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E-MailPamela Marcogliese is partner, Taryn Zucker is counsel, and Lauren Lee is an associate at Freshfields Bruckhaus Deringer LLP. This post is based on their Freshfields memorandum.
On December 22, 2020, the U.S. Securities and Exchange Commission (“SEC”) approved the New York Stock Exchange’s (“NYSE”) rule proposal that fundamentally changed the structure of direct listings by permitting companies to issue shares and raise capital in primary direct listings conducted on the NYSE (“primary direct listings”). [1] Despite this rule change, to date, no companies have conducted a primary direct listing, seemingly due to the pricing limitations that apply. Namely, unlike in a traditional firm commitment underwritten IPO, in primary direct listings, the auction price must be within the price range included in the issuer’s effective registration statement, without the ability to deviate from that the price range that exists in typical underwritten IPOs.
The NYSE noted the challenge of this pricing limitation in its proposed rule change submission to the SEC described below. In the submission, the NYSE noted that the price range limitation applicable to primary direct listings increases the likelihood that an offering is delayed or cancelled, not only in circumstances in which an offering cannot be completed due to lack of investor interest, but also “because it contemplates there being too much investor interest. In other words, if investor interest is greater than the company and its advisors anticipated, an offering would need to be delayed or cancelled.”
The NYSE Proposal
On April 7, 2022, the NYSE proposed a rule to modify pricing limits for securities listed on the NYSE in connection with primary direct listings. The proposed rule would allow designated market makers to facilitate a primary direct listing if the auction price is not less than 20% below the lower price provided in the range established by the issuer in its effective registration statement, or above the highest price provided in the range, provided that, in all such cases, certain other conditions are met (e.g., the issuer has disclosed and certified to the NYSE that the auction price outside the price range would not materially change the disclosure in the issuer’s effective registration statement, the price range in the preliminary prospectus is a bona fide price range in accordance with Item 501(b)(3) of Regulation S-K, the issuer has included a sensitivity analysis, the issuer has confirmed that there are no additional disclosures required under federal securities laws after the determination of the auction price).
Given that traditional underwritten IPOs often price above or below the ranges included in preliminary prospectuses, if passed, the amendment may encourage companies looking to raise capital to explore the possibility of a primary direct listing.
The SEC Response
The SEC issued an order on July 18, 2022, to further analyze and solicit additional comments regarding the NYSE’s proposed rule. In particular, the SEC focused on whether the proposed rule is consistent with the Exchange Act and, in particular Section 6(b)(5) of the Exchange Act, “which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest” In the order, the SEC went on to note that it has “consistently recognized the importance of national securities exchange listing standards” which, among other things, “help ensure that exchange-listed companies will have sufficient public float, investor base, and trading interest to provide the depth and liquidity necessary to promote fair and orderly markets.” The SEC focused on the gatekeeping role of various market participants and the importance of this function for the protection of investors.
The SEC requested written comments and possible requests for oral presentations by August 12, 2022; rebuttals are due by August 26, 2022. It remains to be seen whether the SEC will approve the NYSE’s proposed rule and, if it does, whether it will seek to impose additional changes to primary direct offerings, or direct offerings generally, whether by way of disclosure or otherwise.
Endnotes
1The SEC approved a similar Nasdaq proposal on May 19, 2021. Nasdaq subsequently proposed rule changes to modify price range limitations in connection with primary direct listings similar to those discussed in this post. On July 7, 2022, the SEC issued an order instituting proceedings to determine whether to approve Nasdaq’s proposed rule change. While the Nasdaq proposal is outside the scope of this post, the SEC similarly extended its deadline for providing comments until August 3, 2022, and rebuttals are due by August 17, 2022.(go back)
