Nasdaq Allows Primary Direct Listings, Offers Relaxed Price Limits | Skadden, Arps, Slate, Meagher & Flom LLP
On May 19, 2021, the Securities and Exchange Commission (SEC) approved Nasdaq’s proposal to allow companies to issue shares and raise capital through direct primary listings conducted on the Nasdaq Global Select market without the intervention of traditional underwriters. The changes, which are effective immediately, closely align Nasdaq’s direct offering framework with that of the New York Stock Exchange (NYSE), which, as noted in our previous client alert “NYSE Direct Listing Rules Approved; The Nasdaq proposes substantially similar rules, authorizes such registrations since December 2020.
On May 26, 2021, shortly after the SEC approval of the primary direct listing proposal, the Nasdaq additional proposed changes make direct quotes more attractive for issuers. Under the current rules, issuers must disclose the price range in which they expect their securities to be listed on direct listing, and securities must be directly listed within that price range, unless a issuer files a subsequent modification to the registration statement. If the rules proposed by the Nasdaq are approved, these price range requirements will be relaxed, allowing for deviations of up to 20% above or below the disclosed price range in all cases, and deviations of more. 20% above the disclosed price range if certain conditions are met.
As of 2018, the NYSE and the Nasdaq allow direct listings as an alternative to the IPO in cases where companies do not issue new shares or raise capital for themselves, but instead register existing shares. previous investors via resale registration statements. While direct listings offer some advantages over traditional Initial Public Offerings (IPOs), the ban on raising new capital has significantly limited their appeal in some cases. Since 2018, only nine companies have gone public through direct listing. Beginning in 2019, the NYSE and the Nasdaq submitted proposals to expand the reach of direct listings by allowing issuers to raise additional capital under limited circumstances.
Rules approved by the Nasdaq
The Nasdaq’s rules on direct primary listings are substantially similar to those of the NYSE. The main requirements for a primary direct listing on the Nasdaq include:
Listing on the Nasdaq Global Select market: Issuers must meet the initial listing requirements of the Nasdaq Global Select Market, including having a minimum of 2,200 total shareholders or 450 round lot holders (that is to say, holders of at least 100 shares), of which at least 50% hold at least $ 2,500 in securities. Issuers must also own at least 1.25 million public shares (including all shares sold in the auction and all shares publicly held prior to the auction) and achieve a minimum bid price of at least $ 4. at the time of initial listing. Issuers that go public on the Nasdaq Global Market or the Nasdaq Capital Market are not eligible for direct primary listings, but may continue to be eligible for direct secondary listings.
The NYSE also requires issuers with a direct primary listing to meet the applicable initial listing requirements, although these requirements are slightly different (400 round lot holders, 1.1 million public shares, and a minimum bid price of 4. $). Meeting the initial listing requirements of either exchange is more difficult in a direct listing than in a traditional IPO, where the involvement of underwriters and the book-building process facilitate compliance.
Minimum market valuation of securities: To meet the requirements of Nasdaq Listing Rule IM-5315-2, the total market value of unrestricted public shares immediately prior to listing, as well as the market value of shares sold in direct listing, must total at minus $ 110 million (or $ 100 million, if equity is at least $ 110 million). Market value is calculated using the lowest price per share within the price range shown in the registration statement multiplied by the total number of shares outstanding immediately prior to the offer, plus the number of new shares. to be issued as part of the direct listing. This market valuation requirement is significantly higher than the $ 45 million required by a company pursuing a traditional IPO on the Nasdaq, but lower than the $ 250 million requirement imposed by the Nasdaq for secondary direct listings. It is also lower than the valuation requirements of the NYSE market. To list directly on the New York Stock Exchange, issuers must achieve a market valuation of $ 250 million of shares held by the public immediately prior to listing, combined with the value of shares sold at auction, or must sell $ 100 million worth of stock at auction.
Main auction procedures for direct listing
A primary direct listing on the Nasdaq will be done through an opening auction, with prices set through the Nasdaq Halt Cross. As a preliminary step, a business will issue a direct business listing order (CDL order), a new type of order exclusive to direct listings. A CDL Order must relate to the total number of shares directly listed, as indicated in the issuer’s effective registration statement. However, the CDL Order will not include the price per share. Instead, the Nasdaq Halt Cross, in consultation with the company’s financial advisor, will determine the price, which must be within the price range shown in the registration statement. Nasdaq will allow trading to commence only if the CDL order will be filled in full during the opening auction, at the lowest price or above and at the highest price or below the disclosed price range. . All orders at the best price must also be executed in full. If one or both of these conditions cannot be met, the Nasdaq will postpone the auction. Thus, a CDL Order will operate largely as a limit order, as it cannot be executed at a price lower than the lower price of the disclosed price range nor for a number lower than the total number of shares offered in the price range. registration statement. A CDL order cannot be canceled or changed, and unlike a traditional IPO, an issuer would be required to file a pre-registration change if the opening auction price was below the range. price indicated in the registration statement. After the initial auction, the shares would begin to trade freely on the Nasdaq.
Rules proposed by the Nasdaq to allow greater price flexibility
The current process and pricing requirements for direct Nasdaq listings are substantially similar to those imposed by the NYSE, although different terminology is used. Nasdaq’s initial proposal on primary direct listings would have allowed the opening price of the offer to be up to 20% below the price range indicated in the registration statement. Although the Nasdaq initially withdrew the proposal after the SEC raised concerns, the Nasdaq reintroduced price flexibility into direct listings in its latest proposed rule change.
The proposed rules would allow direct listing at a price of 20% outside of the price range disclosed in the actual listing statement. As is currently the case with IPOs, the Nasdaq would calculate 20% of the higher price in the disclosed price range, and add that amount to the high end (in the event of a price increase) or subtract from the low end (in the event of a price drop) to calculate the authorized variation of 20%. Additionally, direct quotes could be more than 20% above the disclosed price range, provided the company certifies to the Nasdaq that the price change would not materially alter the company’s disclosure in its disclosure statement. ‘previous recording. The Nasdaq would issue an “industry wide trader alert” advising auction participants of the lowest possible price for the securities, taking into account the allowed 20% variation, and whether there was a limit of higher price above which the auction could not continue, based on the approval of the business. The additional pricing flexibility would also impact the calculation of the mark-to-market, which would be based on a price per share 20% lower than the lower price of the price range indicated in the registration statement.
Advocating for more price flexibility, the Nasdaq noted that current price band restrictions increase the risk of supply failure in the event of significant changes in the market or in investor confidence. The Nasdaq observed that IPOs are able to set prices outside the disclosed price range and that changing the requirements for direct listings would harmonize the requirements and make direct listings more attractive to investors, without increasing the risk for investors. If the rules are approved, companies could adjust the price of a direct listing using a 424 (b) prospectus rather than a post-effective amendment, thereby reducing the delay and the market risk incurred by this delay.
Standard application of securities law responsibilities and security rules
The existing safe-haven obligations and rules under securities laws continue to apply in the context of direct listing. While an underwriter does not participate in a direct quote, financial advisers play a similar, but more limited role. The SEC warned that existing securities regulations could result in a financial advisor being considered a statutory underwriter, but that assessment would be fact-specific and determined on a case-by-case basis. Insiders of the company, including directors, officers and 10% shareholders, are also eligible to participate in a direct listing, provided that their participation complies with existing securities laws and applicable safety regulations. .