Dechert LLP

[co-author: Nick Quarrie]

Following the high profile direct listings by Spotify in 2018 and Slack in 2019, direct listings have been an area of increased focus in recent years, with both the New York Stock Exchange (NYSE) and Nasdaq seeking rule changes to facilitate their use.

Unlike a traditional initial public offering, a direct listing company is one listed on a U.S. stock exchange without conducting an underwritten offering. Under current rules, issuers cannot raise capital through direct listings, with only secondary sales by selling shareholders permitted and requiring the issuer to have at least 400 round lot holders (i.e., with each holder holding 100 shares of stock) and 1.1 million publicly-held shares at the time of listing. This has generally limited the practical use of direct listings to companies that do not need to raise capital in connection with becoming a public company.

In December 2019, the NYSE filed a revised (and then further amended) rule change proposal with the U.S. Securities Exchange Commission (SEC) seeking to amend the rules on direct listings. The revised proposal followed a previously rejected request made by the NYSE in November 2019. Nasdaq has not yet proposed a rule change to allow primary offerings in connection with a direct listing, but has indicated that such rule changes are under consideration.

The rule change proposed by the NYSE seeks to permit issuers to be able to sell newly-issued primary shares on their own behalf (or, in their discretion, secondary shares) directly in the opening trade (i.e., with no underwritten public offering and with the price determined by the opening trade auction). The NSYE is proposing that a company would qualify for listing in a primary direct listing if:

  • at least U.S.$100 million in market value of shares is sold in the opening auction; or
  • the aggregate market value of freely tradeable publicly-held and new shares in the opening auction totals at least U.S.$250 million.

The NYSE also proposes to delay the distribution requirements for direct listings. Currently, issuers are required to have at least 400 round lot holders and 1.1 million publicly-held shares at the time of listing. This can be difficult to achieve for companies that do not have a broad shareholder base prior to the direct listing. Under the new rules, an issuer conducting a direct listing will have a 90 day grace period to comply with these distribution requirements if (a) in a “primary direct floor listing”, the company sells at least U.S.$250 million in market value of shares in the opening auction or the aggregate market value of freely-tradable, publicly-held shares and new shares in the opening auction totals at least U.S.$350 million; or (b) in a “selling shareholder direct floor listing”, the market value of freely tradable shares at the time of listing is at least U.S.$350 million.

The effect of these proposed rule changes would align the rules for direct listings more closely to traditional initial public offerings.

In an interview with Reuters in January 2020, and without commenting on the SEC review of the NYSE’s revised proposal, SEC Commissioner Rob Jackson commented that he generally welcomed innovations that could help to bring down the fees paid by companies to go public and that “direct listings is the beginning of what [he] hope[s] will be a lot of innovation in the space”. Accordingly, whether or not the SEC approves the proposed rule change, further innovation in the direct listing space and an increased number of direct listings could be seen in the near future.

The NYSE’s rule change proposal follows the approval by the SEC in December 2019 of rule changes proposed by Nasdaq to permit standard direct listings on the Nasdaq Global Market and the Nasdaq Capital Market (rather than just on the Nasdaq Global Select Market), with certain differences to listings on the Nasdaq Global Select Market relating to the price-based initial listing requirement and alternatives to third-party valuation.

The full text of the NYSE’s revised rule change proposal can be found here.