Member Article

In a year that has already seen explosive growth in the alternative initial public offering space, the New York Stock Exchange (NYSE) has gotten approval to allow companies to raise capital through a primary direct listing on the NYSE.

The NYSE submitted its proposal relating to direct primary listings in November 2019, and had amended the proposal twice in an effort to satisfy the United States Securities and Exchange Commission (SEC), which is the NYSE's primary regulator. The SEC approved the NYSE’s rule change on August 26.

Previously, if a company wanted to sell a large block of shares in its NYSE IPO, the company would either have to (i) do a firm-commitment underwritten offering, where an investment bank agreed to initially purchase all of the shares being offered by the company on its first day of trading, or (ii) conduct asecondarydirect listing, where the company can only resell shares on behalf of its pre-existing stockholders.

With the NYSE’s new rules, companies can now sell both newly issued shares as well as reselling previously issued shares on behalf of stockholders, all potentially without the help of an investment bank. One potential use case might be when a company doesn't want to raise capital, such as creating publicly traded shares to be used as M&A currency.

Still, if a company conducting a primary direct listing wants to raise significant amounts of capital, it will still need to engage one or more investment banks to help facilitate the securities selling process.

And it should be made clear that the NYSE’s rule contemplates that these direct listing will be relatively large - for example, requiring that if a company wishes to sell less than $100 million in primary shares via direct listing, then the aggregate market value of the company’s publicly held shares must be greater than $250 million.

Furthermore, it is very likely that an engagement of this kind would free the company of certain restrictions that one usually sees in an underwriting agreement (such as lock-up provisions), and would also lower the fees earned by a bank pursuant to the engagement agreement. Given the large size of deals contemplated under the new rule, even 1-2% less in investment banking fees could mean savings in the millions.

Further proof of the high level of interest in alternative public offerings (as well as the slightly diminishing role of traditional investment banks in such transactions) is that The Nasdaq Stock Market LLC submitted its own proposal for direct primary listings for SEC approval on August 24, 2020, just 2 days before the SEC approved the NYSE’s proposal.

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