How Security Tokens may seize the day after SEC bans direct primary listings.

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Bernard Lunn is a Fintech deal-maker, investor, entrepreneur & advisor. He is CEO of Daily Fintech and author of The Blockchain Economy.

The news 9 months ago was unexciting and seemed like a no brainer. On February 8, 2018, the headline (from a law firm called Skadden) was SEC Approves NYSE Rules to Facilitate Direct Listings

Who would not want direct listings?

Then on December 10, 2019, the headline from another law firm (Cooley) was SEC fast tracks a “no” to NYSE primary direct listing proposal.


To understand what is going on we have to go below the headlines.

What this reveals is a different point of view between Wall Street West (aka Silicon Valley) and Wall Street East (aka New York).

To understand this, start with the basics of direct primary listings vs investment banker underwritten offerings.

Direct primary listings vs banker underwritten offerings

A direct primary listing means an SEC registered/regulated sale of Securities directly into the public market and here is the difference, without intermediary underwriter commissions or roadshow expenses. Direct listings puts the marketing responsibility onto the issuer, without relying on the bankers.

Although everybody refers to direct listings, the more precise term should be direct primary listing. Primary means that the  issuing company collects funds for selling securities; secondary means existing shareholders sell securities and collect the money. Direct secondary is permitted now.

Using the Daily Fintech Qui Bono/Qui Amisit Analysis:

  • Qui Bono. Direct listings are good for some issuers/entrepreneurs who have plenty of capital and a well-known consumer brand. The best articulation of this point of view comes from one of the leading purveyors of capital for entrepreneurs, the always articulate Bill Gurley of Benchmark Capital. In short, get your capital from private funds and do your own marketing. This makes sense because a modern IPO is much more of a marketing event than a capital raising event.
  • Qui Amisit. Direct listings are bad for Investment Banks who lose some of those underwriting commissions. Most other players in the ecosystem are neutral or positive about direct listings. Many lawyers for example, anticipate growth from direct listings.

Issuing public stock is more than a marketing or capital raising exercise. Two key advantages are that it provides a public stock currency for M&A, and enables employees to see and get value from public stock bonuses. The third reason helps explain why VCs are so keen on this and why the SEC reversed course – a direct listing does away with lock-up periods at the offering for insiders.

A direct listing works well for consumer brands such as Spotify. Many companies that are less well known (such as enterprise ventures) may rather have an underwriter/banker doing the work for them of selling the shares of an IPO into their network, pricing, taking them on road show and creating an aftermarket.

A direct listing also works well for unicorns, where the the NY underwriters are not essential to creating demand/liquidity. The unicorn in the IPO pipeline that might have been pondering a direct listing is Airbnb.

So, what does all this have to do with Security Tokens? To understand this, understand three three letter acronyms – ICO, IEO, STO


ICO = initial Coin Offering = unregulated offerings using Ethereum that the SEC declared to be Securities. Big in 2017 as entrepreneurs bypassed the traditional gatekeepers.

STO = Security Token Offerings = regulated offerings using Ethereum that are officially Securities. These were big on the hope front in the early days of 2018 as the crypto market crashed and ICOs were deemed no longer valid.

IEO = Initial Exchange Offering. This makes the Exchange into the gatekeeper. That could mean legacy exchanges such as NYSE & NASDAQ or the new breed of crypto exchanges such as Binance. The more liquidity offered by  the Exchange, the more they can charge for their gatekeeper role.

All these with O are designed to evoke IPO. A direct primary listing is different and maybe coming to the token world.

Direct primary listing applies to both shares and tokens

Our thesis is that the direct listings vs IPO debate will come to the token world. What we call a Security Token + Direct Listing remains to be seen. It could be something like STL = Security Token Listing.

You simply list your offering using Ethereum and do a lot of marketing to ensure that it gets noticed so that there is liquidity. If that comes to pass, we can redo the Daily Fintech Qui Bono/Qui Amisit Analysis. Qui Bono is all the entrepreneurs and their investors – same as with direct primary listings. Qui Amisit is some of the Investment Bankers eager for underwriting fees.

Most direct token offerings will be by unknown companies, who will still need some form of Investment Bankers who will market the offering to investors.   

If our thesis is correct that the direct listings will come to the token world, the regulation will be critical. The SEC slamming NYSE primary direct listings may simply serve the function of slowing it down until the rules and risks are studied better. Watch this space. We may see SEC approved direct primary token listings in 2020. 

As this is so driven by legal and regulatory issues, we reached out to Sheldon Freedman for comment. Sheldon Freedman, who is a Fintech Lawyer at Hassans International Law Firm, a multi-services law firm based in Gibraltar with a strong Fintech and Blockchain practice and also a DailyFintech Dean told us:

“The hunger among issuing companies and investors for a shorter path to funding and liquidity is a powerful driver for Security Token capitalization (whether via IPOs or Direct Listings). Those entrepreneurs will of course need to commit capital for legal/regulatory as well as for marketing to effect successful offerings.”


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