Document ID: SEC-2022-0287-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2022-03-02T05:00Z

[Federal Register Volume 87, Number 41 (Wednesday, March 2, 2022)]
[Notices]
[Pages 11780-11786]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-04336]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94311; File No. SR-NASDAQ-2021-045]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order 
Disapproving a Proposed Rule Change, as Modified by Amendment No. 2, To 
Modify Certain Pricing Limitations for Companies Listing in Connection 
With a Direct Listing Primary Offering

February 24, 2022
    On June 11, 2021, The Nasdaq Stock Market LLC (``Nasdaq'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) \1\ of the Securities 
Exchange Act of 1934 (``Exchange Act'') \2\ and Rule 19b-4 
thereunder,\3\ a proposed rule change to modify certain pricing 
limitations for companies listing in connection with a direct listing 
primary offering 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 June 30, 2021.\4\ On August 12, 2021, pursuant to Section 19(b)(2) 
of the Exchange Act,\5\ the Commission designated a longer period 
within which to either approve or disapprove the proposed rule change, 
or institute proceedings to determine whether to disapprove the 
proposed rule change.\6\ On September 24, 2021, the Commission 
instituted proceedings under Section 19(b)(2)(B) of the Exchange Act 
\7\ to determine whether to approve or disapprove the proposed rule 
change.\8\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ See Securities Exchange Act Release No. 92256 (June 24, 
2021), 86 FR 34815 (June 30, 2021) (``Notice''). Comments received 
on the proposal are available on the Commission's website at: 
https://www.sec.gov/comments/sr-nasdaq-2021-045/srnasdaq2021045.htm.
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 92649, 86 FR 46295 
(August 18, 2021). The Commission designated September 28, 2021, as 
the date by which it should approve, disapprove, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.
    \7\ 15 U.S.C. 78s(b)(2)(B).
    \8\ See Securities Exchange Act Release No. 93119 (September 24, 
2021), 86 FR 54262 (September 30, 2021) (``OIP'').
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    On December 20, 2021, the Commission extended the time period for 
approving or disapproving the proposal to February 25, 2022.\9\ On 
December 22, 2021, the Exchange filed Amendment No. 2 to the proposed 
rule change, which superseded the proposed rule change as originally 
filed.\10\ Amendment No. 2 was published for comment in the Federal 
Register on January 12, 2022.\11\
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    \9\ See Securities Exchange Act Release No. 93830, 86 FR 73071 
(December 23, 2021).
    \10\ On December 21, 2021, Nasdaq submitted Amendment No. 1, 
which was subsequently withdrawn.
    \11\ See Securities Exchange Act Release No. 93924 (January 6, 
2022), 87 FR 1797 (January 12, 2022) (``Amended Notice'').
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    This order disapproves the proposed rule change, as modified by 
Amendment No. 2, because, as discussed below, Nasdaq has not met its 
burden under the Exchange Act and the Commission's Rules of Practice to 
demonstrate that its proposal is consistent with the requirements of 
Exchange Act Section 6(b)(5), and, in particular, the requirement that 
the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, promote just and 
equitable principles of trade, and protect investors and the public 
interest.

I. Description of the Proposal, as Modified by Amendment No. 2

    Nasdaq Listing Rule IM-5315-2 provides listing requirements for 
Nasdaq's Global Select Market for a company that has not previously had 
its common equity securities registered under the Exchange Act to list 
its common equity securities on the Exchange at the time of 
effectiveness of a registration statement \12\ pursuant to which the 
company will sell shares itself in the opening auction on the first day 
of trading on the Exchange (a ``Direct Listing with a Capital 
Raise'').\13\

[[Page 11781]]

Securities qualified for listing under Nasdaq Listing Rule IM-5315-2 
must begin trading on the Exchange following the initial pricing 
through the mechanism outlined in Nasdaq Rule 4120(c)(9) and Nasdaq 
Rule 4753 for the opening auction, otherwise known as the Nasdaq Halt 
Cross.\14\ Currently, in the case of a Direct Listing with a Capital 
Raise, the Exchange will release the security for trading on the first 
day of listing if, among other things, the actual price calculated by 
the Nasdaq Halt Cross is at or above the lowest price and at or below 
the highest price of the price range established by the issuer in its 
effective registration statement \15\ (the ``Pricing Range 
Limitation''). The Exchange has proposed to modify the Pricing Range 
Limitation to provide that the Exchange would release the security for 
trading if (a) the actual price calculated by the Nasdaq Halt Cross is 
at or above the price that is 20% below the lowest price, and at or 
below the price that is 20% above the highest price, of the disclosed 
price range; or (b) the actual price calculated by the Nasdaq Halt 
Cross is at a price above the price that is 20% above the highest price 
of such price range, provided that, among other things, the company has 
publicly disclosed and certified to the Exchange that the company's 
registration statement contains a sensitivity analysis explaining how 
the company's plans would change if the actual proceeds from the 
offering exceed the amount assumed in such price range and that the 
company does not expect that such price would materially change the 
company's previous disclosure in its effective registration 
statement.\16\ The Exchange would calculate the 20% threshold based on 
the maximum offering price set forth in the registration fee table in 
the company's effective registration statement, which the Exchange 
argues is consistent with the Instruction to paragraph (a) of 
Securities Act Rule 430A.\17\ The Exchange has also proposed to make 
related conforming changes.
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    \12\ The reference to a registration statement refers to a 
registration statement effective under the Securities Act of 1933 
(``Securities Act'').
    \13\ A Direct Listing with a Capital Raise 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 Nasdaq Listing Rule IM-5315-2. See also 
Securities Exchange Act Release No. 91947 (May 19, 2021), 86 FR 
28169 (May 25, 2021) (order approving rules to permit a Direct 
Listing with a Capital Raise and adopting related rules concerning 
how the opening transaction for such listing will be effected) 
(``2021 Order''). The Exchange's rules provide for a company listing 
pursuant to a Direct Listing with a Capital Raise to list only on 
the Nasdaq Global Select Market.
    \14\ See Nasdaq Listing Rule IM-5315-2. ``Nasdaq Halt Cross'' 
means the process for determining the price at which Eligible 
Interest shall be executed at the open of trading for a halted 
security and for executing that Eligible Interest. See Nasdaq Rule 
4753(a)(4). ``Eligible Interest'' means any quotation or any order 
that has been entered into the system and designated with a time-in-
force that would allow the order to be in force at the time of the 
Nasdaq Halt Cross. See Nasdaq Rule 4753(a)(5). Pursuant to Nasdaq 
Rule 4120, the Exchange will halt trading in a security that is the 
subject of an initial public offering (or direct listing), and 
terminate that halt when the Exchange releases the security for 
trading upon certain conditions being met, as discussed further 
below. See Nasdaq Rule 4120(a)(7) and (c)(8).
    \15\ The Exchange states that references in the proposal to the 
price range established by the issuer in its effective registration 
statement refer to the price range disclosed in the prospectus in 
such effective registration statement. See Amended Notice, supra 
note 11, 87 FR at 1799 n.14. Throughout this order, we refer to this 
as the ``disclosed price range.''
    \16\ See proposed Nasdaq Rule 4120(c)(9)(B)(vii)c. See also 
Amended Notice, supra note 11, 87 FR at 1799.
    \17\ See proposed Nasdaq Rule 4120(c)(9)(B)(vii)c.3.
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    Currently Nasdaq Rule 4120(c)(9)(B) states that, notwithstanding 
the provisions of Nasdaq Rule 4120(c)(8)(A) and (c)(9)(A), in the case 
of a Direct Listing with a Capital Raise, for purposes of releasing 
securities for trading on the first day of listing, the Exchange, in 
consultation with the financial advisor to the issuer, will make the 
determination of whether the security is ready to trade. The Exchange 
will release the security for trading if: (i) All market orders will be 
executed in the Nasdaq Halt Cross; and (ii) the actual price calculated 
by the Nasdaq Halt Cross complies with the Pricing Range Limitation. 
The Exchange will postpone and reschedule the offering only if either 
or both of such conditions are not met.\18\ The Exchange states that if 
there is insufficient buy interest to satisfy the CDL Order \19\ and 
all other market orders, as required by the current rule, or if the 
actual price calculated by the Nasdaq Halt Cross is outside the 
disclosed price range, the Nasdaq Halt Cross would not proceed and such 
security would not begin trading.\20\
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    \18\ See Nasdaq Rule 4120(c)(9)(B).
    \19\ A ``Company Direct Listing Order'' or ``CDL Order'' is a 
market order that may be entered only on behalf of the issuer and 
may be executed only in the Nasdaq Halt Cross for a Direct Listing 
with a Capital Raise. The CDL Order is entered without a price (with 
a price later set in accordance with the requirements of Nasdaq Rule 
4120(c)(9)(B)), must be for the quantity of shares offered by the 
issuer as disclosed in its effective registration statement, must be 
executed in full in the Nasdaq Halt Cross, and may not be canceled 
or modified. See Nasdaq Rule 4702(b)(16).
    \20\ See Amended Notice, supra note 11, 87 FR at 1799. The 
Exchange represents that in such event, because the Nasdaq Halt 
Cross cannot be conducted, the Exchange would postpone and 
reschedule the offering and notify participants via a Trader Update 
that the Direct Listing with a Capital Raise scheduled for that date 
has been cancelled and any orders for that security that have been 
entered on the Exchange would be cancelled back to the entering 
firms. See id.
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    According to the Exchange, based on conversations it has had with 
companies and their advisors, the Exchange believes that some companies 
may be reluctant to use the existing rules for a Direct Listing with a 
Capital Raise because of concerns about the Pricing Range 
Limitation.\21\ The Exchange states that the Pricing Range Limitation 
imposed on a Direct Listing with a Capital Raise (but not on a 
traditional IPO) increases the probability of a failed offering, 
because the offering cannot proceed without some delay not only due to 
lack of investor interest, but also if investor interest is greater 
than the company and its advisors anticipated.\22\ According to the 
Exchange, the Exchange believes that there may be instances of 
offerings where the price determined by the Exchange's opening auction 
will exceed the highest price of the price range disclosed in the 
company's effective registration statement.\23\ The Exchange states 
that, under the existing rule, a security subject to a Direct Listing 
with a Capital Raise cannot be released for trading by the Exchange if 
the actual price calculated by the Nasdaq Halt Cross is above the 
highest price of the disclosed price range.\24\ The Exchange further 
states that, in this case, the Exchange would have to cancel or 
postpone the offering until the company amends its effective 
registration statement, and that, at a minimum, such a delay exposes 
the company to market risk of changing investor sentiment in the event 
of an adverse market event.\25\ In addition, the Exchange states that 
the determination of the public offering price of a traditional IPO is 
not subject to limitations similar to the Pricing Range Limitation for 
a Direct Listing with a Capital Raise, which, in the Exchange's view, 
could make companies reluctant to use this alternative method of going 
public despite its expected potential benefits.\26\
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    \21\ See id. The Exchange states that a Direct Listing with a 
Capital Raise could maximize the chances of more efficient price 
discovery of the initial public sale of securities for issuers and 
investors, because, unlike in a traditional firm commitment 
underwritten public offering (``IPO''), the initial sale price is 
determined based on market interest and the matching of buy and sell 
orders in an auction open to all market participants. See id.
    \22\ See id. at 1800. The Exchange states that if an offering 
cannot be completed due to lack of investor interest, there is 
likely to be a substantial amount of negative publicity for the 
company and the offering may be delayed or cancelled. See id.
    \23\ See id.
    \24\ See id.
    \25\ See id.
    \26\ See id.
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    The Exchange has proposed to modify the Pricing Range Limitation 
such that even if the actual price calculated by the

[[Page 11782]]

Nasdaq Halt Cross is outside the disclosed price range, the Exchange 
would release a security for trading if the actual price at which the 
Nasdaq Halt Cross would occur is at or above the price that is 20% 
below the lowest price of the disclosed price range and at or below the 
price that is 20% above the highest price of the disclosed price range, 
provided all other necessary conditions are satisfied, and that the 
company has specified the quantity of shares registered, as permitted 
by Securities Act Rule 457.\27\ In addition, under the proposal, the 
Exchange would release the security for trading, provided all other 
necessary conditions are satisfied, at a price more than 20% above the 
highest price of the disclosed price range, if the company publicly 
disclosed and has certified to the Exchange prior to the beginning of 
the Display Only Period \28\ that the company does not expect that such 
offering price would materially change the company's previous 
disclosure in its effective registration statement, the company's 
registration statement contains a sensitivity analysis explaining how 
the company's plans would change if the actual proceeds from the 
offering exceed the amount assumed in the price range established by 
the issuer in its effective registration statement, and the price range 
in the preliminary prospectus included in its effective registration 
statement is a bona fide price range in accordance with Item 501(b)(3) 
of Regulation S-K.\29\ The Exchange states that the goal of the 
requirement is to have disclosure that allows investors to see how 
changes in share price ripple through critical elements of the 
disclosure.\30\
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    \27\ See id. See also infra notes 31 and 33 and accompanying 
text.
    \28\ See Nasdaq Rule 4120(c)(7)(A) and proposed Nasdaq Rule 
4120(c)(9)(B)(iii)-(v) for a description of the ``Display Only 
Period.''
    \29\ See Amended Notice, supra note 11, 87 FR at 1800; proposed 
Nasdaq Rule 4120(c)(9)(B)(vii)c.2.
    \30\ See Amended Notice, supra note 11, 87 FR at 1800.
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    The Exchange states that it believes that its proposed approach is 
consistent 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.\31\ According to the Exchange, the Exchange 
believes such guidance also allows deviation above the price range 
beyond the 20% threshold if such change or deviation does not 
materially change the previous disclosure.\32\ The Exchange states 
that, accordingly, the Exchange believes that a company listing in 
connection with a Direct Listing with a Capital Raise can specify the 
quantity of shares registered, as permitted by Securities Act Rule 457, 
and, when 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 disclosure, in each case 
assuming the number of shares issued is not increased from the number 
of shares disclosed in the prospectus.\33\ The Exchange states that, 
for the purposes of this rule, the 20% threshold would be calculated 
based on the maximum offering price set forth in the registration fee 
table, and that this method of calculation is consistent with the SEC 
Staff's guidance on Securities Act Rule 430A.\34\
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    \31\ See id. The Exchange states that 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, and the Exchange 
proposes to require that companies selling shares through a Direct 
Listing with a Capital Raise will register securities by specifying 
the quantity of shares registered and not a maximum offering amount. 
See id. at 1800 n.20. The Exchange also states that the Exchange 
believes that the proposed modification of the Pricing Range 
Limitation is consistent with the protection of investors, 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 1802.
    \32\ See id. at 1800.
    \33\ See id.
    \34\ See id.
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    According to the Exchange, given that there may be a Direct Listing 
with a Capital Raise that could price outside of the disclosed price 
range and that there may be no upside limit above which the Nasdaq Halt 
Cross could not proceed, the Exchange proposes to enhance transparency 
by providing readily available, real time pricing information to 
investors.\35\ To that end, the Exchange states that it would 
disseminate, free of charge, the Current Reference Price on a public 
website, such as Nasdaq.com, during the Pre-Launch Period and indicate 
whether the Current Reference Price is within the disclosed price 
range.\36\ The Exchange also proposes to adopt a new Price Volatility 
Constraint and disseminate information about whether the Price 
Volatility Constraint has been satisfied, which will indicate whether 
the security may be ready to trade.\37\ The ``Price Volatility 
Constraint'' would require that the Current Reference Price has not 
deviated by 10% or more from any Current Reference Price within the 
previous 10 minutes.\38\ The Exchange states that the Price Volatility 
Constraint would provide investors with notice that the Nasdaq Halt 
Cross nears execution.\39\ The Pre-Launch Period would continue until 
the Price Volatility Constraint has been satisfied.\40\ Further, the 
Pre-Launch Period shall end, and the security shall be released for 
trading when the Exchange, in consultation with the financial advisor 
to the issuer, makes the determination that the security is ready to 
trade and the conditions in proposed Nasdaq Rule 4120(c)(9)(B)(vii) and 
(viii) are met.\41\
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    \35\ See id.
    \36\ See id. See Nasdaq Rule 4753(a)(3) for a description of the 
``Current Reference Price'' and Nasdaq Rule 4120(c)(8)(A) and 
proposed Nasdaq Rule 4120(c)(9)(B)(v)-(vii) for a description of the 
``Pre-Launch Period.''
    \37\ See Amended Notice, supra note 11, 87 FR at 1800-01.
    \38\ See id. at 1801.
    \39\ See id.
    \40\ See id.
    \41\ See proposed Nasdaq Rule 4120(c)(9)(B)(vii).
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    The Exchange also proposes to prohibit market orders (other than by 
the company through its CDL Order) from the opening of a Direct Listing 
with a Capital Raise.\42\ The Exchange states that this would assure 
that investors only purchase shares at a price at or better than the 
price they affirmatively set, after having the opportunity to review 
the company's effective registration statement, including the 
sensitivity analysis describing how the company would use any 
additional proceeds raised.\43\
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    \42\ See Amended Notice, supra note 11, 87 FR at 1801.
    \43\ See id.
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    In addition, the Exchange states that to protect investors and 
assure that they are informed about the attributes of a Direct Listing 
with a Capital Raise, the Exchange proposes to impose specific 
requirements on Nasdaq members with respect to a Direct Listing with a 
Capital Raise.\44\ These rules would require members to provide to a 
customer, before that customer places an order to be executed in the 
Nasdaq Halt Cross, a notice describing the mechanics of pricing a 
security subject to a Direct Listing with a Capital Raise in the

[[Page 11783]]

Nasdaq Halt Cross, including information regarding the location of the 
public website where the Exchange would disseminate the Current 
Reference Price.\45\
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    \44\ See id.
    \45\ See id.
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    The Exchange states that to assure that members have the necessary 
information to be provided to their customers, the Exchange proposes to 
distribute, at least one business day prior to the commencement of 
trading of a security listing in connection with a Direct Listing with 
a Capital Raise, an information circular to its members.\46\ This 
information circular would describe any special characteristics of the 
offering and the Exchange's rules that apply to the initial pricing 
through the mechanism outlined in Nasdaq Rule 4120(c)(9)(B) and Nasdaq 
Rule 4753 for the opening auction, including information about the 
notice that members must provide to their customers.\47\ The 
information circular would also describe other requirements that: (a) 
Require members 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; (b) require members in 
recommending transactions for a security subject to a Direct Listing 
with a Capital Raise 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 members, and (ii) the 
customer can evaluate the special characteristics, and is able to bear 
the financial risks, of an investment in such security; and (c) require 
members not to accept market orders to be executed in the Nasdaq Halt 
Cross.\48\ The Exchange states that these member requirements are 
intended to remind members of their obligations to ``know their 
customers,'' increase transparency of the pricing mechanisms of a 
Direct Listing with a Capital Raise, and help assure that investors 
have sufficient price discovery information.\49\
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    \46\ See id. The Exchange states that an information circular is 
an industry-wide, free service provided by the Exchange. See id. at 
1801 n.21.
    \47\ See id. at 1801.
    \48\ See id.; proposed Nasdaq Rule 4120(c)(9)(B)(i).
    \49\ See Amended Notice, supra note 11, 87 FR at 1801.
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    The Exchange represents that in each instance of a Direct Listing 
with a Capital Raise, the Exchange's information circular would inform 
market participants that the auction could price up to 20% below the 
lowest price of the price range and would specify that price. The 
Exchange also represents that it would indicate in such circular 
whether or not there is an upside limit above which the Nasdaq Halt 
Cross could not proceed, based on the company's certification.\50\
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    \50\ See id. The Exchange states that it believes that investors 
have become familiar with the approach of pricing an IPO outside of 
the price range stated in an effective registration statement. See 
id. at 1803.
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    The Exchange states that to assure that the issuer has the ability, 
prior to the completion of the offering, to provide any necessary 
additional disclosures that are dependent on the price of the offering, 
the Exchange proposes to introduce to the operation of the Nasdaq Halt 
Cross a brief Post-Pricing Period, in circumstances where the actual 
price calculated by the Nasdaq Halt Cross is above the price that is 
20% above the highest price of the price range established by the 
issuer in its effective registration statement.\51\ Specifically, in 
such circumstances, the Exchange would initiate a ``Post-Pricing 
Period'' following the calculation of the actual price.\52\ During the 
Post-Pricing Period, the issuer must confirm to the Exchange that no 
additional disclosures are required under the federal securities laws 
based on the actual price calculated by the Nasdaq Halt Cross. Further, 
during this period no additional orders for the security could be 
entered in the Nasdaq Halt Cross, and no existing orders could be 
modified.\53\ The Exchange states that the security would be released 
for trading immediately following the Post-Pricing Period.\54\ However, 
if the Company cannot provide the required confirmation, then the 
Exchange would postpone and reschedule the offering.\55\
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    \51\ See id. at 1801.
    \52\ See id.
    \53\ See id.
    \54\ See id.
    \55\ See id.
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    The Exchange also proposes to clarify several provisions of 
existing Nasdaq Rule 4120(c)(9) without changing them.\56\ 
Specifically, the Exchange proposes to clarify the mechanics of the 
Nasdaq Halt Cross by specifying that the Exchange will initiate a 10-
minute Display Only Period only after the CDL Order has been entered 
and that the Exchange shall select price bands for purposes of applying 
the price validation test in the Nasdaq Halt Cross in connection with a 
Direct Listing with a Capital Raise.\57\ The Exchange proposes to 
clarify that the ``actual price,'' as the term is used in the rule, is 
the Current Reference Price at the time the system applies the price 
validation test.\58\
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    \56\ See Amended Notice, supra note 11, 87 FR at 1802.
    \57\ See id. The Exchange would select an upper price band and a 
lower price band with the default for an upper and lower price band 
set at zero. The Exchange represents that if a security does not 
pass the price validation test, the Exchange may select different 
price bands before recommencing the process to release the security 
for trading. See id.
    \58\ See id.
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    Nasdaq Listing Rule IM-5315-2 provides that in determining whether 
a company listing in connection with a Direct Listing with a Capital 
Raise satisfies the Market Value of Unrestricted Publicly Held Shares 
\59\ for initial listing on the Nasdaq Global Select Market, the 
Exchange will deem such company to have met the applicable requirement 
\60\ if the amount of the company's Unrestricted Publicly Held Shares 
before the offering, along with the market value of the shares to be 
sold by the company in the Exchange's opening auction in the Direct 
Listing with a Capital Raise, is at least $110 million (or $100 
million, if the company has stockholders' equity of at least $110 
million). For this purpose, under current rules, the Market Value of 
Unrestricted Publicly Held Shares will be calculated using a price per 
share equal to the lowest price of the disclosed price range.\61\ The 
Exchange states that because the Exchange proposes to allow the opening 
auction to price up to 20% below the lowest price of the disclosed 
price range, the Exchange proposes to make a conforming change to 
Nasdaq Listing Rule IM-5315-2 to provide that the price used to 
determine such company's compliance with the required Market Value of 
Unrestricted Publicly Held Shares would be the price per share equal to 
the price that is 20% below the lowest price of the disclosed price 
range.\62\ The Exchange further states that this is the minimum price 
at which the company could qualify to be listed.\63\
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    \59\ See Nasdaq Listing Rule 5005(a)(23) and (45) for the 
definitions of ``Market Value'' and ``Unrestricted Publicly Held 
Shares,'' respectively.
    \60\ See Nasdaq Listing Rule 5315(f)(2).
    \61\ See Nasdaq Listing Rule IM-5315-2. The Exchange will 
determine that the company has met the applicable bid price and 
market capitalization requirements based on the same per share 
price. See id.
    \62\ See Amended Notice, supra note 11, 87 FR at 1801.
    \63\ See id.
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    The Exchange states that any company listing in connection with a 
Direct Listing with a Capital Raise would continue to be subject to, 
and required to meet, all other applicable initial listing 
requirements, including the requirements to have the applicable number 
of shareholders and at least

[[Page 11784]]

1,250,000 Unrestricted Publicly Held Shares outstanding at the time of 
initial listing, and the requirement to have a price per share of at 
least $4.00 at the time of initial listing.\64\ The Exchange also 
proposes to amend Nasdaq Listing Rule IM-5315-2 to specify that a 
company offering securities for sale in connection with a Direct 
Listing with a Capital Raise must register securities by specifying the 
quantity of shares registered, as permitted by Securities Act Rule 
457(a), and that securities qualified for listing under Nasdaq Listing 
Rule IM-5315-2 must satisfy the additional requirements of Nasdaq Rule 
4120(c)(9)(B).\65\
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    \64\ See id. at 1801-02 (citing Nasdaq Listing Rules 5315(e)(1) 
and (2) and 5315(f)(1)).
    \65\ See proposed Nasdaq Listing Rule IM-5315-2.
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    Finally, the Exchange has proposed to amend Nasdaq Rules 
4753(a)(3)(A) and 4753(b)(2) to conform the requirements for 
disseminating information and establishing the opening price through 
the Nasdaq Halt Cross in a Direct Listing with a Capital Raise to the 
proposed amendment to allow the opening auction to price as much as 20% 
below the lowest price of the disclosed price range.\66\ Specifically, 
the Exchange proposes changes to Nasdaq Rules 4753(a)(3)(A) and 
4753(b)(2) to make adjustments to the calculation of the Current 
Reference Price, which is disseminated in the Nasdaq Order Imbalance 
Indicator,\67\ and to the calculation of the price at which the Nasdaq 
Halt Cross will execute, for a Direct Listing with a Capital Raise. 
Under these rules currently, where there are multiple prices that would 
satisfy the conditions for determining the price, the fourth tie-
breaker for a Direct Listing with a Capital Raise is the price that is 
closest to the lowest price of the disclosed price range. The Exchange 
states that, to conform these rules to the proposed modification of the 
price range within which the opening auction would proceed, the 
Exchange proposes to modify the fourth tie-breaker for a Direct Listing 
with a Capital Raise to use the price closest to the price that is 20% 
below the lowest price of the disclosed price range.\68\
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    \66\ See proposed Nasdaq Rules 4753(a)(3)(A)(iv)c. and 
4753(b)(2)(D)(iii).
    \67\ See Nasdaq Rule 4753(a)(3) for a description of the ``Order 
Imbalance Indicator.''
    \68\ See Amended Notice, supra note 11, 87 FR at 1802.
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II. Discussion and Commission Findings

    Under Section 19(b)(2)(C) of the Exchange Act,\69\ the Commission 
shall approve a proposed rule change of a self-regulatory organization 
if it finds that such proposed rule change is consistent with the 
requirements of the Exchange Act, and the rules and regulations 
thereunder that are applicable to such organization.\70\ The Commission 
shall disapprove a proposed rule change if it does not make such a 
finding.\71\ The Commission's Rules of Practice, under Rule 700(b)(3), 
state that the ``burden to demonstrate that a proposed rule change is 
consistent with the Exchange Act and the rules and regulations 
thereunder . . . is on the self-regulatory organization that proposed 
the rule change'' and that a ``mere assertion that the proposed rule 
change is consistent with those requirements . . . is not sufficient.'' 
\72\
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    \69\ See 15 U.S.C. 78s(b)(2)(C).
    \70\ See 15 U.S.C. 78s(b)(2)(C)(i).
    \71\ See 15 U.S.C. 78s(b)(2)(C)(ii); and see also 17 CFR 
201.700(b)(3).
    \72\ 17 CFR 201.700(b)(3).
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    The description of a proposed rule change, its purpose and 
operation, its effect, and a legal analysis of its consistency with 
applicable requirements must all be sufficiently detailed and specific 
to support an affirmative Commission finding,\73\ and any failure of 
the self-regulatory organization to provide this information may result 
in the Commission not having a sufficient basis to make an affirmative 
finding that a proposed rule change is consistent with the Exchange Act 
and the applicable rules and regulations.\74\ Moreover, ``unquestioning 
reliance'' on a self-regulatory organization's representations in a 
proposed rule change is not sufficient to justify Commission approval 
of a proposed rule change.\75\
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    \73\ See id.
    \74\ See id.
    \75\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).
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    For the reasons discussed below, the Commission is disapproving the 
proposed rule change because the information before the Commission is 
insufficient to support a finding that the proposed rule change is 
consistent with the requirements of the Exchange Act and the rules and 
regulations thereunder applicable to a national securities exchange. 
Specifically, the Commission concludes that the Exchange has not met 
its burden to demonstrate that the proposed rule change is consistent 
with Section 6(b)(5) of the Exchange Act, and in particular the 
requirements that a national securities exchange's rules be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, and to protect investors and the 
public interest.
    The Commission has consistently recognized the importance 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.\76\
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    \76\ 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., 2021 Order, supra note 13, 86 FR at 28172 
n.47; Securities Exchange Act Release Nos. 90768 (December 22, 
2020), 85 FR 85807, 85811 n.55 (December 29, 2020) (SR-NYSE-2019-67) 
(``NYSE 2020 Order''); 82627 (February 2, 2018), 83 FR 5650, 5653 
n.53 (February 8, 2018) (SR-NYSE-2017-30) (``NYSE 2018 Order''); 
81856 (October 11, 2017), 82 FR 48296, 48298 (October 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., 2021 Order, supra note 13, 86 FR at 28172 n.47; NYSE 2020 
Order, 85 FR at 85811 n.55; NYSE 2018 Order, 83 FR at 5653 n.53; 
Securities Exchange Act Release Nos. 87648 (December 3, 2019), 84 FR 
67308, 67314 n.42 (December 9, 2019) (SR-NASDAQ-2019-059); 88716 
(April 21, 2020), 85 FR 23393, 23395 n.22 (April 27, 2020) (SR-
NASDAQ-2020-001).
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    The Exchange proposes to modify its rules concerning pricing 
restrictions for the opening auction on the first day of trading for a 
Direct Listing with a Capital Raise. Instead of imposing the Pricing 
Range Limitation, which limits the price of the opening transaction to 
the price range disclosed in the issuer's effective registration 
statement, the proposal would allow the opening auction to proceed at a 
price up to 20% above or below the disclosed price range, or at a price 
more than 20% above the disclosed price range if certain additional 
conditions are met.
    The Exchange states that it believes that its proposal to modify 
the Pricing Range Limitation is consistent with the protection of 
investors and argues that the proposal is similar to the pricing 
flexibility that is permitted for a firm commitment underwritten 
IPO.\77\ However, in the context of a firm

[[Page 11785]]

commitment underwritten IPO, the IPO price is determined prior to the 
time of sale to the underwriters and initial investors, which takes 
place in advance of the opening transaction on the Exchange. 
Accordingly, issuers and underwriters have the ability to provide 
investors with any necessary additional disclosures prior to completing 
the offering, including those that are dependent on the price of the 
offering, and to delay the offering if necessary to provide any such 
disclosures. In contrast, in the context of a Direct Listing with a 
Capital Raise, the IPO price is the opening auction price on the 
Exchange, so that the IPO price and proceeds to the issuer are not 
known by the issuer and market participants until the securities are 
sold to investors in the opening transaction on the Exchange. The 
Exchange's current rules for a Direct Listing with a Capital Raise 
require it to postpone and reschedule the offering if the opening 
auction price does not fall within the disclosed price range, so that 
issuers are able to update any disclosures if necessary before 
proceeding with an offering outside of the disclosed price range. 
However, as discussed below, the Exchange's proposal to expand Direct 
Listings with a Capital Raise would not ensure, in all cases, that 
issuers conducting a Direct Listing with a Capital Raise would have an 
opportunity to convey additional material information to investors, if 
needed, prior to the time of sale.
---------------------------------------------------------------------------

    \77\ See Amended Notice, supra note 11, 87 FR at 1802.
---------------------------------------------------------------------------

    As discussed above, in cases where the opening auction price will 
be more than 20% above the high end of the disclosed price range, an 
issuer would have to have previously certified to the Exchange and 
publicly disclosed, prior to the beginning of the Display Only 
Period,\78\ that it does not expect such price to materially change the 
issuer's previous disclosure in its effective registration statement. 
In such cases, when the opening auction price will be more than 20% 
above the high end of the disclosed price range, the issuer would then 
need to confirm to the Exchange again, during the Post-Pricing Period, 
that no additional disclosures are required under the federal 
securities laws based on the actual price calculated in the auction. If 
the issuer could not provide the required confirmation, the Exchange 
would postpone and reschedule the offering.
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    \78\ Starting at the beginning of the Display Only Period, the 
Exchange would begin disseminating the Order Imbalance Indicator, 
which includes the Current Reference Price and other order 
information, every second. See proposed Nasdaq Rule 
4120(c)(9)(B)(iv).
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    However, the Exchange does not propose to apply these additional 
protections to a Direct Listing with a Capital Raise where the opening 
auction price will be outside of the disclosed price range, but up to 
20% above the high end or 20% below the low end of such disclosed price 
range. In these cases, the Exchange has not proposed any mechanism by 
which an issuer or the Exchange could postpone or reschedule the 
offering, even if the disclosures included in the registration 
statement are not based on an opening auction price that is outside the 
disclosed price range.\79\ The Exchange argues that under its proposal 
an issuer in a Direct Listing with a Capital Raise would have the same 
ability as an issuer in a firm commitment underwritten IPO to delay an 
offering at any time.\80\ Under Nasdaq's proposal, however, should 
concerns arise relating to the adequacy of the disclosure for an 
offering that prices within 20% of the disclosed price range, the 
Nasdaq procedures would not give the issuer the option to halt or delay 
the offering once the issuer submits its order. If the opening auction 
price would be up to 20% above the high end or 20% below the low end of 
the disclosed price range and the conditions in proposed Nasdaq Rule 
4120(c)(9)(B)(vii)(a) and (b) and the Price Volatility Constraint are 
met, the opening auction would proceed.\81\ Accordingly, the Commission 
does not believe that the proposal adequately addresses how an issuer 
would be able to disclose any additional material information related 
to the final offering price prior to the time of sale in a Direct 
Listing with a Capital Raise where the actual price calculated in the 
opening auction is higher or lower than, but no more than 20% outside 
of, the disclosed price range.\82\ In these cases, the inability of an 
issuer to provide potentially material disclosures to investors in a 
timely manner prior to the sale of securities continues to raise 
investor protection concerns under Section 6(b)(5) of the Exchange 
Act.\83\ Therefore, the Exchange has not met its burden to demonstrate 
that its proposal is consistent with the Exchange Act.
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    \79\ Registration statements for initial public offerings 
typically provide disclosure based on an assumed offering price 
equal to the mid-point of the disclosed price range. They may or may 
not contain additional information explaining how the disclosure 
would change, including how the issuer's plans and financial 
condition would be affected, given specified changes in the assumed 
offering price. Moreover, the proposed Nasdaq rule would impose no 
such obligation on offerings that price up to 20% above the high end 
or 20% below the low end of the disclosed price range. As a result, 
if the opening auction price is substantially below the low end of 
the disclosed price range, depending on what information the issuer 
had provided prior to effectiveness of the registration statement, 
the issuer may need to provide additional disclosure relating to, 
among other things, changes in the planned use of offering proceeds, 
liquidity, or material risk factors.
    \80\ See Letter from Nikolai Utochkin, Counsel, Listing and 
Governance, Nasdaq (December 21, 2021), at 8 (``Nasdaq Letter'').
    \81\ See proposed Nasdaq Rule 4120(c)(9)(B)(viii) (stating ``. . 
. Nasdaq shall postpone and reschedule the pricing of the security 
only if the conditions in paragraphs (vii) a. and b., above, are not 
met.'').
    \82\ One commenter opposing the proposal raises concerns about 
the potential absence of material information concerning the final 
offering price prior to the time of the sale of shares in a Direct 
Listing with a Capital Raise. See Letter from Jeffrey P. Mahoney, 
General Counsel, Council of Institutional Investors (October 21, 
2021), at 2 (``CII Letter''). This commenter states that its 
sensitivity to this lack of disclosure in the Exchange proposal is 
heightened by its broader concerns about the loss of investor 
protections relating to direct listings generally, including the 
difficulties of investors in bringing claims under Section 11 of the 
Securities Act for material misstatements or omissions in direct 
listing registration statements. The commenter argues that investors 
in direct listings, including Direct Listings with a Capital Raise, 
are likely to continue to have ``fewer legal rights than investors 
in a traditional initial public offering.'' See id. at 4. The 
Exchange has not responded to this commenter's concerns, including 
the concern relating to ``tracing'' share purchases for purposes of 
Section 11 claims, in its proposal.
    \83\ See OIP, supra note 8.
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    Similarly, in cases where the opening auction price will be more 
than 20% above the high end of the disclosed price range, the issuer 
would have to have included in its registration statement a sensitivity 
analysis explaining how the issuer's plans would change if the actual 
proceeds from the offering exceeded the amount assumed in the disclosed 
price range. The Exchange states that requiring this sensitivity 
analysis is designed to protect investors because it allows investors 
to see how changes in the share price ripple through critical elements 
of the companies' disclosure.\84\ However, this sensitivity analysis is 
not required under the Exchange's proposal in cases where the actual 
price calculated in the opening auction for a Direct Listing with a 
Capital Raise is higher or lower than, but no more than 20% outside of, 
the disclosed price range. This could result in an offering proceeding 
without investors having the opportunity to receive additional material 
information, such as a sensitivity analysis, in these cases. As noted 
above, the Commission believes this could raise investor protection 
concerns under Section 6(b)(5) of the Exchange Act.
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    \84\ See Nasdaq Letter, at 3. See also id. at 7-8 (describing 
the requirements that would apply to an offering that prices more 
than 20% above the high end of the disclosed price range).
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    In addition, the Exchange proposes to establish a Price Volatility 
Constraint, which would require that the Current

[[Page 11786]]

Reference Price not deviate by 10% or more from any Current Reference 
Price in the previous 10 minutes, as a condition to the opening auction 
in a Direct Listing with a Capital Raise.\85\ Specifically, the 
Exchange's proposal provides that ``[t]he Pre-Launch Period shall 
continue until the Price Volatility Constraint is satisfied.'' \86\ The 
Exchange also proposes to disseminate information about whether the 
Price Volatility Constraint has been satisfied, which, according to the 
Exchange, ``will indicate whether the security is ready to trade,'' and 
``will provide investors with notice that the Cross nears execution.'' 
\87\ Once the Price Volatility Constraint is satisfied, however, there 
are additional conditions that must be met before the opening cross 
will occur and in the intervening period the expected opening auction 
price may change because orders can continue to be entered and 
cancelled.\88\ Specifically, the Exchange, in consultation with the 
financial advisor to the issuer, must make the determination that the 
security is ready to trade, and several additional conditions specified 
in proposed Nasdaq Rule 4120(c)(9)(B)(vii) and (viii) must be met, 
including the potential initiation and conclusion of a Post-Pricing 
Period.\89\ Thus, it would appear that there could be a substantial 
price change during the period of time between the Exchange's 
dissemination of the fact that the Price Volatility Constraint has been 
satisfied and the actual execution of the opening cross for a Direct 
Listing with a Capital Raise. In such event, investors could be misled 
that the opening cross ``nears execution'' and that the disseminated 
Current Reference Price will likely be close to the opening auction 
price when, in fact, the auction may not occur for a considerable time 
and the opening auction price may differ substantially. The Exchange 
has not addressed this potential discrepancy between the stated purpose 
of the proposed dissemination of the Price Volatility Constraint, and 
its potential application in practice, or explained how this result 
would be consistent with the protection of investors, the public 
interest, or the other requirements of Section 6(b)(5) of the Exchange 
Act.
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    \85\ See supra notes 37-39 and accompanying text.
    \86\ Proposed Nasdaq Rule 4120(c)(9)(B)(vii).
    \87\ Amended Notice, supra note 11, 87 FR at 1800-01. See 
proposed Nasdaq Rule 4120(c)(9)(B)(v) stating that the Price 
Volatility Constraint ``indicates that the security may be ready to 
trade.'' See also Nasdaq Letter, at 7 (``Then, Nasdaq will publicly 
indicate when the Price Volatility Constraint has been met, thus 
providing investors with real time information that the price 
discovery process nears completion and the security is ready to 
trade shortly.'')
    \88\ The Exchange's proposal states that investors could enter 
additional orders or cancel existing orders throughout the pre-
opening process until the actual opening auction price is 
calculated; therefore, the Current Reference Price may change 
throughout this time period. See proposed Nasdaq Rule 
4120(c)(9)(B)(v) and (viii)(b).
    \89\ These conditions also include a determination that the 
issuer's CDL Order will be executed in full in the Nasdaq Halt 
Cross, a price validation test, and satisfaction of the pricing 
conditions. See proposed Nasdaq Rule 4120(c)(9)(B)(vii).
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    As stated above, under the Commission's Rules of Practice, the 
``burden to demonstrate that a proposed rule change is consistent with 
the Exchange Act and the rules and regulations issued thereunder . . . 
is on the self-regulatory organization that proposed the rule 
change.\90\ For the foregoing reasons, the Exchange has not met its 
burden to demonstrate that its proposal is consistent with the Exchange 
Act. In particular, the Exchange has not adequately demonstrated that 
its proposal to allow a Direct Listing with a Capital Raise to proceed 
at an opening auction price that falls outside of the disclosed price 
range is consistent with investor protection, the public interest, and 
other relevant provisions of Section 6(b)(5) of the Exchange Act. \91\ 
Accordingly, for the reasons set forth above, the Commission must 
disapprove the proposed rule change, as modified by Amendment No. 2, 
because the Exchange has not met its burden to demonstrate that the 
proposal is consistent with Section 6(b)(5) of the Exchange Act.\92\
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    \90\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \91\ 15 U.S.C. 78f(b)(5).
    \92\ In disapproving the proposed rule change, the Commission 
has considered its impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f). According to the Exchange, the 
proposal would give issuers additional flexibility in becoming a 
public company, and in that way promote competition among service 
providers, such as underwriters and other advisers, to such 
companies. See Amended Notice, supra note 11, 87 FR at 1804. One 
commenter expresses its belief that the ability for companies to 
raise primary capital in a direct listing provides companies with 
additional choice and flexibility as they consider alternatives to 
going public and, therefore, helps facilitate capital formation. See 
Letter from Evan Damast, Global Head of Equity and Fixed Income 
Syndicate, Morgan Stanley (July 21, 2021); Letter from Evan Damast, 
Global Head of Equity and Fixed Income Syndicate, Morgan Stanley 
(February 1, 2022). Another commenter states that adding a primary 
capital raise to a direct listing would advance the efficiency and 
openness of the U.S. capital markets and solve a conflict of 
interest problem. See Letter from Bill Gurley, General Partner, 
Benchmark (February 2, 2022). See also Letter from Ran D. Ben-Tzur 
and Jennifer J. Hitchcock, Fenwick & West LLP (February 1, 2022) 
(stating that the proposal would mitigate issuers' reluctance to use 
a Direct Listing with a Capital Raise because traditional IPOs are 
not subject to similar price range limitations); Letter from Barry 
McCarthy (February 1, 2022) (stating that Direct Listings with a 
Capital Raise are the next logical evolution of a direct listing, 
but will not work with the current price range constraints). Another 
commenter states that it believes the proposal would stimulate a 
vibrant ecosystem of data and analytics and fintech companies to 
further refine IPO pricing accuracy and broaden investor 
participation, thus improving capital intermediation for U.S. 
markets. See Letter from Burke Dempsey, EVP Head of Investment 
Banking, Wedbush Securities Inc. (August 9, 2021). For the reasons 
discussed throughout, however, the Commission is disapproving the 
proposed rule change because it does not find that the proposed rule 
change is consistent with the Exchange Act.
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III. Conclusion

    The Commission does not find, pursuant to Section 19(b)(2) of the 
Exchange Act,\93\ that the proposed rule change is consistent with the 
Exchange Act and the rules and regulations thereunder applicable to a 
national securities exchange, and, in particular, with Section 6(b)(5) 
of the Exchange Act.
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    \93\ 15 U.S.C. 78s(b)(2).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act, that the proposed rule change (SR-NASDAQ-2021-045), as 
modified by Amendment No. 2, be, and hereby is, Disapproved.
    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\94\
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    \94\ 17 CFR 200.30-3(a)(12).

Eduardo Aleman,
Assistant Secretary.
[FR Doc. 2022-04336 Filed 3-1-22; 8:45 am]
BILLING CODE 8011-01-P