Direct listing rule change will end traditional IPOs

Venture capitalist Bill Gurley on Tuesday cheered a change in the direct listing process approved by U.S. regulators, telling CNBC he believes it will “unquestionably” usher in the end of traditional initial public offerings.

Companies that go public on the New York Stock Exchange through a direct listing will now be able to raise new capital. Prior to the Securities and Exchange Commission adopting the rule, companies could only sell existing shares to public market investors.

Gurley, who led investments by Benchmark in Uber and Zillow, has become increasingly critical of the traditional IPO process. But he said Tuesday’s move by the SEC solidifies the direct listing as a better alternative.

“I can’t imagine, in my mind, when you can do a primary offering through a direct listing, why any board or CEO or founder would choose to go through this archaic process that has resulted in massive one-day wealth transfers straight from founders, employees and investors to the buy side,” Gurley said on “Closing Bell.”

The IPO process has been under the microscope in recent weeks after the massive one-day pops in shares of DoorDash and Airbnb. CNBC’s Jim Cramer called the pricing mechanism “broken” and “embarrassing.” And Verishop CEO Imran Khan, who helped take Alibaba public when he worked at Credit Suisse, told CNBC they demonstrated “an epic level of incompetency from the bankers.”

Indeed, Gurley said the traditional Wall Street firms who usher companies through the IPO process may be rankled by the SEC’s rule change. But for the companies themselves and for smaller investors, Gurley said direct listings offer major advantages, especially now that they can raise money in the process.

“In the future you’ll be able to go on Robinhood and if you want to participate in an IPO, you can,” Gurley said, referencing the popular stock trading app among young investors. “Let’s not let these intermediaries and gatekeepers hand allocate who gets this underpriced stock,” added Gurley.

New York Stock Exchange President Stacey Cunningham told CNBC earlier Tuesday she did not believe the direct listing rule change will lead to the end initial public offerings. But she said it is a crucial innovation for private companies breaking into public markets.

“Some of them will continue to choose a traditional IPO but others will have this as an alternative if they want to reduce their cost of capital and they want to have a democratized access to their company on the first day,” she said. “I do think there’s an improvement that is welcome in the IPO arena.”

Cunningham said she believes allowing companies to raise capital through a direct listing is not necessarily meant as a way to avoid investment banking fees associated with an IPO. “The banks are still providing services to companies when they choose to do a direct listing, and they get compensated for providing that value to them when they’re working with them,” she said.

Instead, she said choosing a direct listing while raising new funds is “about the cost of capital.” She contended it will better reflect market demand because every interested investor, not just large, institutional funds will be expressing interest toward available shares.

“Just think about all those examples when we see an IPO pop on the first day, and there are shares allocated the night before and it gets priced at a certain level,” she said. “Then the next day it’s up 100% and people say, ‘Well that’s a great IPO. Look how wonderful and exciting this company is.’ It’s not a great IPO if you were the one that sold shares the night before because you could’ve gotten a much better price if everybody was participating in that offering.”