Self-Regulatory Organizations; New York Stock Exchange LLC; Order Approving a Proposed Rule Change, as Modified by Amendment No. 2, To Amend Chapter One of the Listed Company Manual To Modify the Provisions Relating to Direct Listings, 54454-54461 [2020-19203]

Download as PDF 54454 Federal Register / Vol. 85, No. 170 / Tuesday, September 1, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES the Commission believes that, by improving LCH SA’s ability to assess and validate the CDS Margin Framework, the changes described in Section II.B above should help to ensure the continued performance of the CDS Margin Framework and, therefore, LCH SA’s ability to calculate margin using the CDS Margin Framework. For similar reasons, the Commission believes the changes described in Section II.C above should improve the CDS Margin Framework, and LCH SA’s ability to calculate margin using the CDS Margin Framework, by correcting drafting errors. Because they should improve LCH SA’s ability to calculate margin using the CDS Margin Framework, the Commission believes that the changes described in Section II.B and Section II.C above should enhance LCH SA’s ability to use margin to avoid losses that could result from miscalculating the risks associated with clearing transactions. The Commission further believes that these losses could negatively affect LCH SA’s ability to clear and settle transactions and safeguard funds. Therefore, the Commission believes that by improving LCH SA’s ability to avoid losses that could result from mismanaging the risks associated with clearing transactions, these aspects of the proposed rule change should promote the prompt and accurate clearance and settlement of CDS contracts and transactions and assure the safeguarding of securities and funds which are in the custody or control of LCH SA or for which it is responsible. For these reasons, the Commission finds that the proposed rule change is consistent with Section 17A(b)(3)(F) of the Act.12 B. Consistency With Rule 17Ad– 22(e)(6)(i) Rule 17Ad–22(e)(6)(i) requires that LCH SA establish, implement, maintain, and enforce written policies and procedures reasonably designed to cover its credit exposures to its participants by establishing a risk-based margin system that, at a minimum considers, and produces margin levels commensurate with, the risks and particular attributes of each relevant product, portfolio, and market.13 As discussed above, the Commission believes the changes to the CDS Margin Framework described in Section II.A above should facilitate LCH SA’s clearing of CDS contracts on the ESG Index by modifying LCH SA’s margin calculations to take into account 12 15 13 17 U.S.C. 78q–1(b)(3)(F). CFR 240.17Ad–22(e)(6)(i). VerDate Sep<11>2014 19:00 Aug 31, 2020 Jkt 250001 the risks of clearing such contracts. The Commission therefore believes these changes should help to ensure that LCH SA’s margin system considers, and produces margin levels commensurate with, the risks and particular attributes of CDS contracts on the ESG Index. Moreover, as discussed above, the Commission believes the changes described in Section II.B above should improve LCH SA’s ability to assess and validate the CDS Margin Framework. The Commission further believes this aspect of the proposed rule change should help LCH SA to identify any possible errors in, and make improvements to, the CDS Margin Framework. Similarly, as discussed above, the Commission believes the changes described in Section II.C above should improve the CDS Margin Framework by correcting drafting errors. The Commission further believes this aspect of the proposed rule change should help resolve possible errors in applying the CDS Margin Framework and reduce the possibility for confusion or mistakes in using the CDS Margin Framework. Finally, by helping to improve the CDS Margin Framework, resolve possible errors, and reduce the possibility for confusion or mistakes, the Commission believes that the changes described in Section II.B and Section II.C above should help to ensure that LCH SA’s margin system considers, and produces margin levels commensurate with, the risks and particular attributes of the transactions cleared by LCH SA. For these reasons, the Commission finds that the proposed rule change is consistent with Rule 17Ad-22(e)(6)(i).14 IV. Conclusion On the basis of the foregoing, the Commission finds that the proposed rule change is consistent with the requirements of the Act, and in particular, with the requirements of Section 17A(b)(3)(F) of the Act 15 and Rule 17Ad–22(e)(6)(i) thereunder.16 IT IS THEREFORE ORDERED pursuant to Section 19(b)(2) of the Act 17 that the proposed rule change, as modified by Amendment No. 1 (SR– LCH–SA–2020–002), be, and hereby is, approved.18 14 17 CFR 240.17Ad–22(e)(6)(i). U.S.C. 78q–1(b)(3)(F). 16 17 CFR 240.17Ad–22(e)(6)(i). 17 15 U.S.C. 78s(b)(2). 18 In approving the proposed rule change, the Commission considered the proposal’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 15 15 PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.19 Jill M. Peterson, Assistant Secretary. [FR Doc. 2020–19191 Filed 8–31–20; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–89684; File No. SR–NYSE– 2019–67] Self-Regulatory Organizations; New York Stock Exchange LLC; Order Approving a Proposed Rule Change, as Modified by Amendment No. 2, To Amend Chapter One of the Listed Company Manual To Modify the Provisions Relating to Direct Listings August 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 relating 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 On March 26, 2020, the Commission instituted proceedings to determine whether to approve or disapprove the 19 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) (‘‘Original Notice’’). Comments received on the proposal are available on the Commission’s website at: https://www.sec.gov/comments/sr-nyse2019-67/srnyse2019-67.htm. 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 E:\FR\FM\01SEN1.SGM 01SEN1 Federal Register / Vol. 85, No. 170 / Tuesday, September 1, 2020 / Notices the purpose of allowing existing shareholders to sell their shares.12 The Exchange has proposed to define this type of direct listing already permitted by the Exchange’s rules as a ‘‘Selling Shareholder Direct Floor Listing.’’ 13 In addition, the Exchange has proposed to recognize an additional type of direct listing in which a company that has not previously had its common equity securities registered under the Exchange Act would list its common equity securities on the Exchange at the time of effectiveness of a registration statement pursuant to which the company would sell shares itself in the opening auction on the first day of II. Description of the Proposal, as trading on the Exchange in addition to, Modified by Amendment No. 2 or instead of, facilitating sales by selling Section 102.01B, Footnote (E) of the shareholders (a ‘‘Primary Direct Floor Manual states that the Exchange Listing’’).14 Under the proposal, the generally expects to list companies in Exchange would, on a case-by-case connection with a firm commitment basis, exercise discretion to list underwritten initial public offering companies that are listing in connection (‘‘IPO’’), upon transfer from another with a Selling Shareholder Direct Floor market, or pursuant to a spin-off, but Listing or a Primary Direct Floor also allows for the possibility of using Listing.15 10 a direct listing, as described below. With respect to a Selling Shareholder Currently, Footnote (E) states that the Direct Floor Listing, the Exchange Exchange recognizes that companies proposal retains the existing standards that have not previously had their regarding how the Exchange will common equity securities registered determine whether a company has met under the Exchange Act, but that have its market value of publicly-held shares sold common equity securities in a listing requirement. The Exchange will private placement, may wish to list their continue to determine that such common equity securities on the company has met the $100 million Exchange at the time of effectiveness of aggregate market value of publicly-held a registration statement 11 filed solely for shares requirement based on a jbell on DSKJLSW7X2PROD with NOTICES proposed rule change, as modified by Amendment No. 1.6 On June 22, 2020, the Exchange filed Amendment No. 2 to the proposed rule change, which superseded the proposed rule change as modified by Amendment No. 1.7 On June 24, 2020, the Commission extended the time period for approving or disapproving the proposal to August 26, 2020.8 The proposed rule change, as modified by Amendment No. 2, was published for comment in the Federal Register on June 30, 2020.9 The Commission is approving the proposed rule change, as modified by Amendment No. 2. 6 See Securities Exchange Act Release No. 88485 (March 26, 2020), 85 FR 18292 (April 1, 2020) (‘‘OIP’’). 7 Amendment No. 2 to the proposed rule change revised the proposal to, among other things, (1) delete the proposed changes to Section 102.01A of the Manual that would have provided additional time under certain circumstances for companies listing in connection with a direct listing to meet the initial listing distribution standards; (2) add provisions specifying how companies listing in connection with a direct listing would qualify for listing if it includes both sales of securities by the company and possible sales by selling shareholders; (3) add a new order type for companies to use when selling securities in a direct listing and describe how such companies would participate in a direct listing auction; and (4) remove references to direct listing auctions from Rule 7.35C, ExchangeFacilitated Auctions. Amendment No. 2 to the proposed rule change is available on the Commission’s website at https://www.sec.gov/ comments/sr-nyse-2019-67/srnyse201967-7332320218590.pdf. 8 See Securities Exchange Act Release No. 89147 (June 24, 2020), 85 FR 39226 (June 30, 2020). The Commission designated August 26, 2020, as the date by which it should either approve or disapprove the proposed rule change. 9 See Securities Exchange Act Release No. 89148 (June 24, 2020), 85 FR 39246 (June 30, 2020) (‘‘Notice’’). 10 See Section 102.01B, Footnote (E) of the Manual. 11 The reference to a registration statement refers to a registration statement effective under the Securities Act of 1933 (‘‘Securities Act’’). VerDate Sep<11>2014 19:00 Aug 31, 2020 Jkt 250001 12 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) (‘‘NYSE 2018 Order’’) (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). 13 See proposed Section 102.01B, Footnote (E) of the Manual. Under the proposal, the Exchange would specify that such company may have previously sold common equity securities in ‘‘one or more’’ private placements. The Exchange also has proposed to move the description of this type of direct listing as involving a company ‘‘where such company is listing without a related underwritten offering upon effectiveness of a registration statement registering only the resale of shares sold by the company in earlier private placements’’ so that this description appears in conjunction with the definition of ‘‘Selling Shareholder Direct Floor Listing.’’ See id. 14 See proposed Section 102.01B, Footnote (E) of the Manual. A Primary Direct Floor Listing would include any such listing in which either (i) only the company itself is selling shares in the opening auction on the first day of trading; or (ii) the company is selling shares and selling shareholders may also sell shares in such opening auction. See id. 15 See proposed Section 102.01B, Footnote (E) of the Manual. PO 00000 Frm 00113 Fmt 4703 Sfmt 4703 54455 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’’).16 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.17 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 will sell 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.18 Alternatively, where a company is conducting a Primary Direct Floor Listing and will sell 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 aggregate market value of the shares the company will sell in the opening auction on the first day of trading and the shares that are publicly held immediately prior to the listing is at least $250 million, with such market value calculated using a price per share equal to the lowest price of the price range established by the issuer in its registration statement.19 16 See proposed Section 102.01B, Footnote (E) of the Manual. 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. See 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. 17 See Section 102.01B, Footnote (E) of the Manual. 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, Footnote (B) of the Manual. 18 See proposed Section 102.01B, Footnote (E) of the Manual. 19 See proposed Section 102.01B, Footnote (E) of the Manual. The Exchange states that, for example, E:\FR\FM\01SEN1.SGM Continued 01SEN1 54456 Federal Register / Vol. 85, No. 170 / Tuesday, September 1, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES According to the Exchange, a company may list on the Exchange in connection with an IPO with a market value of publicly-held shares of $40 million and, in the Exchange’s experience in listing IPOs, a liquid trading market develops after listing for issuers with a much smaller value of publicly-held shares than the Exchange anticipates would exist after the opening auction in a Primary Direct Floor Listing under the proposed market value of publicly-held shares requirements.20 Consequently, the Exchange believes that 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.21 The Exchange also states that, with the exception of the proposed requirement for Primary Direct Floor Listings, shares held by officers, directors, or owners of more than 10% of the company stock are not included in calculations of publiclyheld shares for purposes of Exchange listing rules.22 The Exchange states that such investors may acquire in secondary market trades shares sold by the issuer in a Primary Direct Floor Listing that were included when calculating whether the issuer meets the market value of publicly-held shares initial listing requirement.23 The Exchange further states that it believes that because of the enhanced publicly-held shares requirement for listing in connection with a Primary Direct Floor Listing, which is much higher than the Exchange’s $40 million requirement for a traditional underwritten IPO, and the neutral nature of the opening auction process, companies using a Primary Direct Floor Listing would have an adequate public float and liquid trading if the company is selling five million shares in the opening auction, there are 45 million publicly-held shares issued and outstanding immediately prior to listing, and the lowest price of the price range disclosed in the company’s registration statement is $10 per share, then the Exchange will attribute to the company a market value of publicly-held shares of $500 million. See Notice, supra note 9, 85 FR at 39247. 20 See Notice, supra note 9, 85 FR at 39250. 21 See Notice, supra note 9, 85 FR at 39250. 22 See Notice, supra note 9, 85 FR at 39247. The Exchange states that these types of inside investors may purchase shares sold by the company in the opening auction, and purchase shares sold by other shareholders or sell their own shares in the opening auction and in trading after the opening auction, to the extent not inconsistent with general antimanipulation provisions, Regulation M, and other applicable securities laws. See id. 23 See Notice, supra note 9, 85 FR at 39247. VerDate Sep<11>2014 19:00 Aug 31, 2020 Jkt 250001 market after completion of the opening auction.24 The Exchange states that any company listing in connection with a Primary Direct Floor Listing or a Selling Shareholder Direct Floor Listing would continue to be subject to and need to meet all other applicable initial listing requirements. According to the Exchange, this would include the requirements of Section 102.01A of the Manual to have 400 shareholders of round lots and 1.1 million publicly-held shares outstanding at the time of initial listing, and the requirement of Section 102.01B of the Manual to have a price per share of at least $4.00 at the time of initial listing.25 The Exchange has proposed a new order type to be used by the issuer in a Primary Direct Floor Listing and has proposed rules regarding how that new order type would participate in a Direct Listing Auction.26 Specifically, the Exchange has proposed to introduce an Issuer Direct Offering Order (‘‘IDO Order’’), which would be a Limit Order to sell that is to be traded only in a Direct Listing Auction for a Primary Direct Floor Listing.27 The IDO Order would have the following requirements: (1) Only one IDO Order may be entered on behalf of the issuer and only by one member organization; (2) the limit price of the IDO Order must be equal to the lowest price of the price range established by the issuer in its effective registration statement (the price range is defined as the ‘‘Primary Direct Floor Listing Auction Price Range’’); (3) the IDO Order must be for the quantity of shares offered by the issuer, as disclosed in the prospectus in the effective registration statement; (4) an IDO Order may not be cancelled or modified; and (5) an IDO Order must be executed in full in the Direct Listing Auction.28 Consistent with current rules, a Designated Market Maker (‘‘DMM’’) would effectuate a Direct Listing Auction manually, and the DMM would be responsible for determining the Auction Price.29 Under the proposal, the 24 See Notice, supra note 9, 85 FR at 39247. Notice, supra note 9, 85 FR at 39247. 26 Under current Rule 1.1(f), the term ‘‘Direct Listing’’ means ‘‘a security that is listed under Footnote (E) to Section 102.01B of the Listed Company Manual.’’ The Exchange has proposed to modify this definition to specify that the term ‘‘Direct Listing’’ may refer to either a Selling Shareholder Direct Floor Listing or a Primary Direct Floor Listing. See proposed Rule 1.1(f). See also Rule 7.35(a)(1) for the definition of ‘‘Auction’’ and Rule 7.35(a)(1)(E) for the definition of ‘‘Direct Listing Auction.’’ 27 See proposed Rule 7.31(c)(1)(D). See also Rule 7.31(a)(2) for the definition of ‘‘Limit Order.’’ 28 See proposed Rule 7.31(c)(1)(D)(i)–(v). 29 ‘‘Auction Price’’ is defined as the price at which an Auction is conducted. See Rule 7.35(a)(5). 25 See PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 DMM would not conduct a Direct Listing Auction for a Primary Direct Floor Listing if (1) the Auction Price would be below the lowest price or above the highest price of the Primary Direct Floor Listing Auction Price Range; or (2) there is insufficient buy interest to satisfy both the IDO Order and all better-priced sell orders in full.30 The Exchange states that if there is insufficient buy interest and the DMM cannot price the Auction and satisfy the IDO Order as required, the Direct Auction would not proceed and such security would not begin trading.31 The Exchange represents that, if a Direct Listing Auction cannot be conducted, the Exchange would notify market participants via a Trader Update that the Primary Direct Floor Listing has been cancelled and any orders for that security that had been entered on the Exchange, including the IDO Order, would be cancelled back to the entering firms.32 Currently, Rule 7.35A(h) generally provides that, once an Auction Price has been determined, better-priced orders are guaranteed to participate in the Auction at the Auction Price, whereas at-priced orders are not guaranteed to participate and will be allocated according to specified priority rules.33 The Exchange has proposed that an IDO Order would be guaranteed to participate in the Direct Listing Auction at the Auction Price.34 If the limit price of the IDO Order is equal to the Auction Price, the IDO Order would have priority at that price.35 The Exchange states that providing priority to an atpriced IDO Order would increase the potential for the IDO Order to be executed in full, and therefore for the Primary Direct Floor Listing to proceed.36 The Exchange states that because an IDO Order would not be entered by the DMM, the Exchange has proposed to include IDO Orders among the types of Auction-Only Orders that are not available to DMMs. See Notice, supra note 9, 85 FR at 39248, n.21. See also proposed Rule 7.31(c). An ‘‘AuctionOnly Order’’ is a Limit or Market Order that is to be traded only in an auction pursuant to the Rule 7.35 Series (for Auction-Eligible Securities) or routed pursuant to Rule 7.34 (for UTP Securities). See Rule 7.31(c). See also Rule 7.31(a)(1) for the definition of ‘‘Market Order.’’ 30 See proposed Rule 7.35A(g)(2). A buy (sell) order is ‘‘better-priced’’ if it is priced higher (lower) than the Auction Price, and this includes all sell Market Orders and Market-on-Open Orders. See Rule 7.35(a)(5)(A). See also Rule 7.31(c)(1)(B) for the definition of ‘‘Market-on-Open Order.’’ A buy (sell) order is ‘‘at-priced’’ if it is priced equal to the Auction Price. See Rule 7.35(a)(5)(B). 31 See Notice, supra note 9, 85 FR at 39249. 32 See Notice, supra note 9, 85 FR at 39249. 33 See Rule 7.35A(h)(1) and (2). 34 See proposed Rule 7.35A(h)(4). 35 See proposed Rule 7.35A(h)(4). 36 See Notice, supra note 9, 85 FR at 39249. E:\FR\FM\01SEN1.SGM 01SEN1 Federal Register / Vol. 85, No. 170 / Tuesday, September 1, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES In addition, the Exchange has proposed to specify that two existing provisions would apply in the case of a Selling Shareholder Direct Floor Listing only. Currently, a DMM will publish a pre-opening indication before a security opens if the Auction Price is anticipated to be a change of more than the Applicable Price Range 37 from a specified Indication Reference Price.38 Under the proposal, the Indication Reference Price for a security that is a Selling Shareholder Direct Floor Listing that has had recent sustained trading in a Private Placement Market prior to listing would be the most recent transaction price in that market or, if none, would be a price determined by the Exchange in consultation with a financial advisor to the issuer of such security.39 Further, when facilitating the opening on the first day of trading of a Selling Shareholder Direct Floor Listing that has not had a recent sustained history of trading in a Private Placement Market prior to listing, the DMM would consult with a financial advisor to the issuer of such security in order to effect a fair and orderly opening of such security.40 The Exchange states that these provisions are not applicable to a Primary Direct Floor Listing because, unlike for a Selling Shareholder Direct Floor Listing, the registration statement for a Primary Direct Floor Listing would include a price range within which the company anticipates selling the shares it is offering.41 In the case of a Primary Direct Floor Listing, the Exchange has proposed a new measure of the Indication Reference Price. Specifically, for a security that is offered in a Primary Direct Floor Listing, the Indication Reference Price would be the lowest price of the Primary Direct Floor Listing Auction Price Range.42 The Exchange states that any services provided by a financial advisor to the issuer of a security listing in connection with a Selling Shareholder Direct Floor 37 The ‘‘Applicable Price Range’’ for determining whether to publish a pre-opening indication, with limited exception, is 5% for securities with an Indication Reference Price over $3.00 and $0.15 for securities with an Indication Reference Price equal to or lower than $3.00. See Rule 7.35A(d)(3)(A). 38 See Rule 7.35A(d)(1)(A). 39 See proposed Rule 7.35A(d)(2)(A)(iv). 40 See proposed Rule 7.35A(g)(1). The Exchange has proposed a non-substantive change to this provision to modify a reference to ‘‘Private Placement’’ to utilize the defined term ‘‘Private Placement Market.’’ See id. 41 See Notice, supra note 9, 85 FR at 39249. 42 See proposed Rule 7.35A(d)(2)(A)(v). The Exchange states that, for example, if the Primary Direct Floor Listing Auction Price Range is $10.00 to $20.00, then the Indication Reference Price would be $10.00. See Notice, supra note 9, 85 FR at 39248, n.22. VerDate Sep<11>2014 19:00 Aug 31, 2020 Jkt 250001 Listing or a Primary Direct Floor Listing (the ‘‘financial advisor’’) and the DMM assigned to that security must provide such services in a manner that is consistent with all federal securities laws, including Regulation M and other anti-manipulation requirements.43 The Exchange states that, for example, when a financial advisor provides a consultation to the Exchange as required by Rule 7.35A(d)(2)(a)(iv), when the DMM consults with a financial advisor in connection with Rule 7.35A(g)(1), or when a financial advisor otherwise assists or consults with the DMM as to pricing or opening of trading in a Selling Shareholder Direct Floor Listing or Primary Direct Floor Listing, the financial advisor and DMM will not act inconsistent with Regulation M and other anti-manipulation provisions of the federal securities laws, or Exchange Rule 2020.44 The Exchange represents that it has retained the Financial Industry Regulatory Authority (‘‘FINRA’’) pursuant to a regulatory services agreement to monitor such compliance with Regulation M and other anti-manipulation provisions of the federal securities laws, and Rule 2020.45 The Exchange has proposed a new commentary that states that, in connection with a Selling Shareholder Direct Floor Listing, the financial advisor to the issuer of the security being listed and the DMM assigned to such security are reminded that any consultation that the financial advisor provides to the Exchange as required by Rule 7.35A(d)(2)(A)(iv) and any consultation between the DMM and financial advisor as required by Rule 7.35A(g)(1) is to be conducted in a manner that is consistent with the federal securities laws, including Regulation M and other antimanipulation requirements.46 Finally, the Exchange has proposed to remove references to Direct Listing Auctions from Rule 7.35C, which concerns Exchange-facilitated 43 See Notice, supra note 9, 85 FR at 39249. Notice, supra note 9, 85 FR at 39249 (citing Rule 2020, which provides that ‘‘No member or member organization shall effect any transaction in, or induce the purchase or sale of, any security by means of any manipulative, deceptive or other fraudulent contrivance’’). 45 See Notice, supra note 9, 85 FR at 39249. The Exchange further represents that it expects to issue regulatory guidance in connection with a company conducting a Primary Direct Floor Listing, and that such regulatory guidance would include a reminder to member organizations that activities in connection with a Primary Direct Floor Listing, like activities in connection with other listings, must be conducted in a manner not inconsistent with Regulation M and other anti-manipulation provisions of the federal securities laws and Rule 2020. See id. at 39249, n.28. 46 See proposed Rule 7.35A, Commentary .10. 44 See PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 54457 auctions.47 The Exchange states that, because of the importance of the DMM to the Direct Listing Auction, if a DMM is unable to manually facilitate a Direct Listing Auction, the Exchange would not proceed with a Selling Shareholder Direct Floor Listing or a Primary Direct Floor Listing.48 III. Discussion and Commission Findings After careful review, the Commission finds that the proposed rule change, as modified by Amendment No. 2, is consistent with the requirements of the Exchange Act and the rules and regulations thereunder applicable to a national securities exchange.49 In particular, the Commission finds that the proposed rule change, as modified by Amendment No. 2, is consistent with Section 6(b)(5) of the Exchange Act,50 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. 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.51 47 See proposed Rule 7.35C(a), (a)(3), (b)(1), and (b)(3). 48 See Notice, supra note 9, 85 FR at 39249. 49 15 U.S.C. 78f(b). In approving this proposed rule change, the Commission has considered the proposed rule change’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 50 15 U.S.C. 78f(b)(5). 51 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., NYSE 2018 Order, supra note 12, 83 FR at 5653, n.53; 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 has stated that adequate listing standards, by promoting fair and orderly markets, E:\FR\FM\01SEN1.SGM Continued 01SEN1 54458 Federal Register / Vol. 85, No. 170 / Tuesday, September 1, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES The Exchange’s listing standards currently provide the Exchange with discretion to list a company whose stock has not been previously registered under the Exchange Act, where such company is listing in connection with a Selling Shareholder Direct Floor Listing.52 The Exchange has proposed to allow companies to list in connection with a Primary Direct Floor Listing, which would for the first time provide a company the option, without a firm commitment underwritten offering, of selling shares to raise capital in the opening auction upon initial listing on the Exchange.53 Several commenters expressed support for the proposed expansion of direct listings to permit a primary offering.54 One commenter, for example, 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.55 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 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. See, e.g., NYSE 2018 Order, supra note 12, 83 FR at 5653, n.53; Securities Exchange Act Release Nos. 87648 (December 3, 2019), 84 FR 67308, 67314, n.42 (December 9, 2019) (SR–NASDAQ–2019–059); 88716 (April 21, 2020), 85 FR 23393, 23395, n.22 (April 27, 2020) (SR–NASDAQ–2020–001). 52 See Section 102.01B, Footnote (E) of the Manual. See also NYSE 2018 Order, supra note 12, 83 FR at 5654. 53 See NYSE Listed Company Manual Section 102.01B, Footnote (E) of the Manual which states in part that the Exchange expects to list companies in connection with a firm commitment underwritten IPO, upon transfer from another market, or pursuant to a spin-off. 54 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 Capital 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’’); Letter from Burke Dempsey, Executive Vice President Head of Investment Banking, Wedbush Securities (April 20, 2020) (‘‘Wedbush Letter’’). 55 See Citigroup Letter, supra note 54. This commenter also stated its belief 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. VerDate Sep<11>2014 19:00 Aug 31, 2020 Jkt 250001 provide investors a broader array of attractive investment opportunities.56 The Commission believes that a number of the changes set forth in Amendment No. 2 support a finding that the proposal is consistent with the Act. More specifically, the Commission believes that the following aspects result in a proposal for a Primary Direct Floor Listing that is reasonably designed to be consistent with the protection of investors and the maintenance of fair and orderly markets, as well as the facilitation of capital formation: (i) Addition of the IDO Order type and other requirements which address how the issuer will participate in the opening auction; (ii) discussion of the role of financial advisors; (iii) addition of the Commentary that provides that specified activities are to be conducted in a manner that is consistent with the federal securities laws, including Regulation M and other antimanipulation requirements; (iv) retaining of FINRA to monitor compliance with Regulation M and other anti-manipulation provisions of the federal securities laws and NYSE Rule 2020; (v) clarification of how market value will be determined for qualifying the company’s securities for listing; and (vi) elimination of the grace period for meeting certain listing requirements. With respect to the aggregate market value of publicly-held shares requirement, the Exchange proposes to require that it will deem a company to have met such requirement if the company will sell at least $100 million in market value of shares in the Exchange’s opening auction on the first day of trading. Alternatively, where a company will sell shares in the opening auction with a market value of less than $100 million, the Exchange will deem the company to have met such requirement if the aggregate market value of the shares the company will sell in the opening auction on the first day of trading and the shares that are publicly held immediately prior to listing is at least $250 million. According to the Exchange, a company may list in connection with an IPO with a market value of publicly-held shares of $40 million and, ‘‘in the Exchange’s 56 See Goldman Sachs Letter, supra note 54. 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. See also Citadel Letter, supra note 54, at 1; Wedbush Letter, supra note 54. PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 experience in listing IPOs, a liquid trading market develops after listing for issuers with a much smaller value of publicly-held shares than the Exchange anticipates would exist after the opening auction in a Primary Direct Floor Listing.’’ 57 In Amendment No. 2, the Exchange clarified that market value would be calculated using a price per share equal to the lowest price of the price range multiplied by the number of shares being offered, as set forth by the issuer in its registration statement.58 One commenter expressed the view that the proposal, as originally noticed for comment, appropriately updated the publicly-held shares and distribution requirements associated with direct listings in order to ensure the development of a liquid trading market.59 The Exchange’s proposed aggregate market value of publicly-held shares requirement provides the Exchange with a reasonable level of assurance that the company’s market value supports listing on the Exchange and the maintenance of fair and orderly markets. The proposed requirements are comparable to or higher than the aggregate market value of publicly-held shares required by the Exchange for initial listing in other contexts.60 Specifically, the Exchange’s proposed minimum market value requirements, which are designed in part to ensure sufficient liquidity, of $100 million and $250 million for Primary Direct Floor Listings are higher than the $40 million minimum market value requirement for IPOs 61 and comparable to the $100 million and $250 million minimum market value requirements for Selling Shareholder 57 Notice, supra note 9, 85 FR at 39250. As described above, in determining that a company has met the market value of publicly-held shares standards the Exchange will consider the market value of all shares sold by the company in the opening auction, rather than excluding shares that may be purchased by officers, directors, or owners of more than 10% of the company’s common stock, notwithstanding that generally the Exchange’s listing standards exclude shares held by such insiders from its calculations of publicly-held shares. The Exchange asserts that the Primary Direct Floor Listing will have an adequate public float and liquid trading market after completion of the opening auction given the higher market value requirement than that required for listing an underwritten IPO. See Notice, supra note 9, 85 FR at 39247. 58 See Notice, supra note 9, 85 FR at 39247 and note 19, supra, and accompanying text. 59 See Citadel Letter, supra note 54, at 1. 60 See Section 102.01B of the Manual. 61 In addition to the $40 Million standard, the Exchange’s current listing standards require an aggregate market value of publicly held shares of $100 million for companies that list other than at the time of an IPO, spin-off, or initial firm commitment underwritten public offering. See Section 102.01B of the Manual. E:\FR\FM\01SEN1.SGM 01SEN1 jbell on DSKJLSW7X2PROD with NOTICES Federal Register / Vol. 85, No. 170 / Tuesday, September 1, 2020 / Notices Direct Floor Listings.62 The Commission further believes that using the lowest price in the price range established by the issuer in its registration statement to determine the minimum market value is a reasonable and conservative approach given that, as described below, the Primary Direct Floor Listing will not proceed at a lower price. In the Order Instituting Proceedings, the Commission expressed concern that, with a Primary Direct Floor Listing, 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, and stated that the Exchange had not explained how its opening auction rules would apply in a Primary Direct Floor Listing.63 In Amendment No. 2, the Exchange proposed to add the IDO Order as a new order type to be used by the issuer in a Primary Direct Floor Listing, and to clarify in its rules how the DMM would conduct the opening auction for such listings. As discussed above, the issuer would be required to submit an IDO Order in the opening auction with a limit price equal to the low end of the Primary Direct Floor Listing Auction Price Range, and for the full quantity, as reflected in the registration statement. The IDO Order cannot be modified or canceled by the issuer once entered. Further, the DMM would conduct the opening auction only if the auction price is within the Primary Direct Floor Listing Auction Price Range disclosed in the registration statement, and the IDO Order and all better priced sell orders can be satisfied in full. If the auction price is equal to the limit price of the IDO Order (i.e., the low end of the Primary Direct Floor Listing Auction Price Range), the IDO Order would have priority over other sell orders at that price.64 The Commission believes that the IDO Order and related clarifications proposed by the Exchange assure that the method by which the issuer participates in the opening auction is clearly defined, that the issuer is not in a position to improperly influence the price discovery process, and that the auction is otherwise consistent with the disclosures in the registration statement. The Commission further believes it is appropriate for the IDO Order to have priority over other sell orders at the same price if the auction price is at the limit price of the IDO Order, because the auction will not occur at all unless the IDO Order is satisfied in full, and this would assure that both the issuer and better priced sell orders are able to sell securities in the auction.65 The Commission believes that the IDO Order requirements described above help to mitigate concerns about the price discovery process in the opening auction and would provide some reasonable assurance that the opening auction and subsequent trading promote fair and orderly markets and that the proposed rules are designed to prevent manipulative acts and practices, and protect investors and the public interest in accordance with Section 6(b)(5) of the Exchange Act. In Amendment No. 2, the Exchange added language to its proposal, discussed above, reminding a financial adviser to an issuer and the DMM that 62 One commenter raised a concern that the Exchange does not provide any data to support its conclusion that there would be adequate liquidity for a security listing in connection with a Primary Direct Floor Listing. See Letter from Jeffrey P. Mahoney, General Counsel, Council of Institutional Investors (July 16, 2020) (‘‘CII Letter III’’), at 5. While the Exchange did not provide the data specifically referenced by the commenter, as noted above, the proposed minimum market value requirements are comparable to or higher than those applied by the Exchange in other contexts. See supra notes 16–17 and accompanying text. The existing $40 million and $100 million market value requirements in Section 102.01B of the Manual are longstanding requirements that have supported the listing of companies on the Exchange that are suitable for listing over many years. The Commission also previously approved the standards for Selling Shareholder Direct Floor Listings as supporting listing on the Exchange and the maintenance of fair and orderly markets thereby protecting investors and the public interest in accordance with Section 6(b)(5) of the Exchange Act (see NYSE 2018 Order, supra note 12, 83 FR at 5654). 63 One commenter expressed general support for the proposal and offered a variety of observations beyond the scope of the proposal, including with respect to the importance of opening auction information. See ClearingBid Letter, supra note 54, at 1. 64 In addition, as discussed above, the Exchange proposes that the DMM will publish a pre-opening indication in a Primary Direct Floor Listing if the auction price is expected to be outside a price range around an ‘‘Indication Reference Price’’ equal to the low end of the price range reflected in the registration statement. The Commission believes this is a reasonable and conservative reference price because the auction cannot occur at a lower price, and if the auction occurs at a higher price the proposal errs on the side of requiring opening indication information to be disseminated to market participants. 65 In addition, the Commission believes that the proposed changes to Rule 7.35C to remove the references to Direct Listing Auction would assure that all direct listings occur with a DMM that will facilitate the opening auction manually, and should help promote fair and orderly markets in connection with direct listings, because of the role of the DMM in ensuring that the conditions described above to conduct the auction have been met. The Commission also believes that the proposed changes to (i) Section 102.01B of the Manual, Footnote (E) to clarify the description of a Selling Shareholder Direct Floor Listing, (ii) Rule 1.1(f) to amend the definition of ‘‘Direct Listing,’’ and (iii) Rule 7.35A(g)(1) to use the defined term ‘‘Private Placement Market’’ will provide clarity to the Exchange’s rules, consistent with the protection of investors and the public interest under Section 6(b)(5) of the Exchange Act. VerDate Sep<11>2014 19:00 Aug 31, 2020 Jkt 250001 PO 00000 Frm 00117 Fmt 4703 Sfmt 4703 54459 any consultations with the financial adviser must be conducted in a manner consistent with the federal securities laws, including Regulation M and other anti-manipulation requirements.66 The Exchange also represents that it has retained FINRA to monitor such compliance and that it plans to issue regulatory guidance in this area. The Commission believes that these are reasonable steps to help assure compliance by participants in the direct listing process with these important provisions of the federal securities laws and that the proposed changes are consistent with preventing manipulative acts and practices, and protecting investors and the public interest in accordance with Section 6(b)(5) of the Exchange Act. Finally, several commenters expressed concerns that the lack of traditional underwriter involvement in direct listings generally would increase risks for investors, suggesting that direct listings circumvent the traditional due diligence process and traditional underwriter liability.67 One commenter believed that approval of the proposal would likely increase the number of companies that forego the traditional IPO process,68 and significantly increase the risks for retail investors, including by circumventing the due diligence process.69 This commenter expressed 66 See Notice, supra note 9, 85 FR at 39249, and proposed Rule 7.35A, Commentary .10. See also supra note 45 and accompanying text noting that the Exchange will be issuing a regulatory circular to remind member organizations that activities in connection with a Primary Direct Floor Listing, like activities in connection with other listings, must be conducted in a manner not inconsistent with Regulation M and other anti-manipulation provisions of the federal securities laws and NYSE Rule 2020. 67 See, e.g., Letter from Christopher A. Iacovella, Chief Executive Officer, ASA (December 12, 2019) (‘‘ASA Letter I’’), at 1. 68 The Commission acknowledges the possibility that some companies may pursue a Primary Direct Floor Listing instead of a traditional IPO. The Commission also believes that some companies may pursue a Primary Direct Floor Listing that would not otherwise go public, or that would wait to pursue a traditional IPO until a later stage of development, both of which would potentially reduce opportunities for public shareholders to share in growth opportunities. Thus, the Commission believes that the proposed rule change may result in additional investment opportunities while providing companies more flexible options for becoming publicly traded. 69 See ASA Letter I, supra note 67, at 1–2. This commenter believed 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.’’ Id. at 1. In this commenter’s view, two recent highprofile direct listings—Spotify and Slack—did not work out particularly well for retail investors, and a robust underwriting process would have E:\FR\FM\01SEN1.SGM Continued 01SEN1 54460 Federal Register / Vol. 85, No. 170 / Tuesday, September 1, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES 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 are required to hold the regulatory capital necessary to act as a de facto underwriter.70 Another commenter recommended that the Commission disapprove the proposal and 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.71 The commenter stated that it could not support direct listings as an alternative to IPOs if public companies could limit their liability for damages uncovered more of these companies’ vulnerabilities before these securities were offered to the public. See id. at 2. Another commenter stated that these direct listings may have been successes for private investors, but the retail and public investors that purchased stock in Spotify and Slack were under water for years, and one company is facing a lawsuit because of how direct listings are modeled. See Letter from Anonymous (June 30, 2020). 70 See ASA Letter I, supra note 67, at 2; Letter from Christopher A. Iacovella, Chief Executive Officer, American Securities Association (March 5, 2020) (‘‘ASA Letter II’’), at 2–3. Several additional commenters raised a variety of concerns with the use of a direct listing to conduct a primary offering. 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.’’ Letter from Anonymous (January 3, 2020). And another commenter stated that a primary capital raise would have many red flags, questioned how to trust a private company’s accounting methods that are not consistent with the public markets, and stated that a direct listing is ‘‘fraudulent with no liability.’’ See Letter from Anonymous (July 1, 2020). The Commission acknowledges these concerns, but believes the proposed rule change is consistent with investor protection in light of the fact that Primary Direct Floor Listings will be registered under the Securities Act, and that such registration statements will require both bona fide price ranges and audited financial statements prepared in accordance with either U.S. GAAP or International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. 71 See Letter from Jeffrey P. Mahoney, General Counsel, Council of Institutional Investors (January 16, 2020) (‘‘CII Letter I’’), at 2; Letter from Jeffrey P. Mahoney, General Counsel, Council of Institutional Investors (April 16, 2020) (‘‘CII Letter II’’), at 2; CII Letter III, supra note 60, at 3–4, 6. VerDate Sep<11>2014 19:00 Aug 31, 2020 Jkt 250001 caused by untrue statements of fact or material omissions of fact within registration statements associated with direct listings.72 On the other hand, one commenter supported direct listings as a suitable option for certain issuers, and took the position that ‘‘[d]ue diligence is already ably done by the legions of experienced accountants, lawyers, consultants, rating agencies, etc.’’ 73 In response, the Exchange stated that it disagrees that the absence of underwriters creates a loophole in the regulatory regime that governs offerings of securities to the public.74 According to the Exchange, while involvement of a traditional underwriter is often necessary to the success of an IPO or other public offering, underwriter participation in the public capitalraising process is not required by the Securities Act, and companies regularly access the public markets for capital raising and other purposes without using traditional underwriters.75 In the Exchange’s view, the due diligence process in Primary Direct Floor 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.76 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.77 72 See CII Letter I, supra note 71, at 2–3; CII Letter II, supra note 71, at 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.’’ CII Letter I, supra note 71, 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; CII Letter III, supra note 62, at 4. 73 Wedbush Letter, supra note 54. 74 See Letter from Elizabeth K. King, Chief Regulatory Officer, ICE, General Counsel & Corporate Secretary, NYSE (March 16, 2020) (‘‘NYSE Response Letter’’), at 2. 75 See NYSE Response Letter, supra note 74, at 2– 3. 76 See NYSE Response Letter, supra note 74, 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. 77 See NYSE Response Letter, supra note 74, at 4. The Exchange also took the position that the absence of lock-up agreements with pre-IPO PO 00000 Frm 00118 Fmt 4703 Sfmt 4703 As to the comments concerning underwriter liability and due diligence, the Commission agrees, as noted by the Exchange, that the Securities Act does not require the involvement of an underwriter in registered offerings. Moreover, given the broad definition of ‘‘underwriter’’ 78 in the Securities Act, a financial advisor to an issuer engaged in a Primary Direct Floor Listing may, depending on the nature and extent of the financial advisor’s activities and on the facts and circumstances, be deemed a statutory ‘‘underwriter’’ with respect to the securities offering, with attendant underwriter liabilities.79 In addition, given the broad definition of underwriter, required involvement of financial advisors, and the financial advisors’ reputational interests and potential liability, including as statutory underwriters, the Commission believes that the financial advisors to issuers in Primary Direct Floor Listings will be incentivized to engage in robust due diligence, notwithstanding the lack of a firm commitment underwriting agreement. Even absent the involvement of a statutory underwriter, investors would not be precluded from pursuing any claims they may have under the Securities Act for false or misleading offering documents, nor would the absence of a statutory underwriter affect the amount of damages investors may be entitled to recover. In addition, issuers and other gatekeepers, with their attendant liability, play important roles in assuring that disclosures provided to investors are materially accurate and complete. The Commission therefore does not view a firm commitment underwriting as necessary to provide adequate investor protection in the context of a registered offering. Indeed, exchange-listed companies often engage in offerings that do not involve a firm commitment underwriting. Given that shareholders in Primary Direct Floor Listings does not create short-term price instability, and that at most it shifts the timing of such instability from six months after the offering to closer to the time of listing. See id. 78 Section 2(a)(11) of the Securities Act defines ‘‘underwriter’’ to mean ‘‘any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates, or has a direct or indirect participation in the direct or indirect underwriting of any such undertaking.’’ 79 The Commission does not agree, as asserted by one commenter, that financial advisors, exchanges, control shareholders, and directors involved in a direct listing will automatically incur statutory underwriter liability under the Securities Act. See ASA Letter I, supra note 67, at 2; ASA Letter II, supra note 70, at 2–3. Whether or not any person would be considered a statutory underwriter would be evaluated based on the particular facts and circumstances, in light of the definition of underwriter contained in Section 2(a)(11). E:\FR\FM\01SEN1.SGM 01SEN1 jbell on DSKJLSW7X2PROD with NOTICES Federal Register / Vol. 85, No. 170 / Tuesday, September 1, 2020 / Notices the proposed rule change will require all Primary Direct Floor Listings to be registered under the Securities Act, and in light of the fact that the existing liability framework under the Securities Act for registered offerings will apply to all such Primary Direct Floor Listings, the Commission concludes the proposed rule change is consistent with investor protection. The Commission further believes that Primary Direct Floor Listings may provide benefits to existing and potential investors, relative to firm commitment underwritten offerings. First, because the securities to be issued by the company in connection with a Primary Direct Floor Listing would be allocated based on matching buy and sell orders, in accordance with the proposed rules, some investors may be able to purchase securities in a Primary Direct Floor Listing who might not otherwise receive an initial allocation in a firm commitment underwritten offering. The proposed rule change therefore has the potential to broaden the scope of investors that are able to purchase securities in an initial public offering, at the initial public offering price, rather than in aftermarket trading. Second, because the price of securities issued by the company in a Primary Direct Floor Listing will be determined based on market interest and the matching of buy and sell orders, some believe that Primary Direct Floor Listings may be a more accurate way to price securities offerings.80 In a firm commitment underwritten offering, the offering price is decided through negotiations between the issuer and the underwriters for the offering. The opening auction in a Primary Direct Floor Listing provides for a different price discovery method for initial public offerings which some believe may result in more appropriate pricing for the offered shares, a potential benefit to existing and potential investors. The Commission believes that the proposed rule change, by providing an opening process in which buy and sell orders are matched, in accordance with the proposed rules, to determine the offering price, may allow for efficiencies in the way IPOs are priced and allocated without sacrificing investor protection. Commenters also raised concerns about shareholder claims pursuant to Section 11 of the Securities Act. The Commission notes that this issue is not exclusive to Primary Direct Floor Listings but rather is a recurring issue, 80 See Matt Levine, Soon Direct Listings Will Raise Money, Bloomberg, available at https:// www.bloomberg.com/opinion/articles/2019-11-27/ soon-direct-listings-will-raise-money. VerDate Sep<11>2014 19:00 Aug 31, 2020 Jkt 250001 particularly in the context of aftermarket securities purchases. Purchasers in a registered offering may face difficulty tracing their shares back to the registration statement whenever a company conducts a registered offering for less than all of its shares. Thus, even in the context of traditional firm commitment offerings, the ability of existing shareholders who meet the conditions of Rule 144 to sell shares on an unregistered basis may result in concurrent registered and unregistered sales of the same class of security at the time of an exchange listing, leading to difficulties tracing purchases back to the registered offering.81 Although judicial precedent on this topic may continue to evolve, the Commission is aware of only one court that has considered this issue in the direct listing context to date, and that court ruled in favor of allowing the plaintiffs to pursue Section 11 claims.82 The Commission does not believe that the proposed rule change to permit Primary Direct Floor Listings poses a heightened risk to investors, and finds that the proposed rule change is consistent with investor protection. For the reasons discussed above, the Commission finds that the proposed rule change, as modified by Amendment No. 2, is consistent with the Exchange Act. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Exchange Act,83 that the proposed rule change (SR– NYSE–2019–67), as modified by Amendment No. 2 thereto, be, and it hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.84 Jill M. Peterson, Assistant Secretary. [FR Doc. 2020–19203 Filed 8–31–20; 8:45 am] BILLING CODE 8011–01–P 81 In a Primary Direct Floor Listing, all company shares will be sold in the opening auction, making it potentially easier to trace those shares back to the registration statement than in other contexts. 82 See Pirani v. Slack Techs., Inc., 2020 U.S. Dist. LEXIS 70177 (N.D. Cal., April 21, 2020). 83 15 U.S.C. 78s(b)(2). 84 17 CFR 200.30–3(a)(12). PO 00000 Frm 00119 Fmt 4703 Sfmt 4703 54461 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–89679; File No. SR–FINRA– 2020–024] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Delete the FINRA Order Audit Trail System (OATS) Rules August 26, 2020. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on August 14, 2020, Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by FINRA. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change FINRA is proposing to eliminate the Order Audit Trail System (‘‘OATS’’) rules in the FINRA Rule 7400 Series and FINRA Rule 4554 (Alternative Trading Systems—Recording and Reporting Requirements of Order and Execution Information for NMS Stocks) once members are effectively reporting to the consolidated audit trail (‘‘CAT’’) and the CAT’s accuracy and reliability meet certain standards, as described below. The Rule 7400 Series and Rule 4554 are collectively referred to herein as the ‘‘OATS Rules.’’ The text of the proposed rule change is available on FINRA’s website at https://www.finra.org, at the principal office of FINRA and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, FINRA included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. FINRA has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. 1 15 2 17 E:\FR\FM\01SEN1.SGM U.S.C. 78s(b)(1). CFR 240.19b–4. 01SEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 85, Number 170 (Tuesday, September 1, 2020)]
[Notices]
[Pages 54454-54461]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-19203]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89684; File No. SR-NYSE-2019-67]


Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Approving a Proposed Rule Change, as Modified by Amendment No. 2, To 
Amend Chapter One of the Listed Company Manual To Modify the Provisions 
Relating to Direct Listings

August 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 relating 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\ On March 
26, 2020, the Commission instituted proceedings to determine whether to 
approve or disapprove the

[[Page 54455]]

proposed rule change, as modified by Amendment No. 1.\6\ On June 22, 
2020, the Exchange filed Amendment No. 2 to the proposed rule change, 
which superseded the proposed rule change as modified by Amendment No. 
1.\7\ On June 24, 2020, the Commission extended the time period for 
approving or disapproving the proposal to August 26, 2020.\8\ The 
proposed rule change, as modified by Amendment No. 2, was published for 
comment in the Federal Register on June 30, 2020.\9\ The Commission is 
approving the proposed rule change, as modified by Amendment No. 2.
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    \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) (``Original Notice''). 
Comments received on the proposal are available on the Commission's 
website at: https://www.sec.gov/comments/sr-nyse-2019-67/srnyse2019-67.htm.
    \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\ See Securities Exchange Act Release No. 88485 (March 26, 
2020), 85 FR 18292 (April 1, 2020) (``OIP'').
    \7\ Amendment No. 2 to the proposed rule change revised the 
proposal to, among other things, (1) delete the proposed changes to 
Section 102.01A of the Manual that would have provided additional 
time under certain circumstances for companies listing in connection 
with a direct listing to meet the initial listing distribution 
standards; (2) add provisions specifying how companies listing in 
connection with a direct listing would qualify for listing if it 
includes both sales of securities by the company and possible sales 
by selling shareholders; (3) add a new order type for companies to 
use when selling securities in a direct listing and describe how 
such companies would participate in a direct listing auction; and 
(4) remove references to direct listing auctions from Rule 7.35C, 
Exchange-Facilitated Auctions. Amendment No. 2 to the proposed rule 
change is available on the Commission's website at https://www.sec.gov/comments/sr-nyse-2019-67/srnyse201967-7332320-218590.pdf.
    \8\ See Securities Exchange Act Release No. 89147 (June 24, 
2020), 85 FR 39226 (June 30, 2020). The Commission designated August 
26, 2020, as the date by which it should either approve or 
disapprove the proposed rule change.
    \9\ See Securities Exchange Act Release No. 89148 (June 24, 
2020), 85 FR 39246 (June 30, 2020) (``Notice'').
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II. Description of the Proposal, as Modified by Amendment No. 2

    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.\10\ 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 that 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 \11\ filed solely for the purpose of allowing 
existing shareholders to sell their shares.\12\ The Exchange has 
proposed to define this type of direct listing already permitted by the 
Exchange's rules as a ``Selling Shareholder Direct Floor Listing.'' 
\13\ In addition, the Exchange has proposed to recognize an additional 
type of direct listing in which a company that has not previously had 
its common equity securities registered under the Exchange Act would 
list its common equity securities on the Exchange at the time of 
effectiveness of a registration statement pursuant to which the 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 Listing'').\14\ 
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.\15\
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    \10\ See Section 102.01B, Footnote (E) of the Manual.
    \11\ The reference to a registration statement refers to a 
registration statement effective under the Securities Act of 1933 
(``Securities Act'').
    \12\ 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) (``NYSE 2018 Order'') 
(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).
    \13\ See proposed Section 102.01B, Footnote (E) of the Manual. 
Under the proposal, the Exchange would specify that such company may 
have previously sold common equity securities in ``one or more'' 
private placements. The Exchange also has proposed to move the 
description of this type of direct listing as involving a company 
``where such company is listing without a related underwritten 
offering upon effectiveness of a registration statement registering 
only the resale of shares sold by the company in earlier private 
placements'' so that this description appears in conjunction with 
the definition of ``Selling Shareholder Direct Floor Listing.'' See 
id.
    \14\ See proposed Section 102.01B, Footnote (E) of the Manual. A 
Primary Direct Floor Listing would include any such listing in which 
either (i) only the company itself is selling shares in the opening 
auction on the first day of trading; or (ii) the company is selling 
shares and selling shareholders may also sell shares in such opening 
auction. See id.
    \15\ See proposed Section 102.01B, Footnote (E) of the Manual.
---------------------------------------------------------------------------

    With respect to a Selling Shareholder Direct Floor Listing, the 
Exchange proposal retains 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'').\16\ 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.\17\
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    \16\ See proposed Section 102.01B, Footnote (E) of the Manual. 
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. See 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.
    \17\ See Section 102.01B, Footnote (E) of the Manual. 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, 
Footnote (B) 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 will sell 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.\18\ Alternatively, where a company is conducting a Primary 
Direct Floor Listing and will sell 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 aggregate market value of the shares the company 
will sell in the opening auction on the first day of trading and the 
shares that are publicly held immediately prior to the listing is at 
least $250 million, with such market value calculated using a price per 
share equal to the lowest price of the price range established by the 
issuer in its registration statement.\19\
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    \18\ See proposed Section 102.01B, Footnote (E) of the Manual.
    \19\ See proposed Section 102.01B, Footnote (E) of the Manual. 
The Exchange states that, for example, if the company is selling 
five million shares in the opening auction, there are 45 million 
publicly-held shares issued and outstanding immediately prior to 
listing, and the lowest price of the price range disclosed in the 
company's registration statement is $10 per share, then the Exchange 
will attribute to the company a market value of publicly-held shares 
of $500 million. See Notice, supra note 9, 85 FR at 39247.

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[[Page 54456]]

    According to the Exchange, a company may list on the Exchange in 
connection with an IPO with a market value of publicly-held shares of 
$40 million and, in the Exchange's experience in listing IPOs, a liquid 
trading market develops after listing for issuers with a much smaller 
value of publicly-held shares than the Exchange anticipates would exist 
after the opening auction in a Primary Direct Floor Listing under the 
proposed market value of publicly-held shares requirements.\20\ 
Consequently, the Exchange believes that 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.\21\ The Exchange also states that, with the exception 
of the proposed requirement for Primary Direct Floor Listings, shares 
held by officers, directors, or owners of more than 10% of the company 
stock are not included in calculations of publicly-held shares for 
purposes of Exchange listing rules.\22\ The Exchange states that such 
investors may acquire in secondary market trades shares sold by the 
issuer in a Primary Direct Floor Listing that were included when 
calculating whether the issuer meets the market value of publicly-held 
shares initial listing requirement.\23\ The Exchange further states 
that it believes that because of the enhanced publicly-held shares 
requirement for listing in connection with a Primary Direct Floor 
Listing, which is much higher than the Exchange's $40 million 
requirement for a traditional underwritten IPO, and the neutral nature 
of the opening auction process, companies using a Primary Direct Floor 
Listing would have an adequate public float and liquid trading market 
after completion of the opening auction.\24\
---------------------------------------------------------------------------

    \20\ See Notice, supra note 9, 85 FR at 39250.
    \21\ See Notice, supra note 9, 85 FR at 39250.
    \22\ See Notice, supra note 9, 85 FR at 39247. The Exchange 
states that these types of inside investors may purchase shares sold 
by the company in the opening auction, and purchase shares sold by 
other shareholders or sell their own shares in the opening auction 
and in trading after the opening auction, to the extent not 
inconsistent with general anti-manipulation provisions, Regulation 
M, and other applicable securities laws. See id.
    \23\ See Notice, supra note 9, 85 FR at 39247.
    \24\ See Notice, supra note 9, 85 FR at 39247.
---------------------------------------------------------------------------

    The Exchange states that any company listing in connection with a 
Primary Direct Floor Listing or a Selling Shareholder Direct Floor 
Listing would continue to be subject to and need to meet all other 
applicable initial listing requirements. According to the Exchange, 
this would include the requirements of Section 102.01A of the Manual to 
have 400 shareholders of round lots and 1.1 million publicly-held 
shares outstanding at the time of initial listing, and the requirement 
of Section 102.01B of the Manual to have a price per share of at least 
$4.00 at the time of initial listing.\25\
---------------------------------------------------------------------------

    \25\ See Notice, supra note 9, 85 FR at 39247.
---------------------------------------------------------------------------

    The Exchange has proposed a new order type to be used by the issuer 
in a Primary Direct Floor Listing and has proposed rules regarding how 
that new order type would participate in a Direct Listing Auction.\26\ 
Specifically, the Exchange has proposed to introduce an Issuer Direct 
Offering Order (``IDO Order''), which would be a Limit Order to sell 
that is to be traded only in a Direct Listing Auction for a Primary 
Direct Floor Listing.\27\ The IDO Order would have the following 
requirements: (1) Only one IDO Order may be entered on behalf of the 
issuer and only by one member organization; (2) the limit price of the 
IDO Order must be equal to the lowest price of the price range 
established by the issuer in its effective registration statement (the 
price range is defined as the ``Primary Direct Floor Listing Auction 
Price Range''); (3) the IDO Order must be for the quantity of shares 
offered by the issuer, as disclosed in the prospectus in the effective 
registration statement; (4) an IDO Order may not be cancelled or 
modified; and (5) an IDO Order must be executed in full in the Direct 
Listing Auction.\28\ Consistent with current rules, a Designated Market 
Maker (``DMM'') would effectuate a Direct Listing Auction manually, and 
the DMM would be responsible for determining the Auction Price.\29\ 
Under the proposal, the DMM would not conduct a Direct Listing Auction 
for a Primary Direct Floor Listing if (1) the Auction Price would be 
below the lowest price or above the highest price of the Primary Direct 
Floor Listing Auction Price Range; or (2) there is insufficient buy 
interest to satisfy both the IDO Order and all better-priced sell 
orders in full.\30\ The Exchange states that if there is insufficient 
buy interest and the DMM cannot price the Auction and satisfy the IDO 
Order as required, the Direct Auction would not proceed and such 
security would not begin trading.\31\ The Exchange represents that, if 
a Direct Listing Auction cannot be conducted, the Exchange would notify 
market participants via a Trader Update that the Primary Direct Floor 
Listing has been cancelled and any orders for that security that had 
been entered on the Exchange, including the IDO Order, would be 
cancelled back to the entering firms.\32\
---------------------------------------------------------------------------

    \26\ Under current Rule 1.1(f), the term ``Direct Listing'' 
means ``a security that is listed under Footnote (E) to Section 
102.01B of the Listed Company Manual.'' The Exchange has proposed to 
modify this definition to specify that the term ``Direct Listing'' 
may refer to either a Selling Shareholder Direct Floor Listing or a 
Primary Direct Floor Listing. See proposed Rule 1.1(f). See also 
Rule 7.35(a)(1) for the definition of ``Auction'' and Rule 
7.35(a)(1)(E) for the definition of ``Direct Listing Auction.''
    \27\ See proposed Rule 7.31(c)(1)(D). See also Rule 7.31(a)(2) 
for the definition of ``Limit Order.''
    \28\ See proposed Rule 7.31(c)(1)(D)(i)-(v).
    \29\ ``Auction Price'' is defined as the price at which an 
Auction is conducted. See Rule 7.35(a)(5). The Exchange states that 
because an IDO Order would not be entered by the DMM, the Exchange 
has proposed to include IDO Orders among the types of Auction-Only 
Orders that are not available to DMMs. See Notice, supra note 9, 85 
FR at 39248, n.21. See also proposed Rule 7.31(c). An ``Auction-Only 
Order'' is a Limit or Market Order that is to be traded only in an 
auction pursuant to the Rule 7.35 Series (for Auction-Eligible 
Securities) or routed pursuant to Rule 7.34 (for UTP Securities). 
See Rule 7.31(c). See also Rule 7.31(a)(1) for the definition of 
``Market Order.''
    \30\ See proposed Rule 7.35A(g)(2). A buy (sell) order is 
``better-priced'' if it is priced higher (lower) than the Auction 
Price, and this includes all sell Market Orders and Market-on-Open 
Orders. See Rule 7.35(a)(5)(A). See also Rule 7.31(c)(1)(B) for the 
definition of ``Market-on-Open Order.'' A buy (sell) order is ``at-
priced'' if it is priced equal to the Auction Price. See Rule 
7.35(a)(5)(B).
    \31\ See Notice, supra note 9, 85 FR at 39249.
    \32\ See Notice, supra note 9, 85 FR at 39249.
---------------------------------------------------------------------------

    Currently, Rule 7.35A(h) generally provides that, once an Auction 
Price has been determined, better-priced orders are guaranteed to 
participate in the Auction at the Auction Price, whereas at-priced 
orders are not guaranteed to participate and will be allocated 
according to specified priority rules.\33\ The Exchange has proposed 
that an IDO Order would be guaranteed to participate in the Direct 
Listing Auction at the Auction Price.\34\ If the limit price of the IDO 
Order is equal to the Auction Price, the IDO Order would have priority 
at that price.\35\ The Exchange states that providing priority to an 
at-priced IDO Order would increase the potential for the IDO Order to 
be executed in full, and therefore for the Primary Direct Floor Listing 
to proceed.\36\
---------------------------------------------------------------------------

    \33\ See Rule 7.35A(h)(1) and (2).
    \34\ See proposed Rule 7.35A(h)(4).
    \35\ See proposed Rule 7.35A(h)(4).
    \36\ See Notice, supra note 9, 85 FR at 39249.

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[[Page 54457]]

    In addition, the Exchange has proposed to specify that two existing 
provisions would apply in the case of a Selling Shareholder Direct 
Floor Listing only. Currently, a DMM will publish a pre-opening 
indication before a security opens if the Auction Price is anticipated 
to be a change of more than the Applicable Price Range \37\ from a 
specified Indication Reference Price.\38\ Under the proposal, the 
Indication Reference Price for a security that is a Selling Shareholder 
Direct Floor Listing that has had recent sustained trading in a Private 
Placement Market prior to listing would be the most recent transaction 
price in that market or, if none, would be a price determined by the 
Exchange in consultation with a financial advisor to the issuer of such 
security.\39\ Further, when facilitating the opening on the first day 
of trading of a Selling Shareholder Direct Floor Listing that has not 
had a recent sustained history of trading in a Private Placement Market 
prior to listing, the DMM would consult with a financial advisor to the 
issuer of such security in order to effect a fair and orderly opening 
of such security.\40\ The Exchange states that these provisions are not 
applicable to a Primary Direct Floor Listing because, unlike for a 
Selling Shareholder Direct Floor Listing, the registration statement 
for a Primary Direct Floor Listing would include a price range within 
which the company anticipates selling the shares it is offering.\41\
---------------------------------------------------------------------------

    \37\ The ``Applicable Price Range'' for determining whether to 
publish a pre-opening indication, with limited exception, is 5% for 
securities with an Indication Reference Price over $3.00 and $0.15 
for securities with an Indication Reference Price equal to or lower 
than $3.00. See Rule 7.35A(d)(3)(A).
    \38\ See Rule 7.35A(d)(1)(A).
    \39\ See proposed Rule 7.35A(d)(2)(A)(iv).
    \40\ See proposed Rule 7.35A(g)(1). The Exchange has proposed a 
non-substantive change to this provision to modify a reference to 
``Private Placement'' to utilize the defined term ``Private 
Placement Market.'' See id.
    \41\ See Notice, supra note 9, 85 FR at 39249.
---------------------------------------------------------------------------

    In the case of a Primary Direct Floor Listing, the Exchange has 
proposed a new measure of the Indication Reference Price. Specifically, 
for a security that is offered in a Primary Direct Floor Listing, the 
Indication Reference Price would be the lowest price of the Primary 
Direct Floor Listing Auction Price Range.\42\
---------------------------------------------------------------------------

    \42\ See proposed Rule 7.35A(d)(2)(A)(v). The Exchange states 
that, for example, if the Primary Direct Floor Listing Auction Price 
Range is $10.00 to $20.00, then the Indication Reference Price would 
be $10.00. See Notice, supra note 9, 85 FR at 39248, n.22.
---------------------------------------------------------------------------

    The Exchange states that any services provided by a financial 
advisor to the issuer of a security listing in connection with a 
Selling Shareholder Direct Floor Listing or a Primary Direct Floor 
Listing (the ``financial advisor'') and the DMM assigned to that 
security must provide such services in a manner that is consistent with 
all federal securities laws, including Regulation M and other anti-
manipulation requirements.\43\ The Exchange states that, for example, 
when a financial advisor provides a consultation to the Exchange as 
required by Rule 7.35A(d)(2)(a)(iv), when the DMM consults with a 
financial advisor in connection with Rule 7.35A(g)(1), or when a 
financial advisor otherwise assists or consults with the DMM as to 
pricing or opening of trading in a Selling Shareholder Direct Floor 
Listing or Primary Direct Floor Listing, the financial advisor and DMM 
will not act inconsistent with Regulation M and other anti-manipulation 
provisions of the federal securities laws, or Exchange Rule 2020.\44\ 
The Exchange represents that it has retained the Financial Industry 
Regulatory Authority (``FINRA'') pursuant to a regulatory services 
agreement to monitor such compliance with Regulation M and other anti-
manipulation provisions of the federal securities laws, and Rule 
2020.\45\ The Exchange has proposed a new commentary that states that, 
in connection with a Selling Shareholder Direct Floor Listing, the 
financial advisor to the issuer of the security being listed and the 
DMM assigned to such security are reminded that any consultation that 
the financial advisor provides to the Exchange as required by Rule 
7.35A(d)(2)(A)(iv) and any consultation between the DMM and financial 
advisor as required by Rule 7.35A(g)(1) is to be conducted in a manner 
that is consistent with the federal securities laws, including 
Regulation M and other anti-manipulation requirements.\46\
---------------------------------------------------------------------------

    \43\ See Notice, supra note 9, 85 FR at 39249.
    \44\ See Notice, supra note 9, 85 FR at 39249 (citing Rule 2020, 
which provides that ``No member or member organization shall effect 
any transaction in, or induce the purchase or sale of, any security 
by means of any manipulative, deceptive or other fraudulent 
contrivance'').
    \45\ See Notice, supra note 9, 85 FR at 39249. The Exchange 
further represents that it expects to issue regulatory guidance in 
connection with a company conducting a Primary Direct Floor Listing, 
and that such regulatory guidance would include a reminder to member 
organizations that activities in connection with a Primary Direct 
Floor Listing, like activities in connection with other listings, 
must be conducted in a manner not inconsistent with Regulation M and 
other anti-manipulation provisions of the federal securities laws 
and Rule 2020. See id. at 39249, n.28.
    \46\ See proposed Rule 7.35A, Commentary .10.
---------------------------------------------------------------------------

    Finally, the Exchange has proposed to remove references to Direct 
Listing Auctions from Rule 7.35C, which concerns Exchange-facilitated 
auctions.\47\ The Exchange states that, because of the importance of 
the DMM to the Direct Listing Auction, if a DMM is unable to manually 
facilitate a Direct Listing Auction, the Exchange would not proceed 
with a Selling Shareholder Direct Floor Listing or a Primary Direct 
Floor Listing.\48\
---------------------------------------------------------------------------

    \47\ See proposed Rule 7.35C(a), (a)(3), (b)(1), and (b)(3).
    \48\ See Notice, supra note 9, 85 FR at 39249.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 2, is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to a national securities exchange.\49\ In 
particular, the Commission finds that the proposed rule change, as 
modified by Amendment No. 2, is consistent with Section 6(b)(5) of the 
Exchange Act,\50\ 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\ 15 U.S.C. 78f(b). In approving this proposed rule change, 
the Commission has considered the proposed rule change's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \50\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    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.\51\
---------------------------------------------------------------------------

    \51\ 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., NYSE 2018 Order, supra note 12, 83 FR at 5653, n.53; 
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 has stated that 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. See, e.g., NYSE 2018 Order, supra note 12, 83 FR at 
5653, n.53; Securities Exchange Act Release Nos. 87648 (December 3, 
2019), 84 FR 67308, 67314, n.42 (December 9, 2019) (SR-NASDAQ-2019-
059); 88716 (April 21, 2020), 85 FR 23393, 23395, n.22 (April 27, 
2020) (SR-NASDAQ-2020-001).

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[[Page 54458]]

    The Exchange's listing standards currently provide the Exchange 
with discretion to list a company whose stock has not been previously 
registered under the Exchange Act, where such company is listing in 
connection with a Selling Shareholder Direct Floor Listing.\52\ The 
Exchange has proposed to allow companies to list in connection with a 
Primary Direct Floor Listing, which would for the first time provide a 
company the option, without a firm commitment underwritten offering, of 
selling shares to raise capital in the opening auction upon initial 
listing on the Exchange.\53\
---------------------------------------------------------------------------

    \52\ See Section 102.01B, Footnote (E) of the Manual. See also 
NYSE 2018 Order, supra note 12, 83 FR at 5654.
    \53\ See NYSE Listed Company Manual Section 102.01B, Footnote 
(E) of the Manual which states in part that the Exchange expects to 
list companies in connection with a firm commitment underwritten 
IPO, upon transfer from another market, or pursuant to a spin-off.
---------------------------------------------------------------------------

    Several commenters expressed support for the proposed expansion of 
direct listings to permit a primary offering.\54\ One commenter, for 
example, 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.\55\ 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.\56\
---------------------------------------------------------------------------

    \54\ 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 Capital 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''); Letter from Burke Dempsey, Executive Vice President 
Head of Investment Banking, Wedbush Securities (April 20, 2020) 
(``Wedbush Letter'').
    \55\ See Citigroup Letter, supra note 54. This commenter also 
stated its belief 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.
    \56\ See Goldman Sachs Letter, supra note 54. 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. See also Citadel Letter, supra 
note 54, at 1; Wedbush Letter, supra note 54.
---------------------------------------------------------------------------

    The Commission believes that a number of the changes set forth in 
Amendment No. 2 support a finding that the proposal is consistent with 
the Act. More specifically, the Commission believes that the following 
aspects result in a proposal for a Primary Direct Floor Listing that is 
reasonably designed to be consistent with the protection of investors 
and the maintenance of fair and orderly markets, as well as the 
facilitation of capital formation: (i) Addition of the IDO Order type 
and other requirements which address how the issuer will participate in 
the opening auction; (ii) discussion of the role of financial advisors; 
(iii) addition of the Commentary that provides that specified 
activities are to be conducted in a manner that is consistent with the 
federal securities laws, including Regulation M and other anti-
manipulation requirements; (iv) retaining of FINRA to monitor 
compliance with Regulation M and other anti-manipulation provisions of 
the federal securities laws and NYSE Rule 2020; (v) clarification of 
how market value will be determined for qualifying the company's 
securities for listing; and (vi) elimination of the grace period for 
meeting certain listing requirements.
    With respect to the aggregate market value of publicly-held shares 
requirement, the Exchange proposes to require that it will deem a 
company to have met such requirement if the company will sell at least 
$100 million in market value of shares in the Exchange's opening 
auction on the first day of trading. Alternatively, where a company 
will sell shares in the opening auction with a market value of less 
than $100 million, the Exchange will deem the company to have met such 
requirement if the aggregate market value of the shares the company 
will sell in the opening auction on the first day of trading and the 
shares that are publicly held immediately prior to listing is at least 
$250 million. According to the Exchange, a company may list in 
connection with an IPO with a market value of publicly-held shares of 
$40 million and, ``in the Exchange's experience in listing IPOs, a 
liquid trading market develops after listing for issuers with a much 
smaller value of publicly-held shares than the Exchange anticipates 
would exist after the opening auction in a Primary Direct Floor 
Listing.'' \57\ In Amendment No. 2, the Exchange clarified that market 
value would be calculated using a price per share equal to the lowest 
price of the price range multiplied by the number of shares being 
offered, as set forth by the issuer in its registration statement.\58\ 
One commenter expressed the view that the proposal, as originally 
noticed for comment, appropriately updated the publicly-held shares and 
distribution requirements associated with direct listings in order to 
ensure the development of a liquid trading market.\59\
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    \57\ Notice, supra note 9, 85 FR at 39250. As described above, 
in determining that a company has met the market value of publicly-
held shares standards the Exchange will consider the market value of 
all shares sold by the company in the opening auction, rather than 
excluding shares that may be purchased by officers, directors, or 
owners of more than 10% of the company's common stock, 
notwithstanding that generally the Exchange's listing standards 
exclude shares held by such insiders from its calculations of 
publicly-held shares. The Exchange asserts that the Primary Direct 
Floor Listing will have an adequate public float and liquid trading 
market after completion of the opening auction given the higher 
market value requirement than that required for listing an 
underwritten IPO. See Notice, supra note 9, 85 FR at 39247.
    \58\ See Notice, supra note 9, 85 FR at 39247 and note 19, 
supra, and accompanying text.
    \59\ See Citadel Letter, supra note 54, at 1.
---------------------------------------------------------------------------

    The Exchange's proposed aggregate market value of publicly-held 
shares requirement provides the Exchange with a reasonable level of 
assurance that the company's market value supports listing on the 
Exchange and the maintenance of fair and orderly markets. The proposed 
requirements are comparable to or higher than the aggregate market 
value of publicly-held shares required by the Exchange for initial 
listing in other contexts.\60\ Specifically, the Exchange's proposed 
minimum market value requirements, which are designed in part to ensure 
sufficient liquidity, of $100 million and $250 million for Primary 
Direct Floor Listings are higher than the $40 million minimum market 
value requirement for IPOs \61\ and comparable to the $100 million and 
$250 million minimum market value requirements for Selling Shareholder

[[Page 54459]]

Direct Floor Listings.\62\ The Commission further believes that using 
the lowest price in the price range established by the issuer in its 
registration statement to determine the minimum market value is a 
reasonable and conservative approach given that, as described below, 
the Primary Direct Floor Listing will not proceed at a lower price.
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    \60\ See Section 102.01B of the Manual.
    \61\ In addition to the $40 Million standard, the Exchange's 
current listing standards require an aggregate market value of 
publicly held shares of $100 million for companies that list other 
than at the time of an IPO, spin-off, or initial firm commitment 
underwritten public offering. See Section 102.01B of the Manual.
    \62\ One commenter raised a concern that the Exchange does not 
provide any data to support its conclusion that there would be 
adequate liquidity for a security listing in connection with a 
Primary Direct Floor Listing. See Letter from Jeffrey P. Mahoney, 
General Counsel, Council of Institutional Investors (July 16, 2020) 
(``CII Letter III''), at 5. While the Exchange did not provide the 
data specifically referenced by the commenter, as noted above, the 
proposed minimum market value requirements are comparable to or 
higher than those applied by the Exchange in other contexts. See 
supra notes 16-17 and accompanying text. The existing $40 million 
and $100 million market value requirements in Section 102.01B of the 
Manual are longstanding requirements that have supported the listing 
of companies on the Exchange that are suitable for listing over many 
years. The Commission also previously approved the standards for 
Selling Shareholder Direct Floor Listings as supporting listing on 
the Exchange and the maintenance of fair and orderly markets thereby 
protecting investors and the public interest in accordance with 
Section 6(b)(5) of the Exchange Act (see NYSE 2018 Order, supra note 
12, 83 FR at 5654).
---------------------------------------------------------------------------

    In the Order Instituting Proceedings, the Commission expressed 
concern that, with a Primary Direct Floor Listing, 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, and stated that the Exchange had not explained how 
its opening auction rules would apply in a Primary Direct Floor 
Listing.\63\
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    \63\ One commenter expressed general support for the proposal 
and offered a variety of observations beyond the scope of the 
proposal, including with respect to the importance of opening 
auction information. See ClearingBid Letter, supra note 54, at 1.
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    In Amendment No. 2, the Exchange proposed to add the IDO Order as a 
new order type to be used by the issuer in a Primary Direct Floor 
Listing, and to clarify in its rules how the DMM would conduct the 
opening auction for such listings. As discussed above, the issuer would 
be required to submit an IDO Order in the opening auction with a limit 
price equal to the low end of the Primary Direct Floor Listing Auction 
Price Range, and for the full quantity, as reflected in the 
registration statement. The IDO Order cannot be modified or canceled by 
the issuer once entered. Further, the DMM would conduct the opening 
auction only if the auction price is within the Primary Direct Floor 
Listing Auction Price Range disclosed in the registration statement, 
and the IDO Order and all better priced sell orders can be satisfied in 
full. If the auction price is equal to the limit price of the IDO Order 
(i.e., the low end of the Primary Direct Floor Listing Auction Price 
Range), the IDO Order would have priority over other sell orders at 
that price.\64\ The Commission believes that the IDO Order and related 
clarifications proposed by the Exchange assure that the method by which 
the issuer participates in the opening auction is clearly defined, that 
the issuer is not in a position to improperly influence the price 
discovery process, and that the auction is otherwise consistent with 
the disclosures in the registration statement. The Commission further 
believes it is appropriate for the IDO Order to have priority over 
other sell orders at the same price if the auction price is at the 
limit price of the IDO Order, because the auction will not occur at all 
unless the IDO Order is satisfied in full, and this would assure that 
both the issuer and better priced sell orders are able to sell 
securities in the auction.\65\ The Commission believes that the IDO 
Order requirements described above help to mitigate concerns about the 
price discovery process in the opening auction and would provide some 
reasonable assurance that the opening auction and subsequent trading 
promote fair and orderly markets and that the proposed rules are 
designed to prevent manipulative acts and practices, and protect 
investors and the public interest in accordance with Section 6(b)(5) of 
the Exchange Act.
---------------------------------------------------------------------------

    \64\ In addition, as discussed above, the Exchange proposes that 
the DMM will publish a pre-opening indication in a Primary Direct 
Floor Listing if the auction price is expected to be outside a price 
range around an ``Indication Reference Price'' equal to the low end 
of the price range reflected in the registration statement. The 
Commission believes this is a reasonable and conservative reference 
price because the auction cannot occur at a lower price, and if the 
auction occurs at a higher price the proposal errs on the side of 
requiring opening indication information to be disseminated to 
market participants.
    \65\ In addition, the Commission believes that the proposed 
changes to Rule 7.35C to remove the references to Direct Listing 
Auction would assure that all direct listings occur with a DMM that 
will facilitate the opening auction manually, and should help 
promote fair and orderly markets in connection with direct listings, 
because of the role of the DMM in ensuring that the conditions 
described above to conduct the auction have been met. The Commission 
also believes that the proposed changes to (i) Section 102.01B of 
the Manual, Footnote (E) to clarify the description of a Selling 
Shareholder Direct Floor Listing, (ii) Rule 1.1(f) to amend the 
definition of ``Direct Listing,'' and (iii) Rule 7.35A(g)(1) to use 
the defined term ``Private Placement Market'' will provide clarity 
to the Exchange's rules, consistent with the protection of investors 
and the public interest under Section 6(b)(5) of the Exchange Act.
---------------------------------------------------------------------------

    In Amendment No. 2, the Exchange added language to its proposal, 
discussed above, reminding a financial adviser to an issuer and the DMM 
that any consultations with the financial adviser must be conducted in 
a manner consistent with the federal securities laws, including 
Regulation M and other anti-manipulation requirements.\66\ The Exchange 
also represents that it has retained FINRA to monitor such compliance 
and that it plans to issue regulatory guidance in this area. The 
Commission believes that these are reasonable steps to help assure 
compliance by participants in the direct listing process with these 
important provisions of the federal securities laws and that the 
proposed changes are consistent with preventing manipulative acts and 
practices, and protecting investors and the public interest in 
accordance with Section 6(b)(5) of the Exchange Act.
---------------------------------------------------------------------------

    \66\ See Notice, supra note 9, 85 FR at 39249, and proposed Rule 
7.35A, Commentary .10. See also supra note 45 and accompanying text 
noting that the Exchange will be issuing a regulatory circular to 
remind member organizations that activities in connection with a 
Primary Direct Floor Listing, like activities in connection with 
other listings, must be conducted in a manner not inconsistent with 
Regulation M and other anti-manipulation provisions of the federal 
securities laws and NYSE Rule 2020.
---------------------------------------------------------------------------

    Finally, several commenters expressed concerns that the lack of 
traditional underwriter involvement in direct listings generally would 
increase risks for investors, suggesting that direct listings 
circumvent the traditional due diligence process and traditional 
underwriter liability.\67\ One commenter believed that approval of the 
proposal would likely increase the number of companies that forego the 
traditional IPO process,\68\ and significantly increase the risks for 
retail investors, including by circumventing the due diligence 
process.\69\ This commenter expressed

[[Page 54460]]

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 are required to hold the 
regulatory capital necessary to act as a de facto underwriter.\70\
---------------------------------------------------------------------------

    \67\ See, e.g., Letter from Christopher A. Iacovella, Chief 
Executive Officer, ASA (December 12, 2019) (``ASA Letter I''), at 1.
    \68\ The Commission acknowledges the possibility that some 
companies may pursue a Primary Direct Floor Listing instead of a 
traditional IPO. The Commission also believes that some companies 
may pursue a Primary Direct Floor Listing that would not otherwise 
go public, or that would wait to pursue a traditional IPO until a 
later stage of development, both of which would potentially reduce 
opportunities for public shareholders to share in growth 
opportunities. Thus, the Commission believes that the proposed rule 
change may result in additional investment opportunities while 
providing companies more flexible options for becoming publicly 
traded.
    \69\ See ASA Letter I, supra note 67, at 1-2. This commenter 
believed 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.'' Id. at 1. 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. at 2. Another commenter stated that these direct listings 
may have been successes for private investors, but the retail and 
public investors that purchased stock in Spotify and Slack were 
under water for years, and one company is facing a lawsuit because 
of how direct listings are modeled. See Letter from Anonymous (June 
30, 2020).
    \70\ See ASA Letter I, supra note 67, at 2; Letter from 
Christopher A. Iacovella, Chief Executive Officer, American 
Securities Association (March 5, 2020) (``ASA Letter II''), at 2-3. 
Several additional commenters raised a variety of concerns with the 
use of a direct listing to conduct a primary offering. 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.'' Letter from Anonymous (January 3, 2020). And another 
commenter stated that a primary capital raise would have many red 
flags, questioned how to trust a private company's accounting 
methods that are not consistent with the public markets, and stated 
that a direct listing is ``fraudulent with no liability.'' See 
Letter from Anonymous (July 1, 2020). The Commission acknowledges 
these concerns, but believes the proposed rule change is consistent 
with investor protection in light of the fact that Primary Direct 
Floor Listings will be registered under the Securities Act, and that 
such registration statements will require both bona fide price 
ranges and audited financial statements prepared in accordance with 
either U.S. GAAP or International Financial Reporting Standards 
(IFRS) as issued by the International Accounting Standards Board.
---------------------------------------------------------------------------

    Another commenter recommended that the Commission disapprove the 
proposal and 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.\71\ 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.\72\
---------------------------------------------------------------------------

    \71\ See Letter from Jeffrey P. Mahoney, General Counsel, 
Council of Institutional Investors (January 16, 2020) (``CII Letter 
I''), at 2; Letter from Jeffrey P. Mahoney, General Counsel, Council 
of Institutional Investors (April 16, 2020) (``CII Letter II''), at 
2; CII Letter III, supra note 60, at 3-4, 6.
    \72\ See CII Letter I, supra note 71, at 2-3; CII Letter II, 
supra note 71, at 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.'' CII 
Letter I, supra note 71, 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; CII 
Letter III, supra note 62, at 4.
---------------------------------------------------------------------------

    On the other hand, one commenter supported direct listings as a 
suitable option for certain issuers, and took the position that ``[d]ue 
diligence is already ably done by the legions of experienced 
accountants, lawyers, consultants, rating agencies, etc.'' \73\
---------------------------------------------------------------------------

    \73\ Wedbush Letter, supra note 54.
---------------------------------------------------------------------------

    In response, the Exchange stated that it disagrees that the absence 
of underwriters creates a loophole in the regulatory regime that 
governs offerings of securities to the public.\74\ According to the 
Exchange, while involvement of a traditional underwriter 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 regularly access the 
public markets for capital raising and other purposes without using 
traditional underwriters.\75\ In the Exchange's view, the due diligence 
process in Primary Direct Floor 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.\76\ 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.\77\
---------------------------------------------------------------------------

    \74\ See Letter from Elizabeth K. King, Chief Regulatory 
Officer, ICE, General Counsel & Corporate Secretary, NYSE (March 16, 
2020) (``NYSE Response Letter''), at 2.
    \75\ See NYSE Response Letter, supra note 74, at 2-3.
    \76\ See NYSE Response Letter, supra note 74, 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.
    \77\ See NYSE Response Letter, supra note 74, 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 that at most it shifts the 
timing of such instability from six months after the offering to 
closer to the time of listing. See id.
---------------------------------------------------------------------------

    As to the comments concerning underwriter liability and due 
diligence, the Commission agrees, as noted by the Exchange, that the 
Securities Act does not require the involvement of an underwriter in 
registered offerings. Moreover, given the broad definition of 
``underwriter'' \78\ in the Securities Act, a financial advisor to an 
issuer engaged in a Primary Direct Floor Listing may, depending on the 
nature and extent of the financial advisor's activities and on the 
facts and circumstances, be deemed a statutory ``underwriter'' with 
respect to the securities offering, with attendant underwriter 
liabilities.\79\ In addition, given the broad definition of 
underwriter, required involvement of financial advisors, and the 
financial advisors' reputational interests and potential liability, 
including as statutory underwriters, the Commission believes that the 
financial advisors to issuers in Primary Direct Floor Listings will be 
incentivized to engage in robust due diligence, notwithstanding the 
lack of a firm commitment underwriting agreement. Even absent the 
involvement of a statutory underwriter, investors would not be 
precluded from pursuing any claims they may have under the Securities 
Act for false or misleading offering documents, nor would the absence 
of a statutory underwriter affect the amount of damages investors may 
be entitled to recover.
---------------------------------------------------------------------------

    \78\ Section 2(a)(11) of the Securities Act defines 
``underwriter'' to mean ``any person who has purchased from an 
issuer with a view to, or offers or sells for an issuer in 
connection with, the distribution of any security, or participates, 
or has a direct or indirect participation in the direct or indirect 
underwriting of any such undertaking.''
    \79\ The Commission does not agree, as asserted by one 
commenter, that financial advisors, exchanges, control shareholders, 
and directors involved in a direct listing will automatically incur 
statutory underwriter liability under the Securities Act. See ASA 
Letter I, supra note 67, at 2; ASA Letter II, supra note 70, at 2-3. 
Whether or not any person would be considered a statutory 
underwriter would be evaluated based on the particular facts and 
circumstances, in light of the definition of underwriter contained 
in Section 2(a)(11).
---------------------------------------------------------------------------

    In addition, issuers and other gatekeepers, with their attendant 
liability, play important roles in assuring that disclosures provided 
to investors are materially accurate and complete. The Commission 
therefore does not view a firm commitment underwriting as necessary to 
provide adequate investor protection in the context of a registered 
offering. Indeed, exchange-listed companies often engage in offerings 
that do not involve a firm commitment underwriting. Given that

[[Page 54461]]

the proposed rule change will require all Primary Direct Floor Listings 
to be registered under the Securities Act, and in light of the fact 
that the existing liability framework under the Securities Act for 
registered offerings will apply to all such Primary Direct Floor 
Listings, the Commission concludes the proposed rule change is 
consistent with investor protection.
    The Commission further believes that Primary Direct Floor Listings 
may provide benefits to existing and potential investors, relative to 
firm commitment underwritten offerings. First, because the securities 
to be issued by the company in connection with a Primary Direct Floor 
Listing would be allocated based on matching buy and sell orders, in 
accordance with the proposed rules, some investors may be able to 
purchase securities in a Primary Direct Floor Listing who might not 
otherwise receive an initial allocation in a firm commitment 
underwritten offering. The proposed rule change therefore has the 
potential to broaden the scope of investors that are able to purchase 
securities in an initial public offering, at the initial public 
offering price, rather than in aftermarket trading. Second, because the 
price of securities issued by the company in a Primary Direct Floor 
Listing will be determined based on market interest and the matching of 
buy and sell orders, some believe that Primary Direct Floor Listings 
may be a more accurate way to price securities offerings.\80\ In a firm 
commitment underwritten offering, the offering price is decided through 
negotiations between the issuer and the underwriters for the offering. 
The opening auction in a Primary Direct Floor Listing provides for a 
different price discovery method for initial public offerings which 
some believe may result in more appropriate pricing for the offered 
shares, a potential benefit to existing and potential investors. The 
Commission believes that the proposed rule change, by providing an 
opening process in which buy and sell orders are matched, in accordance 
with the proposed rules, to determine the offering price, may allow for 
efficiencies in the way IPOs are priced and allocated without 
sacrificing investor protection.
---------------------------------------------------------------------------

    \80\ See Matt Levine, Soon Direct Listings Will Raise Money, 
Bloomberg, available at https://www.bloomberg.com/opinion/articles/2019-11-27/soon-direct-listings-will-raise-money.
---------------------------------------------------------------------------

    Commenters also raised concerns about shareholder claims pursuant 
to Section 11 of the Securities Act. The Commission notes that this 
issue is not exclusive to Primary Direct Floor Listings but rather is a 
recurring issue, particularly in the context of aftermarket securities 
purchases. Purchasers in a registered offering may face difficulty 
tracing their shares back to the registration statement whenever a 
company conducts a registered offering for less than all of its shares. 
Thus, even in the context of traditional firm commitment offerings, the 
ability of existing shareholders who meet the conditions of Rule 144 to 
sell shares on an unregistered basis may result in concurrent 
registered and unregistered sales of the same class of security at the 
time of an exchange listing, leading to difficulties tracing purchases 
back to the registered offering.\81\ Although judicial precedent on 
this topic may continue to evolve, the Commission is aware of only one 
court that has considered this issue in the direct listing context to 
date, and that court ruled in favor of allowing the plaintiffs to 
pursue Section 11 claims.\82\ The Commission does not believe that the 
proposed rule change to permit Primary Direct Floor Listings poses a 
heightened risk to investors, and finds that the proposed rule change 
is consistent with investor protection.
---------------------------------------------------------------------------

    \81\ In a Primary Direct Floor Listing, all company shares will 
be sold in the opening auction, making it potentially easier to 
trace those shares back to the registration statement than in other 
contexts.
    \82\ See Pirani v. Slack Techs., Inc., 2020 U.S. Dist. LEXIS 
70177 (N.D. Cal., April 21, 2020).
---------------------------------------------------------------------------

    For the reasons discussed above, the Commission finds that the 
proposed rule change, as modified by Amendment No. 2, is consistent 
with the Exchange Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\83\ that the proposed rule change (SR-NYSE-2019-67), as 
modified by Amendment No. 2 thereto, be, and it hereby is, approved.
---------------------------------------------------------------------------

    \83\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\84\
---------------------------------------------------------------------------

    \84\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2020-19203 Filed 8-31-20; 8:45 am]
BILLING CODE 8011-01-P

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