Self-Regulatory Organizations; New York Stock Exchange LLC; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change, as Modified by Amendment No. 1, To Amend Chapter One of the Listed Company Manual To Modify the Provisions Related to Direct Listings, 18292-18296 [2020-06732]
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IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CboeBZX–2020–027 on the subject line.
Paper Comments
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• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CboeBZX–2020–027. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CboeBZX–2020–027, and
should be submitted on or before April
22, 2020.
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.16
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–06740 Filed 3–31–20; 8:45 am]
BILLING CODE 8011–01–P
II. Description of the Proposal
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88485; File No. SR–NYSE–
2019–67]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Order
Instituting Proceedings To Determine
Whether To Approve or Disapprove a
Proposed Rule Change, as Modified by
Amendment No. 1, To Amend Chapter
One of the Listed Company Manual To
Modify the Provisions Related to Direct
Listings
March 26, 2020.
I. Introduction
On December 11, 2019, New York
Stock Exchange LLC (‘‘NYSE’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Exchange Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to amend Chapter One of the
Listed Company Manual (‘‘Manual’’) to
modify the provisions related to direct
listings. On December 13, 2019, the
Exchange filed Amendment No. 1 to the
proposed rule change, which amended
and replaced the proposed rule change
in its entirety. The proposed rule
change, as modified by Amendment No.
1, was published for comment in the
Federal Register on December 30,
2019.3 On February 13, 2020, pursuant
to Section 19(b(2) of the Exchange Act,4
the Commission designated a longer
period within which to either approve
the proposed rule change, disapprove
the proposed rule change, or institute
proceedings to determine whether to
disapprove the proposed rule change.5
The Commission has received twelve
comment letters on the proposed rule
change, including a response from the
16 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 87821
(December 20, 2019), 84 FR 72065 (December 30,
2019) (‘‘Notice’’).
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 88190
(February 13, 2020), 85 FR 9891 (February 20,
2020). The Commission designated March 29, 2020,
as the date by which it should approve, disapprove,
or institute proceedings to determine whether to
disapprove the proposed rule change.
1 15
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Exchange.6 This order institutes
proceedings under Section 19(b)(2)(B) of
the Exchange Act 7 to determine
whether to approve or disapprove the
proposed rule change, as modified by
Amendment No. 1.
Sfmt 4703
Section 102.01B, Footnote (E) of the
Manual states that the Exchange
generally expects to list companies in
connection with a firm commitment
underwritten initial public offering
(‘‘IPO’’), upon transfer from another
market, or pursuant to a spin-off, but
also allows for the possibility of using
a direct listing, as described below.8
Currently, Footnote (E) states that the
Exchange recognizes that companies
that have not previously had their
common equity securities registered
under the Exchange Act, but which have
sold common equity securities in a
private placement, may wish to list their
common equity securities on the
Exchange at the time of effectiveness of
a registration statement 9 filed solely for
the purpose of allowing existing
shareholders to sell their shares.10 The
Exchange has proposed to define this
type of direct listing already
contemplated by the Exchange’s rules as
a ‘‘Selling Shareholder Direct Floor
Listing.’’ 11 In addition, the Exchange
has proposed to recognize an additional
type of direct listing in which a
company would sell shares itself in the
opening auction on the first day of
trading on the Exchange in addition to,
or instead of, facilitating sales by selling
shareholders (a ‘‘Primary Direct Floor
6 Comments received on the Notice are available
on the Commission’s website at: https://
www.sec.gov/comments/sr-nyse-2019-67/
srnyse201967.htm.
7 15 U.S.C. 78s(b)(2)(B).
8 See Section 102.01B, Footnote (E) of the
Manual.
9 The reference to a registration statement refers
to a registration statement effective under the
Securities Act of 1933 (‘‘Securities Act’’).
10 See Section 102.01B, Footnote (E) of the
Manual. See also Securities Exchange Act Release
No. 82627 (February 2, 2018), 3 FR 5650 (February
8, 2018) (SR–NYSE–2017–30) (approving proposed
rule change to amend Section 102.01B of the
Manual to modify the provisions relating to the
qualifications of companies listing without a prior
Exchange Act registration in connection with an
underwritten IPO and amend the Exchange’s rules
to address the opening procedures on the first day
of trading for such securities).
11 See proposed Section 102.01B, Footnote (E) of
the Manual. Under the proposal, the Exchange
would remove a description of this type of direct
listing as involving a company ‘‘whose stock is not
previously registered under the Exchange Act,
where such company is listing without a related
underwritten offering upon effectiveness of a
registration statement registered only the resale of
shares sold by the company in earlier private
placements.’’ See id.
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Listing’’).12 Under the proposal, the
Exchange would, on a case by case
basis, exercise discretion to list
companies that are listing in connection
with a Selling Shareholder Direct Floor
Listing or a Primary Direct Floor
Listing.13
With respect to a Selling Shareholder
Direct Floor Listing, the Exchange has
proposed to retain the existing
standards regarding how the Exchange
will determine whether a company has
met its market value of publicly-held
shares listing requirement. The
Exchange will continue to determine
that such company has met the $100
million aggregate market value of
publicly-held shares requirement based
on a combination of both (i) an
independent third-party valuation
(‘‘Valuation’’) of the company; and (ii)
the most recent trading price for the
company’s common stock in a trading
system for unregistered securities
operated by a national securities
exchange or a registered broker-dealer
(‘‘Private Placement Market’’).14 The
Exchange will attribute a market value
of publicly-held shares to the company
equal to the lesser of: (i) The value
calculable based on the Valuation; and
(ii) the value calculable based on the
most recent trading price in a Private
Placement Market.15 Alternatively, in
the absence of any recent trading in a
Private Placement Market, the Exchange
will determine that such company has
met its market value of publicly-held
shares requirement if the company
provides a Valuation evidencing a
market value of publicly-held shares of
at least $250 million.16
With respect to a Primary Direct Floor
Listing, the Exchange has proposed that
it will deem a company to have met the
applicable aggregate market value of
publicly-held shares requirement if the
company sells at least $100 million in
market value of the shares in the
Exchange’s opening auction on the first
12 See proposed Section 102.01B, Footnote (E) of
the Manual.
13 See proposed Section 102.01B, Footnote (E) of
the Manual.
14 See proposed Section 102.01B, Footnote (E) of
the Manual. For specific requirements regarding the
Valuation and the independence of the valuation
agent conducting such Valuation, see Section
102.01B, Footnote (E) of the Manual. Section
102.01B, Footnote (E) of the Manual also sets forth
specific factors for relying on a Private Placement
Market price. Generally, the Exchange will only rely
on a Private Placement Market price if it is
consistent with a sustained history over a several
month period prior to listing evidencing a market
value in excess of the Exchange’s market value
requirement.
15 See Section 102.01B, Footnote (E) of the
Manual.
16 See Section 102.01B, Footnote (E) of the
Manual.
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day of trading on the Exchange.17
Alternatively, where a company is
conducting a Primary Direct Floor
Listing and sells shares in the opening
auction with a market value of less than
$100 million, the Exchange will
determine that such company has met
its market value of publicly-held shares
requirement if the company provides a
Valuation evidencing a market value of
publicly-held shares of at least $250
million.18 According to the Exchange,
these requirements would provide that
any company conducting a Primary
Direct Floor Listing would be of a
suitable size for Exchange listing and
that there would be sufficient liquidity
for the security to be suitable for auction
market trading.19
In addition, the Exchange has
proposed to amend Section 102.01A of
the Manual to provide certain
exceptions to the requirement that a
company listing in connection with a
Primary Direct Floor Listing or a Selling
Shareholder Direct Floor Listing comply
with the applicable initial listing
distribution requirements, which
require at least 400 round lot holders
and 1.1 million publicly-held shares, at
the time of initial listing.20 In each of
the following cases, the Exchange has
proposed to grant the company a grace
period of up to 90 trading days from the
date of initial listing (‘‘Distribution
Standard Compliance Period’’) to
comply with the applicable initial
listing distribution requirements: (i) A
company listing in connection with a
Primary Direct Floor Listing in which it
sells at least $250 million in market
value of shares in the Exchange’s
opening auction on the first day of
trading on the Exchange; (ii) a company
listing in connection with a Primary
Direct Floor Listing in which the
aggregate amount of the market value of
shares sold by the company in the
opening auction and the market value of
publicly-held shares demonstrated by
the company immediately prior to the
time of initial listing (in the manner set
forth in Section 102.01B, Footnote (E) of
the Manual) is at least $350 million; and
(iii) a company listing in connection
with a Selling Shareholder Direct Floor
17 See proposed Section 102.01B, Footnote (E) of
the Manual.
18 See proposed Section 102.01B, Footnote (E) of
the Manual.
19 See Notice, supra note 3, 84 FR at 72067.
20 See proposed Section 102.01A of the Manual.
Section 102.01A requires a company to have 400
holders of 100 shares or more (or of a unit of trading
if less than 100 shares) and 1,100,000 publicly-held
shares. Shares held by directors, officers, or their
immediate families and other concentrated holdings
of 10 percent or more are excluded in calculating
the number of publicly-held shares. See Section
102.01A of the Manual.
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18293
Listing in which it demonstrates at the
time of initial listing (in the manner set
forth in Section 102.01B, Footnote (E) of
the Manual) that it has at least $350
million in aggregate market value of
publicly held shares.21
Under the proposal, any such
company that fails to demonstrate its
compliance with the applicable
requirements of Section 102.01A within
the Distribution Standard Compliance
Period will be deemed to be below
compliance with listing requirements.22
Any such company will have the right
to submit a plan pursuant to the
provisions of Sections 802.02 or 802.03
of the Manual, as applicable,
demonstrating its ability to gain
compliance with the applicable
requirements of Section 102.01A of the
Manual within a period not to exceed
six months from the end of the
Distribution Standard Compliance
Period.23
According to the Exchange, private
companies generally do not have as
many as 400 round lot holders, but that
this typically is not a barrier to listing
for a company undertaking an IPO
because the underwriters are able to
ensure that the shares sold in the IPO
are distributed to sufficient accounts to
meet the Exchange’s distribution
standards.24 However, the Exchange
asserts that, in the absence of an
underwritten transaction at the time of
listing, the initial listing distribution
standards may represent more of a
challenge for a private company
contemplating listing in connection
with a Selling Shareholder Direct Floor
Listing or a Primary Direct Floor
Listing.25 The Exchange believes that a
Primary Direct Floor Listing in which
the company sells at least $250 million
of its stock in the opening auction on
the day of listing would provide an
appropriately liquid trading market and
make it highly likely that the company
would meet the initial listing
distribution standards quickly after
initial listing.26 The Exchange notes that
the market value of publicly-held shares
requirement for initial listings other
than direct listings and IPOs is $100
million, and that the proposed $350
million requirement to use the
Distribution Compliance Period is far
higher than what a newly-listed
company would have to demonstrate
21 See
proposed Section 102.01A of the Manual.
proposed Section 102.01A of the Manual;
Notice, supra note 3, 84 FR at 72066.
23 See proposed Section 102.01A of the Manual.
24 See Notice, supra note 3, 84 FR at 72066.
25 See Notice, supra note 3, 84 FR at 72066.
26 See Notice, supra note 3, 84 FR at 72066.
22 See
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under other circumstances.27 The
Exchange believes that this heightened
standard significantly increases the
likelihood that a liquid trading market
will develop after a Selling Shareholder
Direct Floor Listing or Primary Direct
Floor Listing, and therefore makes it
likely that these companies will meet
the initial distribution standards within
the Distribution Standard Compliance
Period.28
III. Summary of Comment Letters
Received
The Commission has received twelve
comment letters on the proposed rule
change, including two letters from one
commenter and a letter responding to
the comments from the Exchange.29
Four commenters generally supported
the proposal.30 One commenter stated
that it supports alternative formats for
IPOs, including direct listing proposals
like the one proposed by the Exchange,
and expressed the view that issuers
should be offered choices that match
their objectives so long as they protect
the integrity of the markets and are fair
and clear to investors, using transparent
processes.31 Another commenter
believed that allowing for multiple
pathways for private companies to
achieve exchange listing would
encourage more companies to
participate in public equity markets and
provide investors a broader array of
attractive investment opportunities.32 A
third commenter stated that it strongly
supports proposals designed to facilitate
companies accessing the public equity
markets, and expressed the view that
the proposal appropriately updated the
27 See
Notice, supra note 3, 84 FR at 72066.
Notice, supra note 3, 84 FR at 72066.
29 See supra note 6.
30 See Letter from Stephen John Berger, Managing
Director, Global Head of Government & Regulatory
Policy, Citadel Securities (February 18, 2020)
(‘‘Citadel Letter’’), at 1; Letter from Paul
Abrahimzadeh and Russell Chong, Co-Heads, U.S.
Equity Capital Markets, Citigroup Global Markets
Inc. (February 26, 2020) (‘‘Citigroup Letter’’); Letter
from Matthew B. Venturi, Founder & CEO,
ClearingBid, Inc. (January 21, 2020) (‘‘ClearingBid
Letter’’), at 5; Letter from David Ludwig, Head of
Americas Equity Capital Markets, Goldman Sachs
Group, Inc. (February 7, 2020) (‘‘Goldman Sachs
Letter’’).
31 See Citigroup Letter, supra note 30. This
commenter also believed that the direct listing
format would afford broad participation in the
capital formation process and help establish a
shareholder base that has a long-term interest in
partnering with management teams. See id.
32 See Goldman Sachs Letter, supra note 30. This
commenter also referenced the recent direct listings
by Spotify Technology S.A. and Slack
Technologies, Inc., and expressed the view that the
development of a direct listing approach to
becoming a public company has been a significant
step forward in providing companies greater choice
in their path to going public, and that the ability
to include a primary capital raise in a direct listing
will further enhance this flexibility. See id.
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28 See
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publicly-held shares and distribution
requirements associated with direct
listings in order to ensure the
development of a liquid trading
market.33 Finally, one commenter
expressed general support for the
proposal, but offered a variety of
observations and concerns, including
that the historical approach to IPO
pricing is not sufficiently transparent,
creates the opportunity for dramatic
price swings, and is not fair to all
qualified investors.34 In its view, all
investors should have the opportunity
to participate in a seamless process that
also provides transparency.35
Other commenters opposed the
proposal. One commenter expressed the
view that allowing companies to raise
primary capital through a direct listing
‘‘would be a complete end run around
the traditional underwriting process and
. . . create a massive loophole in the
regulatory regime that governs the
offerings of securities to the public.’’ 36
This commenter believed that approval
of the proposal would likely increase
the number of companies that forego the
traditional IPO process, and
significantly increase the risks for retail
investors, including by circumventing
the due diligence process.37 The
commenter expressed concern that
direct listings could weaken certain
shareholder investor protections, and
recommended that the Commission
make clear that financial advisors,
exchanges, control shareholders, and
directors involved in a direct listing
automatically incur statutory
underwriter liability under the
Securities Act and be required to hold
the regulatory capital necessary to act as
a de facto underwriter.38
33 See Citadel Letter, supra note 30, at 1. This
commenter also referenced its role as the NYSE
Designated Market Maker for both Spotify
Technology S.A. and Slack Technologies, Inc., and
stated that its experience has demonstrated that a
direct listing can be an attractive alternative to the
traditional IPO process. See id.
34 See ClearingBid Letter, supra note 30, at 1.
35 See ClearingBid Letter, supra note 30, at 5. This
commenter also believed that, coupled with greater
transparency for a truer indication of market
demand via real-time price discovery, fair and equal
market access can be provided to all investors, not
just the largest institutions. See id.
36 Letter from Christopher A. Iacovella, Chief
Executive Officer, ASA (December 12, 2019) (‘‘ASA
Letter I’’), at 1.
37 See ASA Letter I, supra note 36, at 2. In this
commenter’s view, two recent high-profile direct
listings—Spotify and Slack—did not work out
particularly well for retail investors, and a robust
underwriting process would have uncovered more
of these companies’ vulnerabilities before these
securities were offered to the public. See id.
38 See ASA Letter I, supra note 36, at 2; Letter
from Christopher A. Iacovella, Chief Executive
Officer, American Securities Association (March 5,
2020) (‘‘ASA Letter II’’), at 2–3.
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Another commenter noted that it had
generally supported permitting direct
listings, based on a belief that a direct
listing should be a choice for companies
considering a public listing that could
be more cost-effective than an IPO while
still providing necessary investor
protections.39 However, this commenter
expressed concern that shareholder
legal rights under Section 11 of the
Securities Act may be particularly
vulnerable in the case of direct listings,
and that investors in direct listing
companies may have fewer legal
protections than investors in IPOs.40
The commenter stated that it could not
support direct listings as an alternative
to IPOs if public companies could limit
their liability for damages caused by
untrue statements of fact or material
omissions of fact within registration
statements associated with direct
listings.41 Finally, this commenter
specifically opposed the Distribution
Standard Compliance Period proposed
by the Exchange. The commenter noted
that the Exchange had provided no data
to support its argument that issuers with
at least $350 million in public float
would quickly develop a liquid trading
market and comply with the initial
listing distribution requirements within
the 90-day grace period and stated that,
without evidence, the $350 million
threshold ‘‘appears arbitrary.’’ 42
The Exchange responded to several of
the concerns raised by commenters. The
Exchange disagrees that the absence of
39 See Letter from Jeffrey P. Mahoney, General
Counsel, Council of Institutional Investors (January
16, 2020) (‘‘CII Letter’’), at 1–2.
40 See CII Letter, supra note 39, at 2.
41 See CII Letter, supra note 39, at 2–3. This
commenter was particularly concerned about
positions taken by the issuer in a recent lawsuit
relating to the direct listing of Slack, and expressed
the view that the issuer ‘‘relies on (1) attacking the
right of secondary market purchasers to bring a
Section 11 claim; and (2) the inability to determine
what shares were ‘covered’ by Slack’s registration
statement.’’ Id. at 2. Among other things, the
commenter urged the Commission to explore
establishing a system of traceable shares before
approving a direct listing regime. See id. at 2–3.
42 See CII Letter, supra note 39, at 4. Several
additional commenters raised a variety of concerns
with the proposal. For example, one commenter
expressed the view that ‘‘bailing out’’ private
market investors with reduced offering
requirements would incent companies to remain
private longer, reduce transparency, and impair
price discovery. See Letter from Anonymous
(December 4, 2019). Another commenter took the
position that direct listings are a method for
insiders to ‘‘rip-off’’ IPO investors. See Letter from
Allan Rosenbalm (December 4, 2019). Yet another
commenter was critical of direct listings for a
variety of reasons, and expressed the view, among
other things, that they are ‘‘an attempt to bypass the
independent skilled investment banking and
investment management professionals when
establishing the initial market value of the
company.’’ See Letter from Anonymous (January 3,
2020).
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underwriters creates a loophole in the
regulatory regime that governs offerings
of securities to the public.43 According
to the Exchange, while underwriter
involvement is often necessary to the
success of an IPO or other public
offering, underwriter participation in
the public capital-raising process is not
required by the Securities Act, and
companies that do not require the
services of an underwriter are not
required to purchase them.44 In the
Exchange’s view, the due diligence
process in primary direct listings is the
responsibility of the gatekeepers who
participate in the transaction, such as
the company’s board of directors, its
senior management, and its
independent accountants.45 The
Exchange further stated that a company
pursuing a Primary Direct Floor Listing
would go through the same process of
publicly filing a registration statement
as an underwritten offering, and if a
company’s business model exhibits
weaknesses, they will be exposed to the
public prior to listing.46
IV. Proceedings To Determine Whether
To Approve or Disapprove SR–NYSE–
2019–67 and Grounds for Disapproval
Under Consideration
The Commission is instituting
proceedings pursuant to Section
19(b)(2)(B) of the Exchange Act to
determine whether the proposal should
be approved or disapproved.47
Institution of such proceedings is
appropriate at this time in view of the
legal and policy issues raised by the
proposed rule change, as discussed
below. Institution of disapproval
proceedings does not indicate that the
Commission has reached any
conclusions with respect to any of the
issues involved.
Pursuant to Section 19(b)(2)(B) of the
Exchange Act, the Commission is
providing notice of the grounds for
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43 See
Letter from Elizabeth K. King, Chief
Regulatory Officer, ICE, General Counsel &
Corporate Secretary, NYSE (March 16, 2020)
(‘‘NYSE Response Letter’’), at 2.
44 See NYSE Response Letter, supra note 43, at 2–
3.
45 See NYSE Response Letter, supra note 43, at 2–
3. The Exchange took the position that IPOs carry
a certain amount of risk for investors, that an
underwritten IPO does not insulate investors from
that risk, and that there is no reason to believe that
companies with direct listings will perform any
better or worse than companies with underwritten
IPOs. See id. at 3.
46 See NYSE Response Letter, supra note 43, at 4.
The Exchange also took the position that the
absence of lock-up agreements with pre-IPO
shareholders in Primary Direct Floor Listings does
not create short-term price instability, and at most
it shifts the timing of such instability from six
months after the offering to closer to the time of
listing. See id.
47 15 U.S.C. 78s(b)(2)(B).
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disapproval under consideration. The
Commission is instituting proceedings
to allow for additional analysis and
input concerning the proposed rule
change’s consistency with the Exchange
Act 48 and, in particular, with Section
6(b)(5) of the Exchange Act, which
requires, among other things, that the
rules of a national securities exchange
be designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest; and
are not designed to permit unfair
discrimination between customers,
issuers, brokers, or dealers.49
The Commission has consistently
recognized the importance of exchange
listing standards. Among other things,
such listing standards help ensure that
exchange-listed companies will have
sufficient public float, investor base,
and trading interest to provide the depth
and liquidity necessary to promote fair
and orderly markets.50
The Exchange is proposing to provide
new exceptions to its initial listing
standards for companies listing in
connection with a Primary Direct Floor
Listing or a Selling Shareholder Direct
Floor Listing. Specifically, such
companies would be granted a grace
period of up to 90 trading days to
comply with the requirements to have at
least 400 round lot holders and 1.1
million publicly-held shares (i.e., the
Distribution Standard Compliance
Period), so long as they meet one of
three $250 million or $350 million
market value of shares tests. In support
of its proposal, the Exchange simply
expresses the belief that these
heightened market value standards
48 15
U.S.C. 78f(b)(5).
49 Id.
50 The Commission has stated in approving
exchange listing requirements that the development
and enforcement of adequate standards governing
the listing of securities on an exchange is an activity
of critical importance to the financial markets and
the investing public. In addition, once a security
has been approved for initial listing, maintenance
criteria allow an exchange to monitor the status and
trading characteristics of that issue to ensure that
it continues to meet the exchange’s standards for
market depth and liquidity so that fair and orderly
markets can be maintained. See, e.g., Securities
Exchange Act Release Nos. 81856 (October 11,
2017), 82 FR 48296, 48298 (October 17, 2017) (SR–
NYSE–2017–31); 81079 (July 5, 2017), 82 FR 32022,
32023 (July 11, 2017) (SR–NYSE–2017–11). The
Commission notes that, in general, adequate listing
standards, by promoting fair and orderly markets,
are consistent with Section 6(b)(5) of the Exchange
Act, in that they are, among other things, designed
to prevent fraudulent and manipulative acts and
practices, promote just and equitable principles of
trade, and protect investors and the public interest.
PO 00000
Frm 00111
Fmt 4703
Sfmt 4703
18295
significantly increase the likelihood that
a liquid trading market will develop
after the listing, which the Exchange
believes makes it likely that these
companies will meet the initial
distribution standards within the 90trading day period. The Exchange,
however, does not offer any further
explanation as to why a higher market
value of shares would lead to a
potentially substantial increase in the
number of shareholders in a relatively
short time frame. In addition, the
Exchange does not provide any data or
other evidence to support its belief that
companies with the specified market
values are likely to have at least 400
round lot holders within 90 trading days
of listing, regardless of the number of
holders upon listing or other
characteristics of the company. Further,
the Exchange effectively is proposing
not to enforce any minimum number of
holders requirements for such
companies for 90 trading days, and has
not explained why potentially listing an
issuer with a very small number of
holders, and allowing it to trade for
many months, would not risk
undermining fair and orderly markets or
the protection of investors, or otherwise
would be consistent with Section 6(b)(5)
and other relevant provisions of the
Exchange Act. Finally, by first listing
companies and only later enforcing
compliance with the specified
distribution standards, the Exchange
would appear to be increasing the risk
of delisting companies relatively soon
after their listing, and the Exchange has
not offered any assessment of this risk
or the impact such delistings may have
on investors in those securities or on
fair and orderly markets.
The Exchange also has proposed that,
with respect to a Primary Direct Floor
Listing, a company will be deemed to
have met the applicable $100 million
aggregate market value of publicly-held
shares requirement if the company sells
at least $100 million in market value of
shares in the Exchange’s opening
auction on the first day of trading. The
Exchange has not explained, however,
how it would be assured that a company
listing under this provision will actually
sell shares valued at $100 million or
more at the time the company is
approved for listing, which necessarily
will be in advance of the Exchange’s
opening auction. If the company is
unable to sell shares with the requisite
valuation in the opening auction, then
it may not in fact have met the initial
listing standards prior to listing and
trading. This immediate compliance
issue, and the potential for delisting,
would appear to raise fair and orderly
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Federal Register / Vol. 85, No. 63 / Wednesday, April 1, 2020 / Notices
markets, investor protection, and other
issues similar to those discussed above
with respect to the Distribution
Standard Compliance Period. The
Exchange has not explained how this
would be consistent with Section 6(b)(5)
and other relevant provisions of the
Exchange Act.
Finally, the proposal, for the first
time, would permit the Exchange to
conduct a Primary Direct Floor Listing,
either alone or in combination with a
Selling Shareholder Direct Floor Listing,
where the company being listed would
sell shares in the opening auction on the
first day of trading. In such a case, the
company could be the only seller (or a
dominant seller) participating in the
opening auction, and thus could be in
a position to uniquely influence the
price discovery process. The Exchange,
however, has not explained how its
opening auction rules would apply in a
Primary Direct Floor Listing, or how the
Exchange would assure that the opening
auction and subsequent trading promote
fair and orderly markets, prevent
manipulative acts and practices, protect
investors, and otherwise would be
consistent with Section 6(b)(5) and
other relevant provisions of the
Exchange Act.
The Commission notes that, under the
Commission’s Rules of Practice, the
‘‘burden to demonstrate that a proposed
rule change is consistent with the
Exchange Act and the rules and
regulations issued thereunder . . . is on
the self-regulatory organization [‘SRO’]
that proposed the rule change.’’ 51 The
description of a proposed rule change,
its purpose and operation, its effect, and
a legal analysis of its consistency with
applicable requirements must all be
sufficiently detailed and specific to
support an affirmative Commission
finding,52 and any failure of an SRO to
provide this information may result in
the Commission not having a sufficient
basis to make an affirmative finding that
a proposed rule change is consistent
with the Exchange Act and the
applicable rules and regulations.53
For these reasons, the Commission
believes it is appropriate to institute
proceedings pursuant to Section
19(b)(2)(B) of the Exchange Act 54 to
determine whether the proposal should
be approved or disapproved.
51 Rule 700(b)(3), Commission Rules of Practice,
17 CFR 201.700(b)(3).
52 See id.
53 See id.
54 15 U.S.C. 78s(b)(2)(B).
VerDate Sep<11>2014
18:31 Mar 31, 2020
Jkt 250001
V. Commission’s Solicitation of
Comments
The Commission requests that
interested persons provide written
submissions of their views, data, and
arguments with respect to the issues
identified above, as well as any other
concerns they may have with the
proposal. In particular, the Commission
invites the written view of interested
persons concerning whether the
proposal is consistent with Section
6(b)(5) or any other provision of the
Exchange Act, or the rules and
regulations thereunder. Although there
do not appear to be any issues relevant
to approval or disapproval that would
be facilitated by an oral presentation of
views, data, and arguments, the
Commission will consider, pursuant to
Rule 19b–4, any request for an
opportunity to make an oral
presentation.55
Interested persons are invited to
submit written data, views, and
arguments regarding whether the
proposal should be approved or
disapproved by April 22, 2020. Any
person who wishes to file a rebuttal to
any other person’s submission must file
that rebuttal by May 6, 2020.
Comments may be submitted by any
of the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NYSE–2019–67 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NYSE–2019–67. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
55 Section 19(b)(2) of the Exchange Act, as
amended by the Securities Act Amendments of
1975, Public Law 94–29 (June 4, 1975), grants the
Commission flexibility to determine what type of
proceeding—either oral or notice and opportunity
for written comments—is appropriate for
consideration of a particular proposal by a selfregulatory organization. See Securities Act
Amendments of 1975, Senate Comm. on Banking,
Housing & Urban Affairs, S. Rep. No. 75, 94th
Cong., 1st Sess. 30 (1975).
PO 00000
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Fmt 4703
Sfmt 4703
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–NYSE–2019–67 and should
be submitted on or before April 22,
2020. Rebuttal comments should be
submitted by May 6, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.56
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–06732 Filed 3–31–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Sunshine Act Meetings
Notice is hereby given,
pursuant to the provisions of the
Government in the Sunshine Act, Public
Law 94–409, that the Securities and
Exchange Commission Investor
Advisory Committee will hold a public
meeting on Thursday April 2, 2020, by
remote means and/or at the
Commission’s headquarters, 100 F St.
NE, Washington, DC 20549.
TIME AND DATE:
The meeting will begin at 4:00
p.m. (ET) and will be open to the public.
The meeting will be conducted by
remote means and/or at the
Commission’s headquarters, 100 F St.
NE, Washington, DC 20549. Members of
the public may watch the webcast of the
meeting on the Commission’s website at
www.sec.gov.
PLACE:
56 17
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]]>Agencies
[Federal Register Volume 85, Number 63 (Wednesday, April 1, 2020)]
[Notices]
[Pages 18292-18296]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-06732]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88485; File No. SR-NYSE-2019-67]
Self-Regulatory Organizations; New York Stock Exchange LLC; Order
Instituting Proceedings To Determine Whether To Approve or Disapprove a
Proposed Rule Change, as Modified by Amendment No. 1, To Amend Chapter
One of the Listed Company Manual To Modify the Provisions Related to
Direct Listings
March 26, 2020.
I. Introduction
On December 11, 2019, New York Stock Exchange LLC (``NYSE'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend Chapter One of the
Listed Company Manual (``Manual'') to modify the provisions related to
direct listings. On December 13, 2019, the Exchange filed Amendment No.
1 to the proposed rule change, which amended and replaced the proposed
rule change in its entirety. The proposed rule change, as modified by
Amendment No. 1, was published for comment in the Federal Register on
December 30, 2019.\3\ On February 13, 2020, pursuant to Section 19(b(2)
of the Exchange Act,\4\ the Commission designated a longer period
within which to either approve the proposed rule change, disapprove the
proposed rule change, or institute proceedings to determine whether to
disapprove the proposed rule change.\5\ The Commission has received
twelve comment letters on the proposed rule change, including a
response from the Exchange.\6\ This order institutes proceedings under
Section 19(b)(2)(B) of the Exchange Act \7\ to determine whether to
approve or disapprove the proposed rule change, as modified by
Amendment No. 1.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 87821 (December 20,
2019), 84 FR 72065 (December 30, 2019) (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 88190 (February 13,
2020), 85 FR 9891 (February 20, 2020). The Commission designated
March 29, 2020, as the date by which it should approve, disapprove,
or institute proceedings to determine whether to disapprove the
proposed rule change.
\6\ Comments received on the Notice are available on the
Commission's website at: https://www.sec.gov/comments/sr-nyse-2019-67/srnyse201967.htm.
\7\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
II. Description of the Proposal
Section 102.01B, Footnote (E) of the Manual states that the
Exchange generally expects to list companies in connection with a firm
commitment underwritten initial public offering (``IPO''), upon
transfer from another market, or pursuant to a spin-off, but also
allows for the possibility of using a direct listing, as described
below.\8\ Currently, Footnote (E) states that the Exchange recognizes
that companies that have not previously had their common equity
securities registered under the Exchange Act, but which have sold
common equity securities in a private placement, may wish to list their
common equity securities on the Exchange at the time of effectiveness
of a registration statement \9\ filed solely for the purpose of
allowing existing shareholders to sell their shares.\10\ The Exchange
has proposed to define this type of direct listing already contemplated
by the Exchange's rules as a ``Selling Shareholder Direct Floor
Listing.'' \11\ In addition, the Exchange has proposed to recognize an
additional type of direct listing in which a company would sell shares
itself in the opening auction on the first day of trading on the
Exchange in addition to, or instead of, facilitating sales by selling
shareholders (a ``Primary Direct Floor
[[Page 18293]]
Listing'').\12\ Under the proposal, the Exchange would, on a case by
case basis, exercise discretion to list companies that are listing in
connection with a Selling Shareholder Direct Floor Listing or a Primary
Direct Floor Listing.\13\
---------------------------------------------------------------------------
\8\ See Section 102.01B, Footnote (E) of the Manual.
\9\ The reference to a registration statement refers to a
registration statement effective under the Securities Act of 1933
(``Securities Act'').
\10\ See Section 102.01B, Footnote (E) of the Manual. See also
Securities Exchange Act Release No. 82627 (February 2, 2018), 3 FR
5650 (February 8, 2018) (SR-NYSE-2017-30) (approving proposed rule
change to amend Section 102.01B of the Manual to modify the
provisions relating to the qualifications of companies listing
without a prior Exchange Act registration in connection with an
underwritten IPO and amend the Exchange's rules to address the
opening procedures on the first day of trading for such securities).
\11\ See proposed Section 102.01B, Footnote (E) of the Manual.
Under the proposal, the Exchange would remove a description of this
type of direct listing as involving a company ``whose stock is not
previously registered under the Exchange Act, where such company is
listing without a related underwritten offering upon effectiveness
of a registration statement registered only the resale of shares
sold by the company in earlier private placements.'' See id.
\12\ See proposed Section 102.01B, Footnote (E) of the Manual.
\13\ See proposed Section 102.01B, Footnote (E) of the Manual.
---------------------------------------------------------------------------
With respect to a Selling Shareholder Direct Floor Listing, the
Exchange has proposed to retain the existing standards regarding how
the Exchange will determine whether a company has met its market value
of publicly-held shares listing requirement. The Exchange will continue
to determine that such company has met the $100 million aggregate
market value of publicly-held shares requirement based on a combination
of both (i) an independent third-party valuation (``Valuation'') of the
company; and (ii) the most recent trading price for the company's
common stock in a trading system for unregistered securities operated
by a national securities exchange or a registered broker-dealer
(``Private Placement Market'').\14\ The Exchange will attribute a
market value of publicly-held shares to the company equal to the lesser
of: (i) The value calculable based on the Valuation; and (ii) the value
calculable based on the most recent trading price in a Private
Placement Market.\15\ Alternatively, in the absence of any recent
trading in a Private Placement Market, the Exchange will determine that
such company has met its market value of publicly-held shares
requirement if the company provides a Valuation evidencing a market
value of publicly-held shares of at least $250 million.\16\
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\14\ See proposed Section 102.01B, Footnote (E) of the Manual.
For specific requirements regarding the Valuation and the
independence of the valuation agent conducting such Valuation, see
Section 102.01B, Footnote (E) of the Manual. Section 102.01B,
Footnote (E) of the Manual also sets forth specific factors for
relying on a Private Placement Market price. Generally, the Exchange
will only rely on a Private Placement Market price if it is
consistent with a sustained history over a several month period
prior to listing evidencing a market value in excess of the
Exchange's market value requirement.
\15\ See Section 102.01B, Footnote (E) of the Manual.
\16\ See Section 102.01B, Footnote (E) of the Manual.
---------------------------------------------------------------------------
With respect to a Primary Direct Floor Listing, the Exchange has
proposed that it will deem a company to have met the applicable
aggregate market value of publicly-held shares requirement if the
company sells at least $100 million in market value of the shares in
the Exchange's opening auction on the first day of trading on the
Exchange.\17\ Alternatively, where a company is conducting a Primary
Direct Floor Listing and sells shares in the opening auction with a
market value of less than $100 million, the Exchange will determine
that such company has met its market value of publicly-held shares
requirement if the company provides a Valuation evidencing a market
value of publicly-held shares of at least $250 million.\18\ According
to the Exchange, these requirements would provide that any company
conducting a Primary Direct Floor Listing would be of a suitable size
for Exchange listing and that there would be sufficient liquidity for
the security to be suitable for auction market trading.\19\
---------------------------------------------------------------------------
\17\ See proposed Section 102.01B, Footnote (E) of the Manual.
\18\ See proposed Section 102.01B, Footnote (E) of the Manual.
\19\ See Notice, supra note 3, 84 FR at 72067.
---------------------------------------------------------------------------
In addition, the Exchange has proposed to amend Section 102.01A of
the Manual to provide certain exceptions to the requirement that a
company listing in connection with a Primary Direct Floor Listing or a
Selling Shareholder Direct Floor Listing comply with the applicable
initial listing distribution requirements, which require at least 400
round lot holders and 1.1 million publicly-held shares, at the time of
initial listing.\20\ In each of the following cases, the Exchange has
proposed to grant the company a grace period of up to 90 trading days
from the date of initial listing (``Distribution Standard Compliance
Period'') to comply with the applicable initial listing distribution
requirements: (i) A company listing in connection with a Primary Direct
Floor Listing in which it sells at least $250 million in market value
of shares in the Exchange's opening auction on the first day of trading
on the Exchange; (ii) a company listing in connection with a Primary
Direct Floor Listing in which the aggregate amount of the market value
of shares sold by the company in the opening auction and the market
value of publicly-held shares demonstrated by the company immediately
prior to the time of initial listing (in the manner set forth in
Section 102.01B, Footnote (E) of the Manual) is at least $350 million;
and (iii) a company listing in connection with a Selling Shareholder
Direct Floor Listing in which it demonstrates at the time of initial
listing (in the manner set forth in Section 102.01B, Footnote (E) of
the Manual) that it has at least $350 million in aggregate market value
of publicly held shares.\21\
---------------------------------------------------------------------------
\20\ See proposed Section 102.01A of the Manual. Section 102.01A
requires a company to have 400 holders of 100 shares or more (or of
a unit of trading if less than 100 shares) and 1,100,000 publicly-
held shares. Shares held by directors, officers, or their immediate
families and other concentrated holdings of 10 percent or more are
excluded in calculating the number of publicly-held shares. See
Section 102.01A of the Manual.
\21\ See proposed Section 102.01A of the Manual.
---------------------------------------------------------------------------
Under the proposal, any such company that fails to demonstrate its
compliance with the applicable requirements of Section 102.01A within
the Distribution Standard Compliance Period will be deemed to be below
compliance with listing requirements.\22\ Any such company will have
the right to submit a plan pursuant to the provisions of Sections
802.02 or 802.03 of the Manual, as applicable, demonstrating its
ability to gain compliance with the applicable requirements of Section
102.01A of the Manual within a period not to exceed six months from the
end of the Distribution Standard Compliance Period.\23\
---------------------------------------------------------------------------
\22\ See proposed Section 102.01A of the Manual; Notice, supra
note 3, 84 FR at 72066.
\23\ See proposed Section 102.01A of the Manual.
---------------------------------------------------------------------------
According to the Exchange, private companies generally do not have
as many as 400 round lot holders, but that this typically is not a
barrier to listing for a company undertaking an IPO because the
underwriters are able to ensure that the shares sold in the IPO are
distributed to sufficient accounts to meet the Exchange's distribution
standards.\24\ However, the Exchange asserts that, in the absence of an
underwritten transaction at the time of listing, the initial listing
distribution standards may represent more of a challenge for a private
company contemplating listing in connection with a Selling Shareholder
Direct Floor Listing or a Primary Direct Floor Listing.\25\ The
Exchange believes that a Primary Direct Floor Listing in which the
company sells at least $250 million of its stock in the opening auction
on the day of listing would provide an appropriately liquid trading
market and make it highly likely that the company would meet the
initial listing distribution standards quickly after initial
listing.\26\ The Exchange notes that the market value of publicly-held
shares requirement for initial listings other than direct listings and
IPOs is $100 million, and that the proposed $350 million requirement to
use the Distribution Compliance Period is far higher than what a newly-
listed company would have to demonstrate
[[Page 18294]]
under other circumstances.\27\ The Exchange believes that this
heightened standard significantly increases the likelihood that a
liquid trading market will develop after a Selling Shareholder Direct
Floor Listing or Primary Direct Floor Listing, and therefore makes it
likely that these companies will meet the initial distribution
standards within the Distribution Standard Compliance Period.\28\
---------------------------------------------------------------------------
\24\ See Notice, supra note 3, 84 FR at 72066.
\25\ See Notice, supra note 3, 84 FR at 72066.
\26\ See Notice, supra note 3, 84 FR at 72066.
\27\ See Notice, supra note 3, 84 FR at 72066.
\28\ See Notice, supra note 3, 84 FR at 72066.
---------------------------------------------------------------------------
III. Summary of Comment Letters Received
The Commission has received twelve comment letters on the proposed
rule change, including two letters from one commenter and a letter
responding to the comments from the Exchange.\29\
---------------------------------------------------------------------------
\29\ See supra note 6.
---------------------------------------------------------------------------
Four commenters generally supported the proposal.\30\ One commenter
stated that it supports alternative formats for IPOs, including direct
listing proposals like the one proposed by the Exchange, and expressed
the view that issuers should be offered choices that match their
objectives so long as they protect the integrity of the markets and are
fair and clear to investors, using transparent processes.\31\ Another
commenter believed that allowing for multiple pathways for private
companies to achieve exchange listing would encourage more companies to
participate in public equity markets and provide investors a broader
array of attractive investment opportunities.\32\ A third commenter
stated that it strongly supports proposals designed to facilitate
companies accessing the public equity markets, and expressed the view
that the proposal appropriately updated the publicly-held shares and
distribution requirements associated with direct listings in order to
ensure the development of a liquid trading market.\33\ Finally, one
commenter expressed general support for the proposal, but offered a
variety of observations and concerns, including that the historical
approach to IPO pricing is not sufficiently transparent, creates the
opportunity for dramatic price swings, and is not fair to all qualified
investors.\34\ In its view, all investors should have the opportunity
to participate in a seamless process that also provides
transparency.\35\
---------------------------------------------------------------------------
\30\ See Letter from Stephen John Berger, Managing Director,
Global Head of Government & Regulatory Policy, Citadel Securities
(February 18, 2020) (``Citadel Letter''), at 1; Letter from Paul
Abrahimzadeh and Russell Chong, Co-Heads, U.S. Equity Capital
Markets, Citigroup Global Markets Inc. (February 26, 2020)
(``Citigroup Letter''); Letter from Matthew B. Venturi, Founder &
CEO, ClearingBid, Inc. (January 21, 2020) (``ClearingBid Letter''),
at 5; Letter from David Ludwig, Head of Americas Equity Capital
Markets, Goldman Sachs Group, Inc. (February 7, 2020) (``Goldman
Sachs Letter'').
\31\ See Citigroup Letter, supra note 30. This commenter also
believed that the direct listing format would afford broad
participation in the capital formation process and help establish a
shareholder base that has a long-term interest in partnering with
management teams. See id.
\32\ See Goldman Sachs Letter, supra note 30. This commenter
also referenced the recent direct listings by Spotify Technology
S.A. and Slack Technologies, Inc., and expressed the view that the
development of a direct listing approach to becoming a public
company has been a significant step forward in providing companies
greater choice in their path to going public, and that the ability
to include a primary capital raise in a direct listing will further
enhance this flexibility. See id.
\33\ See Citadel Letter, supra note 30, at 1. This commenter
also referenced its role as the NYSE Designated Market Maker for
both Spotify Technology S.A. and Slack Technologies, Inc., and
stated that its experience has demonstrated that a direct listing
can be an attractive alternative to the traditional IPO process. See
id.
\34\ See ClearingBid Letter, supra note 30, at 1.
\35\ See ClearingBid Letter, supra note 30, at 5. This commenter
also believed that, coupled with greater transparency for a truer
indication of market demand via real-time price discovery, fair and
equal market access can be provided to all investors, not just the
largest institutions. See id.
---------------------------------------------------------------------------
Other commenters opposed the proposal. One commenter expressed the
view that allowing companies to raise primary capital through a direct
listing ``would be a complete end run around the traditional
underwriting process and . . . create a massive loophole in the
regulatory regime that governs the offerings of securities to the
public.'' \36\ This commenter believed that approval of the proposal
would likely increase the number of companies that forego the
traditional IPO process, and significantly increase the risks for
retail investors, including by circumventing the due diligence
process.\37\ The commenter expressed concern that direct listings could
weaken certain shareholder investor protections, and recommended that
the Commission make clear that financial advisors, exchanges, control
shareholders, and directors involved in a direct listing automatically
incur statutory underwriter liability under the Securities Act and be
required to hold the regulatory capital necessary to act as a de facto
underwriter.\38\
---------------------------------------------------------------------------
\36\ Letter from Christopher A. Iacovella, Chief Executive
Officer, ASA (December 12, 2019) (``ASA Letter I''), at 1.
\37\ See ASA Letter I, supra note 36, at 2. In this commenter's
view, two recent high-profile direct listings--Spotify and Slack--
did not work out particularly well for retail investors, and a
robust underwriting process would have uncovered more of these
companies' vulnerabilities before these securities were offered to
the public. See id.
\38\ See ASA Letter I, supra note 36, at 2; Letter from
Christopher A. Iacovella, Chief Executive Officer, American
Securities Association (March 5, 2020) (``ASA Letter II''), at 2-3.
---------------------------------------------------------------------------
Another commenter noted that it had generally supported permitting
direct listings, based on a belief that a direct listing should be a
choice for companies considering a public listing that could be more
cost-effective than an IPO while still providing necessary investor
protections.\39\ However, this commenter expressed concern that
shareholder legal rights under Section 11 of the Securities Act may be
particularly vulnerable in the case of direct listings, and that
investors in direct listing companies may have fewer legal protections
than investors in IPOs.\40\ The commenter stated that it could not
support direct listings as an alternative to IPOs if public companies
could limit their liability for damages caused by untrue statements of
fact or material omissions of fact within registration statements
associated with direct listings.\41\ Finally, this commenter
specifically opposed the Distribution Standard Compliance Period
proposed by the Exchange. The commenter noted that the Exchange had
provided no data to support its argument that issuers with at least
$350 million in public float would quickly develop a liquid trading
market and comply with the initial listing distribution requirements
within the 90-day grace period and stated that, without evidence, the
$350 million threshold ``appears arbitrary.'' \42\
---------------------------------------------------------------------------
\39\ See Letter from Jeffrey P. Mahoney, General Counsel,
Council of Institutional Investors (January 16, 2020) (``CII
Letter''), at 1-2.
\40\ See CII Letter, supra note 39, at 2.
\41\ See CII Letter, supra note 39, at 2-3. This commenter was
particularly concerned about positions taken by the issuer in a
recent lawsuit relating to the direct listing of Slack, and
expressed the view that the issuer ``relies on (1) attacking the
right of secondary market purchasers to bring a Section 11 claim;
and (2) the inability to determine what shares were `covered' by
Slack's registration statement.'' Id. at 2. Among other things, the
commenter urged the Commission to explore establishing a system of
traceable shares before approving a direct listing regime. See id.
at 2-3.
\42\ See CII Letter, supra note 39, at 4. Several additional
commenters raised a variety of concerns with the proposal. For
example, one commenter expressed the view that ``bailing out''
private market investors with reduced offering requirements would
incent companies to remain private longer, reduce transparency, and
impair price discovery. See Letter from Anonymous (December 4,
2019). Another commenter took the position that direct listings are
a method for insiders to ``rip-off'' IPO investors. See Letter from
Allan Rosenbalm (December 4, 2019). Yet another commenter was
critical of direct listings for a variety of reasons, and expressed
the view, among other things, that they are ``an attempt to bypass
the independent skilled investment banking and investment management
professionals when establishing the initial market value of the
company.'' See Letter from Anonymous (January 3, 2020).
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The Exchange responded to several of the concerns raised by
commenters. The Exchange disagrees that the absence of
[[Page 18295]]
underwriters creates a loophole in the regulatory regime that governs
offerings of securities to the public.\43\ According to the Exchange,
while underwriter involvement is often necessary to the success of an
IPO or other public offering, underwriter participation in the public
capital-raising process is not required by the Securities Act, and
companies that do not require the services of an underwriter are not
required to purchase them.\44\ In the Exchange's view, the due
diligence process in primary direct listings is the responsibility of
the gatekeepers who participate in the transaction, such as the
company's board of directors, its senior management, and its
independent accountants.\45\ The Exchange further stated that a company
pursuing a Primary Direct Floor Listing would go through the same
process of publicly filing a registration statement as an underwritten
offering, and if a company's business model exhibits weaknesses, they
will be exposed to the public prior to listing.\46\
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\43\ See Letter from Elizabeth K. King, Chief Regulatory
Officer, ICE, General Counsel & Corporate Secretary, NYSE (March 16,
2020) (``NYSE Response Letter''), at 2.
\44\ See NYSE Response Letter, supra note 43, at 2-3.
\45\ See NYSE Response Letter, supra note 43, at 2-3. The
Exchange took the position that IPOs carry a certain amount of risk
for investors, that an underwritten IPO does not insulate investors
from that risk, and that there is no reason to believe that
companies with direct listings will perform any better or worse than
companies with underwritten IPOs. See id. at 3.
\46\ See NYSE Response Letter, supra note 43, at 4. The Exchange
also took the position that the absence of lock-up agreements with
pre-IPO shareholders in Primary Direct Floor Listings does not
create short-term price instability, and at most it shifts the
timing of such instability from six months after the offering to
closer to the time of listing. See id.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-NYSE-
2019-67 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Exchange Act to determine whether the proposal
should be approved or disapproved.\47\ Institution of such proceedings
is appropriate at this time in view of the legal and policy issues
raised by the proposed rule change, as discussed below. Institution of
disapproval proceedings does not indicate that the Commission has
reached any conclusions with respect to any of the issues involved.
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\47\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Exchange Act, the Commission
is providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis and input concerning the proposed rule change's consistency
with the Exchange Act \48\ and, in particular, with Section 6(b)(5) of
the Exchange Act, which requires, among other things, that the rules of
a national securities exchange be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
of a free and open market and a national market system, and, in
general, to protect investors and the public interest; and are not
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.\49\
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\48\ 15 U.S.C. 78f(b)(5).
\49\ Id.
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The Commission has consistently recognized the importance of
exchange listing standards. Among other things, such listing standards
help ensure that exchange-listed companies will have sufficient public
float, investor base, and trading interest to provide the depth and
liquidity necessary to promote fair and orderly markets.\50\
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\50\ The Commission has stated in approving exchange listing
requirements that the development and enforcement of adequate
standards governing the listing of securities on an exchange is an
activity of critical importance to the financial markets and the
investing public. In addition, once a security has been approved for
initial listing, maintenance criteria allow an exchange to monitor
the status and trading characteristics of that issue to ensure that
it continues to meet the exchange's standards for market depth and
liquidity so that fair and orderly markets can be maintained. See,
e.g., Securities Exchange Act Release Nos. 81856 (October 11, 2017),
82 FR 48296, 48298 (October 17, 2017) (SR-NYSE-2017-31); 81079 (July
5, 2017), 82 FR 32022, 32023 (July 11, 2017) (SR-NYSE-2017-11). The
Commission notes that, in general, adequate listing standards, by
promoting fair and orderly markets, are consistent with Section
6(b)(5) of the Exchange Act, in that they are, among other things,
designed to prevent fraudulent and manipulative acts and practices,
promote just and equitable principles of trade, and protect
investors and the public interest.
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The Exchange is proposing to provide new exceptions to its initial
listing standards for companies listing in connection with a Primary
Direct Floor Listing or a Selling Shareholder Direct Floor Listing.
Specifically, such companies would be granted a grace period of up to
90 trading days to comply with the requirements to have at least 400
round lot holders and 1.1 million publicly-held shares (i.e., the
Distribution Standard Compliance Period), so long as they meet one of
three $250 million or $350 million market value of shares tests. In
support of its proposal, the Exchange simply expresses the belief that
these heightened market value standards significantly increase the
likelihood that a liquid trading market will develop after the listing,
which the Exchange believes makes it likely that these companies will
meet the initial distribution standards within the 90-trading day
period. The Exchange, however, does not offer any further explanation
as to why a higher market value of shares would lead to a potentially
substantial increase in the number of shareholders in a relatively
short time frame. In addition, the Exchange does not provide any data
or other evidence to support its belief that companies with the
specified market values are likely to have at least 400 round lot
holders within 90 trading days of listing, regardless of the number of
holders upon listing or other characteristics of the company. Further,
the Exchange effectively is proposing not to enforce any minimum number
of holders requirements for such companies for 90 trading days, and has
not explained why potentially listing an issuer with a very small
number of holders, and allowing it to trade for many months, would not
risk undermining fair and orderly markets or the protection of
investors, or otherwise would be consistent with Section 6(b)(5) and
other relevant provisions of the Exchange Act. Finally, by first
listing companies and only later enforcing compliance with the
specified distribution standards, the Exchange would appear to be
increasing the risk of delisting companies relatively soon after their
listing, and the Exchange has not offered any assessment of this risk
or the impact such delistings may have on investors in those securities
or on fair and orderly markets.
The Exchange also has proposed that, with respect to a Primary
Direct Floor Listing, a company will be deemed to have met the
applicable $100 million aggregate market value of publicly-held shares
requirement if the company sells at least $100 million in market value
of shares in the Exchange's opening auction on the first day of
trading. The Exchange has not explained, however, how it would be
assured that a company listing under this provision will actually sell
shares valued at $100 million or more at the time the company is
approved for listing, which necessarily will be in advance of the
Exchange's opening auction. If the company is unable to sell shares
with the requisite valuation in the opening auction, then it may not in
fact have met the initial listing standards prior to listing and
trading. This immediate compliance issue, and the potential for
delisting, would appear to raise fair and orderly
[[Page 18296]]
markets, investor protection, and other issues similar to those
discussed above with respect to the Distribution Standard Compliance
Period. The Exchange has not explained how this would be consistent
with Section 6(b)(5) and other relevant provisions of the Exchange Act.
Finally, the proposal, for the first time, would permit the
Exchange to conduct a Primary Direct Floor Listing, either alone or in
combination with a Selling Shareholder Direct Floor Listing, where the
company being listed would sell shares in the opening auction on the
first day of trading. In such a case, the company could be the only
seller (or a dominant seller) participating in the opening auction, and
thus could be in a position to uniquely influence the price discovery
process. The Exchange, however, has not explained how its opening
auction rules would apply in a Primary Direct Floor Listing, or how the
Exchange would assure that the opening auction and subsequent trading
promote fair and orderly markets, prevent manipulative acts and
practices, protect investors, and otherwise would be consistent with
Section 6(b)(5) and other relevant provisions of the Exchange Act.
The Commission notes that, under the Commission's Rules of
Practice, the ``burden to demonstrate that a proposed rule change is
consistent with the Exchange Act and the rules and regulations issued
thereunder . . . is on the self-regulatory organization [`SRO'] that
proposed the rule change.'' \51\ The description of a proposed rule
change, its purpose and operation, its effect, and a legal analysis of
its consistency with applicable requirements must all be sufficiently
detailed and specific to support an affirmative Commission finding,\52\
and any failure of an SRO to provide this information may result in the
Commission not having a sufficient basis to make an affirmative finding
that a proposed rule change is consistent with the Exchange Act and the
applicable rules and regulations.\53\
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\51\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
\52\ See id.
\53\ See id.
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For these reasons, the Commission believes it is appropriate to
institute proceedings pursuant to Section 19(b)(2)(B) of the Exchange
Act \54\ to determine whether the proposal should be approved or
disapproved.
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\54\ 15 U.S.C. 78s(b)(2)(B).
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V. Commission's Solicitation of Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
view of interested persons concerning whether the proposal is
consistent with Section 6(b)(5) or any other provision of the Exchange
Act, or the rules and regulations thereunder. Although there do not
appear to be any issues relevant to approval or disapproval that would
be facilitated by an oral presentation of views, data, and arguments,
the Commission will consider, pursuant to Rule 19b-4, any request for
an opportunity to make an oral presentation.\55\
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\55\ Section 19(b)(2) of the Exchange Act, as amended by the
Securities Act Amendments of 1975, Public Law 94-29 (June 4, 1975),
grants the Commission flexibility to determine what type of
proceeding--either oral or notice and opportunity for written
comments--is appropriate for consideration of a particular proposal
by a self-regulatory organization. See Securities Act Amendments of
1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No.
75, 94th Cong., 1st Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by April 22, 2020. Any person who wishes to file a rebuttal
to any other person's submission must file that rebuttal by May 6,
2020.
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NYSE-2019-67 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSE-2019-67. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NYSE-2019-67 and should be submitted on
or before April 22, 2020. Rebuttal comments should be submitted by May
6, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\56\
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\56\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-06732 Filed 3-31-20; 8:45 am]
BILLING CODE 8011-01-P
