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Popular cryptocurrency exchange Coinbase went public on Nasdaq on April 14 using a direct listing. The company achieved a huge valuation (more than $100 billion) in this offering. While it’s too early to tell whether Coinbase’s stock price will hold up over time, the initial success of this offering is impressive. This continues a string of successful direct listing offerings by large technology companies such as Slack, Spotify, Palantir and Asana, all of which utilized this process to become public companies. What is a direct listing and how is it better (or worse) than a traditional IPO? More importantly, should you use a direct listing to take your company public? (Spoiler alert:  maybe not).

Direct listing is a somewhat rare process in which a company achieves public company status without using traditional underwritten IPO sales efforts. Historically, only the company’s existing shareholders were allowed to sell shares in a direct listing. The company would not receive any of the proceeds of the offering as it would not be allowed to issue new shares, and accordingly all funds would go directly to the selling shareholders. On December 22, 2020, however, the SEC approved a rule change proposed by the NYSE that allows a company to conduct a primary offering through a direct listing under certain circumstances. Nasdaq later submitted a similar proposal which is currently under SEC review but which should be approved, as it is substantially similar to the NYSE proposal. This should fuel even more interest in direct listings going forward.
Continue Reading Direct Listings – A viable IPO alternative?

Nasdaq reverses course on independence standardsApparently, corporate governance cannot be dictated by the stock exchanges.  As we had blogged about last year, Section 952 of Dodd-Frank required each national securities exchange to review its independence standards for directors who serve on an issuer’s compensation committee.  Each national securities exchange had to ensure that its independence definition considered relevant factors…

Publicly traded bankDid you know that banks can go public and trade on Nasdaq and not have to file reports on the SEC’s EDGAR filing system?  Well, they can, but it may not be such a good thing.  You get this result when a bank goes public without a holding company.  These banks are instead required to register with their primary federal regulator (i.e., the FDIC, the Federal Reserve or the Office of the Comptroller of the Currency) and these regulators do not use the SEC’s EDGAR filing system.  So no EDGAR filings are required for these banks.

The problem is that EDGAR helps public companies satisfy SEC and other requirements.  For example, the national exchanges have listing requirements that are in addition to the reporting requirements of the SEC and the bank regulators. To comply, listed banks and bank holding companies must, on or before the applicable due date, file copies of all reports and other documents filed with the SEC or their appropriate regulatory authority. For listed bank holding companies, compliance with these requirements is easy because they file on EDGAR, which provides public access and download capabilities at no cost. Due to electronic links with the EDGAR system, most national exchanges generally provide that their filing requirements are considered fulfilled if the bank holding company files a required report or document with the SEC on EDGAR.  This is the result for the vast majority of publicly traded banks in the U.S.  According to the Federal Reserve, currently, about 84% of commercial banks in the U.S. are part of a bank holding company, and in addition, only a limited few publicly traded banks don’t have holding companies.

But what about banks that do not have holding companies? These banks can still go public by registering with their primary federal bank regulator, but they don’t get the benefit of the EDGAR system.  Instead, the bank regulatory authorities have their own filing requirements and the banks must comply with these rules to maintain their good standing as a public company. Where does this leave these publicly traded banks when it comes to their Nasdaq or national exchange filing requirements?  The answer is that these banks must still comply with the reporting requirements of Nasdaq or the national exchanges by undertaking an alternative filing process. For example, the Nasdaq requires these banks to provide it with three paper copies of the applicable filing. So there are more filings involved and more room for error.

Another problem with not using the EDGAR system is that
Continue Reading Publicly Traded Banks Illustrate the Side Benefits of EDGAR

Where to list NYSE or Nasdaq?These are interesting times for technology companies that are contemplating initial public offerings. For companies of sufficient size, the exchange for the listing of their securities generally comes down to the New York Stock Exchange and the Nasdaq Stock Market. The NYSE has historical prestige and a long track record, while the Nasdaq has cultivated a progressive, tech-friendly reputation. If you are a high visibility technology company, you will probably find these exchanges actively competing for your listing. Such benefits as free advertising have been used, and business deals involving a company’s services may influence a company’s decision as to which exchange to list its securities. For example, Oracle’s switch to the NYSE from Nasdaq was reportedly in part due to an agreement by the NYSE to continue to use Oracle software in its operations.

Nasdaq has long been the favorite exchange for the listing of technology company offerings. This was probably due to the initial progressive use of automation and electronics in this exchange’s early operations which resonated with technology company executives. Rather than traders waving pieces of paper (the historical process at the NYSE), Nasdaq pioneered the use of electronic quotation boards and other advanced methods in its operations. Nasdaq was willing to list the offerings of smaller companies and was also cheaper than the NYSE. All of these factors allowed Nasdaq to build a reputation as the technology companies’ preferred exchange. This reputation was fostered and supported by the listing of a large number of technology companies, including big hitters like Apple and Microsoft.

Nasdaq’s role as the preeminent exchange for technology companies has been diminished. One of the major blows for this exchange was
Continue Reading Stock exchanges compete for technology company IPO listings – Twitter chooses NYSE, but who’s really winning?

Stock Exchange
Panorama of Wall Street Historic District by Michael Daddino

An SEC advisory committee is likely to recommend that that the SEC support the formation of a new securities exchange designed especially for small cap and micro cap public companies. While this new exchange is a long way from approval and operation, strong SEC support could substantially increase its chances of successful implementation. This securities exchange could reduce costs and create new liquidity and capital raising opportunities for these companies.

It is too early to predict whether this new securities exchange will become a reality or how effective it may be. I believe, however, that this exchange concept is another potentially positive event for small companies and that it could produce significant benefits. This securities exchange, along with certain components of the JOBS Act, could provide significant opportunities for small companies to generate liquidity in their securities and raise additional capital for growth.

The SEC advisory committee that is making this recommendation is the Advisory Committee on Small and Emerging Companies. This Committee is made up of 20 individuals with connections to the small public company space, including business executives, state regulators and, angel investors. Christine Jacobs, co-chair of the Committee, is the CEO of a Theragenics Corp., a small cap medical device manufacturer. The Committee was formed in 2011 to focus on the special needs and dynamics of small businesses and small public companies (see September 13, 2011 formation announcement here). These Committee members are aware of the particular issues that these companies face in the capital raising, corporate governance and securities regulation arenas, and they make the SEC aware of issues and problems in the small company space. You can review information on current Committee members here.

The SEC is not bound by the recommendations of the Committee, but I believe that these recommendations will be taken seriously by the SEC and that some positive action could result. The SEC’s strong support here would substantially increase the chance of this new securities exchange being formed. I was not able to find any indication from the SEC on its possible reaction to the Committee’s recommendation.

The Committee has been reviewing this proposed new securities exchange and its possible positive effects on
Continue Reading SEC advisory committee to recommend formation of small company securities exchange

compensation committeesIssuers listed on the NYSE or Nasdaq should pay close attention to the rules proposed by the exchanges last week because the proposed rules will impact compensation committees; however, the impact may be a “tale of two exchanges” because the impact is more significant to Nasdaq-listed companies.  As you may recall, Congress included several provisions in the Dodd-Frank Act to combat perceived public concerns over excessive executive compensation.  One provision, say-on-pay, has been implemented, but other more controversial provisions such as executive compensation clawbacks and executive compensation pay ratios have not been implemented.  Last week, the exchanges proposed rules to implement the independence requirements for compensation committees required under Dodd-Frank. 

As we have mentioned before, Section 952 of the Dodd-Frank Act does not infringe on traditional state corporation law by requiring an issuer to have a compensation committee or to have a compensation committee actually approve executive compensation.  Instead, it directs the exchanges to design and implement their interpretations of corporate governance best practices based on the parameters of Section 952.  The NYSE and Nasdaq proposed rules are different, and I highlight some of the most important aspects of each of the set of rules below.  In general, NYSE-listed companies are impacted significantly less than Nasdaq-listed companies.  

Director Independence  

The SEC rules implementing Section 952 require that the exchanges’ definition of independence consider relevant factors such as (i) the source of the director’s compensation, including any consulting, advisory, or other compensatory fees paid by the listed company and (ii) whether the director has an affiliate relationship with the company.  The two exchanges interpreted the SEC’s rules vastly different.  

The NYSE merely maintains its current definition of “independence” and requires the issuer to consider the two additional factors set out by the SEC.  In practice, it would be highly unlikely that the two additional factors set out by the SEC would impact a board’s assessment of a particular director’s independence.  

Nasdaq’s current definition of “independent director” remains in effect; however, Nasdaq has elected to overlay a separate independence
Continue Reading Proposed compensation committee independence rules will impact some issuers more than others

Coke vs. Pepsi.  Apple vs. Microsoft.  Energizer vs. Duracell.  All are great brand rivalries.  Today we look at one of the biggest rivalries in the capital markets space: NYSE vs. Nasdaq.  And ever since the Nasdaq debacle with the Facebook IPO, the rivalry has only intensified. 

Companies going public face lots of decisions including where to list their shares.  Ever since the dot-com craze of the late 1990s, the rivalry between the NYSE and Nasdaq has been fierce.  Each exchange attempts to woo each other’s clients to switch their listing.  In fact, some big names have changed exchanges over the past year.  Texas Instruments and Viacom switched from the NYSE to Nasdaq in 2011.  Earlier this year, TD Ameritrade left Nasdaq for the Big Board, but Nasdaq countered by poaching Kraft.  Nasdaq (with its history of winning the listings of technology companies) and the NYSE have been fighting hand-to-hand in the technology company space with Groupon and Zynga choosing Nasdaq and LinkedIn and Pandora going with the NYSE.  So is one exchange better than the other?  This post will examine some of the most important factors you should consider in making your decision.

Historic Differences.  The NYSE started operating in 1792 while Nasdaq started up in 1971.  The 200 year head start by the NYSE led to a couple of differences initially, but these changes have largely disappeared over the past decade.  Nasdaq has no physical trading floor; it is 100% electronic.  Because the NYSE operated without the assistance of computers for the bulk of its existence, it has a physical trading floor; however, since 2007 virtually all NYSE stock can be traded electronically.  One of the other major differences went away in 2008 when the SEC began allowing Nasdaq-listed companies to have one-, two- or three-letter ticker symbols.  Historically, all Nasdaq-listed companies needed to have a four letter trading symbol.  (Zillow was the first Nasdaq-listed company to take a one-letter trading symbol, “Z.”)  The ticker change followed Nasdaq’s conversion from an interdealer quotation system to a licensed national exchange in 2006, which from an issuer’s perspective, had little to no effect other than to further legitimize the then 35-year old “upstart” Nasdaq.

Branding and Marketing.  The biggest difference between the two exchanges is the public’s perception of the exchanges.  Nasdaq with its upstart image and all electronic trading platform has attracted more technology-based companies, many of which did not qualify to list on the NYSE when they originally went public.  The Big Board, on the o
Continue Reading Where to list: NYSE or Nasdaq?

NASDAQ recently filed a proposed rule change with the SEC. Upon taking effect, the rule will change the way total assets and shareholders’ equity are calculated for listing purposes on the NASDAQ Global Select Market. To conform with NYSE’s treatment under their comparable standard, NASDAQ proposes to delete the requirement that total assets be demonstrated…

Last Wednesday, the SEC proposed new rules required by Section 952 of Dodd-Frank Act.  Under the proposal, each national securities exchange will be required to adopt new listing standards to prohibit the listing of any issuer that is not in compliance with the exchange’s independence requirements for compensation committees.  While compensation committees will need to be comprised entirely of independent directors, each national securities exchange will need to define independence for itself taking into consideration two factors: (1) the source of compensation of a Board member, including any consulting, advisory, or other compensatory fee paid by the issuer to the Board member, and (2) whether a Board member is affiliated with the issuer.  It is important to note that, in passing the Dodd-Frank Act, Congress did not infringe on the traditional role of states in defining corporate law.  There is neither a requirement to actually have a compensation committee nor a requirement for a compensation committee to approve executive compensation.  Any such requirements would be set forth by the national securities exchanges, such as the New York Stock Exchange currently requires.

The independence requirements, as proposed, would be applicable to any committee of the Board that oversees executive compensation, whether or not the committee is formally designated as a “compensation committee.”  While this particular requirement of the proposed rules is an attempt to prevent issuers from evading the independence requirements by renaming the
Continue Reading National Securities Exchanges to Adopt New Listing Standards to Ensure Independence of Compensation Committees