Last week, the New York Stock Exchange (NYSE) filed proposed rule changes with the Securities and Exchange Commission (SEC) to allow companies to sell shares on their own behalf in direct listings. Currently, direct listings are limited to shares held by existing stockholders. Today, the SEC rejected the NYSE proposal. The proposed rules would have created a hybrid model that would have expanded the universe of companies for which direct listings were a viable option.
As of the time of this Client Alert, the SEC has not commented on why the NYSE proposal was rejected. It is possible that additional SEC rulemaking is necessary to make primary direct listings a possible option or that the SEC would like the NYSE proposal to address other topics before it is resubmitted. For example, aspects of Regulation M, the application of which is well established in the traditional initial public offering (IPO) context and which protects against market manipulation, may need to be clarified by additional SEC rulemaking for primary direct listings. The NYSE has stated, however, that it expects to continue to work with the SEC on this proposal.
Under the proposed rules, a company could have pursued the sale of its own shares through a direct listing if it either 1) sold $250 million of its shares in connection with the opening auction or 2) if it sold less, then the aggregate market value of the shares it did sell, together with the market value of the shares held by existing stockholders (based on an independent third-party valuation), must have been at least $250 million.
In addition, given that most companies rely on underwriters in a traditional IPO to meet the NYSE's requirements to have at least 400 round lot holders and 1.1 million publicly-held shares at the time of listing1, the NYSE proposal would have allowed a 90-day, post-listing grace period to meet this standard, assuming the company met certain aggregate market value standards.
These rules would have resulted in a liberalization of existing NYSE direct listing rules by addressing two significant issues related to direct listings, 1) the ability of companies to raise capital and 2) compliance with initial distribution requirements, which could have increased the appeal of direct listings to a broader range of companies. However, other limitations related to direct listings may continue to make them a company-specific pathway to becoming a public company. For example, without underwriters engaging in book-building and market stabilization activities, potential concerns may remain about the levels of investor interest in company stock at and after listing, whether investors buying shares in direct listings are steady long-term holders, and possible increased trading and price volatility immediately post listing. In addition, while companies undertaking direct listings do not pay underwriter fees, they must still engage those same underwriters to act as financial advisers with substantial fees.
[1] See NYSE Listed Company Manual Rule 102.01A.
