By Rodney F. Tonkovic, J.D.
The Council of Institutional Investors (CII) has notified the SEC that it will seek a review of an NYSE rule change allowing raising capital through direct listings. The rule change, approved by the SEC on August 26, 2020, allows companies to conduct a primary offering as a direct listing on the stock exchange. CII has five days after the August 31st filing of the notice to file a petition for review, and the SEC has notified the NYSE that the rule changes have been stayed.
NYSE rule. The NYSE rule recognizes a new type of direct listing known as a "primary direct floor listing." The rule change gives companies the option of selling shares to raise capital in the open auction upon listing on the exchange without a firm commitment underwritten offering. The NYSE will exercise discretion on a case-by-case basis to list companies that are listing in connection with a primary direct floor listing, and monetary thresholds analogous to those currently in effect for secondary direct listings will be used. The rule also covers a new order type, and rules governing that order type, to be used in a primary direct listing.
The Commission's Division of Trading and Markets approved the proposal on August 26, 2020, concluding that the rule change does not pose a heightened risk to investors. Among other items, the Commission noted that it believes that the NYSE will take reasonable steps to assure compliance with the securities laws by those choosing the direct listing process. Nasdaq has also filed a proposed rule change that would similarly allow for direct primary listings.
CII comments. CII has criticized the rule change since its inception, commenting in opposition to the first version and again on the second amendment. CII has generally supported direct listings as a more cost-effective option than the IPO process, but has become concerned that shareholder rights under Securities Act Section 11 may be especially vulnerable in the case of direct listing. CII noted in particular that purchasers in a direct listing may not be able to directly trace their shares to a misrepresented registration statement in support of a meritorious claim. In its order, the Commission said tracing shares is an issue that is not exclusive to primary direct listings and that judicial precedent on the topic may evolve—only one court has considered the issue in the direct listing context to date.