Unicorns, IPOs, Direct Listings, Institutional Investors
Most people think of “going public” as an Initial Public Offering (IPO), but as IPOs have boomed and busted over the past decade, the direct listing has emerged as an unconventional but viable way to raise capital. The direct listing approach was uncovered by one rebellious “unicorn,” a term used to describe privately held companies with valuations exceeding one billion dollars. By circumventing the traditional IPO process, Spotify prompted both the SEC and major stock exchanges to examine direct listings and promulgate rules for future offerings. Though these rules are still developing, companies now have a clear path to follow in Spotify’s footsteps and forgo the traditional IPO.
The development of the direct listing is important not only because of the regulatory response, but also because of what it might reveal about the truth behind unicorn valuations. Many economists and industry professionals suspect that the reason behind several recent high-profile IPO failures may lie in excessively high valuations that do not correspond to reality. Many companies that went public through an IPO continue to trade well below their offering prices despite their private market success.
IPOs are still trending upward. But if unicorns continue to struggle to maintain massive pre-IPO valuations in the public markets, others may see the allure of the cost-saving and more transparent direct listing approach.
Tatum Sornborger, Move Over IPOs: Unicorn Direct Listings May Be the New Mythical Beasts in Town, 26 Fordham J. Corp. & Fin. L. 215 (2021).