Direct Listings NYSE SEC; Vaping Apps & Apple, CBD & FDA (#16)

Hi everyone. Welcome to episode 16 of 16 Minutes. Feels very special somehow, given our penchant for all things coming in 16s. I'm Sonal, and this is our show where we cover the news headlines the A6 and Z way. What's hype, what's real, why they matter from our vantage point in tech. And this week we have not one but two new episodes. You can check out episode number 15 in this feed, but in this episode we cover two, well, really three recent news items that we combine the last two. So the first segment is on the back and forth between the New York Stock exchange and the SEC around making changes to direct listings. And the second segment is a very quick take on the recent moves by Apple against vaping apps and by the FDA against CBD products. As a reminder, none of the following should be taken as investment advice. Please see a6nc.com/disclosures for more important information. Okay, so for our first segment, we're going to cover the news and the news again and the news again around direct listings. So let me do a quick high-level summary, just a quick definition. What is a direct listing? It's basically another route to the public market markets, but unlike an IPO, an initial public offering, there is no O or an offering. And the first reuse of it in the modern form, because in the past it was used for companies that were splitting or going bankruptcy or debt restructuring, was done by Spotify. And we had Barry McCarthy, the CFO of Spotify, who architected that whole thing on the podcast recently. And then this year Slack also did a direct listing. And so it's becoming a bit of an emerging trend, although so far there's only a case of two. They were both listed on the New York Stock Exchange, and the New York Stock Exchange actually proposed to the SEC that they would like to now recouple the capital raising with the direct listings, but then their proposal was rejected by the SEC. And just a couple of days ago, they repropose with new numbers. So that's a quick high-level summary of the news. And now let me introduce our A6&C expert, managing partner Scott Cooper, who's written a book about venture capital and also is a former banker and has a lot of depth in corporate development and policy around public companies as well. Welcome, Scott.

Thank you, Sonal.

So what's your take on the news?

So there's a couple of issues at play here. One is this concept of price discovery. right? Which is, okay, really, do we feel like when we start trading this stock, we have a good idea of what it's worth and therefore what we should sell it at and what it should trade at? And one of the big complaints that you hear about IPOs all the time is the stock price is at $10, it goes up to $30 on its first trade, it then goes up to $50 later in the day. And rightly so, companies say, hey, wait a second, we sold shares at $10, it opened literally a minute later at $30. Why is that $20 like not in our pockets? Right.

It's basically in the parlance, they're leaving money on the table.

That's right. They're leaving money on the table. I use the term wealth transfer 'cause it's a transfer of wealth from the company to, in this case, the institutional investors who bought in the IPO.

And some people argue— I mean, you yourself have discussed this in a post you wrote for MarketWatch this summer. There's a lot of contrived artificial distortions, especially around the pop and various other things in pricing an IPO.

Some of it is also just psychological, which is we've decided that having an IPO pop is a sign of success in a company. And so therefore we orchestrate for it in some cases. So anyways, I think the beauty of the direct listing, at least that people are saying, is, look, it solves this price discovery problem. When we talk about price discovery, Let's just distinguish between what happens in a traditional underwritten IPO versus what happens in direct listing. So in a traditional IPO, the night before, the underwriters have literally been aggregating demand from different people and they literally put together what's called the book of orders and they say, great, it's gonna be $10. And so tomorrow when the stock market opens or an hour later, we're gonna open this thing at $10. But then what often happens of course is it's an imperfect science. And so that $10 sometimes turns into the first trade at $30 'cause people get excited about it and all this good stuff.

More of an art in fact than a science.

That's exactly right. They actually televise it on TV. If you watch the Slack opening, Instead of this kind of, you know, night before book process, they literally had people there in real time sitting on the floor of the exchange with, you know, telephones in both ears saying, hey, like, would you pay this? Would you pay that? And so they're trying to kind of literally do this more, you know, real-time discovery.

Right. So that's all good. Not hand allocated, basically.

That's exactly right. And that's all great. The question, though, is, is the direct listing the panacea for this, or could you, in theory, could you actually improve price discovery on the actual traditional—

Oh, that's interesting, because basically what you're saying is that there are broader structural things at play that could be better. And so now I actually am very curious for that. Like, what are some of your thoughts on some of the other things that could technologically or otherwise address that?

Yeah, so I think there's a couple ways to do it. So one is, look, we could have a more sophisticated process for actually soliciting demand and stuff like that. So today, you know, again, we use this term the book and, you know, in many cases, quite frankly, it literally is a book that they're building, right? So you could imagine, right, you could do more sophisticated financial polling of your institutional investors in a traditional IPO. To try to actually tighten up that price discovery. The other thing is just an incentives thing. To me, one of the most interesting things about direct listing is what implications might it have on traditional IPOs? And I think what's interesting, you know, I mentioned it earlier, we love this idea of these big pops, right? That shouldn't be the judge of whether it's successful or not. And so I think if nothing else, you will just see behavioral changes now in the form of the underwriters of thinking about, can I tighten that price spread? Because I don't need this kind of almost marketing benefit of these big pops.

Yes, get rid of that artificially contrived pop and everything else. So the other factor in a direct listing, big difference between direct listings and IPOs besides the no offering stock being sold by the company is that there is no lockup period. And as we all know, there's a traditional lockup period of like 180 days. And so a lot of the argument is that it's actually not the true volume of the stock because all the available stock is not actually available in that initial offering. It's actually quite artificially constrained. So you get the true volume of that stock when that lockup period expires.

That's right.

Yeah.

So yeah, I think that's the other big conversation that we ought to be having around all this direct listing stuff is exactly that, which is what is the sum total of things that can potentially exacerbate price movements of a public stock? As we talked about earlier, one is just the nature of how the pricing process and the price discovery process work. The other is the aftermarket, like what happens of trading in the aftermarket. And you're exactly right. In today's IPO market, in traditional IPO market, most companies are selling about 10% of their stocks, right?

Very limited float.

That's right. So you can imagine both on the upside and the downside, right? If something good happens or something bad happens with relatively low float and low volume, you get exacerbated stock prices.

Basically, in layman's terms, you get a lot more distortions when you have such a small volume.

Absolutely. And that's because we've had this traditional 6-month lockup. The direct listing goes completely the opposite way, which is, look, 100% of the shares in theory are available for trading on day 1. And maybe the answer too is like a direct listing of 100% also may not be the right answer. So it's about predictability.

So Cooper, then just to bring it back to the original question of the NYSE's, the New York Stock Exchange proposal and sort of this general movement of there being an acknowledgement that there needs to be some updates to current methods. People are basically describing it like a hybrid model between an IPO and —direct listing.

So, you know, this whole direct listing stuff is a great conversation. It's not the cure-all for everything out there. I think the bigger question is we got to think about what's actually causing these problems, right? So one is better mechanisms for price discovery, you know, whether that's a direct listing. You know, people may remember a long, long time ago Google did this Dutch auction thing. Oh, that's right. You know, it was a one-and-done thing that never actually happened after that. But look, maybe it's time to rebring those ideas back and really think about that stuff. Secondly is the lockup mechanics and what does that do, right? So these small floats and this kind of magical switch where we kind of, you know, flip the switch on 6 months and a day and, you know, it causes all kinds of weird trading, right? 'Cause hedge funds, everybody knows about it, it's public. So people sell into that, it causes these weird gyrations. And then I think there's a third big overarching issue that we're trying to address, which is how do we make sure that actually more of the appreciation that happens today in the private markets also is accessible to normal retail and public market investors? And by the way, I've written a bunch of blog posts on this. I actually had the pleasure of testifying in front SEC and the Senate on this stuff is this very big meta question that we've got here, which is, given that companies are staying private so long, how do we deal with the fact that there's all kinds of wealth and appreciation opportunities that are really available today to private investors only that used to be available to public investors? Right.

I mean, the whole point is the markets can be democratizing.

That's exactly right. And so one of the theories of direct listing is, look, if it's a better process and it makes it easier to go public, then maybe that actually encourages companies to go public even potentially at an earlier stage than they would otherwise do. And look, the other thing that some people in D.C. are thinking about is potentially, do you liberalize the rules in the private markets to make private market investing more accessible to, you know, kind of a broader cross-section of, you know, traditional retail investors? Still super, super early stages on those discussions. But I think this discussion really highlights kind of that fundamental issue, which is who benefits from the wealth appreciation from a lot of these companies.

So bottom line it for me, Cooper, how should we then think about this particular news where the NYSE proposed something, the SEC, they rejected it. They came back and they rejected it again.

So bottom line is like we are now in inning 1 of what is hopefully— now it's a 9-inning game, but it's probably at least a 5-inning game of, you know, there's going to be comment periods, there's going to be people making things. But it's a really healthy discussion because we're basically addressing these fundamental underlying questions that I think are really important about accessibility to capital markets. That's fantastic.

Thank you so much for joining this episode. Thanks, Sonal. Okay. So for this second segment, let me quickly summarize the 2 news items and then I'll introduce our A6NZ expert. So the first bit of news is that Apple recently announced that they're removing removing all vaping-related apps from their App Store. And it turns out there's 181 vaping apps. And just a quick reminder, vaping is shorthand for the act of smoking aerosol products that can be like— include nicotine, it may not include nicotine— in the form of devices that are e-cigarettes, like basically electronic cigarettes. And they did this on the tails of reports that at least 42 people have died from vaping-related lung illness, per the CDC. So that's one quick item. And then the other quick news item is that the FDA sent out warning letters to 15 companies for illegally selling products that include CBD, which is basically a cannabis-derived product. And they also published a revised consumer update that details the safety concerns more broadly, including potential liver injury, drowsiness, unintended interaction effects, diarrhea, and other things. And they basically said that this is not considered a GRAS— generally recognized as safe— for human and animal food as well. There's actually only one approved prescription by the FDA, which is for rare severe forms of epilepsy. So that's the news with the FDA. Okay, So now let me introduce our Asics and Z expert, general partner Vijay Pandey. So we can talk about it all at once, but at a high level, what's your take?

Well, the FDA going after CBD, that seems straight down the middle, right? I mean, CBD is a controlled substance. You can't sell controlled substances without a prescription. But here's the interesting twist. Is Apple saying no to vaping apps? Because as far as I can tell, the vaping app itself doesn't violate any laws. Ah, right. And that's a really good point.

We're not talking about the actual e-cigarettes, vaping devices.

Yeah. And so the app should in principle be safe, but Apple is choosing to do this because of the deaths associated with vaping. What's happening here is that Apple is acting kind of like a digital FDA.

I was about to say, what's the big deal? They ban apps all the time. But that's actually really interesting. Okay, so then let's quickly break down some of the specifics. So on the CBD, you said it was sort of straight down the middle because it's a controlled substance. But, you know, I see it everywhere. I mean, literally, even just— I came back from my the holidays, every airport had a huge CBD kiosk with all kinds of products like facial makeup, lipstick, you name it. It's even in infant products. How is that no different than a supplement?

Yeah, you know, the interesting thing is that— and this is where it gets a little complicated— is that from cannabis plants, there are many small molecules that come out of this and some of them are controlled. I don't think all of them are necessarily controlled. And actually, even this has interesting parallels with the whole vaping thing because people— the reason why people are vaping is that cigarettes have all of these compounds in them and that this is really trying to use vaping as just a nicotine delivery. And so now we have this game where people are pulling individual chemicals out and things are happening because of it.

Well, speaking of individual chemicals, recently the CDC on the vaping front issued a statement. The headline says, "The outbreak of lung injury associated with the use of e-cigarette or vaping products." And they said that they have identified vitamin E acetate as a chemical of concern among people with e-cigarette or vaping product use. And the quote, "This is the first time that we have detected a chemical of concern in biologic samples from patients with these lung injuries. These findings provide direct evidence at the primary site of injury within the lungs.

Well, the problem is that once you light up anything, you can change the molecular nature of things. And so who knows what derivative substances you're getting versus like chewing nicotine gum, you know, and that would be simpler.

So then on this note of supplements in general, like, how do you think about that? Especially because we've talked a lot on this podcast about everything from digital therapeutics to other alternatives to medicine. And we did an episode with Jorge on the opioid crisis and alternatives alternatives to pain medicine.

I think of supplements almost the way I think about food, in that both of them are aspects of medicine, aspects of engendering health. So like anything I put in my body, I'm thinking about how is this going to help my next workout, how I'm going to help my next day. And so I'm thinking about protein, I'm thinking carbohydrate, maybe I'm thinking about creatine, maybe I'm thinking about other things. The challenge for all of it is now we get into the very, very murky area of like nutrition and diet. And the one thing that is emerging, I think there's great consensus on this, is that this has to be very patient-specific. And study after study after study shows this. And that's part of the reason why, like, we see like this diet works or that diet works or that diet works. Most of these diets work for somebody. But the question is, does it work for you?

So you're basically saying that the broader context that this is all playing out against is while we might have an increase in all these supplements and various things that may actually work in some ways for some people, there's a specific, precise calibration or combo that makes things happen.

And how do you know what is the right combination for you? And it's really hard. And this is really an unsolved problem. And the opportunity here is that in principle, now we can finally measure all this stuff. The question is like, is every individual going to have to be like the result of some science experiment, or is there some way to bring this to the masses? That's still unseen, right?

So one question then, do you have any thoughts on what the FDA's role in all this is?

Yeah. Well, so So FDA, Food and Drug Administration, it's not the DA, not the Drug Administration. And so it's very intriguing that we put the two together. And it will get interesting once we start thinking about that. There is not this very clear distinction between diet and health, that the whole goal is not treating sick, it's keeping people healthy. But there's work left to do to blur those distinctions.

So now going back to the Apple News apps. So what Apple's statement— and they made this to Axios, which is the media outlet that exclusively covered this initially— to your point about Apple as the FDA, what they said was We take great care to curate the App Store as a trusted place for customers, particularly youth, to download apps. We're constantly evaluating apps and consulting the latest evidence to determine risk to users' health and well-being. I think it's interesting to your point about this sort of Apple playing the role of the FDA because it does tie into their larger marketing about being the company that's a trusted company, the consumer company, the safe company, the walled garden.

And it's safe inside. Exactly.

It's a walled garden. It's safe inside.

Exactly. Yeah. Yeah. Well, and it kind of makes sense if you look at some of these apps, some of them are like almost like Instagram meets Yelp for CBD. Oh my God, are you serious? Yeah. I mean, and there's vaping stars, vaping influencers.

I'm glad you brought that up because I just thought it was apps to control the temperature and lighting of vape pens. Okay, Vijay, so bottom line it for me from your perspective. Clearly there's not like an obvious tech angle here, but what's our takeaway?

Well, we're seeing this blurring for healthcare and technology. And normally we think about healthcare as treating the sick. As healthcare— and this is one of the major trends in healthcare— is moving towards value and keeping people healthy rather than than waiting till they get sick. This is where tech is gonna play a very— Value-based care. Value-based care, exactly. This is where tech is already starting to play a role. And it is just, to me, really intriguing that Apple's not taking this away because the software doesn't work or any of the other reasons. It's working. They're making a healthcare assessment. And that's the new ground.

Okay, that's great. Thank you for joining this segment of 16 Minutes. Yeah, thank you.