Document ID: SEC-2022-1629-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: New York Stock Exchange, LLC
Posted Date: 2022-12-21T05:00Z

[Federal Register Volume 87, Number 244 (Wednesday, December 21, 2022)]
[Notices]
[Pages 78141-78150]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-27659]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96514; File No. SR-NYSE-2022-14]

Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Approving a Proposed Rule Change, as Modified by Amendment No. 2, To 
Modify Certain Pricing Limitations for Securities Listed on the 
Exchange Pursuant to a Primary Direct Floor Listing

December 15, 2022.

I. Introduction

    On April 7, 2022, New York Stock Exchange LLC (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to modify certain pricing 
limitations for securities listed on the Exchange pursuant to a direct 
listing in which the company will sell shares itself in the opening 
auction on the first day of trading on the Exchange. The proposed rule 
change was published for comment in the Federal Register on April 19, 
2022.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 94708 (Apr. 13, 
2022), 87 FR 23300 (Apr. 19, 2022). Comments received on the 
proposal are available on the Commission's website at: https://www.sec.gov/comments/sr-nyse-2022-14/srnyse202214.htm. The comments 
expressed by one commenter are not relevant to the proposed rule 
change. See Letter from Andrew Robison (Apr. 22, 2022).
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    On May 26, 2022, pursuant to Section 19(b)(2) of the Exchange 
Act,\4\ the Commission designated a longer period within which to 
either approve the proposed rule change, disapprove the proposed rule 
change, or institute proceedings to determine whether to disapprove the 
proposed rule change.\5\ On July 18, 2022, the Commission instituted 
proceedings under Section 19(b)(2)(B) of the Exchange Act \6\ to 
determine whether to approve or disapprove the proposed rule change.\7\ 
On October 11, 2022, the Commission extended the time period for 
approving or disapproving the proposal to December 15, 2022.\8\
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 94991 (May 26, 
2022), 87 FR 33518 (June 2, 2022). The Commission designated July 
18, 2022, as the date by which it should approve, disapprove, or 
institute proceedings to determine whether to disapprove the 
proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 95312 (July 18, 
2022), 87 FR 43914 (July 22, 2022) (``OIP'').
    \8\ See Securities Exchange Act Release No. 96023 (Oct. 11, 
2022), 87 FR 62902 (Oct. 17, 2022.
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    On November 8, 2022, the Exchange filed Amendment No. 2 to the 
proposed rule change, which superseded the original filing in its 
entirety.\9\ The proposed rule change, as modified by Amendment No. 2, 
was published for comment in the Federal Register on November 15, 
2022.\10\ The Commission is approving the proposed rule change, as 
modified by Amendment No. 2.
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    \9\ On November 4, 2022, the Exchange filed Amendment No. 1 to 
the proposed rule change. Amendment No. 1 was withdrawn on November 
8, 2022. Amendment No. 2 to the proposed rule change revised the 
proposal: (i) to require the retention of an underwriter with 
respect to the primary sales of shares by the company and 
identification of the underwriter in the company's effective 
registration statement; (ii) to clarify that the 20% and 80% 
thresholds used in determining the Primary Direct Floor Listing 
Auction Price Range will be calculated based on the highest price of 
the Issuer Price Range; (iii) to require that the Auction Price 
cannot be above the price that is 80% above the highest price of the 
Issuer Price Range; (iv) to require that if the issuer certifies to 
the Exchange a maximum Auction Price that is below the price that is 
80% above the highest price of the Issuer Price Range, the Auction 
Price may not be above such price; and (v) to make other clarifying 
changes.
    \10\ See Securities Exchange Act Release No. (Nov. 8, 2022), 87 
FR 68558 (Nov. 15, 2022) (``Notice'').
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II. Description of the Proposal, as Modified by Amendment No. 2

    Section 102.01B, Footnote (E) of the of the Listed Company Manual 
(the ``Manual'') provides that, in certain cases, a company that has 
not previously had its common equity securities registered under the 
Exchange Act may wish to list its common equity securities on the 
Exchange at the time of effectiveness of a registration statement \11\ 
pursuant to which the company will sell shares itself in the opening 
auction on the first day of trading on the Exchange (a ``Primary Direct 
Floor Listing'').\12\ In the Exchange's prior approved proposal to 
initially allow for a Primary Direct Floor Listing, the Exchange also 
adopted Rule 7.31(c)(1)(D) defining an Issuer Direct Offering Order 
(``IDO Order'') \13\ for use by a company that wishes to sell its 
shares through a Primary Direct Floor Listing. In addition, the 
Exchange modified Rule 7.35A to describe how the IDO Order would 
participate in a Direct Listing Auction, establish additional 
requirements for a Designated Market Maker (``DMM'') when conducting a 
Direct Listing Auction for a Primary Direct Floor Listing, and specify 
how the Indication Reference Price would be determined for a security 
to be opened in a Direct Listing.\14\ Currently, under Rule 
7.35A(g)(2), the DMM will not conduct a Direct Listing Auction for a 
Primary Direct Floor Listing if (i) the Auction Price \15\ would be 
outside of the price range specified by the company in its effective 
registration statement (the ``Price Range Limitation'') \16\ or (ii) 
there

[[Page 78142]]

is insufficient interest to satisfy both the IDO Order and all better-
priced sell orders in full.\17\
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    \11\ The reference to a registration statement refers to a 
registration statement effective under the Securities Act of 1933 
(``Securities Act'').
    \12\ A Primary Direct Floor Listing includes listings where 
either: (i) only the company itself is selling shares in the opening 
auction on the first day of trading; or (ii) the company is selling 
shares and selling shareholders may also sell shares in such opening 
auction. See Section 102.01B, Footnote (E) of the Manual. See also 
Securities Exchange Act Release No. 90768 (Dec. 22, 2020), 85 FR 
85807 (Dec. 29, 2020) (SR-NYSE-2019-67) (Order Setting Aside Action 
by Delegated Authority and Approving a Proposed Rule Change, as 
Modified by Amendment No. 2, to Amend Chapter One of the Listed 
Company Manual to Modify the Provisions Relating to Direct Listings) 
(``Approval Order'').
    \13\ See Approval Order, supra note 12, 85 FR 85813. An IDO 
Order is a Limit Order to sell that is to be traded only in a Direct 
Listing Auction. See Rule 7.31(c)(1)(D). See also Rule 7.31(a)(2) 
for the definition of ``Limit Order,'' Rule 7.35(a)(1) for the 
definition of ``Auction,'' and Rule 7.35(a)(1)(E) for the definition 
of ``Direct Listing Auction.'' The IDO Order has the following 
requirements: (i) only one IDO Order may be entered on behalf of the 
issuer and only by one member organization; (ii) the limit price of 
the IDO Order must be equal to the lowest price of the price range 
established by the issuer in its effective registration statement; 
(iii) the IDO Order must be for the quantity of shares offered by 
the issuer, as disclosed in the prospectus in the effective 
registration statement; (iv) an IDO Order may not be cancelled or 
modified; and (v) an IDO Order must be executed in full in the 
Direct Listing Auction. See Rule 7.31(c)(1)(D)(i)-(v).
    \14\ See Approval Order, supra note 12, 85 FR 85813. See also 
Notice, supra note 10, 87 FR 68563. See Rule 7.35A(d)(2)(A)(v) for a 
description about how the ``Indication Reference Price'' is 
determined for a security that is a Primary Direct Floor Listing.
    \15\ The Exchange defines Auction Price in Rule 7.35(a)(6) as 
the price at which an Auction is conducted. In addition, Rule 7.35A 
sets forth requirements relating to the determination of the Auction 
Price by the DMM. For purposes of the proposal, ``Auction Price'' 
refers to the price at which trading would commence in a security to 
be opened in a Direct Listing Auction for a Primary Direct Floor 
Listing. See Notice, supra note 10, 87 FR 68559 n.13.
    \16\ The Exchange states that references in the proposal to the 
price range established by the issuer in its effective registration 
statement are to the price range disclosed in the prospectus in such 
registration statement. See Notice, supra note 10, 87 FR 68559 n.14. 
Currently, the Exchange defines the price range established by the 
issuer in its effective registration statement as the ``Primary 
Direct Floor Listing Auction Price Range.'' See Rule 
7.31(c)(1)(D)(ii). As discussed further below, the Exchange proposes 
to redefine the price range established by the issuer in its 
effective registration statement as the ``Issuer Price Range.'' See 
proposed Rule 7.31(c)(1)(D)(ii). Throughout this order, we also 
refer to this ``Issuer Price Range'' as the ``disclosed price 
range.''
    \17\ See Notice, supra note 10, 87 FR 68559.
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    The Exchange proposes to modify the Price Range Limitation to 
provide that a Direct Listing Auction for a Primary Direct Floor 
Listing may be conducted if the Auction Price determined by the DMM is 
outside of the Issuer Price Range (i.e., the price range established by 
the issuer in its effective registration statement), but only if the 
Auction Price is (1) at or above the price that is 20% below the lowest 
price of the Issuer Price Range \18\ and (2) at or below the price that 
is 80% above the highest price of the Issuer Price Range (the ``80% 
Upside Limit'').\19\ The Exchange proposes that a Direct Listing 
Auction for a Primary Direct Floor Listing could proceed in these 
circumstances at a price outside of the Issuer Price Range (whether 
lower or higher), provided that the issuer has specified the quantity 
of shares registered in its registration statement, as permitted by 
Securities Act Rule 457, and certified to the Exchange and publicly 
disclosed that: (i) it does not expect that the Auction Price would 
materially change the issuer's previous disclosure in its effective 
registration statement; (ii) the price range in the preliminary 
prospectus included in the effective registration statement is a bona 
fide price range in accordance with Item 501(b)(3) of Regulation S-K; 
and (iii) such registration statement contains a sensitivity analysis 
explaining how the issuer's plans would change if the actual proceeds 
from the offering differ from the amount assumed in the disclosed price 
range.\20\ In addition, if the issuer certifies to the Exchange an 
upper price limit that is below the 80% Upside Limit, the Exchange 
proposes that the Direct Listing Auction for a Primary Direct Floor 
Listing may not proceed if the Auction Price determined by the DMM 
exceeds the certified price limit. The Exchange also proposes to 
require that a company offering securities for sale in a Primary Direct 
Floor Listing must retain an underwriter with respect to the primary 
sales of shares by the company and identify the underwriter in its 
effective registration statement.\21\ In addition, the Exchange 
proposes to require that for the purposes of determining the Primary 
Direct Floor Listing Auction Price Range, the 20% and 80% thresholds 
will be calculated based on the highest price of the Issuer Price 
Range.\22\
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    \18\ The Exchange proposes to define the ``Primary Direct Floor 
Listing Auction Price Range'' in Rule 7.31(c)(1)(D)(ii) as the price 
range that includes 20% below the lowest price and 80% above the 
highest price of the Issuer Price Range. See Notice, supra note 10, 
87 FR 68559.
    \19\ As provided in proposed Rule 7.31(c)(1)(D)(ii), the 
Exchange proposes to calculate the 20% and 80% thresholds to 
determine the Primary Direct Floor Listing Auction Price Range based 
on the highest price of the Issuer Price Range. For example, if the 
Issuer Auction Price Range is $28.00 to $30.00, the Primary Direct 
Floor Listing Auction Price Range would be $22.00 to $54.00. See 
Notice, supra note 10, 87 FR 68559.
    \20\ See Notice, supra note 10, 87 FR 68559. See also proposed 
Rule 7.35A(g)(2)(B)(i).
    \21\ See Notice, supra note 10, 87 FR 68559.
    \22\ See id. at 68563.
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    The Exchange states its belief that, while many companies are 
interested in alternatives to the traditional initial public offering 
(``IPO''), companies and their advisors may be reluctant to use the 
Primary Direct Floor Listing under current Exchange rules because of 
concerns about the Price Range Limitation.\23\ The Exchange states it 
believes that ``[t]he Price Range Limitation--which is imposed on a 
Primary Direct Floor Listing but not on an IPO--increases the 
probability of a failed offering because it contemplates there also 
being too much investor interest. In other words, if investor interest 
is greater than the company and its advisors anticipated, an offering 
would need to be delayed or cancelled.'' \24\
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    \23\ See id. at 68559.
    \24\ Id.
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    The Exchange states that, under current Exchange Rules, the DMM 
would not conduct a Direct Listing Auction for a security subject to a 
Primary Direct Floor Listing if the Auction Price determined is above 
the highest price of the price range established by the issuer in its 
effective registration statement.\25\ The Exchange further states that, 
in this case, the offering would be cancelled or postponed until the 
company amends its effective registration statement, and at a minimum, 
such a delay could expose the company to risks associated with changing 
investor sentiment in the event of an adverse market event.\26\ The 
Exchange states its belief that, as a result, companies may be 
reluctant to use this alternative method of going public despite its 
expected potential benefits because of the restrictions of the Price 
Range Limitation.\27\
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    \25\ See id. at 68560.
    \26\ See id.
    \27\ See id.
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    The Exchange has proposed to modify the Price Range Limitation such 
that a Direct Listing Auction for a Primary Direct Floor Listing could 
proceed if the Auction Price is at or above the price that is 20% below 
the lowest price of the Issuer Price Range and at or below the 80% 
Upside Limit.\28\ Therefore, the Exchange proposes that the DMM could 
conduct the Direct Listing Auction even if the Auction Price is outside 
of the Issuer Price Range, provided all other necessary conditions are 
met, if the Auction Price would not be more than 20% below the lowest 
price or more than 80% above the highest price of the Issuer Price 
Range and the company has, in its effective registration statement, 
specified the quantity of shares registered, as permitted by Securities 
Act Rule 457.\29\
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    \28\ See id.
    \29\ See id.
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    The Exchange proposes that when the Auction Price is outside of the 
Issuer Price Range, but not more than 20% below such price range and 
higher than the 80% Upper Limit, the Direct Listing Auction would not 
proceed unless the company has previously certified to the Exchange and 
publicly disclosed that (i) the company does not expect that such 
offering price would materially change the company's previous 
disclosure in its effective registration statement; (ii) the price 
range in the preliminary prospectus included in the effective 
registration statement is a bona fide price range in accordance with 
Item 501(b)(3) of Regulation S-K; and (iii) the company's registration 
statement contains a sensitivity analysis explaining how the company's 
plans would change if the actual proceeds from the offering differ from 
the amount assumed in the disclosed price range.\30\ In addition, if 
the company's certification submitted to the Exchange includes a price 
limit that is below the 80% Upper Limit, the Direct Listing Auction 
would not take place if the Auction Price is determined by the DMM to 
be above such limit.\31\
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    \30\ See id.
    \31\ See id.
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    When the Auction Price is outside of the Issuer Price Range 
(whether it is lower or higher than such price range), the Exchange 
also proposes to provide the issuer with the opportunity to provide any 
necessary additional disclosures that are dependent on the price of the 
offering so that any such disclosures would be available to investors 
prior to the completion of the offering.\32\ The Exchange proposes that 
a Direct Listing Auction for a Primary Direct Floor Listing would only 
proceed outside the Issuer Price Range if the issuer also confirms to 
the Exchange that no additional disclosures are

[[Page 78143]]

required under federal securities laws based on the Auction Price 
determined by the DMM.\33\
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    \32\ See id.
    \33\ See id. See proposed Rule 7.35A(g)(2)(B)(ii).
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    The Exchange states its belief that the additional requirements to 
permit a Direct Listing Auction to take place at an Auction Price that 
is outside of the Issuer Price Range (whether it is lower or higher 
than such price range but within the Primary Direct Floor Listing 
Auction Price Range), as proposed, would provide sufficient disclosures 
to allow investors to evaluate whether to participate in the Direct 
Listing Auction for a Primary Direct Floor Listing, including the 
opportunity to see how changes in share price may impact the company's 
disclosures.\34\
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    \34\ See Notice, supra note 10, 87 FR 68560.
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    The Exchange states that it believes its proposal with respect to 
the Price Range Limitation for a Primary Direct Floor Listing can be 
analogized with Securities Act Rule 430A and staff guidance, which, 
according to the Exchange, generally allow a company to price a public 
offering 20% outside of the disclosed price range without regard to the 
materiality of the changes to the disclosure contained in the company's 
registration statement.\35\ According to the Exchange, it believes that 
such guidance would also allow for deviation of greater than 20% above 
the highest price of the disclosed price range, provided that such 
change would not materially change the previous disclosure.\36\ The 
Exchange states that, accordingly, it believes that a company listing 
in connection with a Primary Direct Floor Listing could specify the 
quantity of shares registered, as permitted by Securities Act Rule 457, 
and, if an Auction prices outside of the disclosed price range, use a 
Rule 424(b) prospectus, rather than a post-effective amendment, when 
either (i) the 20% threshold noted in Rule 430A is not exceeded, 
regardless of the materiality or non-materiality of resulting changes 
to the registration statement disclosure that would be contained in the 
Rule 424(b) prospectus, or (ii) there is a deviation above the price 
range beyond the 20% threshold noted in Rule 430A if such deviation 
would not materially change the previous disclosures, in each case 
assuming the number of shares issued is not increased from the number 
of shares disclosed in the prospectus.\37\
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    \35\ See id. According to the Exchange, Securities Act Rule 457 
permits issuers to register securities either by specifying the 
quantity of shares registered, pursuant to Rule 457(a), or the 
proposed maximum aggregate offering amount. The Exchange proposes to 
require that companies selling shares through a Primary Direct Floor 
Listing will register securities by specifying the quantity of 
shares registered and not a maximum offering amount. See id. at 
68560 n.20. The Exchange also states that the Exchange believes that 
the proposed modification of the Price Range Limitation would 
promote just and equitable principles of trade, remove impediments 
to and perfect the mechanism of a free and open market and a 
national market system, and protect investors and the public 
interest, because, according to the Exchange, this approach is 
similar to the pricing of an IPO where an issuer is permitted to 
price outside of the disclosed price range in accordance with the 
SEC Staff's guidance. See id. at 68564.
    \36\ See id. at 68560.
    \37\ See Notice, supra note 10, 87 FR 68560. See supra note 20 
and accompanying text.
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    The Exchange states that the burden of complying with the 
disclosures required under federal securities laws, including providing 
any disclosure necessary to avoid any material misstatements or 
omissions, remains with the issuer.\38\ Under the proposal, therefore, 
the Direct Listing Auction for a Primary Direct Floor Listing would not 
take place outside of the Issuer Price Range until the issuer confirms 
to the Exchange that no additional disclosures are required under the 
federal securities laws based on the Auction Price determined by the 
DMM.\39\
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    \38\ See id. According to the Exchange, the Commission 
previously stated that while Securities Act Rule 430A permits 
companies to omit specified price-related information from the 
prospectus included in the registration statement at the time of 
effectiveness, and later file the omitted information with the 
Commission as specified in the rule, it neither prohibits a company 
from conducting a registered offering at prices beyond those that 
would permit a company to provide pricing information through a 
Securities Act Rule 424(b) prospectus supplement nor absolves any 
company relying on the rule from any liability for potentially 
misleading disclosure under the federal securities laws. See id. at 
68560-61 (citing Securities Exchange Act Release No. 93119 (Sept. 
24, 2021), 86 FR 54262 (Sept. 30, 2021)).
    \39\ See Notice, supra note 10, 87 FR 68561.
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    The Exchange states it believes that an underwriter plays an 
important role in a traditional IPO and, therefore, proposes to require 
that a company listing securities on the Exchange in connection with a 
Primary Direct Floor Listing must retain an underwriter with respect to 
the primary sales of shares by the company and identify the underwriter 
in its effective registration statement.\40\ The Exchange believes that 
investor protection provisions are necessary in a Primary Direct Floor 
Listing if an offering can price outside of the disclosed price range, 
subject to the proposed limitations, because such provisions allow 
investors to make reasonable pricing decisions with clarity that the 
company's underwriter would face statutory liability.\41\
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    \40\ See id.
    \41\ See id.
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    The Exchange further states it believes that the requirement to 
retain a named underwriter mitigates concerns raised by the Commission 
in the OIP regarding the usefulness of price range disclosure provided 
to investors in a Securities Act registration statement filed in 
connection with a Primary Direct Floor Listing.\42\ The Exchange 
believes that an underwriter retained in connection with a Primary 
Direct Floor Listing would perform substantially similar functions, 
including those related to establishing and adjusting the price range, 
to those performed by an underwriter in a ``typical'' IPO because the 
underwriter would be subject to similar liability and reputational 
risk.\43\
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    \42\ See id. at 68562.
    \43\ See id.
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    The Exchange also states it believes that the requirement to retain 
a named underwriter, as described above, may mitigate concerns raised 
by the Commission in the OIP regarding challenges to bringing claims 
under Section 11 of the Securities Act due to the potential assertion 
of tracing defenses because an underwriter may choose to impose lock-up 
arrangements.\44\ The Exchange states that, as in a traditional firm 
commitment underwritten IPO, in which lock-up arrangements are often 
imposed, an underwriter in connection with a Primary Direct Floor 
Listing would be able to impose lock-up agreements for the same reasons 
that make lock-up agreements common in an IPO.\45\
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    \44\ See id. at 68561.
    \45\ See id. at 68561-62.
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    The Exchange states that its proposal to require that the 
securities of a company listing in connection with a Primary Direct 
Floor Listing cannot price above the 80% Upper Limit further mitigates 
concerns regarding the usefulness of the price range disclosure 
provided to investors.\46\ The Exchange states that the 80% Upper Limit 
would incentivize the company and its underwriter to set the disclosed 
price range to avoid the failed offering consequences and would also 
encourage an issuer to adjust the price range disclosed in their 
registration statement prior to effectiveness in response to pricing 
feedback received from market analysts and potential investors.\47\
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    \46\ See id. at 68562.
    \47\ See id.
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    The Exchange states that given that, as proposed, there may be a 
Primary Direct Floor Listing that could price outside of the disclosed 
price range subject to the 80% Upper Limit above which the Direct 
Listing Auction could not proceed, the Exchange proposes ``to support 
price discovery transparency by providing readily available, real time

[[Page 78144]]

pricing information to investors.'' \48\ Specifically, the Exchange 
represents that the DMM's pre-opening indications for a security to be 
opened in a Direct Listing Auction for a Primary Direct Floor Listing 
would continue to be published via the securities information processor 
(``SIP'') and proprietary data feeds.\49\ The Exchange states that it 
would also make the Indication Reference Price available, free of 
charge, on a public website (such as www.nyse.com) on the day such 
auction is anticipated to take place.\50\ The Exchange also proposes to 
require member organizations to provide to a customer, before that 
customer places an order to participate in a Direct Listing Auction for 
a Primary Direct Floor Listing, a notice describing the mechanics of 
pricing a security subject to a Direct Listing Auction for a Primary 
Direct Floor Listing, including information regarding the availability 
of pre-opening indications via the SIP and proprietary data feeds and 
the location of the public website where the Exchange would disseminate 
information relating to the Indication Reference Price.\51\
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    \48\ See id.
    \49\ See id. See also proposed Rule 7.35A(d)(2)(A)(v). The 
Exchange states that its dissemination of pre-opening indications 
for a security to be opened in a Direct Listing Auction for a 
Primary Direct Floor Listing via the SIP and proprietary data feeds 
is consistent with the availability of the same for securities 
opened in IPOs and believes that interested investors have found 
pre-opening indications to be readily accessible and to provide 
useful real time pricing information to inform their participation 
in such auctions. The Exchange thus believes that its proposal 
addresses the concerns raised in the OIP regarding the sufficiency 
of price discovery transparency for investors. See Notice, supra 
note 10, 87 FR 68562 n.29.
    \50\ See Notice, supra note 10, 87 FR 68562. The Indication 
Reference Price for a security that is a Primary Direct Floor 
Listing is the lowest price of the Primary Direct Floor Listing 
Auction Price Range. This price would be known before the opening 
process begins and would not change once established.
    \51\ See id. See also proposed Rule 7.35A, Commentary .20(3).
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    The Exchange further proposes to distribute, at least one business 
day prior to the commencement of trading of a security listing in 
connection with a Primary Direct Floor Listing, a regulatory bulletin 
that describes any special characteristics of the offering and the 
Exchange rules that apply to the pricing of a Primary Direct Floor 
Listing.\52\ The Exchange states that the regulatory bulletin would 
also include information about the notice that member organizations 
would be required to provide customers, as proposed, and remind member 
organizations of their obligations pursuant to the Exchange rules that 
(1) require member organizations to use reasonable diligence in regard 
to the opening and maintenance of every account, to know (and retain) 
the essential facts concerning every customer and concerning the 
authority of each person acting on behalf of such customer (Rule 2090); 
and (2) require member organizations in recommending transactions for a 
security subject to a Direct Listing Auction for a Primary Direct Floor 
Listing to have a reasonable basis to believe that: (i) the 
recommendation is suitable for a customer given reasonable inquiry 
concerning the customer's investment objectives, financial situation, 
needs, and any other information known by such member organizations, 
and (ii) the customer can evaluate the special characteristics, and is 
able to bear the financial risks, of an investment in such security 
(Rule 2111).\53\ The Exchange states that these member organization 
requirements are intended to remind members of their obligations to 
``know their customers'' and would also serve to increase transparency 
regarding the pricing mechanisms applicable to a Primary Direct Floor 
Listing and help provide investors with sufficient price discovery 
information.\54\ The Exchange represents that, for each Primary Direct 
Floor Listing, the Exchange's regulatory bulletin would also inform 
market participants that the Auction Price could be up to 20% below the 
lowest price of the disclosed price range and would specify that 
price.\55\ The Exchange also represents that this regulatory bulletin 
would indicate the price above which the Direct Listing Auction for the 
Primary Direct Floor Listing could not proceed, based on the company's 
certification.\56\
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    \52\ See Notice, supra note 10, 87 FR 68562. See also proposed 
Rule 7.35A, Commentary .20.
    \53\ See Notice, supra note 10, 87 FR 68562. See also proposed 
Rule 7.35A, Commentary .20(1) and (2).
    \54\ See Notice, supra note 10, 87 FR 68562.
    \55\ See id.
    \56\ See id.
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    The Exchange also proposes to amend certain aspects of the Manual. 
Specifically, Section 102.01B, Footnote (E) of the Manual currently 
provides that, with respect to a Primary Direct Floor Listing, the 
Exchange will deem a company to have met the applicable aggregate 
market value of publicly-held shares requirement \57\ if the company 
will sell at least $100,000,000 in market value of shares in the 
Exchange's opening auction on the first day of trading on the Exchange. 
The Manual further provides that, where a company is conducting a 
Primary Direct Floor Listing and will sell shares in the opening 
auction with a market value of less than $100,000,000, the Exchange 
will determine that such company has met its market-value of publicly-
held shares requirement if the aggregate market value of the shares the 
company will sell in the opening auction on the first day of trading 
and the shares that are publicly held immediately prior to the listing 
is at least $250,000,000 with such market value calculated using a 
price per share equal to the lowest price of the disclosed price 
range.\58\
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    \57\ See Section 102.01B of the Manual.
    \58\ See Section 102.01B, Footnote (E) of the Manual.
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    The Exchange states that, to effect the changes to the Price Range 
Limitation and facilitate the possibility of a Direct Listing Auction 
for a Primary Direct Floor Listing pricing up to 20% below the 
disclosed price range, the Exchange proposes to modify Section 102.01B, 
Footnote (E) of the Manual to provide that the Exchange would calculate 
the market value of such company's shares using a price per share equal 
to the lowest price of the disclosed price range, minus an amount equal 
to 20% of the highest price included in such price range, which would 
be referred to as the ``Primary Direct Floor Listing Minimum Price.'' 
\59\ The Exchange also proposes to amend Section 102.01B, Footnote (E) 
to include the requirement, as discussed above, that a company listing 
its securities on the Exchange pursuant to a Primary Direct Floor 
Listing must have specified the quantity of shares registered, as 
permitted by Securities Act Rule 457, in its effective registration 
statement and retained an underwriter with respect to the primary sales 
of shares by the company and identified the underwriter in its 
effective registration statement.\60\
---------------------------------------------------------------------------

    \59\ See Notice, supra note 10, 87 FR 68563.
    \60\ See id.
---------------------------------------------------------------------------

    The Exchange states that, to implement the changes to the Price 
Range Limitation described above, the Exchange is proposing the 
following changes to Rules 7.31 and 7.35A.\61\ The Exchange proposes to 
modify Rule 7.31(c)(1)(D)(ii) to provide that the limit price of an IDO 
Order would be equal to the lowest price of the Primary Direct Floor 
Listing Auction Price Range and to redefine the ``Primary Direct Floor 
Listing Auction Price Range'' as 20% below the lowest price and 80% 
above the highest price of the disclosed price range.\62\ The Exchange 
also proposes to define ``Issuer Price Range'' as the price range 
established by the issuer in its

[[Page 78145]]

effective registration statement.\63\ The Exchange states that Rule 
7.31(c)(1)(D)(ii), as modified, would facilitate the proposed changes 
to the Price Range Limitation by providing that the limit price of an 
IDO Order would be equal to the price that is 20% below the lowest 
price of the Issuer Price Range.\64\ The Exchange further proposes to 
specify in Rule 7.31(c)(D)(ii) that, for purposes of determining the 
Primary Direct Floor Listing Auction Price Range, the 20% and 80% 
thresholds would be calculated based on the highest price of the Issuer 
Price Range.\65\
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    \61\ See id.
    \62\ See id.
    \63\ See id.
    \64\ See id. The Exchange further proposes to specify in Rule 
7.31(c)(1)(D)(ii) that, for purposes of determining the Primary 
Direct Floor Listing Auction Price Range, the 20% and 80% thresholds 
would be calculated based on the highest price of the disclosed 
price range, consistent with the Instruction to paragraph (a) of 
Securities Act Rule 430A. See id.
    \65\ See supra note 22.
---------------------------------------------------------------------------

    Currently, Rule 7.35A(d)(2)(A)(v) provides that, for a security 
that is a Primary Direct Floor Listing, the Indication Reference Price 
will be the lowest price of the Primary Direct Floor Listing Auction 
Price Range.\66\ The Exchange proposes to add the requirement that the 
Exchange disseminate the Indication Reference Price on a public website 
to Rule 7.35A(d)(2)(A)(v).\67\ The Exchange also states that, based on 
the proposed revision to the definition of Primary Direct Floor Listing 
Auction Price Range in Rule 7.31(c)(1)(D)(ii), the Indication Reference 
Price for a Primary Direct Floor Listing would be the price that is 20% 
below the lowest price of the Issuer Price Range, consistent with the 
proposed changes to the Price Range Limitation.\68\
---------------------------------------------------------------------------

    \66\ See Notice, supra note 10, 87 FR 68563.
    \67\ See id.
    \68\ See id.
---------------------------------------------------------------------------

    Currently, Rule 7.35A(g)(2) specifies the circumstances under which 
a DMM may not conduct a Direct Listing Auction for a Primary Direct 
Floor Listing.\69\ The Exchange proposes to amend Rule 7.35A(g)(2) such 
that the rule would specify requirements for a Direct Listing Auction 
for a Primary Direct Floor Listing to proceed, rather than specifying 
circumstances under which a DMM would not conduct a Direct Listing 
Auction for a Primary Direct Floor Listing.\70\ The Exchange proposes 
to modify this rule to specify that the Auction Price for a Direct 
Listing Auction for a Primary Direct Floor Listing may not be lower 
than the price that is 20% below the lowest price of the Issuer Price 
Range or higher than the 80% Upper Limit.\71\ In other words, the 
Auction Price may not be outside of the Primary Direct Floor Listing 
Auction Price Range, as defined in amended Rule 7.31(c)(1)(D)(ii).\72\ 
The Exchange proposes that Rule 7.35A(g)(2)(A) would further provide 
that, if an issuer has certified to the Exchange a maximum Auction 
Price that is lower than the 80% Upper Limit, the Auction Price may not 
exceed such lower certified price.\73\
---------------------------------------------------------------------------

    \69\ See id.
    \70\ See id.
    \71\ See id.
    \72\ See id.
    \73\ See id.
---------------------------------------------------------------------------

    The Exchange proposes to amend Rule 7.35A(g)(2)(B) to provide that 
a Direct Listing Auction could proceed when the Auction Price is 
outside of the Issuer Price Range but within the Primary Direct Floor 
Listing Auction Price Range (as described in proposed Rule 
7.35A(g)(2)(A)) if the issuer has previously certified to the Exchange 
and publicly disclosed that: (a) the issuer does not expect that the 
Auction Price would materially change its previous disclosure in its 
effective registration statement (proposed Rule 7.35A(g)(2)(B)(i)(a)); 
(b) the price range in the preliminary prospectus included in the 
effective registration statement is a bona fide price range in 
accordance with Item 501(b)(3) of Regulation S-K (proposed Rule 
7.35A(g)(2)(B)(i)(b)); and (c) the registration statement contains a 
sensitivity analysis explaining how the issuer's plans would change if 
the actual proceeds from the offering differ from the amount assumed in 
the price range established by the issuer in its effective registration 
statement (proposed Rule 7.35A(g)(2)(B)(i)(c)).\74\
---------------------------------------------------------------------------

    \74\ See id. at 68564.
---------------------------------------------------------------------------

    The Exchange states that proposed Rule 7.35A(g)(2)(B)(ii) would 
further provide that, when the Auction Price determined by the DMM is 
outside of the Issuer Price Range (whether lower or higher), the issuer 
would be required to confirm to the Exchange that no additional 
disclosures are required under the federal securities laws based on 
such price.\75\ According to the Exchange, this proposed change would 
permit issuers to comply with their disclosure obligations under 
federal securities laws and provide investors with access to the 
requisite disclosures before the offering would proceed.\76\ The 
Exchange states that, upon receiving confirmation from the issuer that 
any such obligations have been met, the Exchange would relay that 
information to the DMM to proceed with the Direct Listing Auction.\77\
---------------------------------------------------------------------------

    \75\ See id.
    \76\ See id. As stated above, the Exchange also notes that the 
burden of complying with the disclosures required under the federal 
securities laws, including providing any disclosure necessary to 
avoid any material misstatements or omission, remains with the 
issuer. See Notice, supra note 10, 87 FR 68561.
    \77\ See id.
---------------------------------------------------------------------------

    The Exchange states that proposed Rule 7.35A(g)(2)(C)(i) would 
reflect the requirement set forth in current Rule 7.35A(g)(2)(B) that 
the DMM may not conduct a Direct Listing Auction for a Primary Direct 
Floor Listing if there is insufficient buy interest to satisfy both the 
IDO Order and all better-priced sell orders in full.\78\ The Exchange 
does not propose to change this requirement, other than adding 
clarifying text to specify that such orders would be satisfied at the 
Auction Price.\79\
---------------------------------------------------------------------------

    \78\ See id.
    \79\ See id.
---------------------------------------------------------------------------

    The Exchange states that proposed Rule 7.35A(g)(2)(C)(ii) would 
provide that the DMM would not proceed with a Direct Listing Auction 
for a Primary Direct Floor Listing until it has been notified by the 
Exchange that the additional conditions set forth in new Commentary .20 
to Rule 7.35A have been satisfied.\80\ The Exchange also states that 
proposed Commentary .20 to Rule 7.35A would provide that the Direct 
Listing Auction for a Primary Direct Floor Listing for a security may 
not be conducted until the Exchange has notified the DMM that, at least 
one business day prior to the commencement of trading in such security, 
the Exchange has distributed a regulatory bulletin describing: (i) any 
special characteristics of the offering and the Exchange rules that 
apply to the pricing of the Primary Direct Floor Listing; (ii) the 
obligations of member organizations pursuant to Exchange Rules 2090 and 
2111; and (iii) the requirement that a member organization provide its 
customers with a notice with information regarding the Direct Listing 
Auction for a Primary Direct Floor Listing.\81\ The Exchange states 
that this proposed change would: (i) facilitate the requirements 
described above to provide member organizations with sufficient 
information so that they may in turn inform their customers; (ii) 
remind member organizations of their obligations to ``know their 
customers''; (iii) increase transparency around the pricing mechanisms 
of a Primary Direct Floor Listing; and (iv) help provide investors with 
sufficient price discovery information.\82\
---------------------------------------------------------------------------

    \80\ See id.
    \81\ See id. See also supra notes 52-53 and accompanying text.
    \82\ See Notice, supra note 10, 87 FR 68564.

---------------------------------------------------------------------------

[[Page 78146]]

    Finally, the Exchange states that proposed Rule 7.35A(g)(2)(C)(iii) 
would provide that the DMM would not conduct a Direct Listing Auction 
for a Primary Direct Floor Listing if the Auction Price is outside of 
the Issuer Price Range and the issuer has not satisfied the conditions 
set forth in proposed Rules 7.35A(g)(2)(A) and 7.35A(g)(2)(B)(i) and 
(ii).\83\ The Exchange states that it proposes this rule to reinforce 
that a Direct Listing Auction for a Primary Direct Floor Listing could 
not proceed in these circumstances unless the issuer has made the 
requisite disclosures described in proposed Rule 7.35A(g)(2)(B).\84\
---------------------------------------------------------------------------

    \83\ See id.
    \84\ See id.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    The Commission finds that the proposed rule change, as modified by 
Amendment No. 2, is consistent with the requirements of the Exchange 
Act and the rules and regulations thereunder applicable to a national 
securities exchange.\85\ In particular, the Commission finds that the 
proposed rule change, as modified by Amendment No. 2, is consistent 
with Section 6(b)(5) of the Exchange Act,\86\ which requires, among 
other things, that the rules of a national securities exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest; and are not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \85\ 15 U.S.C. 78f(b). In approving this proposed rule change, 
the Commission has considered the proposed rule change's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \86\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission has consistently recognized the importance and 
significance of national securities exchange listing standards. Among 
other things, such listing standards help ensure that exchange-listed 
companies will have sufficient public float, investor base, and trading 
interest to provide the depth and liquidity necessary to promote fair 
and orderly markets.\87\
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    \87\ The Commission has stated in approving national securities 
exchange listing requirements that the development and enforcement 
of adequate standards governing the listing of securities on an 
exchange is an activity of critical importance to the financial 
markets and the investing public. In addition, once a security has 
been approved for initial listing, maintenance criteria allow an 
exchange to monitor the status and trading characteristics of that 
issue to ensure that it continues to meet the exchange's standards 
for market depth and liquidity so that fair and orderly markets can 
be maintained. See, e.g., Approval Order, supra note 11, 85 FR 
85807, 85811 n.55 (Dec. 29, 2020) (SR-NYSE-2019-67) (``NYSE 2020 
Order''); 82627 (Feb. 2, 2018), 83 FR 5650, 5653 n.53 (Feb. 8, 2018) 
(SR-NYSE-2017-30) (``NYSE 2018 Order''); 81856 (Oct. 11, 2017), 82 
FR 48296, 48298 (Oct. 17, 2017) (SR-NYSE-2017-31); 81079 (July 5, 
2017), 82 FR 32022, 32023 (July 11, 2017) (SR-NYSE-2017-11). The 
Commission has stated that adequate listing standards, by promoting 
fair and orderly markets, are consistent with Section 6(b)(5) of the 
Exchange Act, in that they are, among other things, designed to 
prevent fraudulent and manipulative acts and practices, promote just 
and equitable principles of trade, and protect investors and the 
public interest. See, e.g., NYSE 2020 Order, 85 FR 85811 n.55; NYSE 
2018 Order, 83 FR 5653 n.53; Securities Exchange Act Release Nos. 
87648 (Dec. 3, 2019), 84 FR 67308, 67314 n.42 (Dec. 9, 2019) (SR-
NASDAQ-2019-059); 88716 (Apr. 21, 2020), 85 FR 23393, 23395 n.22 
(Apr. 27, 2020) (SR-NASDAQ-2020-001).
---------------------------------------------------------------------------

    The Exchange's listing standards currently provide the Exchange 
with discretion to list a company whose stock has not been previously 
registered under the Exchange Act, where such company is listing in 
connection with a Primary Direct Floor Listing, without a firm 
commitment underwritten offering, either selling shares to raise 
capital alone or in conjunction with shares by selling 
shareholders.\88\ The Exchange proposes to modify its rules concerning 
pricing limitations for securities listing on the Exchange pursuant to 
a Primary Direct Floor Listing. Instead of the current Price Range 
Limitation, which limits the Auction Price to the price range disclosed 
in the issuer's effective registration statement,\89\ the proposal 
would allow the Direct Listing Auction for a Primary Direct Floor 
Listing to proceed at a price up to either 20% below or 80% above the 
disclosed price range if certain additional conditions are met. The 
Exchange also proposes changes to the procedures for a Direct Listing 
Auction for a Primary Direct Floor Listing to accommodate the proposed 
changes to the Price Range Limitation.
---------------------------------------------------------------------------

    \88\ See Section 102.01B, Footnote (E) of the Manual and supra 
note 12. See also Approval Order, supra note 11, 85 FR 85807. The 
listing standards under Section 102.01B, Footnote (E) of the Manual 
also allow for direct listings in connection with the sale of shares 
by selling shareholders only.
    \89\ See Rule 7.31(c)(1)(D)(ii). The Commission previously 
approved the Exchange's proposal to allow Primary Direct Floor 
Listings as long as the Direct Listing Auction occurred within the 
Price Range Limitation. See Approval Order, supra note 12.
---------------------------------------------------------------------------

    As explained further below, the following aspects of the proposal, 
as modified by Amendment No. 2, demonstrate that the Exchange's 
proposal is consistent with the protection of investors and the public 
interest under Section 6(b)(5) of the Exchange Act as well as the 
maintenance of fair and orderly markets: (i) by modifying the Price 
Range Limitation such that, provided other requirements are satisfied, 
a Primary Direct Floor Listing can be executed in the Direct Listing 
Auction at a price that is above the highest price of the disclosed 
price range only if the Auction Price is at or below the 80% Upside 
Limit; (ii) by adding conditions that must be satisfied before the 
Direct Listing Auction could proceed at a price outside of the 
disclosed price range that provide some assurance that issuers are 
complying with the disclosure requirements under federal securities 
laws, including conditions that require an issuer to provide a prior 
certification to NYSE to include a sensitivity analysis in its 
registration statement and to also confirm that no additional 
disclosures are required under the federal securities laws to open the 
Direct Listing Auction at the Auction Price; (iii) by requiring that a 
company offering securities for sale in connection with a Primary 
Direct Floor Listing must retain an underwriter with respect to the 
primary sales of shares by the company and identify the underwriter in 
its effective registration statement; and (iv) by making clarifying 
changes regarding calculation of the 20% threshold below the disclosed 
price range and other clarifying changes.
    The Commission discusses below the Exchange's proposed 
modifications to Primary Direct Floor Listing. First, the Commission 
addresses the modifications to the Price Range Limitation, and the 
certification process and other conditions, that would allow a Primary 
Direct Floor Listing to execute in the Direct Listing Auction at a 
price that is outside the disclosed price range (i.e., up to 20% below 
the lowest price in the disclosed price range or no higher than the 80% 
Upside Limit). Second, the Commission addresses the availability of 
pricing information to investors during the course of a Direct Listing 
Auction. Third, the Commission addresses the Exchange's proposed 
requirement that a company offering securities for sale in connection 
with a Primary Direct Floor Listing must retain an underwriter with 
respect to the primary sales of shares by the company and identify the 
underwriter in its effective registration statement and addresses 
concerns about Section 11 liability and how requiring an underwriter 
may mitigate such concerns. Finally, the Commission discusses 
additional clarifications to the proposal. As discussed throughout this

[[Page 78147]]

order, the Commission concludes that the Exchange has met its burden to 
demonstrate that its proposal is consistent with the Exchange Act, and 
therefore finds the proposed rule change is consistent with the 
requirements of the Exchange Act.

A. Modification of Price Range Limitation and Required Certification

    The Exchange proposes to modify its rules concerning pricing 
restrictions for the Direct Listing Auction for a Primary Direct Floor 
Listing. Provided that other requirements are satisfied, a Primary 
Direct Floor Listing will be able to be executed in the Direct Listing 
Auction at a price that is at or above the price that is as low as 20% 
below the lowest price in the disclosed price range, or at a price that 
is as high as 80% above the highest price of the disclosed price range 
(i.e., at or below the 80% Upside Limit).
    In all such cases where the execution price would be outside of the 
disclosed price range, the company will be required to specify the 
quantity of shares registered in its registration statement, as 
permitted by Securities Act Rule 457, and that registration statement 
will be required to contain a sensitivity analysis explaining how the 
company's plans would change if the actual proceeds from the offering 
are less than or exceed the amount assumed in the disclosed price 
range. Prior to the Direct Listing Auction, the company must certify to 
NYSE that the registration statement contains the required sensitivity 
analysis.\90\ The company will also be required to publicly disclose 
and certify to NYSE that the company does not expect that such offering 
price would materially change the company's previous disclosure in its 
effective registration statement and that the price range in the 
preliminary prospectus included in the effective registration statement 
is a bona fide price range in accordance with Item 501(b)(3) of 
Regulation S-K. If the company's certification submitted to NYSE in 
that regard includes a price limit that is below the 80% Upside Limit, 
NYSE will not execute the Direct Listing Auction if it results in an 
Auction Price above such limit.
---------------------------------------------------------------------------

    \90\ As the Exchange states, the sensitivity analysis would 
allow investors to see how changes in the share price ripple through 
critical elements of a company's disclosure.
---------------------------------------------------------------------------

    The Exchange also proposes to require that the securities of a 
company listing in connection with a Primary Direct Floor Listing 
cannot price above the 80% Upside Limit (i.e., at a price that is more 
than 80% above the highest price of the disclosed price range). The 
Exchange believes this will incentivize the company and its named 
underwriter to take steps to help ensure the accuracy of the disclosed 
price range so as to avoid the consequences of a failed offering. In 
the OIP, the Commission asked questions about the potential usefulness 
and reliability of the price range disclosure in the registration 
statement if issuers could price up to 20% below and anywhere above the 
disclosed price range.\91\ The changes that the Exchange made 
subsequent to the OIP, including the imposition of the 80% Upside Limit 
and the named underwriter requirement, is a reasonable response to 
address these concerns, and eliminates the open-ended nature of the 
original proposal that would have allowed the opening to occur at any 
price above the high end of the disclosed price range, with no 
limitations.
---------------------------------------------------------------------------

    \91\ See OIP, supra note 7. One commenter raised similar 
concerns. See Letter from Jeffrey P. Mahoney, General Counsel, 
Council of Institutional Investors (July 28, 2022) (``CII Letter 
I'').
---------------------------------------------------------------------------

    The Exchange's proposal to expand the Price Range Limitation for 
Primary Direct Floor Listing would not allow the Direct Listing Auction 
to proceed at a price outside of the disclosed price range if the 
company is unable to provide NYSE with the required certification about 
the adequacy of the disclosure to allow the offering to execute at a 
price that is up to 20% below the low end of the disclosed price range 
or is up to the 80% Upside Limit. In addition, the Direct Listing 
Auction could not proceed at a price outside of the disclosed price 
range if the company is unable to confirm to the Exchange that no 
additional disclosures are required under the federal securities laws 
to open the Direct Listing Auction at the Auction Price. The DMM would 
not conduct a Direct Listing Auction for a Primary Direct Floor Listing 
if, among other things, the Auction Price would be outside the 
disclosed price range and the company has not satisfied the conditions 
described above. We believe these provisions, taken together, will 
provide an opportunity for the company to meet its disclosure 
obligations under the federal securities laws prior to the opening 
auction on the NYSE proceeding if the Direct Listing Auction for a 
Primary Direct Floor Listing will execute at a price that is up to 20% 
below the low end of the disclosed price range or is up to the 80% 
Upside Limit. Issuers also must comply with separate disclosure 
obligations under the federal securities laws, and compliance with the 
specific requirements of NYSE's proposed listing standards may not be 
sufficient to comply with the federal securities laws. In particular, 
an issuer using Rule 430A to omit pricing-related information would 
need to consider whether a post-effective amendment to a registration 
statement containing a price range would be required if a change in 
price materially alters the disclosure in the registration statement at 
effectiveness. In addition, for purposes of Securities Act Sections 
12(a)(2) and 17(a)(2), information delivered to purchasers after the 
time of sale is not taken into account in determining whether there 
were material misstatements or omissions.\92\ The Commission has 
interpreted Section 12(a)(2) and Section 17(a)(2) as reflecting a core 
concept of the Securities Act--that materially accurate and complete 
information regarding an issuer and the securities being sold should be 
available to investors at the time of the contract of sale, when they 
make their investment decisions.\93\ Based on the above, the Commission 
believes that this aspect of the proposal is consistent with the 
investor protection and public interest provisions under Section 
6(b)(5) of the Exchange Act.\94\
---------------------------------------------------------------------------

    \92\ See Securities Act Rule 159. See also Securities Exchange 
Act Release No. 93119 (Sept. 23, 2021), 86 FR 54262, 54266 n.47 
(Sept. 30, 2021).
    \93\ See Securities Offering Reform Proposing Release, 
Securities Act Release No. 8501 (Nov. 3, 2004) (proposing current 
Rule 159 as an interpretation of Section 12(a)(2) and Section 
17(a)(2)) and Securities Offering Reform Adopting Release, 
Securities Act Release No. 8591 (Aug. 3, 2005) (adopting Rule 159 as 
proposed).
    \94\ See OIP, supra note 7.
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B. Availability of Pricing Information

    In the OIP, the Commission asked whether providing pricing 
information during the course of the auction process only through pre-
opening indications via data feeds that charge subscription fees would 
be consistent with, as stated by the Exchange, ``providing readily 
available, real time pricing information to investors.'' \95\ The 
Exchange stated in response that its dissemination of pre-opening 
indications for a security to be opened in a Direct Listing Auction for 
a Primary Direct Floor Listing via the SIP and proprietary data feeds 
is consistent with the availability of the same for securities opened 
in IPOs and the Exchange believes that interested investors have found 
pre-opening indications to be readily accessible and to provide useful 
real time pricing information to inform their participation in such 
auctions.\96\ In its proposal, the Exchange also stated that by 
providing real time pricing information by

[[Page 78148]]

disseminating pre-opening indications, as stated above, market 
participants would have ready access to up-to-date pricing information 
leading up to the Direct Listing Auction for a Primary Direct Floor 
Listing and this should support price discovery transparency to 
investors.\97\ The Exchange further stated that, under the proposal, 
member organizations would be required to provide to a customer, before 
that customer places an order to participate in a Direct Listing 
Auction for a Primary Direct Floor Listing, a notice describing the 
mechanics of pricing a security subject to a Direct Listing Auction for 
a Primary Direct Floor Listing, including information regarding the 
availability of pre-opening indications via the SIP and proprietary 
data feeds and the location of the public website where the Exchange 
would disseminate information relating to the Indication Reference 
Price.\98\ The Exchange also represented that it would issue a 
regulatory bulletin describing any special characteristics of the 
offering and the rules that apply to the pricing of the Primary Direct 
Floor Listing. Further, the Exchange represented that its regulatory 
bulletin would indicate the highest price at which the Direct Listing 
Auction for the Primary Direct Floor Listing could proceed.\99\
---------------------------------------------------------------------------

    \95\ See OIP, supra note 7.
    \96\ See Notice, supra note 10, 87 FR 68562 n.29.
    \97\ See id. at 68565.
    \98\ See id. at 68562. The Exchange will also make the 
Indication Reference Price available, free of charge, on a public 
website (such as www.nyse.com) on the day the Direct Listing Auction 
is anticipated to take place. As stated above, this price is the 
lowest price of the Primary Direct Floor Listing Auction Price Range 
and would be known before the opening process begins and would not 
change once established.
    \99\ See id. The Exchange also represented that the regulatory 
bulletin would specify the price that is 20% below the lowest price 
of the disclosed price range. See id.
---------------------------------------------------------------------------

    The Exchange has further stated that the pre-opening indications, 
based on the DMM's assessment of interest eligible to participate in 
the Direct Listing Auction, would provide notice of when ``price 
volatility has subsided and price equilibrium has been met with respect 
to the orders wishing to participate in such Auction.'' \100\ In 
particular, the Exchange highlighted three existing rules concerning 
pre-opening indication procedures: Exchange Rule 7.35A(d)(4)(C) 
provides that the DMM should aim to publish a pre-opening indication 
with a spread of less than $1.00 before opening a security; Rule 
7.35A(d)(4)(D) provides that the DMM must wait for certain minimum 
specified periods of time after publishing a pre-opening indication 
before opening a security; \101\ and Rule 7.35A(d)(4)(G) provides that 
the DMM may not open a security outside of the last-published pre-
opening indication. These pre-opening indication procedures apply to 
Direct Listings, including Primary Direct Floor Listings, as well as 
other IPOs on the Exchange. Further, the Exchange has represented that 
the availability of pre-opening indications for Primary Direct Floor 
Listings are consistent with the availability of the same information 
for securities opened in IPOs on the Exchange.
---------------------------------------------------------------------------

    \100\ See id. at 68565.
    \101\ A DMM must wait for a minimum of three minutes between 
publication of the first indication and a security's opening or 
reopening. If more than one indication has been published, a 
security may be opened or reopened one minute after the last 
published indication provided that at least three minutes have 
elapsed from the dissemination of the first indication. See NYSE 
Rule 7.35A(d)(4)(D).
---------------------------------------------------------------------------

    The Commission believes that the availability of pre-opening 
indications, which must be provided in accordance with these existing 
procedures to investors in Primary Direct Floor Listings, could help to 
provide investors with useful information as to the pricing of the 
security in the Direct Listing Auction and help to inform investors in 
making decisions about entering, modifying, or cancelling orders to 
participate in such auction. The Commission also believes that the 80% 
Upside Limit, or other lower maximum price based on the company's 
certification, will provide a cap to an investor's financial obligation 
on its buy order that would be executed in the opening auction and that 
the regulatory bulletin should help inform investors of this 
price.\102\ Based on the above, the Commission finds these procedures 
are consistent with the protection of investors, the public interest, 
and the other requirements of Section 6(b)(5) of the Exchange Act.
---------------------------------------------------------------------------

    \102\ But see discussion in Section III A, supra, concerning an 
issuer's disclosure obligations with respect to pricing and pricing 
changes.
---------------------------------------------------------------------------

C. Addition of Named Underwriter Requirement in a Primary Direct Floor 
Listing and Securities Act Section 11 Standing

    Given the broad definition of ``underwriter'' in the Securities 
Act,\103\ parties, such as the issuers' financial advisor, may, 
depending on the facts and circumstances including the nature and 
extent of that party's activities, be deemed a statutory underwriter 
with respect to a direct listing, with attendant underwriter 
liabilities. In the OIP, the Commission asked several questions about 
potential issues related to the lack of a named underwriter (as opposed 
to a statutory underwriter) in a Primary Direct Floor Listing where an 
offering can price outside of the range established by the issuer in 
its effective registration statement.\104\ The Commission questioned 
whether a party who may meet the statutory underwriter definition but 
is not named as an underwriter would review and adequately conduct due 
diligence on the information contained in the registration statement 
for a Primary Direct Floor Listing where the Direct Listing Auction is 
executed outside of the disclosed price range. The Commission also 
stated that permitting a Primary Direct Floor Listing could potentially 
result in increased regulatory arbitrage if and to the extent that 
issuers and intermediaries, including financial advisors, are not 
subject to equivalent liability standards in the direct listings 
context as they would be in traditional firm commitment underwritten 
IPOs.\105\
---------------------------------------------------------------------------

    \103\ Section 2(a)(11) of the Securities Act defines 
``underwriter'' to mean ``any person who has purchased from an 
issuer with a view to, or offers or sells for an issuer in 
connection with, the distribution of any security, or participates 
or has a direct or indirect participation in any such undertaking, 
or participates or has a participation in the direct or indirect 
underwriting of any such undertaking.''
    \104\ See OIP, supra note 7. One commenter stated it was 
concerned, consistent with the statements in the OIP, about the lack 
of a named underwriter in a Primary Direct Floor Listing where the 
offering could price outside of the range established by the issuer 
in its effective registration statement and stated it also had 
concerns about challenges to bringing claims under Section 11 of the 
Securities Act due to potential tracing issues. See CII Letter I, at 
4.
    \105\ See OIP, supra note 7.
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    In the proposed rule change as modified by Amendment No. 2, the 
Exchange proposes to require that a company offering securities for 
sale in connection with a Primary Direct Floor Listing retain an 
underwriter with respect to the primary sales of shares by the company 
and identify the underwriter in its effective registration 
statement.\106\ The Exchange states that it believes that underwriters 
provide significant investor protections that are necessary in a 
Primary Direct Floor Listing where an offering can price outside of the 
range established by the issuer in its effective registration 
statement.\107\ For example, the Exchange states that underwriters are 
exposed to potential Securities Act liability, which provides a strong 
incentive for them to take steps to help ensure the accuracy of 
disclosure in a registration statement.\108\ The Exchange states that 
it ``believes that these significant investor

[[Page 78149]]

protection provisions are necessary in a Primary Direct Floor Listing 
if an offering can price outside the price range established in the 
issuer's effective registration statement, subject to the proposed 
limitations, because such provisions allow investors to make reasonable 
pricing decisions with clarity that the company's underwriter would 
face statutory liability.'' \109\ Earlier in the amended proposal, the 
Exchange notes the Commission's recent explanation that ``[t]he civil 
liability provisions of the Securities Act reflect the unique position 
underwriters occupy in the chain of distribution of securities and 
provide strong incentives for underwriters to take steps to help ensure 
the accuracy of disclosure in a registration statement.'' \110\ 
Accordingly, the Exchange proposes to require named underwriters for 
listings of securities on the Exchange in connection with a Primary 
Direct Floor Listing.
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    \106\ See Notice, supra note 10, 87 FR 68559.
    \107\ See id. at 68561.
    \108\ See id.
    \109\ See id. at 68561.
    \110\ See id. (quoting Special Purpose Acquisition Companies, 
Shell Companies, and Projections, Securities Exchange Act Release 
No. 94546 (Mar. 30, 2022), 87 FR 29458 (May 13, 2022)).
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    The Commission believes that the Exchange's proposed requirement 
that a company conducting a Primary Direct Floor Listing must retain 
and name an underwriter will help address the investor protection 
concerns discussed in the OIP that can arise in a Primary Direct Floor 
Listing that prices outside of the disclosed price range. With respect 
to disclosure, for example, for an offering to proceed at a price 
outside of the disclosed price range, the Exchange's proposal would 
require the company to initially provide certifications to the Exchange 
and publicly disclose that the company does not expect that such a 
price would materially change its effective registration statement 
disclosure. The company's registration statement also would need to 
contain a sensitivity analysis explaining how the company's plans would 
change if the actual proceeds from the offering are less than or exceed 
the amount assumed in the disclosed price range. In addition, the 
company would be required to confirm to the Exchange that no additional 
disclosures are required under the federal securities laws based on the 
actual price. The required presence of named underwriters who are 
subject to Securities Act liability should help ensure the accuracy of 
these disclosures that potential investors receive in a Primary Direct 
Floor Listing. This disclosure includes information, such as the use of 
proceeds and the required sensitivity analysis, that becomes even more 
important when an offering prices outside of the range established by 
the company in its registration statement. Investors should also 
benefit from the knowledge that underwriters with Securities Act 
liability are required as companies consider the certifications they 
must provide to the Exchange with respect to the impact of price 
changes on their registration statement disclosure and on their 
obligation to provide additional disclosures under the federal 
securities laws.
    The Commission also asked questions in the OIP about shareholders' 
ability to pursue claims under Section 11 of the Securities Act due to 
potential traceability issues.\111\ The Exchange states that it 
believes that the requirement to retain a named underwriter in a 
Primary Direct Floor Listing may mitigate traceability concerns because 
the underwriter ``would be able to impose lock-up arrangements for the 
same reasons that make lock-up agreements common in an IPO.'' \112\ The 
Commission agrees that the requirement to retain a named underwriter 
may help mitigate traceability concerns. However, the actual impact of 
the named underwriter requirement is far from certain, particularly 
because tracing is a judicially-developed doctrine and there is limited 
judicial precedent addressing tracing requirements in the context of 
direct listings. In addition, because of the many factors that go into 
an underwriter's decision to request or require lock-up arrangements in 
public offerings, whether, and if so to what extent, underwriters in 
Primary Direct Floor Listing would impose lock-up arrangements on all 
company shareholders is unclear. Although the Commission's findings in 
this order are based on the specific proposed rule change filed with 
the Commission, including how the proposed rule operates under the 
circumstances discussed in this order, the Commission recognizes that, 
over time, those circumstances may change. Some of the circumstances 
that may change involve tracing and may include developments in case 
law involving tracing in the direct listing context.
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    \111\ See OIP, supra note 7. One commenter raised similar 
concerns. See CII Letter I and Letter from Jeffery P. Mahoney, 
General Counsel, Council of Institutional Investors (Dec. 1, 2022) 
(``CII Letter II''). This commenter also stated that the Exchange 
does not address how its proposal ``might alleviate the poor 
corporate governance practices that appear endemic to companies that 
become public through a direct listing.'' CII Letter II. As the 
Commission stated previously, the Commission does not believe that 
investors will be precluded from raising concerns about governance 
structures in the context of direct listings; to the extent a 
company's corporate governance practices are of sufficient concern 
to investors, they may be able to influence companies' governance 
practices through signaling their unwillingness to purchase a 
company's shares through a direct listing. In this way, investors 
may be able to persuade companies to adopt preferred governance 
provisions, whether the company becomes listed through a direct 
listing or a firm commitment IPO. See Securities Exchange Act 
Release No. 91947 (May 19, 2021), 86 FR 28169, 28177 (May 25, 2021) 
(SR-NASDAQ-2020-057) (``Nasdaq 2021 Order'').
    \112\ See Notice, supra note 10, 87 FR 68561.
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    In view of the totality of the Exchange's proposal, including the 
requirement that a company seeking to conduct a Primary Direct Floor 
Listing retain and name an underwriter, the Commission does not expect 
any such tracing challenges in this context to be of such magnitude as 
to render the proposal inconsistent with the Exchange Act.\113\ The 
Commission therefore concludes that the proposed rule change, as 
modified by Amendment No. 2, is consistent with the protection of 
investors and the public interest under Section 6(b)(5) of the Exchange 
Act.
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    \113\ See Approval Order, supra note 12, 85 FR 85816. See also 
Nasdaq 2021 Order, supra note 111, 86 FR 28176.
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D. Additional Clarifications

    In the OIP, the Commission asked questions about how the Exchange 
would calculate the 20% threshold below the disclosed price range under 
proposed Rule 7.31(c)(1)(D)(ii) and whether that computation would lead 
to the same minimum price contemplated by the proposed revisions to 
Section 102.01B, Footnote (E) of the Manual.\114\ Subsequently, the 
Exchange revised its proposal to provide that the 20% threshold below 
the disclosed price range, along with the 80% threshold used to 
determine the 80% Upper Limit, would be calculated using the highest 
price of the Issuer Price Range.\115\ In addition, the Exchange made 
clarifying changes to the description of the 20% threshold used for 
evaluating whether the company has satisfied the market value 
requirement in Section 102.01B, Footnote (E) of the Manual.\116\ The 
Commission finds that these changes will help ensure that the 
calculations are consistent throughout the Exchange's rules and set 
forth a clear process for how the Exchange will calculate the 20% and 
80% thresholds, thereby providing clarity to investors

[[Page 78150]]

and market participants on the lowest and highest price outside of the 
disclosed price range at which the Direct Listing Auction can occur 
consistent with the protection of investors and the public interest 
under Section 6(b)(5) of the Exchange Act.
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    \114\ See OIP, supra note 7.
    \115\ See proposed Rule 7.31(c)(1)(D)(ii). See also Notice, 
supra note 10, 87 FR 68563. Under the Exchange's original proposal, 
the 20% threshold would have been calculated based on the maximum 
offering price set forth in the registration fee table, consistent 
with the Instruction to paragraph (a) of the Securities Act.
    \116\ See proposed Section 102.01B, Footnote (E) of the Manual. 
See also Notice, supra note 10, 87 FR 68562.
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IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment No. 2, is consistent with the 
Exchange Act and the rules and regulations thereunder applicable to a 
national securities exchange.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\117\ that the proposed rule change (SR-NYSE-2022-14), as 
modified by Amendment No. 2 thereto, be, and it hereby is, approved.
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    \117\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\118\
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    \118\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022-27659 Filed 12-20-22; 8:45 am]
BILLING CODE 8011-01-P