Risk and Reputation

Authors

Taylor J. Wilson, University of Michigan Law School

Abstract

Direct listing is an innovative alternative to a traditional initial public offering. Since direct listing was revived in 2018, there have been many lingering questions, particularly about the liability of financial advisors involved in the process. In a traditional IPO, a company retains an investment bank as an underwriter; the underwriter takes on a degree of financial risk and lends credibility to the company’s offering, often directly marketing the offering to potential investors. In a direct listing, however, investment banks act as financial advisors but do not assume financial risk or market the sale of securities. Section 11 is an important antifraud provision of the Securities Act of 1933, which imposes liability on all offering participants meeting the statutory definition of underwriter. Whether that definition fairly encompasses financial advisors is unsettled, resulting in uncertainty for both investors and offering participants.

After arguing for the application of the Lehman Brothers interpretation of the underwriter definition, this Note then argues that financial advisors are not likely to be statutory underwriters under that interpretation. This Note therefore recommends against the application of section 11 liability to financial advisors. After briefly discussing the risks this conclusion implies for investors, this Note discusses what should be done. One scholar has suggested that section 11 liability should be imposed on financial advisors through exchange rules. But increasing liability is not without costs. Reframing the question as a choice between negligence-based liability and scienter-based liability, this Note points to the possibility that an increase in liability could undermine the primary benefits of direct listing. Drawing on a framework developed by Professor Assaf Hamdani, this Note finally discusses the possibility of using direct regulation in concert with scienter-based liability to incentivize financial advisors to be effective gatekeepers.

Recommended Citation

Taylor J. Wilson, Risk and Reputation, 121 Mich. L. Rev. 461 (2022).
Available at: https://repository.law.umich.edu/mlr/vol121/iss3/4