Lunches with Legends with Stacey Cunningham: New Ways of Going Public
Stacey Cunningham, President of the New York Stock Exchange, believes that SPACs and direct listings are positive innovations that will continue to support the democratization of equity markets, allowing more people to share in the profits of young businesses. She joined Prime Quadrant’s Lunches with Legends Series to share her unique perspective and experience in the capital markets. In fact, despite the difficulties of the pandemic in 2020, Stacey highlighted that it was a record year for private companies to go public.
As Stacey pointed out, one of the primary drivers for the surge in activity was the explosion in special purpose acquisition companies (“SPACs”). SPACs are publicly listed shell companies with no current business operations that go public via an initial public offering (“IPO”) to merge with or acquire an existing company. SPACs are also known as “blank cheque” companies and represent an alternative solution to taking a private company public via an IPO. Here, the SPAC goes public first via an IPO and then acquires a private company, making it a publicly listed company whose shares are traded on the open market.
One of the main advantages of SPACs is timing, as private companies can go public faster via SPACs than with the traditional IPO process. Also, SPACs provide target companies the opportunity to forecast potential growth (something that is not allowed in IPOs). These benefits can encourage younger companies to enter the public markets earlier. Before the surge in SPACs, we saw companies going public much later in their life cycle compared to 10 or 20 years ago. SPACs have served to counter that trend, giving the public a chance to participate in newer companies.
Participating in a SPAC investment requires thought, research, and education (this article may help if you wish to continue learning about SPACs). Stacey emphasized that not all SPACs will be winners, and investors should remain cautious when investing in a sponsor company. However, with over 220 SPACs searching for acquisition targets at the time of our discussion with her, Stacey believes SPACs are here to stay and offer the opportunity to foster inclusiveness for investors and younger companies within the capital markets.
Stacey also mentioned direct listings, another alternative to the traditional IPO. Going public via a direct listing works as follows: on the chosen day, shareholders of the private company (mainly founders, venture capitalists, and employees) offer their shares for sale on the stock market to the public. Stacey highlighted that this shows companies are now more often going public for reasons other than the traditional capital raise through an initial public offering. In a direct listing, the company itself does not receive any money, as all proceeds go to the sellers of the company’s shares. Direct listings tend to make sense for companies entering the public markets later in their life cycle, as they have more established revenue streams and, therefore, less need for capital. For these companies, increasing visibility and providing liquidity for private investors and employees holding shares are primary motivators.
Stacey is fond of direct listings because they democratize access for investors. In an IPO, a predetermined group of individuals (typically large institutional clients of the investment banks) can benefit from an initial surge in the price upon trading. In a direct listing, all investors can share in the newly public company’s success.
Stacey emphasized the NYSE does not have any bias towards the method of public offering companies choose, be it traditional IPO or SPAC or direct listing. She also shared that we should not underestimate the social benefits of equal access to the markets, especially when inequality gaps and social justice issues are so prevalent in our society.
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