Yesterday, the New York Stock Exchange (NYSE) filed a revised proposal with the Securities and Exchange Commission (SEC) to allow companies to sell shares on their own behalf in direct listings. Last week, as discussed in our previous Alert, the SEC rejected the NYSE's initial primary direct listing proposal. Currently, direct listings are limited to shares held by existing stockholders.
Notably, the revised proposal tracks closely with the initial proposal, addressing both the market value of shares and the distribution initial listing requirements.
Market Value of Shares Listing Requirement. Under existing NYSE listing rules, a company seeking to undertake a secondary direct listing is required to meet the market value of shares listing requirement by either 1) demonstrating an aggregate market value of publicly-held shares of $100 million based on a combination of both (a) an independent third-party valuation of the company and (b) the most recent trading price for the company's common stock in a private placement market, or 2) in the absence of private placement trading prices, the company may provide an independent third-party valuation evidencing a market value of publicly-held shares of at least $250 million.1
Under the NYSE proposal, companies undertaking primary direct listings could meet the market value of shares listing requirement as follows:
- Initial NYSE Proposal. By either 1) selling at least $250 million of its shares in the opening auction or 2) if it sells less, then demonstrating that the sum of the market value of shares it sells in the opening auction, together with the market value of shares held by existing stockholders, reaches the applicable threshold.
- Revised NYSE Proposal. By either 1) selling at least $100 million of its shares in the opening auction or 2) if it sells less, then demonstrating that the sum of the market value of the shares it sells in the opening auction, together with the market value of the shares held by existing stockholders (measured in the same manner as discussed above for secondary direct listings), reaches the applicable threshold.
Distribution Listing Requirement. Under existing NYSE listing rules, a company seeking to undertake a secondary direct listing is required to have at least 400 round lot holders and 1.1 million publicly-held shares at the time of listing.2
Under the NYSE proposal, this distribution requirement would also apply to primary direct listings but there would be a grace period to meet this initial listing requirement under certain circumstances. This grace period would apply in the following circumstances:
- Initial NYSE Proposal. Either 1) a company undertaking a primary direct listing sells at least $250 million in shares in the opening auction, or 2) a company undertaking a secondary direct listing demonstrates $350 million in market value of publicly-held shares, or 3) a company undertaking a primary direct listing in which the sum 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 is at least $350 million.
- Either 1) a company undertaking a primary direct listing sells at least $250 million in shares in the opening auction, or 2) a company undertaking a secondary direct listing demonstrates $350 million in market value of publicly-held shares, or 3) a company undertaking a primary direct listing that sells less than $250 million of its shares in the opening auction, but in which the sum 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 is at least $350 million.
As of the time of this Client Alert, the SEC has still not commented on why the NYSE's initial proposal was rejected. Thus, it remains unclear as to whether this revised proposal would be sufficient to address the SEC's concerns, particularly since the principal revision (aside from clarifying revisions) was lowering the market value of shares listing threshold, as it relates to the sale of shares in the opening auction, from $250 million to $100 million.
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.
[1] See Rule 102.01B(E) of the NYSE Listed Company Manual.
[2] See Rule 102.01A of the NYSE Listed Company Manual.