Direct listings have increasingly been gaining attention as a means for a private company to go public. In our most recent memo available here, we provide a summary of the current requirements for direct listings on the NYSE and Nasdaq and of NYSE’s recent proposal to amend its direct listing rules to allow primary offerings through the NYSE in conjunction with direct listings. We also explore the potential benefits and risks associated with direct listings.
A direct listing refers to the listing of a privately held company’s stock for trading on a national stock exchange (either the NYSE or Nasdaq) without conducting an underwritten offering, spin-off or transfer quotation from another regulated stock exchange. Under current stock exchange rules, direct listings involve a company effectively going public through the registration of a secondary offering with, the SEC. Existing shareholders, such as employees and early-stage investors, whose shares are registered for resale are able to sell their shares on the applicable exchange, but are not obligated to do so, providing flexibility and value to such shareholders by creating a public market and liquidity for the company’s stock. Upon listing of the company’s stock, the company becomes subject to the reporting and governance requirements applicable to publicly traded companies under the Securities Exchange Act of 1934, as amended, and the rules of the applicable stockexchange. Going public, whether through a direct listing or a traditional IPO, provides a company with optionality going forward to use the public capital markets to raise cash, typically lowering its cost of capital and increasing flexibility in capital planning, and publicly traded equity that can serve as a more attractive acquisition currency, both before and after listing.
Direct listings are a sign of the times. As U.S. companies raise increasingly large amounts of capital in the private markets, the public capital markets need to provide a wider variety of means for a private company to enter the public capital markets and provide liquidity to existing shareholders. Although direct listings will undoubtedly provide new opportunities for entrepreneurial companies with a well-recognized brand name or easily understood business model, we do not expect direct listings to replace IPOs any time soon. Direct listing practice is evolving and involves new risks and speedbumps. Any company considering an entry to the public capital markets through a direct listing is encouraged to carefully consider the risks and benefits in consultation with counsel and financial advisors. Members of the Gibson Dunn Capital Markets team are available to discuss strategy, options and considerations as the rules and practice concerning direct listings evolve.
Special appreciation to associate Evan Shepherd for his assistance with the memo.