Just How Safe Are Direct Listings, Really?

Good morning! Hope your 2020 is off to a good start. I’m back in the land of alarm clocks, early morning coffee, and hot-off-the-press deals. Here’s what’s on my radar today:

Direct listings have been a big topic of conversation in tech circles, and venture capitalists and founders alike seem to be fans of the unconventional way of going public. But a new Wall Street Journal report asks: Just how safe are they for Main Street investors?

As a reminder, direct listings are a considerably cheaper method of going public in which only existing shares are sold, no cash is raised for the company, and bank underwriters that help market the deal are largely cut out.

Spotify and Slack both chose this method over a traditional initial public offering. Both companies had smooth debuts. Private market investors made a killing.

Spotify shares opened at $165.90, up nearly 26% from a reference price of $132 set by the New York Stock Exchange the day before. The stock closed at $149.01, valuing the streaming music service at $26.5 billion.

Slack opened at $38.50, 48% above the reference price of $26 that had been set by the NYSE the day before. That nearly tripled Slack’s as a private company, valuing it at about $20 billion.

But according to the WSJ, public market investors haven’t benefited nearly as much. Slack’s shares have fallen 42%, while the S&P 500 has climbed 9.5%. Meanwhile, shares of Spotify have gained 2.3% since its debut in April 2018, which is below the 24% increase in the S&P 500 over the same period.

One big difference between traditional IPOs and direct listings is what happens when shareholders decide to sue a company. Right now, investors are suing Slack in California federal court, claiming that it did not fully disclose certain risks when it sold securities. Slack responded that the nature of its direct listing provision could, in essence, allow it to sidestep the Securities Act, according to the story:

The company says it shouldn’t be held liable under Section 11 of the Securities Act of 1933, a provision that underpins many shareholder suits. That is because when Slack went public, investors bought a mix of shares, Slack said in a November court filing. Some were covered by the company’s registration statement filed with the SEC and other shares hadn’t been registered because they were sold by Slack insiders rather the company itself.

Because the investors suing Slack can’t directly trace their shares to the registration statement, the suit should be dismissed, the company argued. Slack also said the plaintiffs can’t seek damages because there was no offering price in its direct listing, which would determine how much money the plaintiffs had lost.

While some have argued that direct listings are a much-needed innovation in the IPO process, it’s important to consider all the risks that come along with it.

Read more here.

UBER AND LYFT FIGHT BACK: Uber and Lyft are refusing to abide by a new California law that compels the companies to classify their drivers as employees.

Assembly Bill 5, or simply AB5, is a law that went into effect in California on Wednesday that could completely change the face of the gig economy in its aims to make it harder for businesses to hire workers as contractors.

Uber and Postmates filed a lawsuit in federal court challenging AB5, alleging that the law is unconstitutional. The companies claim that it’s arbitrary that direct salespeople, travel agents, grant writers, construction truck drivers, commercial fishermen and others are exempted from the law.

“There is no rhyme or reason to these nonsensical exemptions, and some are so ill-defined or entirely undefined that it is impossible to discern what they include or exclude,” according to the complaint.

As venture capitalist Bradley Tusk recently predicted in Term Sheet: Worker classification will be one of the most heated policy fights of 2020.

A NEW FORTUNE: This month, Fortune will be launching a new site and app, a new video hub, a new magazine, plus a subscription package. Stay up to date on the developments by entering your email address here.

Polina Marinova
Twitter: @polina_marinova
Email: polina.marinova@fortune.com

VENTURE DEALS

- Loft, a Brazil-based digital real estate platform, raised $175 million in Series C funding. Vulcan Capital and Andreessen Horowitz co-led the round, and was joined by investors including QED Investors, Fifth Wall Ventures, Thrive Capital, and Valor Capital, Monashees.

- Ruangguru, an Indonesia-based online education platform, raised $150 million in Series C funding. General Atlantic and GGV Capital co-led the round.

- Clearcover, a Chicago-based auto insurance provider, raised $50 million in Series C funding. OMERS Ventures led the round, and was joined by investors including American Family Ventures, Cox Enterprises and IA Capital Group.

- BlueConic, a Boston-based customer data platform, raised $13 million in Series B funding. - Spring Lake Equity Partners led the round, and was joined by investors including Sigma Prime Ventures.

- TypingDNA, a Brooklyn-based developer of biometric security solutions, raised $7 million in Series A funding. Gradient Ventures led the round, and was joined by investors including Techstars Ventures and GapMinder Venture Partners.

- TaxBit, a Salt Lake City, Utah-based cryptocurrency tax automation platform, raised $5 million in seed funding. Investors include TTV Capital, Valar Ventures, Dragonfly Capital Partners, Collaborative Fund, Winklevoss Capital, Global Founders Capital, Table Management, and Album VC.

- Repisodic, a Philadelphia-based healthcare technology company, raised $1.75 million in seed funding. American Enterprise Ventures led the round.

PRIVATE EQUITY DEALS

- Gryphon Technologies, a portfolio company of AE Industrial Partners, acquired OMNITEC Solutions, Inc, a Maryland-based business management consultant. Financial terms weren't disclosed.

- KKR and Alberta Investment Management Corporation agreed to acquire a 65% equity interest in the Coastal GasLink Pipeline Project, a Canada-based gas pipeline company, from TC Energy Corporation. Financial terms weren't disclosed.

- IMG Companies, which is backed by Addison Capital Partners, acquired Altair Technologies Inc, a Fremont, Calif.-based manufacturer specializing in furnace brazing technology. Financial terms weren't disclosed.

- One Equity Partners made an investment in Computer Design and Integration, a New York-based provider of IT infrastructure hardware and software, consulting and managed services. Financial terms weren't disclosed.

IPOs

- Lixiang Automotive, a Beijing-based electric vehicle maker, has filed for a $500 million in New York, Reuters reports, citing sources. Read more.

- 1Life Healthcare, a San Francisco-based chain of primary-care clinics known as One Medical, filed to raise $100 million in an IPO. The firm posted revenue of $212.7 million in 2018 and losses of $45.5 million. The Carlyle Group (26.8%), Benchmark (13%), and Oak Investment Partners (11.4%) back the firm. It plans to list on the Nasdaq as “ONEM.” Read more.

- Black Diamond Therapeutics, a Cambridge, Mass.-based biotech developing small molecule, tumor-agnostic therapies, filed to raise $100 million in an IPO. The firm has yet to post a revenue and posted losses of $8.9 million in 2018. Versant Ventures (42%), New Enterprise Associates (11.2%), and RA Capital Management (6.7%) back the firm. It plans to list on the Nasdaq as “BDTX.” Read more.

EXITS

- Flywheel Sports, a New York-based operator of indoor cycling boutiques, is close to selling its studios to Town Sports International Holdings Inc, the owner of New York Sports Clubs. Financial terms weren't disclosed. Flywheel has raised more than $120 million in venture funding from investors including L Catterton, Benvolio Group, and Global Endowment Management. Read more.

- Endeavor acquired On Location Experiences, a White Plains, N.Y.-based experiential hospitality business. Financial terms weren't disclosed. Sellers include RedBird Capital Partners, Bruin Sports Capital, the Carlyle Group and 32 Equity.

FIRMS + FUNDS

- Antler, a Singapore-based startup generator and early-stage venture capital firm, raised $50 million for its funds.

PEOPLE

- Edison Partners promoted Kelly Ford to general partner.

- Entrepreneur Partners promoted Lori Lombardo to principal.

- Catalyst Investors promoted Kapil Desai to principal.

- Spectrum Equity promoted John Connolly and Leah Palmer to managing director; Carolina Picazo to chief administrative officer; Cameron Ghorbani to vice president; and Jamie Mitchell and Sam Todd to senior associate.