The day of the IPNOs

FACED WITH THE GLOBAL PHENOMENON OF THE DECREASE IN THE LISTING OF COMPANIES, NEW ALTERNATIVE FORMS HAVE BEEN INTRODUCED, INCLUDING, FOR EXAMPLE, SPACS. HOWEVER, ONLY WELL CAPITALIZED COMPANIES LIKE UNICORNS AND COOL KIDS ARE LIKELY TO BE ABLE TO USE THIS FOR OF DIRECT LISTING

by Maria Lucia Passador, academic fellow at Department of Legal Studies
Translated by Alex Foti

Back in June 2019, a notable roundtable organized by the European Corporate Governance Institute focused on the remarkable downsizing of the global corporate listing phenomenon and investigated its causes. On that occasion, René Stulz icastically defined the dramatic decrease (halving) of listed companies in the United States in the past two decades as an "eclipse" of public companies, occurring not so much because of the increasing burdens imposed by regulations, but as a result of the considerable increase in intangible assets; the institutionalization of private equity; the reduced liquidity advantage now granted by the stock market; the prohibition currently imposed by the internal regulations of institutional investors to participate in small listed companies with low liquidity.
Given this anything but heartening scenario, alternative forms (IPNOs) have gradually been introduced, including the business combinations of SPACs (addressed in my forthcoming paper in Brooklyn Journal of Corporate, Financial & Commercial Law, 2022) and direct listing (c. d. direct listing or direct public offering or direct placement, covered in the forthcoming book chapter entitled Finding an Alternative to IPOs: SPACs and Direct Listing, in Research Handbook on Global Capital Markets Law, Iain MacNeil and Iris H-Y Chiu (eds.), Edward Elgar Publishing Ltd, 2022).

In the case of SPACs, it is highly likely that their use will be dramatically downscaled if the SEC's proposal dated April 30, 2020 is approved, while direct listing will possibly be given greater prominence and companies (or, more properly, their initial investors and employees) will not interface with brokers and investment banks to underwrite the share issue, but will directly sell existing and outstanding shares. Among its advantages we can recall the uniformity of information among sellers and buyers, the possibility of identifying the price according to the market trend and the liquidity ensured to shareholders; on the contrary, there are no warranties for investors in the long term, nor is there any possibility to use greenshoe or over-allotment options to stabilize prices in the aftermath of an IPO, allowing the underwriter the right to sell more shares than initially planned should demand be particularly strong.


It may sound like a panacea for companies and the market, however, while an IPO would allow even smaller companies whose brands are less widely known to the public to reach a wide network of investors, only a carefully selected group of companies can enjoy a direct listing (which has so far involved companies operating in the food and biotech sectors, but also Spotify and Slack Technologies). It is therefore likely that unicorns and cool kids, i.e. well-capitalized companies with a large and diverse shareholder base that can provide sufficient liquidity, a viable business model and a strongly recognized brand, will benefit from it.