Another Brick Out of the Wall: NYSE Opens the Door for Companies to Raise Capital Through Direct Listings

Note: Please see our December 9 update, SEC Rejects NYSE’s Proposed Direct Listing Rules, Precluding Capital Raises Through Direct Listing For Now.

On November 26, 2019, the NYSE filed proposed rule changes to allow companies to raise capital through a direct listing (a “Primary Direct Listing”). As previously noted in our Direct Listing Primer, issued on November 6, 2019, the current direct listing rules do not allow a company to sell any securities for its own account in connection with a direct listing.

In this edition of Momentum Minutes, our team supplements our Direct Listing Primer by taking a deep dive into Primary Direct Listings.

The Key Characteristics of the Proposed NYSE Primary Direct Listing

CAPITAL CAN BE RAISED

• A company, itself, could sell newly issued shares in the opening auction on the first day of trading on the stock exchange.¹
  • As noted in our Direct Listing Primer, the current direct listing rules only allow for companies to register the resale of securities sold in earlier private placements on behalf of existing stockholders (i.e., employees and/or investors) (a “Selling Stockholder Direct Listing”).
• Capital raised by the sale of newly issued shares will dilute existing stockholders.

NO UNDERWRITTEN COMPONENT

Even though capital will be raised, the fundraising will not entail an organized selling effort by investment banks.

AGGREGATE MARKET VALUE ANALYSIS

• In a Primary Direct Listing, a company will be able to meet the NYSE requirement for shares held by non-affiliates having a minimum aggregate value if:
  • The company sells at least $250M in market value of shares in the opening auction on the first day of trading on the NYSE, or
  • The aggregate market value of the shares sold by the company in the opening auction and the market value of shares held by non-affiliates immediately prior to the time of listing² is at least $350M.
• As noted in our Direct Listing Primer, the stock exchanges want to ensure that companies have sufficient public float in order to support healthy trading.

THE DYNAMICS OF “INVESTOR DAY” / DIRECT LISTING ROADSHOWS WILL LIKELY CHANGE

While the investment banks will continue to not book-build during a Primary Direct Listing roadshow, given the desire to raise funds in connection with a Primary Direct Listing, a company’s approach to direct listing roadshows may evolve.

THESE RULES ARE MEANT TO BE A SUPPLEMENT, NOT A REPLACEMENT, TO THE SELLING STOCKHOLDER DIRECT LISTING RULES

As a result, when deciding whether to become a public company, a company can choose (a) either or both the Primary Direct or Selling Stockholder Direct Listing options, or (b) a traditional IPO.

Additional Amendment to NYSE Listing Rules to Better Facilitate Direct Listings — Delay of Requirement to Have 400 Stockholders Before Listing

• The NYSE currently requires a company to demonstrate that it will have at least 400 “round lot”³ stockholders before listing. The NYSE proposes to allow a grace period of 90 days from the date of listing to comply with this requirement in connection with a Primary Direct Listing or a Selling Stockholder Direct Listing, if ¹:
  • In the Primary Direct Listing, the company sells at least $250M in market value of shares in the opening auction on the first day of trading on the NYSE, or
  • In the Primary Direct Listing, the aggregate market value of the shares sold by the company in the opening auction and market value of shares held by non-affiliates immediately prior to the time of listing² is at least $350M.

If you have any questions regarding the proposed Primary Direct Listing or a Selling Stockholder Direct Listing, please contact Dave Johnson, Warren Lazarow, or Jeeho Lee, or another Momentum team member.

¹ The NYSE proposed rule change is subject to approval by the SEC. Nasdaq is reported to be considering making a similar proposed rule change.

² This pre-listing market value can be calculated as described under “Both the NYSE and Nasdaq have specific rules regarding public float and the determination of the opening pricing that will typically apply to direct listings” in our Direct Listing Primer.

³ A “round lot” holder is a holder of 100 shares or more. Nasdaq requires at least 450 round lot holders.