On December 3, 2019, the SEC approved NASDAQ’s proposal on extending direct listings. This means that companies will now be able to directly list securities on NASDAQ’s “Nasdaq Global Market” and “Nasdaq Capital Market” in addition to “Nasdaq Global Select Market”, which was already eligible for direct listing. This is a significant change for smaller companies as we will continue to explain later in the article.
What is a Direct Listing
A direct listing is a direct public offering (“DPO”) to the market which eliminates underwriter involvement and pre-trading steps including price setting, roadshow activities, and negotiation with investment banks. The process is very similar to an IPO but yet very different in the sense that the company lists directly with the exchange similar to Spotify’s direct listing last year. Direct listings allow company employee and investor shares to be registered through a registration statement without outside capital being raised.
Direct Listing Benefits
So why is a direct listing beneficial? The company is able to list their securities on the NASDAQ and go public quickly and inexpensively without an underwriter, share dilution and lock-up periods. It is the current favorite of some analysts because of the advantages it comes with, but we should not forget that there are associated disadvantages, the most important being price stabilization, limited long-term investors, no promotions, no guarantee of share sale, liquidity concerns and no possibility of greenshoe options. It is also important to note that while new share issue is not allowed in direct listings, the NYSE proposed a plan for direct listings that would include new share issues. This was rejected by the SEC but an amended proposal has been resubmitted for reconsideration. There should be more to follow on this later.
The final amendments are given under IM-5405-1 and IM-5505-1 of NASDAQ’s rules respectively. Although the new requirements for the Global Market and Capital Market are similar to the Nasdaq Global Select Market, they come with their own variations. We have given below a concise output for NASDAQ’s rule change:
Price-Based Initial Listing Requirement: The Global Select Market should have a third-party valuation of at least $250 million, while the Global Market and Capital Market should exceed 200 percent of the otherwise applicable requirements for market value of listed securities, and market value of unrestricted publicly held shares.
Under the amended rules, Nasdaq will determine a security’s price based on (i) a third party tender offer for cash; (ii) a sale between unaffiliated third parties; (iii) equity sales by the company; (iv) an independent valuation meeting specific standards; or (v) a valuation as determined by a private placement market.
The third-party valuation provided should be recent and be provided by someone who has remarkable experience and competence in the provision of such valuations.Nasdaq will examine the trading price trends for the stock in the Private Placement Market over a period of several months prior to listing and will only rely on a Private Placement Market price if it is consistent with a sustained history over that several months period in the absence of any recent sustained trading Valuation must evidence a price, Market Value of Listed Securities and Market Value of Unrestricted Publicly Held Shares that exceed 200% of the otherwise applicable requirement, meaning a minimum bid price of $8 per share.
Under unique circumstances, if a company is large enough to be listed, Nasdaq may accept other compelling evidence that may be a tender offer by the company or a third party, a third-party transaction involving the company’s equity securities, or security sales by the Company provided such transactions were recent, occurring within the prior six months, and substantial in size, representing sales of at least 20% of the applicable Market Value of Unrestricted Publicly Held Shares requirement.
Foreign Exchange Listings: Nasdaq will consider the value based on the recent trading price in the foreign market, for companies transferring from foreign listings or seeking to dual list.
Nasdaq may withdraw its approval of the listing at any time prior to the listing date if it believes that the Valuation no longer accurately reflects the company’s likely market value, if the technical requirements are not met or even if it believes such denial is necessary to protect investors and the public interest.