By Matt Lindberg
After a long period of market uncertainty driven by the COVID-19 pandemic, the second half of 2020 saw market conditions improve for IPOs with a recent flurry of tech companies making their debut. With increased demand to access the public markets, a strong pipeline of companies set to come to market is shaping up quickly for all of 2021.
Also hot are new options for companies to enter the public markets. After 2019 saw a surge in special purpose acquisition company (SPAC) listings, the transaction type gained even more steam in 2020. In addition to SPACs, there is increasing interest in direct listings, another relatively new way for companies to debut on the stock market. Both have already transformed the IPO market and are poised to continue doing so, with the New York Stock Exchange (NYSE) recently getting approval from regulators to allow companies to raise capital through direct listings, although the plan is currently on hold after pushback from the Council of Institutional Investors.
Going public is one of the most significant events in the lifetime of a company, and as part of a core team managing the event, communicators often find themselves with a new title: chief coordination officer. Many don’t realize at the onset that IPO coordination requires a unique combination of skills that stretch beyond communications expertise, including financial and legal acumen, organizational structure, project management, event management and more. Just when PR leaders thought they had a playbook on IPOs, direct listings have the industry questioning the differences, similarities, and the new rules of the road.
Before exploring how to effectively communicate through a direct listing, it’s important to understand the structure, process and intentions of direct listing. Direct listings are most often described as an alternative to an IPO, as a way to bring a company public. That is true in a sense, but unlike an IPO, which is primarily a vehicle for a company to raise capital, part of the intent of a direct listing is fundamentally to provide liquidity to current shareholders, allowing them to immediately sell shares. Down the road, should a company wish to raise cash, being public will provide an easier route to do so.
The primary reason for an IPO has traditionally been to raise money for growth. The explosive expansion of VC investing over the past 10 years has provided private companies with more (and easier) access to capital, leading many of them to stay private longer or indefinitely. The unintended consequence is that early employees and investors have had a much longer timeline to be able to sell their shares, made possible following an IPO.
Along comes the direct listing, a structure that allows current investors to sell their shares directly to the public through the open market. While the company helps to facilitate the sale, it does not raise primary capital. That said, with the SEC approving the plan for the NYSE to create a new type of direct listing where companies can in fact issue new shares, there is likely to be yet another route for companies to take when looking to go public.
Direct listings in either form come along with many nuances that make communicating through them different than communicating through an IPO, or even a SPAC. Here are a few considerations and best practices for well-choreographed communication.
Effective communications require cross-functional integration — and that is even more important in financial transactions. It is the job of the communicators to insist on collaboration early, ensure the company remains in control, and make sure the messages being conveyed to a diverse range of constituents are clear and consistent. The teams I have seen do this most effectively are the ones who have formed communications committees comprised of representatives from various business functions. Collaboration among PR, finance and IR, HR, legal and marketing will help drive consistency and bring diverse perspectives to hone the messaging.
Direct listings are designed to provide liquidity to current shareholders, many of whom may be employees. While employees are a key audience for communications in any significant financial event, it is absolutely critical in a direct listing. Employees’ direct involvement in the process (potentially selling their shares, if they choose to) intensifies the importance of three key considerations in the approach: identifying appropriate timing to disclose updates, providing an extra layer of transparency into the process and the need to be a bit more tempered in exuberance. The last one is tricky, as it is an exciting moment for the company and the individual. Remember, many employees have a personal and financial interest in the success of the deal, and so painting an early picture of what the process is like and what they can expect is very important. For example, media often opines on the success of an IPO relative to the opening or day-one stock jump. Direct listings are not priced the same way IPOs are, so that is a dangerous and misguided view of success in a direct listing. (Many debate its merits relative to evaluating success of an IPO as well, but that’s a different discussion.)
The media is viewed as the authority, but they are learning about this novel process with each listing. It’s important that companies and their agents monitor media coverage closely. This is of benefit for a few reasons: Media discussion can be a valuable resource in refining messaging, shaping Q&A and building a priority listing day media schedule comprised of reporters who understand the business. Teams should be monitoring for accuracy, to correct errors and to delicately resolve misconceptions. They may also serve as a silent subject matter expert, to help adjust misunderstanding (misreporting) of the listing process. I have always found the term “media quiet period” to be a little misleading in describing what is legally permitted. In many conversations with companies, it’s not just misleading; it’s misunderstood. My simple rule: It’s not who you talk to that’s regulated, it’s what you say.
Similar to employees, media will benefit from a clearer understanding of what success looks like in day-one/week-one trading. IPOs have set expectations of a day-one stock pop. In the cases of Spotify and Slack, successful price discovery was evidenced by high volume in the first trade and minimal volatility throughout the day. Companies and their agents should go on the offense to educate reporters on direct listing vs. IPO in regards to the differences in the pricing process and the drivers of price discovery. Listing day spokespeople should be prepared to thread the needle in addressing that from a clinical perspective, while not commenting directly on their own trading activity.
Going public by any means is an arduous process, and while I have led dozens of companies through public offerings (ICR has led hundreds), the one constant that emerges is that each situation is different. Just when you think you have seen it all, we encounter something new. Each situation and each company encounters new challenges or new situations, whether they be internal or from the broader market/industry. When considering a communications partner, look for diverse and varied experience, which will allow teams to draw comparisons to the past. With so much grey area in the regulations, experience is the most valuable thing you can draw on to direct the appropriate path. For communicators, even those who have the experience with IPOs, the newness of direct listings presents many questions and new challenges. It’s a very public process, with the eyes of the industry and financial markets fixed on your every move. With so much market and media interest in the process and the companies moving through it, the stakes are high, and it’s wise to go with a sure thing.
Direct listings are unique from other capital events, and the communications around it should be treated as such. It’s a new and already evolving process, with only a handful of companies completing direct listings to date and potential changes to the transaction process ahead. While there is much more to learn, we already know that the communications playbook is distinct for a direct listing vs. IPO. Many organizational functions must collaborate to ensure the tactical success, but communications carries the weight in the perception of success among key stakeholders and the general public. Communications should take the lead in organizing a cross-functional committee that drives clarity and consistency across communications with all constituents.
It doesn’t end with listing day. All stakeholders, primarily employees, need to understand the responsibility they have to communicate as an agent of a public company. That requires additional processes and special training exercises, but establishing these best practices early will ease the transition to the new normal that is life as a public company.
For a more in-depth look at the process of a direct listing, download ICR’s Guide to Direct Listings.
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