Direct Listings vs IPO
Direct listings have become a hot topic after music-streaming company Spotify Technology SA used the process to go public last year. In 2019, tech company, Slack Technologies Inc., followed suit. In 2020, Airbnb and Asana are also expected to go public via direct listings.
Direct listings and IPOs both allow a private company to “go public” and begin selling its shares of stock on the open market. In a direct listing, also known as a direct public offering (DPO), companies sell their shares directly to the public. Direct listings are attractive because they avoid a lot of the complex and expensive processes that are required in an IPO. In an IPO, underwriters facilitate the process and charge a commission for their work. In a DPO, the business may save money by avoiding the costs associated with underwriters. However, because companies do not partner with an investment bank or broker-dealer, they must do a lot of the legwork in-house, which can be burdensome.
DPOs can also be risky. Unlike an IPO, the number of shares offered and initial price are not predetermined. On the day of the DPO, the stock is available for trading; however, the number of shares available is determined by the number of employees and initial investors who choose to list on the market. In addition, pricing is determined by market conditions and demand rather than an underwriter.
NYSE Direct Listing Proposal
Currently, direct listings on the NYSE are limited to those shares owned by existing stockholders. To expand access to direct listings, the NYSE is seeking to amend its Listed Company Manual (the “Manual”) to modify the provisions relating to direct listings.
The NYSE’s proposed changes would allow a company to sell shares on its own behalf through a direct listing in the opening auction on the first day of trading on the NYSE. The proposal would permit a company to conduct the new “Primary Direct Floor Listing” in addition to, or instead of, a traditional Selling Shareholder Direct Floor Listing.
Under current NYSE rules, a company seeking to pursue a secondary direct listing must "demonstrate that it has $250 million in market value of publicly-held shares at the time of listing." For Primary Direct Floor Listings, the NYSE proposes that a company would qualify for listing by selling at least $250 million in market value of shares in the opening auction. The NYSE further proposes that a company would qualify for listing in connection with a Primary Direct Floor Listing if the aggregate of the market value of publicly-held shares immediately prior to listing together with the market value of shares sold by the company in the opening auction totals at least $250 million.
The NYSE proposal also amends the distribution requirements for both primary and secondary direct listings. Currently, a company must have at least 400 round lot holders and 1.1 million publicly held shares at the time of listing, which can be a challenge for a private company pursuing a direct listing.
The NYSE proposes to amend Section 102.01A to provide that any company listing in connection with a Primary Direct Floor Listing in which the company sells at least $250 million in market value of shares in the opening auction on the initial listing date may list and commence trading on the basis that the company would have to demonstrate compliance with the distribution requirements within 90 trading days of the listing date.
The NYSE further proposes to provide the benefit of the same distribution period in the case of: (i) a company listing in connection with a Selling Shareholder Direct Floor Listing that demonstrates $350 million in market value of publicly-held shares; and (ii) a Primary Direct Floor Listing in which the company sells less than $250 million of its stock in the opening auction but has a market value of publicly-held shares immediately prior to listing together with the market value of shares sold by the company in the opening auction totaling at least $350 million.
SEC Rejects Initial Proposal
On December 6, 2019, the SEC rejected the NYSE’s initial proposal. In response, the NYSE stated that it would continue to work with the SEC. “We are committed to the evolution of the direct listing. Our rule changes, if approved, will make these transactions available to a broader universe of companies and create the option for a capital raise as part of a direct listing,” John Tuttle, Vice Chairman and Chief Commercial Officer at NYSE, said in a statement.
It is not uncommon for the SEC to reject an initial proposal and then go on to approve a rule change, provided that the NYSE addresses any concerns raised by the SEC staff. The NYSE has already amended its proposal. In its latest filing, the NYSE lowered the minimum amount companies would need to sell in a Primary Direct Floor Listing from $250 million to $100.
The availability of primary direct listings may encourage more companies to consider going public. We will continue to track the NYSE’s direct listing proposal. In addition, NASDAQ is reportedly considering its own rule changes, which are expected in 2020.
While direct listings may be attracting a lot of buzz, they are not the best option for every company. To determine the best path for your business, it is always wise to consult with an experienced business attorney. At Scarinci Hollenbeck, we can help you weigh the risks and benefits of an IPO, a DPO, or other capital-raising alternatives.
If you have questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.