On October 17, 2019, the Securities and Exchange Commission (SEC) extended the review period for Nasdaq's proposed rule changes relating to direct listings, designating December 3, 2019 as the date on which the SEC will either approve, disapprove, or institute proceedings to determine whether to disapprove, the proposed rule changes.

In February 2019, Nasdaq adopted rule changes for direct listings on The Nasdaq Global Select Market, including, among other things, to 1) clarify the role of a broker-dealer serving as a financial advisor in a direct listing, 2) set forth how Nasdaq will calculate the price-based initial listing requirements for direct listings on The Nasdaq Global Select Market, and 3) require 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 proposed rule changes to the SEC extending the foregoing rules to direct listings on The Nasdaq Global Market and The Nasdaq Capital Market, respectively (published in the Federal Register here). While the proposed rules are substantially similar to the rules adopted in February 2019, there were some differences including, among others, the following:

• 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. 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.
• Alternatives to Private Placement Market Trading History and Valuation.
  • Global Select Market. None.
  • Global Market and Capital Market. A company may provide other “compelling evidence” that shows that it meets the applicable price-based initial listing requirements, including, but not limited to, a tender offer by the company or a third party, a third-party transaction involving the company's equity securities, or security sales by the company. These transactions 1) must be recent, i.e., within the past six months, 2) must be substantial in size, i.e., representing at least 20 percent of the applicable market value of unrestricted publicly held shares requirement, 3) must show that the price, market value of listed securities, and market value of unrestricted publicly held shares each exceed 250 percent of the otherwise applicable requirements, and 4) must have been conducted at arm's-length, i.e., affiliates may not participate in negotiating the economic terms of the transaction and, if affiliates participate in the transaction itself, then their participation must have been suggested or required by unaffiliated investors and must not be more than de minimis in nature (i.e., less than 5 percent of the transaction by any one affiliate, and collectively less than 10 percent of the transaction by all affiliates).

What To Do Now?

For now, we shall wait and see whether the SEC will approve, disapprove, or institute proceedings to determine to disapprove, the proposed extension of the direct listing rules to The Nasdaq Global Market and The Nasdaq Capital Market. If approved, companies that may not meet the applicable requirements for listing on The Nasdaq Global Select Market tier will be able to consider undertaking a direct listing on The Nasdaq Global Market or The Nasdaq Capital Market tier.

For more information about Nasdaq's proposed rules, direct listings or any related matter, please contact any WSGR member of the firm's capital markets practice.