On December 22, 2020, the U.S. Securities and Exchange Commission (SEC) approved the proposed rule change filed by the New York Stock Exchange (NYSE) allowing companies to sell new shares and raise capital in direct listings.
This approval comes several months after the SEC's initial approval of the rule change, which was stayed following the submission of a notice of intention to petition for review by the Council of Institutional Investors (CII). Following a de novo review of the proposed rule change, as well as review of the briefs, motions, and statements submitted, the SEC issued a finding that the NYSE proposed rule change is consistent with the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, and approved the proposed rule change. This approval opens the door to another pathway for companies to offer and sell their shares in the public markets.
The following provides a high-level summary of some of the key highlights of the new rules, which were discussed in greater detail in our previous alert.
- Primary Direct Floor Listing. Under the new rules, the NYSE Listed Company Manual allows for a "primary direct floor listing" whereby a company may list its common equity securities on the NYSE at the time of effectiveness of a registration statement pursuant to which either 1) the company will sell new shares in the opening auction on the first day of trading or 2) the company and selling shareholders will sell shares in the opening auction on the first day of trading.
- Market Value of Publicly Held Shares Listing Requirement. In order to list shares on the NYSE in a traditional underwritten initial public offering, a company must have an aggregate market value of publicly held shares of at least $40 million. For a primary direct floor listing, a company will be deemed to have satisfied the market value of publicly held shares initial listing requirement if it sells at least $100 million in market value of shares in the opening auction on the first day of trading. In the alternative, if the company sells less than $100 million in the opening auction, then the company will be deemed to have satisfied this initial listing requirement if 1) the aggregate market value of the shares the company will sell in the opening auction on the first day of trading and 2) the shares that are publicly held immediately prior to the listing is at least $250 million, with the market value calculated using a price per share equal to the lowest price in the price range set forth in the applicable registration statement.
Of note, companies seeking to list shares on the NYSE in connection with a direct listing (whether a primary direct floor listing or a selling shareholder direct floor listing) will continue to be subject to all other applicable initial listing requirements, including, for example, the requirements to have at least 400 round-lot shareholders and 1.1 million publicly held shares outstanding at the time of the initial listing.
- Auction Procedures. Under the new rules, the NYSE added a new limit order, referred to as an Issuer Direct Offering Order (IDO Order), applicable solely to auctions for primary direct floor listings. Among other things, the IDO Order will have a limit price equal to the lowest price in the price range set forth on the applicable registration statement, and cover the number of shares offered by the company as set forth in the prospectus in the applicable registration statement. In addition, a designated market maker (DMM) will be required to effectuate the auction for primary direct floor listings manually, and will be responsible for determining the auction price. The DMM will not be permitted to conduct the auction if the auction price is outside of the price range in the company's effective registration statement or if there is insufficient interest to satisfy both the IDO Order and all better-priced sell orders in full. Under the new rules, the services provided by the company's financial advisor and the DMM assigned to the listing will be required to be provided in a manner that is consistent with all federal securities laws, including Regulation M and other anti-manipulation requirements. In order to monitor compliance with Regulation M and other anti-manipulation provisions of the federal securities laws, the NYSE has retained the Financial Industry Regulatory Authority (FINRA) pursuant to a regulatory services agreement.
What to Do Now?
The new rules are effective immediately, and provide yet another avenue for companies to offer and sell their shares in the public markets. While the number of companies able to undertake a direct listing may remain limited due to, among other things, the NYSE's initial listing requirements (including the requirement that companies must have at least 400 round-lot holders), the ability for companies to raise capital in primary direct listings will likely result in more companies considering this pathway to going public.
Following the SEC's approval of the NYSE rule change, Nasdaq submitted a substantially similar proposed rule change relating to primary direct listings, and is seeking immediate effectiveness. This latest submission differs from Nasdaq's previous proposed rule change, which remains under review by the SEC, and is discussed in further detail in our previous alert. We will continue to monitor developments on Nasdaq's proposed rule changes relating to primary direct listings.