Direct listings
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What’s behind the fight over direct listings?

Protocol Index

Hello! This week: Institutional investors have qualms with the NYSE's direct listing proposal, ServiceNow's Gina Mastantuono thinks CFOs are now CTOs, and why you might want to look at GoPro's stock. Want Index in your inbox each week? Subscribe here.

Also, some housekeeping: We're taking next week off Index. But don't worry! I'll be writing our daily newsletter, Source Code, all week, and there'll be plenty of finance news to discuss. Subscribe here to get it.


  • "If we get a vaccine … some normalization of global economic growth would probably push market participants to look for the start of a new mini-cycle. This could lead to a rotation and trigger a diversification out of Big Tech." — SocGen's Sophie Huynh thinks an economic recovery could be bad news for tech stocks.
  • "We've been growing so fast over the last five years that we're not noticing a significant swing at any one of these inflection points across the industry." — RISC-V's Calista Redmond told me that the Nvidia-Arm acquisition hasn't boosted the technology's adoption just yet, saying that people were still waiting to see if the deal actually closes.
  • "We learned in cleantech that people care about the environment, but they don't want to pay to care about the environment … But they will pay to care about food." — Khosla Ventures' Samir Kaul said meat alternatives are the new frontier for cleantech investing.
  • "I haven't seen such investor anxiety in my [five years] in Hong Kong … Everyone I have spoken to says they are building cash reserves either by moving cash or selling existing investments to be ready when the offering opens." — An anonymous source involved in Ant's IPO said investors are piling cash into the country in preparation for the listing.

The Big Story

What's behind the fight over direct listings?

Amid the furor around Snowflake's gigantic IPO pop last week, Bill Gurley started to tweet. (What else is new?) Gurley's long argued the IPO process is broken. But this time he pointed out that though the NYSE is trying to create a new alternative to IPOs — Primary Direct Floor Listings, a version of the direct listing that allows companies to raise capital at the same time — the Council of Institutional Investors was pushing back against it.

  • Gurley's not wrong. At the end of August, the SEC stayed the NYSE's proposal, despite having approved it a week earlier. That was down to a petition from the CII, which said that the proposal does not contain "adequate investor protections."

So what's the problem? Well, first a bit of background on securities fraud.

  • "The bigger problem comes back to this issue called proxy plumbing," CII general counsel Jeff Mahoney told me. "Typically, in order to prove that you've been defrauded, you have to trace your share back to the offering statement, which included the fraud," he said. "In a typical IPO, if I end up getting some shares from an IPO and there's a fraud in the document … I can claim that my shares relate to the fraud in that document." In other words, investors in an IPO can trace their shares back to their registration, making fraud relatively easy to prove.
  • "But in a direct listing, you have a situation where there's typically no lockup," Mahoney said. In a Primary Direct Floor Listing, shares sold by the company would become available at the same time as shares sold by insiders. That means "you can't trace those shares back to that registration statement, because you don't know whether you got shares as part of that registration statement, or if you got shares from an insider whose shares are unregistered and not covered by that registration statement." That makes it much harder to prove you've been defrauded.

Direct listing supporters might say that this isn't a big problem. In its initial approval of the NYSE's proposal, the SEC pointed out tracing shares back is "a recurring issue, particularly in the context of aftermarket securities purchases," something that Mahoney concedes, too.

But this isn't an abstract worry. After Slack's direct listing, some investors sued the company, saying it didn't fully disclose certain risks. Slack pushed back, saying it shouldn't be held liable because the investors couldn't trace their shares back to the registration statement. The court involved ruled against Slack, but referred the case to the Ninth Circuit court, which could rule differently, Mahoney wrote in his petition.

  • He points to a memo from Latham & Watkins, a law firm that worked on Slack and Spotify's direct listings. In it, the firm cites the traceability problem as "another important advantage of the direct listing," saying that it could "deter litigation." That makes it hard to dismiss the CII's claims as scaremongering.
  • Mahoney also dismissed the idea that the CII opposes direct listings because it wants its members to benefit from first-day pops. "That doesn't make any sense at all," he said, because "our members generally are not involved in IPOs ... [they] are largely passively invested."

For Mahoney, the solution to all this involves fixing the proxy plumbing system. That's something the SEC has begun work on, but it's going to take a while because of the complexity of the financial system.

  • But if it is fixed, he'd be happy. "If they fixed proxy plumbing and we had a system of traceable shares, would we have filed that petition? The answer's no, we would not have."
  • Another solution might be to add a lockup period to direct listings so insiders can't sell all their shares straight away — something Palantir has done ahead of its listing next week. "I don't know if [that] has something to do with my petition or not, but I thought it was interesting," Mahoney said.

Mahoney's larger point, though, is that this issue is too important to go without further discussion. "Given how significant this change is to the U.S. capital market system, shouldn't this issue be discussed by the full commission?" he asked.



Stronger care … from more efficient operations

In a defining moment for healthcare, it's even more crucial to deliver patient-centered care efficiently. At Philips, we are committed to providing intelligent, automated workflows that seek to improve patient care. More efficient healthcare means stronger, more resilient healthcare.

Learn more.

Up to Speed

  • Monday: Microsoft bought ZeniMax for $7.5 billion. PagerDuty bought Rundeck for $100M. Playco raised $100M at a $1B+ valuation. Ant reportedly raised its IPO target to $35B at a $250B valuation. Quibi was reported to be considering a sale or SPAC merger. Aaptiv was reported to be considering a sale.
  • Tuesday: Yandex acquired Tinkoff for $5.5B. HCL Technologies acquired DWS for $116M. GoodRx's IPO raised $1.14B at a $12.7B valuation. WM Motor raised $1.5B. Robinhood raised $660M at an $11.7B valuation. Mirakl raised $300M at a $1.5B valuation. Pegatron was reported to be investing $1B in Vietnam. ASM Pacific was reported to be planning a Hong Kong delisting and a STAR market relisting. Carvana shares soared after its earnings forecast.
  • Wednesday: KKR bought 1-800 Contacts for a reported $3B+. Reliance Retail raised $754M from KKR at a $57B valuation. Byju's raised a reported $300M at a $11B valuation. Attentive raised $230M at a $2.2B valuation. Next Insurance raised $250M at a $2B+ valuation. GOAT raised $100M at a reported $1.75B valuation. GoodRx shares jumped on listing. WeWork sold its Chinese joint venture stake. Ant was reported to be forgoing cornerstone investors in its Hong Kong IPO. Chindata said it wants to raise $540M at a $5B valuation in its IPO. UnitedHealth was reportedly in talks to buy DivvyDose for $300M. Peter Thiel launched a SPAC.
  • Thursday: Apple acquired Scout FM. ChargePoint said it would go public via a SPAC, at a $2.4B valuation. Palantir was reported to be targeting a $22B valuation after its listing. Deliveroo was reported to be planning an IPO for next year. Greenlight raised $215M at a $1.2B valuation.

Diving Deeper

CFOs are the new CTOs

What with … everything … that's going on, CFOs have more to think about than ever. According to ServiceNow's Gina Mastantuono, that's changing the entire job description.

  • "The role of the CFO has shifted enormously, from the bean counter and the one that holds the checkbook, to the strategic adviser … and the catalyst for change," she told me.

The CFO role has been changing for a while, but COVID has accelerated the trend, Mastantuono thinks. "It's really elevating the CFO into this chief transformation officer" role, she said.

  • The reason, according to Mastantuono, is that CFOs are just very well placed to drive forward change day-to-day.
  • "As you think about investing behind the strategies driving the ROI, really making sure that you're holding businesses accountable and the teams accountable for achieving the ROI — I think it falls really naturally in the wheelhouse of the CFO," she said.

COVID's put a couple new things in that wheelhouse, too: offices and salaries. The shift to remote work has the potential to lead to big savings on both of those — but Mastantuono said that isn't what's guiding ServiceNow's decisions.

  • Saving money on real estate is "an outcome," Mastantuono said. "It's not the reason why we're doing it." Instead, she said they're being driven by employees' increasing desire for flexibility, which was happening even before COVID.
  • The impact for ServiceNow, she thinks, won't necessarily be lower real estate costs, but "we won't run out of space as quickly as we thought we would."
  • As for hiring around the country, "low costs could be an outcome." But Mastantuono's priority is being able to "capture talent pools in different demographics and different areas." Given how hard it is to hire in the Bay Area, that's no small benefit.

Money Talks

Todd McElhatton, Zuora CFO

What's your favorite Excel trick?

Excel alone is good, but when coupled with VBA (Visual Basic for Applications), it really becomes a powerful tool. The use of macros for large data analysis and being able to slice and dice your data with the click of a button is just so efficient.

What tech stock do you have your eye on?

GoPro! The company recently launched a new subscription service, displaying a commitment to offer their customers more value on a recurring basis. In contrast to Apple's Apple One service, they're bundling the right way by including the centerpiece of their business: the GoPro camera.

What's been your worst financial decision?

To wash windows as a kid rather than learn how to code!

What was the most overlooked and/or overhyped deal of the last 12 months?

Netflix's pricing strategies, in my eyes, are certainly well-deserving of all the hype over the last few months. From making the decision to automatically cancel "zombie" membership accounts to making several titles free to non-subscribers in select markets, the company is truly doubling down on finding new ways to attract new subscribers and rise above the competition.

While lockdown may have stalled the rapid creation of new content for Netflix, the company's efforts to increase market share and monetize on new consumer demands is a critical turning point for companies competing in the subscription economy.

What piece of financial advice should a founder ignore?

Whatever you learned in business school. Early on in Zuora's history, our founder, Tien Tzuo, presented an idea that we'd recognize revenue as a customer used software, not up front. Annual recurring revenue is how we measure our business — the value of recurring revenue is now widely known but not in 2009. We benchmarked ourselves against other software companies by backing out what their ARR was. Simply put, the traditional financial plan is out of date in today's subscription economy.

Coming Up

  • Expect a busy week for antitrust. The House antitrust committee will hold a hearing Thursday to discuss proposals for law reform, and it's expected to release its report soon, too. Some reports also say to expect the DOJ's Google lawsuit, though Bloomberg reported Friday that could come the week after instead.
  • Palantir and Asana are both expected to list on Wednesday, though some reports expect Palantir on Tuesday. Both are going public via a direct listing. Yalla is expected to IPO on Wednesday, while Chindata should follow on Thursday.
  • Friday is jobs day. Analysts expect the unemployment rate to more or less hold steady, dropping from 8.4% in August to 8.3%.



Stronger care … from more efficient operations

In a defining moment for healthcare, it's even more crucial to deliver patient-centered care efficiently. At Philips, we are committed to providing intelligent, automated workflows that seek to improve patient care. More efficient healthcare means stronger, more resilient healthcare.

Learn more.

Thoughts/feedback/tips? Email me — — or And subscribe to get Index in your inbox every week. Thanks for reading — have a great weekend, and see you in Source Code next week.

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