Direct Public Offerings: NYSE Expanded Listing Options
Initial public offerings (IPO) have long been the primary channel for companies looking to go public. But in the past few years, more companies have turned to capital markets alternatives, such as direct public offerings (DPO) and special purpose acquisition companies (SPAC). While DPOs have recently been leveraged by Spotify, Slack, iHeartMedia, and other technology titans that did not have a need to raise capital, recent regulatory changes have made this increasingly popular capital markets vehicle more attractive to companies across a range of industries.
Since the new DPO landscape still carries some uncertainty, companies should proceed with caution if they choose to pursue this capital markets option.
In August, the New York Stock Exchange (NYSE) received approval by the US Securities and Exchange Commission (SEC) to allow companies to sell new shares in a DPO transaction. As a result, companies pursuing a DPO are now able to raise new funding in a listing. This change marks a stark shift from the previous rules, thus making DPOs a viable option for companies in need of growth capital. Since DPOs bear certain advantages for legacy investors and less fees for the company than traditional IPOs, the new change will undoubtedly lead to a rise in this type of capital markets transaction.
As companies consider going public through a DPO, here are three things they should know about the recent changes.
- New Capital: In a traditional IPO, a company raises new capital with underwritten securities that are marketed by a financial institution and subject to a lockup period in which shareholders are prohibited from trading. By contrast, a DPO historically gave only legacy shareholders the option to sell their securities directly into the public markets without the use of an underwriter or any new capital being raised for the company. The SEC’s recent approval allows companies to go public by selling new shares directly on the NYSE without incurring the hefty underwriter fees associated with a standard IPO known as a primary direct floor listing.
- Share Issuance Expectations: Previously, the DPO path allowed legacy shareholders to sell shares into the market at any time. As part of the updated requirements, all newly issued shares sold by the company must be sold in the opening auction at one price and at one time. Legacy shareholders may sell in the opening auction if there is demand for additional shares at the opening auction price; legacy shareholders may further sell at any time after the opening auction is completed.
- Listing Requirements: The new regulation will require companies pursuing a primary direct floor listing to sell at least $100 million in market value of the shares in the Exchange’s opening auction on the first day of trading. If a company sells less than $100 million in the opening auction, the Exchange will determine that such company has met its market value 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. Market value is calculated using a price per share equal to the lowest price of the price range established by the issuer in its registration statement.
Similar to an IPO, a DPO must be approved by the SEC. Companies can generally register under either the Securities Act of 1933 using Form S-1 or the Securities Act of 1934 using Form 10. Since a DPO does not use underwriters, certain sections of the Registration Statements, such as underwriting, are not applicable in a DPO.
Some companies are already taking advantage of the change. Palantir and Asana filed updated registration statements in September to go public via a DPO, indicating that large companies are eager to capitalize on the cost-saving aspects of DPOs. This capital markets path could save Palantir Technologies and Asana millions of dollars in underwriting fees.
While the updated listing requirements make DPOs an attractive way for companies to save on certain costs, some investors remain cautious about the new incentives and believe DPOs could pose major risks. In early September, the Council of Institutional Investors (CII) filed a petition against the SEC’s DPO approval for the NYSE. The CII believes that the updated requirements may offer fewer legal protections to investors. One of the main concerns revolves around traceability concerns. The CII’s petition to the SEC highlights this concern as to whether investors can effectively challenge misleading registration statements if they cannot track their shares to the shares offered in the Registration Statement.
Since the new DPO landscape still carries some uncertainty, companies should proceed with caution if they choose to pursue this capital markets option. Still, for companies considering a less costly way to go public, a DPO might be the right approach for gaining access to capital. Companies should consult with their financial, legal, and accounting advisors to plan and execute their listings in compliance with SEC regulations, exchange listing rules, and investor expectations. If management is not prepared to go public through a traditional IPO, a DPO, which bears many similarities, is unlikely to be the answer.