Primary Direct Listings

What you need to know about this IPO alternative

On December 22, 2020, the Securities and Exchange Commission (SEC) approved a NYSE rule that permits an issuer, at the time of an initial listing on the NYSE, to conduct a primary offering as part of a direct listing without conducting a firm commitment underwritten offering.  On the same date, Nasdaq submitted a substantially similar rule proposal that would, if approved by the SEC, permit a primary offering in conjunction with a direct listing on Nasdaq.

How does a primary direct listing differ from a traditional IPO, and is it right for your company?

What is a direct listing anyway? 

Historically, a direct listing referred to an alternative to a traditional IPO in which a company’s outstanding shares were registered for resale with the SEC and directly listed on a national securities exchange (e.g., NYSE or Nasdaq) without an underwritten offering of shares.  NYSE now refers to this listing method as a “Selling Shareholder Direct Floor Listing” to distinguish it from a direct listing that includes a primary offering by the company, which it refers to as a “Primary Direct Floor Listing.

How does a Primary Direct Floor Listing differ from a Selling Shareholder Direct Floor Listing?

In a Primary Direct Floor Listing, the company sells newly issued shares in the opening auction on the first day that the company’s shares trade on the NYSE.  A Primary Direct Floor Listing may also include sales of outstanding company shares by selling stockholders.

That sounds a lot like a traditional IPO—how does it differ?

A traditional IPO is underwritten on a firm commitment basis by a group of investment banks, which act as underwriters.  The company enters into an underwriting agreement with the banks pursuant to which the banks agree to buy a specified number of shares from the company at a fixed price.  The price paid by the underwriters for the shares reflects a discount to the public offering price.  The public offering price is determined via a negotiation between the company and the underwriters, which is based on indications of interest by prospective initial purchasers.  The underwriters sell the shares to the initial purchasers at the public offering price before the start of trading.  When trading on the exchange commences, the opening price is determined based on buy and sell orders on the exchange; this opening price can be higher or lower (sometimes significantly) than the public offering price.  In a direct listing, there is no initial sale to an underwriter and no pre-opening sale to initial purchasers.

In approving the NYSE proposal, the SEC observed that a direct listing might broaden investor participation in IPOs by enabling investors who would otherwise be unable to receive an allocation of shares from an underwriter in a traditional IPO to acquire shares directly from the company at the offering price, rather than at prevailing prices in aftermarket trading.

How is the opening price determined in a Primary Direct Floor Listing?

The opening price is determined via an auction process that is subject to specific rules.  The NYSE has created a new order type to be used in a Primary Direct Floor Listing—an “Issuer Direct Offering Order,” or IDO Order.

What is an IDO Order?

An IDO Order is a limit order placed by the company to sell shares in a direct listing auction for a Primary Direct Floor Listing.  Consistent with current rules, a designated market maker, or DMM, would manually effect the direct listing auction, and the DMM would be responsible for determining the auction price.

Is an IDO Order subject to certain requirements?

Yes, an IDO Order is subject to the following requirements:

  1. only one IDO Order may be entered on behalf of the company and only by one member organization;
  2. the limit price of the IDO Order must be equal to the lowest price of the price range included in the company’s registration statement at the time of effectiveness;
  3. the IDO Order must seek to sell all of the shares offered by the company;
  4. the IDO Order may not be cancelled or modified; and
  5. the IDO Order must be executed in full in the direct listing auction.

What happens if the DMM cannot satisfy the IDO order?

If there is insufficient buy interest and the DMM cannot price the auction and satisfy the IDO Order and all other lower-priced sell orders, the auction would not proceed. The shares would not start trading on the NYSE and the IDO Order would be cancelled.

Can the opening auction price exceed the highest price included in the company’s registration statement?

No, the DMM will not be able to conduct the direct listing auction if the auction price would be below the lowest price or above the highest price of the price range disclosed in the company’s registration statement at effectiveness.

The SEC observed that, because the company would receive the auction price determined on the basis of actual orders to buy and sell shares, rather than on the basis of a private negotiation with the underwriters, the pricing of direct listing may be more efficient than the pricing of a traditional underwritten IPO.

What companies would be eligible to conduct a Primary Direct Floor Listing on the NYSE?

Companies that sell at least $100 million in market value of shares in the direct listing auction will meet the applicable aggregate market share requirement.  Alternatively, if the company is selling less than $100 million in the auction, it will qualify if the aggregate market value of publicly held shares prior to listing, together with the market value of the shares sold by the company in the direct listing auction, is at least $250 million.  For this purpose, “publicly-held shares” do not include shares held by directors or officers of the company, their family members or 10% stockholders.  Notably, these minimum requirements are much higher than those imposed on companies conducting a traditional IPO; a company conducting an underwritten IPO can list on the NYSE with an aggregate market value of publicly-held shares of only $40 million. In approving the NYSE proposal, the SEC noted that approximately 48% of IPOs in 2019 would not have satisfied the $100 million offering size requirement.

How is aggregate market value calculated for this purpose?

NYSE will calculate aggregate market value using a price per share equal to the lowest price of the price range included in the company’s registration statement.

Will a company listing in connection with a Primary Direct Floor Listing be subject to other NYSE initial listing requirements?

Yes, the company would be subject to all other customary initial listing requirements, including requirements related to the number of round lot holders, publicly‑held shares outstanding and minimum per share price.

What role do investment banks play in a direct listing?

Investment banks may (and generally will) serve as financial advisors to issuers conducting a direct listing and can consult with the NYSE regarding the auction process.

Are direct listings with a primary offering permitted on Nasdaq?

Not currently, but on December 22, 2020 Nasdaq submitted a separate rule proposal that would allow primary direct listings on the Nasdaq Global Select Market.  As Nasdaq’s proposed rule is substantially similar to the NYSE rule, we expect that the SEC will approve the Nasdaq rule.

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