Beware of Wall Street's Latest "Con" Game

By Matthew Milner, on Wednesday, January 8, 2020

Growing up, my parents taught me that being “direct” was a good thing.

Being direct meant being honest, straightforward, forthcoming.

So when I heard about startups going public using a new method — something known as a “direct” listing — I was intrigued…

Direct listings were promising to give individuals like you an honest shot at profiting from the world’s leading tech companies, just as they’re going public.

But as it turns out, the direct listing is just another con game.

Today, I’ll explain why — and then I’ll reveal the real way to profit from leading startups.

What Is a “Direct Listing”?

Before I explain why you should avoid these investments, first let me explain what they are, and how they differ from a traditional Initial Public Offering (IPO.)

In a traditional IPO, a company works with an investment bank to sell its shares to the general public — in other words, investors like you. Working with a bank has a number of advantages. For example, the bank might guarantee that it can raise a certain amount of capital.

But for a very hot company, that might not be necessary. That’s because there may already be a great deal of demand for the company’s shares.

Furthermore, without a “middle man” like a bank getting involved, the company can avoid paying millions in fees — and investors like you can get your shares at a far lower price.

That’s why, during a direct listing, no investment bank is involved.

Now let me show you a recent example of a direct listing…

Slack: From Zero to $400 Million

A few months ago, a startup called Slack (NYSE: WORK) went public.

Slack is an instant messaging platform for work, and it’s taken the world by storm.

Since launching in 2013, it’s grown to more than 10 million daily users. In 2017, it did about $100 million in revenues. In 2018, it did more than $200 million. And last year, it brought in about $400 million.

Now that’s the kind of tech startup you’d want to invest in — right?

Not so fast…

What Happened During Slack’s Public Offering

In June of 2019, Slack went public in a direct listing.

This allowed it to save a bundle on fees — and to circumvent the standard legal protections that an IPO provides to investors.

You might have been tempted to invest in this deal, but I hope you didn’t:

So far, investors in Slack’s direct listing have lost nearly 50% of their money.

Our Advice: Avoid Direct Listings

As reported in the Wall Street Journal last week, direct listings lack the “safeguards of conventional initial public offerings.”

For example, as Tyler Gellasch, executive director of Healthy Markets Association, noted, “With a direct listing, the legal obligations of those setting the prices are not as clear. That’s a new risk for investors.”

Attorney Francis McConville specializes in representing shareholders who’ve lost money on their investments. As he said, “The danger, from an investor-protection and market-transparency standpoint, is that direct listings could be seen as a tool for companies to sidestep Securities Act liability.”

If you ask us, this is too much risk. That’s why we recommend that you steer clear.

Unfortunately, Direct Listings Are “The Future”

Unfortunately, direct listings are expected to become the preferred method of going public. Goldman Sachs is calling them “the future.”

For example, as The Wall Street Journal reported, Airbnb, the home-sharing startup, is weighing using a direct listing to go public this year.

Wall Street has started a PR campaign to ensure it can earn huge fees from these deals. And it’s working. As S&P Global reported, Wall Street is being “inundated” with direct listing inquiries.

But where does this leave investors like you? If you’re eager to capture the upside of the world’s fastest-growing companies, what can you do?

A Far Better Alternative

The answer is simple:

Get in before the direct listing. In other words, invest in such companies when they’re just getting off the ground.

As Forbes reported, that’s how early private investors in Slack made up to “1,600 times their original bet” — even as public market investors have lost half their money!

1,600x their money. That’s enough to turn a tiny investment of about $600 into $1 million.

Now that’s how you should invest.

How To Get in Early

As you learned today, high-potential startups are planning to go public by using direct listings.

This might benefit them… but it won’t benefit you.

To capture the upside potential of such startups, you need to get in early — well before these companies go public.

Here are three easy ways to get started:

First, check out our weekly “Deals” email. We send this out every Monday at 11am EST, and it contains a handful of new startup deals for you to explore.

Second, check out our free white papers like “Tips from the Pros.” These easy-to-read reports will teach you how to separate the good deals from the bad.

And third, if you’d like to accelerate your success in startup investing, consider signing up for our online course, The Early-Stage Playbook, or for one of our premium research services like Private Market Profits.

Happy investing!

Best Regards,
Matthew Milner
Matthew Milner


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