NYSE Proposal for Primary Direct Listings

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner.

In late November, the NYSE filed with the SEC a proposed rule change that would have allowed companies going public to raise capital through a primary direct listing. Under current NYSE rules, only secondary sales are permitted in a direct listing. As a result, thus far, companies that have embarked on direct listings have been more of the unicorn variety, where the company was not necessarily in need of additional capital. The new proposal looked like it could be a game changer for the traditional underwritten IPO. (See this PubCo post.) But then, as reported by CNBC and Reuters, a little over a week later, the SEC rejected the NYSE’s proposal, and it was removed from the NYSE website, causing a lot of speculation about the nature of the SEC’s objection and whether the proposal could be resurrected. At the time, an NYSE spokesperson confirmed to CNBC that the proposal had been rejected, but said that the NYSE remained “‘committed to evolving the direct listing product…This sort of action is not unusual in the filing process and we will continue to work with the SEC on this initiative.’” (See this PubCo post.) Apparently, the NYSE meant what it said: the proposal was just refiled with some clarifications and corrections, and then, on Friday afternoon, the NYSE filed an amendment to the refiled proposal, which supersedes the earlier filing in its entirety. So now we’re back at the starting gate.

Essentially, a “direct listing” involves a registered sale, currently permitted only by selling shareholders, directly into the public market with no intermediary underwriter, no underwriting commissions (just advisory fees) and no roadshow or similar expenses. What’s more, with direct listings, companies may be on their own when it comes to any marketing effort, otherwise typically provided by the bankers, and there may be only limited banker support of the stock price in the aftermarket. Of course, under the current structure, there are also no proceeds to the company, which has put a definite crimp in the potential popularity of direct listings, as only companies that do not need to raise capital for their own use are likely to opt for that alternative.

But, since the splashy market debuts of two companies via direct listings, there has been a vociferous call from many VCs and others for alternative on-ramps to public-company status, such as direct listings. Those that favor direct listings complain about the cost and rigidity of the underwriting commission structure. And insiders are often especially pleased with direct listings because, ­unlike with underwritten IPOs, there is no “lockup period,” and shareholders are free to sell their shares right away.

Whether or not the availability of primary direct listings completely upends the conventional underwritten route, many believe that the alternative process may encourage more companies to consider going public. Reuters cites an NYSE executive for that proposition: “Will this displace the traditional IPO? No, but is it another pathway we are providing companies to come to the public markets and to have investors participate and (have) growth opportunities? Yes.”

To that end, the NYSE proposal would amend Section 102.01B of the Listed Company Manual to permit a “Primary Direct Floor Listing,” which would “allow a company to sell shares on its own behalf in connection with its initial listing upon effectiveness of a registration statement, without a traditional underwritten public offering.” The company would sell its common shares in the opening auction on the first day of trading on the NYSE. The company could limit its offering to primary shares or, in its discretion, also include secondary shares.

Under Section 102.01B of NYSE Listed Company Manual, for secondary direct listings, the listing standards require the company to demonstrate an aggregate market value of publicly held shares of at least $100 million. The company can satisfy that listing requirement in either of two ways: first, it can meet the $100 million requirement based on the lower of (i) an independent third-party valuation of the company or (ii) the most recent trading price for the company’s common stock in a private placement market; or second, in the absence of any recent trading in a private placement market, it can satisfy the market value of publicly held shares requirement by providing a valuation evidencing a market value of publicly held shares of at least $250 million.

For primary direct listings, the NYSE is proposing that a company would qualify for listing by:

  • “selling at least $100 million in market value of shares in the opening auction”; or
  • “if the aggregate of the market value of publicly-held shares immediately prior to listing together with the market value of shares sold by the company in the opening auction totals at least $250 million.”

The amendment was filed to make clear that a company conducting a primary direct listing can still qualify even if it sells shares in the opening auction with a market value of less than $100 million so long as the aggregate of the market value of publicly held shares immediately prior to listing together with the market value of shares sold by the company in the opening auction is at least $250 million. The proposal would also modify the distribution requirements in Section 102.01A of the Manual for listing in connection with both primary and secondary direct listings. Currently, a company is required to have at least 400 round lot holders and 1.1 million publicly held shares at the time of listing, which can be a challenge for a private company in a direct listing. Under the proposal, so long as the company sells at least $250 million in market value of shares in the opening auction on the initial listing date, it may commence trading and will have a 90-trading-day grace period to demonstrate compliance with the distribution requirements. The proposal would extend the same grace period for a secondary direct listing that demonstrates at least $350 million in market value of publicly held shares, and for a primary direct listing in which the company sells less than $250 million of its shares in the opening auction but the aggregate of the market value of its publicly held shares immediately prior to listing together with the market value of shares sold by the company in the opening auction is at least $350 million. Any company that failed to meet the distribution standards within the grace period would not be compliant and would need to submit a compliance plan. Failure to meet the distributions standards by the end of six months would subject the company to suspension and delisting.

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