On December 3, 2019, the Securities and Exchange Commission (SEC) approved Nasdaq's recently amended proposal to allow direct listings on The Nasdaq Global Market and The Nasdaq Capital Market. Prior to this rule change, direct listings were permitted solely on the Nasdaq's most exclusive market, The Nasdaq Global Select Market, as well as the New York Stock Exchange.

Background

In February 2019, the SEC approved Nasdaq's proposed rule changes for direct listings on The Nasdaq Global Select Market, which rule changes included, among other things, 1) clarifying the role of a broker-dealer serving as a financial advisor in a direct listing, 2) setting forth how Nasdaq will calculate the price-based initial listing requirements for direct listings, and 3) requiring that a company that lists through a direct listing do so at the time of effectiveness of a registration statement filed under the Securities Act of 1933 solely for the purpose of allowing existing shareholders to sell their shares.

In August 2019, Nasdaq submitted an initial proposal to the SEC to extend the foregoing rules to direct listings on The Nasdaq Global Market and The Nasdaq Capital Market. Following an extension of the review period in October and Nasdaq's submission of the amended proposal on November 26, the SEC approved the proposed rules, as amended.

Summary of Final Rules

While the final approved rules relating to direct listings on The Nasdaq Global Market and The Nasdaq Capital Market are generally similar to the rules relating to direct listings on The Nasdaq Global Select Market, there are some differences. A summary of these differences follows, including, where applicable, clarifications or revisions from the initial proposed rules discussed in our prior Alert.

• Price-Based Initial Listing Requirement. If the company does not have recent sustained trading activity in a private placement market, and thereby must rely on a third-party valuation, then:
  • Global Select Market. The third-party valuation must reflect a market value of unrestricted publicly held shares of at least $250 million.
  • Global Market and Capital Market. Consistent with the initial proposal, the final approved rules provide that the third-party valuation must reflect a price, market value of listed securities, and market value of unrestricted publicly held shares that exceed 200 percent of the otherwise applicable requirements. The final approved rules clarify that the third-party valuation must meet the existing requirements for third-party valuations used for direct listings on The Nasdaq Global Select Market, set forth in IM-5315-1e) and (f) of the Nasdaq listing rules.
• Alternatives to Third-Party Valuation – "Other Compelling Evidence".
  • Global Select Market. None.
  • Global Market and Capital Market. Consistent with the initial proposal, for direct listings on The Nasdaq Global Market and The Nasdaq Capital Market, Nasdaq may accept "other compelling evidence" reflecting a price, market value of listed securities, and market value of unrestricted publicly held shares that exceed 250 percent of the otherwise applicable requirements. Examples of "other compelling evidence" include the following: 1) a tender offer for cash by the company or an unaffiliated third party; 2) a sale between unaffiliated third parties involving the company's equity securities; or 3) equity security sales by the company.
    
    These transactions 1) must be recent, i.e., completed (and in the case of a tender offer, commenced and completed) within the prior six months, 2) must be substantial in size, i.e., represented at least 20 percent of the applicable market value of unrestricted, publicly-held shares requirement, and 3) must have been conducted at arm's-length, i.e., had not more than de minimis participation from affiliates. In order to be considered "de minimis," the company must certify in writing to Nasdaq that any affiliate's participation was less than 5 percent of the transaction, that collective affiliate participation was less than 10 percent of the transaction, that affiliate participation was suggested or required by unaffiliated investors, and that the affiliates did not participate in negotiating the economic terms of the transaction.
    
    Updates from the initial proposal are noted in italics in the foregoing paragraphs, including that tender offers must be for cash, that references to third parties means unaffiliated third parties, that tender offers must have been commenced and been completed within the prior six months, and that companies must certify in writing to Nasdaq their compliance with the "de minimis" requirements. In addition, in a departure from the initial proposal, the final approved rules specify that the examples of "other compelling evidence" are exhaustive.

What to Do Now?

For those companies unable to qualify for listing on The Nasdaq Global Select Market due to its higher quantitative listing requirements, direct listings may now be a viable option on either The Nasdaq Global Market or The Nasdaq Capital Market. At this time, direct listings remain limited to resales of shares held by existing stockholders, and thus have limited appeal to companies needing additional capital. We continue to monitor developments in this area.

For more information about direct listings or any related matter, please contact any member of Wilson Sonsini's capital markets practice.