Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To Allow Companies To List in Connection With a Direct Listing With a Primary Offering In Which the Company Will Sell Shares Itself In the Opening Auction on the First Day of Trading on Nasdaq and To Explain How the Opening Transaction for Such a Listing Will Be Effected, 84025-84029 [2020-28319]
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Federal Register / Vol. 85, No. 247 / Wednesday, December 23, 2020 / Notices
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–NYSEArca–2020–110, and
should be submitted on or before
January 13, 2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.19
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–28303 Filed 12–22–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–90717; File No. SR–
NASDAQ–2020–057]
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Order
Instituting Proceedings To Determine
Whether To Approve or Disapprove a
Proposed Rule Change To Allow
Companies To List in Connection With
a Direct Listing With a Primary Offering
In Which the Company Will Sell Shares
Itself In the Opening Auction on the
First Day of Trading on Nasdaq and To
Explain How the Opening Transaction
for Such a Listing Will Be Effected
December 17, 2020.
I. Introduction
On September 4, 2020, The Nasdaq
Stock Market LLC (‘‘Nasdaq’’ 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 allow companies to list in
connection with a primary offering in
which the company will sell shares
itself in the opening auction on the first
day of trading on the Exchange and to
explain how the opening transaction for
such a listing will be effected. The
proposed rule change was published for
comment in the Federal Register on
September 21, 2020.3 On November 4,
2020, pursuant to Section 19(b(2) of the
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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. 89878
(September 15, 2020), 85 FR 59349 (September 21,
2020) (‘‘Notice’’). Comments received on the
proposal are available on the Commission’s website
at: https://www.sec.gov/comments/sr-nasdaq-2020057/srnasdaq2020057.htm.
1 15
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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 This order
institutes proceedings under Section
19(b)(2)(B) of the Exchange Act 6 to
determine whether to approve or
disapprove the proposed rule change.
II. Description of the Proposal
Listing Rule IM–5315–1 provides
additional listing requirements for
listing a company that has not
previously had its common equity
securities registered under the Exchange
Act on the Nasdaq Global Select Market
at the time of effectiveness of a
registration statement 7 filed solely for
the purpose of allowing existing
shareholders to sell their shares (a
‘‘Selling Shareholder Direct Listing’’).
To allow a company to also sell shares
on its own behalf in connection with its
initial listing upon effectiveness of a
registration statement, without a
traditional underwritten public offering,
the Exchange has proposed to adopt
Listing Rule IM–5315–2. This proposed
rule would allow a company that has
not previously had its common equity
securities registered under the Exchange
Act, to list its common equity securities
on the Nasdaq Global Select Market at
the time of effectiveness of a registration
statement pursuant to which the
company itself will sell shares in the
opening auction on the first day of
trading on the Exchange (a ‘‘Direct
Listing with a Capital Raise’’).8
In considering a Selling Shareholder
Direct Listing, Listing Rule IM–5315–1
currently provides that the Exchange
will determine that such company has
met the applicable Market Value of
4 15
U.S.C. 78s(b)(2).
Securities Exchange Act Release No. 90331
(November 4, 2020), 85 FR 71708 (November 10,
2020). The Commission designated December 20,
2020, as the date by which it should approve,
disapprove, or institute proceedings to determine
whether to disapprove the proposed rule change.
6 15 U.S.C. 78s(b)(2)(B).
7 The reference to a registration statement refers
to a registration statement effective under the
Securities Act of 1933 (‘‘Securities Act’’).
8 See proposed IM–5315–2. A Direct Listing with
a Capital Raise would include listings where 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. The Commission notes that while
the Exchange’s current rules also permit Selling
Shareholder Direct Listings on the Nasdaq Global
Market and Nasdaq Capital Market (see IM–5405–
1 and IM–5505–1), the current proposal would only
provide for a Direct Listing with a Capital Raise on
the Nasdaq Global Select Market.
5 See
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84025
Unrestricted Publicly Held Shares 9
requirements based on the lesser of: (i)
An independent third party valuation of
the company (a ‘‘Valuation’’); 10 and (ii)
the most recent trading price for the
company’s common stock in a Private
Placement Market 11 where there has
been sustained recent trading. For a
security that has not had sustained
trading in a Private Placement Market
prior to listing, the Exchange will
determine that such company has met
the Market Value of Unrestricted
Publicly Held Shares requirement if the
company satisfies the applicable Market
Value of Unrestricted Publicly Held
Shares requirement and provides a
Valuation evidencing a Market Value of
Publicly Held Shares of at least
$250,000,000.
With respect to a Direct Listing with
a Capital Raise, the Exchange has
proposed that, in determining whether a
company satisfies the Market Value of
Unrestricted Publicly Held Shares
requirement for initial listing on the
Nasdaq Global Select Market, the
Exchange will deem such company to
have met the applicable requirement if
the amount of the company’s
Unrestricted Publicly Held Shares
before the offering, along with the
market value of the shares to be sold in
the Exchange’s opening auction in the
Direct Listing with a Capital Raise, is at
least $110 million (or $100 million, if
the company has stockholders’ equity of
at least $110 million).12 The Exchange
has proposed to calculate the Market
Value of Unrestricted Publicly Held
Shares, for this purpose, using a price
per share equal to the price that is 20%
below the lowest price of the price range
disclosed by the issuer in its registration
9 ‘‘Restricted Securities’’ means securities that are
subject to resale restrictions for any reason,
including, but not limited to, securities: (1)
Acquired directly or indirectly from the issuer or
an affiliate of the issuer in unregistered offerings
such as private placements or Regulation D
offerings; (2) acquired through an employee stock
benefit plan or as compensation for professional
services; (3) acquired in reliance on Regulation S,
which cannot be resold within the United States; (4)
subject to a lockup agreement or a similar
contractual restriction; or (5) considered ‘‘restricted
securities’’ under Rule 144. See Rule 5005(a)(37).
‘‘Unrestricted Securities’’ means securities that are
not Restricted Securities. See Rule 5005(a)(46).
‘‘Unrestricted Publicly Held Shares’’ means the
Publicly Held Shares that are Unrestricted
Securities. See Rule 5005(a)(45). See also Rule
5005(a)(23) and (35) for definitions of ‘‘Market
Value’’ and ‘‘Publicly Held Shares.’’
10 IM–5315–1 describes the requirement for a
Valuation, including the experience and
independence of the entity providing the Valuation.
11 The Exchange defines ‘‘Private Placement
Market’’ in Listing Rule 5005(a)(34) as a trading
system for unregistered securities operated by a
national securities exchange or a registered brokerdealer.
12 See proposed IM–5315–2.
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statement.13 The Exchange also
proposes to determine whether the
company has met the applicable bid
price and market capitalization
requirements based on the same share
price.14
The Exchange states that, except as
proposed for a Direct Listing with a
Capital Raise, its listing rules generally
do not include shares held by officers,
directors, or owners of more than 10%
of the company’s common stock in
calculations of Publicly Held Shares.15
In qualifying companies for listing in a
Direct Listing with a Capital Raise,
however, such officers, directors and
owners of 10% or more of the
company’s common stock will be
included in determining whether the
company meets the Market Value of
Publicly Held Shares requirement.
According to the Exchange, such
investors may acquire in secondary
market trades shares sold by the issuer
in a Direct Listing with a Capital Raise
that were included when calculating
whether the issuer meets the Market
Value of Unrestricted Publicly Held
Shares requirement for initial listing.16
The Exchange states, however, that a
company listing in conjunction with a
Direct Listing with a Capital Raise will
be required to have a Market Value of
Unrestricted Publicly Held Shares that
13 See proposed IM–5315–2. The Exchange states
that, for example, if the company is selling five
million shares in the opening auction and there are
45 million shares issued and outstanding
immediately prior to the listing that are eligible for
inclusion as Unrestricted Publicly Held Shares
based on disclosure in the company’s registration
statement, then the Exchange would calculate the
Market Value of Unrestricted Publicly Held Shares
based on a combined total of 50 million shares. If
the lowest price of the price range disclosed in the
company’s registration statement is $10 per share,
the Exchange will attribute to the company a
Market Value of Unrestricted Publicly Held Shares
of $400 million, based on an $8 price per share,
which is 20% below the bottom of the disclosed
range. See Notice, supra note 3, 85 FR at 59350, n.7.
The Exchange also states that, as described below,
the opening auction would not execute at a price
that is more than 20% below the bottom of the
disclosed range, so this is the minimum price at
which the company could list in connection with
a Direct Listing with a Capital Raise. See Notice,
supra note 3, 85 FR at 59350, n.6.
14 See proposed IM–5315–2.
15 See Notice, supra note 3, 85 FR at 59350. 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.
16 See Notice, supra note 3, 85 FR at 59350. The
Exchange states that it expects that a company
expecting to sell a significant portion of its shares
to officers, directors, and existing significant
shareholders would not undertake a public listing
through a Direct Listing with a Capital Raise. See
id. at 59352.
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is much higher than the Exchange’s $45
million Market of Unrestricted Publicly
Held Shares requirement that applies to
a traditional underwritten initial public
offering (‘‘IPO’’).17 The Exchange further
states that this heightened requirement,
along with the ability of all investors to
purchase shares in the opening process
on the Exchange, should result in
companies using a Direct Listing with a
Capital Raise having adequate public
float and a liquid trading market after
completion of the opening auction.18
The Exchange also states that it
believes that it is consistent with the
protection of investors to calculate the
security’s bid price and values derived
from the security’s price using a price
per share equal to the price that is 20%
below the lowest price of the price range
disclosed by the issuer in its registration
statement.19 According to the Exchange,
Commission rules and interpretations
generally allow the sale of securities
pursuant to an effective registration
statement at a price that is 20% below
the lowest price of the price range
disclosed by the issuer in its registration
statement.20 The Exchange states that, as
a result, the Exchange will allow the
opening auction, otherwise known as
the Nasdaq Halt Cross,21 to take place at
a price as low as this price, but no
lower, and so this is the minimum price
at which a company could be listed.22
The Exchange states that any
company listing in connection with a
Direct Listing with a Capital Raise
would continue to be subject to, and be
required to meet, all other applicable
initial listing requirements. According
to the Exchange, this would include the
requirements to have the applicable
number of shareholders and at least
17 See Notice, supra note 3, 85 FR at 59350. The
Exchange also states that, unlike a company listing
in connection with a Selling Shareholder Direct
Listing that could qualify for the price-based initial
listing requirements based on a Valuation, a
company listing in connection with a Direct Listing
with a Capital Raise, like an IPO, must qualify for
such requirements based on the minimum price at
which it could sell shares in the offering. See id.
at 59352.
18 See Notice, supra note 3, 85 FR at 59350.
19 See Notice, supra note 3, 85 FR at 59352.
20 See Notice, supra note 3, 85 FR at 59352.
21 ‘‘Nasdaq Halt Cross’’ means the process for
determining the price at which Eligible Interest
shall be executed at the open of trading for a halted
security and for executing that Eligible Interest. See
Rule 4753(a)(4). ‘‘Eligible Interest’’ means any
quotation or any order that has been entered into
the system and designated with a time-in-force that
would allow the order be in force at the time of the
Halt Cross. See Rule 4753(a)(5). Pursuant to Rule
4120, the Exchange will halt trading in a security
that is the subject of an IPO (or direct listing), and
terminate that halt when the Exchange releases the
security for trading upon certain conditions being
met, as discussed further below. See Rule 4120(a)(7)
and (c)(8).
22 See Notice, supra note 3, 85 FR at 59352.
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Frm 00144
Fmt 4703
Sfmt 4703
1,250,000 Unrestricted Publicly Held
Shares outstanding at the time of initial
listing, and the requirement to have a
price per share of at least $4.00 at the
time of initial listing.23
In addition, the Exchange has
proposed to amend Rule 4702 to add a
new order type, the ‘‘Company Direct
Listing Order’’ or ‘‘CDL Order,’’ which
would be used by the issuer in a Direct
Listing with a Capital Raise. This would
be a market order entered for the
quantity of shares offered by the issuer,
as disclosed in an effective registration
statement for the offering, that will
execute at the price determined in the
Nasdaq Halt Cross.24 A CDL Order may
be entered only on behalf of the issuer
and the CDL Order may not be cancelled
or modified. Only one Nasdaq member,
representing the issuer, may enter a CDL
Order during a Direct Listing with a
Capital Raise. The CDL Order must be
executed in full at the price determined
in the Nasdaq Halt Cross, and all orders
priced better than the price determined
in the Nasdaq Halt Cross also would
need to be satisfied.25
The Exchange has proposed that
securities listing in connection with a
Direct Listing with a Capital Raise must
begin trading on the Exchange following
the initial pricing through the Nasdaq
Halt Cross, which is described in Rules
4120(c)(8) and Rule 4753. The Exchange
further has proposed that, to allow such
initial pricing, the company must, in
accordance with Rule 4120(c)(9), have a
broker-dealer serving in the role of
financial advisor to the issuer of the
securities being listed, who is willing to
perform the functions under Rule
4120(c)(8) that are performed by an
underwriter with respect to an IPO.26
The Exchange states that the
requirement that the company begin
trading of the company’s securities
following the initial pricing through the
Nasdaq Halt Cross will promote fair and
orderly markets by protecting against
volatility in the pricing and initial
23 See Notice, supra note 3, 85 FR at 59351 (citing
Rules 5315(e)(1) and (2), and 5315(f)).
24 See proposed Rule 4702(b)(16)(A) and (B).
25 See proposed Rule 4702(a)(16)(A); Notice,
supra note 3, 85 FR at 59351.
26 See proposed IM–5315–2. Rule 4120(c)(9)
states that the process for halting and initial pricing
of a security that is subject to an IPO is also
available for the initial pricing of any other security
that has not been listed on a national security
exchange immediately prior to the initial pricing, if
a broker-dealer serving in the role of financial to the
issuer is willing to perform the functions under
Rule 4120(c)(8) that are performed by an
underwriter with respect to an IPO, and if more
than one broker-dealer is serving in the role of
financial advisor, the issuer must designate one to
perform these functions. The Exchange proposes to
renumber this provision as Rule 4120(c)(9)(A). See
proposed Rule 4120(c)(9)(A).
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trading of securities covered by the
proposal.27 In addition, the Exchange
has proposed to amend Rule 4120(c)(9)
to specify that any services provided by
such financial advisor to the issuer of a
security, including a company listing in
connection with a Direct Listing with a
Capital Raise, must provide such
services in a manner that is consistent
with all federal securities laws,
including Regulation M and other antimanipulation requirements.28
With respect to the Nasdaq Halt Cross,
the Exchange has proposed that, in the
case of a Direct Listing with a Capital
Raise, a security shall not be released for
trading by Nasdaq unless the expected
price at which the cross would occur (as
defined in Rule 4120(c)(8)(A)(i)) is at or
above the price that is 20% below the
lowest price of the price range
established by the issuer in its effective
registration statement.29 This
requirement would be in addition to the
existing conditions described in Rule
4120(c)(8)(A)(i), (ii), and (iii), which
would continue to apply.30 The
Exchange notes that, unlike in an IPO,
a company listing through a Direct
Listing with a Capital Raise would not
have an underwriter to guarantee that a
specified number of shares would be
sold by the company at a price
consistent with disclosure in the
company’s effective registration
statement. However, the Exchange
asserts that this would be achieved
through the proposed requirements that
(1) the Nasdaq Halt Cross occur only if
the CDL Order, which must be equal to
the total number of shares disclosed as
being offered by the company in the
effective registration statement, is
executed in full, and (2) the Nasdaq Halt
Cross occur at a price per share no less
than 20% below the lowest price of the
price range disclosed by the issuer in its
registration statement.31
The Exchange states that, because the
financial advisor would be responsible
for determining when the security
subject to the Nasdaq Halt Cross is ready
to trade, the proposal would make the
financial advisor responsible for
determining whether the Nasdaq Halt
Cross for a Direct Listing with a Capital
Raise can proceed.32 According to the
27 See
Notice, supra note 3, 85 FR at 59352.
proposed Rule 4120(c)(9)(A).
29 See proposed Rule 4120(c)(9)(B).
30 Rule 4120(c)(8)(A) provides that a security will
not be released for trading until Nasdaq receives
notice from the underwriter of the IPO or financial
advisor in the case of a Direct Listing that the
security is ready to trade, the system verifies that
all market orders will be executed in the cross, and
the price determined in the cross satisfies a price
validation test.
31 See Notice, supra note 3, 85 FR at 59352.
32 See Notice, supra note 3, 85 FR at 59351.
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28 See
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Exchange, if there is insufficient buy
interest to satisfy the CDL Order as
required by the proposal, the Nasdaq
Halt Cross would not proceed and such
security would not begin trading.33 The
Exchange represents that, if the Nasdaq
Halt Cross cannot be conducted, the
Exchange would notify market
participants via a Trader Update that the
Direct Listing with a Capital Raise has
been cancelled and any orders for that
security that had been entered on the
Exchange, including the CDL Order,
would be cancelled back to the entering
firms.34 The Exchange further states
that, because the CDL Order will be a
market order, if the Nasdaq Halt Cross
proceeds, that order will execute in full
in the Nasdaq Halt Cross, along with
orders priced at or better than the price
determined in the Nasdaq Halt Cross.35
The Exchange notes that, while the
Nasdaq Halt Cross would not proceed if
the price calculated is 20% or more
below the lowest price disclosed by the
company in its effective registration
statement, there would be no upper
limit to the price determined in the
Nasdaq Halt Cross.36
Finally, the Exchange has proposed to
make adjustments to how it would
calculate the Current Reference Price,
which is disseminated in the Nasdaq
Order Imbalance Indicator, and the
price at which the Nasdaq Halt Cross
would execute, for a Direct Listing with
a Capital Raise.37 In each case, where
there are multiple prices that would
satisfy the conditions for determining
the price, the Exchange would modify
the fourth tie-breaker for a Direct Listing
with a Capital Raise to use the price that
is closest to the price that is 20% below
the lowest price of the price range
disclosed by the issuer in its effective
registration statement.38
III. Summary of Comment Letters
Received
One commenter recommended that
the Commission disapprove the
proposal because it believes that the
proposed expansion of direct listings
33 See
Notice, supra note 3, 85 FR at 59351.
Notice, supra note 3, 85 FR at 59351.
35 See Notice, supra note 3, 85 FR at 59351.
36 See Notice, supra note 3, 85 FR at 59351.
37 See Rule 4853(a)(3) for a description of the
‘‘Current Reference Price’’ and ‘‘Order Imbalance
Indicator.’’
38 See proposed Rule 4753(a)(3)(A)(iv)(c) and
(b)(2)(D)(iii). The Exchange states that the fourth tiebreaker used to calculate the Current Reference
Price for an IPO is the price that is closest to the
issuer’s IPO price, and that a Direct Listing with a
Capital Raise is similar to an IPO in that the
company sells securities in the offering. See Notice,
supra note 3, 85 FR at 59352. The Exchange also
proposes non-substantive changes to renumber the
other alternatives for the fourth tie-breaker. See
proposed Rule 4753(a)(3)(A)(iv) and (b)(2)(D).
34 See
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84027
would compound problems that
shareholders face in tracing their share
purchases to a registration statement
and may lead to a decline in effective
governance at U.S. public companies.39
The commenter stated that traceability
concerns often arise when there have
been successive offerings, as
shareholders seek to establish their
standing to litigate claims for material
misstatements or omissions under
federal securities law.40 The commenter
stated that investor concerns about the
traceability of shares in a direct listing
were drawn into sharp focus in current
litigation involving a direct listing by
Slack Technologies, Inc. (‘‘Slack’’),
which is still under consideration.41
The commenter further stated that,
independent of the Slack case, the
Exchange’s proposal raises important
investor issues that the Commission
should consider before opening U.S.
capital markets up to the potential for a
vastly increased number of direct
listings.42 The commenter urged the
Commission to explore updating its
‘‘proxy plumbing’’ regulations before
approving an expanded direct listings
regime.43
In addition, this commenter stated
that it is concerned that the Exchange’s
proposal would result in a significant
increase in the use of direct listings, and
that more direct listings may lead to a
39 See Letter from Jeffrey P. Mahoney, General
Counsel, Council of Institutional Investors, at 2, 4
(October 8, 2020) (‘‘CII Letter’’). The commenter
stated that on September 25, 2020, the Commission
issued an order granting the Council of Institutional
Investors’ petition for review of an order, issued by
delegated authority, granting approval of a
proposed rule change by the New York Stock
Exchange LLC relating to a proposed direct listing
with a primary offering (‘‘NYSE Proposal’’). See id.
at 1–2. See also Securities Exchange Act Release
No. 90001 (September 25, 2020), 85 FR 61793
(September 30, 2020) (SR–NYSE–2019–67) (Order
Granting Petition for Review, Scheduling Filing of
Statements, and Denying New York Stock Exchange
LLC’s Motion to Lift the Stay). This commenter
stated that the Exchange’s current proposal is
similar to the NYSE Proposal and cites its petition
for review of the NYSE Proposal as further support
for its recommendation that the Commission
disapprove the Exchange’s proposal. See CII Letter,
at 1–2 (citing Petition of Council of Institutional
Investors for Review of an Order, Issued by
Delegated Authority, Granting Approval of a
Proposed Rule (September 8, 2020), available at
https://www.sec.gov/rules/sro/nyse/2020/34-89684petition.pdf).
40 See CII Letter, supra note 39, at 2–3.
41 See CII Letter, supra note 39, at 3. The
commenter stated with respect to this case that
while the district court denied a motion to dismiss
a Section 11 claim on the grounds that the plaintiff
could not trace its purchases to Slack’s registration
statement, the court of appeals has agreed to hear
the matter on an interlocutory basis, so it is unclear
whether the district court case will be upheld. See
id. See also Pirani v. Slack Technologies, Inc., No.
20–16419 (9th Cir. July 23, 2020), Docket No. 1.
42 See CII Letter, supra note 39, at 3.
43 See CII Letter, supra note 39, at 4.
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Federal Register / Vol. 85, No. 247 / Wednesday, December 23, 2020 / Notices
decline in the effective corporate
governance of U.S. public companies to
the detriment of long-term investors and
the capital markets generally.44 The
commenter stated that a recent direct
listing of Palantir Technologies Inc. had
a dual-class structure that is viewed by
many market participants as
inconsistent with effective
governance.45
Another commenter simply stated
support for the proposed method of
opening the transaction.46
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IV. Proceedings To Determine Whether
To Approve or Disapprove SR–
NASDAQ–2020–057 and Grounds for
Disapproval Under Consideration
The Commission is instituting
proceedings pursuant to Section
19(b)(2)(B) of the Exchange Act to
determine whether the proposal should
be approved or disapproved.47
Institution of such proceedings is
appropriate at this time in view of the
legal and policy issues raised by the
proposed rule change, as discussed
below. Institution of disapproval
proceedings does not indicate that the
Commission has reached any
conclusions with respect to any of the
issues involved.
Pursuant to Section 19(b)(2)(B) of the
Exchange Act, the Commission is
providing notice of the grounds for
disapproval under consideration. The
Commission is instituting proceedings
to allow for additional analysis and
input concerning the proposed rule
change’s consistency with the Exchange
Act 48 and, in particular, with Section
6(b)(5) of the Exchange Act, which
requires, among other things, that the
rules of a national securities exchange
be designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest; and
are not designed to permit unfair
discrimination between customers,
issuers, brokers, or dealers.49
The Commission has consistently
recognized the importance of exchange
listing standards. Among other things,
such listing standards help ensure that
exchange-listed companies will have
sufficient public float, investor base,
and trading interest to provide the depth
44 See
CII Letter, supra note 39, at 4.
45 See CII Letter, supra note 39, at 5.
46 See Letter from Rahul Chaudhary (October 13,
2020).
47 15 U.S.C. 78s(b)(2)(B).
48 15 U.S.C. 78f(b)(5).
49 Id.
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and liquidity necessary to promote fair
and orderly markets.50
The Exchange proposal states that for
a Direct Listing with a Capital Raise, the
Nasdaq Halt Cross on the first day of
trading for the security would not
proceed unless the price would be at or
above the price that is 20% below the
lowest price of the price range
established by the issuer in its effective
registration statement.51 The proposal,
however, has no maximum price above
which the Nasdaq Halt Cross may not
proceed.52 Therefore, the proposed rule
would permit issuers to sell, in the
opening, the quantity of shares
disclosed as offered in the prospectus
included in the effective registration
statement at a price that is above the
price range disclosed in the effective
registration statement. As there is no
proposed upside limit on the price at
which the opening auction could occur,
it is not clear how the issuer could
ensure that the issuer’s Securities Act
registration statement covers the full
amount of securities to be sold in the
offering.53 Although issuers may file
additional Securities Act registration
statements to register additional
securities needed to complete an
offering, Section 5 of the Securities Act
50 The Commission has stated in approving
exchange listing requirements that the development
and enforcement of adequate standards governing
the listing of securities on an exchange is an activity
of critical importance to the financial markets and
the investing public. In addition, once a security
has been approved for initial listing, maintenance
criteria allow an exchange to monitor the status and
trading characteristics of that issue to ensure that
it continues to meet the exchange’s standards for
market depth and liquidity so that fair and orderly
markets can be maintained. See, e.g., Securities
Exchange Act Release Nos. 82627 (February 2,
2018), 83 FR 5650, 5653, n.53 (February 8, 2018)
(SR–NYSE–2017–30) (‘‘NYSE 2018 Order’’); 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, 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).
51 See supra note 29 and accompanying text.
52 See supra note 36 and accompanying text.
53 Securities Act Rule 457 permits issuers to
register securities either by specifying the quantity
of shares registered, pursuant to Rule 457(a), or the
proposed maximum aggregate offering amount,
pursuant to Rule 457(o). For issuers that register
securities based on the proposed maximum
aggregate offering amount, it is not clear how the
issuer could ensure that the total amount sold by
the issuer in the opening auction does not exceed
the amount of securities registered under the
Securities Act.
PO 00000
Frm 00146
Fmt 4703
Sfmt 4703
requires all of the related registration
statements to be effective prior to the
time of sale. To the extent Nasdaq’s
proposal may result in issuers needing
to register additional securities beyond
those included in an initial Securities
Act registration statement, it is not
apparent how an issuer could ensure
that any additional required registration
statement would be effective prior to the
time of opening. Nor is it apparent how
an issuer would be able to determine
whether an additional Securities Act
registration statement would be required
before the opening occurs. Thus, we
have concerns that Nasdaq’s proposed
rule may not provide adequate
safeguards to ensure that issuers
conducting a Direct Listing with a
Capital Raise are able to comply with
Section 5 of the Securities Act. The
Exchange has not explained how this
would be consistent with the investor
protection requirements under Section
6(b)(5) and other relevant provisions of
the Exchange Act.
In addition, the Exchange states that
‘‘investors know the minimum price at
which the company can sell shares in
the offering.’’ 54 The Exchange has not
explained how investors would know
that price, as the opening could occur if
the price obtained in the Nasdaq Halt
Cross is up to 20% below the price
range disclosed by the issuer in its
effective registration statement.
Further, the Exchange asserts,
throughout its proposal, that the Nasdaq
Halt Cross will not occur at a price
lower than 20% below the low end of
the issuer’s disclosed price range, but it
is unclear from the Exchange’s rules that
this would always be the case.
Specifically, proposed Rule
4120(c)(9)(B) states that the security will
not be released for trading unless ‘‘the
Expected Price is at or above the price
that is 20% below the lowest price of
the price range established’’ in the
effective registration statement.55 Rule
4120(c)(8), however, appears to permit
the underwriter or financial advisor to
select price bands of up to $0.50 outside
of the Expected Price, and provide that
the Nasdaq system would view the price
validation test as having been passed
and permit the security to be released
for trading, so long as the actual price
calculated by the cross differs from the
Expected Price by no more than the
price band.56 The Exchange has not
54 Notice,
supra note 3, 85 FR at 59350.
Price’’ under Rule 4120(c)(8)(A)(i)
means the Current Reference Price at the time the
Exchange receives notice that the security is ready
to trade from an underwriter or financial advisor.
56 Under Nasdaq Rule 4120(c)(8)(B) a financial
advisor in a Direct Listing with a Capital Raise
would select ‘‘price bands’’ that are defined as the
55 ‘‘Expected
E:\FR\FM\23DEN1.SGM
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Federal Register / Vol. 85, No. 247 / Wednesday, December 23, 2020 / Notices
jbell on DSKJLSW7X2PROD with NOTICES
explained this apparent inconsistency
in its rules.
Finally, although the Exchange has
proposed that the CDL Order may not be
cancelled or modified, the Exchange’s
rules appear to permit the issuer’s
financial advisor broad discretion to
postpone the offering, which would
effectively cancel the CDL Order.
Specifically, Rule 4120(c)(8) provides
that the validation needed to open the
security only occurs after the Expected
Price is displayed to the financial
advisor and the financial advisor then
approves proceeding. Rule 4120(c)(8)
also permits the financial advisor, with
the concurrence of Nasdaq, to determine
at any point during the Nasdaq Halt
Cross process up through the conclusion
of the pre-launch period to postpone
and reschedule the offering. The
financial advisor therefore could
effectively ‘‘cancel’’ the CDL Order, on
behalf of the issuer, by deciding not to
proceed with the offering for a variety
of reasons, including being dissatisfied
with the Expected Price. The Exchange
has not explained why its rules appear
to allow the financial advisor this
discretion in the case of a Direct Listing
with a Capital Raise, or why doing so
would be consistent with Section 6(b)(5)
and other relevant provisions of the
Exchange Act.
The Commission notes that, under the
Commission’s Rules of Practice, the
‘‘burden to demonstrate that a proposed
rule change is consistent with the
Exchange Act and the rules and
regulations issued thereunder . . . is on
the self-regulatory organization [‘SRO’]
that proposed the rule change.’’ 57 The
description of a proposed rule change,
its purpose and operation, its effect, and
a legal analysis of its consistency with
applicable requirements must all be
sufficiently detailed and specific to
support an affirmative Commission
finding,58 and any failure of an SRO to
provide this information may result in
the Commission not having a sufficient
basis to make an affirmative finding that
a proposed rule change is consistent
with the Exchange Act and the
applicable rules and regulations.59
For these reasons, the Commission
believes it is appropriate to institute
proceedings pursuant to Section
amounts by which the actual price may not be
lower, or higher, than the Expected Price. The rule
states that available price bands, set by Nasdaq,
shall include $0 but shall not be in excess of $0.50.
Under the proposal, the financial advisor in a Direct
Listing with a Capital Raise is not restricted from
selecting price bands in accordance with Rule
4120(c)(8)(B).
57 Rule 700(b)(3), Commission Rules of Practice,
17 CFR 201.700(b)(3).
58 See id.
59 See id.
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21:21 Dec 22, 2020
Jkt 253001
19(b)(2)(B) of the Exchange Act 60 to
determine whether the proposal should
be approved or disapproved.
V. Commission’s Solicitation of
Comments
The Commission requests that
interested persons provide written
submissions of their views, data, and
arguments with respect to the issues
identified above, as well as any other
concerns they may have with the
proposal. In particular, the Commission
invites the written view of interested
persons concerning whether the
proposal is consistent with Section
6(b)(5) or any other provision of the
Exchange Act, or the rules and
regulations thereunder. Although there
do not appear to be any issues relevant
to approval or disapproval that would
be facilitated by an oral presentation of
views, data, and arguments, the
Commission will consider, pursuant to
Rule 19b–4, any request for an
opportunity to make an oral
presentation.61
Interested persons are invited to
submit written data, views, and
arguments regarding whether the
proposal should be approved or
disapproved by January 13, 2021. Any
person who wishes to file a rebuttal to
any other person’s submission must file
that rebuttal by January 27, 2021.
Comments may be submitted by any
of the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NASDAQ–2020–057 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NASDAQ–2020–057. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
60 15
U.S.C. 78s(b)(2)(B).
61 Section 19(b)(2) of the Exchange Act, as
amended by the Securities Act Amendments of
1975, Public Law 94–29 (June 4, 1975), grants the
Commission flexibility to determine what type of
proceeding—either oral or notice and opportunity
for written comments—is appropriate for
consideration of a particular proposal by a selfregulatory organization. See Securities Act
Amendments of 1975, Senate Comm. on Banking,
Housing & Urban Affairs, S. Rep. No. 75, 94th
Cong., 1st Sess. 30 (1975).
PO 00000
Frm 00147
Fmt 4703
Sfmt 4703
84029
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–NASDAQ–2020–057 and
should be submitted on or before
January 13, 2021. Rebuttal comments
should be submitted by January 27,
2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.62
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–28319 Filed 12–22–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–90711; File No. SR–MIAX–
2020–38]
Self-Regulatory Organizations; Miami
International Securities Exchange,
LLC; Notice of Filing and Immediate
Effectiveness of a Proposed Rule
Change To Amend Chapter XVII, Audit
Trail Compliance Rule
December 17, 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 December
11, 2020, Miami International Securities
Exchange, LLC (‘‘MIAX Options’’ or the
‘‘Exchange’’) filed with the Securities
62 17
CFR 200.30–3(a)(57).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
E:\FR\FM\23DEN1.SGM
23DEN1
]]>Agencies
[Federal Register Volume 85, Number 247 (Wednesday, December 23, 2020)]
[Notices]
[Pages 84025-84029]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28319]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-90717; File No. SR-NASDAQ-2020-057]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order
Instituting Proceedings To Determine Whether To Approve or Disapprove a
Proposed Rule Change To Allow Companies To List in Connection With a
Direct Listing With a Primary Offering In Which the Company Will Sell
Shares Itself In the Opening Auction on the First Day of Trading on
Nasdaq and To Explain How the Opening Transaction for Such a Listing
Will Be Effected
December 17, 2020.
I. Introduction
On September 4, 2020, The Nasdaq Stock Market LLC (``Nasdaq'' 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 allow companies to list in
connection with a primary offering in which the company will sell
shares itself in the opening auction on the first day of trading on the
Exchange and to explain how the opening transaction for such a listing
will be effected. The proposed rule change was published for comment in
the Federal Register on September 21, 2020.\3\ On November 4, 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\ This order institutes proceedings under Section 19(b)(2)(B)
of the Exchange Act \6\ to determine whether to approve or disapprove
the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 89878 (September 15,
2020), 85 FR 59349 (September 21, 2020) (``Notice''). Comments
received on the proposal are available on the Commission's website
at: https://www.sec.gov/comments/sr-nasdaq-2020-057/srnasdaq2020057.htm.
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 90331 (November 4,
2020), 85 FR 71708 (November 10, 2020). The Commission designated
December 20, 2020, as the date by which it should approve,
disapprove, or institute proceedings to determine whether to
disapprove the proposed rule change.
\6\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
II. Description of the Proposal
Listing Rule IM-5315-1 provides additional listing requirements for
listing a company that has not previously had its common equity
securities registered under the Exchange Act on the Nasdaq Global
Select Market at the time of effectiveness of a registration statement
\7\ filed solely for the purpose of allowing existing shareholders to
sell their shares (a ``Selling Shareholder Direct Listing''). To allow
a company to also sell shares on its own behalf in connection with its
initial listing upon effectiveness of a registration statement, without
a traditional underwritten public offering, the Exchange has proposed
to adopt Listing Rule IM-5315-2. This proposed rule would allow a
company that has not previously had its common equity securities
registered under the Exchange Act, to list its common equity securities
on the Nasdaq Global Select Market at the time of effectiveness of a
registration statement pursuant to which the company itself will sell
shares in the opening auction on the first day of trading on the
Exchange (a ``Direct Listing with a Capital Raise'').\8\
---------------------------------------------------------------------------
\7\ The reference to a registration statement refers to a
registration statement effective under the Securities Act of 1933
(``Securities Act'').
\8\ See proposed IM-5315-2. A Direct Listing with a Capital
Raise would include listings where 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.
The Commission notes that while the Exchange's current rules also
permit Selling Shareholder Direct Listings on the Nasdaq Global
Market and Nasdaq Capital Market (see IM-5405-1 and IM-5505-1), the
current proposal would only provide for a Direct Listing with a
Capital Raise on the Nasdaq Global Select Market.
---------------------------------------------------------------------------
In considering a Selling Shareholder Direct Listing, Listing Rule
IM-5315-1 currently provides that the Exchange will determine that such
company has met the applicable Market Value of Unrestricted Publicly
Held Shares \9\ requirements based on the lesser of: (i) An independent
third party valuation of the company (a ``Valuation''); \10\ and (ii)
the most recent trading price for the company's common stock in a
Private Placement Market \11\ where there has been sustained recent
trading. For a security that has not had sustained trading in a Private
Placement Market prior to listing, the Exchange will determine that
such company has met the Market Value of Unrestricted Publicly Held
Shares requirement if the company satisfies the applicable Market Value
of Unrestricted Publicly Held Shares requirement and provides a
Valuation evidencing a Market Value of Publicly Held Shares of at least
$250,000,000.
---------------------------------------------------------------------------
\9\ ``Restricted Securities'' means securities that are subject
to resale restrictions for any reason, including, but not limited
to, securities: (1) Acquired directly or indirectly from the issuer
or an affiliate of the issuer in unregistered offerings such as
private placements or Regulation D offerings; (2) acquired through
an employee stock benefit plan or as compensation for professional
services; (3) acquired in reliance on Regulation S, which cannot be
resold within the United States; (4) subject to a lockup agreement
or a similar contractual restriction; or (5) considered ``restricted
securities'' under Rule 144. See Rule 5005(a)(37). ``Unrestricted
Securities'' means securities that are not Restricted Securities.
See Rule 5005(a)(46). ``Unrestricted Publicly Held Shares'' means
the Publicly Held Shares that are Unrestricted Securities. See Rule
5005(a)(45). See also Rule 5005(a)(23) and (35) for definitions of
``Market Value'' and ``Publicly Held Shares.''
\10\ IM-5315-1 describes the requirement for a Valuation,
including the experience and independence of the entity providing
the Valuation.
\11\ The Exchange defines ``Private Placement Market'' in
Listing Rule 5005(a)(34) as a trading system for unregistered
securities operated by a national securities exchange or a
registered broker-dealer.
---------------------------------------------------------------------------
With respect to a Direct Listing with a Capital Raise, the Exchange
has proposed that, in determining whether a company satisfies the
Market Value of Unrestricted Publicly Held Shares requirement for
initial listing on the Nasdaq Global Select Market, the Exchange will
deem such company to have met the applicable requirement if the amount
of the company's Unrestricted Publicly Held Shares before the offering,
along with the market value of the shares to be sold in the Exchange's
opening auction in the Direct Listing with a Capital Raise, is at least
$110 million (or $100 million, if the company has stockholders' equity
of at least $110 million).\12\ The Exchange has proposed to calculate
the Market Value of Unrestricted Publicly Held Shares, for this
purpose, using a price per share equal to the price that is 20% below
the lowest price of the price range disclosed by the issuer in its
registration
[[Page 84026]]
statement.\13\ The Exchange also proposes to determine whether the
company has met the applicable bid price and market capitalization
requirements based on the same share price.\14\
---------------------------------------------------------------------------
\12\ See proposed IM-5315-2.
\13\ See proposed IM-5315-2. The Exchange states that, for
example, if the company is selling five million shares in the
opening auction and there are 45 million shares issued and
outstanding immediately prior to the listing that are eligible for
inclusion as Unrestricted Publicly Held Shares based on disclosure
in the company's registration statement, then the Exchange would
calculate the Market Value of Unrestricted Publicly Held Shares
based on a combined total of 50 million shares. If the lowest price
of the price range disclosed in the company's registration statement
is $10 per share, the Exchange will attribute to the company a
Market Value of Unrestricted Publicly Held Shares of $400 million,
based on an $8 price per share, which is 20% below the bottom of the
disclosed range. See Notice, supra note 3, 85 FR at 59350, n.7. The
Exchange also states that, as described below, the opening auction
would not execute at a price that is more than 20% below the bottom
of the disclosed range, so this is the minimum price at which the
company could list in connection with a Direct Listing with a
Capital Raise. See Notice, supra note 3, 85 FR at 59350, n.6.
\14\ See proposed IM-5315-2.
---------------------------------------------------------------------------
The Exchange states that, except as proposed for a Direct Listing
with a Capital Raise, its listing rules generally do not include shares
held by officers, directors, or owners of more than 10% of the
company's common stock in calculations of Publicly Held Shares.\15\ In
qualifying companies for listing in a Direct Listing with a Capital
Raise, however, such officers, directors and owners of 10% or more of
the company's common stock will be included in determining whether the
company meets the Market Value of Publicly Held Shares requirement.
According to the Exchange, such investors may acquire in secondary
market trades shares sold by the issuer in a Direct Listing with a
Capital Raise that were included when calculating whether the issuer
meets the Market Value of Unrestricted Publicly Held Shares requirement
for initial listing.\16\ The Exchange states, however, that a company
listing in conjunction with a Direct Listing with a Capital Raise will
be required to have a Market Value of Unrestricted Publicly Held Shares
that is much higher than the Exchange's $45 million Market of
Unrestricted Publicly Held Shares requirement that applies to a
traditional underwritten initial public offering (``IPO'').\17\ The
Exchange further states that this heightened requirement, along with
the ability of all investors to purchase shares in the opening process
on the Exchange, should result in companies using a Direct Listing with
a Capital Raise having adequate public float and a liquid trading
market after completion of the opening auction.\18\
---------------------------------------------------------------------------
\15\ See Notice, supra note 3, 85 FR at 59350. 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.
\16\ See Notice, supra note 3, 85 FR at 59350. The Exchange
states that it expects that a company expecting to sell a
significant portion of its shares to officers, directors, and
existing significant shareholders would not undertake a public
listing through a Direct Listing with a Capital Raise. See id. at
59352.
\17\ See Notice, supra note 3, 85 FR at 59350. The Exchange also
states that, unlike a company listing in connection with a Selling
Shareholder Direct Listing that could qualify for the price-based
initial listing requirements based on a Valuation, a company listing
in connection with a Direct Listing with a Capital Raise, like an
IPO, must qualify for such requirements based on the minimum price
at which it could sell shares in the offering. See id. at 59352.
\18\ See Notice, supra note 3, 85 FR at 59350.
---------------------------------------------------------------------------
The Exchange also states that it believes that it is consistent
with the protection of investors to calculate the security's bid price
and values derived from the security's price using a price per share
equal to the price that is 20% below the lowest price of the price
range disclosed by the issuer in its registration statement.\19\
According to the Exchange, Commission rules and interpretations
generally allow the sale of securities pursuant to an effective
registration statement at a price that is 20% below the lowest price of
the price range disclosed by the issuer in its registration
statement.\20\ The Exchange states that, as a result, the Exchange will
allow the opening auction, otherwise known as the Nasdaq Halt
Cross,\21\ to take place at a price as low as this price, but no lower,
and so this is the minimum price at which a company could be
listed.\22\
---------------------------------------------------------------------------
\19\ See Notice, supra note 3, 85 FR at 59352.
\20\ See Notice, supra note 3, 85 FR at 59352.
\21\ ``Nasdaq Halt Cross'' means the process for determining the
price at which Eligible Interest shall be executed at the open of
trading for a halted security and for executing that Eligible
Interest. See Rule 4753(a)(4). ``Eligible Interest'' means any
quotation or any order that has been entered into the system and
designated with a time-in-force that would allow the order be in
force at the time of the Halt Cross. See Rule 4753(a)(5). Pursuant
to Rule 4120, the Exchange will halt trading in a security that is
the subject of an IPO (or direct listing), and terminate that halt
when the Exchange releases the security for trading upon certain
conditions being met, as discussed further below. See Rule
4120(a)(7) and (c)(8).
\22\ See Notice, supra note 3, 85 FR at 59352.
---------------------------------------------------------------------------
The Exchange states that any company listing in connection with a
Direct Listing with a Capital Raise would continue to be subject to,
and be required to meet, all other applicable initial listing
requirements. According to the Exchange, this would include the
requirements to have the applicable number of shareholders and at least
1,250,000 Unrestricted Publicly Held Shares outstanding at the time of
initial listing, and the requirement to have a price per share of at
least $4.00 at the time of initial listing.\23\
---------------------------------------------------------------------------
\23\ See Notice, supra note 3, 85 FR at 59351 (citing Rules
5315(e)(1) and (2), and 5315(f)).
---------------------------------------------------------------------------
In addition, the Exchange has proposed to amend Rule 4702 to add a
new order type, the ``Company Direct Listing Order'' or ``CDL Order,''
which would be used by the issuer in a Direct Listing with a Capital
Raise. This would be a market order entered for the quantity of shares
offered by the issuer, as disclosed in an effective registration
statement for the offering, that will execute at the price determined
in the Nasdaq Halt Cross.\24\ A CDL Order may be entered only on behalf
of the issuer and the CDL Order may not be cancelled or modified. Only
one Nasdaq member, representing the issuer, may enter a CDL Order
during a Direct Listing with a Capital Raise. The CDL Order must be
executed in full at the price determined in the Nasdaq Halt Cross, and
all orders priced better than the price determined in the Nasdaq Halt
Cross also would need to be satisfied.\25\
---------------------------------------------------------------------------
\24\ See proposed Rule 4702(b)(16)(A) and (B).
\25\ See proposed Rule 4702(a)(16)(A); Notice, supra note 3, 85
FR at 59351.
---------------------------------------------------------------------------
The Exchange has proposed that securities listing in connection
with a Direct Listing with a Capital Raise must begin trading on the
Exchange following the initial pricing through the Nasdaq Halt Cross,
which is described in Rules 4120(c)(8) and Rule 4753. The Exchange
further has proposed that, to allow such initial pricing, the company
must, in accordance with Rule 4120(c)(9), have a broker-dealer serving
in the role of financial advisor to the issuer of the securities being
listed, who is willing to perform the functions under Rule 4120(c)(8)
that are performed by an underwriter with respect to an IPO.\26\ The
Exchange states that the requirement that the company begin trading of
the company's securities following the initial pricing through the
Nasdaq Halt Cross will promote fair and orderly markets by protecting
against volatility in the pricing and initial
[[Page 84027]]
trading of securities covered by the proposal.\27\ In addition, the
Exchange has proposed to amend Rule 4120(c)(9) to specify that any
services provided by such financial advisor to the issuer of a
security, including a company listing in connection with a Direct
Listing with a Capital Raise, must provide such services in a manner
that is consistent with all federal securities laws, including
Regulation M and other anti-manipulation requirements.\28\
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\26\ See proposed IM-5315-2. Rule 4120(c)(9) states that the
process for halting and initial pricing of a security that is
subject to an IPO is also available for the initial pricing of any
other security that has not been listed on a national security
exchange immediately prior to the initial pricing, if a broker-
dealer serving in the role of financial to the issuer is willing to
perform the functions under Rule 4120(c)(8) that are performed by an
underwriter with respect to an IPO, and if more than one broker-
dealer is serving in the role of financial advisor, the issuer must
designate one to perform these functions. The Exchange proposes to
renumber this provision as Rule 4120(c)(9)(A). See proposed Rule
4120(c)(9)(A).
\27\ See Notice, supra note 3, 85 FR at 59352.
\28\ See proposed Rule 4120(c)(9)(A).
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With respect to the Nasdaq Halt Cross, the Exchange has proposed
that, in the case of a Direct Listing with a Capital Raise, a security
shall not be released for trading by Nasdaq unless the expected price
at which the cross would occur (as defined in Rule 4120(c)(8)(A)(i)) is
at or above the price that is 20% below the lowest price of the price
range established by the issuer in its effective registration
statement.\29\ This requirement would be in addition to the existing
conditions described in Rule 4120(c)(8)(A)(i), (ii), and (iii), which
would continue to apply.\30\ The Exchange notes that, unlike in an IPO,
a company listing through a Direct Listing with a Capital Raise would
not have an underwriter to guarantee that a specified number of shares
would be sold by the company at a price consistent with disclosure in
the company's effective registration statement. However, the Exchange
asserts that this would be achieved through the proposed requirements
that (1) the Nasdaq Halt Cross occur only if the CDL Order, which must
be equal to the total number of shares disclosed as being offered by
the company in the effective registration statement, is executed in
full, and (2) the Nasdaq Halt Cross occur at a price per share no less
than 20% below the lowest price of the price range disclosed by the
issuer in its registration statement.\31\
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\29\ See proposed Rule 4120(c)(9)(B).
\30\ Rule 4120(c)(8)(A) provides that a security will not be
released for trading until Nasdaq receives notice from the
underwriter of the IPO or financial advisor in the case of a Direct
Listing that the security is ready to trade, the system verifies
that all market orders will be executed in the cross, and the price
determined in the cross satisfies a price validation test.
\31\ See Notice, supra note 3, 85 FR at 59352.
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The Exchange states that, because the financial advisor would be
responsible for determining when the security subject to the Nasdaq
Halt Cross is ready to trade, the proposal would make the financial
advisor responsible for determining whether the Nasdaq Halt Cross for a
Direct Listing with a Capital Raise can proceed.\32\ According to the
Exchange, if there is insufficient buy interest to satisfy the CDL
Order as required by the proposal, the Nasdaq Halt Cross would not
proceed and such security would not begin trading.\33\ The Exchange
represents that, if the Nasdaq Halt Cross cannot be conducted, the
Exchange would notify market participants via a Trader Update that the
Direct Listing with a Capital Raise has been cancelled and any orders
for that security that had been entered on the Exchange, including the
CDL Order, would be cancelled back to the entering firms.\34\ The
Exchange further states that, because the CDL Order will be a market
order, if the Nasdaq Halt Cross proceeds, that order will execute in
full in the Nasdaq Halt Cross, along with orders priced at or better
than the price determined in the Nasdaq Halt Cross.\35\ The Exchange
notes that, while the Nasdaq Halt Cross would not proceed if the price
calculated is 20% or more below the lowest price disclosed by the
company in its effective registration statement, there would be no
upper limit to the price determined in the Nasdaq Halt Cross.\36\
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\32\ See Notice, supra note 3, 85 FR at 59351.
\33\ See Notice, supra note 3, 85 FR at 59351.
\34\ See Notice, supra note 3, 85 FR at 59351.
\35\ See Notice, supra note 3, 85 FR at 59351.
\36\ See Notice, supra note 3, 85 FR at 59351.
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Finally, the Exchange has proposed to make adjustments to how it
would calculate the Current Reference Price, which is disseminated in
the Nasdaq Order Imbalance Indicator, and the price at which the Nasdaq
Halt Cross would execute, for a Direct Listing with a Capital
Raise.\37\ In each case, where there are multiple prices that would
satisfy the conditions for determining the price, the Exchange would
modify the fourth tie-breaker for a Direct Listing with a Capital Raise
to use the price that is closest to the price that is 20% below the
lowest price of the price range disclosed by the issuer in its
effective registration statement.\38\
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\37\ See Rule 4853(a)(3) for a description of the ``Current
Reference Price'' and ``Order Imbalance Indicator.''
\38\ See proposed Rule 4753(a)(3)(A)(iv)(c) and (b)(2)(D)(iii).
The Exchange states that the fourth tie-breaker used to calculate
the Current Reference Price for an IPO is the price that is closest
to the issuer's IPO price, and that a Direct Listing with a Capital
Raise is similar to an IPO in that the company sells securities in
the offering. See Notice, supra note 3, 85 FR at 59352. The Exchange
also proposes non-substantive changes to renumber the other
alternatives for the fourth tie-breaker. See proposed Rule
4753(a)(3)(A)(iv) and (b)(2)(D).
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III. Summary of Comment Letters Received
One commenter recommended that the Commission disapprove the
proposal because it believes that the proposed expansion of direct
listings would compound problems that shareholders face in tracing
their share purchases to a registration statement and may lead to a
decline in effective governance at U.S. public companies.\39\ The
commenter stated that traceability concerns often arise when there have
been successive offerings, as shareholders seek to establish their
standing to litigate claims for material misstatements or omissions
under federal securities law.\40\ The commenter stated that investor
concerns about the traceability of shares in a direct listing were
drawn into sharp focus in current litigation involving a direct listing
by Slack Technologies, Inc. (``Slack''), which is still under
consideration.\41\ The commenter further stated that, independent of
the Slack case, the Exchange's proposal raises important investor
issues that the Commission should consider before opening U.S. capital
markets up to the potential for a vastly increased number of direct
listings.\42\ The commenter urged the Commission to explore updating
its ``proxy plumbing'' regulations before approving an expanded direct
listings regime.\43\
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\39\ See Letter from Jeffrey P. Mahoney, General Counsel,
Council of Institutional Investors, at 2, 4 (October 8, 2020) (``CII
Letter''). The commenter stated that on September 25, 2020, the
Commission issued an order granting the Council of Institutional
Investors' petition for review of an order, issued by delegated
authority, granting approval of a proposed rule change by the New
York Stock Exchange LLC relating to a proposed direct listing with a
primary offering (``NYSE Proposal''). See id. at 1-2. See also
Securities Exchange Act Release No. 90001 (September 25, 2020), 85
FR 61793 (September 30, 2020) (SR-NYSE-2019-67) (Order Granting
Petition for Review, Scheduling Filing of Statements, and Denying
New York Stock Exchange LLC's Motion to Lift the Stay). This
commenter stated that the Exchange's current proposal is similar to
the NYSE Proposal and cites its petition for review of the NYSE
Proposal as further support for its recommendation that the
Commission disapprove the Exchange's proposal. See CII Letter, at 1-
2 (citing Petition of Council of Institutional Investors for Review
of an Order, Issued by Delegated Authority, Granting Approval of a
Proposed Rule (September 8, 2020), available at https://www.sec.gov/rules/sro/nyse/2020/34-89684-petition.pdf).
\40\ See CII Letter, supra note 39, at 2-3.
\41\ See CII Letter, supra note 39, at 3. The commenter stated
with respect to this case that while the district court denied a
motion to dismiss a Section 11 claim on the grounds that the
plaintiff could not trace its purchases to Slack's registration
statement, the court of appeals has agreed to hear the matter on an
interlocutory basis, so it is unclear whether the district court
case will be upheld. See id. See also Pirani v. Slack Technologies,
Inc., No. 20-16419 (9th Cir. July 23, 2020), Docket No. 1.
\42\ See CII Letter, supra note 39, at 3.
\43\ See CII Letter, supra note 39, at 4.
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In addition, this commenter stated that it is concerned that the
Exchange's proposal would result in a significant increase in the use
of direct listings, and that more direct listings may lead to a
[[Page 84028]]
decline in the effective corporate governance of U.S. public companies
to the detriment of long-term investors and the capital markets
generally.\44\ The commenter stated that a recent direct listing of
Palantir Technologies Inc. had a dual-class structure that is viewed by
many market participants as inconsistent with effective governance.\45\
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\44\ See CII Letter, supra note 39, at 4.
\45\ See CII Letter, supra note 39, at 5.
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Another commenter simply stated support for the proposed method of
opening the transaction.\46\
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\46\ See Letter from Rahul Chaudhary (October 13, 2020).
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-
NASDAQ-2020-057 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Exchange Act to determine whether the proposal
should be approved or disapproved.\47\ Institution of such proceedings
is appropriate at this time in view of the legal and policy issues
raised by the proposed rule change, as discussed below. Institution of
disapproval proceedings does not indicate that the Commission has
reached any conclusions with respect to any of the issues involved.
---------------------------------------------------------------------------
\47\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
Pursuant to Section 19(b)(2)(B) of the Exchange Act, the Commission
is providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis and input concerning the proposed rule change's consistency
with the Exchange Act \48\ and, in particular, with Section 6(b)(5) of
the Exchange Act, which requires, among other things, that the rules of
a national securities exchange be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
of a free and open market and a national market system, and, in
general, to protect investors and the public interest; and are not
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.\49\
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\48\ 15 U.S.C. 78f(b)(5).
\49\ Id.
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The Commission has consistently recognized the importance of
exchange listing standards. Among other things, such listing standards
help ensure that exchange-listed companies will have sufficient public
float, investor base, and trading interest to provide the depth and
liquidity necessary to promote fair and orderly markets.\50\
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\50\ The Commission has stated in approving exchange listing
requirements that the development and enforcement of adequate
standards governing the listing of securities on an exchange is an
activity of critical importance to the financial markets and the
investing public. In addition, once a security has been approved for
initial listing, maintenance criteria allow an exchange to monitor
the status and trading characteristics of that issue to ensure that
it continues to meet the exchange's standards for market depth and
liquidity so that fair and orderly markets can be maintained. See,
e.g., Securities Exchange Act Release Nos. 82627 (February 2, 2018),
83 FR 5650, 5653, n.53 (February 8, 2018) (SR-NYSE-2017-30) (``NYSE
2018 Order''); 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, 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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The Exchange proposal states that for a Direct Listing with a
Capital Raise, the Nasdaq Halt Cross on the first day of trading for
the security would not proceed unless the price would be at or above
the price that is 20% below the lowest price of the price range
established by the issuer in its effective registration statement.\51\
The proposal, however, has no maximum price above which the Nasdaq Halt
Cross may not proceed.\52\ Therefore, the proposed rule would permit
issuers to sell, in the opening, the quantity of shares disclosed as
offered in the prospectus included in the effective registration
statement at a price that is above the price range disclosed in the
effective registration statement. As there is no proposed upside limit
on the price at which the opening auction could occur, it is not clear
how the issuer could ensure that the issuer's Securities Act
registration statement covers the full amount of securities to be sold
in the offering.\53\ Although issuers may file additional Securities
Act registration statements to register additional securities needed to
complete an offering, Section 5 of the Securities Act requires all of
the related registration statements to be effective prior to the time
of sale. To the extent Nasdaq's proposal may result in issuers needing
to register additional securities beyond those included in an initial
Securities Act registration statement, it is not apparent how an issuer
could ensure that any additional required registration statement would
be effective prior to the time of opening. Nor is it apparent how an
issuer would be able to determine whether an additional Securities Act
registration statement would be required before the opening occurs.
Thus, we have concerns that Nasdaq's proposed rule may not provide
adequate safeguards to ensure that issuers conducting a Direct Listing
with a Capital Raise are able to comply with Section 5 of the
Securities Act. The Exchange has not explained how this would be
consistent with the investor protection requirements under Section
6(b)(5) and other relevant provisions of the Exchange Act.
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\51\ See supra note 29 and accompanying text.
\52\ See supra note 36 and accompanying text.
\53\ Securities Act Rule 457 permits issuers to register
securities either by specifying the quantity of shares registered,
pursuant to Rule 457(a), or the proposed maximum aggregate offering
amount, pursuant to Rule 457(o). For issuers that register
securities based on the proposed maximum aggregate offering amount,
it is not clear how the issuer could ensure that the total amount
sold by the issuer in the opening auction does not exceed the amount
of securities registered under the Securities Act.
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In addition, the Exchange states that ``investors know the minimum
price at which the company can sell shares in the offering.'' \54\ The
Exchange has not explained how investors would know that price, as the
opening could occur if the price obtained in the Nasdaq Halt Cross is
up to 20% below the price range disclosed by the issuer in its
effective registration statement.
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\54\ Notice, supra note 3, 85 FR at 59350.
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Further, the Exchange asserts, throughout its proposal, that the
Nasdaq Halt Cross will not occur at a price lower than 20% below the
low end of the issuer's disclosed price range, but it is unclear from
the Exchange's rules that this would always be the case. Specifically,
proposed Rule 4120(c)(9)(B) states that the security will not be
released for trading unless ``the Expected Price is at or above the
price that is 20% below the lowest price of the price range
established'' in the effective registration statement.\55\ Rule
4120(c)(8), however, appears to permit the underwriter or financial
advisor to select price bands of up to $0.50 outside of the Expected
Price, and provide that the Nasdaq system would view the price
validation test as having been passed and permit the security to be
released for trading, so long as the actual price calculated by the
cross differs from the Expected Price by no more than the price
band.\56\ The Exchange has not
[[Page 84029]]
explained this apparent inconsistency in its rules.
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\55\ ``Expected Price'' under Rule 4120(c)(8)(A)(i) means the
Current Reference Price at the time the Exchange receives notice
that the security is ready to trade from an underwriter or financial
advisor.
\56\ Under Nasdaq Rule 4120(c)(8)(B) a financial advisor in a
Direct Listing with a Capital Raise would select ``price bands''
that are defined as the amounts by which the actual price may not be
lower, or higher, than the Expected Price. The rule states that
available price bands, set by Nasdaq, shall include $0 but shall not
be in excess of $0.50. Under the proposal, the financial advisor in
a Direct Listing with a Capital Raise is not restricted from
selecting price bands in accordance with Rule 4120(c)(8)(B).
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Finally, although the Exchange has proposed that the CDL Order may
not be cancelled or modified, the Exchange's rules appear to permit the
issuer's financial advisor broad discretion to postpone the offering,
which would effectively cancel the CDL Order. Specifically, Rule
4120(c)(8) provides that the validation needed to open the security
only occurs after the Expected Price is displayed to the financial
advisor and the financial advisor then approves proceeding. Rule
4120(c)(8) also permits the financial advisor, with the concurrence of
Nasdaq, to determine at any point during the Nasdaq Halt Cross process
up through the conclusion of the pre-launch period to postpone and
reschedule the offering. The financial advisor therefore could
effectively ``cancel'' the CDL Order, on behalf of the issuer, by
deciding not to proceed with the offering for a variety of reasons,
including being dissatisfied with the Expected Price. The Exchange has
not explained why its rules appear to allow the financial advisor this
discretion in the case of a Direct Listing with a Capital Raise, or why
doing so would be consistent with Section 6(b)(5) and other relevant
provisions of the Exchange Act.
The Commission notes that, under the Commission's Rules of
Practice, the ``burden to demonstrate that a proposed rule change is
consistent with the Exchange Act and the rules and regulations issued
thereunder . . . is on the self-regulatory organization [`SRO'] that
proposed the rule change.'' \57\ The description of a proposed rule
change, its purpose and operation, its effect, and a legal analysis of
its consistency with applicable requirements must all be sufficiently
detailed and specific to support an affirmative Commission finding,\58\
and any failure of an SRO to provide this information may result in the
Commission not having a sufficient basis to make an affirmative finding
that a proposed rule change is consistent with the Exchange Act and the
applicable rules and regulations.\59\
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\57\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
\58\ See id.
\59\ See id.
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For these reasons, the Commission believes it is appropriate to
institute proceedings pursuant to Section 19(b)(2)(B) of the Exchange
Act \60\ to determine whether the proposal should be approved or
disapproved.
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\60\ 15 U.S.C. 78s(b)(2)(B).
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V. Commission's Solicitation of Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
view of interested persons concerning whether the proposal is
consistent with Section 6(b)(5) or any other provision of the Exchange
Act, or the rules and regulations thereunder. Although there do not
appear to be any issues relevant to approval or disapproval that would
be facilitated by an oral presentation of views, data, and arguments,
the Commission will consider, pursuant to Rule 19b-4, any request for
an opportunity to make an oral presentation.\61\
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\61\ Section 19(b)(2) of the Exchange Act, as amended by the
Securities Act Amendments of 1975, Public Law 94-29 (June 4, 1975),
grants the Commission flexibility to determine what type of
proceeding--either oral or notice and opportunity for written
comments--is appropriate for consideration of a particular proposal
by a self-regulatory organization. See Securities Act Amendments of
1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No.
75, 94th Cong., 1st Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by January 13, 2021. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
January 27, 2021.
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NASDAQ-2020-057 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2020-057. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NASDAQ-2020-057 and should be submitted
on or before January 13, 2021. Rebuttal comments should be submitted by
January 27, 2021.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\62\
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\62\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-28319 Filed 12-22-20; 8:45 am]
BILLING CODE 8011-01-P
