Nasdaq moves to clarify direct listings process

This article has been updated with corrections

Nasdaq has filed a proposal with the SEC clarifying it's process for direct listings without an IPO. 

The move comes amid rumors that collaboration platform Slack is planning to go public via a direct listing. Last year music-streaming giant Spotify took advantage of newly changed NYSE rules to forgo underwriters and list direct to market – bringing this type of listing to the spotlight. 

While Nadaq has done a number of direct listings in the past, it is now clarifying certain aspects of that process. ‘Nasdaq recognizes that some companies that have sold common equity securities in private placements, which have not been listed on a national securities exchange or traded in the over-the-counter market… may wish to list those securities to allow existing shareholders to sell their shares,’ says the exchange in its filing. 

It adds that the rule change would still mean ‘direct listings are subject to all initial listing requirements applicable to equity securities and, subject to applicable exemptions, the corporate governance requirements set forth in the Rule 5600 Series,’ adding that any company listing directly should do so ‘solely for the purpose of allowing existing shareholders to sell their shares.’

Other key points in the Nasdaq filing include the requirement ‘that a company listing on the Nasdaq Global Select Market through a direct listing provide Nasdaq an independent third-party valuation.’ The exchange adds that any company considering this option must have a valuation showing a market value of publicly held shares of at least $250 mn to meet the requirement for listing on the Global Select Market.

At present the filing applies only to listings on the Global Select Market, though Nasdaq says it ‘intends to subsequently file a proposed rule change’ for both its Capital Market and Global Market segments.

When Spotify went public via a direct listing in April last year, it did so on the NYSE after the exchange had changed its rules in February 2018. 

Unlike in an IPO, Spotify’s move to become a publicly listed company was ‘a direct resale by its registered shareholders without being underwritten by an investment bank and with no price set ahead of the debut,’ wrote Ben Maiden in IR Magazine (see Spotify plays new IR tune, summer 2018, page 24), discussing a video the streaming giant had published to explain its decision:

• To list without the company having to sell shares

• To offer liquidity for shareholders

• To provide equal access to all buyers and sellers

• To conduct the process with ‘radical transparency’ – pointing out that it filed a Form F1 with the SEC providing full financial disclosure, as it would have done for an IPO

• To enable ‘market-driven price discovery through the [NYSE]’.

There was speculation at the time that the direct listing route could prove popular among big tech – firms like Uber, Airbnb and Pinterest were all named as companies that could benefit from a listing approach that essentially uses brand recognition to make it easier to sell to retail and institutional shareholders without the help of the sell side. 

This need for name recognition is one factor likely to limit the number of companies choosing a direct listing. The other is the fact that these listings are not designed to raise cash – the very thing most firms are looking for in an IPO.