On November 26, 2019, the New York Stock Exchange (the “NYSE”) proposed amendments to Rule 102.01B and related rules of its Listed Company Manual (the “Manual”) that would allow companies to conduct primary offerings in connection with direct listings. Under current NYSE rules, companies can pursue what’s called a “Selling Shareholder Direct Floor Listing,” a form of secondary offering that is conducted through the facilities of the exchange, coincident with the initial listing. The current rules permit a secondary offering conducted by selling shareholders pursuant to a resale registration statement under the Securities Act of 1933, as amended (the “Securities Act”), but otherwise preclude the company itself from conducting a traditional initial public offering. The proposed amendments would allow a company to sell shares to raise capital, without a traditional underwritten public offering, in what the NYSE is calling a “Primary Direct Floor Listing.” Under the proposed rules, companies would be allowed to pursue a Primary Direct Floor Listing either in addition to—or in place of—a Selling Shareholder Direct Floor Listing.
In February 2018, the NYSE adopted Rule 102.01B of the Manual to permit Selling Shareholder Direct Floor Listings. As part of these rules, a company is required to file with the Securities and Exchange Commission (the “SEC”) a resale shelf registration statement on Form S-1, Form S-11, or Form F-1, solely for the purpose of allowing existing shareholders to sell their shares. In order to pursue a Selling Shareholder Direct Floor Listing, a company must demonstrate that it has $250 million in market value of publicly-held shares (excluding shares held by affiliates) at the time of listing, based on a combination of (i) an independent third-party valuation of the company and (ii) the most recent trading price for the company’s common stock in a trading system for unregistered securities operated by a national securities exchange or a registered broker-dealer (a “Private Placement Market”). Since these rules were adopted, Spotify Technology SA and Slack Technologies Inc. are two high-profile companies that have pursued direct listings. In connection with its direct listing, for instance, Spotify submitted an independent third-party valuation evidencing a market value of its shares of at least $250 million because its shares had not previously traded on a Private Placement Market for a sustained trading history over several months, despite some history of private resales. In addition, companies pursuing a Selling Shareholder Direct Floor Listing are required to satisfy distribution requirements for listing that mandate companies have at least 400 round lot holders (i.e., holders of 100 shares or more) and 1.1 million publicly held shares at the time of listing (the “Distribution Requirements”).
Proposed Changes to Facilitate Primary Direct Floor Listings
The proposed amendments to Rule 102.01B of the Manual would not specifically require that a company pursuing a Primary Direct Floor Listing demonstrate the minimum market value through a third-party valuation if it sells at least $250 million in the opening auction on the first day of listing. The NYSE explained that this sale would ensure that there will be at least $250 million in public hands after the first trade. However, if a company proposes to sell less than $250 million in market value of shares in the opening auction, it would also qualify for a Primary Direct Floor Listing by demonstrating that the aggregate of the market value of publicly held shares immediately prior to the listing, plus the market value of the shares sold by the company in the opening auction, is at least $250 million.
Proposed Changes to Distribution Requirements for all Floor Listings
The proposed amendments to Rule 101.01B of the Manual would also update the Distribution Requirements for listing in connection with a Primary Direct Floor Listing. The amendments would amend Section 102.01A to establish a more flexible timetable to demonstrate compliance with the Distribution Requirements for companies pursuing a Primary Direct Floor Listing through the sale of at least $250 million in market value of shares in the opening auction. In such cases, the company would have to demonstrate compliance with the Distribution Requirements within 90 trading days of the listing date (the “Distribution Standard Compliance Period”). If a company fails to satisfy the Distribution Requirements by the end of the Distribution Standard Compliance Period, the company would be deemed to be below compliance and given up to six months from that date to enact a compliance plan to achieve compliance. Any failure to be in compliance by the end date specified in its compliance plan would subject the company to immediate suspension and delisting from the NYSE.
The NYSE also proposes to provide a more flexible timetable to demonstrate compliance with the Distribution Requirements to companies pursuing a Selling Shareholder Direct Floor Listing or a Primary Direct Floor Listing in certain other circumstances as well. A company pursuing a Selling Shareholder Direct Floor Listing that demonstrates $350 million in market value of publicly held shares (compared to the $250 million that is generally required) would also have 90 trading days from listing to meet the Distribution Requirements. Similarly, a company pursuing a Primary Direct Floor Listing that demonstrates that the aggregate market value of publicly held shares immediately prior to the listing, plus the market value of shares sold by the company in the opening action, is at least $350 million would also have 90 trading days from listing to meet the Distribution Requirements. Similar to the treatment of companies pursuing a Primary Direct Floor Listing with $250 million of open auction sales, failure to meet the Distribution Requirements by the end of the Distribution Standard Compliance Period will result in a requirement to enact a compliance plan. Under such compliance plan, a company will have up to six months to achieve compliance or risk immediate suspension and delisting from the NYSE if the Distribution Requirements are not subsequently met in that time frame.
To date, direct listings have been the subject of great interest as a means of going public without the traditional IPO process. However, given the absence of many of the market-making and liquidity benefits afforded by a traditional, underwritten IPO process, the direct listing rules enacted by both the NYSE and the NASDAQ have been relevant only for larger companies. The proposed amendments continue to benefit larger companies that have significant scale, size, and substantial private market capitalizations, and should be seen as expanding the options available to those companies and not as expanding the universe of companies who could pursue direct listings. In our recent Going Public: U.S. IPO Report, for instance, we noted that more than 65% of U.S. IPOs in the first half of 2019 involved base deals of less than $300 million. Almost all of these issuers would not be able to pursue a direct listing of any kind in light of the $250 million market value standard that’s applicable in either the Selling Shareholder Direct Floor Listing or the Primary Direct Floor Listing. As a result, while a direct listing may be an appropriate avenue for some companies to pursue, many companies wishing to go public will still find the traditional, underwritten IPO a more viable path.
If the SEC approves the proposed amendments, the rules change is not expected to take effect until at least 45 days after its publication in the Federal Register.
If you have any questions concerning these developing issues, please do not hesitate to contact any of the Paul Hastings lawyers in our Securities and Capital Markets Practice Group.