Notice2022-27659
Self-Regulatory Organizations; New York Stock Exchange LLC; Order Approving a Proposed Rule Change, as Modified by Amendment No. 2, To Modify Certain Pricing Limitations for Securities Listed on the Exchange Pursuant to a Primary Direct Floor Listing
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
December 21, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 244 (Wednesday, December 21, 2022)</title>
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[Federal Register Volume 87, Number 244 (Wednesday, December 21, 2022)]
[Notices]
[Pages 78141-78150]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-27659]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96514; File No. SR-NYSE-2022-14]
Self-Regulatory Organizations; New York Stock Exchange LLC; Order
Approving a Proposed Rule Change, as Modified by Amendment No. 2, To
Modify Certain Pricing Limitations for Securities Listed on the
Exchange Pursuant to a Primary Direct Floor Listing
December 15, 2022.
I. Introduction
On April 7, 2022, New York Stock Exchange LLC (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``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 modify certain pricing
limitations for securities listed on the Exchange pursuant to a direct
listing in which the company will sell shares itself in the opening
auction on the first day of trading on the Exchange. The proposed rule
change was published for comment in the Federal Register on April 19,
2022.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 94708 (Apr. 13,
2022), 87 FR 23300 (Apr. 19, 2022). Comments received on the
proposal are available on the Commission's website at: <a href="https://www.sec.gov/comments/sr-nyse-2022-14/srnyse202214.htm">https://www.sec.gov/comments/sr-nyse-2022-14/srnyse202214.htm</a>. The comments
expressed by one commenter are not relevant to the proposed rule
change. See Letter from Andrew Robison (Apr. 22, 2022).
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On May 26, 2022, pursuant to Section 19(b)(2) of the Exchange
Act,\4\ the Commission designated a longer period within which to
either approve the proposed rule change, disapprove the proposed rule
change, or institute proceedings to determine whether to disapprove the
proposed rule change.\5\ On July 18, 2022, the Commission instituted
proceedings under Section 19(b)(2)(B) of the Exchange Act \6\ to
determine whether to approve or disapprove the proposed rule change.\7\
On October 11, 2022, the Commission extended the time period for
approving or disapproving the proposal to December 15, 2022.\8\
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\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 94991 (May 26,
2022), 87 FR 33518 (June 2, 2022). The Commission designated July
18, 2022, 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\ See Securities Exchange Act Release No. 95312 (July 18,
2022), 87 FR 43914 (July 22, 2022) (``OIP'').
\8\ See Securities Exchange Act Release No. 96023 (Oct. 11,
2022), 87 FR 62902 (Oct. 17, 2022.
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On November 8, 2022, the Exchange filed Amendment No. 2 to the
proposed rule change, which superseded the original filing in its
entirety.\9\ The proposed rule change, as modified by Amendment No. 2,
was published for comment in the Federal Register on November 15,
2022.\10\ The Commission is approving the proposed rule change, as
modified by Amendment No. 2.
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\9\ On November 4, 2022, the Exchange filed Amendment No. 1 to
the proposed rule change. Amendment No. 1 was withdrawn on November
8, 2022. Amendment No. 2 to the proposed rule change revised the
proposal: (i) to require the retention of an underwriter with
respect to the primary sales of shares by the company and
identification of the underwriter in the company's effective
registration statement; (ii) to clarify that the 20% and 80%
thresholds used in determining the Primary Direct Floor Listing
Auction Price Range will be calculated based on the highest price of
the Issuer Price Range; (iii) to require that the Auction Price
cannot be above the price that is 80% above the highest price of the
Issuer Price Range; (iv) to require that if the issuer certifies to
the Exchange a maximum Auction Price that is below the price that is
80% above the highest price of the Issuer Price Range, the Auction
Price may not be above such price; and (v) to make other clarifying
changes.
\10\ See Securities Exchange Act Release No. (Nov. 8, 2022), 87
FR 68558 (Nov. 15, 2022) (``Notice'').
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II. Description of the Proposal, as Modified by Amendment No. 2
Section 102.01B, Footnote (E) of the of the Listed Company Manual
(the ``Manual'') provides that, in certain cases, a company that has
not previously had its common equity securities registered under the
Exchange Act may wish to list its common equity securities on the
Exchange at the time of effectiveness of a registration statement \11\
pursuant to which the company will sell shares itself in the opening
auction on the first day of trading on the Exchange (a ``Primary Direct
Floor Listing'').\12\ In the Exchange's prior approved proposal to
initially allow for a Primary Direct Floor Listing, the Exchange also
adopted Rule 7.31(c)(1)(D) defining an Issuer Direct Offering Order
(``IDO Order'') \13\ for use by a company that wishes to sell its
shares through a Primary Direct Floor Listing. In addition, the
Exchange modified Rule 7.35A to describe how the IDO Order would
participate in a Direct Listing Auction, establish additional
requirements for a Designated Market Maker (``DMM'') when conducting a
Direct Listing Auction for a Primary Direct Floor Listing, and specify
how the Indication Reference Price would be determined for a security
to be opened in a Direct Listing.\14\ Currently, under Rule
7.35A(g)(2), the DMM will not conduct a Direct Listing Auction for a
Primary Direct Floor Listing if (i) the Auction Price \15\ would be
outside of the price range specified by the company in its effective
registration statement (the ``Price Range Limitation'') \16\ or (ii)
there
[[Page 78142]]
is insufficient interest to satisfy both the IDO Order and all better-
priced sell orders in full.\17\
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\11\ The reference to a registration statement refers to a
registration statement effective under the Securities Act of 1933
(``Securities Act'').
\12\ A Primary Direct Floor Listing includes 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 Section 102.01B, Footnote (E) of the Manual. See also
Securities Exchange Act Release No. 90768 (Dec. 22, 2020), 85 FR
85807 (Dec. 29, 2020) (SR-NYSE-2019-67) (Order Setting Aside Action
by Delegated Authority and Approving a Proposed Rule Change, as
Modified by Amendment No. 2, to Amend Chapter One of the Listed
Company Manual to Modify the Provisions Relating to Direct Listings)
(``Approval Order'').
\13\ See Approval Order, supra note 12, 85 FR 85813. An IDO
Order is a Limit Order to sell that is to be traded only in a Direct
Listing Auction. See Rule 7.31(c)(1)(D). See also Rule 7.31(a)(2)
for the definition of ``Limit Order,'' Rule 7.35(a)(1) for the
definition of ``Auction,'' and Rule 7.35(a)(1)(E) for the definition
of ``Direct Listing Auction.'' The IDO Order has the following
requirements: (i) only one IDO Order may be entered on behalf of the
issuer and only by one member organization; (ii) the limit price of
the IDO Order must be equal to the lowest price of the price range
established by the issuer in its effective registration statement;
(iii) the IDO Order must be for the quantity of shares offered by
the issuer, as disclosed in the prospectus in the effective
registration statement; (iv) an IDO Order may not be cancelled or
modified; and (v) an IDO Order must be executed in full in the
Direct Listing Auction. See Rule 7.31(c)(1)(D)(i)-(v).
\14\ See Approval Order, supra note 12, 85 FR 85813. See also
Notice, supra note 10, 87 FR 68563. See Rule 7.35A(d)(2)(A)(v) for a
description about how the ``Indication Reference Price'' is
determined for a security that is a Primary Direct Floor Listing.
\15\ The Exchange defines Auction Price in Rule 7.35(a)(6) as
the price at which an Auction is conducted. In addition, Rule 7.35A
sets forth requirements relating to the determination of the Auction
Price by the DMM. For purposes of the proposal, ``Auction Price''
refers to the price at which trading would commence in a security to
be opened in a Direct Listing Auction for a Primary Direct Floor
Listing. See Notice, supra note 10, 87 FR 68559 n.13.
\16\ The Exchange states that references in the proposal to the
price range established by the issuer in its effective registration
statement are to the price range disclosed in the prospectus in such
registration statement. See Notice, supra note 10, 87 FR 68559 n.14.
Currently, the Exchange defines the price range established by the
issuer in its effective registration statement as the ``Primary
Direct Floor Listing Auction Price Range.'' See Rule
7.31(c)(1)(D)(ii). As discussed further below, the Exchange proposes
to redefine the price range established by the issuer in its
effective registration statement as the ``Issuer Price Range.'' See
proposed Rule 7.31(c)(1)(D)(ii). Throughout this order, we also
refer to this ``Issuer Price Range'' as the ``disclosed price
range.''
\17\ See Notice, supra note 10, 87 FR 68559.
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The Exchange proposes to modify the Price Range Limitation to
provide that a Direct Listing Auction for a Primary Direct Floor
Listing may be conducted if the Auction Price determined by the DMM is
outside of the Issuer Price Range (i.e., the price range established by
the issuer in its effective registration statement), but only if the
Auction Price is (1) at or above the price that is 20% below the lowest
price of the Issuer Price Range \18\ and (2) at or below the price that
is 80% above the highest price of the Issuer Price Range (the ``80%
Upside Limit'').\19\ The Exchange proposes that a Direct Listing
Auction for a Primary Direct Floor Listing could proceed in these
circumstances at a price outside of the Issuer Price Range (whether
lower or higher), provided that the issuer has specified the quantity
of shares registered in its registration statement, as permitted by
Securities Act Rule 457, and certified to the Exchange and publicly
disclosed that: (i) it does not expect that the Auction Price would
materially change the issuer's previous disclosure in its effective
registration statement; (ii) the price range in the preliminary
prospectus included in the effective registration statement is a bona
fide price range in accordance with Item 501(b)(3) of Regulation S-K;
and (iii) such registration statement contains a sensitivity analysis
explaining how the issuer's plans would change if the actual proceeds
from the offering differ from the amount assumed in the disclosed price
range.\20\ In addition, if the issuer certifies to the Exchange an
upper price limit that is below the 80% Upside Limit, the Exchange
proposes that the Direct Listing Auction for a Primary Direct Floor
Listing may not proceed if the Auction Price determined by the DMM
exceeds the certified price limit. The Exchange also proposes to
require that a company offering securities for sale in a Primary Direct
Floor Listing must retain an underwriter with respect to the primary
sales of shares by the company and identify the underwriter in its
effective registration statement.\21\ In addition, the Exchange
proposes to require that for the purposes of determining the Primary
Direct Floor Listing Auction Price Range, the 20% and 80% thresholds
will be calculated based on the highest price of the Issuer Price
Range.\22\
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\18\ The Exchange proposes to define the ``Primary Direct Floor
Listing Auction Price Range'' in Rule 7.31(c)(1)(D)(ii) as the price
range that includes 20% below the lowest price and 80% above the
highest price of the Issuer Price Range. See Notice, supra note 10,
87 FR 68559.
\19\ As provided in proposed Rule 7.31(c)(1)(D)(ii), the
Exchange proposes to calculate the 20% and 80% thresholds to
determine the Primary Direct Floor Listing Auction Price Range based
on the highest price of the Issuer Price Range. For example, if the
Issuer Auction Price Range is $28.00 to $30.00, the Primary Direct
Floor Listing Auction Price Range would be $22.00 to $54.00. See
Notice, supra note 10, 87 FR 68559.
\20\ See Notice, supra note 10, 87 FR 68559. See also proposed
Rule 7.35A(g)(2)(B)(i).
\21\ See Notice, supra note 10, 87 FR 68559.
\22\ See id. at 68563.
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The Exchange states its belief that, while many companies are
interested in alternatives to the traditional initial public offering
(``IPO''), companies and their advisors may be reluctant to use the
Primary Direct Floor Listing under current Exchange rules because of
concerns about the Price Range Limitation.\23\ The Exchange states it
believes that ``[t]he Price Range Limitation--which is imposed on a
Primary Direct Floor Listing but not on an IPO--increases the
probability of a failed offering because it contemplates there also
being too much investor interest. In other words, if investor interest
is greater than the company and its advisors anticipated, an offering
would need to be delayed or cancelled.'' \24\
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\23\ See id. at 68559.
\24\ Id.
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The Exchange states that, under current Exchange Rules, the DMM
would not conduct a Direct Listing Auction for a security subject to a
Primary Direct Floor Listing if the Auction Price determined is above
the highest price of the price range established by the issuer in its
effective registration statement.\25\ The Exchange further states that,
in this case, the offering would be cancelled or postponed until the
company amends its effective registration statement, and at a minimum,
such a delay could expose the company to risks associated with changing
investor sentiment in the event of an adverse market event.\26\ The
Exchange states its belief that, as a result, companies may be
reluctant to use this alternative method of going public despite its
expected potential benefits because of the restrictions of the Price
Range Limitation.\27\
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\25\ See id. at 68560.
\26\ See id.
\27\ See id.
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The Exchange has proposed to modify the Price Range Limitation such
that a Direct Listing Auction for a Primary Direct Floor Listing could
proceed if the Auction Price is at or above the price that is 20% below
the lowest price of the Issuer Price Range and at or below the 80%
Upside Limit.\28\ Therefore, the Exchange proposes that the DMM could
conduct the Direct Listing Auction even if the Auction Price is outside
of the Issuer Price Range, provided all other necessary conditions are
met, if the Auction Price would not be more than 20% below the lowest
price or more than 80% above the highest price of the Issuer Price
Range and the company has, in its effective registration statement,
specified the quantity of shares registered, as permitted by Securities
Act Rule 457.\29\
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\28\ See id.
\29\ See id.
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The Exchange proposes that when the Auction Price is outside of the
Issuer Price Range, but not more than 20% below such price range and
higher than the 80% Upper Limit, the Direct Listing Auction would not
proceed unless the company has previously certified to the Exchange and
publicly disclosed that (i) the company does not expect that such
offering price would materially change the company's previous
disclosure in its effective registration statement; (ii) the price
range in the preliminary prospectus included in the effective
registration statement is a bona fide price range in accordance with
Item 501(b)(3) of Regulation S-K; and (iii) the company's registration
statement contains a sensitivity analysis explaining how the company's
plans would change if the actual proceeds from the offering differ from
the amount assumed in the disclosed price range.\30\ In addition, if
the company's certification submitted to the Exchange includes a price
limit that is below the 80% Upper Limit, the Direct Listing Auction
would not take place if the Auction Price is determined by the DMM to
be above such limit.\31\
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\30\ See id.
\31\ See id.
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When the Auction Price is outside of the Issuer Price Range
(whether it is lower or higher than such price range), the Exchange
also proposes to provide the issuer with the opportunity to provide any
necessary additional disclosures that are dependent on the price of the
offering so that any such disclosures would be available to investors
prior to the completion of the offering.\32\ The Exchange proposes that
a Direct Listing Auction for a Primary Direct Floor Listing would only
proceed outside the Issuer Price Range if the issuer also confirms to
the Exchange that no additional disclosures are
[[Page 78143]]
required under federal securities laws based on the Auction Price
determined by the DMM.\33\
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\32\ See id.
\33\ See id. See proposed Rule 7.35A(g)(2)(B)(ii).
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The Exchange states its belief that the additional requirements to
permit a Direct Listing Auction to take place at an Auction Price that
is outside of the Issuer Price Range (whether it is lower or higher
than such price range but within the Primary Direct Floor Listing
Auction Price Range), as proposed, would provide sufficient disclosures
to allow investors to evaluate whether to participate in the Direct
Listing Auction for a Primary Direct Floor Listing, including the
opportunity to see how changes in share price may impact the company's
disclosures.\34\
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\34\ See Notice, supra note 10, 87 FR 68560.
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The Exchange states that it believes its proposal with respect to
the Price Range Limitation for a Primary Direct Floor Listing can be
analogized with Securities Act Rule 430A and staff guidance, which,
according to the Exchange, generally allow a company to price a public
offering 20% outside of the disclosed price range without regard to the
materiality of the changes to the disclosure contained in the company's
registration statement.\35\ According to the Exchange, it believes that
such guidance would also allow for deviation of greater than 20% above
the highest price of the disclosed price range, provided that such
change would not materially change the previous disclosure.\36\ The
Exchange states that, accordingly, it believes that a company listing
in connection with a Primary Direct Floor Listing could specify the
quantity of shares registered, as permitted by Securities Act Rule 457,
and, if an Auction prices outside of the disclosed price range, use a
Rule 424(b) prospectus, rather than a post-effective amendment, when
either (i) the 20% threshold noted in Rule 430A is not exceeded,
regardless of the materiality or non-materiality of resulting changes
to the registration statement disclosure that would be contained in the
Rule 424(b) prospectus, or (ii) there is a deviation above the price
range beyond the 20% threshold noted in Rule 430A if such deviation
would not materially change the previous disclosures, in each case
assuming the number of shares issued is not increased from the number
of shares disclosed in the prospectus.\37\
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\35\ See id. According to the Exchange, 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. The Exchange proposes to
require that companies selling shares through a Primary Direct Floor
Listing will register securities by specifying the quantity of
shares registered and not a maximum offering amount. See id. at
68560 n.20. The Exchange also states that the Exchange believes that
the proposed modification of the Price Range Limitation would
promote just and equitable principles of trade, remove impediments
to and perfect the mechanism of a free and open market and a
national market system, and protect investors and the public
interest, because, according to the Exchange, this approach is
similar to the pricing of an IPO where an issuer is permitted to
price outside of the disclosed price range in accordance with the
SEC Staff's guidance. See id. at 68564.
\36\ See id. at 68560.
\37\ See Notice, supra note 10, 87 FR 68560. See supra note 20
and accompanying text.
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The Exchange states that the burden of complying with the
disclosures required under federal securities laws, including providing
any disclosure necessary to avoid any material misstatements or
omissions, remains with the issuer.\38\ Under the proposal, therefore,
the Direct Listing Auction for a Primary Direct Floor Listing would not
take place outside of the Issuer Price Range until the issuer confirms
to the Exchange that no additional disclosures are required under the
federal securities laws based on the Auction Price determined by the
DMM.\39\
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\38\ See id. According to the Exchange, the Commission
previously stated that while Securities Act Rule 430A permits
companies to omit specified price-related information from the
prospectus included in the registration statement at the time of
effectiveness, and later file the omitted information with the
Commission as specified in the rule, it neither prohibits a company
from conducting a registered offering at prices beyond those that
would permit a company to provide pricing information through a
Securities Act Rule 424(b) prospectus supplement nor absolves any
company relying on the rule from any liability for potentially
misleading disclosure under the federal securities laws. See id. at
68560-61 (citing Securities Exchange Act Release No. 93119 (Sept.
24, 2021), 86 FR 54262 (Sept. 30, 2021)).
\39\ See Notice, supra note 10, 87 FR 68561.
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The Exchange states it believes that an underwriter plays an
important role in a traditional IPO and, therefore, proposes to require
that a company listing securities on the Exchange in connection with a
Primary Direct Floor Listing must retain an underwriter with respect to
the primary sales of shares by the company and identify the underwriter
in its effective registration statement.\40\ The Exchange believes that
investor protection provisions are necessary in a Primary Direct Floor
Listing if an offering can price outside of the disclosed price range,
subject to the proposed limitations, because such provisions allow
investors to make reasonable pricing decisions with clarity that the
company's underwriter would face statutory liability.\41\
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\40\ See id.
\41\ See id.
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The Exchange further states it believes that the requirement to
retain a named underwriter mitigates concerns raised by the Commission
in the OIP regarding the usefulness of price range disclosure provided
to investors in a Securities Act registration statement filed in
connection with a Primary Direct Floor Listing.\42\ The Exchange
believes that an underwriter retained in connection with a Primary
Direct Floor Listing would perform substantially similar functions,
including those related to establishing and adjusting the price range,
to those performed by an underwriter in a ``typical'' IPO because the
underwriter would be subject to similar liability and reputational
risk.\43\
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\42\ See id. at 68562.
\43\ See id.
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The Exchange also states it believes that the requirement to retain
a named underwriter, as described above, may mitigate concerns raised
by the Commission in the OIP regarding challenges to bringing claims
under Section 11 of the Securities Act due to the potential assertion
of tracing defenses because an underwriter may choose to impose lock-up
arrangements.\44\ The Exchange states that, as in a traditional firm
commitment underwritten IPO, in which lock-up arrangements are often
imposed, an underwriter in connection with a Primary Direct Floor
Listing would be able to impose lock-up agreements for the same reasons
that make lock-up agreements common in an IPO.\45\
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\44\ See id. at 68561.
\45\ See id. at 68561-62.
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The Exchange states that its proposal to require that the
securities of a company listing in connection with a Primary Direct
Floor Listing cannot price above the 80% Upper Limit further mitigates
concerns regarding the usefulness of the price range disclosure
provided to investors.\46\ The Exchange states that the 80% Upper Limit
would incentivize the company and its underwriter to set the disclosed
price range to avoid the failed offering consequences and would also
encourage an issuer to adjust the price range disclosed in their
registration statement prior to effectiveness in response to pricing
feedback received from market analysts and potential investors.\47\
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\46\ See id. at 68562.
\47\ See id.
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The Exchange states that given that, as proposed, there may be a
Primary Direct Floor Listing that could price outside of the disclosed
price range subject to the 80% Upper Limit above which the Direct
Listing Auction could not proceed, the Exchange proposes ``to support
price discovery transparency by providing readily available, real time
[[Page 78144]]
pricing information to investors.'' \48\ Specifically, the Exchange
represents that the DMM's pre-opening indications for a security to be
opened in a Direct Listing Auction for a Primary Direct Floor Listing
would continue to be published via the securities information processor
(``SIP'') and proprietary data feeds.\49\ The Exchange states that it
would also make the Indication Reference Price available, free of
charge, on a public website (such as <a href="http://www.nyse.com">www.nyse.com</a>) on the day such
auction is anticipated to take place.\50\ The Exchange also proposes to
require member organizations to provide to a customer, before that
customer places an order to participate in a Direct Listing Auction for
a Primary Direct Floor Listing, a notice describing the mechanics of
pricing a security subject to a Direct Listing Auction for a Primary
Direct Floor Listing, including information regarding the availability
of pre-opening indications via the SIP and proprietary data feeds and
the location of the public website where the Exchange would disseminate
information relating to the Indication Reference Price.\51\
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\48\ See id.
\49\ See id. See also proposed Rule 7.35A(d)(2)(A)(v). The
Exchange states that its dissemination of pre-opening indications
for a security to be opened in a Direct Listing Auction for a
Primary Direct Floor Listing via the SIP and proprietary data feeds
is consistent with the availability of the same for securities
opened in IPOs and believes that interested investors have found
pre-opening indications to be readily accessible and to provide
useful real time pricing information to inform their participation
in such auctions. The Exchange thus believes that its proposal
addresses the concerns raised in the OIP regarding the sufficiency
of price discovery transparency for investors. See Notice, supra
note 10, 87 FR 68562 n.29.
\50\ See Notice, supra note 10, 87 FR 68562. The Indication
Reference Price for a security that is a Primary Direct Floor
Listing is the lowest price of the Primary Direct Floor Listing
Auction Price Range. This price would be known before the opening
process begins and would not change once established.
\51\ See id. See also proposed Rule 7.35A, Commentary .20(3).
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The Exchange further proposes to distribute, at least one business
day prior to the commencement of trading of a security listing in
connection with a Primary Direct Floor Listing, a regulatory bulletin
that describes any special characteristics of the offering and the
Exchange rules that apply to the pricing of a Primary Direct Floor
Listing.\52\ The Exchange states that the regulatory bulletin would
also include information about the notice that member organizations
would be required to provide customers, as proposed, and remind member
organizations of their obligations pursuant to the Exchange rules that
(1) require member organizations to use reasonable diligence in regard
to the opening and maintenance of every account, to know (and retain)
the essential facts concerning every customer and concerning the
authority of each person acting on behalf of such customer (Rule 2090);
and (2) require member organizations in recommending transactions for a
security subject to a Direct Listing Auction for a Primary Direct Floor
Listing to have a reasonable basis to believe that: (i) the
recommendation is suitable for a customer given reasonable inquiry
concerning the customer's investment objectives, financial situation,
needs, and any other information known by such member organizations,
and (ii) the customer can evaluate the special characteristics, and is
able to bear the financial risks, of an investment in such security
(Rule 2111).\53\ The Exchange states that these member organization
requirements are intended to remind members of their obligations to
``know their customers'' and would also serve to increase transparency
regarding the pricing mechanisms applicable to a Primary Direct Floor
Listing and help provide investors with sufficient price discovery
information.\54\ The Exchange represents that, for each Primary Direct
Floor Listing, the Exchange's regulatory bulletin would also inform
market participants that the Auction Price could be up to 20% below the
lowest price of the disclosed price range and would specify that
price.\55\ The Exchange also represents that this regulatory bulletin
would indicate the price above which the Direct Listing Auction for the
Primary Direct Floor Listing could not proceed, based on the company's
certification.\56\
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\52\ See Notice, supra note 10, 87 FR 68562. See also proposed
Rule 7.35A, Commentary .20.
\53\ See Notice, supra note 10, 87 FR 68562. See also proposed
Rule 7.35A, Commentary .20(1) and (2).
\54\ See Notice, supra note 10, 87 FR 68562.
\55\ See id.
\56\ See id.
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The Exchange also proposes to amend certain aspects of the Manual.
Specifically, Section 102.01B, Footnote (E) of the Manual currently
provides that, with respect to a Primary Direct Floor Listing, the
Exchange will deem a company to have met the applicable aggregate
market value of publicly-held shares requirement \57\ if the company
will sell at least $100,000,000 in market value of shares in the
Exchange's opening auction on the first day of trading on the Exchange.
The Manual further provides that, where a company is conducting a
Primary Direct Floor Listing and will sell shares in the opening
auction with a market value of less than $100,000,000, the Exchange
will determine that such company has met its market-value of publicly-
held shares requirement if the aggregate market value of the shares the
company will sell in the opening auction on the first day of trading
and the shares that are publicly held immediately prior to the listing
is at least $250,000,000 with such market value calculated using a
price per share equal to the lowest price of the disclosed price
range.\58\
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\57\ See Section 102.01B of the Manual.
\58\ See Section 102.01B, Footnote (E) of the Manual.
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The Exchange states that, to effect the changes to the Price Range
Limitation and facilitate the possibility of a Direct Listing Auction
for a Primary Direct Floor Listing pricing up to 20% below the
disclosed price range, the Exchange proposes to modify Section 102.01B,
Footnote (E) of the Manual to provide that the Exchange would calculate
the market value of such company's shares using a price per share equal
to the lowest price of the disclosed price range, minus an amount equal
to 20% of the highest price included in such price range, which would
be referred to as the ``Primary Direct Floor Listing Minimum Price.''
\59\ The Exchange also proposes to amend Section 102.01B, Footnote (E)
to include the requirement, as discussed above, that a company listing
its securities on the Exchange pursuant to a Primary Direct Floor
Listing must have specified the quantity of shares registered, as
permitted by Securities Act Rule 457, in its effective registration
statement and retained an underwriter with respect to the primary sales
of shares by the company and identified the underwriter in its
effective registration statement.\60\
---------------------------------------------------------------------------
\59\ See Notice, supra note 10, 87 FR 68563.
\60\ See id.
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The Exchange states that, to implement the changes to the Price
Range Limitation described above, the Exchange is proposing the
following changes to Rules 7.31 and 7.35A.\61\ The Exchange proposes to
modify Rule 7.31(c)(1)(D)(ii) to provide that the limit price of an IDO
Order would be equal to the lowest price of the Primary Direct Floor
Listing Auction Price Range and to redefine the ``Primary Direct Floor
Listing Auction Price Range'' as 20% below the lowest price and 80%
above the highest price of the disclosed price range.\62\ The Exchange
also proposes to define ``Issuer Price Range'' as the price range
established by the issuer in its
[[Page 78145]]
effective registration statement.\63\ The Exchange states that Rule
7.31(c)(1)(D)(ii), as modified, would facilitate the proposed changes
to the Price Range Limitation by providing that the limit price of an
IDO Order would be equal to the price that is 20% below the lowest
price of the Issuer Price Range.\64\ The Exchange further proposes to
specify in Rule 7.31(c)(D)(ii) that, for purposes of determining the
Primary Direct Floor Listing Auction Price Range, the 20% and 80%
thresholds would be calculated based on the highest price of the Issuer
Price Range.\65\
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\61\ See id.
\62\ See id.
\63\ See id.
\64\ See id. The Exchange further proposes to specify in Rule
7.31(c)(1)(D)(ii) that, for purposes of determining the Primary
Direct Floor Listing Auction Price Range, the 20% and 80% thresholds
would be calculated based on the highest price of the disclosed
price range, consistent with the Instruction to paragraph (a) of
Securities Act Rule 430A. See id.
\65\ See supra note 22.
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Currently, Rule 7.35A(d)(2)(A)(v) provides that, for a security
that is a Primary Direct Floor Listing, the Indication Reference Price
will be the lowest price of the Primary Direct Floor Listing Auction
Price Range.\66\ The Exchange proposes to add the requirement that the
Exchange disseminate the Indication Reference Price on a public website
to Rule 7.35A(d)(2)(A)(v).\67\ The Exchange also states that, based on
the proposed revision to the definition of Primary Direct Floor Listing
Auction Price Range in Rule 7.31(c)(1)(D)(ii), the Indication Reference
Price for a Primary Direct Floor Listing would be the price that is 20%
below the lowest price of the Issuer Price Range, consistent with the
proposed changes to the Price Range Limitation.\68\
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\66\ See Notice, supra note 10, 87 FR 68563.
\67\ See id.
\68\ See id.
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Currently, Rule 7.35A(g)(2) specifies the circumstances under which
a DMM may not conduct a Direct Listing Auction for a Primary Direct
Floor Listing.\69\ The Exchange proposes to amend Rule 7.35A(g)(2) such
that the rule would specify requirements for a Direct Listing Auction
for a Primary Direct Floor Listing to proceed, rather than specifying
circumstances under which a DMM would not conduct a Direct Listing
Auction for a Primary Direct Floor Listing.\70\ The Exchange proposes
to modify this rule to specify that the Auction Price for a Direct
Listing Auction for a Primary Direct Floor Listing may not be lower
than the price that is 20% below the lowest price of the Issuer Price
Range or higher than the 80% Upper Limit.\71\ In other words, the
Auction Price may not be outside of the Primary Direct Floor Listing
Auction Price Range, as defined in amended Rule 7.31(c)(1)(D)(ii).\72\
The Exchange proposes that Rule 7.35A(g)(2)(A) would further provide
that, if an issuer has certified to the Exchange a maximum Auction
Price that is lower than the 80% Upper Limit, the Auction Price may not
exceed such lower certified price.\73\
---------------------------------------------------------------------------
\69\ See id.
\70\ See id.
\71\ See id.
\72\ See id.
\73\ See id.
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The Exchange proposes to amend Rule 7.35A(g)(2)(B) to provide that
a Direct Listing Auction could proceed when the Auction Price is
outside of the Issuer Price Range but within the Primary Direct Floor
Listing Auction Price Range (as described in proposed Rule
7.35A(g)(2)(A)) if the issuer has previously certified to the Exchange
and publicly disclosed that: (a) the issuer does not expect that the
Auction Price would materially change its previous disclosure in its
effective registration statement (proposed Rule 7.35A(g)(2)(B)(i)(a));
(b) the price range in the preliminary prospectus included in the
effective registration statement is a bona fide price range in
accordance with Item 501(b)(3) of Regulation S-K (proposed Rule
7.35A(g)(2)(B)(i)(b)); and (c) the registration statement contains a
sensitivity analysis explaining how the issuer's plans would change if
the actual proceeds from the offering differ from the amount assumed in
the price range established by the issuer in its effective registration
statement (proposed Rule 7.35A(g)(2)(B)(i)(c)).\74\
---------------------------------------------------------------------------
\74\ See id. at 68564.
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The Exchange states that proposed Rule 7.35A(g)(2)(B)(ii) would
further provide that, when the Auction Price determined by the DMM is
outside of the Issuer Price Range (whether lower or higher), the issuer
would be required to confirm to the Exchange that no additional
disclosures are required under the federal securities laws based on
such price.\75\ According to the Exchange, this proposed change would
permit issuers to comply with their disclosure obligations under
federal securities laws and provide investors with access to the
requisite disclosures before the offering would proceed.\76\ The
Exchange states that, upon receiving confirmation from the issuer that
any such obligations have been met, the Exchange would relay that
information to the DMM to proceed with the Direct Listing Auction.\77\
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\75\ See id.
\76\ See id. As stated above, the Exchange also notes that the
burden of complying with the disclosures required under the federal
securities laws, including providing any disclosure necessary to
avoid any material misstatements or omission, remains with the
issuer. See Notice, supra note 10, 87 FR 68561.
\77\ See id.
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The Exchange states that proposed Rule 7.35A(g)(2)(C)(i) would
reflect the requirement set forth in current Rule 7.35A(g)(2)(B) that
the DMM may not conduct a Direct Listing Auction for a Primary Direct
Floor Listing if there is insufficient buy interest to satisfy both the
IDO Order and all better-priced sell orders in full.\78\ The Exchange
does not propose to change this requirement, other than adding
clarifying text to specify that such orders would be satisfied at the
Auction Price.\79\
---------------------------------------------------------------------------
\78\ See id.
\79\ See id.
---------------------------------------------------------------------------
The Exchange states that proposed Rule 7.35A(g)(2)(C)(ii) would
provide that the DMM would not proceed with a Direct Listing Auction
for a Primary Direct Floor Listing until it has been notified by the
Exchange that the additional conditions set forth in new Commentary .20
to Rule 7.35A have been satisfied.\80\ The Exchange also states that
proposed Commentary .20 to Rule 7.35A would provide that the Direct
Listing Auction for a Primary Direct Floor Listing for a security may
not be conducted until the Exchange has notified the DMM that, at least
one business day prior to the commencement of trading in such security,
the Exchange has distributed a regulatory bulletin describing: (i) any
special characteristics of the offering and the Exchange rules that
apply to the pricing of the Primary Direct Floor Listing; (ii) the
obligations of member organizations pursuant to Exchange Rules 2090 and
2111; and (iii) the requirement that a member organization provide its
customers with a notice with information regarding the Direct Listing
Auction for a Primary Direct Floor Listing.\81\ The Exchange states
that this proposed change would: (i) facilitate the requirements
described above to provide member organizations with sufficient
information so that they may in turn inform their customers; (ii)
remind member organizations of their obligations to ``know their
customers''; (iii) increase transparency around the pricing mechanisms
of a Primary Direct Floor Listing; and (iv) help provide investors with
sufficient price discovery information.\82\
---------------------------------------------------------------------------
\80\ See id.
\81\ See id. See also supra notes 52-53 and accompanying text.
\82\ See Notice, supra note 10, 87 FR 68564.
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[[Page 78146]]
Finally, the Exchange states that proposed Rule 7.35A(g)(2)(C)(iii)
would provide that the DMM would not conduct a Direct Listing Auction
for a Primary Direct Floor Listing if the Auction Price is outside of
the Issuer Price Range and the issuer has not satisfied the conditions
set forth in proposed Rules 7.35A(g)(2)(A) and 7.35A(g)(2)(B)(i) and
(ii).\83\ The Exchange states that it proposes this rule to reinforce
that a Direct Listing Auction for a Primary Direct Floor Listing could
not proceed in these circumstances unless the issuer has made the
requisite disclosures described in proposed Rule 7.35A(g)(2)(B).\84\
---------------------------------------------------------------------------
\83\ See id.
\84\ See id.
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III. Discussion and Commission Findings
The Commission finds that the proposed rule change, as modified by
Amendment No. 2, is consistent with the requirements of the Exchange
Act and the rules and regulations thereunder applicable to a national
securities exchange.\85\ In particular, the Commission finds that the
proposed rule change, as modified by Amendment No. 2, is consistent
with Section 6(b)(5) of the Exchange Act,\86\ 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.
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\85\ 15 U.S.C. 78f(b). In approving this proposed rule change,
the Commission has considered the proposed rule change's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\86\ 15 U.S.C. 78f(b)(5).
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The Commission has consistently recognized the importance and
significance of national securities 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.\87\
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\87\ The Commission has stated in approving national securities
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., Approval Order, supra note 11, 85 FR
85807, 85811 n.55 (Dec. 29, 2020) (SR-NYSE-2019-67) (``NYSE 2020
Order''); 82627 (Feb. 2, 2018), 83 FR 5650, 5653 n.53 (Feb. 8, 2018)
(SR-NYSE-2017-30) (``NYSE 2018 Order''); 81856 (Oct. 11, 2017), 82
FR 48296, 48298 (Oct. 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 2020 Order, 85 FR 85811 n.55; NYSE
2018 Order, 83 FR 5653 n.53; Securities Exchange Act Release Nos.
87648 (Dec. 3, 2019), 84 FR 67308, 67314 n.42 (Dec. 9, 2019) (SR-
NASDAQ-2019-059); 88716 (Apr. 21, 2020), 85 FR 23393, 23395 n.22
(Apr. 27, 2020) (SR-NASDAQ-2020-001).
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The Exchange's listing standards currently provide the Exchange
with discretion to list a company whose stock has not been previously
registered under the Exchange Act, where such company is listing in
connection with a Primary Direct Floor Listing, without a firm
commitment underwritten offering, either selling shares to raise
capital alone or in conjunction with shares by selling
shareholders.\88\ The Exchange proposes to modify its rules concerning
pricing limitations for securities listing on the Exchange pursuant to
a Primary Direct Floor Listing. Instead of the current Price Range
Limitation, which limits the Auction Price to the price range disclosed
in the issuer's effective registration statement,\89\ the proposal
would allow the Direct Listing Auction for a Primary Direct Floor
Listing to proceed at a price up to either 20% below or 80% above the
disclosed price range if certain additional conditions are met. The
Exchange also proposes changes to the procedures for a Direct Listing
Auction for a Primary Direct Floor Listing to accommodate the proposed
changes to the Price Range Limitation.
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\88\ See Section 102.01B, Footnote (E) of the Manual and supra
note 12. See also Approval Order, supra note 11, 85 FR 85807. The
listing standards under Section 102.01B, Footnote (E) of the Manual
also allow for direct listings in connection with the sale of shares
by selling shareholders only.
\89\ See Rule 7.31(c)(1)(D)(ii). The Commission previously
approved the Exchange's proposal to allow Primary Direct Floor
Listings as long as the Direct Listing Auction occurred within the
Price Range Limitation. See Approval Order, supra note 12.
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As explained further below, the following aspects of the proposal,
as modified by Amendment No. 2, demonstrate that the Exchange's
proposal is consistent with the protection of investors and the public
interest under Section 6(b)(5) of the Exchange Act as well as the
maintenance of fair and orderly markets: (i) by modifying the Price
Range Limitation such that, provided other requirements are satisfied,
a Primary Direct Floor Listing can be executed in the Direct Listing
Auction at a price that is above the highest price of the disclosed
price range only if the Auction Price is at or below the 80% Upside
Limit; (ii) by adding conditions that must be satisfied before the
Direct Listing Auction could proceed at a price outside of the
disclosed price range that provide some assurance that issuers are
complying with the disclosure requirements under federal securities
laws, including conditions that require an issuer to provide a prior
certification to NYSE to include a sensitivity analysis in its
registration statement and to also confirm that no additional
disclosures are required under the federal securities laws to open the
Direct Listing Auction at the Auction Price; (iii) by requiring that a
company offering securities for sale in connection with a Primary
Direct Floor Listing must retain an underwriter with respect to the
primary sales of shares by the company and identify the underwriter in
its effective registration statement; and (iv) by making clarifying
changes regarding calculation of the 20% threshold below the disclosed
price range and other clarifying changes.
The Commission discusses below the Exchange's proposed
modifications to Primary Direct Floor Listing. First, the Commission
addresses the modifications to the Price Range Limitation, and the
certification process and other conditions, that would allow a Primary
Direct Floor Listing to execute in the Direct Listing Auction at a
price that is outside the disclosed price range (i.e., up to 20% below
the lowest price in the disclosed price range or no higher than the 80%
Upside Limit). Second, the Commission addresses the availability of
pricing information to investors during the course of a Direct Listing
Auction. Third, the Commission addresses the Exchange's proposed
requirement that a company offering securities for sale in connection
with a Primary Direct Floor Listing must retain an underwriter with
respect to the primary sales of shares by the company and identify the
underwriter in its effective registration statement and addresses
concerns about Section 11 liability and how requiring an underwriter
may mitigate such concerns. Finally, the Commission discusses
additional clarifications to the proposal. As discussed throughout this
[[Page 78147]]
order, the Commission concludes that the Exchange has met its burden to
demonstrate that its proposal is consistent with the Exchange Act, and
therefore finds the proposed rule change is consistent with the
requirements of the Exchange Act.
A. Modification of Price Range Limitation and Required Certification
The Exchange proposes to modify its rules concerning pricing
restrictions for the Direct Listing Auction for a Primary Direct Floor
Listing. Provided that other requirements are satisfied, a Primary
Direct Floor Listing will be able to be executed in the Direct Listing
Auction at a price that is at or above the price that is as low as 20%
below the lowest price in the disclosed price range, or at a price that
is as high as 80% above the highest price of the disclosed price range
(i.e., at or below the 80% Upside Limit).
In all such cases where the execution price would be outside of the
disclosed price range, the company will be required to specify the
quantity of shares registered in its registration statement, as
permitted by Securities Act Rule 457, and that registration statement
will be required to contain a sensitivity analysis explaining how the
company's plans would change if the actual proceeds from the offering
are less than or exceed the amount assumed in the disclosed price
range. Prior to the Direct Listing Auction, the company must certify to
NYSE that the registration statement contains the required sensitivity
analysis.\90\ The company will also be required to publicly disclose
and certify to NYSE that the company does not expect that such offering
price would materially change the company's previous disclosure in its
effective registration statement and that the price range in the
preliminary prospectus included in the effective registration statement
is a bona fide price range in accordance with Item 501(b)(3) of
Regulation S-K. If the company's certification submitted to NYSE in
that regard includes a price limit that is below the 80% Upside Limit,
NYSE will not execute the Direct Listing Auction if it results in an
Auction Price above such limit.
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\90\ As the Exchange states, the sensitivity analysis would
allow investors to see how changes in the share price ripple through
critical elements of a company's disclosure.
---------------------------------------------------------------------------
The Exchange also proposes to require that the securities of a
company listing in connection with a Primary Direct Floor Listing
cannot price above the 80% Upside Limit (i.e., at a price that is more
than 80% above the highest price of the disclosed price range). The
Exchange believes this will incentivize the company and its named
underwriter to take steps to help ensure the accuracy of the disclosed
price range so as to avoid the consequences of a failed offering. In
the OIP, the Commission asked questions about the potential usefulness
and reliability of the price range disclosure in the registration
statement if issuers could price up to 20% below and anywhere above the
disclosed price range.\91\ The changes that the Exchange made
subsequent to the OIP, including the imposition of the 80% Upside Limit
and the named underwriter requirement, is a reasonable response to
address these concerns, and eliminates the open-ended nature of the
original proposal that would have allowed the opening to occur at any
price above the high end of the disclosed price range, with no
limitations.
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\91\ See OIP, supra note 7. One commenter raised similar
concerns. See Letter from Jeffrey P. Mahoney, General Counsel,
Council of Institutional Investors (July 28, 2022) (``CII Letter
I'').
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The Exchange's proposal to expand the Price Range Limitation for
Primary Direct Floor Listing would not allow the Direct Listing Auction
to proceed at a price outside of the disclosed price range if the
company is unable to provide NYSE with the required certification about
the adequacy of the disclosure to allow the offering to execute at a
price that is up to 20% below the low end of the disclosed price range
or is up to the 80% Upside Limit. In addition, the Direct Listing
Auction could not proceed at a price outside of the disclosed price
range if the company is unable to confirm to the Exchange that no
additional disclosures are required under the federal securities laws
to open the Direct Listing Auction at the Auction Price. The DMM would
not conduct a Direct Listing Auction for a Primary Direct Floor Listing
if, among other things, the Auction Price would be outside the
disclosed price range and the company has not satisfied the conditions
described above. We believe these provisions, taken together, will
provide an opportunity for the company to meet its disclosure
obligations under the federal securities laws prior to the opening
auction on the NYSE proceeding if the Direct Listing Auction for a
Primary Direct Floor Listing will execute at a price that is up to 20%
below the low end of the disclosed price range or is up to the 80%
Upside Limit. Issuers also must comply with separate disclosure
obligations under the federal securities laws, and compliance with the
specific requirements of NYSE's proposed listing standards may not be
sufficient to comply with the federal securities laws. In particular,
an issuer using Rule 430A to omit pricing-related information would
need to consider whether a post-effective amendment to a registration
statement containing a price range would be required if a change in
price materially alters the disclosure in the registration statement at
effectiveness. In addition, for purposes of Securities Act Sections
12(a)(2) and 17(a)(2), information delivered to purchasers after the
time of sale is not taken into account in determining whether there
were material misstatements or omissions.\92\ The Commission has
interpreted Section 12(a)(2) and Section 17(a)(2) as reflecting a core
concept of the Securities Act--that materially accurate and complete
information regarding an issuer and the securities being sold should be
available to investors at the time of the contract of sale, when they
make their investment decisions.\93\ Based on the above, the Commission
believes that this aspect of the proposal is consistent with the
investor protection and public interest provisions under Section
6(b)(5) of the Exchange Act.\94\
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\92\ See Securities Act Rule 159. See also Securities Exchange
Act Release No. 93119 (Sept. 23, 2021), 86 FR 54262, 54266 n.47
(Sept. 30, 2021).
\93\ See Securities Offering Reform Proposing Release,
Securities Act Release No. 8501 (Nov. 3, 2004) (proposing current
Rule 159 as an interpretation of Section 12(a)(2) and Section
17(a)(2)) and Securities Offering Reform Adopting Release,
Securities Act Release No. 8591 (Aug. 3, 2005) (adopting Rule 159 as
proposed).
\94\ See OIP, supra note 7.
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B. Availability of Pricing Information
In the OIP, the Commission asked whether providing pricing
information during the course of the auction process only through pre-
opening indications via data feeds that charge subscription fees would
be consistent with, as stated by the Exchange, ``providing readily
available, real time pricing information to investors.'' \95\ The
Exchange stated in response that its dissemination of pre-opening
indications for a security to be opened in a Direct Listing Auction for
a Primary Direct Floor Listing via the SIP and proprietary data feeds
is consistent with the availability of the same for securities opened
in IPOs and the Exchange believes that interested investors have found
pre-opening indications to be readily accessible and to provide useful
real time pricing information to inform their participation in such
auctions.\96\ In its proposal, the Exchange also stated that by
providing real time pricing information by
[[Page 78148]]
disseminating pre-opening indications, as stated above, market
participants would have ready access to up-to-date pricing information
leading up to the Direct Listing Auction for a Primary Direct Floor
Listing and this should support price discovery transparency to
investors.\97\ The Exchange further stated that, under the proposal,
member organizations would be required to provide to a customer, before
that customer places an order to participate in a Direct Listing
Auction for a Primary Direct Floor Listing, a notice describing the
mechanics of pricing a security subject to a Direct Listing Auction for
a Primary Direct Floor Listing, including information regarding the
availability of pre-opening indications via the SIP and proprietary
data feeds and the location of the public website where the Exchange
would disseminate information relating to the Indication Reference
Price.\98\ The Exchange also represented that it would issue a
regulatory bulletin describing any special characteristics of the
offering and the rules that apply to the pricing of the Primary Direct
Floor Listing. Further, the Exchange represented that its regulatory
bulletin would indicate the highest price at which the Direct Listing
Auction for the Primary Direct Floor Listing could proceed.\99\
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\95\ See OIP, supra note 7.
\96\ See Notice, supra note 10, 87 FR 68562 n.29.
\97\ See id. at 68565.
\98\ See id. at 68562. The Exchange will also make the
Indication Reference Price available, free of charge, on a public
website (such as <a href="http://www.nyse.com">www.nyse.com</a>) on the day the Direct Listing Auction
is anticipated to take place. As stated above, this price is the
lowest price of the Primary Direct Floor Listing Auction Price Range
and would be known before the opening process begins and would not
change once established.
\99\ See id. The Exchange also represented that the regulatory
bulletin would specify the price that is 20% below the lowest price
of the disclosed price range. See id.
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The Exchange has further stated that the pre-opening indications,
based on the DMM's assessment of interest eligible to participate in
the Direct Listing Auction, would provide notice of when ``price
volatility has subsided and price equilibrium has been met with respect
to the orders wishing to participate in such Auction.'' \100\ In
particular, the Exchange highlighted three existing rules concerning
pre-opening indication procedures: Exchange Rule 7.35A(d)(4)(C)
provides that the DMM should aim to publish a pre-opening indication
with a spread of less than $1.00 before opening a security; Rule
7.35A(d)(4)(D) provides that the DMM must wait for certain minimum
specified periods of time after publishing a pre-opening indication
before opening a security; \101\ and Rule 7.35A(d)(4)(G) provides that
the DMM may not open a security outside of the last-published pre-
opening indication. These pre-opening indication procedures apply to
Direct Listings, including Primary Direct Floor Listings, as well as
other IPOs on the Exchange. Further, the Exchange has represented that
the availability of pre-opening indications for Primary Direct Floor
Listings are consistent with the availability of the same information
for securities opened in IPOs on the Exchange.
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\100\ See id. at 68565.
\101\ A DMM must wait for a minimum of three minutes between
publication of the first indication and a security's opening or
reopening. If more than one indication has been published, a
security may be opened or reopened one minute after the last
published indication provided that at least three minutes have
elapsed from the dissemination of the first indication. See NYSE
Rule 7.35A(d)(4)(D).
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The Commission believes that the availability of pre-opening
indications, which must be provided in accordance with these existing
procedures to investors in Primary Direct Floor Listings, could help to
provide investors with useful information as to the pricing of the
security in the Direct Listing Auction and help to inform investors in
making decisions about entering, modifying, or cancelling orders to
participate in such auction. The Commission also believes that the 80%
Upside Limit, or other lower maximum price based on the company's
certification, will provide a cap to an investor's financial obligation
on its buy order that would be executed in the opening auction and that
the regulatory bulletin should help inform investors of this
price.\102\ Based on the above, the Commission finds these procedures
are consistent with the protection of investors, the public interest,
and the other requirements of Section 6(b)(5) of the Exchange Act.
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\102\ But see discussion in Section III A, supra, concerning an
issuer's disclosure obligations with respect to pricing and pricing
changes.
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C. Addition of Named Underwriter Requirement in a Primary Direct Floor
Listing and Securities Act Section 11 Standing
Given the broad definition of ``underwriter'' in the Securities
Act,\103\ parties, such as the issuers' financial advisor, may,
depending on the facts and circumstances including the nature and
extent of that party's activities, be deemed a statutory underwriter
with respect to a direct listing, with attendant underwriter
liabilities. In the OIP, the Commission asked several questions about
potential issues related to the lack of a named underwriter (as opposed
to a statutory underwriter) in a Primary Direct Floor Listing where an
offering can price outside of the range established by the issuer in
its effective registration statement.\104\ The Commission questioned
whether a party who may meet the statutory underwriter definition but
is not named as an underwriter would review and adequately conduct due
diligence on the information contained in the registration statement
for a Primary Direct Floor Listing where the Direct Listing Auction is
executed outside of the disclosed price range. The Commission also
stated that permitting a Primary Direct Floor Listing could potentially
result in increased regulatory arbitrage if and to the extent that
issuers and intermediaries, including financial advisors, are not
subject to equivalent liability standards in the direct listings
context as they would be in traditional firm commitment underwritten
IPOs.\105\
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\103\ Section 2(a)(11) of the Securities Act defines
``underwriter'' to mean ``any person who has purchased from an
issuer with a view to, or offers or sells for an issuer in
connection with, the distribution of any security, or participates
or has a direct or indirect participation in any such undertaking,
or participates or has a participation in the direct or indirect
underwriting of any such undertaking.''
\104\ See OIP, supra note 7. One commenter stated it was
concerned, consistent with the statements in the OIP, about the lack
of a named underwriter in a Primary Direct Floor Listing where the
offering could price outside of the range established by the issuer
in its effective registration statement and stated it also had
concerns about challenges to bringing claims under Section 11 of the
Securities Act due to potential tracing issues. See CII Letter I, at
4.
\105\ See OIP, supra note 7.
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In the proposed rule change as modified by Amendment No. 2, the
Exchange proposes to require that a company offering securities for
sale in connection with a Primary Direct Floor Listing retain an
underwriter with respect to the primary sales of shares by the company
and identify the underwriter in its effective registration
statement.\106\ The Exchange states that it believes that underwriters
provide significant investor protections that are necessary in a
Primary Direct Floor Listing where an offering can price outside of the
range established by the issuer in its effective registration
statement.\107\ For example, the Exchange states that underwriters are
exposed to potential Securities Act liability, which provides a strong
incentive for them to take steps to help ensure the accuracy of
disclosure in a registration statement.\108\ The Exchange states that
it ``believes that these significant investor
[[Page 78149]]
protection provisions are necessary in a Primary Direct Floor Listing
if an offering can price outside the price range established in the
issuer's effective registration statement, subject to the proposed
limitations, because such provisions allow investors to make reasonable
pricing decisions with clarity that the company's underwriter would
face statutory liability.'' \109\ Earlier in the amended proposal, the
Exchange notes the Commission's recent explanation that ``[t]he civil
liability provisions of the Securities Act reflect the unique position
underwriters occupy in the chain of distribution of securities and
provide strong incentives for underwriters to take steps to help ensure
the accuracy of disclosure in a registration statement.'' \110\
Accordingly, the Exchange proposes to require named underwriters for
listings of securities on the Exchange in connection with a Primary
Direct Floor Listing.
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\106\ See Notice, supra note 10, 87 FR 68559.
\107\ See id. at 68561.
\108\ See id.
\109\ See id. at 68561.
\110\ See id. (quoting Special Purpose Acquisition Companies,
Shell Companies, and Projections, Securities Exchange Act Release
No. 94546 (Mar. 30, 2022), 87 FR 29458 (May 13, 2022)).
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The Commission believes that the Exchange's proposed requirement
that a company conducting a Primary Direct Floor Listing must retain
and name an underwriter will help address the investor protection
concerns discussed in the OIP that can arise in a Primary Direct Floor
Listing that prices outside of the disclosed price range. With respect
to disclosure, for example, for an offering to proceed at a price
outside of the disclosed price range, the Exchange's proposal would
require the company to initially provide certifications to the Exchange
and publicly disclose that the company does not expect that such a
price would materially change its effective registration statement
disclosure. The company's registration statement also would need to
contain a sensitivity analysis explaining how the company's plans would
change if the actual proceeds from the offering are less than or exceed
the amount assumed in the disclosed price range. In addition, the
company would be required to confirm to the Exchange that no additional
disclosures are required under the federal securities laws based on the
actual price. The required presence of named underwriters who are
subject to Securities Act liability should help ensure the accuracy of
these disclosures that potential investors receive in a Primary Direct
Floor Listing. This disclosure includes information, such as the use of
proceeds and the required sensitivity analysis, that becomes even more
important when an offering prices outside of the range established by
the company in its registration statement. Investors should also
benefit from the knowledge that underwriters with Securities Act
liability are required as companies consider the certifications they
must provide to the Exchange with respect to the impact of price
changes on their registration statement disclosure and on their
obligation to provide additional disclosures under the federal
securities laws.
The Commission also asked questions in the OIP about shareholders'
ability to pursue claims under Section 11 of the Securities Act due to
potential traceability issues.\111\ The Exchange states that it
believes that the requirement to retain a named underwriter in a
Primary Direct Floor Listing may mitigate traceability concerns because
the underwriter ``would be able to impose lock-up arrangements for the
same reasons that make lock-up agreements common in an IPO.'' \112\ The
Commission agrees that the requirement to retain a named underwriter
may help mitigate traceability concerns. However, the actual impact of
the named underwriter requirement is far from certain, particularly
because tracing is a judicially-developed doctrine and there is limited
judicial precedent addressing tracing requirements in the context of
direct listings. In addition, because of the many factors that go into
an underwriter's decision to request or require lock-up arrangements in
public offerings, whether, and if so to what extent, underwriters in
Primary Direct Floor Listing would impose lock-up arrangements on all
company shareholders is unclear. Although the Commission's findings in
this order are based on the specific proposed rule change filed with
the Commission, including how the proposed rule operates under the
circumstances discussed in this order, the Commission recognizes that,
over time, those circumstances may change. Some of the circumstances
that may change involve tracing and may include developments in case
law involving tracing in the direct listing context.
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\111\ See OIP, supra note 7. One commenter raised similar
concerns. See CII Letter I and Letter from Jeffery P. Mahoney,
General Counsel, Council of Institutional Investors (Dec. 1, 2022)
(``CII Letter II''). This commenter also stated that the Exchange
does not address how its proposal ``might alleviate the poor
corporate governance practices that appear endemic to companies that
become public through a direct listing.'' CII Letter II. As the
Commission stated previously, the Commission does not believe that
investors will be precluded from raising concerns about governance
structures in the context of direct listings; to the extent a
company's corporate governance practices are of sufficient concern
to investors, they may be able to influence companies' governance
practices through signaling their unwillingness to purchase a
company's shares through a direct listing. In this way, investors
may be able to persuade companies to adopt preferred governance
provisions, whether the company becomes listed through a direct
listing or a firm commitment IPO. See Securities Exchange Act
Release No. 91947 (May 19, 2021), 86 FR 28169, 28177 (May 25, 2021)
(SR-NASDAQ-2020-057) (``Nasdaq 2021 Order'').
\112\ See Notice, supra note 10, 87 FR 68561.
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In view of the totality of the Exchange's proposal, including the
requirement that a company seeking to conduct a Primary Direct Floor
Listing retain and name an underwriter, the Commission does not expect
any such tracing challenges in this context to be of such magnitude as
to render the proposal inconsistent with the Exchange Act.\113\ The
Commission therefore concludes that the proposed rule change, as
modified by Amendment No. 2, is consistent with the protection of
investors and the public interest under Section 6(b)(5) of the Exchange
Act.
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\113\ See Approval Order, supra note 12, 85 FR 85816. See also
Nasdaq 2021 Order, supra note 111, 86 FR 28176.
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D. Additional Clarifications
In the OIP, the Commission asked questions about how the Exchange
would calculate the 20% threshold below the disclosed price range under
proposed Rule 7.31(c)(1)(D)(ii) and whether that computation would lead
to the same minimum price contemplated by the proposed revisions to
Section 102.01B, Footnote (E) of the Manual.\114\ Subsequently, the
Exchange revised its proposal to provide that the 20% threshold below
the disclosed price range, along with the 80% threshold used to
determine the 80% Upper Limit, would be calculated using the highest
price of the Issuer Price Range.\115\ In addition, the Exchange made
clarifying changes to the description of the 20% threshold used for
evaluating whether the company has satisfied the market value
requirement in Section 102.01B, Footnote (E) of the Manual.\116\ The
Commission finds that these changes will help ensure that the
calculations are consistent throughout the Exchange's rules and set
forth a clear process for how the Exchange will calculate the 20% and
80% thresholds, thereby providing clarity to investors
[[Page 78150]]
and market participants on the lowest and highest price outside of the
disclosed price range at which the Direct Listing Auction can occur
consistent with the protection of investors and the public interest
under Section 6(b)(5) of the Exchange Act.
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\114\ See OIP, supra note 7.
\115\ See proposed Rule 7.31(c)(1)(D)(ii). See also Notice,
supra note 10, 87 FR 68563. Under the Exchange's original proposal,
the 20% threshold would have been calculated based on the maximum
offering price set forth in the registration fee table, consistent
with the Instruction to paragraph (a) of the Securities Act.
\116\ See proposed Section 102.01B, Footnote (E) of the Manual.
See also Notice, supra note 10, 87 FR 68562.
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IV. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change, as modified by Amendment No. 2, is consistent with the
Exchange Act and the rules and regulations thereunder applicable to a
national securities exchange.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\117\ that the proposed rule change (SR-NYSE-2022-14), as
modified by Amendment No. 2 thereto, be, and it hereby is, approved.
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\117\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\118\
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\118\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022-27659 Filed 12-20-22; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on December 21, 2022.
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