Securities Regulation Daily SEC allows companies to bypass IPOs via direct listings on NYSE
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Thursday, August 27, 2020

SEC allows companies to bypass IPOs via direct listings on NYSE

By Anne Sherry, J.D.

The SEC approved a NYSE rule change to allow companies to raise capital through direct listings, bypassing an underwritten IPO. Nasdaq filed its own proposal seeking to allow similar direct listings.

The SEC approved a proposed rule change by the New York Stock Exchange to allow companies to conduct a primary offering as a direct listing on the stock exchange. Spotify and Slack have previously gone public through direct listings, but they were not allowed to issue new shares, only to list existing securities for secondary trading. The SEC said that the rule change "may allow for efficiencies in the way IPOs are priced and allocated without sacrificing investor protection." Nasdaq filed a similar proposal with the SEC that would allow companies with a market value of at least $110 million to raise capital via a direct listing (Release No. 34-89684, August 26, 2020).

Listing requirements. Under the new rule, NYSE may, in its discretion, list securities in a primary offering if the company will sell at least $100 million in publicly held shares in the opening auction. Alternatively, the company can satisfy the market value requirement if the shares it will sell in the opening auction, along with the shares that are publicly held immediately prior to the listing, have an aggregate total market value of at least $250 million. The market value must be based on the lowest per-share price in the range established in the registration statement.

The $100 million and $250 million thresholds are analogous to those currently in effect for secondary direct listings. They are also well above the $40 million threshold for IPOs. NYSE said in its proposed rule change that this higher threshold and the auction process would ensure that companies conducting a primary offering would have an adequate public float and a liquid trading market after the opening auction. NYSE also proposed a new order type, and rules governing that order type, to be used in a primary direct listing.

Comments. SEC staff held meetings with NYSE representatives and considered comments from interested persons. Some commenters pointed out faults in the current IPO process and welcomed alternatives. Citigroup Global Markets said that direct listings "would afford broad participation in the capital formation process and help establish a shareholder base that has a long-term interest in partnering with management teams." Similarly, Goldman Sachs wrote that allowing more options will offer "public investors a broader array of attractive investment opportunities."

The Council of Institutional Investors (CII) was a voice against the proposal, commenting once on the first amendment and again on the second. Citing ongoing litigation arising out of Slack’s 2019 direct listing, CII said that investors who purchase shares in a direct listing may face hurdles in pursuing fraud claims because they cannot directly trace their shares to a misrepresented registration statement. The group also said it was insufficient for the NYSE to base its arguments about size and liquidity solely on its experience in listing IPOs and its belief that the $100/$250 million thresholds would be adequate. The American Securities Association similarly said that the proposal could undermine investor protection, calling the Slack offering "a serious warning sign for investors."

Approval. Addressing these comments in its order, the SEC said that the Securities Act does not require the involvement of an underwriter in registered offerings and that other parties act as gatekeepers to ensure that disclosures to investors are accurate and complete. The Commission acknowledged the concern about tracing in private litigation, but said that the issue is not exclusive to primary direct listings and occurs even in traditional firm commitment offerings. While allowing that "judicial precedent on this topic may continue to evolve," the SEC wrote that the one court to have considered the issue in the direct listing context ruled in favor of the plaintiffs’ standing.

In approving the rule change, the SEC highlighted amendments that NYSE made to align the proposal with the Commission’s tripartite mission of protecting investors, ensuring fair and orderly markets, and facilitating capital-raising. The agency said that the market value thresholds provide "a reasonable level of assurance" that the company’s market value supports its listing and that the markets are fair and orderly. The SEC also said that using the lowest price in the range given in the registration statement is a conservative approach given that the listing cannot proceed at a lower price. The new order type and corresponding rules also gave the Commission comfort that the issuer will not improperly influence price discovery. NYSE also included language in its amendment emphasizing the continued applicability of the federal securities laws and representing that it has maintained FINRA to monitor compliance.

Nasdaq application. Nasdaq also filed with the SEC a proposed rule change that would allow for direct primary listings. Under the exchange’s proposal, the market value threshold for a direct listing would be $110 million, calculated based on a price per share 20 percent below the low end of the price range in the issuer’s registration statement. In contrast, Nasdaq’s minimum requirement for an IPO is a $45 million market value. Nasdaq believes the threshold would ensure an adequate public float and a liquid market for trading the securities.

This is Release No. 34-89684.

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