The chatter has it that some unicorns are considering skipping the standard underwritten IPO in favor of a “direct listing.” Essentially, this process involves a registered sale by selling shareholders directly into the public market with no intermediary underwriter and—imagine this—no underwriting commissions and no roadshow or similar expenses. Of course, there’s also the small matter of no proceeds to the company. What’s more, companies may be on their own when it comes to any marketing effort, otherwise typically provided by the bankers, and there may be only limited banker support of the stock price in the aftermarket. And what about that first day pop in the stock that can breed so much excitement? Of course, many companies have taken advantage of the fertile territory for capital raising provided by the private markets—after all, that’s how they got to be unicorns—and may have no need of additional capital at this point. Their motivation for becoming public may have more to do with shareholder liquidity and obtaining the “currency” that publicly traded stock can provide in the context of acquisitions and similar transactions. Whether the “direct listing” route to going public catches fire remains to be seen.
While it’s been possible to do a direct listing on the NYSE since at least 2008, the SEC has just granted accelerated approval to an NYSE proposal to ease its listing standards to facilitate direct listings. The rule change would amend Section 102.01B of the NYSE Manual to modify the provisions relating to the qualifications for listing of companies without a prior Exchange Act registration in connection with an underwritten IPO. The rule change also amends NYSE rules related to the opening procedures on the first day of trading.
Of course, the most well-trod pathways to the NYSE are through an underwritten IPO or transfer from other exchanges. However, in 2008, the NYSE adopted a provision that allows the NYSE, in its discretion, to list a company upon effectiveness of a Securities Act registration statement registering the resale of privately placed shares. To qualify, the company must demonstrate that its publicly held shares will have an aggregate market value of at least $100 million, based on the lesser of the value estimated as a result of an independent third-party valuation or the price in a private placement market, that is, a trading system for unregistered securities operated by a national securities exchange or a registered broker-dealer.
But what if there hasn’t been any recent trading in a private placement market? Are those companies not worthy of listing on the NYSE? How fair is that? Not fair at all, says the NYSE (especially if we’re talking about an especially high-profile unicorn); that requirement “may cause difficulties for certain companies that are otherwise clearly qualified for listing.” Accordingly, the NYSE has added an alternative, which provides that, “in the absence of any recent trading in a Private Placement Market, the Exchange will determine that such company has met its market-value of publicly-held shares requirement if the company provides a Valuation evidencing a market value of publicly-held shares of at least $250,000,000.” According to the NYSE, requiring a threshold valuation of at least two-and-a-half times the $100 million requirement “will give a significant degree of comfort that the market value of the company’s shares will meet the [$100 million] standard upon commencement of trading,” especially because the valuation “must be provided by an entity that has significant experience and demonstrable competence in the provision of such valuations.” The SEC “believes that requiring a company that does not have a recent and sustained history of trading of its securities in a Private Placement Market to provide a Valuation of at least $250 million should provide the Exchange with a reasonable level of assurance that the company’s market value supports listing on the Exchange and the maintenance of fair and orderly markets thereby protecting thereby protecting investors and the public interest….”
To ensure that the independent valuation is reliable, the current NYSE rule requires that it be provided by “an independent third party that has significant experience and demonstrable competence in providing valuations of companies.” The rule change adds more independence criteria, which provide that the valuation agent will not be considered “independent” if the “valuation agent, or any affiliated person, owns in the aggregate more than 5% of the securities to be listed, or has provided investment banking services to the company in the 12 months prior to the Valuation or in connection with the listing.” “Investment banking services” include such activities as acting as an underwriter in an offering for the issuer; acting as a financial adviser in a merger or acquisition; providing venture capital, equity lines of credit, PIPEs or similar investments; serving as placement agent for the issuer; or acting as a member of a selling group in a securities underwriting.
The rule changes also affect some procedural aspects related to the opening of trading. For example, where there is no previous night’s closing price or IPO offering price, how will the pre-opening reference price be determined? A change to Rule 15 provides that, for a direct listing, in the absence of a recent transaction price from a private placement market, the reference price will be determined by the NYSE in consultation with a financial advisor to the issuer.
The designated market maker for a security is responsible under the rules for facilitating openings and supplying liquidity as needed. To facilitate the opening on the first day of trading for a direct listing of a security that has no recent sustained history of trading in a private placement market prior to listing, the rule change provides that the DMM, although retaining responsibility, “will consult with a financial advisor to the issuer to effect a fair and orderly opening of such security.” The NYSE believes that the issuer’s financial advisor “would have an understanding of the status of ownership of outstanding shares in the company and would have been working with the issuer to identify a market for the securities upon listing. As a result, it believes such financial advisor would be able to provide input to the DMM regarding expectations of where such a new listing should be priced, based on pre-listing selling and buying interest and other factors that would not be available to the DMM through other sources.”
The amendments also provide authority to declare a regulatory halt for a non-IPO new listing prior to opening the security. Under the rule change, the NYSE may declare a regulatory halt in a security that is the subject of an initial pricing of a direct listing. The authority is intended to ensure that a direct listing could not be traded before the security opens on the NYSE. This regulatory halt will be terminated when the DMM opens the security.