Through the Looking Glass: What Does 2022 Hold for Direct Listings?

Against the backdrop of a record-breaking year for IPOs (with 1,000 deals for the first time, more than half of which were SPAC IPOs) direct listings continued to quietly gain momentum. Six companies, including Coinbase and Warby Parker, went public by direct listing in 2021, double the number from 2020. One trend to watch in 2022 is whether direct listings will gain further traction, in particular following recent NYSE and Nasdaq rule changes that have been approved by the SEC permitting companies to raise capital—and not merely go public—through a direct listing (a “Primary Direct Listing”).

The Primary Direct Listing rules for the NYSE and Nasdaq Global Select Markets are substantially the same, providing that:

• New shares that the issuer can sell will be sold in the opening auction on the first day of trading.
• Even though capital will be raised, the fundraising will not entail an organized selling effort by investment banks.
• Registration statements must include a price range within which the issuer anticipates selling its shares. The opening auction price must be within the disclosed price range.
• Issuers will be required to submit an order for opening day trading specifying the number of shares offered by the issuer and such order would not be able to be cancelled or modified.

The main difference between the NYSE and Nasdaq rules relate to the determination of aggregate market value for a Primary Direct Listing:

• For the NYSE, a company will be able to meet the requirement for shares held by non-affiliates having a minimum aggregate value if:
• the issuer will sell at least $100M in market value of shares in the opening auction on the first day of trading on the NYSE; or
• if the aggregate market value of the shares the issuer will sell in the opening auction and the shares that are publicly held immediately prior to the listing is at least $250M, with such market value calculated using a price per share equal to the lowest price of the price range in the registration statement.

• For Nasdaq, a company will be able to meet the requirement for shares held by non-affiliates having a minimum aggregate value if:
• the aggregate market value of the shares the issuer will sell in the opening auction and the shares that are publicly held immediately prior to the listing is at least $110M (or $100M, if the issuer has stockholders’ equity of at least $110M), with such market value calculated using a price per share equal to the lowest price of the price range in the registration statement.

As noted in our primer on direct listings, there are various advantages and considerations for companies considering whether to become public by a direct listing (whether through a Primary Direct or a Selling Stockholder Direct Listing option). However, the greater options afforded by the changes to the NYSE and Nasdaq rules, combined with an on-average stronger performance for direct listing companies compared to benchmarks like the S&P 500, will continue to make direct listings a worthy alternative to traditional IPOs.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. David J. Johnson Jr., an O’Melveny partner licensed to practice law in California, the District of Columbia, Hong Kong, and New York, Warren T. Lazarow, an O’Melveny partner licensed to practice law in California and New York, Jeeho Lee, an O’Melveny partner licensed to practice law in California and New York, and Tai Vivatvaraphol, an O’Melveny counsel licensed to practice law in New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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