United States: NYSE To Expand Opportunity For Private Companies To List On NYSE Without IPO

As private growth companies continue to change the dynamics and the landscape of the financial markets, the NYSE has responded by proposing a change to its listing requirements to allow companies to list their shares immediately upon effectiveness of an Exchange Act registration statement without a concurrent public offering of its shares. The NYSE also proposed a change to allow a company to list its shares on the NYSE if the company provides an independent valuation (without reliance on its trading price on a private market) indicating at least $250 million in market value of publicly held shares (i.e., shares not held by directors, officers, their immediate families and 10 percent holders).

Generally, a company is listed on the NYSE either through the typical underwritten IPO process, upon transfer from another market such as Nasdaq or the OTC market, or in connection with a spin-off. Though less common, a company may also seek to list its shares on the NYSE when a registration statement filed solely for the purpose of allowing existing shareholders to sell their shares becomes effective. In each case, a company is required to meet certain distribution standards (either $40 million or $100 million) imposed by the NYSE to ensure a liquid trading market for their shares.

If a company seeks to list its shares upon effectiveness of a resale registration statement, the NYSE has discretion to list the shares if it determines the company has at least $100 million in market value of publicly held shares. The NYSE bases this determination on a combination of (1) an independent valuation of the company, and (2) the most recent trading price of the company's shares on a private market for unregistered securities, such Nasdaq Private Market and SharesPost. The NYSE then attributes a market value of publicly held shares to the company equal to the lesser of the valuation and the trading price. The rule further provides that the NYSE will rely upon a trading price only if the trading price shows a sustained history over several months that supports a market value in excess of $100 million.

The NYSE recognizes that reliance on a trading price in addition to a valuation may cause difficulties for certain companies that are otherwise qualified for listing. Specifically, the NYSE notes that some companies are clearly large enough to be suitable for listing on the NYSE, but their shares are not traded at all before going public. In other cases, the private market trading is too limited to provide a reasonable basis for reaching conclusions about a company's qualification. Consequently, the NYSE is seeking to amend Footnote (E) to Section 102.01B of the NYSE Listed Company Manual to (1) explicitly state that the rule applies to companies listing upon effectiveness of an Exchange Act registration statement without a concurrent Securities Act registration, as well as to companies listing upon effectiveness of a resale registration statement, and (2) provide an exception to the private market trading requirement if a company provides a recent valuation from an independent firm indicating at least $250 million in market value of publicly held shares. Similar to the current rule, any valuation used for this purpose must be provided by an independent firm that has "significant experience and demonstrable competence in the provision of such valuations." The proposed rule provides that the valuation firm will not be deemed to be independent if:

  • At the time it provides the valuation, the valuation firm or any affiliated person beneficially owns in the aggregate more than 5 percent of the class of securities to be listed, including any right to receive such securities exercisable within 60 days
  • The valuation firm or any affiliated person has provided any investment banking services to the listing company within the 12 months preceding the date of the valuation, which includes acting as an underwriter; acting as a financial adviser in a merger or acquisition; providing venture capital, equity lines of credit, PIPEs or similar investments; serving as placement agent; or acting as a member of a selling group in a securities underwriting
  • The valuation firm or any affiliated person has been engaged to provide investment banking services to the listing company in connection with the proposed listing or any related financings or other related transactions

The rule proposal also addresses a few technical trading rules related to the proposed changes to Footnote (E) to Section 102.01B. In particular, the NYSE proposes to further amend its rules governing the opening of trading on the day of initial listing of a company that lists under the amended provisions of Footnote (E) to Section 102.01B and that did not have any recent trading in a private placement market before listing to specify that the opening price will be determined by the NYSE (through the designated market maker) in consultation with a financial advisor to the listing company, which the listing company must retain within 90 days of the date of listing to provide these specified functions. Finally, the rule proposal specifies that the NYSE may declare a regulatory halt in a security that is the subject of an IPO or initial listing on the NYSE.

We expect these proposed changes to be especially attractive to companies seeking to list on the NYSE that (1) have VC and PE investors who would like liquidity or flexibility over the shares they acquired in various private placements, including shares acquired by conversion of various convertible equity or debt instruments, but whose securities are not actively traded or do not trade at all in the private markets; or (2) are well-capitalized and do not need additional equity capital but would still like to offer liquidity to their investors and employees. However, we do not expect these proposed changes to fundamentally alter the stock exchange listing landscape in light of the fact that Nasdaq has completed only "about a half-dozen direct listings of private companies since 2006," according to a recent Wall Street Journal article.

The NYSE initially filed its proposed rule change with the SEC in March 2017. The SEC did not receive any comments on the NYSE's proposal. On May 12, 2017, the SEC extended its review period of the proposal to June 29, 2017. During this period, the NYSE also filed Amendment No. 1 to the proposed rule change on May 16, 2017 and Amendment No. 2 to the proposed rule change on May 24, 2017, both of which were subsequently withdrawn. On June 6, 2017, the NYSE filed Amendment No. 3 to the proposed rule change, which was withdrawn by the NYSE on June 19, 2017. On June 13, 2017, the NYSE submitted a substantially similar rule proposal to the SEC that provided additional rationale for the proposed changes, along with several clarifications and technical trading rule changes. The NYSE has requested accelerated effectiveness of the proposed rule changes because the proposed changes have been out for public comment since mid-March and the SEC has not received any comments on the proposed rule changes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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