SEC Must Prioritize Investor Protections Before Expanding Direct Listings

The SEC was created to restore investor trust and confidence in America’s capital markets following a period of widespread fraud and abuse

WASHINGTON – The American Securities Association (ASA) today sent a letter to the Securities and Exchange Commission (SEC) calling on the Commission to prioritize investor protections as it considers a proposal to expand the use of direct listings to raise primary capital. In the letter, ASA also called on the Commission to make clear that those involved in a direct listing automatically incur statutory underwriter liability and be required to hold the regulatory capital necessary to act as a de facto underwriter.

“The SEC was created to restore investor trust and confidence in America’s capital markets following a period of widespread fraud and abuse,” said ASA CEO Chris Iacovella. “Before expanding the use of direct listings, and rolling back decades of our country’s most important investor protection regulations, the SEC must address some key concerns that are fundamental to its mission.”

The proposal “is not consistent with the Commission’s overarching mission of (1) protecting investors, (2) maintaining fair, orderly and efficient markets, and (3) facilitating capital formation,” Iacovella wrote in the letter. “Investors would be exposed to companies with unsustainable valuations and have little legal recourse if an issuer engages in wrongdoing. Short sellers could exploit price inefficiencies associated with direct listings, and confidence in our public markets would likely be eroded as investors get burned by the absence of lock-ups, due diligence, and liability for issuers and underwriters.”

“Rather than offering an alternative path forward for more businesses to go public, the Slack offering is a serious warning sign for investors,” Iacovella cautioned. “If the company is successful in its California lawsuit, then investors will have diminished and uneven rights for claims against issuers. Given that Slack – along with Spotify – is one of the two high-profile companies that have added momentum to the call for direct listings in the U.S., it behooves the SEC to refrain from any further regulatory changes until the California litigation and SEC probe are concluded.”

“At a minimum, the SEC should make clear that financial advisors, exchanges, control shareholders, and directors involved in a direct listing automatically incur statutory underwriter liability under the 1933 Securities Act and be required to hold the regulatory capital necessary to act as a de facto underwriter,” Iacovella concluded.

In December of 2019, ASA sent a similar letter to the SEC outlining its initial concerns with the proposal.

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ASA’s regional financial services companies work in communities across the country to create jobs, grow the economy, and increase prosperity for all Americans. The ASA exclusively represents the capital market and private client interests of its members and seeks to promote free market principles making it easier to access financial advice and capital. ASA members help Americans save for retirement, provide Main Street businesses with capital to grow, and advise hardworking Americans how to create and preserve wealth. For the latest updates follow @AmerSecurities and learn more at http://americansecurities.org/.