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SEC Approves NYSE Rule Allowing Primary Issuances In Direct Listings

January 4, 2021, Covington Alert

On December 22, 2020, the SEC approved a rule change by the New York Stock Exchange (the “NYSE”) to allow issuers to offer and sell newly issued shares through the direct listing process (a “Primary Direct Floor Listing”). The NYSE historically has allowed direct listings only when issuers list securities on the NYSE in tandem with an offering of outstanding shares by selling shareholders. However, prior to this rule, a company listing on the NYSE was not permitted to make a primary issuance of securities through a direct listing unless it conducted an initial public offering (“IPO”). The rule change is immediately effective.

Key Provisions of the Rule

In order to list and sell on the NYSE, a new listed issuer must establish that it will have at least $100 million aggregate market value of publicly-held shares after the listing. For a Primary Direct Floor Listing, an issuer will meet this requirement if (i) it will sell at least $100 million in market value of the shares in the NYSE’s opening auction on the first day of trading; or (ii) the aggregate market value of the shares the issuer will sell in the opening auction on the first day of trading and the shares that are publicly held immediately prior to the listing is at least $250 million. The market value for the latter method is calculated using a price per share equal to the lowest price of the price range established by the issuer in its registration statement filed under the Securities Act of 1933 (the “Securities Act”) with respect to the offering. The NYSE believes these requirements will ensure an issuer’s securities have sufficient liquidity to be suitable for auction market trading. An issuer listing in connection with a Primary Direct Floor Listing must also meet all other applicable initial listing requirements set by the NYSE, including having (i) at least 400 round lot shareholders; (ii) at least 1.1 million publicly-held shares outstanding; and (iii) a price of at least $4.00 per share at the time of initial listing.

To conduct a Primary Direct Floor Listing, the issuer must establish a price range for the sale and disclose such price range in the registration statement for the offering. Additionally, the Primary Direct Floor Listing has a new order type to be used by the issuer (the “Issuer Direct Offering Order” or “IDO Order”). The IDO Order must meet the following requirements:

  1. only one IDO Order may be entered on behalf of the issuer and only by one member organization;
  2. the limit price of the IDO Order must be equal to the lowest price of the price range established by the issuer;
  3. the IDO Order must be for the quantity of shares offered by the issuer, as disclosed in the prospectus in the effective registration statement;
  4. the IDO Order may not be cancelled or modified; and
  5. the IDO Order must be executed in full in the auction.

The designated market maker will not conduct the auction if (i) the auction price would be below the lowest or above the highest price of the price range established by the issuer, or (ii) there is insufficient buy interest to satisfy both the IDO Order and all better-priced sell orders in full.

Supporters of the new rule note the benefit of giving new issuers a choice over how to go public to match their objectives, and believe that allowing additional pathways for private companies to list on the NYSE will encourage more companies to participate in the public markets. The SEC determined that the NYSE met the burden of proving the rule complies with the applicable standard for the SEC’s review of the NYSE’s rules under the Securities Exchange Act of 1934, stating that the rule adequately protects investors without the use of underwriters by requiring a higher minimum market value than IPOs and setting strict boundaries on the auction process including the price range and the IDO Order that cannot be modified or cancelled.

Two SEC commissioners criticized the new rule for allowing offerings without underwriters in light of their role as gatekeepers to the primary capital raising process and also noted potential challenges tracing shares sold by the issuer and selling shareholders in the same offering for purposes of potential liability regarding disclosure deficiencies in the registration statement. The SEC’s release addressed these points, stating that investors will be adequately protected by the involvement of financial advisors and the requirement that Primary Direct Floor Listings be registered under the Securities Act, which will provide transparency about the company’s operations and financial results and legal remedies to recover damages for false and misleading statements. Additionally, the SEC noted that tracing challenges are not unique to nor inherent in direct offerings, and the doctrine of traceability is judicially created and not a Securities Act requirement.

In our view, aside from unicorn companies with ample existing institutional investor relationships, we believe that most companies seeking to conduct a primary securities issuance as part of the listing process will continue to require the assistance of investment banks and their existing networks of connections to the investing community.

Similar Nasdaq Direct Listing Proposal is Pending

Nasdaq submitted a proposal to allow primary direct listings to the SEC in September 2020, which it updated on December 17, 2020. On December 22, 2020, Nasdaq submitted a new proposal that is substantially similar to NYSE’s rule and requested immediate effectiveness of the proposal. The following day, the SEC Staff released a statement that it is working expeditiously to consider Nasdaq’s proposal.

If you have any questions concerning the material discussed in this client alert, please contact the following members of our Securities and Capital Markets practice.

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