OTC Open Direct Listing

A global or local direct pledge or list is a bailment that conveys possessory title to property owned by a debtor (the pledgor) to a creditor (the pledgee) to secure repayment for some debt or obligation and to the mutual benefit of both parties. A direct listing is a process by which a company can go public by selling existing shares instead of offering new ones. Companies that choose to go public using the direct listing method usually have different goals than those that use an initial public offering (IPO). The term is also used to denote the property which constitutes the security.

Summary Points

  • A direct listing is a process for a company to become public without going through the initial public offering process.
  • The process makes existing stock owned by employees and/or investors available for the public to buy and does not require underwriters or a lock-up period.
  • Direct listing increases liquidity for existing shareholders and is usually cheaper than an IPO.
  • The pledge is a type of security interest.

Why Do Companies Choose Direct Listing?

The definition for Pledge is the pignus of Roman law, from which most of the modern European-based law on the subject is derived, but is generally a feature of even the most basic legal systems. It differs from hypothecation and from the more usual mortgage in that the pledge is in the possession of the pledgee.

Companies that use direct listing have different goals than those that choose an IPO. In an IPO, companies are trying to raise capital for expansion or funding. On the other hand, companies that use a direct listing are not necessarily seeking capital. Instead, they are looking for the other benefits of being a public company, such as increased liquidity for existing shareholders.

Companies that want to go public through this process should also fit a certain profile. Since no underwriters are selling the stocks, the company itself has to be attractive enough for the market. The rough outline of companies that should use this method includes those that: (1) are consumer-facing with a strong brand identity; (2) have easy to understand business models; (3) are not in need of substantial additional capital.

Two notable companies that have gone public through direct listings are Spotify and Slack. Both companies already had strong reputations before going public. They were widely used, and it was easy to understand how the company makes money. These two things combined increase the number of people who are interested in investing in the company. It is because investors are more inclined to invest in companies that they have heard of before and understand.

In earlier medieval law, especially in Germanic law, two types of pledge existed, being either possessory (cf. Old English wedOld French gageOld High German wettiLatin pignus depositum), i.e., delivered from the outset, or nonpossessory (cf. OE bād, OFr nam, nant, OHG pfant, L pignus oppositum), i.e., distrained on the maturity date, and the latter essentially gave rise to the legal principle of distraint. This distinction still remains in some systems, e.g. French gage vs. nantissement and Dutch vuistpand vs. stil pand. Token (symbolic) reciprocal pledges were commonly incorporated into formal ceremonies as a way of solidifying agreements and other transactions.

The chief difference between Roman and English law is that certain things (e.g. apparel, furniture and instruments of tillage) could not be pledged in Roman law, while there is no such restriction in English law. In the case of a pledge, a special property passes to the pledgee, sufficient to enable him to maintain an action against a wrongdoer, but the general property, that is the property subject to the pledge, remains in the pledgor.

Benefits and Drawbacks of a Direct Listing

There are several benefits of a direct listing that attract companies to the process. First, by going public the company provides liquidity for existing shareholders by allowing them to freely sell their shares in the public market. Secondly, the cost of the process is much lower than the cost of an IPO. Direct listing helps companies avoid hefty fees paid to investment banks. It also helps them avoid the indirect cost of selling the stocks at a discount.

Since direct listing does not use investment banks to underwrite the stocks, there is often more initial volatility. The availability of stock depends on current employees and investors. If on the day of the listing, no employees or investors want to sell their shares, then no transactions will occur. The stock price is purely dependent on market demand.

Unlike an IPO in which the share price is negotiated beforehand, in a direct listing the price of the stock depends solely on supply and demand. This increases volatility, as the range in which the stock is traded is less predictable.

Direct Listing vs. Initial Public Offerings (IPO)

The major difference between a direct listing and an IPO is that one sells existing stocks while the other issues new stock shares. In a direct listing, employees and investors sell their existing stocks to the public. In an IPO, a company sells part of the company by issuing new stocks. The goal of companies that become public through a direct listing is not focused on raising additional capital, which is why new shares are not necessary.

The second difference is that in a direct listing there are no underwriters. Underwriters work for investment banks to help sell stocks of a company that is going public. They make large purchases which adds value to companies as those shares are taken off their hands. However, the shares are typically sold at a discount to their true value.

The process of using underwriters and selling at a discount increases the time and cost for a company that is issuing new shares. The practice of investment banks buying stocks and then selling the stock themselves is not as common now. Instead, the investment banks will use their network to help market the stocks and drive sales.

Lastly, the direct listing process also does not have the “lock-up” period that applies to IPOs. In traditional IPOs, though not always required, companies have lock-up periods in which existing shareholders are not allowed to sell their shares in the public market. It prevents an overly large supply in the market that would decrease the price of the stock.

As the pledge is for the benefit of both parties, the pledgee is bound to exercise only ordinary care over the pledge. The pledgee has the right of selling the pledge if the pledgor fails to make payment at the stipulated time. No title to a third party purchaser is guaranteed following a wrongful sale except in the case of property passing by delivery, such as money or negotiable securities. In all other cases that person must show they are a bona fide purchaser, for (good) value, without notice (BFP). In the case of some types of property as defined on the detailed laws of the jurisdiction such a new possessor (BFP) must have first consulted (before purchase) revealing no other ownership and then made a public notice or registered their title in a court-recognised Register before the pledgor. After a wrongful sale by a pledgee (e.g. where the pledgor has been keeping to his payment schedule and will have the right to redeem the goods if continuing to do so), the pledgor cannot recover the pledge/the value of the pledge without a tender of (full payment of) the amount due (secured under the pledge).

In direct listings, existing shareholders can sell their shares right when the company goes public. Since no new shares are issued, transactions will only occur if existing shareholders sell their shares. Some Christian Churches, such as those in the Methodist tradition, teach the concept of Storehouse Tithing, which emphasizes that tithes must be prioritized and given to the local church, before offerings can be made to apostolates or charities. Donations to the Church beyond what is owed in the tithe are known as offerings.

This contrasts with the general law of mortgages where most mortgagors can sustain a cause of action (sue) on a wrongful sale to restore the property into their qualified ownership provided they bring any payment arrears up to date. The law of Scotland and the United States generally agrees with that of England as to pledges. The main difference is that in Scotland and in Louisiana a pledge cannot be sold unless with judicial authority. In some of the U.S. states the common law as it existed apart from the Factors Acts is still followed; in others the factor has more or less restricted power to give a title by pledge.

In the law of contract, an exchange of promises is usually held to be legally enforceable, according to the Latin maxim pacta sunt servanda. A promise is a commitment by someone to do or not do something. As a noun promise means a declaration assuring that one will or will not do something. As a verb it means to commit oneself by a promise to do or give. It can also mean a capacity for good, similar to a value that is to be realized in the near future i.e. futures contracts. or contracts for difference. Lombard banking was a mount of piety style of pawn shop in the Middle Ages, a type of banking that originated in prosperous Northern Italy, called Lombardy as a whole during the Middle Ages. The term was sometimes used in a derogatory sense, and some were accused of usury.

The practice of Lombard credit is still commonly used in central banking, where central banks lend against marketable securities, such as government bonds. Modern repo (repurchase-sale transactions) are also forms of Lombard lending: one bank sells marketable securities to another (at a discount), with an agreement to repurchase the securities (typically at par) in a fixed period of time. Although the legal documentation of the transaction is that of a sale and subsequent repurchase, the substance of the transaction is a secured loan (and under most accounting standards, will be treated as a loan). Pawn shops in many countries and languages are often still referred to as Lombards.

Most European towns called the pawn shop the “Lombard”. The Lombards were a banking community in medieval London, England. According to legend, a Medici employed by Charlemagne slew a giant using three bags of rocks. The three-ball symbol became the family crest. Since the Medicis were so successful in the financial, banking, and money lending industries, other families also adopted the symbol. Throughout the Middle Ages, coats of arms bore three balls, orbs, plates, discs, coins and more as symbols of monetary success.

The pawnbrokers’ symbol is three spheres suspended from a bar. The three sphere symbol is attributed to the Medici family of Florence, Italy, owing to its symbolic meaning of Lombard. This refers to the Italian region of Lombardy, where pawn shop banking originated under the name of Lombard banking. It has been conjectured that the golden spheres were originally three flat yellow effigies of bezants, or gold coins, laid heraldically upon a sable field, but that they were converted into spheres to better attract attention.

Collateral, especially within banking, traditionally refers to secured lending (also known as asset-based lending). More-complex collateralization arrangements may be used to secure trade transactions (also known as capital market collateralization). The former often presents unilateral obligations secured in the form of propertysuretyguarantee or other collateral (originally denoted by the term security), whereas the latter often presents bilateral obligations secured by more-liquid assets such as cash or securities, often known as margin.

Marketable collateral is the exchange of financial assets, such as stocks and bonds, for a loan between a financial institution and borrower. To be deemed marketable, assets must be capable of being sold under normal market conditions with reasonable promptness at current fair market value. For national banks to accept a borrower’s loan proposal, collateral must be equal to or greater than 100% of the loan or credit extension amount. In the United States of America, the bank’s total outstanding loans and credit extensions to one borrower may not exceed 15 percent of the bank’s capital and surplus, plus an additional 10 percent of the bank’s capital and surplus. The tithe gift is discussed in the Hebrew Bible (Numbers 18:21–26) according to which a tenth of the produce was to be presented to a Levite who then gave a tenth of the first tithe to a kohen (Numbers 18:26). Tithing was seen as performing a mitzvah done in joyful obedience to God. Giving tithe would open oneself up to receipt of divine blessing.

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