[Federal Register Volume 84, Number 119 (Thursday, June 20, 2019)]
[Notices]
[Pages 28879-28881]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-13075]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86117; File No. SR-NYSE-2018-46]
Self-Regulatory Organizations; New York Stock Exchange LLC; Order
Disapproving a Proposed Rule Change To Amend the Listed Company Manual
for Special Purpose Acquisition Companies To Reduce the Continued
Listing Standards for Public Holders From 300 to 100 and To Enable the
Exchange To Exercise Discretion To Allow Special Purpose Acquisition
Companies a Reasonable Time Period Following a Business Combination to
Demonstrate Compliance With the Applicable Quantitative Listing
Standards
June 14, 2019.
I. Introduction
On October 1, 2018, New York Stock Exchange LLC (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend the NYSE Listed Company
Manual (``Manual'') for Special Purpose Acquisition Companies
(``SPACs'') \3\ to reduce the minimum number of public holders required
for continued listing from 300 to 100, and to enable the Exchange to
exercise discretion to allow SPACs a reasonable time period following a
business combination to demonstrate compliance with the applicable
quantitative listing standards. The proposed rule change was published
for comment in the Federal Register on October 18, 2018.\4\ The
Commission received one comment letter on the proposal.\5\ On November
29, 2018, the Commission designated a longer period within which to
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to approve or disapprove
the proposed rule change.\6\ On January 15, 2019, the Commission issued
an order instituting proceedings (``OIP'' or ``Order Instituting
Proceedings'') under Section 19(b)(2)(B) of the Act to determine
whether to approve or disapprove the proposed rule change.\7\ The
Commission received one additional comment letter, from the same
commenter, on the OIP.\8\ On April 15, 2019, the Commission designated
a longer period within which to issue an order approving or
disapproving the proposed rule change.\9\ This order disapproves the
proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The Commission notes that throughout this order we have used
the term ``SPAC'' or ``SPACs.'' These terms have the same meaning as
``Acquisition Company'' which is the term used by the Exchange in
the Manual.
\4\ See Securities Exchange Act Release No. 84420 (October 12,
2018), 83 FR 52854 (October 18, 2018) (``Notice'').
\5\ See Letter to Secretary, Commission, from Jeffrey P.
Mahoney, General Counsel, Council of Institutional Investors, dated
November 8, 2018 (``CII Letter'').
\6\ See Securities Exchange Act Release No. 84680 (November 29,
2018), 83 FR 62942 (December 8, 2018).
\7\ See Securities Exchange Act Release No. 84984 (January 15,
2019), 84 FR 0855 (January 31, 2019).
\8\ See Letter to Secretary, Commission, from Jeffrey P.
Mahoney, General Counsel, Council of Institutional Investors, dated
February 11, 2019 (``CII Letter II'').
\9\ See Securities Exchange Act Release No. 85644 (April 15,
2019), 84 FR 16299 (April 18, 2019). The date was extended until
June 15, 2019.
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II. Description of the Proposal
A. Background on SPACs
A SPAC is a special purpose acquisition company whose business plan
is to raise capital in an initial public offering (``IPO'') and, within
a specific period of time, engage in a merger or acquisition with one
or more unidentified companies. Among other things, a SPAC must keep
90% of the gross proceeds of its IPO in an escrow account until the
date of a business combination.\10\ The SPAC must complete one or more
business combinations, having an aggregate fair market value of at
least 80% of the value of the escrow account, within 36 months of the
effectiveness of the IPO registration statement.\11\ Additionally,
public shareholders who object to a business combination have the right
to convert their common stock into a pro rata share of the funds held
in escrow.\12\ Following a business combination, the combined company
must meet the Exchange's requirements for initial listing of an
operating company.\13\
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\10\ See Section 102.06 of the Manual. Section 102.06 also
contains additional quantitative requirements to list a SPAC.
\11\ See id.
\12\ See Section 102.06(b) of the Manual.
\13\ This includes the requirement to maintain a minimum of 400
round lot holders. See Sections 102.01A and 802.01B of the Manual.
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B. Description of the Proposed Changes to SPAC Listing Standards
The Exchange has proposed two changes to its SPAC listing
requirements. First, the Exchange has proposed to reduce the number of
public stockholders required for continued listing of a SPAC, prior to
consummation of a business combination, from 300 to 100.\14\ According
to the Exchange, SPACs have difficulty demonstrating compliance with
the 300 public stockholders continued listing requirement because there
is limited retail investor interest in SPACs, and those who do invest
in SPACs tend to hold their shares until a transaction is announced.
The Exchange also stated its belief that the number of stockholders is
less relevant for SPACs than for operating companies, because ``the
price of [a SPAC] is based primarily on the value of the funds it holds
in trust, and the [SPAC]'s shareholders have the right to redeem their
shares for a pro rata share of that trust in conjunction with a
Business Combination.'' For these reasons, NYSE asserted that SPACs,
historically ``trade close to the value in the trust, even when they
have had few shareholders,'' and that these ``trading patterns suggest
that the low number of shareholders has not resulted in distorted
prices.'' \15\
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\14\ Public stockholders exclude holders that are directors,
officers, or their immediate families and holders of other
concentrated holdings of 10% or more. See Section 802.01B ``Criteria
for Acquisition Companies'' of the Manual.
\15\ The Exchange also articulated other arguments, including
that Exchange Traded Funds are ``somewhat similar'' and do not have
as high of a continued listing shareholder requirement as SPACs. See
Notice, supra, note 4.
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Second, the Exchange has proposed to give itself discretion to
allow SPACs a reasonable time period following a business combination
to demonstrate compliance with the applicable quantitative listing
standards for an operating company, rather than requiring SPACs to
immediately comply with such standards. These listing standards
include: (1) A price per share of at least $4.00; (2) a global market
capitalization of at least $150,000,000; (3) an aggregate market value
of publicly held shares of at least $40,000,000; and (4) other
quantitative requirements set forth in Section 102.01A of the Manual,
including the requirement to maintain a minimum of 400 round lot
holders and 1,100,000 publicly held shares.\16\ The Exchange has
proposed to delete the language in Section 802.01B of the Manual
requiring the combined entity to meet these listing standards
``immediately upon consummation of the Business Combination.''
According to the Exchange, it can be difficult for a company, once
listed, to obtain evidence demonstrating the number of its
shareholders, because many accounts are held in street name, so
companies must seek this information from broker-dealers or their
third-party agents. The Exchange stated that the process of identifying
shareholders is especially burdensome for SPACs at the time of the
business combination, because SPAC shareholders have the right to
request redemption of their securities until immediately before
consummation of the business combination.
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\16\ See Section 802.01B of the Manual.
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III. Summary of Comments
The Commission received one comment letter on the proposal and an
additional comment letter, from the same commenter, in response to the
OIP.\17\ The commenter stated that it could not support the proposal as
submitted ``because it does not provide sufficient information for us
to make a determination as to whether our members and the capital
markets would benefit from the proposed changes.'' \18\ The commenter
referenced its prior comments on similar proposals from the Exchange
and Nasdaq, both of which were subsequently withdrawn.\19\ The
commenter noted that the proposed reduction in the minimum number of
holders from 300 to 100 is far more modest than eliminating it
outright, as was proposed in the prior proposals, but believed that
additional information would be helpful in determining whether the
proposal would benefit investors.
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\17\ See supra notes 5 and 8.
\18\ See supra note 5.
\19\ See SR-NYSE-2017-53 (proposal to, among other things, lower
the initial holders requirement from 300 to 150 round lot holders
and to eliminate the continued holders requirement from 300 public
stockholders to zero, and to impose a 30-day deadline to demonstrate
compliance with certain initial requirements following a business
combination). The proposal was withdrawn on June 21, 2018 after the
Commission institute proceedings to determine whether to approve or
disapprove the proposal. See Notice of Withdrawal, Securities
Exchange Act Release No. 83570 (June 29, 2018), 83 FR 31628 (July 6,
2018). See also SR-Nasdaq-2017-87 (proposal to reduce round lot
holders on Nasdaq Capital Market for initial listing From 300 to 150
and eliminate public holders for continued listing from 300 to zero,
and impose a deadline to demonstrate compliance with initial listing
requirements within 30 Days following each business combination).
The proposal was withdrawn on June 1, 2018 after the Commission
instituted proceedings to determine whether to approve or disapprove
the proposal. See Notice of Withdrawal, Securities Exchange Act
Release No. 83383 (June 5, 2018), 83 FR 27055 (June 11, 2018).
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In response to the OIP, the commenter expressed concerns broadly
that competition between the Exchange and Nasdaq was weakening listing
standards, ``lower[ing] the bar for what goes in the world of SPACs,''
\20\ and is in conflict with the Exchange Act requirement that exchange
rules be designed to protect investors and the public interest. With
respect to the Exchange's proposal, the commenter stated that it did
not believe the Exchange provided sufficient information to determine
whether the commenter's members and the capital markets would benefit
from the proposed changes.
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\20\ See supra note 8.
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IV. Discussion and Commission Findings
Under Section 19(b)(2)(B) of the Act,\21\ the Commission shall
approve a proposed rule change by a self-regulatory organization if the
Commission finds that the proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder that
are applicable to such organization.\22\ The Commission shall
disapprove a proposed rule change if the Commission does not make such
a finding.\23\ Under the Commission's Rules of Practice, the ``burden
to demonstrate that a proposed rule change is consistent with the
Exchange Act and the rules and regulations issued thereunder . . . is
on the self-regulatory organization that proposed the rule change,''
and a ``mere assertion that the proposed rule change is consistent with
those requirements . . . is not sufficient.'' \24\
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\21\ See 15 U.S.C. 78s(b)(2)(C).
\22\ See 15 U.S.C. 78s(b)(2)(C)(i).
\23\ See 15 U.S.C. 78s(b)(2)(C)(ii).
\24\ 17 CFR 201.700(b)(3).
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The description of a proposed rule change, its purpose and
operation, its effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently detailed and specific
to support an affirmative Commission finding, and any failure of a
self-regulatory organization to provide this information may result in
the Commission not having a sufficient basis to make an affirmative
finding that a proposed rule change is consistent with the Act and the
applicable rules and regulations.\25\
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\25\ See id.
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For the reasons discussed below, the Commission is disapproving the
proposed rule change because the information before the Commission is
insufficient to support a finding that the proposed rule change is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
[[Page 28881]]
exchange.\26\ Specifically, the Commission concludes that it does not
have sufficient information to determine that the proposed rule change
is consistent with Section 6(b)(5) of the Act, and in particular the
requirements that a national securities exchange's rules be designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, and, in general, to protect
investors and the public interest.\27\
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\26\ In disapproving the proposed rule change, the Commission
has considered the proposed rule's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
\27\ See 15 U.S.C. 78f(b)(5).
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The Commission has consistently recognized the importance of the
minimum number of holders and other similar requirements in exchange
listing standards. For example, the Commission has repeatedly stated in
approving exchange listing requirements, including NYSE's original SPAC
listing standards, that the development and enforcement of adequate
standards governing the listing of securities on an exchange is an
activity of critical importance to financial markets and the investing
public.\28\ Among other things, such listing standards help ensure that
exchange listed securities have sufficient public float, investor base,
and trading interest to provide the depth and liquidity necessary to
promote fair and orderly markets.\29\
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\28\ See, e.g., Securities Exchange Act Release No. 57785 (May
6, 2008), 73 FR 27597 (May 13, 2008) (stating that the distribution
standards, which include exchange holders requirements ``. . .
should help to ensure that the [SPACs'] securities have sufficient
public float, investor base, and liquidity to promote fair and
orderly markets''). See also Securities Exchange Act Release No.
58228, (July 25, 2008) 73 FR 44794 (July 31, 2008) (approving Nasdaq
initial and continued listing standards for SPACs).
\29\ Id.
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NYSE has proposed to lower the minimum number of holders required
for continued listing of a SPAC, in the period prior to consummation of
a business combination, from 300 public holders to 100 public holders.
In support of its proposal, NYSE asserts, among other things, that
SPACs often have difficulty demonstrating compliance with the minimum
number of holders requirements because there is limited retail investor
interest in them, and that this requirement is less relevant for SPACs
because they historically trade close to the value of the funds held in
trust, and without distorted prices, even when they have few
shareholders. NYSE, however, has provided no evidence (such as, for
example, information about the number of SPAC delisting proceedings as
compared to the number of delisting proceedings for other types of
listed companies) that SPACs in fact have difficulty complying with the
existing minimum number of holders requirements. In addition, to
support its position that the minimum number of holders requirements
are less relevant for SPACs, NYSE made certain representations about
the current trading characteristics of SPACs when they have few
shareholders. The Commission notes, however, that NYSE's observations
were made when the current minimum number of holders requirements were
in place, and NYSE has provided no evidence that the same observations
would be repeated if these requirements were substantially reduced, as
proposed. In the OIP, the Commission asked several questions relating
to this aspect of the proposal, including whether it would ensure a
sufficient liquid market for NYSE-listed SPACs, whether SPACs would
still trade close to their redemption value or be more prone to
manipulation (both before and after the business combination
announcement), and whether there was any data to support NYSE's
assertions about the nature of SPAC trading or the difficulties faced
by SPACs in meeting existing listing standards. NYSE offered no
additional response, arguments or data in response to these questions
or in support of its proposal, nor did any other commenter.
NYSE also has proposed to provide itself discretion to allow SPACs
a reasonable time period following a business combination to
demonstrate compliance with the minimum number of holders and other
applicable quantitative listing standards for an operating company,
rather than requiring SPACs to immediately comply with such standards.
NYSE, however, has provided no supporting evidence (such as, for
example, information about the number of SPAC delisting proceedings as
compared to the number of delisting proceedings for other types of
listed companies) that SPACs have particular difficulties demonstrating
compliance with these important requirements. In addition, the
Commission notes that, while NYSE's current listing standards require a
SPAC to have at least 300 public holders prior to the business
combination, NYSE's proposal would reduce that requirement to as few as
100 public holders. Following consummation of the business combination,
the SPAC would be required to have at least 400 round lot holders. In
the OIP, the Commission questioned whether such a structure would be
workable, and how a listed SPAC would ensure it is in a position to
sufficiently increase its number of holders from the proposed 100
public holder threshold (as opposed to the current 300 threshold), even
within the ``reasonable time period'' contemplated by NYSE. The
Commission further noted that the Exchange offered no explanation as to
why SPACs require additional time, following the consummation of a
business combination, to meet all of the other applicable quantitative
listing standards for operating companies, including those relating to
share price, global market capitalization, and the market value of the
publicly-held shares. However, as with the other concerns raised by the
Commission in the OIP, NYSE offered no additional response, arguments
or data in response to these concerns or in support of its proposal,
nor did any other commenter.
For the reasons discussed above, the Commission concludes that the
record before it does not provide a basis to conclude that the Exchange
has met its burden under the Act and the Commission's Rules of Practice
to demonstrate that its proposed rules change is consistent with
Section 6(b)(5) of the Act.\30\
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\30\ See 15 U.S.C. 78f(b)(5).
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V. Conclusion
For the reasons set forth above, the Commission does not find,
pursuant to Section 19(b)(2) of the Act,\31\ that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange,
and in particular, with Section 6(b)(5) of the Act.\32\
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\31\ See 15 U.S.C. 78s(b)(2).
\32\ See 15 U.S.C. 78f(b)(5).
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It is therefore ordered that, pursuant to Section 19(b)(2) of the
Act,\33\ the proposed rule change (SR-NYSE-2018-46) be, and it hereby
is, disapproved.
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\33\ See 15 U.S.C. 78s(b)(2).
\34\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
Vanessa A. Countryman,
Acting Secretary.
[FR Doc. 2019-13075 Filed 6-19-19; 8:45 am]
BILLING CODE 8011-01-P