Direct Listing – Alternative to an IPO?

The New York Stock Exchange recently re-filed a proposal to permit direct listings, where private companies list a class of shares without an IPO or other registered offering.  The rule change was likely prompted by apparent market interest in such a path to “going public” coupled with the NYSE’s belief that its rival, The Nasdaq Stock Market, already permits direct listings.

If approved by the SEC, the new rules would allow a private company to list its shares for trading on the NYSE by registering the class of shares under the Securities Exchange Act of 1934 without any contemporaneous registration of an offering under the Securities Act of 1933.  Registration under the Exchange Act involves filing a Form 10, which requires much the same information as the traditional Annual Report on Form 10-K.  By registering a class of securities under the Exchange Act and listing them on the NYSE, a company would facilitate secondary trading of its shares by existing stockholders who meet the holding period and other requirements of Rule 144.  (A common misconception is that, once a company “goes public,” all of its outstanding shares are freely tradable.  The federal securities laws don’t work that way.  Instead, only transactions that have been registered (such as occurs in an IPO) or that are otherwise exempt from registration are permitted.)

A private company seeking to register under the Exchange Act will still have to satisfy all of the NYSE’s other requirements for listing a class of securities.  For example, the company would have to show that the aggregate value of its publicly held shares (generally, those held by stockholders other than directors, officers and 10% stockholders) exceeds $100 million.  Under current NYSE rules for a listing in connection with a registered offering, a company must establish this value based on both recent trading prices in a private placement market and a separate valuation by an independent expert.  Under the proposed rules, a company with no prior trading history in a private placement market could satisfy the listing standard with only an independent valuation, but the valuation would have to exceed $250 million. In addition, the NYSE generally requires a company to have at least 400 “round lot” stockholders (those holding 100 shares or more), and the rule proposal did not discuss any accommodation for private companies with more highly concentrated ownership.

The new rules will likely be useful only to a relatively small number of “hot” private companies, such as unicorns that have attracted significant attention from the investor community through valuations of a billion dollars or more, that don’t need to raise capital but that still wish to create a liquid secondary market for their shares.  Recent media reports suggest that Spotify, a popular streaming music service company, may pursue a direct listing later this year.  Pre-IPO companies that are not in this enviable unicorn category may find that, without the traditional IPO roadshow to generate interest in the company, there may be insufficient investor interest to create a strong market for their shares.  In some cases, such as private companies with so many stockholders that they cannot avoid registering under the Exchange Act, the new rule would – if they have a high enough valuation – facilitate an NYSE listing and give their stockholders an attractive market in which to sell their shares.

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