You’d have to assume that the SEC didn’t spend a whole lot of time agonizing over the rule proposal—as reported by CNBC and Reuters, it took only a little over a week for the SEC to reject the NYSE’s proposed rule change that would have allowed companies going public to raise capital through primary direct listings. (See this PubCo post.) It remains to be seen whether the SEC is opposed to the concept in general, making rehabilitation of the proposal unlikely, at least in the near term, or whether the proposal could be quickly resurrected after some fixes to the proposal (or to other rules to accommodate the proposal).
Essentially, a “direct listing” involves a registered sale, currently permitted only by selling shareholders, directly into the public market with no intermediary underwriter, no underwriting commissions (just advisory fees) and no roadshow or similar expenses. What’s more, with direct listings, 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. Of course, under the current structure, there are also no proceeds to the company, which has put a definite crimp in the potential popularity of direct listings, as only companies that do not need to raise capital for their own use are likely to opt for that alternative.
But, since the splashy market debuts of two companies via direct listings, there has been a vociferous call from many VCs and others for alternative on-ramps to public-company status, such as direct listings. Those that favor direct listings complain about the rigid underwriting commission structure. And insiders are often especially pleased with direct listings because, unlike with underwritten IPOs, there is no “lockup period,” and shareholders are free to sell their shares right away.
According to CNBC, the proposal was missing from the NYSE website this past Friday, and an NYSE spokesperson confirmed to CNBC that the proposal had been rejected. The NYSE told CNBC that they “‘remain committed to evolving the direct listing product…This sort of action is not unusual in the filing process and we will continue to work with the SEC on this initiative.’”
The NYSE proposal would have amended Section 102.01B of the Listed Company Manual to permit a “Primary Direct Floor Listing,” allowing a company “to sell shares on its own behalf in connection with its initial listing upon effectiveness of a registration statement, without a traditional underwritten public offering.” Under the proposal, the company would have sold its common shares in the opening auction on the first day of trading on the NYSE. The company could have limited its offering to primary shares or, in its discretion, also include secondary shares. The proposal for primary direct listings would have also dispensed with the current requirement, applicable to secondary direct listings, for the company to “demonstrate that it has $250 million in market value of publicly-held shares at the time of listing,” so long as the company sold at least $250 million in shares in the opening auction on the first day of listing. For smaller primary offerings, the NYSE would have required that the aggregate of the market value of publicly held shares immediately prior to listing and the market value of shares sold by the company in the opening auction be at least $250 million. The proposal would also have provided a 90-trading-day grace period to demonstrate compliance with the distribution requirements in Section 102.01A of the Manual for listing in connection with both primary and secondary direct listings, provided certain conditions were satisfied.