SEC Investigates Unicorns Direct Listings

Might unicorns have their wings clipped – just a bit?

This past week, The Wall Street Journal reported that the Securities and Exchange Commission (SEC) is investigating a number of unicorn listings, to see how trading transpired on the first day shares traded hands and the companies came to market with their listings.

In examples of inquiries, the SEC has sent letters to firms tied to electronic trading in those firms. In one example, one missive was sent to Citadel Securities, focused on how the company “opened” trading in the initial public offering (IPO) for Slack Technologies on June 20 in what is known as direct listing on the New York Stock Exchange (NYSE). As to other trading firms getting request, reports came that GTS was the recipient of requests from regulators asking for details on communications, as well.

It must be noted, as the Journal reported, “It couldn’t be learned who the investigation may be targeting and what types of misconduct the SEC may suspect. It is possible the investigation won’t lead to any allegation of wrongdoing — public or private.”

This means there could be much ado about nothing, where regulators are simply ticking boxes to make sure proper procedures are in place when listings debut, that marketplaces are efficiently run when it comes to matching buyers and sellers.

The direct listing model, employed by Slack Technologies, has sought to bring listings into a more efficient (and less expensive) process by taking banks out of the equation, at least when it comes to underwriting the IPO (the banks still act as advisers).

The company gets a bit of benefit, too, as it can bypass not just the fees but can promote the listing a bit more aggressively, as the report noted, and also can sidestep lockups (which allow insiders to sell shares).

Streamlined Process?

But a bit of illumination indicates the direct listing may not be as streamlined a process as some might tout.

Designated market makers (DMMs) offer what the Journal said are “indications” of where pricing may be upon an IPOs debut, and some critics charged Citadel’s indications were too low — at $30 to $34 early in the day and then $32 to $34 minutes later (which implies that buyers had to pay higher prices). The news outlet, citing unnamed sources, said the indications also did not offer a true window into supply and demand — a complaint that might have been lobbed by floor brokers.

Slack finished the day at more than $38.

The interest by regulators in the direct listing model may may clip unicorns’ wings a bit if — and it’s an if — it leads to new restrictions or if market manipulation is found.

It’s interesting to note that, as reported earlier in the month, the NYSE submitted a proposal that would let companies raise funds when pursuing a direct listing rather than though more traditional IPO conduits. As it stands now, the shares can be sold, but not to raise capital, so perhaps this might winnow down the pool of firms that pursue such a listing.

The market will take a while to digest the ripple effects of the busted debuts that litter the tech landscape (Slack is among them, with a  recent pricing of $21.44). The direct listing model, which some had hoped would shatter traditional IPOs, may not gain the embrace that some had hoped.