In 2018, the New York Stock Exchange (NYSE) amended its rules to allow a company to directly list on the Big Board without engaging in an initial public offering (IPO). This process-called a direct listingallowed a company to list its stock faster and cheaper, and, at least theoretically, at a more accurate price when compared to the traditional IPO. However, this first version of the NYSE's direct listing rule only allowed the company to list, not raise capital. This limited its usefulness to companies. In 2020, the NYSE again amended its rules, this time to allow a company to list and raise capital. Commentators called this new-andimproved direct listing a "game changer" because it did away with any shortcoming (i.e., inability to raise capital) associated with the prior 2018 direct listing rule. In short, the direct listing could overtake the IPO in coming years. The primary claim of this Article is that when the SEC approved direct listings (the SEC must approve all rule changes proposed by the NYSE), it improperly put the advantages to companies before investor protection. While the SEC should give significant weight to a proposed rule change's advantages to companies, it should not use such weighing to countenance the weakening of core investor protections. Yet, by approving direct listings in 2018 and approving the broader use of direct listings in 2020, the SEC did countenance the weakening of core investor protections. First, direct listings are "underwriter-less." There is no traditional underwriter to serve as a gatekeeper to prevent insiders from foisting troubled companies on the public at inflated valuations. Second, if investors are harmed, there are fewer remedies available. One of the primary remedies for harmed investors-Section 11 of the Securities Act-is largely unworkable in the context of a direct listing. The repercussions of the SEC's approval of direct listings are already beginning to show. Pirani v. Slack involves a Section 11 action brought by investors who purchased shares in Slack Technologies Inc.'s direct listing. The Northern District of California found that the investors could pursue their claim despite being unable to trace their shares to the direct listing (a holding contrary to IPO precedent), and the Ninth Circuit affirmed the holding. However, Slack has announced it is going to petition the Supreme Court for certiorari. Further, with the number of direct listings growing exponentially (one in 2018, one in 2019, two in 2020, and four in 2021), more such cases are undoubtedly on the way. Important Note to the Reader: This Article contains a postscript to address two significant events that occurred in December 2022, just prior to publication: the New York Stock Exchange further amended its direct listing rules to require underwriters in some circumstances, and the Supreme Court agreed to hear Pirani v. Slack.
Brent J. Horton,
Direct Listings and the Weakening of Investor Protections,
50 Fla. St. U. L. Rev.