Wednesday, February 5, 2020

Asana Latest Unicorn to Tee Up for a Direct IPO as Cooley LLP Addresses "The Direct Listing Craze"

I happened to be at Cooley's site when the Asana story dropped out of one of the feed-readers.

Our Cooley boilerplate:
Cooley is one of the big dogs of the VC legal eagle biz. Something like a third of the unicorns on the WSJ's Billion Dollar Startup Club list have used Cooley for one purpose or another.
Additionally, 20 or 21 of the companies on the "Technology Review's 50 Smartest Companies 2017" list have been represented or counseled by the firm. As I said, one of the biggies.
First up, from the San Francisco Business Times, February 4:
Asana is preparing to launch an IPO via a direct offering to retail investors and filed a draft registration statement with the Securities and Exchange Commission, Bloomberg reported.

Asana, founded by Justin Rosenstein and Facebook (NASDAQ:FB) co-founder Dustin Moskovitz in 2008, confidentially filed its initial public offering paperwork. Details for its finances currently are not known, but eventually companies that file confidentially will submit a public IPO filing that will reveal their financial status.

The San Francisco unicorn stated in its SEC filing it plans to launch its direct listing “after the SEC completes its review process, subject to market and other conditions,” according to Bloomberg.
Asana is the latest high-profile unicorn to offer its IPO shares directly to retail investors, rather than having investment bankers sell them to institutional investors like mutual fund companies and pension funds at a fixed IPO price before the stock hits the market and is available to retail investors....

And from Cooley, LLP:
2019 marked the rise of the Direct Listing. Though they are not exactly new structures, following the heavily-publicized Direct Listings of tech giants Spotify and Slack, they have captured the imagination of the capital markets world. Venture capitalists love them. CFOs are intrigued by them. Bankers want to hang out with them. Securities lawyers are fearless of them. And, accountants, well, they mostly roll their eyes at them. They are everywhere. Howling in the hills, whispering in the wind, psst!’ing from hastily revised pitch books. If you want to get into a Direct Listing seminar, you have to call on Tuesday morning between 9 and 9:15 am, at least a month out. The point is that Direct Listings are kind of a big deal.
And they should be. The growing sophistication and breadth of private financing alternatives, combined with the mounting frustration at inefficient IPO pricing and market volatility at the very outset of trading, have made traditional IPOs a love-hate affair for investors and companies. Liquidity is fun and zesty, but its charms are often overset by the arbitrary whims of an unequal supply and demand curve. Plus, for the tech Supercorns, doing an IPO just isn’t what it used to be. To a tech Founder, the hallowed sanctum of old Wall Street (and its once-apotheotic IPOs) isn’t exclusive entry into some gilded mansion party. It’s closer to a full day at the DMV, exacerbated by the frustrating knowledge that she could probably create and launch an app in about two weeks to handle the entire process in a few mindless swipes.
More than that, with increasingly notable stock “pops” in technology IPOs, companies are wary of leaving money on the table at IPO pricing by setting the price too low. Direct Listings avoid the shame of hindsight scrutiny. Better to let complete market dynamics (whose capriciousness is too providential to demand apology) decide the day, rather than arbitrary convention and countervailing and conflicting self-interests. Particularly for companies that have plenty of money on the balance sheet, Direct Listings provide a very appealing alternative and avoid dilution and the other potential downsides of an IPO.
With all the innovative energy associated with Direct Listings, they may appear at first to be more different than they really are. Legally, they are pretty similar to a traditional IPO, including:
  • Similar legal and financial disclosure requirements;
  • 2-3 month SEC review process;
  • Adopting governance policies and programs to meet SEC and listing requirements;
  • Some marketing efforts to build support in Wall Street for post-listing trading;
  • Similar publicity and Section 5 concerns when “in registration”;
  • Engaging sophisticated financial advisors to inform trading and pricing;
  • Significant diligence processes to assess the material risks of the business and inform comprehensive disclosure to investors; and
  • Securities Act liability for accuracy of disclosure in the registration statement.
Despite these similarities, there are definitely some fundamentally different aspects that companies will want to carefully consider before deciding to pursue a Direct Listing. Accordingly, we (and posterity) strongly advise that companies carefully read the following (and then call your attorney with any questions): 10 Key Considerations for Direct Listings

The two technology Direct Listings that have kicked off this trend (Slack and Spotify) were very similar in terms of process and structure. As Direct Listings become more prevalent, we will certainly see more bespoke versions. For example, companies are now considering private placements of stock shortly before listing, in which they have more control over the potential dilution and it can be used to help determine the reference price for listing. An initial proposal by the NYSE to allow companies conducting Direct Listing to also sell primary shares to the market – which would have greatly increased the accessibility and appeal of Direct Listings for companies that are seeking capital in the public markets – was recently (and rather swiftly) rejected by the SEC, but the NYSE has since submitted a revised proposal to the SEC last week. Though this primary sale limitation remains a potential shortcoming for Direct Listings, we believe these efforts will continue and will ultimately result in structures that combine some of the best qualities of both IPOs and Direct Listings.

To that point, we suspect the primary catalysts behind Direct Listings will begin to trigger changes in some IPOs....

What do you get when you cross propinquity with serendipity?
This post!