[Federal Register Volume 84, Number 236 (Monday, December 9, 2019)]
[Notices]
[Pages 67308-67318]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-26405]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87648; File No. SR-NASDAQ-2019-059]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of Amendment No. 1 and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To
Adopt Requirements for the Nasdaq Capital and Global Markets Applicable
to Direct Listings
December 3, 2019.
I. Introduction
On August 15, 2019, The Nasdaq Stock Market LLC (``Nasdaq'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to adopt requirements for the
Nasdaq Capital and Global Markets applicable to direct listings. The
proposed rule change was published for comment in the Federal Register
on September 4, 2019.\3\ On October 17, 2019, pursuant to Section
19(b)(2) of the Exchange Act,\4\ 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.\5\ On November 26,
2019, the Exchange filed Amendment No. 1 to the proposed rule change,
which replaced and superseded the proposed rule change as originally
filed.\6\ The Commission received no comments on the proposed rule
change. The Commission is publishing this notice to solicit comments on
the proposed rule change, as modified by Amendment No. 1, from
interested persons and is approving the proposed rule change, as
modified by Amendment No. 1, on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 86792 (August 28,
2019), 84 FR 46580 (September 4, 2019) (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 87328, 84 FR 56868
(October 23, 2019). The Commission designated December 3, 2019, as
the date by which the Commission shall 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\ Amendment No. 1 is available at https://www.sec.gov/comments/sr-nasdaq-2019-059/srnasdaq2019059-6482012-199454.pdf.
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II. Exchange's Description of the Proposal, as Modified by Amendment
No. 1
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Nasdaq is filing this amendment to SR-NASDAQ-2019-059,\7\ which was
published for comment by the Commission on August 28, 2019, in order
to: (i) Specify that to constitute compelling evidence under the
proposed Listing Rules IM-5405-1(a)(3) and IM-5505-1(a)(3), a tender
offer by the company or an unaffiliated third party needs to be for
cash and be commenced and completed within the prior six months; (ii)
clarify that for affiliate participation to be considered de minimis
under the proposed Listing Rules IM-5405-1(a)(3) and IM-5505-1(a)(3),
the transaction must comply with the requirements of Listing Rules IM-
5405-1(a)(3)(ii)(C) or IM-5505-1(a)(3)(ii)(C) and the company must
certify such compliance to Nasdaq in writing; (iii) update the preamble
to proposed Listing Rules IM-5405-1 and IM-5505-1 to clarify that this
Interpretative Material describes when a company whose stock is not
previously registered under the Exchange Act may list on the Nasdaq
Global or Capital Market, where such company is listing without a
related underwritten offering upon effectiveness of a registration
statement registering only the resale of shares sold by the company in
earlier private placements; (iv) require that the examples of
transactions that could constitute compelling evidence for purposes of
Listing Rules IM-5405-1(a)(3) and IM-5505-1(a)(3) are exhaustive; (v)
clarify that references to third parties mean unaffiliated third
parties; and (vi) make minor technical changes to improve the
structure, clarity and readability of the proposed rules.
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\7\ Securities Exchange Act Release No. 86792 (August 28, 2019),
84 FR 46580 (September 4, 2019) (the ``Initial Proposal'').
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For purposes of these proposed rule changes, all references to the
term ``affiliate'' and derivatives of this term rely on the definition
of ``affiliate'' in SEC Rule 10A-3(e). See 17 CFR 240.10A-3(e). This
amendment supersedes and replaces the Initial Proposal in its entirety.
Nasdaq recognizes that some companies, whose stock was not
previously registered under the Exchange Act, that have sold common
equity securities in private placements, which have 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,
may wish to list those securities to allow existing shareholders to
sell their shares. Nasdaq previously adopted requirements applicable to
such Direct Listings listing on the Nasdaq Global Select Market \8\ and
now
[[Page 67309]]
proposes to adopt requirements for the Nasdaq Global and Capital
Markets.
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\8\ Securities Exchange Act Release No. 85156 (February 15,
2019), 84 FR 5787 (February 22, 2019) (SR-NASDAQ-2019-001) (the
``2019 Rule Change''). Nasdaq proposes to insert the defined term
``Direct Listing'' into the existing language of Listing Rule IM-
5315-1 as follows: ``Nasdaq recognizes that some companies that have
sold common equity securities in private placements, which have 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, may wish to list those securities on Nasdaq (a
``Direct Listing'').'' Nasdaq also proposes to update the title of
Listing Rule IM-5315-1 without further modification to that rule
section. Nasdaq intends to submit a subsequent rule filing to adopt
a global definition for Direct Listings that will include the
substantive provisions from the preamble to Listing Rule IM-5315-1
and proposed Listing Rules IM-5405-1 and IM-5505-1.
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The proposed Listing Rules IM-5405-1 and IM-5505-1 describe when a
company whose stock is not previously registered under the Exchange Act
may list on the Nasdaq Global and Capital Markets, where such company
is listing without a related underwritten offering upon effectiveness
of a registration statement registering only the resale of shares sold
by the company in earlier private placements, set forth the additional
listing requirements for Direct Listings on the Nasdaq Global and
Capital Markets and describe how the Exchange will calculate compliance
with the Nasdaq Global and Capital Markets initial listing standards
related to the requirements based on the price of a security, including
the bid price, Market Value of Listed Securities and Market Value of
Unrestricted Publicly Held Shares.\9\
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\9\ On March 21, 2019, Nasdaq filed with the Commission a
proposed rule change to revise the initial listing standards related
to liquidity that, among other changes, added three new definitions
to define ``restricted securities,'' ``unrestricted publicly held
shares'' and ``unrestricted securities.'' This rule change was
approved by the Commission effective July 5, 2019 and operative
August 5, 2019. See Securities Exchange Act Release No. 86314 (July
5, 2019), 84 FR 33102 (July 11, 2019).
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Nasdaq also proposes to modify Nasdaq Rule 4753 to clarify that the
securities listed pursuant to Listing Rules IM-5405-1 and IM-5505-1 can
use the same crossing mechanism available for IPOs outlined in Rule
4120(c)(8) and Rule 4753 (the ``IPO Cross'').
Finally, the proposed Listing Rules IM-5405-1 and IM-5505-1 require
that such securities must begin trading on Nasdaq following the initial
pricing through the IPO Cross. To allow such initial pricing, the
company must: (i) In accordance with Rule 4120(c)(9), have a broker-
dealer serving in the role of financial advisor to the issuer of the
securities being listed, who is willing to perform the functions under
Rule 4120(c)(8) that are performed by an underwriter with respect to an
initial public offering; and (ii) list upon effectiveness of a
Securities Act of 1933 registration statement filed solely for the
purpose of allowing existing shareholders to sell their shares.
Calculation of Price-Based Initial Listing Requirements
Direct Listings are subject to all initial listing requirements
applicable to equity securities and, subject to applicable exemptions,
the corporate governance requirements set forth in the Rule 5600
Series. To provide transparency to the initial listing process, the
Exchange proposes to adopt Listing Rules IM-5405-1 and IM-5505-1, which
will state how the Exchange calculates the initial listing requirements
based on the price of a security, including the bid price, Market Value
of Listed Securities and Market Value of Unrestricted Publicly Held
shares for a Direct Listing on the Nasdaq Global and Capital
Markets.\10\
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\10\ Substantive provisions of Listing Rules IM-5405-1 and IM-
5505-1 are identical.
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Unless Nasdaq determines to accept evidence of the security's price
based on a tender offer for cash by the company or an unaffiliated
third party, a sale between unaffiliated third parties involving the
company's equity securities, or equity security sales by the company,
as described in more detail below, under Listing Rules IM-5405-1 and
IM-5505-1, Nasdaq would generally require that a company listing on the
Nasdaq Global and Capital Markets through a Direct Listing provide
Nasdaq an independent third-party valuation (a ``Valuation''), as
defined in Listing Rule IM-5315-1, that meets the requirements of
Listing Rules IM-5315-1(e) and (f).
Under Listing Rule IM-5315-1(e), any Valuation used for this
purpose must be provided by an entity that has significant experience
and demonstrable competence in the provision of such valuations. The
Valuation must be of a recent date as of the time of the approval of
the company for listing and the evaluator must have considered, among
other factors, the annual financial statements required to be included
in the registration statement, along with financial statements for any
completed fiscal quarters subsequent to the end of the last year of
audited financials included in the registration statement. Nasdaq will
consider any market factors or factors particular to the listing
applicant that would cause concern that the value of the company had
diminished since the date of the Valuation and will continue to monitor
the company and the appropriateness of relying on the Valuation up to
the time of listing. Nasdaq may withdraw its approval of the listing at
any time prior to the listing date if it believes that the Valuation no
longer accurately reflects the company's likely market value.\11\
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\11\ In addition, under Listing Rule 5101 Nasdaq has broad
discretionary authority to deny initial listing, apply additional or
more stringent criteria for the initial or continued listing of
particular securities, or suspend or delist particular securities
based on any event, condition, or circumstance that exists or occurs
that makes initial or continued listing of the securities on Nasdaq
inadvisable or unwarranted in the opinion of Nasdaq, even though the
securities meet all enumerated criteria for initial or continued
listing on Nasdaq.
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Under Listing Rule IM-5315-1(f), Nasdaq requires that a valuation
agent will not be considered independent if:
At the time it provides such Valuation, the valuation
agent or any affiliated person or persons beneficially own in the
aggregate as of the date of the valuation, more than 5% of the class of
securities to be listed, including any right to receive any such
securities exercisable within 60 days.
The valuation agent or any affiliated entity has provided
any investment banking services to the listing applicant within the 12
months preceding the date of the Valuation. For purposes of this
provision, ``investment banking services'' includes, without
limitation, acting as an underwriter in an offering for the issuer;
acting as a financial adviser in a merger or acquisition; providing
venture capital, equity lines of credit, PIPEs (private investment,
public equity transactions), or similar investments; serving as
placement agent for the issuer; or acting as a member of a selling
group in a securities underwriting.
The valuation agent or any affiliated entity has been
engaged to provide investment banking services to the listing applicant
in connection with the proposed listing or any related financings or
other related transactions.
For a security that has had sustained recent trading in a Private
Placement Market \12\ prior to listing, Nasdaq will determine a
company's price, Market Value of Listed Securities and Market Value of
Unrestricted Publicly Held shares based on the lesser of: (i) The value
calculable based on the Valuation \13\ and (ii) the value calculable
based on the most recent trading price in a Private Placement
Market.\14\
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\12\ Nasdaq defines ``Private Placement Market'' in Listing Rule
5005(a)(34) as a trading system for unregistered securities operated
by a national securities exchange or a registered broker-dealer.
\13\ As described in more detail below, under proposed Listing
Rules IM-5405-1(a)(3) and IM-5505-1(a)(3), in lieu of a Valuation,
Nasdaq may accept certain other compelling evidence of the
security's price, Market Value of Listed Securities and Market Value
of Unrestricted Publicly Held Shares.
\14\ Proposed Listing Rules IM-5405-1(a)(1) and IM-5505-1(a)(1).
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Under Proposed Listing Rules IM-5405-1(a)(5) and IM-5505-1(a)(5),
to determine compliance with the price-based requirements and
suitability for listing on the Exchange, Nasdaq will examine the
trading price trends for the stock in the Private Placement Market over
a period of several months prior to listing and will only rely on a
Private Placement Market price if it is consistent with a sustained
history over that several month period evidencing a
[[Page 67310]]
market value in excess of Nasdaq's market value requirement. Nasdaq
believes that the price from such sustained trading in a Private
Placement Market for the issuer's securities is predictive of the price
in the market for the common stock that will develop upon listing of
the securities on Nasdaq.
Alternatively, in the absence of any recent sustained trading in a
Private Placement Market over a period of several months,\15\ to
determine that such company has met the applicable price-based initial
listing requirements, Nasdaq proposes to require, under proposed
Listing Rules IM-5405-1(a)(2) and IM-5505-1(a)(2) that a Valuation must
evidence a price, Market Value of Listed Securities and Market Value of
Unrestricted Publicly Held Shares that exceed 200% of the otherwise
applicable requirement. Thus, to list on the Nasdaq Global Market, the
Valuation must evidence a minimum bid price of at least $8 per share;
Market Value of Unrestricted Publicly Held Shares of $16 million under
the Income Standard; or Market Value of Unrestricted Publicly Held
Shares of $36 million under the Equity Standard; or Market Value of
Unrestricted Publicly Held Shares of $40 million and Market Value of
Listed Securities of $150 million under the Market Value Standard; or
Market Value of Unrestricted Publicly Held Shares of $40 million under
the Total Assets/Total Revenue Standard.\16\
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\15\ Limited trading in the Private Placement Market may not be
sufficient for the Exchange to reach a conclusion that the company
meets the applicable price-based requirements.
\16\ See Listing Rules 5405(a) and (b), which generally require
minimum bid price of at least $4 per share; Market Value of
Unrestricted Publicly Held Shares of $8 million under the Income
Standard; or Market Value of Unrestricted Publicly Held Shares of
$18 million under the Equity Standard; or Market Value of
Unrestricted Publicly Held Shares of $20 million and Market Value of
Listed Securities of $75 million under the Market Value Standard; or
Market Value of Unrestricted Publicly Held Shares of $20 million
under the Total Assets/Total Revenue Standard.
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To list on the Nasdaq Capital Market, the Valuation must generally
evidence a minimum bid price of at least $8 per share; \17\ Market
Value of Unrestricted Publicly Held Shares of $10 million under the Net
Income Standard; or Market Value of Unrestricted Publicly Held Shares
of $30 million under the Equity Standard; or Market Value of
Unrestricted Publicly Held Shares of $30 million and Market Value of
Listed Securities of $100 million under the Market Value Standard.\18\
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\17\ A company listing equity securities under Listing Rule IM-
5505-1 is not eligible to rely on the reduced bid price requirement
of Listing Rule 5505(a)(1)(B) given that such securities do not
trade in a continuous market prior to listing while Listing Rule
5505(a)(1)(B) requires that such security ``must meet the applicable
closing price requirement for at least five consecutive business
days prior to approval.''
\18\ See Listing Rules 5505(a) and (b), which generally require
minimum bid price of at least $4 per share; Market Value of
Unrestricted Publicly Held Shares of $5 million under the Net Income
Standard; or Market Value of Unrestricted Publicly Held Shares of
$15 million under the Equity Standard; or Market Value of
Unrestricted Publicly Held Shares of $15 million and Market Value of
Listed Securities of $50 million under the Market Value Standard.
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Nasdaq believes that some companies, that are clearly large enough
to be suitable for listing on the Exchange, do not have sustained
trading in their securities on a Private Placement Market prior to
going public. Nasdaq believes that for these companies a recent
Valuation indicating that the company exceeds 200% of the otherwise
applicable price-based requirement will give a significant degree of
comfort that the company will meet the applicable initial listing
price-based requirements upon commencement of trading. Nasdaq believes
that it is unlikely that any Valuation would reach a conclusion that is
incorrect to the degree necessary for a company using this provision to
fail to meet the applicable initial listing requirement upon listing,
in particular because any Valuation used for this purpose must be
provided by a valuation agent that meets the independence requirements
of proposed Listing Rule IM-5315-1(f) and has significant experience
and demonstrable competence in the provision of such valuations, as
required by Listing Rule IM-5315-1(e).
Nasdaq further believes that in certain unique circumstances a
company that is clearly large enough to be suitable for listing on the
Exchange may provide other compelling evidence, subject to limitations
described below, to demonstrate that it meets all applicable price-
based requirements without a Valuation. In such cases, Nasdaq under
Proposed Listing Rules IM-5405-1(a)(3) and IM-5505-1(a)(3) may (but is
not required to) accept other compelling evidence of the security's
price, Market Value of Listed Securities and Market Value of
Unrestricted Publicly Held Shares, including, a tender offer for cash
by the company or an unaffiliated third party, a sale between
unaffiliated third parties involving the company's equity securities,
or equity security sales by the company.\19\
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\19\ See also, footnote 11 above.
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In order to be considered compelling evidence of the company's
value, Nasdaq proposes to require that such transactions were recent,
completed (and, in the case of a tender offer, commenced and completed)
within the prior six months, and substantial in size, representing
sales of at least 20% of the applicable Market Value of Unrestricted
Publicly Held Shares requirement.\20\ In addition, to help assure that
such transactions adequately support the value of the company, Nasdaq
proposes to require that such transactions cannot involve affiliates of
the company unless such participation is de minimis. To be considered
de minimis, the transaction must comply with the requirement that and
the company must certify to Nasdaq in writing that: Any affiliate's
participation must be less than 5% of the transaction (and all
affiliates' participation collectively must be less than 10% of the
transaction), such participation must have been suggested or required
by unaffiliated investors and the affiliates must not have participated
in negotiating the economic terms of the transaction. The examples of
transactions that could constitute compelling evidence for purposes of
Listing Rules IM-5405-1 and IM-5505-1 are meant to be exhaustive.
Finally, Nasdaq will examine any such evidence produced by the company
to assure that it is indicative of the company's overall value. If,
based on facts and circumstances, Nasdaq determines that such evidence
is not reliable, Nasdaq will require a Valuation that meets the
requirements of Listing Rules IM-5315-1(e) and (f) and the company must
then satisfy the other standards in the rule that require a Valuation.
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\20\ Listing Rule 5405(b) generally requires, for a company
listing on the Nasdaq Global Market, Market Value of Unrestricted
Publicly Held Shares of $8 million under the Income Standard; Market
Value of Unrestricted Publicly Held Shares of $18 million under the
Equity Standard; Market Value of Unrestricted Publicly Held Shares
of $20 million under the Market Value Standard; or Market Value of
Unrestricted Publicly Held Shares of $20 million under the Total
Assets/Total Revenue Standard. Listing Rule 5505(b) generally
requires, for a company listing on the Nasdaq Capital Market, Market
Value of Unrestricted Publicly Held Shares of $5 million under the
Net Income Standard; Market Value of Unrestricted Publicly Held
Shares of $15 million under the Equity Standard; or Market Value of
Unrestricted Publicly Held Shares of $15 million under the Market
Value Standard.
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In order to determine that such company has met the applicable
price-based initial listing requirements and to list on Nasdaq based on
such evidence without a Valuation, Nasdaq proposes to require such
evidence to show that the security's price, Market Value of Listed
Securities and Market Value of Unrestricted Publicly Held Shares exceed
250% of the otherwise applicable requirement. Thus, to list on the
Nasdaq Global Market, the compelling evidence provided by the company
must show a minimum bid
[[Page 67311]]
price of at least $10 per share; Market Value of Unrestricted Publicly
Held Shares of $20 million under the Income Standard; or Market Value
of Unrestricted Publicly Held Shares of $45 million under the Equity
Standard; or Market Value of Unrestricted Publicly Held Shares of $50
million and Market Value of Listed Securities of $187.5 million under
the Market Value Standard; or Market Value of Unrestricted Publicly
Held Shares of $50 million under the Total Assets/Total Revenue
Standard.\21\
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\21\ See Listing Rules 5405(a) and (b), which generally require
minimum bid price of at least $4 per share; Market Value of
Unrestricted Publicly Held Shares of $8 million under the Income
Standard; or Market Value of Unrestricted Publicly Held Shares of
$18 million under the Equity Standard; or Market Value of
Unrestricted Publicly Held Shares of $20 million and Market Value of
Listed Securities of $75 million under the Market Value Standard; or
Market Value of Unrestricted Publicly Held Shares of $20 million
under the Total Assets/Total Revenue Standard.
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To list on the Nasdaq Capital Market, such evidence must show a
minimum bid price of at least $10 per share; Market Value of
Unrestricted Publicly Held Shares of $12.5 million under the Net Income
Standard; or Market Value of Unrestricted Publicly Held Shares of $37.5
million under the Equity Standard; or Market Value of Unrestricted
Publicly Held Shares of $37.5 million and Market Value of Listed
Securities of $125 million under the Market Value Standard.\22\
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\22\ See Listing Rules 5505(a) and (b), which generally require
minimum bid price of at least $4 per share; Market Value of
Unrestricted Publicly Held Shares of $5 million under the Net Income
Standard; or Market Value of Unrestricted Publicly Held Shares of
$15 million under the Equity Standard; or Market Value of
Unrestricted Publicly Held Shares of $15 million and Market Value of
Listed Securities of $50 million under the Market Value Standard.
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Nasdaq believes that sales of the company's equity securities
representing at least 20% of the applicable Market Value of
Unrestricted Publicly Held Shares on the Nasdaq Capital Market thus
demonstrating a payment in excess of $1 million for a company listing
under the Net Income Standard or in excess of $3 million for a company
listing under other standards,\23\ is compelling evidence that the sale
is substantial enough in size to be indicative of the company's overall
value.
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\23\ Id.
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Similarly, Nasdaq believes that sales of the company's equity
securities representing at least 20% of the applicable Market Value of
Unrestricted Publicly Held Shares on the Nasdaq Global Market thus
demonstrating a payment in excess of $1.6 million for a company listing
under the Net Income Standard, or in excess of $3.6 million for a
company listing under the Equity Standard, or in excess of $4 million
for a company listing under other standards,\24\ is compelling evidence
that the sale is substantial enough in size to be indicative of the
company's overall value.
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\24\ See footnote 21 above.
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Nasdaq believes that recent, substantial in size, arm's-length
tender offers for cash by an unaffiliated third party, sales between
unaffiliated third parties involving the company's equity securities,
or equity security sales by the company, with de minimis insider
participation, indicating the company exceeds 250% of the otherwise
applicable price-based requirements will give a significant degree of
comfort that the company will meet the applicable price-based
requirements upon commencement of trading. Nasdaq also believes that
recent, substantial in size (representing at least 20% of the
applicable Market Value of Unrestricted Publicly Held Shares) tender
offers for cash by the company indicating the company exceeds 250% of
the otherwise applicable price-based requirements is compelling
evidence of the company's value notwithstanding the company's
involvement in the pricing of the transaction, because it is, in
Nasdaq's view, unlikely that the company would misprice the securities
purchased in a tender offer for cash to the degree necessary for a
company using this provision to fail to meet the applicable initial
listing requirement upon listing, in particular because of the
substantial size of the transaction. In addition, Nasdaq believes that
the new requirement that such securities must begin trading on Nasdaq
following the initial pricing through the IPO Cross will help assure
these securities begin trading close to their inherent value.
Foreign Exchange Listings
For a company transferring from a foreign regulated exchange where
there is a broad, liquid market for the company's shares, or listing on
Nasdaq while trading on such exchange, Nasdaq will determine that the
company has met the applicable price-based requirements based on the
recent trading in such market. Nasdaq believes that the price of the
issuer's securities from such broad and liquid trading is predictive of
the price in the market for the common stock that will develop upon
listing of the securities on Nasdaq. While this is consistent with
Nasdaq's current practice, Listing Rules IM-5405-1(a)(4) and IM-5505-
1(a)(4) will clarify that a company transferring from a foreign
regulated exchange where there is a broad, liquid market for the
company's shares or listing on the Nasdaq Global or Capital Markets
while trading on such exchange is not subject to the new requirements
applicable to Direct Listings.
Clarification of the Role of a Financial Advisor in a Direct Listing
In 2014, Nasdaq first adopted rules to allow the use of the Nasdaq
IPO Cross to initiate trading in securities that have 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 and described the role of financial advisors in that
process.\25\ At that time, the Exchange added Rule 4120(c)(9) \26\ to
set forth the process by which trading commences in such securities.
Under that rule, securities of companies that have not previously been
listed on a national securities exchange or traded in the over-the-
counter market pursuant to FINRA Form 211 immediately prior to listing
on Nasdaq can be launched for trading using the IPO Cross. Prior to
that rule change, securities of companies that were not conducting IPOs
were released using the Halt Cross outlined in Rule 4120(c)(7), which
differed from the IPO Cross.\27\
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\25\ Securities Exchange Act Release No. 71931 (April 11, 2014),
79 FR 21829 (April 17, 2014) (SR-NASDAQ-2014-032) (the ``2014 Rule
Change''). Nasdaq stated that ``an advisor, with market knowledge of
the book and an understanding of the company and its security, would
be well placed to provide advice on when the security should be
released for trading.'' The 2014 Rule Change at 21830.
\26\ In 2014, Nasdaq filed SR-NASDAQ-2014-081 modifying the
functions that are performed by an underwriter with respect to an
initial public offering and renumbered certain paragraphs of Rule
4120. Securities Exchange Act Release No. 73399 (October 21, 2014),
79 FR 63981 (October 27, 2014) (approving SR-NASDAQ-2014-081). All
references in this filing are to the renumbered rules, as currently
in effect.
\27\ The Halt Cross process has a shorter quoting period (five
minutes) and provides no ability to extend the quoting period in the
event trading interest or volatility in the market appears likely to
have a material impact on the security, unless there is an order
imbalance as defined in the rule. See the 2014 Rule Change for
additional details on the differences between the Halt Cross and the
IPO Cross.
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The 2014 Rule Change extended the safeguards contained in the IPO
Cross to securities that have 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 and established that
a broker-dealer serving in the role of financial advisor to the issuer
could serve in the same capacity for such securities as the underwriter
does for
[[Page 67312]]
IPOs. Specifically, Rule 4120(c)(9) provides that the IPO Cross process
described in Rules 4120 and 4753 is available to securities that have
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 where ``a broker-dealer serving in the role of
financial advisor to the issuer of the securities being listed is
willing to perform the functions under Rule 4120(c)(8) that are
performed by an underwriter with respect to an initial public
offering.'' \28\
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\28\ Subsequent to the 2014 Rule Change, Nasdaq expanded and
elaborated the functions that are performed by an underwriter with
respect to an initial public offering. See footnote 26, above. Rule
4120(c)(9) requires a broker-dealer serving in the role of a
financial advisor to the issuer of the securities being listed to
perform all such functions in order for the issuer to utilize the
IPO Cross for the initial pricing of the security.
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Rule 4753 provides the definition of Current Reference Price and a
description of the calculation of the price at which the Nasdaq Halt
Cross will occur.\29\ In each case, the applicable price could be
determined based on the issuer's IPO price.\30\ In the absence of an
IPO price from the underwriter, Nasdaq believes that the only viable
options are to rely on a price from recent sustained trading the
Private Placement Market \31\ or one provided by the financial advisor
to the company.
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\29\ Rules 4753(a)(3)(A) and 4753(b)(2)(D).
\30\ Rules 4753(a)(3)(A)(iv)a. and 4753(b)(2)(D)(i). The price
closest to the ``Issuer's Initial Public Offering Price'' is the
fourth tie-breaker in these rules, applicable when no single price
is determined from the three prior tests.
\31\ As described above, Nasdaq believes that the price from
such recent sustained trading in a Private Placement Market for the
issuer's securities is predictive of the price in the market for the
common stock that will develop upon listing of the securities on
Nasdaq. See also proposed Listing Rules IM-5405-1(a)(5) and IM-5505-
1(a)(5).
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Nasdaq has successfully employed, in limited circumstances, the IPO
Cross for securities that have 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 since 2014 \32\ and
following the 2019 Rule Change. Nasdaq continues to believe that
financial advisors to issuers seeking to utilize that process are well
placed to perform the functions that are currently performed by
underwriters with respect to an initial public offering.
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\32\ Among other instances, Nasdaq utilized the IPO Cross for
the initial pricing of the common stock of American Realty Capital
Healthcare Trust, Inc. as indicated in the 2014 Rule Change.
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In the 2019 Rule Change, Nasdaq elaborated on the role of a
financial advisor to the issuer of a security that is listing under IM-
5315-1.\33\ Nasdaq now proposes to amend Rule 4753 to allow for
securities listed pursuant to Listing Rules IM-5405-1 and IM-5505-1 to
be launched for trading using the IPO Cross, subject to additional
requirements in the proposed Listing Rules IM-5405-1 and IM-5505-1.
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\33\ Specifically, Nasdaq amended Rules 4753(a)(3)(A)(iv) and
4753(b)(2)(D) to state that in the case of the initial pricing of a
Direct Listing for a security qualifying for listing under Listing
Rule IM-5315-1, the fourth tie-breaker in calculating each of the
Current Reference Price disseminated in the Nasdaq Order Imbalance
Indicator and the price at which the Nasdaq Halt Cross will occur,
respectively, shall be: (i) For a security that has had recent
sustained trading in a Private Placement Market prior to listing,
the most recent transaction price in that market or, (ii) if there
is not such sustained trading in a Private Placement Market, a price
determined by the Exchange in consultation with the financial
advisor to the issuer identified pursuant to Rule 4120(c)(9). See
2019 Rule Change.
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Nasdaq also proposes to require that all securities listed under
Listing Rules IM-5405-1 and IM-5505-1 must begin trading on Nasdaq
following the initial pricing through the IPO Cross. To that end,
Nasdaq proposes to cross reference Rule 4120(c)(8) in Listing Rules IM-
5405-1 and IM-5505-1 to require that the company, in accordance with
Rule 4120(c)(9), must have a broker-dealer serving in the role of
financial advisor to the issuer of the securities being listed, who is
willing to perform the functions under Rule 4120(c)(8) that are
performed by an underwriter with respect to an initial public offering.
In addition, Nasdaq proposes to require that each company qualified for
listing under Listing Rules IM-5405-1 and IM-5505-1 must list its
securities upon effectiveness of a Securities Act of 1933 registration
statement filed solely for the purpose of allowing existing
shareholders to sell their shares.
Finally, Nasdaq proposes to define ``Direct Listing'' in Listing
Rule IM-5315-1 and update the title without further modification to
that rule section. Nasdaq also proposes to update the reference to
``direct listings under IM-5315-1'' in Listing Rule IM-5900-7 as a
defined term without changing the substance of this rule.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\34\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\35\ in particular, in that it is designed to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transaction in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system and,
in general, to protect investors and the public interest.
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\34\ 15 U.S.C. 78f(b).
\35\ 15 U.S.C. 78f(b)(5).
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Calculation of Price-Based Initial Listing Requirements
The proposed rule change to require a Valuation and describe how
Nasdaq will calculate compliance with the price-based requirements for
listing on the Nasdaq Global and Capital Markets is designed to protect
investors and the public interest because any company relying solely on
a Valuation will have to demonstrate that the company exceeds 200% of
the otherwise applicable price-based requirement, which will give a
significant degree of comfort that upon commencement of trading the
company will meet the applicable price-based requirements.\36\ In
addition, having in place independence standards for the party
providing a Valuation will ensure that the entity providing a Valuation
for purposes of listing on Nasdaq will have a significant level of
independence from the listing applicant and thereby enhance the
reliability of such Valuation.
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\36\ See footnotes 21 and 22 above. The Commission notes that
footnotes 16-18 above discuss the applicable requirements.
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Finally, in addition to the proposed new requirements, Direct
Listings are subject to all initial listing requirements applicable to
equity securities and, subject to applicable exemptions, the corporate
governance requirements set forth in the Rule 5600 Series. Nasdaq's
existing requirements are designed to protect investors and serve to
help assure that securities listed on Nasdaq have sufficient investor
interest and will trade in a liquid manner. As such, Nasdaq believes
these provisions protect investors and the public interest in
accordance with Section 6(b)(5) of the Exchange Act.
The proposed rule change also protects investors and the public
interest by requiring that there be sustained recent trading in the
Private Placement Market in order for a Direct Listing to rely on such
price to demonstrate compliance with the applicable price-based
requirements. Nasdaq believes that the price from such sustained
trading in the Private Placement Market for the issuer's securities is
predictive of the price in the market for the common stock that will
develop upon listing of the securities on Nasdaq and that qualifying a
company based on the lower of such
[[Page 67313]]
trading price or the Valuation helps assure that the company satisfies
Nasdaq's requirements. In the absence of recent sustained trading in
the Private Placement Market, the requirement to demonstrate that the
company exceeds 200% of the otherwise applicable price-based
requirement, similarly helps assure that the company satisfies Nasdaq's
requirement by imposing a standard that is double the otherwise
applicable standard.\37\
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\37\ See footnotes 21 and 22, above. The Commission notes that
footnotes 16-18 above discuss the applicable requirements.
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The proposed rule change to allow a company in certain unique
circumstances to list without a Valuation is designed to protect
investors and the public interest because it requires such company to
produce compelling evidence that the security's price, Market Value of
Listed Securities and Market Value of Unrestricted Publicly Held Shares
exceed 250% of the otherwise applicable requirement. Moreover, in order
to be considered compelling, such evidence of the company's value must
be based on a tender offer for cash by the company or an unaffiliated
third party or on a sale between unaffiliated third parties involving
the company's equity securities, or equity security sales by the
company. In addition, such transactions must be recent, completed (and,
in the case of a tender offer, commenced and completed) within the
prior six months, and substantial in size, representing sales of at
least 20% of the applicable Market Value of Unrestricted Publicly Held
Shares requirement which helps assure, in Nasdaq's view, that the
company satisfies the applicable price-based requirement upon
commencement of trading on Nasdaq. Finally, recent, substantial in size
(representing at least 20% of the applicable Market Value of
Unrestricted Publicly Held Shares) tender offers for cash by the
company indicating the company exceeds 250% of the otherwise applicable
price-based requirements is compelling evidence of the company's value
notwithstanding the company's involvement in the pricing of the
transaction, because, in Nasdaq's view, it is unlikely that the company
would misprice the securities purchased in a tender offer for cash to
the degree necessary for a company using this provision to fail to meet
the applicable initial listing requirement upon listing, in particular
because of the substantial size of the transaction.
The proposed rule change also protects investors and the public
interest by requiring that for a company to demonstrate compliance with
the applicable price-based requirements based on a tender offer for
cash by the company or an unaffiliated third party, a sale between
unaffiliated third parties involving the company's equity securities,
or equity security sales by the company, because such transactions, in
addition to being recent and substantial in size, must also have been
conducted in a manner that helps assure that such transactions
adequately support the value of the company. To that end, Nasdaq
proposes to require that such transactions cannot involve affiliates of
the company unless such participation is de minimis. To be considered
de minimis, the transaction must comply with the requirement that and
the company must certify to Nasdaq in writing that: Any affiliate's
participation must be less than 5% of the transaction (and all
affiliates' participation collectively must be less than 10% of the
transaction), such participation must have been suggested or required
by unaffiliated investors and the affiliates must not have participated
in negotiating the economic terms of the transaction.
The proposed requirement that a company that lists on the Nasdaq
Global or Capital Markets through a Direct Listing must list at the
time of effectiveness of a registration statement filed under the
Securities Act of 1933 solely for the purpose of allowing existing
shareholders to sell their shares is designed to protect investors and
the public interest, because it will ensure such companies satisfy the
rigorous disclosure requirements under the Securities Act of 1933 and
are subject to review by Commission staff.
Finally, the proposal to rely on the price from the existing
trading market for a company transferring from a foreign regulated
exchange or listing on Nasdaq while trading on such exchange is
consistent with the protection of investors because the price from the
broad and liquid trading market for the issuer's securities is
predictive of the price in the market for the common stock that will
develop upon listing of the securities on Nasdaq. This provision
applies only where there is a broad, liquid market for the company's
shares in its country of origin and is designed to clarify that a
company transferring from a foreign regulated exchange or listing on
Nasdaq while trading on such exchange that satisfies Listing Rules IM-
5405-1(a)(4) or IM-5505-1(a)(4) is not subject to the new requirements
applicable to Direct Listings. Enhancing transparency around this
requirement will promote just and equitable principles of trade, foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transaction in securities, remove impediments to and
perfect the mechanism of a free and open market and a national market
system and protect investors and the public interest.\38\
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\38\ Provisions of Listing Rules IM-5405-1(a)(4) and IM-5505-
1(a)(4) are identical to Listing Rule IM-5315-1(c) applicable to
Direct Listings on the Nasdaq Global Select Market, which was
adopted in the 2019 Rule Change.
---------------------------------------------------------------------------
Clarification of the Role of a Financial Advisor in a Direct Listing
Nasdaq believes that the proposed rule change to modify the fourth
tie-breaker used in calculating the Current Reference Price
disseminated in the Nasdaq Order Imbalance Indicator and the price at
which the Nasdaq Halt Cross will occur, protects investors and the
public interest. The 2019 Rule Change established that, in using the
IPO Cross to initiate the initial trading in the company's securities,
the Current Reference Price and price at which the Nasdaq Halt Cross
will occur may be based on the most recent transaction price in a
Private Placement Market where the security has had recent sustained
trading in such a market over several months; otherwise the price will
be determined by the Exchange in consultation with a financial advisor
to the issuer. The proposed rule change simply provides that in
addition to the initial pricing of a security listing under Listing
Rules IM-5315-1 the same process will occur for securities listing
under IM-5405-1 or IM-5505-1.
Where there has been sustained recent trading on a Private
Placement Market over several months, Nasdaq believes the most recent
price from such trading is predictive of the price that will develop
upon listing of the securities on Nasdaq. Where there has not been such
sustained recent trading, Nasdaq notes that financial advisors have
been performing the functions of the underwriter in the IPO Cross on a
limited basis since 2014 and following the 2019 Rule Change and have
market knowledge of buying and selling interest and an understanding of
the company and its security. As such, Nasdaq believes that the rule
change will promote fair and orderly markets because these mechanisms
of establishing the Current Reference Price and the price at which the
Nasdaq Halt Cross will occur will help protect against volatility in
the pricing and initial trading of the securities covered by the
proposed rule change.
[[Page 67314]]
Similarly, the proposed requirement that a company that lists on
the Nasdaq Global or Capital Markets through a Direct Listing must
begin trading of the company's securities following the initial pricing
through the IPO Cross will promote fair and orderly markets by
protecting against volatility in the pricing and initial trading of
unseasoned securities covered by the proposed rule change. Accordingly,
Nasdaq believes these changes, as required by Section 6(b)(5) of the
Exchange Act, are reasonably designed to protect investors and the
public interest and promote just and equitable principles of trade for
the opening of securities listing in connection with a Direct Listing
on the Nasdaq Global or Capital Markets.
Finally, Nasdaq believes that the proposed rule change to update
the title of Listing Rule IM-5315-1, to insert the defined term
``Direct Listing'' into the existing language of this rule and to
update the reference to ``direct listings under IM-5315-1'' in Listing
Rule IM-5900-7 using a defined term, does not change the substance of
these rules and protects investors and the public interest by
clarifying the applicability of these rules and making it easier to
understand.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
The proposed rule change to adopt Listing Rules IM-5405-1 and IM-
5505-1 is designed to provide transparency to the mechanism of listing
securities in connection with a Direct Listing on the Nasdaq Global or
Capital Markets that is appropriately protective of investors and is
not designed to limit the ability of the issuers of those securities to
list them on any other national securities exchange.
In addition, the proposed change is designed to extend the
availability of the IPO Cross to securities listing on Nasdaq under IM-
5405-1 or IM-5505-1 and thus impacts the determination of the initial
pricing of securities upon listing Nasdaq and will have no impact on
competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 1, is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder applicable to a national securities exchange.\39\ In
particular, the Commission finds that the proposed rule change, as
modified by Amendment No. 1, is consistent with Section 6(b)(5) of the
Exchange Act,\40\ which requires, among other things, that the rules of
a national securities exchange be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
of a free and open market and a national market system, and, in
general, to protect investors and the public interest. Section 6(b)(5)
of the Exchange Act \41\ also requires that the rules of an exchange
not be designed to permit unfair discrimination between customers,
issuers, brokers, or dealers.
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\39\ 15 U.S.C. 78f(b). In approving this proposed rule change,
the Commission has considered the proposed rule change's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\40\ 15 U.S.C. 78f(b)(5).
\41\ Id.
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The Commission has consistently recognized the importance of
exchange listing standards. Among other things, such listing standards
help ensure that exchange listed companies will have sufficient public
float, investor base, and trading interest to provide the depth and
liquidity necessary to promote fair and orderly markets.\42\
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\42\ The Commission has stated in approving exchange listing
requirements that the development and enforcement of adequate
standards governing the listing of securities on an exchange is an
activity of critical importance to the financial markets and the
investing public. In addition, once a security has been approved for
initial listing, maintenance criteria allow an exchange to monitor
the status and trading characteristics of that issue to ensure that
it continues to meet the exchange's standards for market depth and
liquidity so that fair and orderly markets can be maintained. See,
e.g., Securities Exchange Act Release Nos. 81856 (October 11, 2017),
82 FR 48296, 48298 (October 17, 2017) (SR-NYSE-2017-31); 81079 (July
5, 2017), 82 FR 32022, 32023 (July 11, 2017) (SR-NYSE-2017-11). The
Commission notes that, in general, adequate listing standards, by
promoting fair and orderly markets, are consistent with Section
6(b)(5) of the Exchange Act, in that they are, among other things,
designed to prevent fraudulent and manipulative acts and practices,
promote just and equitable principles of trade, and protect
investors and the public interest.
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The Exchange has stated that it recognizes that some companies
whose stock was not previously registered under the Exchange Act and
that have sold common equity securities in private placements, and
which have 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, may wish to list those securities on the
Exchange to allow existing shareholders to sell their shares in an
initial listing on the Exchange.\43\ The Exchange therefore has
proposed to adopt listing requirements to permit it to list on the
Nasdaq Global and Capital Markets securities of a company whose stock
has not previously been registered under the Exchange Act and is
listing, without a related underwritten offering, upon the
effectiveness of a registration statement under the Securities Act of
1933 (``Securities Act'') that is registering only the resale of shares
sold by the company in earlier private placements (``Direct
Listing'').\44\ The Exchange's listing standards currently contain
requirements applicable to Direct Listings listed on the Nasdaq Global
Select Market.\45\
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\43\ See supra note 8 and accompanying text.
\44\ See proposed Nasdaq Rules IM-5405-1 and IM-5505-1. For
purposes of this Discussion and Commission Findings section, the
Commission refers to ``Direct Listing'' as defined in this
paragraph. The Commission notes that Nasdaq has agreed to submit a
subsequent proposed rule change that would adopt a global definition
for Direct Listings that includes these characteristics as described
in the preamble to Nasdaq Rule IM-5315-1 and proposed Nasdaq Rules
IM-5405-1 and IM-5505-1. See supra note 8.
\45\ See Nasdaq Rule IM-5315-1. See also Securities Exchange Act
Release No. 85156 (February 15, 2019), 84 FR 5787 (February 22,
2019) (SR-NASDAQ-2019-001) (notice of filing and immediate
effectiveness of proposed rule change to adopt Nasdaq Rule IM-5315-
1). The Exchange's listing standards pertaining to Direct Listings
on the Nasdaq Global Select Market are substantially similar to
listing standards that the Commission approved for another exchange.
See Securities Exchange Act Release Nos. 82627 (February 2, 2018),
83 FR 5650 (February 8, 2018) (SR-NYSE-2017-30) (``2018 Order'')
(approving listing standards for companies that list without a prior
Exchange Act registration and that are not listing in connection
with an underwritten initial public offering); 58550 (September 15,
2008), 73 FR 54442 (September 19, 2008) (SR-NYSE-2008-68) (``2008
Order'') (approving proposal to allow the exchange to determine that
a company meets the exchange's market value listing requirements by
relying on a third-party valuation of the company).
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The Commission believes that the proposed rule change will provide
a means for a category of companies with securities that have not
previously been traded on a public market that are listing only upon
effectiveness of a selling shareholder registration statement, without
a related underwritten offering, and that would not qualify to list
under the Nasdaq Global Select Market standards, to list on the
Exchange's other tiers.\46\ In
[[Page 67315]]
particular, for companies that otherwise meet the Exchange's listing
standards for the Nasdaq Global Market or Nasdaq Capital Market,
respectively,\47\ the proposed rule change sets forth how the Exchange
will determine whether a company satisfies the initial listing
requirements for these markets that are based on the price of security,
which are currently the bid price, Market Value of Listed Securities,
and Market Value of Unrestricted Publicly Held Shares requirements.\48\
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\46\ The Nasdaq Global Select Market has the highest
quantitative listing requirements to list on Nasdaq, followed by the
Nasdaq Global Market and then the Nasdaq Capital Market.
\47\ Companies listing upon an effective registration statement
would have to meet the distribution and minimum bid price
requirements set forth in Nasdaq Rules 5405(a) or 5505(a) and one of
the financial standards set forth in Nasdaq Rules 5405(b) or
5505(b), as well as comply with all other applicable Nasdaq rules,
including the corporate governance requirements. See supra notes 16-
18, 21-22, and accompanying text for a description of some of the
requirements in Nasdaq Rules 5405(a) and (b) and 5505(a) and (b) and
how they would apply to Direct Listings. See also infra note 75 and
accompanying text.
\48\ See proposed Nasdaq Rules IM-5405-1(a) and IM-5505-1(a).
This Discussion and Commission Findings section refers to the bid
price, Market Value of Listed Securities, and Market Value of
Unrestricted Publicly Held Shares requirements as the ``price-based
initial listing requirements.''
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Under the proposal, the Exchange would generally require a company
listing securities under the proposed Direct Listing standards to
provide an independent third-party Valuation that would be used as
described below, with certain differences depending on whether or not
there is sustained trading in a Private Placement Market, to determine
whether the company has met the price-based initial listing
requirements.\49\
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\49\ See proposed Nasdaq Rules IM-5405-1(a)(1) and (2) and IM-
5505-1(a)(1) and (2).
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For a company whose security has had sustained recent trading in a
Private Placement Market, the Exchange generally will attribute a
price, Market Value of Listed Securities, and Market Value of
Unrestricted Publicly Held Shares to the company equal to the lesser of
(i) the value calculable based on a Valuation and (ii) the value
calculable based on the most recent trading price in a Private
Placement Market.\50\ The Commission believes that using the lesser of
these values to determine whether the company has met the Exchange's
price-based initial listing requirements provides a reasonable means of
assessing these metrics in the special circumstances where a company's
stock is not previously registered under the Exchange Act and is
listing upon effectiveness of a selling shareholder registration
statement, without a related underwritten offering. The Commission has
recognized that the most recent trading price in a Private Placement
Market may be an imperfect indication as to the value of a security
upon listing, in part because Private Placement Markets generally do
not have the depth and liquidity and price discovery mechanisms found
on public trading markets.\51\ The proposed rule requires, however, the
Exchange to examine the trading price trends in the Private Placement
Market over a period of several months prior to listing and specifies
that the Exchange will only rely on a Private Placement Market price it
if is consistent with a sustained history over a several month period
evidencing a market value in excess of Nasdaq's market value
requirement.\52\ The Commission therefore agrees with the Exchange that
consideration of both of these values (i.e., the Valuation and trading
on a Private Placement Market) should provide the Exchange with an
estimation of a company's Market Value of Listed Securities, Market
Value of Unrestricted Publicly Held Securities, and bid price that can
support qualifying the company's securities for Exchange listing under
the initial listing standards.\53\ Further, by assessing whether a
company meets price-based initial listing requirements using the lesser
of the Valuation and a value based on the most recent Private Placement
Market trading, the Exchange will be using the more conservative
estimate to determine whether the company qualifies to list under the
Nasdaq Global or Capital Market standards.
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\50\ See proposed Nasdaq Rules IM-5405-1(a)(1) and IM-5505-
1(a)(1).
\51\ See 2008 Order, supra note 45, 73 FR at 54443.
\52\ See proposed Nasdaq Rules IM-5405-1(a)(5) and IM-5505-
1(a)(5). In relying on the price in a Private Placement Market, the
Commission has previously stated that a national security exchange
should consider the trading characteristics of the stock, including
its trading volume and price volatility over a sustained period of
time. See 2008 Order, supra note 45, 73 FR at 54444. See also infra
note 71.
\53\ See 2008 Order, supra note 45, 73 FR at 54443-44.
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For a company whose security has not had sustained recent trading
in a Private Placement Market, the Exchange generally will determine
that the company has met its bid price, Market Value of Listed
Securities, and Market Value of Unrestricted Publicly Held Shares
requirements if the company provides a Valuation evidencing that these
metrics exceed 200% of the otherwise applicable requirements.\54\
According to the Exchange, ``a recent Valuation indicating that the
company exceeds 200% of the otherwise applicable price-based
requirement will give a significant degree of comfort that the company
will meet the applicable initial listing price-based requirements upon
commencement of trading.'' \55\ The Commission believes that requiring
a company that does not have a recent and sustained history of trading
its securities in a Private Placement Market to provide a Valuation
that shows that the company exceeds 200% of the otherwise applicable
price-based initial listing requirements could provide the Exchange
with a reasonable level of assurance that the company will meet the
Market Value of Listed Securities, Market Value of Unrestricted
Publicly Held Shares, and bid price requirements to support listing on
the Exchange and the maintenance of fair and orderly markets in
accordance with the Exchange Act.
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\54\ See proposed Nasdaq Rules IM-5405-1(a)(2) and IM-5505-
1(a)(2). See also supra notes 16-18 and accompanying text, which set
forth the increased requirements.
\55\ See supra Section II.A.1, Calculation of Price-based
Initial Listing Requirements.
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The Commission has previously recognized that a Valuation used to
qualify a company for listing is only an estimate of what a company's
true market value and security price will be upon commencement of
public trading.\56\ The Exchange's rules seek to ensure that the
Valuation used in the listing standards described above is reliable by
requiring it to be provided by an independent third party that has
significant experience and demonstrable competence in providing
valuations of companies, and to be of a recent date as of the time of
approval of the company for listing.\57\ The proposed independence
criteria provide that the valuation agent will not be ``independent''
if the valuation agent, or any affiliated person, owns in the aggregate
more than 5% of the securities to be listed,\58\ or has provided
investment banking services to the company in the 12 months prior to
the Valuation or in connection with the listing.\59\ The Commission
believes that, consistent with Section 6(b)(5) of the Exchange Act and
the protection of
[[Page 67316]]
investors, these independence requirements should help to ensure that
the Valuation is reliable.\60\
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\56\ See 2008 Order, supra note 45, 73 FR at 54443.
\57\ See proposed Nasdaq Rules IM-5405-1(a)(1) and (2) and IM-
5505-1(a)(1) and (2) (incorporating by reference Nasdaq Rule IM-
5315-1(e) and (f)). The Commission notes that Nasdaq Rule IM-5315-
1(e), incorporated by reference into proposed Nasdaq Rules IM-5405-
1(a)(1) and (2) and IM-5505-1(a)(1) and (2), includes additional
requirements that must be satisfied before the Exchange can rely on
a Valuation, such as requiring that the evaluator must have
considered, among other factors, the annual financial statements
required to be included in the registration statement.
\58\ This calculation of ownership will include any right to
receive such securities exercisable within 60 days.
\59\ See proposed Nasdaq Rules IM-5405-1(a)(1) and (2) and IM-
5505-1(a)(1) and (2) (incorporating by reference Nasdaq Rule IM-
5315-1(f)).
\60\ See 2018 Order, supra note 45, 83 FR at 5654 (approving
independence standards for the entity conducting the valuation and
other requirements that must be satisfied for the exchange to rely
on a valuation).
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In addition, the Exchange will be able to approve a security for
listing if, in lieu of a Valuation, the company provides other
compelling evidence that the security's price, Market Value of Listed
Securities, and Market Value of Unrestricted Publicly Held shares
exceed 250% of the otherwise applicable requirement.\61\ The Exchange
will be allowed to consider as compelling evidence a tender offer for
cash by the company or an unaffiliated \62\ third party, sales between
unaffiliated third parties involving the company's equity securities,
or equity security sales by the company.\63\ The Commission believes
that the Exchange's proposed requirements that limit the compelling
evidence that the Exchange may accept in lieu of a Valuation to these
specific types of transactions, and that require that such transactions
must have been completed or, in the case of a tender offer, commenced
and completed, within the prior six months, have represented at least
20% of the applicable Market Value of Publicly Held Shares requirement,
and not have involved the company's affiliates unless such
participation meets the de minimis standards described below, should
provide a reasonable basis for the Exchange to determine whether the
transaction provides a reliable indication of the company's value.\64\
The specified requirements for affiliate participation to be considered
de minimis,\65\ among other considerations, can aid the Exchange in
assessing whether it can rely on the transaction, whether it be a sale
or a tender offer, to qualify the company for listing. Further, the
requirement that the company provide written certification to the
Exchange of compliance with these new rules will provide clarity and
give the Exchange a means to obtain necessary information to ensure
compliance. With respect to a tender offer used as evidence of
compliance with price-based initial listing requirements, the
Commission also notes that the tender offer will be subject, at a
minimum, to Section 14(e) of the Exchange Act and Regulation 14E
thereunder.\66\ Finally, requiring that such evidence shows a value
exceeding 250% of the otherwise applicable price-based initial listing
requirements can provide the Exchange with some reasonable level of
assurance that the company would satisfy the underlying price-based
initial listing requirements.\67\
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\61\ See proposed Nasdaq Rules IM-5405-1(a)(3) and IM-5505-
1(a)(3). See also supra notes 21-22 and accompanying text, which set
forth the increased requirements.
\62\ The Commission notes that Nasdaq will rely on the
definition of ``affiliate'' in SEC Rule 10A-3(e), 17 CFR 240.10A-
3(e), to determine if a party to a transaction is an affiliate of
the company or a third-party participant is unaffiliated with the
company. See supra Section I.A.1.
\63\ See proposed Nasdaq Rules IM-5405-1(a)(3) and IM-5505-
1(a)(3).
\64\ See proposed Nasdaq Rules IM-5405-1(a)(3)(i) and (ii) and
IM-5505-1(a)(3)(i) and (ii).
\65\ The de minimis standard requires that affiliate
participation be less than 5% individually or less than 10%
collectively, that participation be suggested or required by
unaffiliated investors, and that affiliates not have participated in
negotiating the economic terms of the transaction. See proposed
Nasdaq Rules IM-5405-1(a)(3)(ii)(C)(1)-(3) and IM-5505-
1(a)(3)(ii)(C)(1)-(3).
\66\ See 15 U.S.C. 78n(e) and 17 CFR 240.14e-1 to 17 CFR
24.014e-8.
\67\ See supra Section II.A.1, Calculation of Price-based
Initial Listing Requirements (stating Nasdaq's belief that recent,
substantial in size, arm's length tender offers for cash by an
unaffiliated third party, sales between unaffiliated third parties
involving the company's equity securities, or equity security sales
by the company, with de minimis insider participation, indicating
that the company exceeds 250% of the otherwise applicable price-
based requirements, will give a significant degree of comfort that
the company will meet the applicable price-based initial listing
requirements; and that, as to an issuer tender offer that is recent,
substantial in size, and that indicates the company exceeds 250% of
the otherwise applicable price based requirements, such a tender
offer is, in Nasdaq's view, compelling evidence of the company's
value because it is unlikely the company would misprice the
securities purchased to the degree necessary to fail to meet the
applicable initial listing requirements).
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The Commission notes that the Exchange is not required to accept
other evidence in lieu of a Valuation as evidence of compliance with
its price-based initial listing requirements.\68\ Additionally, in its
proposal, the Exchange noted it has broad discretionary authority
pursuant to Nasdaq Rule 5101 to consider whether a company may
appropriately be listed on the Exchange.\69\ The proposed rule language
requires, as noted above, that the Exchange will only rely on a price
in a Private Placement Market if it is consistent with a sustained
history of trading over several months evidencing a market value in
excess of the listing requirement.\70\ In addition, in relying on the
Valuation, Nasdaq has represented that it will consider any market
factors or factors particular to the listing applicant that would cause
concern that the value of the company had diminished since the date of
the Valuation and continue to monitor the company and the
appropriateness of relying on the Valuation up until the time of
listing.\71\ Further, when considering whether to accept other
compelling evidence of a company's value in lieu of a Valuation, the
Exchange has stated that it will examine any such evidence produced by
the company to assure that it is indicative of the company's overall
value.\72\ Nasdaq has stated that, if based on the facts and
circumstances, Nasdaq determines that such evidence is not reliable,
the company will be required to provide a Valuation meeting the
requirements of its rules.\73\ Such review of the transaction, as
Nasdaq has indicated, should help it determine whether it is
appropriate to rely on the transaction as providing a reliable
indication of the company's value when qualifying companies for listing
under the new listing standards.
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\68\ See proposed Nasdaq Rules IM-5405-1(a)(3) and IM-5505-
1(a)(3), which state that ``in lieu of a Valuation Nasdaq may (but
is not required to) accept other compelling evidence.''
\69\ See supra note 11. Nasdaq Rule 5101 states that the
exchange has broad discretionary authority to deny initial listing,
apply additional or more stringent criteria for initial or continued
listing, or suspend or delist particular securities based on any
event, condition or circumstance that exists or occurs that makes
initial or continued listing of the securities on the Exchange
inadvisable or unwarranted in the opinion of the Exchange, even
though the securities meet all enumerated criteria for initial or
continued listing on the Exchange.
\70\ See supra note 52 and accompanying text. See also proposed
Nasdaq Rules IM-5405-1(a)(5) and IM-5505-1(a)(5). As noted by Nasdaq
in its filing, limited trading in a Private Placement Market may not
be sufficient for the Exchange to reach a conclusion that the
company meets the applicable price-based requirements. See supra
note 15.
\71\ See supra note 11 and accompanying text. Nasdaq further
noted in its filing that it may withdraw its approval of the listing
at any time prior to the listing date it if it believes that the
Valuation no longer accurately reflects the company's likely market
value. See supra note 11 and accompanying text.
\72\ See supra Section II.A.1, Calculation of Price-based
Initial Listing Requirements.
\73\ See supra Section II.A.1, Calculation of Price-based
Initial Listing Requirements. For the requirements for such
Valuation, see Nasdaq Rule IM-5315-1(e) and (f) and proposed Nasdaq
Rules IM-5405-1(a)(1) and (2) and IM-5505-1(a)(1) and (2).
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Based on the above, the Commission believes that the proposed
initial listing requirements can provide a reasonable basis for the
Exchange to find that a company has met the price-based initial listing
requirements (i.e., bid price, Market Value of Listed Securities, and
Market Value of Unrestricted Publicly Held Shares) to support listing
on the Exchange and the maintenance of fair and orderly markets,
thereby protecting investors and the public interest in accordance with
Section 6(b)(5) of the Exchange Act. The Commission also notes that
companies listing pursuant to the new provisions will still be required
to meet the listing prerequisites
[[Page 67317]]
contained in Nasdaq Rule 5210, as well as the corporate governance
requirements detailed in the 5600 series of rules. Furthermore, the
Commission notes that companies listing pursuant to the proposed
provisions will be required to comply with the distribution
requirements contained in Nasdaq Rules 5405 and 5505, i.e., that the
company have 400 or 300 Round Lot Holders, as applicable, and 1,100,000
or 1,000,000 Unrestricted Publicly Held Shares, as applicable, and
comply with other requirements that vary depending on which listing
standard the company uses to qualify for listing.\74\ The Commission
believes that these existing provisions should continue to help ensure
that the company has the requisite liquidity for listing on the
Exchange.
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\74\ For example, some of the listing standards require certain
levels of shareholder equity or operating history. See Nasdaq Rules
5405 and 5505.
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In addition, securities qualified for listing under the proposed
listing requirements for the Nasdaq Global or Capital Markets, which
are listing without a related underwritten public offering, must list
upon effectiveness of a registration statement pursuant to the
Securities Act filed solely for the purpose of allowing existing
shareholders to sell their shares.\75\ The Commission believes that
this requirement should help to ensure that investors and the market
have access to complete, accurate, and reliable disclosure of material
information needed for informed investment decisions and secondary
market trading of the listed securities.
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\75\ See proposed Nasdaq Rules IM-5405-1(b)(ii) and IM-5505-
1(b)(ii).
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Under the proposed rule change, securities that are not listed in
connection with an underwritten initial public offering and instead
qualify for listing under the listing requirements for Direct Listings
on the Nasdaq Global or Capital Markets must begin trading on the
Exchange following initial pricing through the IPO Cross procedures and
companies will be required to have a broker-dealer serving in the role
of financial advisor to the issuer who is willing to perform the
functions under Nasdaq Rule 4120(c)(8) related to the opening of
trading in the security that would be performed by an underwriter in an
underwritten initial public offering.\76\ The Commission notes that the
Exchange's rules currently provide that, in the case of initial price
of a security listed under the listing requirements for Direct Listings
on the Nasdaq Global Select Market, the fourth tie-breaker used in
calculating the Current Reference Price and determining the opening
price of the security will be the most recent transaction price in the
Private Placement Market (for a security that has had recent sustained
trading in a Private Placement Market prior to listing) or the price
determined by the Exchange in consultation with the financial advisor
to the issuer.\77\ The proposal would extend these pricing provisions
to Direct Listings on the Nasdaq Global and Capital Markets.\78\ The
Commission believes that specifying that the IPO Cross must be used to
open the securities, and relying on the most recent transaction price
in the Private Placement Market or a price determined by the Exchange
in consultation with the issuer's financial advisor for purposes of the
fourth tie-breaker in the cross, should help establish a reliable
Current Reference Price and the price at which the match will occur,
and thereby facilitate the opening of these securities when trading
first commences on the Exchange for certain securities not listed in
connection with an underwritten IPO. The Commission believes these
changes, consistent with Section 6(b)(5) of the Exchange Act, are
reasonably designed to protect investors and the public interest and
promote just and equitable principles of trade for the opening of
securities listed under the new standards.
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\76\ See proposed Nasdaq Rules IM-5405-1(b) and IM-5505-1(b).
\77\ See Nasdaq Rules 4753(a)(3)(A)(iv)b. and (b)(2)(D)(ii).
\78\ See proposed Nasdaq Rules 4753(a)(3)(A)(iv)b. and
(b)(2)(D)(ii).
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The Exchange has also proposed that, for a company transferring
from a foreign regulated exchange or concurrently listing on the
Exchange and a foreign regulated exchange, the Exchange will determine
that the company has met the applicable price-based requirements based
on the most recent trading price in such market, provided that there is
a broad, liquid market for the company's shares in its country of
origin.\79\ The Commission believes that in these circumstances using
the most recent trading price from the foreign regulated market will
provide a reasonable basis for the Exchange to determine whether the
company meets the Exchange's price-based based initial listing
requirements, and provide clarity that other requirements described
herein applicable to Direct Listing will not apply in such
circumstances, thereby supporting listing on the Exchange and the
maintenance of fair and orderly markets and the public interest in
accordance with Section 6(b)(5) of the Exchange Act.
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\79\ See proposed Nasdaq Rules IM-5405-1(a)(4) and IM-5505-
1(a)(4). The Commission notes that these proposed rules are the same
as existing Nasdaq Rule IM-5315-1(c), which applies to the Nasdaq
Global Select Market, and will extend this provision to companies
listing on the Nasdaq Global and Capital Markets.
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The Commission believes that the proposed changes to Nasdaq Rule
IM-5315-1 to make Direct Listings, as described therein, a defined term
and add to the caption that these requirements apply to the Nasdaq
Global Select Market will provide clarity to the Exchange's rules. The
Commission notes that the proposed rule change will not modify any
substantive requirements for Direct Listings on the Nasdaq Global
Select Market. The Commission also believes that updating the numbering
for current Nasdaq Rule IM-5505 to proposed Nasdaq Rule IM-5505-2 and
using the defined term Direct Listing in proposed Nasdaq Rule IM-5900-7
are also non-substantive changes that will provide clarity to the
Exchange's rules, consistent with the protection of investors and the
public interest under Section 6(b)(5) of the Exchange Act.
For the reasons discussed above, the Commission finds that the
proposed rule change, as modified by Amendment No. 1, is consistent
with the Exchange Act.
IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to submit written views, data, and
arguments concerning whether Amendment No. 1 is consistent with the
Exchange Act. Comments may be submitted by any of the following
methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NASDAQ-2019-059 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2019-059. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/
[[Page 67318]]
rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for website
viewing and printing in the Commission's Public Reference Room, 100 F
Street NE, Washington, DC 20549 on official business days between the
hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be
available for inspection and copying at the principal office of the
Exchange. All comments received will be posted without change. Persons
submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NASDAQ-2019-059 and should
be submitted on or before December 30, 2019.
V. Accelerated Approval of the Proposed Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 1, prior to the thirtieth day
after the date of publication of notice of the filing of Amendment No.
1 in the Federal Register. The Commission notes that the original
proposal was published for comment in the Federal Register and that the
Commission received no comments on the proposal.\80\ The Commission
notes that Amendment No. 1 clarifies and provides additional
explanation relating to the proposed rule change. The changes and
additional information in Amendment No. 1 assist the Commission in
evaluating the Exchange's proposal and in determining that it is
consistent with the Exchange Act. In particular, the Commission
believes that the amendments and clarifications on what may constitute
other compelling evidence in lieu of a Valuation, including what level
of affiliate participation may be considered de minimis, that companies
must provide written certification that they have met these
requirements, that third party transactions must be between
unaffiliated third parties, and that, as to tender offers, only cash
tender offers can be compelling evidence will help the Exchange
administer the requirements and provide clarity on what types of
transactions may qualify. The Commission has also found that the
proposal, as modified by Amendment No. 1, is consistent with the
Exchange Act for the reasons discussed herein. Accordingly, the
Commission finds good cause for approving the proposed rule change, as
modified by Amendment No. 1, on an accelerated basis, pursuant to
Section 19(b)(2) of the Exchange Act.\81\
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\80\ See Notice, supra note 3.
\81\ 15 U.S.C. 78s(b)(2).
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VII. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\82\ that the proposed rule change (SR-NASDAQ-2019-059),
as modified by Amendment No. 1 thereto, be, and it hereby is, approved
on an accelerated basis.
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\82\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\83\
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\83\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-26405 Filed 12-6-19; 8:45 am]
BILLING CODE 8011-01-P