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Another Brick Out of the Wall: NYSE and the SEC Open the Door for Companies to Raise Capital through Direct Listings

August 28, 2020

On August 26, 2020, the SEC approved the NYSE’s primary direct listing proposal, which enables capital raising by the issuer in connection with a direct listing (a “Primary Direct Listing”). Before this determination, only existing stockholders (i.e., employees or private investors) were able to sell stock in a direct listing (a “Selling Stockholder Direct Listing”). This action adds another avenue for issuers to raise capital in the public markets. Some key notes:

CAPITAL CAN BE RAISED

  • The new shares that the issuer can sell would be sold in the opening auction on the first day of trading on the NYSE.
    • 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.
    • As noted in our November 29, 2019 primer on direct listings, financial advisors will still play a critical role. The SEC even noted that a financial advisor to an issuer engaged in a Primary Direct Listing “may, depending on the nature and extent of the financial advisor’s activities and on the facts and circumstance, be deemed a statutory ‘underwriter.’”

PRICING AND SIZING

  • Registration statements in the Primary Direct Listing will have to include a price range within which the issuer anticipates selling its shares. This contrasts with Selling Stockholder Direct Listings in which a range is not required.
  • The opening auction price must be within the disclosed price range.
    • In a traditional IPO, subject to meeting certain requirements, an issuer could price its IPO below the bottom end of 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.

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 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.

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.

OPTIONALITY

  • The ability to undertake a Primary Direct Listing is meant to be a supplement, not a replacement, to Selling Stockholder Direct Listings. 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, (b) a traditional IPO or (c) a SPAC.
    • Any issuer listing in connection with a Primary Direct Listing or Selling Stockholder Direct Listing will continue to be subject to and need to meet all other applicable initial listing requirements.

NASDAQ

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


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 Lazarow, an O’Melveny partner licensed to practice law in California and New York, and Jeeho Lee, an O’Melveny partner licensed to practice law in California and 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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