A London Stock Exchange executive says companies are increasingly looking at token sales, and it points to the innovation sweeping the IPO market

The New York Stock Exchange's hope to shake up the initial public offering market has stalled, but that doesn't mean innovation around the capital-raising process won't continue unabated. 

On December 6, the Securities and Exchange Commission (SEC) shot down a proposal by the Big Board to offer companies a new way to tap into public markets. The proposal, originally filed by the NYSE at the end of November, would have allowed firms to raise funds via the direct-listing process. Indeed, the development reflects a growing trend amongst capital market participants to offer more choices to companies looking to raise capital, one executive at London Stock Exchange told The Block.

"Conversations about crowdfunding and security tokens are highlighting a desire to look at innovative ways of raising capital," Marcus Stuttard, head of AIM and UK Primary Markets at LSE, said in an interview with The Block. 

Best of both worlds

In a direct listing, companies — such as Spotify and Slack — work with bankers to price their stock, offload the stock of some employees, and market the stock to brokers and traders. The direct listing process is a bit more straightforward than the traditional initial public offering (IPO) process. New shares aren't issued and so new capital isn't raised. Rather, the company lists its shares directly and relies on market makers to ensure that the first trade goes smoothly.

Indeed, companies and investors alike have complained about the traditional IPO process, pushing firms like NYSE to make changes. Cost is part of the issue. As Jamie McGurk, a former operating partner at Andreessen Horowitz, noted in an explainer article, direct listings involve a flat advisory fee that comes in at about half of "what the smallest underwriting fee for an IPO would be." Investment banks, by SEC mandate, are required to serve as financial advisors in IPO deals. 

In many cases, companies with a big enough profile or brand don't need to go through the entire process of marketing their stock to the world.

The new NYSE proposal would have married elements of the traditional IPO process and direct listing, enabling companies to raise funds in a single transaction without the need for banks to underwrite the deal. That could make it more attractive for some companies who aren't too concerned about who is buying their shares, as noted by Davis Polk. 

"This change could make the direct listing route more attractive to issuers that need to raise capital, although it is an open question whether issuers will be able to achieve the desired pricing and distribution of shares in a way comparable to that done in a traditional underwritten IPO," as per the memo. "In addition, traditional IPOs allow stable, long-term holders to buy a significant stake in a company, which may not be possible in a direct listing."

Following the denial, NYSE said in a statement to the Wall Street Journal that it is "committed to evolving the direct-listing product.

"This sort of action is not unusual in the filing process, and we will continue to work with the SEC on this initiative," the firm said.

Capital markets are changing

New York Stock Exchange's efforts could help move the needle on the dearth of companies entering into public markets. Some market participants have argued that companies staying private longer is a harmful market trend inasmuch as public markets instill a sense of discipline that can be beneficial for a firm's long-term growth. 

"Private market valuations are primarily bilateral and one person in a two-person deal can make a mistake," former Nasdaq CEO Bob Griefeld told The Block in a recent interview. "Compared to the public markets, you can get a real sense of value."

This disconnect was on full display when WeWork saw its valuation drop by tens of billions soon after it began its march towards an IPO earlier this year. 

New York isn't alone. Across the pond, clients of the London Stock Exchange are looking at ways to tap into new sources of capital. World Chess, owner of the broadcasting rights to the most recent World Chess Championship, is conducting what it calls a "hybrid IPO." In addition to listing its shares on the London Stock Exchange in 2020, the firm is looking to sell 40,000 tokens as part of a security token offering through Securitize. Securitize is leveraging Algorand's blockchain for the sale. 

"In our view, this is actually a perfect and streamlined procedure which will be used by many companies," said Illya Merenzon, CEO of World Chess, in an email to The Block. "It makes smaller deals possible, without too many middlemen, including an exchange, too many brokers, and also addressing a community which is not fully present on the exchange, but offering them a potential exit strategy or liquidity event in the form of the IPO later on."

The opportunity, in other words, offers early investors in World Chess the opportunity to sell their positions. It also enables World Chess to access new markets, outside the UK, for capital. 

Indeed, LSE's Stuttard said companies are looking at conducting token sales prior to going public on an exchange, in tandem with an initial public offering, and following such an offering. 

"Over the last two decades developed markets have seen the number of public companies decline, but in many markets the total market value, daily liquidity, and the amount of capital raised have all increased," Stuttard said in a phone interview with The Block.

"The fact that companies can raise capital privately, from a number of different sources, means that when they get to the point of an IPO they are often of a more significant size."