducing a version of the UK ISA's would be a very popular policy and could carve out middle of the road GOP middle class voters towards the Dems.

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