A paper titled, “The Impact of Exchange Listing on Corporate Governance Evidence from Direct Listing,” written by Dan French, Andrew Kern, Thibaut Morillon, and Adam Yore, considers the impact on corporate governance policies attributable to the listing of a class of securities on a national securities exchange. The authors focus on direct listings and challenge the notion that companies that undertake direct listings may not adopt investor protections and governance practices due to the absence of underwriters that typically act as gatekeepers. The authors examine public non-listed REITs that undertake a listing, or “transitioning REITs.” By doing so, the authors attempt to demonstrate the value of a listing without an offering, or a direct listing. The authors consider various data points, including board size, board independence, nominating and compensation committee independence, etc., in order to draw comparisons between public non-listed REITs and transitioning REITs. Transitioning REITs even before listing on a securities exchange already meet many of the governance standards of the securities exchanges. This suggests that the REITs that undertake direct listings already have characteristics associated with public companies. In addition, once listed on exchanges they ave significant institutional stockholders, and this serves to reinforce the heightened governance standards. The authors conclude that even without the benefits of the traditional IPO process, companies that undertake direct listings have comparable governance standards. The authors note that “changes in corporate governance occur gradually through time as opposed to abruptly just after the listing event.”
On February 2018, the Securities and Exchange Commission (“SEC”) approved the New York Stock Exchange’s (the “NYSE”) proposal to permit qualifying private companies to use “direct listings” to list their shares on the NYSE so long as the direct listing is accompanied by a concurrent resale registration statement under the Securities Act of 1933. To accommodate these direct listings, the NYSE modified its Rules 15, 104, and 123(d). In March 2018, the NYSE issued an information memo highlighting the changes.
NYSE Rule 15 sets forth the requirements for a pre-opening indication, which is the price range within which the opening of trading for a security is anticipated to occur. When the opening transaction on the NYSE is anticipated to be at a price that deviates by more than the “Applicable Price Range” from a specified “Reference Price,” then the Designated Market Maker (“DMM”) must publish a pre-opening indication before a security opens. Under amended Rule 15, the reference price for directly listed securities is defined as: (i) the most recent transaction price if the security had recent sustained trading in a private placement market or, if none, (ii) a price determined by the NYSE in consultation with a financial adviser to the issuer of such security.
Rule 104 sets forth the responsibilities and duties of a DMM. Changes to Rule 104 require that the DMM first consult with the financial adviser to the issuer before a direct public offering (DPO) for securities that do not have a recent sustained history of trading in a private placement market. This consultation aims to promote a fair and orderly opening of such security. Last, the SEC approved an amendment to NYSE Rule 123(d) and granted the NYSE discretion to declare a regulatory halt in a security that is the subject of an initial pricing on the NYSE if that security has not been listed on a national securities exchange or traded in the over-the-counter market pursuant to FINRA Form 211 immediately prior to the initial pricing. This regulatory halt would be terminated when the DMM opens the security. The NYSE Information Memo on Direct Listings can be found in full here.
Despite the NYSE accommodations for DPOs, the Financial Industry Regulatory Authority, Inc. (“FINRA”) advises its member firms to exercise caution when recommending and entering unpriced customer orders at and around the opening on the first day of trading of a direct listing of a security. FINRA notes that there is potential for substantial variance in the opening price of a direct listing and in the subsequent prices at which trading on the secondary market occurs on the first day of trading. As a consequence, FINRA is concerned that without the use of a limit price, customers may receive execution at prices that are not in line with their expectations. Instead, FINRA encourages its member firms to consider using and recommending priced, customer limit orders. FINRA Regulatory Notice 18-11 can be found in full here.