Direct listings Here is a very simple three-period model of corporate finance: - A company raises a small amount of money from a small number of venture capitalists.
- The company raises a large amount of money from a medium number of carefully selected institutional investors and hedge funds.
- The institutional investors and hedge funds sell their stock to whoever wants to buy it: Less-connected hedge funds, retail investors, high-frequency traders, activists, whoever.
Traditionally, step 1 occurs while the company is private: It raises venture capital in private funding rounds. Step 2 occurs when the company goes public: It does an initial public offering to raise money, and the banks leading the IPO carefully select big investors and allocate shares to them. Step 3 starts the next day: The IPO investors, who were carefully chosen by the banks because of their support for the company and their plans to hold for the long term, turn around and dump their stock into a rising market, where it is bought by retail investors and others who didn't have the clout to get an allocation in the IPO. Traditionally, preferably, step 1 occurs at a low valuation (the venture capitalists are taking a lot of risk and demand a high return), step 2 occurs at a higher valuation (the IPO investors are getting a liquid public stock of a mature-ish company, but they are still taking some risk because it is newly public), and step 3 occurs at an even higher valuation (this is called the "IPO pop," as the price of the newly public stock usually goes up early in its first day of trading, and people who bought in the IPO can quickly resell at a profit). If this is your model, what do you make of a direct listing, in which a private company lists its stock for sale without doing an IPO? Early investors are allowed to sell whenever they want at or after the direct listing, and new investors can buy on the exchange without any sort of connections or allocation process. One way to think of this is that it skips step 2: The company raises money privately (step 1), and then it allows its private investors to sell to whomever they like on the open market (step 3), and it never raises money from big institutions in an IPO (step 2). I think that more or less describes Slack Technologies Inc.'s direct listing last week: The investors registered to sell in that offering were mostly executives, early employees, venture capitalists and alt-venture-capitalists (SoftBank), and they sold to whoever wanted to buy without any sort of bookbuilding or allocation process. But that is not the only way to think of it. Another possibility is that step 2 still happens; it just happens while the company is still private. The biggest brand-name unicorn technology startups have raised lots of money in private markets not just from traditional venture capitalists but from big institutional investors like Vanguard and BlackRock and Fidelity. Those investors used to be pure public-markets investors; now they are increasingly willing to invest in large private companies, but they still want those companies to be public eventually, so they can sell their stock or buy more. Anyway here is an article about how Slack's bankers, satisfied with its very smooth direct listing, are talking about the idea with more potential clients. Issuers like the direct listing because it sells stock to the highest bidders rather than to investors hand-picked by the banks. But: But that also means investors may have to buy in at a higher price and therefore miss out on the initial IPO pop that many in the market have gotten used to. That could be a tough reality for large investors like Fidelity Investments that are often big buyers in an IPO, and increasingly buying more stock in private markets. But you can think of "increasingly buying more stock in private markets" as a substitute for buying in the IPO: Fidelity et al. don't need an IPO pop if they can invest privately; they don't need a discounted IPO price if they can get a discounted pre-IPO price. This is not exactly a trend yet: Only two big companies have had direct listings in the U.S. in recent memory, and the biggest private-company consumer of institutional capital, Uber Technologies Inc., went public through a regular IPO. (Which went poorly, probably in part because it had already sold so much stock to public-type investors that there was no one left to buy.) But it is possible that direct listings will increase in popularity in part because companies don't need to raise money from Fidelity in an IPO by offering Fidelity a predictable IPO pop, because they already raised their money from Fidelity. Similarly, one thing that is always mentioned about direct listings is that they don't provide the fee bonanza for investment banks that IPOs do. Well, fine. Companies pay banks to help them raise money, a direct listing doesn't raise money, the banks get paid less. But if the replacement for the IPO is not a direct listing, but rather a series of large private fund-raisings followed by a direct listing, then maybe Wall Street will make out better: Raising money from big institutional investors in a private round is complicated, and banks certainly have ways to make money from it. On this view, direct listings are one more unsurprising outgrowth of the blurring of lines between public and private markets. If big public-market institutional investors can regularly buy shares in big private technology companies, an IPO for those companies becomes both less necessary (they can raise money privately) and less appealing (who's going to buy?). But they still need to go public somehow. They can just skip a step. Insider Trading The one Law of Insider Trading that I kind of regret is Number 8: "If you didn't insider trade, don't forget and accidentally confess to insider trading." I formulated that law in response to an attempt by Richard C.B. Lee, a former analyst at SAC Capital Advisors LP, to withdraw his guilty plea to insider trading because "he had forgotten about two instant messages that show he committed no crime." It just sounds silly, you know? If you need to review the documents to remember if one particular trade was based on illegal inside information, then that sort of implies that some of your trades were based on illegal inside information. But actually it's not so simple, and I repented making fun of Lee the next day. The basic complication is that it is actually not so easy to tell, as a legal matter, which sorts of information are illegal inside information. For instance, if you work at a hedge fund, and your buddy works at another hedge fund, and your buddy instant messages you saying "hey hot tip buy Anacott Steel" or whatever, and you buy Anacott Steel and it announces great earnings and the stock goes up, was that insider trading? It depends on what you knew or should have known or ought to have guessed about where your buddy got that tip from, and how. If your buddy just did a lot of bottom-up fundamental valuation work, decided that the company was a good investment, and relayed that opinion to you with the unfortunate phrasing "hot tip," it's fine. If your buddy delivered sacks of cash to the corporate treasurer in exchange for an early look at its earnings release, that's bad. But even if it was the latter, you are not necessarily guilty of insider trading if you sincerely and reasonably believed it was the former. (Not legal advice!) Either way it sort of sounds bad though. Back in 2013, when Lee pleaded guilty to insider trading, it all sounded bad enough that he didn't want to go to trial and defend trading on hot tips of uncertain provenance. But after his guilty plea, the law changed, and appeals courts made it clear that you're not guilty of insider trading on a tip unless you know, not only that the tip came from an insider, but also that the insider received some "personal benefit" in exchange for the tip. (What exactly that means remains in flux, but never mind that now.) It was not at all obvious in 2013 that "I didn't know the insider giving out this information was getting bribes for it" was a possible defense to insider trading charges, but now it is. So last week a judge let Lee withdraw his guilty plea: While rejecting Lee's claim that new evidence showed he was actually innocent, U.S. District Judge Paul Gardephe found no evidence that Lee knew of any personal benefits that insiders at Yahoo Inc and 3Com Corp might have received by divulging confidential information on which prosecutors said he traded. Gardephe said such knowledge was central to establishing insider trading liability for accused "tippees" like Lee, under decisions issued in 2014 by the federal appeals court in Manhattan and 2016 by the U.S. Supreme Court. "There is no reason to believe that Lee - in using the phrase 'breach of fiduciary duty' during his 2013 allocution - understood that phrase to include the liability components" in the later decisions, Gardephe wrote. "His guilty plea must be vacated." The facts remain disputed, but just assume for a moment that what happened here is: "Lee got a tip from someone, who in turn got it from a corporate insider who was not authorized to disclose it, but Lee didn't know exactly who gave the original tip and had no reason to believe that that person got any personal benefit in exchange for the tip." That fact pattern is probably not illegal insider trading (by Lee), as the law stands in 2019, but probably everyone would have thought it was in 2013. So he thought in 2013 that he had insider traded, and pleaded guilty, and then changed his mind because the law changed. Fair enough really. Narrow Facebanking We talked last week about Facebook Inc.'s plans to build a digital currency called Libra. Libra is meant to be a stablecoin indexed to some basket of existing currencies—dollars and pounds and euros and yen and whatever else—and it would be backed by a reserve fund holding those dollars and pounds and so forth. Except that a giant pool of money, which Facebook surely wants the Libra reserve to be, can't just unproblematically hold dollars and pounds and so forth. It is hard to get your hands on large quantities of pristine perfect dollars. You can open a bank account, and keep your dollars there, but there is some risk of the bank going bust and losing your money. (For small accounts deposit insurance prevents that, but for giant accounts it does not.) Or you can keep your dollars in other sorts of short-term interest-bearing instruments—Treasury bills, commercial paper, repo agreements—but those generally have some sort of risk too. This is an opportunity—those things pay interest, and in Facebook's plans the operators of the Libra system would keep the interest—but it is also sort of a hassle. Ideally you'd be able to abstract away from it and just keep the, say, pounds portion of the reserve in some pure perfect risk-free store of pounds. Preferably one that pays interest too: The Bank of England intends to throw open its vaults to tech companies for the first time, allowing them to bank at Threadneedle Street and thereby offer payments systems on a level playing field with commercial banks. Allowing all payment providers to store funds overnight in interest-bearing accounts at the central bank would help achieve the goal that "similar activities should be regulated consistently", according to BoE governor Mark Carney speaking at the annual Mansion House dinner, which was interrupted at one stage by climate protesters. The move will be seen as a threat to banks, which have exclusive access to BoE payments operations and can make money from acting as intermediaries to other payment providers. The policy is in line with Mr Carney's "open mind but no open door" approach to Facebook and its proposed digital currency, Libra. The sterling funds underpinning Facebook's token would be offered a safe interest-bearing account, relieving the tech company of banking charges and the risk that its commercial banking partners could go bust. We have talked a couple of times around here about the controversy around TNB USA Inc., "The Narrow Bank" that proposed to just open an (interest-bearing, perfectly safe) account at the U.S. Federal Reserve and offer essentially pass-through accounts to customers. The Fed seems reluctant to open an account for TNB, for reasons that I think are understandable but that a lot of people find deeply upsetting. In the Fed's view, this sort of pure risk-free money—central bank reserves—should be limited to a particular functional purpose, that of supporting the banking system. Banks as a whole have an important social purpose (they make loans, and they offer deposits that people can treat as money), and if you split the banking functions apart—if you let non-banks offer perfect risk-free money-like deposits—you might destabilize the whole system. Why keep your money at a bank that invests deposits in risky loans, when you can keep it at a bank that invests deposits in pure safe Fed reserves? But then who will make loans? This rubs a lot of people the wrong way; it seems like—and is, really—special treatment for big incumbent banks. There are calls to open up Fed accounts more broadly and let new competitors have the same access to the Fed that banks do. And in the U.K., something like this might actually happen. I don't know that it matters that much for Facebook and Libra. I suppose on balance it's a better pitch if Libra can say "we invest your money in a basket of dollars, pounds, etc., at the respective central banks" than if it says "we invest your money in a basket of dollar-, pound-, etc.-denominated short-term securities according to the following ratings and diversification criteria," etc. But Libra's success or failure won't depend that much on the details of its reserve accounts; Libra's success or failure will mostly be about how people feel about Facebook. Other payments ideas that don't have Facebook behind them, though, might look a lot more attractive if they have the Bank of England behind them. Goldman Sachs: The Movie It's a nautical yarn about a great vampire squid that no no no I'm kidding it's a corporate documentary for some reason? Goldman Sachs is releasing a documentary film series on Amazon Prime on Monday, commemorating the 150th anniversary of the investment banking giant. "Goldman Sachs at 150" is a 10-part film series covering the firm's 150-year history in 150 minutes. Yahoo Finance obtained a copy of the trailer ahead of next week's debut. "What is it about this organization, about its culture, about its history, about its people, that's allowed it to be nimble, adapt, adjust, move forward, pick itself up when it's been knocked down, and really get stronger for it, every step of the way?" CEO David Solomon is seen asking during the teaser's opening. The film tells the story of the founding of Goldman Sachs, a rags-to-riches story of an immigrant outsider, Marcus Goldman, who managed to make his way in the world to the highest ranks of American capitalism. Don't miss the 20-minute segment devoted entirely to re-enacting highlights of my four years on the corporate equity derivatives desk, no I'm kidding again sorry. Though now I kind of wish someone would make that movie. Things happen Being Transgender at Goldman Sachs. Indexing Giant Vanguard Examining a Push Into Private Equity. Natixis Marks Down Assets to Stem Crisis at H2O Funds Unit. US Fed quizzes Deutsche on 'bad bank' plans. Eldorado Agrees to Buy Caesars for About $8.7 Billion. Lyft and Uber Were Duds, but the I.P.O. Market Is Having a Great Year. Bernie Sanders to Propose Taxing Wall Street to Pay Off Student Debts. Ameribor. Italy's Mafia Uses the Old Lira as Its Own Parallel Currency. "... A 24-year-old blonde with a sharp bob and half-a-dozen tiny earrings who told me she only listened to podcasts about business strategy and murder." Dr. Marijuana Pepsi Won't Change Her Name 'To Make Other People Happy.' Bear Breaks Into Montana Home, Takes Nap On Shelf. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! | 
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