On Tuesday, the Securities and Exchange Commission officially authorized the NYSE to conduct an initial public offering of companies with raising funds through direct listing, that is, companies will sell shares to investors without the participation of underwriters. Shares of the largest investment banks fell amid the news.
Shares of major US banks fell sharply on Tuesday after the Securities and Exchange Commission (SEC) published its approval of the NYSE’s proposal to allow IPOs with raised funds from investors through a direct listing “without an underwriting offer.”
This is the result of several months of negotiations between the NYSE and the SEC in an effort by the exchange to create a more affordable option to go to the market than an expensive IPO. The NYSE IPO has long been criticized for the high commissions of investment banks underwriters. This is a major hurdle for small companies and start-ups looking to go public.
Previously, direct listing on the NYSE provided for the initial public offering of existing shares only, that is, shares were sold only by existing shareholders and the company did not raise additional funds, since it did not issue new shares.
In addition, the NYSE said the issuance of new shares has an advantage over the issuance of secondary shares, which gives companies a better chance of meeting their fundraising goals.
The SEC said in a statement on Tuesday: “The Commission believes the exchange’s proposal will promote orderly distribution and trading of shares, and will also promote competition.”
However, some investor groups cautioned that allowing an IPO process to raise funds without the participation of underwriters could create additional risks for investors, as investment banks performed rigorous scrutiny of companies’ activities and the accuracy of its reports.
“The absence of a traditional underwriter means that investors will lose significant protection: the intermediary in this process was called upon to ensure that disclosures about the initial listing were accurate and not misleading to investors,” said Caroline Crenshaw and Allison Lee, members of the SEC and exchanges that voted against approving the NYSE proposal.
At the same time, according to the final statement of the SEC, the provision regarding direct placement was developed to “prevent fraud and manipulation, as well as to protect investors and the public interest.”
This change in NYSE operations could make direct listings more widespread as more companies gain access to raise capital. At the same time, large investment companies and such well-known investment banks as Goldman Sachs (GS), JP Morgan (JPM) and Morgan Stanley (MS) will lose clients who, instead of the IPO procedure, will choose “direct listing”.
Shares of the six largest banks declined on Tuesday: Goldman Sachs, JPMorgan Chase, Morgan Stanley, Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC).
NYSE rival Nasdaq Inc. submitted a similar proposal for a direct listing with the SEC.