Wednesday, May 26, 2021

Nasdaq to compete with NYSE for direct primary listings

By Mark S. Nelson, J.D.

The SEC’s Division of Trading and Markets, pursuant to delegated authority from the Commission, recently approved a proposal submitted by The Nasdaq Stock Market LLC to permit the exchange to allow companies to conduct primary direct listings. Nasdaq is the second major exchange to obtain such approval within the last six months following New York Stock Exchange LLC’s similar approval in December 2020. Although both Nasdaq’s and NYSE’s rulebooks for direct primary offerings are similar in many respects, they do contain some differences, especially regarding the order type required for direct primary listings (Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order Approving a Proposed Rule Change, as Modified by Amendment No. 2, to Allow Companies to List in Connection with a Direct Listing with a Primary Offering In Which the Company Will Sell Shares Itself In the Opening Auction on the First Day of Trading on Nasdaq and to Explain How the Opening Transaction for Such a Listing Will be Effected, Release No. 34-91947, May 19, 2021).

Rationale. Both Nasdaq and NYSE will now compete for a still comparatively small number of direct primary listings to be conducted by companies seeking to go public without the use of a traditional underwriter. The rationales for a nontraditional IPO can range from cost savings to reaching a company’s investors more directly. Moreover, one thing both Nasdaq and NYSE have in common is that the initial listing amounts required for direct primary offerings will be significantly higher than the $45 million (Nasdaq) and $40 million (NYSE) would demand for traditional IPOs.

Following the December 2020 NYSE approval, Commissioner Elad Roisman stated his support for the new IPO method while also reminding the public that many of the same investment banks that would be involved in traditional IPOs will be involved in direct primary listings. With respect to the new auction process regarding price discovery, Roisman had this to say: "While this represents a different price discovery method compared to traditional IPOs, the proposed auction mechanism is designed to provide fair and efficient pricing for participating investors. Utilizing such an auction may have the additional benefit of increasing opportunities for investors to purchase shares at the initial offering price, rather than having to wait to buy in the aftermarket."

However, Commissioners Allison Herren Lee and Caroline Crenshaw jointly expressed concerns about how the NYSE proposal would evolve the IPO process away from traditional, firm-commitment underwritten IPOs. Lee and Crenshaw said traditional IPOs are designed to hold underwriters accountable by imposing strict liability under the Securities Act if underwriters violate securities laws but that financial advisers to direct primary listings might seek to define their participation in such offerings to avoid underwriter status. The commissioners also worried that shareholders may be unable to sue companies in direct primary offerings if their shares are not traceable.

The traceability issue noted by Lee and Crenshaw, however, may find a resolution in the Ninth Circuit, where a pending appeal seeks review of a district court’s opinion that took an expansive view of traceability in the direct listing context.

Nasdaq and NYSE compared. Direct primary listings to be conducted via Nasdaq and NYSE will follow rules that are largely the same or similar. However, some key differences exist, such as for the different order types that will be used by the two exchanges. The following discussion compares several of the major features contained in the Nasdaq and NYSE direct primary listings proposals that won SEC approval:
  • Initial listing amount—Nasdaq: The Market Value of Unrestricted Publicly Held Shares requirement for initial listing on the Nasdaq Global Select Market is $110 million (or $100 million, if the company has stockholders’ equity of at least $110 million). This requirement is significantly more than the $45 million required by Nasdaq for a traditional, underwritten IPO. NYSE: In a Primary Direct Floor Listing, as distinguished from a Selling Shareholder Direct Floor Listing, the applicable aggregate market value of publicly-held shares requirement would be met if the company will sell at least $100 million in market value of the shares in the Exchange’s opening auction on the first day of trading (as an alternative, when less than $100 million is involved, NYSE could determine the requirement has been met if the aggregate market value of the shares the company 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). By comparison, NYSE would require $40 million in a traditional, underwritten IPO.
  • Publicly-held shares—Nasdaq: Unrestricted Publicly Held Shares outstanding at the time of initial listing must be at least 1,250,000. NYSE: The rules include that there be 400 round lot shareholders and 1.1 million publicly-held shares outstanding at the time of an initial listing.
  • Price per share at time of initial listing—Nasdaq: $4.00 or more. NYSE: $4.00 or more.
  • Order types—Nasdaq: The "Company Direct Listing (CDL) Order" is a market order that executes in full at the price determined by the Nasdaq Halt Cross and all orders priced better than the Nasdaq Halt Cross must be satisfied (emphasis added). NYSE: The "Issuer Direct Offering (IDO) Order" is a limit order that has the following additional 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 in its effective registration statement; (3) the IDO Order must be for the quantity of shares offered by the issuer and disclosed in the prospectus to an 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 Direct Listing Auction (emphasis added).
  • Financial advisers—Nasdaq: In lieu of a traditional underwriter, an issuer’s financial advisor must act consistent with federal securities laws, such as Regulation M, and other antimanipulation requirements. NYSE: A financial advisor to a Primary Direct Floor Listing must provide services in a manner that is consistent with federal securities laws, including Regulation M, and any antimanipulation requirements.
  • Insider transactions—Nasdaq: Officers, directors, or owners of more than 10 percent of the company’s common stock may purchase shares sold by the company in the opening auction, and purchase shares sold by other shareholders or sell their own shares in the opening auction and in trading after the opening auction not inconsistent with antimanipulation provisions, Regulation M, and applicable securities laws. NYSE: Likewise, insiders may purchase shares sold by the company in the opening auction, and purchase shares sold by other shareholders or sell their own shares in the opening auction and in trading after the opening auction, not inconsistent with antimanipulation provisions, Regulation M, and other applicable securities laws.
The release is No. 34-91947.