Document ID: SEC-2020-2105-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: New York Stock Exchange LLC
Posted Date: 2020-12-29T05:00Z

[Federal Register Volume 85, Number 249 (Tuesday, December 29, 2020)]
[Notices]
[Pages 85807-85817]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28709]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90768; File No. SR-NYSE-2019-67]

Self-Regulatory Organizations; New York Stock Exchange LLC; 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

December 22, 2020.

I. Introduction

    On December 11, 2019, New York Stock Exchange LLC (``NYSE'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``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 amend Chapter One of the 
Listed Company Manual (``Manual'') to modify the provisions relating to 
direct listings.\3\ Pursuant to the proposal, NYSE would allow an 
issuer, at the time of an initial listing on the Exchange, to conduct a 
primary offering as part of a direct listing without conducting a firm 
commitment underwritten offering.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On December 13, 2019, the Exchange filed Amendment No. 1 to 
the proposed rule change, which amended and replaced the proposed 
rule change in its entirety. The proposed rule change, as modified 
by Amendment No. 1, was published for comment in the Federal 
Register on December 30, 2019. See Exchange Act Release No. 87821 
(Dec. 20, 2019), 84 FR 72065. On February 13, 2020, pursuant to 
Section 19(b)(2) of the Exchange Act, 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. See Exchange Act Release No. 88190, 85 FR 9891 (Feb. 20, 
2020). On March 26, 2020, the Commission instituted proceedings to 
determine whether to approve or disapprove the proposed rule change, 
as modified by Amendment No. 1. See Exchange Act Release No. 88485, 
85 FR 18292 (Apr. 1, 2020) (``OIP''). On June 22, 2020, the Exchange 
filed Amendment No. 2 to the proposed rule change, which superseded 
the proposed rule change as modified by Amendment No. 1 (``Amendment 
No. 2''). On June 24, 2020, the Commission extended the time period 
for approving or disapproving the proposal to August 26, 2020. See 
Exchange Act Release No. 89147, 85 FR 39226 (June 30, 2020). The 
proposed rule change, as modified by Amendment No. 2, was published 
for comment in the Federal Register on June 30, 2020. See Exchange 
Act Release No. 89148 (June 24, 2020), 85 FR 39246 (``Notice'').
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    On August 26, 2020, the Commission, acting through authority 
delegated to the Division of Trading and Markets (``Division''),\4\ 
approved the proposed rule change, as modified by Amendment No. 2 
(``Approval Order'').\5\ On September 8, 2020, the Council of 
Institutional Investors (``CII'' or ``Petitioner'') filed a petition 
for review of the Approval Order (``Petition for Review''). Pursuant to 
Commission Rule of Practice 431(e), the Approval Order was stayed by 
the filing with the Commission of a notice of intention to petition for 
review.\6\ On September 25, 2020, the Commission issued a scheduling 
order, pursuant to Commission Rule of Practice 431, granting the 
Petition for Review of the Approval Order and providing until October 
16, 2020, for any party or other person to file a written statement in 
support of, or in opposition to, the Approval Order.\7\ On October 16, 
2020, NYSE submitted a written statement in support of the Approval 
Order.\8\
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    \4\ 17 CFR 200.30-3(a)(12).
    \5\ See Exchange Act Release No. 89684, 85 FR 54454 (Sept. 1, 
2020).
    \6\ 17 CFR 201.431(e). See Letter to John Carey, Senior 
Director, NYSE Group Inc. (Aug. 31, 2020) (providing notice of 
receipt of notice of intention for review of delegated action and 
stay of order), available at https://www.sec.gov/rules/sro/nyse/2020/34-89684-carey-letter.pdf. On September 4, 2020, NYSE filed a 
motion for the Commission to lift the automatic stay of the Approval 
Order and a brief in support of its motion to lift the stay. On 
September 8, 2020, CII filed a brief in opposition to NYSE's motion 
to lift the automatic stay. On September 11, 2020, NYSE filed a 
reply brief in support of its motion to lift the stay.
    \7\ See Exchange Act Release No. 90001, 85 FR 61793 (Sept. 30, 
2020). In the scheduling order, the Commission also denied NYSE's 
motion to lift the automatic stay of the Approval Order and ordered 
that the proposed rule change, as modified by Amendment No. 2, 
remain stayed.
    \8\ See The New York Stock Exchange LLC's Statement in Support 
of Order Approving Proposed Rule Change (Oct. 16, 2020) (``NYSE 
Statement'').
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    The Commission has conducted a de novo review of NYSE's proposal, 
giving careful consideration to the entire record--including NYSE's 
amended proposal, the Petition for Review, and all comments and 
statements submitted--to determine whether the proposal is consistent 
with the Exchange Act and the rules and regulations issued thereunder. 
Under Section 19b(2)(C) of the Exchange Act, the Commission must 
approve the proposed rule change of a self-regulatory organization 
(``SRO'') if the Commission finds that the proposed rule change is 
consistent with the Exchange Act and the applicable rules and 
regulations thereunder; if it does not make such a finding, the 
Commission must disapprove the proposed rule change.\9\ Additionally, 
under Rule 700(b)(3) of 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.'' 
\10\ Further, ``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.'' \11\ Finally, ``[a]ny 
failure of the self-regulatory organization to provide the information 
elicited by Form 19b-4 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 rules and 
regulations issued thereunder that are applicable to the self-
regulatory organization.'' \12\
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    \9\ 15 U.S.C. 78s(b)(2)(C).
    \10\ 17 CFR 201.700(b)(3).
    \11\ Id.
    \12\ Id.
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    For the reasons discussed herein, the Commission has determined 
that NYSE has met its burden to show that the proposed rule change is 
consistent with the Exchange Act. We thus set aside the Approval Order 
and approve NYSE's proposed rule change, as amended. Section 6(b)(5) of 
the Exchange Act requires that the rules of a national securities 
exchange be designed to

[[Page 85808]]

prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, 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, or to regulate by virtue of any authority conferred by the 
Exchange Act matters not related to the purposes of the Exchange Act or 
the administration of an exchange.\13\
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    \13\ 15 U.S.C. 78f(b)(5).
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    The record supports a finding that NYSE's proposal is consistent 
with these requirements. In particular, based on that record, the 
Commission concludes that, consistent with Section 6(b)(5) of the 
Exchange Act, NYSE's proposal will prevent fraudulent and manipulative 
acts and practices, 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, in general, will protect 
investors and the public interest; and will not permit unfair 
discrimination between customers, issuers, brokers, or dealers, and is 
not designed to regulate by virtue of the Exchange Act matters not 
related to the purposes of the Exchange Act or the administration of an 
exchange.

II. Description of the Proposal

    In an initial public offering (``IPO'') underwritten on a firm 
commitment basis, an underwriter or group of underwriters enter into an 
underwriting agreement with the issuer in which they commit to take and 
pay for a specified amount of shares at a set price. The underwriters' 
purchase price reflects a discount, or spread, to the public offering 
price, which is negotiated between the issuer and the underwriters. The 
underwriters purchase the securities at the agreed upon discount and 
then resell the securities to the initial investors at the public 
offering price prior to the opening of trading. The underwriters and 
the issuer generally determine the public offering price and the 
discount based on indications for interest from prospective initial 
purchasers, which typically are, in large part, institutional investors 
with ongoing relationships with the underwriters. When the securities 
begin trading on an exchange, the opening price is determined based on 
orders to buy and sell the securities and may vary significantly from 
the initial public offering price. In a direct listing, in contrast, 
there is no initial sale to an underwriter or pre-opening sale by the 
underwriter to the initial purchasers. Instead, initial sales are 
conducted through the exchange, with the prices determined based on 
matching buy and sell orders and in accordance with applicable listing 
rules.
    Section 102.01B, Footnote (E) of the Manual states that the 
Exchange generally expects to list companies in connection with a firm 
commitment underwritten IPO, upon transfer from another market, or 
pursuant to a spin-off, but also allows for the possibility of using a 
direct listing, as described below.\14\ Currently, Footnote (E) states 
that the Exchange recognizes that companies that have not previously 
had their common equity securities registered under the Exchange Act, 
but that have sold common equity securities in a private placement, may 
wish to list their common equity securities on the Exchange at the time 
of effectiveness of a registration statement \15\ filed solely for the 
purpose of allowing existing shareholders to sell their shares.\16\ The 
Exchange has proposed to define this type of direct listing already 
permitted by the Exchange's rules as a ``Selling Shareholder Direct 
Floor Listing.'' \17\ The Exchange has proposed to recognize an 
additional type of direct listing in which a company that has not 
previously had its common equity securities registered under the 
Exchange Act would list its common equity securities on the Exchange at 
the time of effectiveness of a registration statement pursuant to which 
the company itself would sell shares in the opening auction on the 
first day of trading on the Exchange in addition to, or instead of, 
facilitating sales by selling shareholders (a ``Primary Direct Floor 
Listing'').\18\ Under the proposal, the Exchange would, on a case-by-
case basis, exercise discretion to list companies through a Selling 
Shareholder Direct Floor Listing or a Primary Direct Floor Listing.\19\
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    \14\ See Section 102.01B, Footnote (E) of the Manual.
    \15\ The reference to a registration statement refers to an 
effective registration statement filed pursuant to the Securities 
Act of 1933 (``Securities Act'').
    \16\ See Section 102.01B, Footnote (E) of the Manual. See also 
Exchange Act Release No. 82627 (Feb. 2, 2018), 83 FR 5650 (Feb. 8, 
2018) (SR-NYSE-2017-30) (``NYSE 2018 Order'') (approving proposed 
rule change to amend Section 102.01B of the Manual to modify the 
provisions relating to the qualifications of companies listing 
without a prior Exchange Act registration in connection with an 
underwritten IPO and amend the Exchange's rules to address the 
opening procedures on the first day of trading for such securities).
    \17\ See proposed Section 102.01B, Footnote (E) of the Manual. 
Under the proposal, the Exchange would specify that such company may 
have previously sold common equity securities in ``one or more'' 
private placements. The Exchange also has proposed to move the 
description of this type of direct listing as involving a company 
``where such company is listing without a related underwritten 
offering upon effectiveness of a registration statement registering 
only the resale of shares sold by the company in earlier private 
placements'' so that this description appears in conjunction with 
the definition of ``Selling Shareholder Direct Floor Listing.'' See 
id.
    \18\ See proposed Section 102.01B, Footnote (E) of the Manual. A 
Primary Direct Floor Listing would include any such listing in which 
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 id.
    \19\ See proposed Section 102.01B, Footnote (E) of the Manual.
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    With respect to a Selling Shareholder Direct Floor Listing, the 
Exchange proposal retains the existing standards regarding how the 
Exchange will determine whether a company has met its market value of 
publicly-held shares listing requirement. The Exchange will continue to 
determine that such company has met the $100 million aggregate market 
value of publicly-held shares requirement based on a combination of 
both (i) an independent third-party valuation (``Valuation'') of the 
company; and (ii) the most recent trading price for the company's 
common stock in a trading system for unregistered securities operated 
by a national securities exchange or a registered broker-dealer 
(``Private Placement Market'').\20\ Alternatively, in the absence of 
any recent trading in a Private Placement Market, the Exchange will 
determine that such company has met its market value of publicly-held 
shares requirement if the company provides a Valuation evidencing a 
market value of publicly-held shares of at least $250 million.\21\
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    \20\ See proposed Section 102.01B, Footnote (E) of the Manual. 
The Exchange will attribute a market value of publicly-held shares 
to the company equal to the lesser of: (i) The value calculable 
based on the Valuation; and (ii) the value calculable based on the 
most recent trading price in a Private Placement Market. See Section 
102.01B, Footnote (E) of the Manual. For specific requirements 
regarding the Valuation and the independence of the valuation agent 
conducting such Valuation, see Section 102.01B, Footnote (E) of the 
Manual. Section 102.01B, Footnote (E) of the Manual also sets forth 
specific factors for relying on a Private Placement Market price. 
Generally, the Exchange will only rely on a Private Placement Market 
price if it is consistent with a sustained history over a several 
month period prior to listing evidencing a market value in excess of 
the Exchange's market value requirement.
    \21\ See Section 102.01B, Footnote (E) of the Manual. Shares 
held by directors, officers, or their immediate families and other 
concentrated holdings of 10 percent or more are excluded in 
calculating the number of publicly-held shares. See Section 102.01A, 
Footnote (B) of the Manual.

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[[Page 85809]]

    With respect to a Primary Direct Floor Listing, the Exchange has 
proposed that it will deem a company to have met the applicable 
aggregate market value of publicly-held shares requirement if the 
company will sell at least $100 million in market value of the shares 
in the Exchange's opening auction on the first day of trading on the 
Exchange.\22\ Alternatively, 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 million, 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 million, with such market value calculated using a price per 
share equal to the lowest price of the price range established by the 
issuer in its registration statement.\23\
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    \22\ See proposed Section 102.01B, Footnote (E) of the Manual.
    \23\ See proposed Section 102.01B, Footnote (E) of the Manual. 
The Exchange states that, for example, if the company is selling 
five million shares in the opening auction, there are 45 million 
publicly-held shares issued and outstanding immediately prior to 
listing, and the lowest price of the price range disclosed in the 
company's registration statement is $10 per share, then the Exchange 
will attribute to the company a market value of publicly-held shares 
of $500 million. See Notice, 85 FR at 39247.
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    According to the Exchange, a company may list on the Exchange in 
connection with a traditional IPO with a market value of publicly-held 
shares of $40 million and, in the Exchange's experience in listing 
IPOs, a liquid trading market develops after listing for issuers with a 
much smaller value of publicly-held shares than the Exchange 
anticipates would exist after the opening auction in a Primary Direct 
Floor Listing under the proposed market value of publicly-held shares 
requirements.\24\ Consequently, the Exchange believes that these 
requirements would provide that any company conducting a Primary Direct 
Floor Listing would be of a suitable size for Exchange listing and that 
there would be sufficient liquidity for the security to be suitable for 
auction market trading.\25\ The Exchange also states that, with the 
exception of the proposed requirement for Primary Direct Floor 
Listings, shares held by officers, directors, or owners of more than 
10% of the company stock are not included in calculations of publicly-
held shares for purposes of Exchange listing rules.\26\ The Exchange 
states that such investors may acquire in secondary market trades 
shares sold by the issuer in a Primary Direct Floor Listing that were 
included when calculating whether the issuer meets the market value of 
publicly-held shares initial listing requirement.\27\ The Exchange 
further states that it believes that because of the enhanced publicly-
held shares requirement for listing in connection with a Primary Direct 
Floor Listing, which is much higher than the Exchange's $40 million 
requirement for a traditional underwritten IPO, and the neutral nature 
of the opening auction process, companies using a Primary Direct Floor 
Listing would have an adequate public float and liquid trading market 
after completion of the opening auction.\28\
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    \24\ See Notice, 85 FR at 39250.
    \25\ See Notice, 85 FR at 39250.
    \26\ See Notice, 85 FR at 39247. The Exchange states that these 
types of inside investors may purchase shares sold by the company in 
the opening auction, and purchase shares sold by other shareholders 
or sell their own shares in the opening auction and in trading after 
the opening auction, to the extent not inconsistent with general 
anti-manipulation provisions, Regulation M, and other applicable 
securities laws. See id.
    \27\ See Notice, 85 FR at 39247.
    \28\ See Notice, 85 FR at 39247.
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    The Exchange states that any company listing in connection with a 
Primary Direct Floor Listing or a Selling Shareholder Direct Floor 
Listing would continue to be subject to and need to meet all other 
applicable initial listing requirements. According to the Exchange, 
this would include the requirements of Section 102.01A of the Manual to 
have 400 round lot shareholders and 1.1 million publicly-held shares 
outstanding at the time of initial listing, and the requirement of 
Section 102.01B of the Manual to have a price per share of at least 
$4.00 at the time of initial listing.\29\
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    \29\ See Notice, 85 FR at 39247.
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    The Exchange has proposed a new order type to be used by the issuer 
in a Primary Direct Floor Listing and rules regarding how that new 
order type would participate in a Direct Listing Auction.\30\ 
Specifically, the Exchange has proposed to introduce an Issuer Direct 
Offering Order (``IDO Order''), which would be a Limit Order to sell 
that is to be traded only in a Direct Listing Auction for a Primary 
Direct Floor Listing.\31\ The IDO Order would have the following 
requirements: (1) Only one IDO Order may be entered on behalf of the 
issuer and only by one member organization; (2) 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 (the 
price range is defined as the ``Primary Direct Floor Listing Auction 
Price Range''); (3) the IDO Order must be for the quantity of shares 
offered by the issuer, as disclosed in the prospectus in the effective 
registration statement; (4) the IDO Order may not be cancelled or 
modified; and (5) the IDO Order must be executed in full in the Direct 
Listing Auction.\32\ Consistent with current rules, a Designated Market 
Maker (``DMM'') would effectuate a Direct Listing Auction manually, and 
the DMM would be responsible for determining the Auction Price.\33\ 
Under the proposal, the DMM would not conduct a Direct Listing Auction 
for a Primary Direct Floor Listing if (1) the Auction Price would be 
below the lowest price or above the highest price of the Primary Direct 
Floor Listing Auction Price Range; or (2) there is insufficient buy 
interest to satisfy both the IDO Order and all better-priced sell 
orders in full.\34\ The Exchange states that if there is insufficient 
buy interest and the DMM cannot price the Auction and satisfy the IDO 
Order as required, the Direct Auction would not proceed and such 
security would not begin trading.\35\ The Exchange represents that, if 
a Direct Listing Auction cannot be conducted, the Exchange would notify 
market participants via a Trader Update that the Primary Direct Floor 
Listing has been cancelled and any orders for that

[[Page 85810]]

security that had been entered on the Exchange, including the IDO 
Order, would be cancelled back to the entering firms.\36\
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    \30\ Under current Rule 1.1(f), the term ``Direct Listing'' 
means ``a security that is listed under Footnote (E) to Section 
102.01B of the Listed Company Manual.'' The Exchange has proposed to 
modify this definition to specify that the term ``Direct Listing'' 
may refer to either a Selling Shareholder Direct Floor Listing or a 
Primary Direct Floor Listing. See proposed Rule 1.1(f). See also 
Rule 7.35(a)(1) for the definition of ``Auction'' and Rule 
7.35(a)(1)(E) for the definition of ``Direct Listing Auction.''
    \31\ See proposed Rule 7.31(c)(1)(D). See also Rule 7.31(a)(2) 
for the definition of ``Limit Order.''
    \32\ See proposed Rule 7.31(c)(1)(D)(i)-(v).
    \33\ ``Auction Price'' is defined as the price at which an 
Auction is conducted. See Rule 7.35(a)(5). The Exchange states that 
because an IDO Order would not be entered by the DMM, the Exchange 
has proposed to include IDO Orders among the types of Auction-Only 
Orders that are not available to DMMs. See Notice, 85 FR at 39248, 
n.21. See also proposed Rule 7.31(c). An ``Auction-Only Order'' is a 
Limit or Market Order that is to be traded only in an auction 
pursuant to the Rule 7.35 Series (for Auction-Eligible Securities) 
or routed pursuant to Rule 7.34 (for UTP Securities). See Rule 
7.31(c). See also Rule 7.31(a)(1) for the definition of ``Market 
Order.''
    \34\ See proposed Rule 7.35A(g)(2). A buy (sell) order is 
``better-priced'' if it is priced higher (lower) than the Auction 
Price, and this includes all sell Market Orders and Market-on-Open 
Orders. See Rule 7.35(a)(5)(A). See also Rule 7.31(c)(1)(B) for the 
definition of ``Market-on-Open Order.'' A buy (sell) order is ``at-
priced'' if it is priced equal to the Auction Price. See Rule 
7.35(a)(5)(B).
    \35\ See Notice, 85 FR at 39249.
    \36\ See Notice, 85 FR at 39249.
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    Currently, Rule 7.35A(h) generally provides that, once an Auction 
Price has been determined, better-priced orders are guaranteed to 
participate in the Auction at the Auction Price, whereas at-priced 
orders are not guaranteed to participate and will be allocated 
according to specified priority rules.\37\ The Exchange has proposed 
that an IDO Order would be guaranteed to participate in the Direct 
Listing Auction at the Auction Price.\38\ If the limit price of the IDO 
Order is equal to the Auction Price, the IDO Order would have priority 
at that price.\39\ The Exchange states that providing priority to an 
at-priced IDO Order would increase the potential for the IDO Order to 
be executed in full, and therefore for the Primary Direct Floor Listing 
to proceed.\40\
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    \37\ See Rule 7.35A(h)(1) and (2).
    \38\ See proposed Rule 7.35A(h)(4).
    \39\ See proposed Rule 7.35A(h)(4).
    \40\ See Notice, 85 FR at 39249.
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    In addition, the Exchange has proposed to specify that two existing 
provisions would apply in the case of a Selling Shareholder Direct 
Floor Listing only. Currently, a DMM will publish a pre-opening 
indication if the Auction Price is anticipated to be a change of more 
than the Applicable Price Range \41\ from a specified Indication 
Reference Price.\42\ Under the proposal, the Indication Reference Price 
for a security that is a Selling Shareholder Direct Floor Listing that 
has had recent sustained trading in a Private Placement Market prior to 
listing would be the most recent transaction price in that market or, 
if none, would be a price determined by the Exchange in consultation 
with a financial advisor to the issuer of such security.\43\ Further, 
when facilitating the opening on the first day of trading of a Selling 
Shareholder Direct Floor Listing that has not had a recent sustained 
history of trading in a Private Placement Market prior to listing, the 
DMM would consult with a financial advisor to the issuer of such 
security in order to effect a fair and orderly opening of such 
security.\44\ The Exchange states that these provisions are not 
applicable to a Primary Direct Floor Listing because, unlike for a 
Selling Shareholder Direct Floor Listing, the registration statement 
for a Primary Direct Floor Listing would include a price range within 
which the company anticipates selling the shares it is offering.\45\
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    \41\ The ``Applicable Price Range'' for determining whether to 
publish a pre-opening indication, with limited exception, is 5% for 
securities with an Indication Reference Price over $3.00 and $0.15 
for securities with an Indication Reference Price equal to or lower 
than $3.00. See Rule 7.35A(d)(3)(A).
    \42\ See Rule 7.35A(d)(1)(A).
    \43\ See proposed Rule 7.35A(d)(2)(A)(iv).
    \44\ See proposed Rule 7.35A(g)(1). The Exchange has proposed a 
non-substantive change to this provision to modify a reference to 
``Private Placement'' to utilize the defined term ``Private 
Placement Market.'' See id.
    \45\ See Notice, 85 FR at 39249.
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    In the case of a Primary Direct Floor Listing, the Exchange has 
proposed a new measure of the Indication Reference Price. Specifically, 
for a security that is offered in a Primary Direct Floor Listing, the 
Indication Reference Price would be the lowest price of the Primary 
Direct Floor Listing Auction Price Range.\46\
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    \46\ See proposed Rule 7.35A(d)(2)(A)(v). The Exchange states 
that, for example, if the Primary Direct Floor Listing Auction Price 
Range is $10.00 to $20.00, then the Indication Reference Price would 
be $10.00. See Notice, 85 FR at 39248, n.22.
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    The Exchange states that any services provided by a financial 
advisor to the issuer of a security listing in connection with a 
Selling Shareholder Direct Floor Listing or a Primary Direct Floor 
Listing (the ``financial advisor'') and the DMM assigned to that 
security must provide such services in a manner that is consistent with 
all federal securities laws, including Regulation M and other anti-
manipulation requirements.\47\ The Exchange states that, for example, 
when a financial advisor provides a consultation to the Exchange as 
required by Rule 7.35A(d)(2)(a)(iv), when the DMM consults with a 
financial advisor in connection with Rule 7.35A(g)(1), or when a 
financial advisor otherwise assists or consults with the DMM as to 
pricing or opening of trading in a Selling Shareholder Direct Floor 
Listing or Primary Direct Floor Listing, the financial advisor and DMM 
will not act inconsistent with Regulation M and other anti-manipulation 
provisions of the federal securities laws, or Exchange Rule 2020.\48\ 
The Exchange represents that it has retained the Financial Industry 
Regulatory Authority (``FINRA'') pursuant to a regulatory services 
agreement to monitor such compliance with Regulation M and other anti-
manipulation provisions of the federal securities laws, and Rule 
2020.\49\ The Exchange has proposed a new commentary that states that, 
in connection with a Selling Shareholder Direct Floor Listing, the 
financial advisor to the issuer of the security being listed and the 
DMM assigned to such security are reminded that any consultation that 
the financial advisor provides to the Exchange as required by Rule 
7.35A(d)(2)(A)(iv) and any consultation between the DMM and financial 
advisor as required by Rule 7.35A(g)(1) is to be conducted in a manner 
that is consistent with the federal securities laws, including 
Regulation M and other anti-manipulation requirements.\50\
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    \47\ See Notice, 85 FR at 39249.
    \48\ See Notice, 85 FR at 39249 (citing Rule 2020, which 
provides that ``No member or member organization shall effect any 
transaction in, or induce the purchase or sale of, any security by 
means of any manipulative, deceptive or other fraudulent 
contrivance'').
    \49\ See Notice, 85 FR at 39249. The Exchange further represents 
that it expects to issue regulatory guidance in connection with a 
company conducting a Primary Direct Floor Listing, and that such 
regulatory guidance would include a reminder to member organizations 
that activities in connection with a Primary Direct Floor Listing, 
like activities in connection with other listings, must be conducted 
in a manner not inconsistent with Regulation M and other anti-
manipulation provisions of the federal securities laws and Rule 
2020. See id. at 39249, n.28.
    \50\ See proposed Rule 7.35A, Commentary .10.
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    Finally, the Exchange has proposed to remove references to Direct 
Listing Auctions from Rule 7.35C, which concerns Exchange-facilitated 
auctions.\51\ The Exchange states that, because of the importance of 
the DMM to the Direct Listing Auction, if a DMM is unable to manually 
facilitate a Direct Listing Auction, the Exchange would not proceed 
with a Selling Shareholder Direct Floor Listing or a Primary Direct 
Floor Listing.\52\
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    \51\ See proposed Rule 7.35C(a), (a)(3), (b)(1), and (b)(3).
    \52\ See Notice, 85 FR at 39249.
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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 Section 6(b)(5) of the Exchange 
Act,\53\ 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.\54\
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    \53\ 15 U.S.C. 78f(b)(5).
    \54\ 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).
---------------------------------------------------------------------------

    The Commission has consistently recognized the importance and 
significance of national securities

[[Page 85811]]

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.\55\ The 
standards, collectively, also provide investors and market participants 
with some level of assurance that the listed company has the resources, 
policies, and procedures to comply with the requirements of the 
Exchange Act and Exchange rules.\56\
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    \55\ 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., NYSE 2018 Order, 83 FR at 5653, n.53; 
Exchange Act Release Nos. 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 2018 Order, 83 FR at 5653, n.53; 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).
    \56\ ``Meaningful listing standards also are important given 
investor expectations regarding the nature of securities that have 
achieved a national securities exchange listing, and the role of a 
national securities exchange in overseeing its market and assuring 
compliance with its listing standards.'' Exchange Act Release No. 
65708 (Nov. 8, 2011), 76 FR 70799, 70802 (Nov. 15, 2011) (SR-NASDAQ-
2011-073). See also Exchange Act Release Nos. 65709 (Nov. 8, 2011), 
76 FR 70795 (Nov. 15, 2011) (SR-NYSE-2011-38); 88389 (Mar. 16, 
2020), 85 FR 16163 (Mar. 20, 2020) (SR-NASDAQ-2019-089). The 
Exchange, in addition to requiring companies seeking to list to meet 
the quantitative listing standards and once listed the quantitative 
continued listing standards, also requires listed companies to meet 
other qualitative requirements. See, e.g., Section 3, Corporate 
Responsibility, of the Manual.
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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 Selling Shareholder Direct Floor Listing.\57\ The 
Exchange has proposed to allow companies to list in connection with a 
Primary Direct Floor Listing, which would for the first time provide a 
company the option, without a firm commitment underwritten offering, of 
selling shares to raise capital in the opening auction upon initial 
listing on the Exchange.\58\
---------------------------------------------------------------------------

    \57\ See Section 102.01B, Footnote (E) of the Manual. See also 
NYSE 2018 Order, 83 FR at 5654.
    \58\ See NYSE Listed Company Manual Section 102.01B, Footnote 
(E) of the Manual which states generally that the Exchange expects 
to list companies in connection with a firm commitment underwritten 
IPO, upon transfer from another market, or pursuant to a spin-off. 
Section 102.01B, Footnote (E) also states, however, that ``the 
Exchange recognizes that some companies that have not previously had 
their common equity securities registered under the Exchange Act, 
but which have sold common equity securities in a private placement, 
may wish to list their common equity securities on the Exchange at 
the time of effectiveness of a registration statement filed solely 
for the purpose of allowing existing shareholders to sell their 
shares.''
---------------------------------------------------------------------------

    Several commenters expressed support for the proposed expansion of 
direct listings to permit a primary offering.\59\ One commenter, for 
example, stated that it supports alternative formats for IPOs, 
including direct listing proposals like the one proposed by the 
Exchange, and expressed the view that issuers should be offered choices 
that match their objectives so long as they protect the integrity of 
the markets and are fair and clear to investors, using transparent 
processes.\60\ Another commenter believed that allowing for multiple 
pathways for private companies to achieve exchange listing would 
encourage more companies to participate in public equity markets and 
provide investors a broader array of attractive investment 
opportunities.\61\
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    \59\ See Letter from Stephen John Berger, Managing Director, 
Global Head of Government & Regulatory Policy, Citadel Securities 
(Feb. 18, 2020) (``Citadel Letter''), at 1; Letter from Paul 
Abrahimzadeh and Russell Chong, Co-Heads, U.S. Equity Capital 
Markets, Citigroup Capital Markets Inc. (Feb. 26, 2020) (``Citigroup 
Letter''); Letter from Matthew B. Venturi, Founder & CEO, 
ClearingBid, Inc. (Jan. 21, 2020) (``ClearingBid Letter''), at 5; 
Letter from David Ludwig, Head of Americas Equity Capital Markets, 
Goldman Sachs Group, Inc. (Feb. 7, 2020) (``Goldman Sachs Letter''); 
Letter from Burke Dempsey, Executive Vice President Head of 
Investment Banking, Wedbush Securities (Apr. 20, 2020) (``Wedbush 
Letter'').
    \60\ See Citigroup Letter. This commenter also stated its belief 
that the direct listing format would afford broad participation in 
the capital formation process and help establish a shareholder base 
that has a long-term interest in partnering with management teams. 
See id.
    \61\ See Goldman Sachs Letter. This commenter also referenced 
the recent direct listings by Spotify Technology S.A. and Slack 
Technologies, Inc., and expressed the view that the development of a 
direct listing approach to becoming a public company has been a 
significant step forward in providing companies greater choice in 
their path to going public, and that the ability to include a 
primary capital raise in a direct listing will further enhance this 
flexibility. See id. See also Citadel Letter, at 1; Wedbush Letter.
---------------------------------------------------------------------------

    In Amendment No. 2, the Exchange made several modifications to its 
proposal that were designed to clarify the role of the issuer and 
financial advisor in a direct listing to explain how compliance with 
various rules and regulations will be addressed. As discussed in more 
detail below, these changes: (i) Help to ensure that the issuer cannot 
unduly influence the opening price through a new order type that cannot 
be modified or canceled; (ii) highlight that financial advisors 
involved with direct listings cannot violate the anti-manipulation 
provisions of the Exchange Act, including Regulation M; and (iii) 
highlight that the Exchange has retained FINRA pursuant to a regulatory 
services agreement to monitor compliance with Regulation M and other 
anti-manipulation provisions of the federal securities laws. We 
conclude that the proposal, as amended by Amendment No. 2, supports a 
finding that the proposal is consistent with the Exchange Act. More 
specifically, the following aspects of the proposal demonstrate that it 
is reasonably designed to be consistent with the protection of 
investors and the maintenance of fair and orderly markets, as well as 
the facilitation of capital formation: (i) Addition of the IDO Order 
type and other requirements which address how the issuer will 
participate in the opening auction; (ii) discussion of the role of 
financial advisors; (iii) addition of the Commentary that provides that 
specified activities are to be conducted in a manner that is consistent 
with the federal securities laws, including Regulation M and other 
anti-manipulation requirements; (iv) retaining FINRA to monitor 
compliance with Regulation M and other anti-manipulation provisions of 
the federal securities laws and NYSE Rule 2020; (v) clarification of 
how market value will be determined for qualifying the company's 
securities for listing; and (vi) elimination of the grace period for 
meeting certain listing requirements.
    The Commission addresses below the relevant concerns, identified by 
either commenters or the Commission in the OIP, relating to NYSE's 
proposal to allow direct listings with a primary offering. First, the 
Commission addresses issues identified in the OIP related to the 
aggregate market value of publicly-held shares requirement and whether 
the proposed standards will help facilitate adequate liquidity for 
companies listing in a Primary Direct Floor Listing. Second, the 
Commission addresses issues identified in the OIP about the initial 
listing opening auction process for Primary Direct Floor Listings and 
discusses financial advisors. Finally, the Commission addresses 
commenters' concerns about whether the proposal is consistent with 
investor protection and the public interest given the lack of 
traditional underwriter

[[Page 85812]]

involvement in a Primary Direct Floor Listing, as well as concerns 
about Securities Act Section 11(a) liability. As discussed in greater 
detail below, the Commission concludes that the record addresses these 
concerns and 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 to be consistent with the Exchange Act.

A. Aggregate Market Value of Publicly-Held Shares Requirement

    With respect to the aggregate market value of publicly-held shares 
requirement, the Exchange proposes to require that it will deem a 
company to have met such requirement if the company will sell at least 
$100 million in market value of shares in the Exchange's opening 
auction on the first day of trading. Alternatively, where a company 
will sell shares in the opening auction with a market value of less 
than $100 million, the Exchange will deem the company to have met such 
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 listing is at least 
$250 million. According to the Exchange, a company may list in 
connection with an IPO with a market value of publicly-held shares of 
$40 million and, ``in the Exchange's experience in listing IPOs, a 
liquid trading market develops after listing for issuers with a much 
smaller value of publicly-held shares than the Exchange anticipates 
would exist after the opening auction in a Primary Direct Floor 
Listing.'' \62\ In Amendment No. 2, the Exchange clarified that market 
value would be calculated using a price per share equal to the lowest 
price of the price range multiplied by the number of shares being 
offered by the issuer.\63\
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    \62\ Notice, 85 FR at 39250. As described above, in determining 
that a company has met the market value of publicly-held shares 
standards the Exchange will consider the market value of all shares 
sold by the company in the opening auction, rather than excluding 
shares that may be purchased by officers, directors, or owners of 
more than 10% of the company's common stock, notwithstanding that 
generally the Exchange's listing standards exclude shares held by 
such insiders from its calculations of publicly-held shares. The 
Exchange believes that the Primary Direct Floor Listing will have an 
adequate public float and liquid trading market after completion of 
the opening auction given the higher market value requirement than 
that required for listing an underwritten IPO. See Notice, 85 FR at 
39247.
    \63\ See Notice, 85 FR at 39247 and note 23, supra, and 
accompanying text.
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    One commenter expressed the view that the proposal, as originally 
noticed for comment, appropriately updated the publicly-held shares and 
distribution requirements associated with direct listings in order to 
ensure the development of a liquid trading market.\64\ Another 
commenter believed that the Exchange should provide data to support its 
conclusion that there would be adequate liquidity for a security 
listing in connection with a Primary Direct Floor Listing.\65\ In its 
statement in support of its proposal, the Exchange stated that its 
proposal would impose a substantially higher capitalization requirement 
for Primary Direct Floor Listings than its rules require for 
traditional IPOs.\66\
---------------------------------------------------------------------------

    \64\ See Citadel Letter, at 1.
    \65\ See Letter from Jeffrey P. Mahoney, General Counsel, 
Council of Institutional Investors (July 16, 2020) (``CII Letter 
III''), at 5.
    \66\ See NYSE Statement, at 12 (citing Section 102.01B of the 
Manual; Approval Order at 16-17). According to the Exchange, it 
generally requires companies listing on the Exchange in connection 
with an IPO to have a market value of publicly-held shares of at 
least $40 million, whereas the proposal would require a company 
listing in conjunction with a Primary Direct Floor Listing to either 
(1) sell at least $100 million of its listed securities in the 
opening auction; or (2) have an aggregate market value of publicly-
held shares immediately prior to listing, together with the market 
value of shares the company sells in the opening auction, of at 
least $250 million.
---------------------------------------------------------------------------

    The Commission has determined that the Exchange has met its burden 
to show that the proposed aggregate market value of publicly-held 
shares requirement provides the Exchange with a reasonable level of 
assurance that the company's market value supports listing on the 
Exchange and the maintenance of fair and orderly markets.\67\ The 
Commission reaches this conclusion because the proposed market value 
standard for listing a Primary Direct Floor Listing is at least two and 
a half times greater than the market value standard that currently 
exists under Exchange rules for an Exchange listing of an IPO. The 
Commission also finds that the proposed requirements are also 
comparable to or higher than the aggregate market value of publicly-
held shares required by the Exchange for initial listing in other 
contexts.\68\ Specifically, the Exchange's proposed minimum market 
value requirements, which are designed in part to ensure sufficient 
liquidity, of $100 million and $250 million for Primary Direct Floor 
Listings are, in addition to being higher than the $40 million minimum 
market value requirement for IPOs,\69\ comparable to (i) the $100 
million and $250 million minimum market value requirements for listing 
a Selling Shareholder Direct Floor Listing; \70\ and (ii) the $100 
million requirement for aggregate market value of publicly-held shares 
for companies that list other than at the time of an IPO, spin-off, or 
initial firm commitment underwritten public offering.\71\
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    \67\ Almost half of exchange-listed IPOs in the recent year had 
proceeds that fell below the $100 million threshold. Using 
information from Thomson Reuters SDC Platinum New Issues database, 
the Commission staff concluded that, among 146 exchange-listed IPOs 
conducted during the 2019 calendar year, the median offer size was 
$106.7 million. Further, staff concluded that approximately 47.9 
percent of the companies that went public via IPO (12.8 percent for 
NYSE IPOs and 60.7 percent for NASDAQ IPOs) had an offer size that 
fell below $100 million. Similarly, an Ernst & Young report states 
that during 2019, the median proceeds raised in exchange-listed IPOs 
in the United States were approximately $110 million. See Global IPO 
trends: Q4 2019, Ernst & Young, available at https://assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/growth/ey-global-ipo-trends-q4-2019.pdf.
    \68\ The Exchange did not provide the data specifically 
referenced by a commenter. See supra note 65 and accompanying text. 
However, the proposed minimum market value requirements are 
comparable to or higher than those listing standards applied by the 
Exchange in other contexts. See supra notes 20-21 and 66 and 
accompanying text.
    \69\ The existing $40 million market value requirement in 
Exchange Rules (Section 102.01B of the Manual) is a longstanding 
requirement that has supported the listing of companies on the 
Exchange that are suitable for listing and have existed since at 
least 2009. See Section 102.01B of the Manual. See Exchange Act 
Release No. 60501 (Aug. 13, 2009), 74 FR 42348 (Aug. 21, 2009) (SR-
NYSE-2009-80) (lowering the aggregate market value of publicly-held 
shares for the listing of IPOs and spin-offs from $60 million to $40 
million).
    \70\ The Commission previously approved the standards for 
Selling Shareholder Direct Floor Listings as supporting listing on 
the Exchange and the maintenance of fair and orderly markets thereby 
protecting investors and the public interest in accordance with 
Section 6(b)(5) of the Exchange Act. See NYSE 2018 Order, 83 FR at 
5654.
    \71\ See Section 102.01B of the Manual. The Commission 
previously has found that this longstanding requirement is suitable 
for initial listing of companies on the Exchange and that the 
standard has supported listings of companies on the Exchange over 
many years. For example, in 1999 the Commission approved the 
existing $100 million aggregate market value standard of publicly-
held shares standard that currently applies to listings other than 
IPOs and spin-offs. In approving this proposal, the Commission 
stated its belief that this threshold requirement, among others, 
should ``ensure that only companies of a certain minimum size are 
included among those listing on the Exchange, thereby protecting 
investors by raising the minimum standard for listed companies.'' 
Exchange Act Release No. 41502 (June 9, 1999), 64 FR 32588 (June 17, 
1999) (SR-NYSE-99-13). The 1999 rule change also increased to $60 
million the $40 million requirement that applied to IPOs and spin-
offs, which is still significantly below the requirements being 
proposed for a Primary Direct Floor Listing. Id. As noted supra at 
note 69, the $60 million requirement was lowered back to $40 million 
in 2009. See Exchange Act Release No. 60501 (Aug. 13, 2009), 74 FR 
42348 (Aug. 21, 2009) (SR-NYSE-2009-80).
---------------------------------------------------------------------------

    And as described below, using the lowest price in the price range 
established by the issuer in its registration statement to determine 
the minimum market value is a reasonable and conservative approach 
because the

[[Page 85813]]

Primary Direct Floor Listing will not proceed at a lower price.

B. Opening Auction Process for Primary Direct Floor Listings and Role 
of Financial Advisors

    In the Order Instituting Proceedings, the Commission expressed 
concern that, with a Primary Direct Floor Listing, the company could be 
the only seller (or a dominant seller) participating in the opening 
auction and thus could be in a position to uniquely influence the price 
discovery process, and requested the Exchange to explain how its 
opening auction rules would apply in a Primary Direct Floor 
Listing.\72\ In Amendment No. 2, the Exchange proposed to add the IDO 
Order as a new order type to be used by the issuer in a Primary Direct 
Floor Listing, and to clarify in its rules how the DMM would conduct 
the opening auction for such listings. As discussed above, the issuer 
would be required to submit an IDO Order in the opening auction with a 
limit price equal to the low end of the Primary Direct Floor Listing 
Auction Price Range, and for the full quantity of offered shares, as 
reflected in the registration statement. The IDO Order cannot be 
modified or canceled by the issuer once entered. Further, the DMM would 
conduct the opening auction only if the auction price is within the 
Primary Direct Floor Listing Auction Price Range disclosed in the 
registration statement, and the IDO Order and all better-priced sell 
orders can be satisfied in full. If the auction price is equal to the 
limit price of the IDO Order (i.e., the low end of the Primary Direct 
Floor Listing Auction Price Range), the IDO Order would have priority 
over other sell orders at that price.\73\
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    \72\ One commenter expressed general support for the proposal 
and offered a variety of observations beyond the scope of the 
proposal, including with respect to the importance of opening 
auction information. See ClearingBid Letter, at 1.
    \73\ In addition, as discussed above, the Exchange proposes that 
the DMM will publish a pre-opening indication in a Primary Direct 
Floor Listing if the auction price is expected to be outside a price 
range around an ``Indication Reference Price'' equal to the low end 
of the price range reflected in the registration statement. The 
Commission believes this is a reasonable and conservative reference 
price because the auction cannot occur at a lower price, and if the 
auction occurs at a higher price the proposal errs on the side of 
requiring opening indication information to be disseminated to 
market participants.
---------------------------------------------------------------------------

    The Commission finds that the IDO Order and related clarifications 
proposed by the Exchange help to clearly define the method by which the 
issuer participates in the opening auction, to prevent the issuer from 
being in a position to improperly influence the price discovery 
process,\74\ and to design an auction that is otherwise consistent with 
the disclosures in the registration statement. Specifically, the issuer 
would be required to submit an IDO Order in the opening auction with a 
limit price equal to the low end of the Primary Direct Floor Listing 
Auction Price Range, and for the full quantity of offered shares, as 
reflected in the registration statement. Further, the IDO Order cannot 
be modified or canceled by the issuer once entered. The Commission 
further finds that it is appropriate for the IDO Order to have priority 
over other sell orders at the same price if the auction price is at the 
limit price of the IDO Order because the auction will not occur at all 
unless the IDO Order is satisfied in full. This provision therefore 
would allow for both the issuer's IDO Order and better-priced sell 
orders to be executed in the opening auction.\75\ The IDO Order 
requirements described above mitigate concerns about the price 
discovery process in the opening auction and provide reasonable 
assurance that the opening auction and subsequent trading promote fair 
and orderly markets and that the proposed rules are designed to prevent 
manipulative acts and practices, and protect investors and the public 
interest in accordance with Section 6(b)(5) of the Exchange Act.
---------------------------------------------------------------------------

    \74\ See supra notes 72-73 and accompanying text. See also 
proposed Rule 7.31(c)(1)(D)(i)-(v) which sets forth the requirements 
the issuer must follow in entering the IDO Order and proposed Rule 
7.35A(g)(2) which sets forth the requirements in order for the DMM 
to conduct the direct listing auction for a Primary Direct Floor 
Listing.
    \75\ In addition, the proposed changes to Rule 7.35C to remove 
the references to Direct Listing Auction would help ensure that all 
direct listings occur with a DMM that will facilitate the opening 
auction manually, and should help promote fair and orderly markets 
in connection with direct listings, because of the role of the DMM 
in ensuring that the conditions to conduct the auction, described 
above, have been met. The proposed changes to (i) Section 102.01B of 
the Manual, Footnote (E) to clarify the description of a Selling 
Shareholder Direct Floor Listing, (ii) Rule 1.1(f) to amend the 
definition of ``Direct Listing,'' and (iii) Rule 7.35A(g)(1) to use 
the defined term ``Private Placement Market'' will also provide 
clarity to the Exchange's rules, consistent with the protection of 
investors and the public interest under Section 6(b)(5) of the 
Exchange Act.
---------------------------------------------------------------------------

    In Amendment No. 2, the Exchange added language to its proposal, 
discussed above, reminding a financial advisor to an issuer and the DMM 
that any consultations with the financial advisor must be conducted in 
a manner consistent with the federal securities laws, including 
Regulation M and other anti-manipulation requirements.\76\ The Exchange 
also represents that it has retained FINRA to monitor such compliance 
and that it plans to issue regulatory guidance in this area. These 
steps will also help to ensure compliance by participants in the direct 
listing process with these important provisions of the federal 
securities laws and that the proposed changes are consistent with 
preventing manipulative acts and practices, and protecting investors 
and the public interest in accordance with Section 6(b)(5) of the 
Exchange Act.
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    \76\ See Notice, 85 FR at 39249, and proposed Rule 7.35A, 
Commentary .10. See also supra note 36 and accompanying text noting 
that the Exchange will issue a regulatory circular to remind member 
organizations that activities in connection with a Primary Direct 
Floor Listing, like activities in connection with other listings, 
must be conducted in a manner not inconsistent with Regulation M and 
other anti-manipulation provisions of the federal securities laws 
and NYSE Rule 2020.
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C. Lack of Traditional Underwriter Involvement in a Primary Direct 
Floor Listing and Securities Act Section 11(a) Standing

1. Comments on the Proposal
    Several commenters expressed concerns that the lack of traditional 
underwriter involvement in direct listings generally would increase 
risks for investors, suggesting that direct listings circumvent the 
traditional due diligence process and traditional underwriter 
liability.\77\ One commenter stated that approval of the proposal would 
likely increase the number of companies that forgo the traditional IPO 
process, and significantly increase the risks for retail investors, 
including by circumventing the due diligence process.\78\ This 
commenter expressed concern that direct listings could weaken certain 
investor protections, and recommended that the Commission make clear 
that financial advisors, exchanges, control shareholders, and directors 
involved in a direct listing automatically incur statutory underwriter 
liability under the Securities Act and are required to hold

[[Page 85814]]

the regulatory capital necessary to act as a de facto underwriter.\79\ 
On the other hand, one commenter supported direct listings as a 
suitable option for certain issuers, and stated that ``[d]ue diligence 
is already ably done by the legions of experienced accountants, 
lawyers, consultants, rating agencies, etc.'' \80\
---------------------------------------------------------------------------

    \77\ See, e.g., Letter from Christopher A. Iacovella, Chief 
Executive Officer, ASA (December 12, 2019) (``ASA Letter I''), at 1.
    \78\ See ASA Letter I, at 1-2. This commenter believed that 
allowing companies to raise primary capital through a direct listing 
``would be a complete end run around the traditional underwriting 
process and . . . create a massive loophole in the regulatory regime 
that governs the offerings of securities to the public.'' Id. at 1. 
In this commenter's view, two recent high-profile direct listings--
Spotify and Slack--did not work out particularly well for retail 
investors, and a robust underwriting process would have uncovered 
more of these companies' vulnerabilities before these securities 
were offered to the public. See id. at 2. Another commenter stated 
that these direct listings may have been successes for private 
investors, but the retail and public investors that purchased stock 
in Spotify and Slack were under water for years, and one company is 
facing a lawsuit because of how direct listings are modeled. See 
Letter from Anonymous (June 30, 2020).
    \79\ See ASA Letter I, at 2; Letter from Christopher A. 
Iacovella, Chief Executive Officer, American Securities Association 
(Mar. 5, 2020) (``ASA Letter II''), at 2-3. Several additional 
commenters raised a variety of concerns with the use of a direct 
listing to conduct a primary offering. For example, one commenter 
expressed the view that ``bailing out'' private market investors 
with reduced offering requirements would incent companies to remain 
private longer, reduce transparency, and impair price discovery. See 
Letter from Anonymous (Dec. 4, 2019). Another commenter took the 
position that direct listings are a method for insiders to ``rip-
off'' IPO investors. See Letter from Allan Rosenbalm (Dec. 4, 2019). 
Another commenter was critical of direct listings for a variety of 
reasons, and expressed the view, among other things, that they are 
``an attempt to bypass the independent skilled investment banking 
and investment management professionals when establishing the 
initial market value of the company.'' Letter from Anonymous (Jan. 
3, 2020). Another commenter stated that a primary capital raise 
would have many red flags, questioned how to trust a private 
company's accounting methods that are not consistent with the public 
markets, and stated that a direct listing is ``fraudulent with no 
liability.'' See Letter from Anonymous (July 1, 2020).
    \80\ Wedbush Letter.
---------------------------------------------------------------------------

    Another commenter recommended that the Commission disapprove the 
proposal and expressed concern that shareholder legal rights under 
Section 11 of the Securities Act may be particularly vulnerable in the 
case of direct listings, and that investors in direct listings may have 
fewer legal protections than investors in IPOs.\81\ The commenter 
stated that it could not support direct listings as an alternative to 
IPOs if public companies could limit their liability for damages caused 
by untrue statements of fact or material omissions of fact within 
registration statements associated with direct listings.\82\
---------------------------------------------------------------------------

    \81\ See Letter from Jeffrey P. Mahoney, General Counsel, 
Council of Institutional Investors (Jan. 16, 2020) (``CII Letter 
I''), at 2; Letter from Jeffrey P. Mahoney, General Counsel, Council 
of Institutional Investors (Apr. 16, 2020) (``CII Letter II''), at 
2; CII Letter III, at 3-4, 6.
    \82\ See CII Letter I, at 2-3; CII Letter II, at 3; Petition for 
Review, at 9-10. This commenter was particularly concerned about 
positions taken by the issuer in a recent lawsuit relating to the 
direct listing of Slack, and expressed the view that the issuer 
``relies on (1) attacking the right of secondary market purchasers 
to bring a Section 11 claim; and (2) the inability to determine what 
shares were `covered' by Slack's registration statement.'' CII 
Letter I, at 2. See also Pirani v. Slack Technologies, Inc., 445 F. 
Supp. 3d 367 (N.D. Cal. 2020).
---------------------------------------------------------------------------

    The Petitioner's Petition for Review stated that the delegated 
order raises important policy issues that should be decided after 
plenary consideration by the Commission. In particular, the Petitioner 
expanded on its prior comments relating to claims under Section 11 of 
the Securities Act, stating that the proposal compounds the problems 
shareholders face in tracing their share purchases to a registration 
statement. As discussed in greater detail below, Section 11(a) of the 
Securities Act allows purchasers to bring claims for damages based on 
materially false or misleading registration statements. Courts have 
held that plaintiffs lack standing to pursue such claims if they cannot 
trace their purchased shares back to the offering covered by the false 
or misleading registration statement. The Petitioner stated that the 
proposal exacerbates concerns regarding the availability of Section 11 
protections because it would ``make it possible for many more shares to 
be directly listed and sold without the protections offered by IPO 
regulations.'' \83\ The Petitioner acknowledged that traceability 
problems may occur because of successive offerings--where first there 
is an offering under a registration statement and then there are 
unregistered offerings by company insiders after the expiration of any 
applicable lockup or Rule 144 holding periods.\84\ The Petitioner also 
stated that traceability challenges may also arise in the context of 
simultaneous registered and unregistered sales.\85\ The Petitioner also 
argued that the very purpose of the proposal is ``to facilitate, if not 
encourage, a significant increase in the number of securities that can 
be sold to the public without Section 11 protections'' and that it is 
hard to understand how that result poses no heightened risk to 
investors.\86\ The Petitioner urged the Commission to explore a system 
of traceable shares before approving a direct listing regime.\87\
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    \83\ See Petition for Review, at 9.
    \84\ Although not required by federal securities laws or 
existing national securities exchange listing rules, a lockup period 
is an oft-included contractual agreement or provision negotiated 
with the underwriters of an initial public offering that restricts 
insiders and certain other pre-IPO security holders from selling, 
transferring, or otherwise disposing of their securities for a 
specified period--typically 90 to 180 days--following the initial 
public offering. As these provisions are not required by federal 
securities laws or existing national securities exchange listing 
rules, the specific terms of lockup agreements can and do vary 
between offerings. Rule 144 creates a safe harbor for the sale of 
restricted or control securities under the exemption in Section 
4(a)(1) of the Securities Act if the seller complies with the 
conditions of the safe harbor, which includes a minimum holding 
period. See 17 CFR 230.144.
    \85\ The Petitioner stated that tracing shares to a registration 
statement immediately after an IPO may not be a significant concern 
but the situation becomes murkier when insiders are able to sell 
their shares in the company after the end of the lockup period. See 
Petition for Review, at 8. In discussing traceability issues, the 
Petitioner also stated that NYSE's proposal on Selling Shareholder 
Direct Floor Listings ``permitted not only the sale of shares 
covered by the registration statement, but also the simultaneous 
sale of unregistered shares held by insiders, assuming that the 
owner of those shares could satisfy the requirements of the Rule 144 
exemption from registration.'' See Petition for Review, at 9.
    \86\ See id. at 14. The Petitioner stated with respect to the 
Slack case (see note 82, supra) that while the district court denied 
a motion to dismiss a Section 11 claim on the grounds that the 
plaintiff could not trace their purchase to Slack's registration 
statement, the court of appeals has agreed to hear the matter on an 
interlocutory basis so it is unclear whether the district court case 
will be upheld. See Pirani v. Slack Technologies, Inc., No. 20-16419 
(9th Cir. July 23, 2020), Docket No. 1. The Petitioner further 
argued that the Approval Order did not cite any cases where the sale 
of registered and unregistered shares shortly after an IPO and prior 
to the end of a lockup period was used as a basis to dismiss a claim 
of a Section 11 violation. See Petition for Review, at 14.
    \87\ See Petition for Review, at 12; CII Letter I, at 2-3; CII 
Letter III, at 4.
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2. NYSE Response to Comments
    In response, the Exchange stated that it does not believe that the 
absence of underwriters creates a gap in the regulatory regime that 
governs offerings of securities to the public.\88\ According to the 
Exchange, while involvement of a traditional underwriter is often 
necessary to the success of an IPO or other public offering, 
underwriter participation in the public capital-raising process is not 
required by the Securities Act, and companies regularly access the 
public markets for capital raising and other purposes without using 
traditional underwriters.\89\ In the Exchange's view, the due diligence 
process in Primary Direct Floor Listings is the responsibility of the 
gatekeepers who participate in the transaction, such as the company's 
board of directors, its senior management, and its independent 
accountants.\90\ The Exchange further stated that a company pursuing a 
Primary Direct Floor Listing would go through the same process of 
publicly filing a registration statement as an underwritten offering, 
and if a company's business model exhibits weaknesses, they will be 
exposed to the public prior to listing.\91\
---------------------------------------------------------------------------

    \88\ See Letter from Elizabeth K. King, Chief Regulatory 
Officer, ICE, General Counsel & Corporate Secretary, NYSE (Mar. 16, 
2020) (``NYSE Response Letter''), at 2.
    \89\ See NYSE Response Letter, at 2-3.
    \90\ See NYSE Response Letter, at 2-3. The Exchange took the 
position that IPOs carry a certain amount of risk for investors, 
that an underwritten IPO does not insulate investors from that risk, 
and that there is no reason to believe that companies with direct 
listings will perform any better or worse than companies with 
underwritten IPOs. See id. at 3.
    \91\ See NYSE Response Letter, at 4. The Exchange also took the 
position that the absence of lockup agreements with pre-IPO 
shareholders in Primary Direct Floor Listings does not create short-
term price instability, and that at most it shifts the timing of 
such instability from six months after the offering to closer to the 
time of listing. See id. See also NYSE Statement, at 20, stating 
that the same price volatility concerns that cause underwriters to 
request lockup agreements in a traditional IPO may apply to direct 
listings as well.

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[[Page 85815]]

    In response to the Petitioner's concern about the adequacy of 
investor protections under Section 11 of the Securities Act, the 
Exchange stated that these concerns flow from an extraneous factor--
namely, lockup agreements. In particular, the Exchange contends that 
the Section 11 and traceability concerns are due to the potential lack 
of lockup agreements, which are neither prohibited nor required by the 
proposal or any other law or regulation, rather than to anything 
inherent in direct listings themselves or the Exchange rules permitting 
them to be listed.\92\ The Exchange argued that the Petitioner assumes 
that because Primary Direct Floor Listings do not require underwriters, 
they will never involve lockup agreements, and therefore insider 
shareholders will sell their unregistered shares alongside the issuer's 
registered shares, potentially making it harder to trace purchased 
shares back to the registration statement.\93\ Further, according to 
the Exchange, the traceability requirement may make it difficult for 
shareholders to establish standing under Section 11 in many situations 
that do not involve direct listings, including when a company has 
issued securities under more than one registration statement and 
distributed those securities through traditional, firm commitment 
underwritings.\94\ The Exchange stated that in traditional, firm 
commitment underwritten IPOs there is no legal or regulatory 
requirement for the issuer to enter into lockup agreements with 
insiders, and conversely, there is nothing preventing an issuer in a 
direct listing from entering into a lockup agreement.\95\
---------------------------------------------------------------------------

    \92\ See NYSE Statement, at 15.
    \93\ See NYSE Statement, at 18. The Exchange stated that tracing 
issues are very fact-dependent and turn on many factors so it is 
unclear whether Section 11 tracing difficulties will in fact occur. 
See NYSE Statement, at 17.
    \94\ See NYSE Statement, at 18-19 (citing In re Century Aluminum 
Co. Sec. Litig., 729 F.3d 1104, 1107-08 (9th Cir 2013); Krim v. 
pcOrder.com, Inc., 402 F.3d 489, 496-98 (5th Cir. 2005)).
    \95\ See NYSE Statement, at 20 (stating that in the recent 
Selling Shareholder Direct Floor Listing by Palantir, insider 
shareholders entered into lockup agreements with respect to certain 
shares). Further, the Exchange stated that even if lockup agreements 
did prove to be less common in direct listings, there is a market-
based solution to this issue because shareholders will pay less for 
shares acquired with direct listings if they would face materially 
greater difficulty in pursuing Section 11 claims in connection with 
direct listings, and that in turn would incentivize issuers to 
structure their direct listings in a way that does not reduce the 
protections available under the federal securities laws. See id. at 
21, n.67.
---------------------------------------------------------------------------

    According to the Exchange, the only courts to consider Section 11 
standing in the context of a direct listing involved the Selling 
Shareholder Direct Floor Listing by Slack Technologies, Inc., where 
both a federal and a state court concluded that Section 11 did not 
preclude plaintiffs, at the pleading stage, from pursuing claims just 
because they could not definitively trace the securities they acquired 
to the registration statement.\96\ The Exchange stated that for 
Petitioner's concerns to materialize, other courts in circumstances 
where there is no lockup agreement would need to reach the opposite 
conclusion.\97\ Moreover, in response to the Petitioner's arguments 
that the Commission should delay implementation of the proposal until 
it addresses the traceability issue by enacting certain ``proxy 
plumbing'' reform measures, the Exchange stated that the Petitioner has 
pursued this goal for many years and the current proposal is not the 
proper vehicle to advance this agenda.\98\
---------------------------------------------------------------------------

    \96\ See NYSE Statement, at 21-22 (citing Pirani, 445 F. Supp. 
3d at 380-81; Case Management Order #5, In re Slack Techs. Inc. 
S'holder Litig., Master File No. 19CIV005370, 2020 WL 4919555, at 
*3-5 (Cal. Super. Ct. Aug. 12, 2020)).
    \97\ See NYSE Statement, at 22.
    \98\ See NYSE Statement, at 22-24.
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3. Commission Discussion and Analysis
    The Commission agrees with the Exchange that the Securities Act 
does not require the involvement of an underwriter in registered 
offerings.\99\ Moreover, given the broad definition of ``underwriter'' 
\100\ in the Securities Act, a financial advisor to an issuer engaged 
in a Primary Direct Floor Listing may, depending on the facts and 
circumstances including the nature and extent of the financial 
advisor's activities, be deemed a statutory ``underwriter'' with 
respect to the securities offering, with attendant underwriter 
liabilities.\101\ Thus, the financial advisors to issuers in Primary 
Direct Floor Listings have incentives to engage in robust due 
diligence, given their reputational interests and potential liability, 
including as statutory underwriters under the broad definition of that 
term. Moreover, even absent the involvement of a statutory underwriter, 
investors would not be precluded from pursuing any claims they may have 
under the Securities Act for false or misleading offering documents, 
nor would the absence of a statutory underwriter affect the amount of 
damages investors may be entitled to recover.
---------------------------------------------------------------------------

    \99\ See, e.g., Item 508(c) of Regulation S-K (``Outline briefly 
the plan of distribution of any securities to be registered that are 
to be offered otherwise than through underwriters.'').
    \100\ 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 the direct or indirect 
underwriting of any such undertaking.''
    \101\ The Commission does not agree, as argued by one commenter, 
that financial advisors, exchanges, control shareholders, and 
directors involved in a direct listing will necessarily incur 
statutory underwriter liability under the Securities Act. See ASA 
Letter I, at 2; ASA Letter II, at 2-3. Whether or not any person 
would be considered a statutory underwriter would be evaluated based 
on the particular facts and circumstances, in light of the 
definition of underwriter contained in Section 2(a)(11).
---------------------------------------------------------------------------

    In addition, issuers, officers, directors, and accountants, with 
their attendant liability, play important roles in assuring that 
disclosures provided to investors are materially accurate and complete. 
The Commission therefore does not view a firm commitment underwriting 
as necessary to provide adequate investor protection in the context of 
a registered offering. Indeed, exchange-listed companies often engage 
in offerings that do not involve a firm commitment underwriting.
    The Commission finds that the proposed rule change is consistent 
with the protection of investors. First, the Commission disagrees with 
the concerns raised by commenters that direct listings would ``rip 
off'' investors, reduce transparency, or involve reduced offering 
requirements or accounting methods that are not ``up to code with the 
public markets.'' \102\ The proposed rule change will require all 
Primary Direct Floor Listings to be registered under the Securities 
Act, and thus subject to the existing liability and disclosure 
framework under the Securities Act for registered offerings. Among 
other disclosures, these registration statements will require both bona 
fide price ranges \103\ and audited financial statements prepared in 
accordance with either U.S. GAAP or International Financial Reporting 
Standards as issued by the International Accounting Standards 
Board.\104\
---------------------------------------------------------------------------

    \102\ See note 79, supra.
    \103\ See, e.g., Instruction 1 to Item 501(b)(3) of Regulation 
S-K.
    \104\ See Rule 4-01(a) of Regulation S-X.
---------------------------------------------------------------------------

    Second, Petitioner's concerns regarding shareholders' ability to 
pursue claims pursuant to Section 11 of the Securities Act due to 
traceability issues are not exclusive to nor necessarily inherent in 
Primary Direct Floor Listings. Rather, this issue is potentially 
implicated anytime securities that are not the subject of a recently 
effective

[[Page 85816]]

registration statement trade in the same market as those that are so 
subject. Where a registration statement, at the time of effectiveness, 
contains an untrue statement of a material fact or omits to state a 
material fact required to be stated therein or necessary to make the 
statements therein not misleading, Section 11(a) of the Securities Act 
provides a cause of action to ``any person acquiring such security,'' 
unless it is proved that at the time of the acquisition the person 
``knew of such untruth or omission.'' \105\ Courts have interpreted 
this statutory provision to permit aftermarket purchasers (i.e., those 
who acquire their securities in secondary market transactions rather 
than in the initial distribution from the issuer or underwriter) to 
recover damages under Section 11, but only if they can trace the 
acquired shares back to the offering covered by the false or misleading 
registration statement.\106\ Tracing is not set forth in Section 11 and 
is a judicially-developed doctrine. As such, the application of this 
doctrine and, in particular, the pleading standards and factual proof 
that potential claimants must satisfy vary depending on the particular 
facts of the distribution and judicial district.\107\
---------------------------------------------------------------------------

    \105\ Section 11(a) of the Securities Act.
    \106\ See, e.g., In re Century Aluminum Co. Sec. Litig., 729 
F.3d 1104 (9th Cir. 2013).
    \107\ See, e.g., Pirani v. Slack Techs., Inc., 2020 U.S. Dist. 
LEXIS 70177 (N.D. Cal., April 21, 2020) (addressing Securities Act 
Section 11 standing and stating that ``[i]f the text is ambiguous, 
the Court `may [also] use canons of construction, legislative 
history, and the statute's overall purpose to illuminate Congress's 
intent.' '' (quoting Pac. Coast Fed'n of Fishermen's Ass'ns v. 
Glaser, 945 F.3d 1076 (9th Cir. 2019)).
---------------------------------------------------------------------------

    Aftermarket purchasers following either firm commitment 
underwritten IPOs or direct listings may face similar difficulties in 
tracing their shares back to a misleading registration statement. In a 
number of litigated cases outside of the direct listing context, courts 
have denied plaintiffs standing to sue under Section 11 following 
registered public offerings on the basis that plaintiffs purchased 
their securities in secondary market transactions and could not 
directly trace their purchases to the allegedly defective registered 
offering because some portion \108\ of the outstanding securities 
available for trading--sometimes a very small portion--were not issued 
pursuant to the allegedly defective registration statement. These 
situations arise where shares may have been issued pursuant to more 
than one registration statement, not all of which include material 
misstatements or omissions. Shares may have also entered the market 
prior to a potential claimant's purchase other than through the 
registered offering, such as through sales pursuant to Rule 144.\109\ 
For example, the shares might have been sold by insiders or significant 
shareholders following the expiration of lockup agreements or 
applicable restricted periods, or could have also been sold by other 
shareholders who were never subject to any such agreement.\110\ 
Furthermore, traceability concerns can arise when shares are held in 
fungible bulk--as they usually are--such that an investor is not able 
to establish that the particular shares it purchased were acquired 
pursuant to, or are traceable to, a particular misleading registration 
statement.\111\
---------------------------------------------------------------------------

    \108\ See, e.g., Barnes v. Osofsky, 373 F.2d 269 (2d Cir. 1967); 
Krim v. PCOrder.com, 402 F.3d 489 (5th Cir. 2005) (IPO stock 
represented 91% of shares trading in market); In re Century Aluminum 
Co. Sec. Litig., 729 F.3d 1104 (9th Cir. 2013) (49 million shares 
were already trading in market prior to the issuance of 24.5 million 
shares pursuant to allegedly misleading registration statement).
    \109\ Rule 144 is a non-exclusive safe harbor that permits the 
resale of restricted securities, without Securities Act 
registration, if a number of conditions are met, including a holding 
period of either six months or one year, depending on the reporting 
status of the issuer. Non-affiliates of a newly-listed issuer may 
rely on Rule 144 to sell their securities provided they have held 
the securities for at least one year.
    \110\ While lockup agreements are customary in firm commitment 
initial public offerings, in the Commission's experience they often 
do not cover all of the outstanding shares. There is thus a risk 
that, even in the context of IPOs underwritten on a firm commitment 
basis, securities other than those issued pursuant to the related 
registration statement may enter the trading market prior to the 
expiration of any applicable lockup period and thus could raise 
questions regarding traceability of shares purchased on a national 
securities exchange. Additionally, as the Exchange noted, companies 
that pursue a direct listing may also enter into lockup agreements. 
Required disclosure in registration statements, for both direct 
listings and IPOs, may help investors assess the risk that shares 
other than those offered pursuant to the registration statement will 
be available for sale. For example, in registration statements for 
IPOs and direct listings, issuers are required to provide disclosure 
of the amount of shares that may be sold pursuant to Rule 144. See 
Item 201(a)(2) of Regulation S-K. Issuers also typically provide 
disclosure of the material terms of lockup agreements governing pre-
IPO shares.
    \111\ See, e.g., Krim v. PCOrder.com, 402 F.3d 489 (5th Cir. 
2005).
---------------------------------------------------------------------------

    Although it is possible that aftermarket purchases following a 
Primary Direct Floor Listing may present tracing challenges, this 
investor protection concern is not unique to Primary Direct Floor 
Listings, nor (based on the approaches taken by courts as described 
above) do we expect any such tracing challenges in this context to be 
of such magnitude as to render the proposal inconsistent with the Act. 
We expect judicial precedent on traceability in the direct listing 
context to continue to evolve,\112\ but the Commission is not aware of, 
nor have commenters pointed to, any precedent to date in the direct 
listing context which prohibits plaintiffs from pursuing Section 11 
claims.
---------------------------------------------------------------------------

    \112\ For example, the Ninth Circuit Court of Appeals has agreed 
to consider the issue of Section 11 standing at issue in Pirani v. 
Slack Techs., Inc., 2020 U.S. Dist. LEXIS 70177 (N.D. Cal., April 
21, 2020) on an interlocutory basis. See Pirani v. Slack 
Technologies, Inc., No. 20-16419 (9th Cir., July 23, 2020), Docket 
No. 1.
---------------------------------------------------------------------------

    The Commission further believes that Primary Direct Floor Listings 
will provide benefits to existing and potential investors relative to 
firm commitment underwritten offerings. First, because the securities 
to be issued by the company in connection with a Primary Direct Floor 
Listing would be allocated based on matching buy and sell orders, in 
accordance with the proposed rules, some investors may be able to 
purchase securities in a Primary Direct Floor Listing who might not 
otherwise receive an initial allocation in a firm commitment 
underwritten offering. The proposed rule change therefore has the 
potential to broaden the scope of investors that are able to purchase 
securities in an initial public offering, at the initial public 
offering price, rather than in aftermarket trading.
    Second, because the price of securities issued by the company in a 
Primary Direct Floor Listing will be determined based on market 
interest and the matching of buy and sell orders, Primary Direct Floor 
Listings will provide an alternative way to price securities offerings 
that may better reflect prices in the aftermarket, and thus may allow 
for efficiencies in IPO pricing and allocation.\113\ In a firm 
commitment underwritten offering, the offering price is informed by 
underwriter engagement with potential investors to gauge interest in 
the offering, but ultimately decided through negotiations between the 
issuer and the underwriters for the offering. The underwriters then 
sell the securities to the initial purchasers at the public offering 
price. When the securities begin trading on the listing exchange, 
however, the price often varies from the IPO price. The opening auction 
in a Primary Direct Floor Listing provides

[[Page 85817]]

for a different price discovery method for IPOs which may reduce the 
spread between the IPO price and subsequent market trades, a potential 
benefit to existing and potential investors. In this way, the proposed 
rule change may result in additional investment opportunities while 
providing companies more options for becoming publicly traded.\114\
---------------------------------------------------------------------------

    \113\ A frequent academic observation of traditional firm 
commitment underwritten offerings is that the IPO price, established 
through negotiation between the underwriters and the issuer, is 
often lower than the price that the issuer could have obtained for 
the securities, based on a comparison of the IPO price to the 
closing price on the first day of trading. See, e.g., Patrick M. 
Corrigan, Article: The Seller's Curse and the Underwriter's Pricing 
Pivot: A Behavioral Theory of IPO Pricing, 13 Va. L. & Bus. Rev 335; 
Jay R. Ritter, Initial Public Offerings: Underpricing tbl.1a (June 
17, 2020), https://site.warrington.ufl.edu/ritter/files/IPOs2019_Underpricing.pdf.
    \114\ While the Commission acknowledges the possibility that 
some companies may pursue a Primary Direct Floor Listing instead of 
a traditional IPO, these two listing methods may not be 
substitutable in a wide variety of instances. For example, some 
issuers may require the assistance of underwriters to develop a 
broad investor base sufficient to support a liquid trading market; 
others may believe a traditional firm commitment IPO is preferable 
given the benefits to brand recognition that can result from 
roadshows and other marketing efforts that often accompany such 
offerings. Thus, we do not anticipate that all companies that are 
eligible to go public through a Primary Direct Floor Listing will 
choose to do so; the method chosen will depend on each issuer's 
unique characteristics.
---------------------------------------------------------------------------

    The Commission finds that the Exchange's proposal will facilitate 
the orderly distribution and trading of shares, as well as foster 
competition, which is clearly consistent with the purposes of the 
Exchange Act. The orderly distribution of, and trading of shares, 
promotes fair and orderly markets, and is one of the important roles of 
a national securities exchange in ensuring that its rules prevent 
fraudulent and manipulative acts and practices, promote just and 
equitable principles of trade and protect investors and the public 
interest.\115\ The proposal also fosters competition by providing an 
alternate method for companies of sufficient size that decide they 
would rather not conduct a firm commitment underwritten offering to 
list on the Exchange, thereby removing potential impediments to free 
and open markets consistent with Section 6(b)(5) of the Exchange Act 
while also supporting capital formation. For the reasons discussed 
above, the Commission finds that, on balance, the proposed rule change 
to permit Primary Direct Floor Listings is designed to, among other 
things, prevent fraudulent and manipulative acts and practices and to 
protect investors and the public interest.
---------------------------------------------------------------------------

    \115\ See 15 U.S.C. 78f(b)(5). See also 15 U.S.C. 78k-
1(a)(1)(C)(i).
---------------------------------------------------------------------------

IV. Conclusion

    For 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 Rule 431 of the Commission's 
Rules of Practice, that the earlier action taken by delegated 
authority, Exchange Act Release No. 89684 (August 26, 2020), 85 FR 
54454 (September 1, 2020), is set aside and, pursuant to Section 
19(b)(2) of the Exchange Act, the proposed rule change (SR-NYSE-2019-
67), as modified by Amendment No. 2, hereby is approved.

    By the Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020-28709 Filed 12-28-20; 8:45 am]
BILLING CODE 8011-01-P