On May 19, 2021, the U.S. Securities and Exchange Commission (SEC) approved Nasdaq's proposal to allow companies to conduct primary direct listings on The Nasdaq Global Select Market. This approval comes nearly five months after the SEC approved a similar proposal by the New York Stock Exchange (NYSE) (as discussed in our alert here). Following these approvals, companies may now sell new shares and raise capital in direct listings, subject to the satisfaction of certain requirements, on either stock exchange.
The following is a summary of some of the key aspects of Nasdaq's new rules, as well as a side-by-side comparison with the NYSE's rules.
| Nasdaq Global Select Market | NYSE | |
| Primary Direct Listings | Referred to as a "Direct Listing with a Capital Raise" and includes:
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Referred to as a "Primary Direct Floor Listing" and includes:
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| Initial Listing Requirements | ||
| Market Value of Publicly Held Shares | This listing requirement is met if the amount of the company's unrestricted publicly held shares before the offering, plus the market value of the shares to be sold by the company in the primary direct listing is at least $110 million (or $100 million, if the company has stockholders' equity of at least $110 million). The value of unrestricted publicly held shares and the market value are calculated using a price per share equal to the lowest price in the price range disclosed in the registration statement. |
This listing requirement is met if the company will sell at least $100 million in market value of shares in the opening auction. In addition, the listing requirement is met in cases where the company will sell less than $100 million if the market value of publicly-held shares immediately prior to listing, plus the market value of the shares the company will sell in the opening auction is at least $250 million. Market value is calculated using a price per share equal to the lowest price in the price range disclosed in the registration statement. |
| Applicability of Other Listing Requirements | Companies would continue to be required to meet other applicable initial listing requirements1 including, among others:
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Companies would continue to be required to meet other applicable initial listing requirements3 including, among others:
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| Auction Procedures | ||
| Order Type | Nasdaq added a new market order specific to primary direct listings, referred to as a Company Direct Listing Order, or CDL Order. | The NYSE added a new limit order specific to primary direct listings, referred to as an Issuer Direct Offering Order, or IDO Order. |
| Shares Covered by Order | The CDL Order covers the total number of shares offered by the company, as disclosed in the registration statement. | The IDO Order covers the total number of shares offered by the company, as disclosed in the registration statement. |
| Price | The CDL Order is a market order and thus it is entered without a price. The price is determined by the Nasdaq Halt Cross (hereinafter referred to as the opening auction) and must be at or above the lowest price and at or below the highest price established in the registration statement. |
The limit price of the IDO Order is equal to the lowest price of the price range established in the registration statement. The auction price is determined by the designated market maker, or DMM, and must be within the price range established in the registration statement. |
| Better-Priced or At-Priced Orders | All orders priced at or better than the price determined by the opening auction must be satisfied. | All better-priced sell orders (i.e., less than the auction price) must be satisfied. If the primary direct listing is comprised of both primary and secondary shares, then the shares sold by the company would have priority over at-priced orders (i.e., where the limit price is equal to the auction price). |
| Determination of Whether Listing Will Proceed | Nasdaq will release the security for trading if 1) the CDL Order, and all other market orders, will be executed in full in the opening auction and 2) the auction price is at or above the lowest price and at or below the highest price of the price range established in the registration statement. If either or both of the foregoing requirements are not met, then Nasdaq is required to postpone or reschedule the offering. Nasdaq will notify market participants via a Trader Update and any orders that had been entered on Nasdaq, including the CDL Order, will be cancelled back to the entering firms. |
The DMM will conduct the listing if 1) the IDO Order and all better-priced orders will be executed in full in the opening auction and 2) the auction price is within the price range established in the registration statement. If either or both of the foregoing requirements are not met, then the directing listing auction will not be conducted. The NYSE will notify market participants via Trader Update and any orders that have been entered on the NYSE, including the IDO Order, would be cancelled back to the entering firms. |
Similar to the NYSE's primary direct listing rules, Nasdaq's primary direct listing rules include a reminder to financial advisors that any activities performed by them in connection with the initial listing and pricing of the primary direct listing must be provided in a manner consistent with all federal securities laws, including Regulation M and other anti-manipulation requirements.
The proposal approved by the SEC differs from the original primary direct listing proposal submitted by Nasdaq in August 2020 (as discussed in our alert here). In its original proposal, Nasdaq sought to provide greater flexibility than the price range set forth in the registration statement. Accordingly, under the original proposal, primary direct listings would have been able to proceed so long as the price determined in the opening auction was not more than 20 percent below the lowest price in the price range established in the registration statement. This lower price per share would also have been used to satisfy the market value of publicly held shares listing requirement. In December, the SEC expressed some concerns with this approach. While this flexibility was not included in this latest proposal, which was approved by the SEC, Nasdaq indicated that it intends to file a separate proposal that includes this flexibility in pricing and that would seek to address the remaining concerns expressed by the SEC. We are continuing to monitor these developments.
What to Do Now?
The new rules are effective immediately, and they provide yet another alternative for companies seeking to offer and sell their shares in the public markets.
Companies considering a direct listing may consider reviewing their existing investment documents, including their investors' rights agreement and equity plan agreements, or any debt agreements, to determine whether those agreements contemplate a direct listing or only contemplate a traditional underwritten public offering.
For more information on direct listings, or any related matter, please contact any member of Wilson Sonsini's capital markets practice.
[1] See Rule 5315 of the Nasdaq listing rules.
[2] See Rule 5135(f)(C) of the Nasdaq listing rules (“at least 50% of such Round Lot Holders must each hold Unrestricted Securities with a Market Value of at least $2,500”).
