A Current Guide to Direct Listings

• Published in: Insights; the Corporate & Securities Law Advisor 2019-12, Vol.33 (12), p.17-25
• Main Authors: Bannister, J Alan, Pollner, Glenn R, Holmes, Hillary H, Shepherd, Evan
• Format: Article
• Language: English
• Subjects: Advisors; Capital markets; Employees; Equity; Financial planners; Flexibility; Initial public offerings; Investments; Marketing; New stock market listings; Process controls; Registration statements; Stock brokers; Stock exchanges; Stock offerings; Stockholders; Underwriting; Valuation
• ISSN: 0894-3524

Under current stock exchange rules, direct listings involve the registration of a secondary offering of a company's shares on a registration statement on Form S-1 or other applicable registration form filed with, and declared effective by, the Securities and Exchange Commission (SEC).1 Existing shareholders, such as employees and early-stage investors, whose shares are registered for resale are able to sell their shares on the applicable exchange, but are not obligated to do so, providing flexibility and value to such shareholders by creating a public market and liquidity for the company's stock. Companies have not raised fresh capital as part of the direct listing process, but the NYSE recently proposed changes to its rules that would allow a primary offering along with, or in lieu of, a direct secondary listing.2 Advantages of a Direct Listing as Compared to an IPO Immediate Benefits to Existing Shareholders All shareholders whose shares are registered on the resale shelf registration statement will have the opportunity to participate in the first day of trading of the company's stock. Flexibility in Timing of Public Announcement IPO marketing has become more flexible since the introduction of rules providing for "testingthe-waters" communications by Emerging Growth Companies and, starting December 3, 2019, all companies.3 However, a direct listing allows a company to avoid the rigidity of the traditional roadshow conducted for a specified period of time following the publicly announced launch of an IPO and allows it to tailor marketing activities to the specific considerations underlying the direct listing. Financial Advisors and their Independence The rules of both the NYSE and Nasdaq require that the listing company appoint a financial advisor to provide an independent valuation of the listing company's "publicly held" shares and, in practice, assist the applicable exchange's market maker or specialists, as applicable, in setting a reference price.