On August 26, 2020 the U.S. Securities and Exchange Commission (“SEC”) approved the New York Stock Exchange’s (“NYSE”) rule proposal that permitted companies to issue shares and raise capital in primary direct listings (“primary direct listings”), as summarized in our blog titled “Direct listings now available for fresh capital raises: Line between traditional IPOs and direct listings now blurring” which you can access here. A similar rule proposal by the Nasdaq Stock Market LLC (“Nasdaq”) soon followed and was approved on May 19, 2021. NYSE and Nasdaq both subsequently proposed rule changes to modify price range limitations in connection with primary direct listings, as described in our blog titled “SEC Delays Decision Regarding NYSE’s Proposed Relaxed Pricing Limits for Primary Direct Listings” which you can access here.
The SEC recently approved the Nasdaq’s proposed rule amendment on December 2, 2022 and NYSE’s proposed rule amendment on December 15, 2022 to allow the opening auction price in primary direct listings to be at or above the price that is as low as 20% below the lowest price in the disclosed price range, or at a price that is as high as 80% above the highest price of the disclosed price range in an issuer’s effective registration statement (the “disclosed range”), subject to the conditions described below. Both of the rules further clarified that the 20% threshold below and the 80% threshold above the disclosed price range will be calculated based on the high end of the price range disclosed in the registration statement at the time of effectiveness.
The rules amend the existing requirement that the opening auction price in primary direct listings be within the disclosed range, which differs from traditional firm commitment underwritten offerings in which the price may, and often does, deviate from the disclosed range. No primary direct listings have been conducted to date on the Nasdaq or NYSE, likely due to the existing pricing limitation, which increases the likelihood that an offering is delayed or cancelled due to weaker or stronger than expected demand. As such, the rule changes may make primary direct listings a viable alternative to traditional IPOs.
Conditions for primary direct listings to deviate from the disclosed range
Number of shares, certifications and disclosure
In order to deviate from the disclosed range in a primary direct listing, the issuer must: (a) specify the quantity of shares registered in its registration statement, (b) certify to Nasdaq or NYSE that it included a sensitivity analysis in its registration statement that explains how the company’s use of proceeds would change if they are greater or less than the assumed amount based on the disclosed range, (c) publicly disclose and certify to Nasdaq or NYSE that the auction price does not materially change the disclosure in its registration statement and (d) confirm that no additional disclosures are required under federal securities laws after the auction price determination. NYSE additionally requires the issuer to publicly disclose and certify that the price range in the preliminary prospectus included in the effective registration statement is a bona fide price range in accordance with Item 501(b)(3) of Regulation S-K.
While direct listings to date have utilized financial advisors and the SEC has noted such advisors may be deemed to be statutory underwriters, the proposed rules require issuers conducting a primary direct listing to retain and name an underwriter. Despite the fact that there remains no underwriting commitment (as in a traditional IPO), the underwriter assumes statutory underwriter liability under the rules.
Availability of pricing information
Both of the rules also include opening procedures for enhancing pricing transparency by providing readily available, real time pricing information to investors in an effort to address concerns that investors could be misled about the opening auction price with relaxed pricing limits. The new rules include requirements to provide pre-opening indications to investors of when price volatility has subsided and price equilibrium has been met.
The Outlook on Primary Direct Listings
Throughout both of the analyses, the SEC reiterated its determination that the amendments are consistent with the Exchange Act, particularly Section 6(b)(5), “which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest…” While it is unclear if the amendments will be the tipping point for companies to utilize primary direct listings as a means for going public, it is a significant step towards making primary direct listings a viable alternative to traditional IPOs.