In Case You Missed It - Interesting Items for Corporate Counsel - December 2019

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  1. The NYSE proposed in November (here) changes to its listing standards to allow “primary” share offerings through a direct listing (see commentary here, here and here). To date, direct listings have been in the form of stockholder share resales (a “secondary offering”) and not a capital-raising sale of company shares (a “primary offering”). The NYSE changes would have eliminated two listing standard obstacles to a primary offering: (1) the outright ban (a pretty big obstacle) and (2) the requirement that the issuer have 400 round lot shareholders when it lists. The SEC, with astounding alacrity, said “nope” (see here and here). The SEC hasn’t explained why it rejected the NYSE’s proposal, but because primary direct listings are of interest to some heavy hitters, and because stock exchanges make money when shares are listed, count on stock exchanges continuing to work with the SEC to make primary direct listings a thing.

    In case you made it to this sentence and are thinking “what?!?”, some background and a primer on direct listings follows.

    A “direct listing” is the direct sale of shares to the public without intermediary sales to an underwriter or others. Ever since Spotify did one in 2018, direct listing has been a hot topic. Among the touted benefits of a direct listing:

    • Avoiding underwriter fees and discounts. (But Spotify still paid $35 million in advisory fees to Morgan Stanley and Goldman Sachs for help with its direct listing. That’s not nothing, but it’s probably lower than the 5-7% discount typically charged by an underwriter in a traditional IPO.)
    • Ensuring (maybe) that any stock market “pop” benefits existing shareholders and not initial IPO investors. (Underwriters typically underprice IPO shares to ensure the stock trades up and that initial IPO purchasers that buy directly from the underwriters, and that underwriters will count on to buy shares in subsequent offerings, make money. That’s just the way it’s done.)
    • More immediate liquidity for existing shareholders, who are not subject to lockups, as they are in a traditional IPO, and who may sell without worrying about Rule 144 safe harbor requirements.
    • A vague sense that you are innovative and an even vaguer sense that by doing a direct listing you are sticking it to the Man.
    Among the detriments:
    • Less market management, and potentially a higher burden on the company to educate analysts and investors. (Although, one presumes at least part of the $35 million paid by Spotify went toward this.)
    • The potential for a choppy entry into public markets since you don’t have pre-arranged initial purchasers.
    • The potential that this is only really an option for well-known companies like Spotify that don’t need to engage in marketing for investors to enthusiastically buy their shares.

    Commentary on direct listings generally is here and here, and a case study on Spotify’s direct listing is here.

    Each of the NYSE and Nasdaq previously modified their listing standards to make secondary direct listings easier for companies like Spotify. Although it had been possible for private companies to list on the NYSE if they could demonstrate that they had $100 million in public float based on an independent valuation and the most recent trading price on an established trading system for unregistered securities, Spotify didn’t have a sufficient record of trading activity under the NYSE’s rules to adequately establish a trading price. That led the NYSE to do what any self-respecting stock exchange clamoring to list Spotify’s shares would do: it changed the rules (here). The changes eliminated the trading activity requirement for a company valued at $250 million or more, but also tightened independence requirements for valuation firms and required that direct listings be made only in connection with a registration statement filed with the SEC, which is subject to SEC review. Nasdaq similarly modified its rules for direct listings in early 2019 (here) and, last week, tweaked them again (here).

    Direct listings are not new, terribly innovative, or actually much different from traditional IPOs: a company still must file a registration statement that contains a lengthy prospectus to register an offering with the SEC, engage in a prolonged due diligence process, spend lots of time and money getting its corporate governance and accounting processes up to snuff, and educate the investing public (but sure, no underwriting agreement or lockup agreements to negotiate). It’s also not clear whether primary direct listings will be used much, even if the NYSE succeeds in making them available, as long as private equity money is a readily available alternatives. Nonetheless, Spotify’s direct listing has made them seem new, and stock exchanges will keep working to accommodate their use in primary offerings. So now you know.

  2. In case you feel the need, near year-end, to take a breath and remind yourself what the SEC has accomplished in the last year, check out the SEC rulemaking index here. For those yearning for a glimpse ahead, the SEC published its “active” rule-making agenda, which identifies actions in pre-rule, proposed rule and final rule stages, here. Notable, perhaps, on the active agenda are possible changes to the “accredited investor” definition, the dollar thresholds for which haven’t changed since Regulation D was adopted in 1982. (Recall that the SEC requested comment on the definition when it adopted changes to Rule 506 back in 2013, see here.) To round out the picture, the SEC’s “long-term” agenda is here.
  3. Recall that new hedging disclosures are required under Regulation S-K Item 407(i) for annual meetings for the election of directors during fiscal years beginning on or after July 1, 2019 (July 1, 2020 for smaller reporting companies). See here. Companies already disclose hedging policies that apply to executives and directors in their CD&A under Regulation S-K Item 403, so the new disclosure isn’t a big deal for most. Nonetheless, the new disclosure applies to all employees, not just executives, so you may need to modestly change your disclosures and perhaps also your anti-hedging policies. Consider whether to include the new disclosure in your CD&A, which technically brings it into the realm of what shareholders are casting an advisory vote on. (Although if your policy just says “we prohibit it under our insider trading policy for everyone,” it’s hard to care where you locate the disclosure.)
  4. In proxy news:
    • ISS published preliminary FAQs on its compensation policies for 2020 here.
    • The SEC began posting selected informal responses to shareholder proposal no-action requests, and will presumably periodically update its posted response chart, which summarizes letters the SEC believes may be broadly useful. See here.
  5. The Trump Administration issued two executive orders in October intended to limit regulation by guidance. (Executive orders are directives from the President to executive branch agencies indicating how to manage their operations.)
    • The Executive Order on Promoting the Rule of Law Through Improved Agency Guidance Documents is here.
    • The Executive Order on Promoting the Rule of Law Through Transparency and Fairness in Civil Administrative Enforcement and Adjudication is here.

    Commentary on the orders is here, here and here. As an independent agency, the orders don’t directly apply to the SEC, but may affect its behavior.

  6. On the lighter side, Bloomberg reports (here) that SEC Chairman Clayton touted fake letters as evidence that ordinary Americans support recent SEC proxy reform efforts, which generally push the pendulum in a company-favorable direction. Clayton referenced “300 unique letters” in support of SEC efforts and noted: “Some of the letters that struck me the most came from long-term Main Street investors, including an Army veteran and a Marine veteran, a police officer, a retired teacher, a public servant, a single Mom, a couple of retirees who saved for retirement, all of whom expressed concerns about the current proxy process.” An eagle-eyed Bloomberg reporter noticed that several of the cited letters had the same odd digital fingerprint: a random phrase inserted into the SEC’s email address. Bloomberg follow-up calls with the authors of the cited letters revealed none had actually written them. Ghost-written letters are not unusual and arguably the cited letters are just better, small-batch versions of what all lobbyists do all the time (the article notes that the SEC received 18,000 identical form letters opposing proposed SEC changes). But good grief – if you’re going to reference the “authenticity” of supporters of your position, maybe do some diligence?
  7. Finally, a reminder that the California Consumer Privacy Act becomes effective January 1, 2020, a scant 19 days from now. If you haven’t yet considered how and whether your privacy notices and practices should change, now is the time to panic. Our own summary of the CCPA, and references for a few lawyers you can panic to, is here.
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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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