SEC approves NYSE proposal on direct listings

The SEC approves NYSE rule changes allowing companies to raise capital by issuing new shares through a primary direct listing as an alternative to the traditional initial public offering (IPO) path for going public.

Applicability

SEC Release No. 34 -90768

• Entities considering an IPO

Relevant dates

• Effective immediately

Key impacts

The SEC’s approval of the NYSE proposed rule change allows companies that have not previously registered common equity securities under the Exchange Act to list them on the NYSE in a primary direct listing upon the effectiveness of an initial registration statement.

Unlike traditional IPOs, direct listings provide companies the opportunity to list shares without the involvement or the ‘firm commitment’ of an underwriter.

In a direct listing, companies sell shares in an opening auction on the first date of trading on the NYSE, in addition to, or instead of, the sale of selling shareholders. Pricing is determined based on matching buy and sell orders and is conducted in accordance with applicable listing rules.

The NYSE listing requirements for direct listings include, but are not limited to:

• Selling shares in the opening auction with a value of at least $100 million, or having at least $250 million of publicly held shares when combining the new shares sold in the opening auction and existing shares publicly held prior to the listing;
• Having 400 round lot shareholders and 1.1 million publicly held shares outstanding at the time of the initial listing; and
• Using an Issuer Direct Offering Order (IDO Order) to participate in the opening auction.

Companies conducting a direct listing with a capital raise could potentially save on underwriting fees, thereby making it an attractive alternative to the traditional IPO.

Despite the lure of potential cost savings, the SEC remarked that it does not anticipate all companies eligible to go public through a primary direct listing will do so. The SEC provided instances when direct listings may not be suitable; for example:

• Issuers may require the assistance of underwriters to develop a broad investor base sufficient to support a liquid trading market.
• Issuers may believe a traditional firm commitment IPO is preferable given the benefits of brand recognition that can result from roadshows and other marketing efforts provided by an underwriter.

The SEC concluded that the proposed rule change will facilitate the orderly distribution and trading of shares, foster competition, and protect investors and the public interest.