Investment Bankers as Underwriters: Barbarians or Gatekeepers? a Response to Brent Horton on Direct Listings

Abstract

Direct listing clearly has the potential to meaningfully disrupt the IPO process. Changes to permit primary offerings via direct listing will help private companies to overcome some of the obstacles imposed by our securities laws and listing rules. Primary offerings by direct listing would allow for a dramatic increase in efficiency in public offerings, providing further incentive for private companies to finally provide liquidity to their shareholders while saving on the tremendous cost associated with a more traditional IPO by eliminating the need for underwriters.

Despite the positive impacts that direct listings will have on the IPO process, in their current form, they do present a variety of potential risks to investors. Corporate governance concerns, particularly as they relate to dual-class ownership structures and indefinite founder control, have already begun to manifest in recent direct listings. Investors run into both short and long-term risks if the rules around direct-listings are left as they currently stand: largely undefined and filled with unknowns. Without regulatory action, companies will continue to push the boundaries of what is possible with such filings, with investors along for the ride.

Keywords: direct listing, IPO, securities laws, corporate governance, dual class stock, primary offerings, secondary markets