As discussed in Gibson Dunn's Current Guide to Direct Listings, the New York Stock Exchange (NYSE) recently amended its rules to permit a primary offering in connection with a direct listing. The Nasdaq Stock Market LLC (Nasdaq) also had proposed rules permitting primary offerings in connection with a direct listing.[1] On February 24, 2021, in the course of the SEC's review, Nasdaq amended its original proposal to bring its rules more in line with those adopted by the NYSE and approved by the SEC - clearing up some confusion caused by the original proposal.[2]
The NYSE requires that all shares to be offered in a direct listing with a primary capital raise be sold within the price range specified in the applicable registration statement. Nasdaq's original proposal had required that all shares be sold at a price that exceeds the price that is equal to 20% below the lowest price specified in the applicable registration statement (Initial Proposed Minimum Offering Price). In addition, Nasdaq had proposed to calculate the value of a listing company's shares for purposes of the minimum value requirement using the Initial Proposed Minimum Offering Price. In December 2020, the SEC issued a notice to Nasdaq[3] that criticized the original proposal for its use of the Initial Proposed Minimum Offering Price for valuation purposes and inconsistency in the proposed rules that would allow a direct listing with a primary offering to be conducted if the “expected" offering price was up to $0.50 less than the Initial Proposed Minimum Offering Price. In addition, the SEC criticized Nasdaq's original proposal for not establishing a maximum price at which the shares may be sold in a primary direct listing. The absence of a maximum price had caused confusion among market participants because of the conflict with the SEC's rule that the full amount of all securities being offered must be covered by the applicable registration statement.
Nasdaq's amended proposal is largely consistent with the NYSE's approved rules. Nasdaq's amended proposal (1) requires that all shares to be offered in a primary direct listing be sold within the price range specified in the applicable registration statement, and (2) calculates the value of the listing company's shares based on the minimum price set forth in the price range within the registration statement. Nasdaq's amended proposal also requires that the offering price in the primary offering remain below the highest price set forth in the registration statement's price range. The amended proposal remains subject to review and approval by the SEC before becoming effective.
Any company considering a direct listing is encouraged to carefully consider the risks and benefits in consultation with counsel and financial advisors. Members of the Gibson Dunn Capital Markets team are available to discuss strategy and considerations as the rules and practice concerning direct listings evolve. Gibson Dunn will also continue to update its Current Guide To Direct Listings (available here) from time to time to further describe the applicable rules and provide commentary as practices evolve.
[1] Nasdaq's initial proposal, submitted on September 15, 2020, is available at the following link: https://www.sec.gov/rules/sro/nasdaq/2020/34-89878.pdf.
[2] Nasdaq's revised proposal, submitted on February 24, 2021, is available at the following link: https://www.sec.gov/rules/sro/nasdaq/2021/34-91205.pdf.
[3] The SEC's Notice Instituting Proceedings is available at the following link: https://www.sec.gov/rules/sro/nasdaq/2020/34-90717.pdf.
Thank you to capital markets associate Evan Shepherd for his contribution to this post.