[Federal Register Volume 86, Number 99 (Tuesday, May 25, 2021)]
[Notices]
[Pages 28169-28178]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-10968]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91947; File No. SR-NASDAQ-2020-057]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order 
Approving a Proposed Rule Change, as Modified by Amendment No. 2, To 
Allow Companies To List in Connection With a Direct Listing With a 
Primary Offering in Which the Company Will Sell Shares Itself in the 
Opening Auction on the First Day of Trading on Nasdaq and To Explain 
How the Opening Transaction for Such a Listing Will Be Effected

May 19, 2021.

I. Introduction

    On September 4, 2020, 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 allow companies to list in 
connection with a primary offering in which the company will sell 
shares itself in the opening auction on the first day of trading on the 
Exchange and to explain how the opening transaction for such a listing 
will be effected. The proposed rule change was published for comment in 
the Federal Register on September 21, 2020.\3\ On November 4, 2020, 
pursuant to Section 19(b)(2) of the Exchange Act,\4\ the Commission 
designated a longer period within which to either approve the proposed 
rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\5\ On December 17, 2020, the Commission instituted proceedings 
under Section 19(b)(2)(B) of the Exchange Act \6\ to determine whether 
to approve or disapprove the proposed rule change.\7\ On February 22, 
2021, the Exchange filed Amendment No. 1 to the proposed rule change, 
which superseded the proposed rule change as originally filed.\8\ The 
proposed rule change, as modified by Amendment No. 1, was published for 
comment in the Federal Register on March 2, 2021.\9\ On March 17, 2021, 
the Commission extended the time period for approving or disapproving 
the proposal to May 19, 2021.\10\ On April 30, 2021, the Exchange filed 
Amendment No. 2 to the proposed rule change, which superseded the 
proposed rule change, as modified by Amendment No. 1.\11\ The 
Commission is approving the proposed rule change, as modified by 
Amendment No. 2.
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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. 89878 (September 15, 
2020), 85 FR 59349 (September 21, 2020). Comments received on the 
proposal are available on the Commission's website at: https://www.sec.gov/comments/sr-nasdaq-2020-057/srnasdaq2020057.htm.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 90331 (November 4, 
2020), 85 FR 71708 (November 10, 2020).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 90717 (December 17, 
2020), 85 FR 84025 (December 23, 2020) (``Order Instituting 
Proceedings'' or ``OIP'').
    \8\ Amendment No. 1 to the proposed rule change revised the 
proposal to (1) add to the requirements that must be satisfied 
before a security can be released for trading in the cross that the 
actual price calculated by the cross must be at or above the lowest 
price and at or below the highest price of the price range 
established by the issuer in its effective registration statement; 
(2) revise the fourth tie-breaker used in calculating the Current 
Reference Price (as defined below) to provide that this tie-breaker 
will be the price that is closest to the lowest price of the price 
range disclosed by the issuer in its effective registration 
statement; (3) revise the price to be used by Nasdaq for purposes of 
qualifying a security for listing to provide that Nasdaq will use a 
price per share equal to the lowest price in the price range 
disclosed by the issuer in its effective registration statement to 
determine whether the company has met the applicable Market Value of 
Unrestricted Publicly Held Shares (as defined below), bid price, and 
market capitalization requirements; (4) add that, notwithstanding 
the provisions of Rule 4120(c)(8)(A), Nasdaq, in consultation with 
the financial advisor to the issuer, will make the determination of 
whether the security is ready to trade as described in Rule 
4120(c)(8)(A), and Nasdaq will make the determination of whether to 
postpone or reschedule the offering, but will do so only if there is 
insufficient buy interest to satisfy the CDL Order and all other 
market orders, or if the actual price calculated by the cross is 
outside the price range established by the issuer in its effective 
registration statement; and (5) make minor technical changes to 
improve the clarity of the proposal. Amendment No. 1 to the proposed 
rule change is available on the Commission's website at https://www.sec.gov/comments/sr-nasdaq-2020-057/srnasdaq2020057-8400450-229459.pdf.
    \9\ See Securities Exchange Act Release No. 91205 (February 24, 
2021), 86 FR 12245 (March 2, 2021) (``Notice'').
    \10\ See Securities Exchange Act Release No. 91345 (March 17, 
2021), 86 FR 15530 (March 23, 2021).
    \11\ Amendment No. 2 to the proposed rule change revised the 
proposal to (1) clarify Nasdaq's intent in Amendment No. 1 that in a 
Direct Listing with a Capital Raise, Nasdaq alone would make a 
determination of whether to postpone and reschedule the offering, 
and would not postpone and reschedule if (i) all market orders will 
be executed in the cross, and (ii) the actual price calculated by 
the cross is at or above the lowest price and at or below the 
highest price of the price range established by the issuer in its 
effective registration statement; and (2) make minor technical and 
conforming changes to improve the clarity of the proposal. Because 
the changes in Amendment No. 2 to the proposed rule change do not 
materially alter the substance of the proposed rule change or make 
conforming or technical amendments, Amendment No. 2. is not subject 
to notice and comment. Amendment No. 2 to the proposed rule change 
is available on the Commission's website at https://www.sec.gov/comments/sr-nasdaq-2020-057/srnasdaq2020057-8746216-237241.pdf.
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II. Description of the Proposal, as Modified by Amendment No. 2

    Listing Rule IM-5315-1 provides additional listing requirements for 
listing a company that has not previously had its common equity 
securities registered under the Exchange Act on the Nasdaq Global 
Select Market at the time of effectiveness of a registration statement 
\12\ filed solely for the purpose of allowing existing shareholders to 
sell their shares (a ``Selling Shareholder Direct Listing''). To allow 
a company to also sell shares on its own behalf in connection with its 
initial listing upon effectiveness of a registration statement, without 
a traditional underwritten public offering, the Exchange has proposed 
to adopt Listing Rule IM-5315-2. This proposed

[[Page 28170]]

rule would allow a company that has not previously had its common 
equity securities registered under the Exchange Act to list its common 
equity securities on the Nasdaq Global Select Market at the time of 
effectiveness of a registration statement pursuant to which the company 
itself will sell shares in the opening auction on the first day of 
trading on the Exchange (a ``Direct Listing with a Capital 
Raise'').\13\
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    \12\ The reference to a registration statement refers to a 
registration statement effective under the Securities Act of 1933 
(``Securities Act'').
    \13\ See proposed Listing Rule IM-5315-2. A Direct Listing with 
a Capital Raise would include listings where either: (i) Only the 
company itself is selling shares in the opening auction on the first 
day of trading; or (ii) the company is selling shares and selling 
shareholders may also sell shares in such opening auction. See id. 
The Commission notes that while the Exchange's current rules also 
permit Selling Shareholder Direct Listings on the Nasdaq Global 
Market and Nasdaq Capital Market (see Listing Rules IM-5405-1 and 
IM-5505-1), the current proposal would only provide for a Direct 
Listing with a Capital Raise on the Nasdaq Global Select Market.
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    In considering a Selling Shareholder Direct Listing, Listing Rule 
IM-5315-1 currently provides that the Exchange will determine that such 
company has met the applicable Market Value of Unrestricted Publicly 
Held Shares \14\ requirement based on the lesser of: (i) An independent 
third-party valuation of the company (a ``Valuation''); \15\ and (ii) 
the most recent trading price for the company's common stock in a 
Private Placement Market \16\ where there has been sustained recent 
trading. For a security that has not had sustained recent trading in a 
Private Placement Market prior to listing, the Exchange will determine 
that such company has met the Market Value of Unrestricted Publicly 
Held Shares requirement if the company satisfies the applicable Market 
Value of Unrestricted Publicly Held Shares requirement and provides a 
Valuation evidencing a Market Value of Publicly Held Shares of at least 
$250,000,000.
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    \14\ ``Restricted Securities'' means securities that are subject 
to resale restrictions for any reason, including, but not limited 
to, securities: (1) Acquired directly or indirectly from the issuer 
or an affiliate of the issuer in unregistered offerings such as 
private placements or Regulation D offerings; (2) acquired through 
an employee stock benefit plan or as compensation for professional 
services; (3) acquired in reliance on Regulation S, which cannot be 
resold within the United States; (4) subject to a lockup agreement 
or a similar contractual restriction; or (5) considered ``restricted 
securities'' under Rule 144. See Listing Rule 5005(a)(37). 
``Unrestricted Securities'' means securities that are not Restricted 
Securities. See Listing Rule 5005(a)(46). ``Unrestricted Publicly 
Held Shares'' means the Publicly Held Shares that are Unrestricted 
Securities. See Listing Rule 5005(a)(45). See also Listing Rule 
5005(a)(23) and (35) for definitions of ``Market Value'' and 
``Publicly Held Shares.''
    \15\ Listing Rule IM-5315-1 describes the requirement for a 
Valuation, including the experience and independence of the entity 
providing the Valuation.
    \16\ The Exchange 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.
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    With respect to a Direct Listing with a Capital Raise, the Exchange 
has proposed that, in determining whether a company satisfies the 
Market Value of Unrestricted Publicly Held Shares requirement for 
initial listing on the Nasdaq Global Select Market, the Exchange will 
deem such company to have met the applicable requirement if the amount 
of the company's Unrestricted Publicly Held Shares before the offering, 
along with the market value of the shares to be sold by the company in 
the Exchange's opening auction in the Direct Listing with a Capital 
Raise is at least $110 million (or $100 million, if the company has 
stockholders' equity of at least $110 million).\17\ The Exchange has 
proposed to calculate the Market Value of Unrestricted Publicly Held 
Shares, for this purpose, using a price per share equal to the lowest 
price of the price range disclosed by the issuer in its effective 
registration statement.\18\ The Exchange also proposes to determine 
whether the company has met the applicable bid price and market 
capitalization requirements based on the same share price.\19\
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    \17\ See proposed Listing Rule IM-5315-2. See also Listing Rule 
5315(f)(2)(A) and (B) (requiring a Market Value of Unrestricted 
Publicly Held Shares for initial listing on the Nasdaq Global Select 
Market, not in connection with an IPO, of at least $110 million; or 
at least $100 million, if the company has stockholders' equity of at 
least $110 million).
    \18\ See proposed Listing Rule IM-5315-2. The Exchange states 
that, for example, if the company is selling five million shares in 
the opening auction and there are 45 million shares issued and 
outstanding immediately prior to the listing that are eligible for 
inclusion as Unrestricted Publicly Held Shares based on disclosure 
in the company's registration statement, then the Exchange would 
calculate the Market Value of Unrestricted Publicly Held Shares 
based on a combined total of 50 million shares. If the lowest price 
of the price range disclosed in the company's registration statement 
is $10 per share, the Exchange will attribute to the company a 
Market Value of Unrestricted Publicly Held Shares of $500 million, 
based on a $10 price per share. See Notice, supra note 9, 86 FR 
12246 n.15. The Exchange also states that, as described below, the 
opening auction would not execute at a price that is below the 
bottom of the disclosed range, so this is the minimum price at which 
the company could list in connection with a Direct Listing with a 
Capital Raise. See id. at 12246 n.14.
    \19\ See proposed Listing Rule IM-5315-2.
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    The Exchange states that, except as proposed for a Direct Listing 
with a Capital Raise, its listing rules generally do not include shares 
held by officers, directors, or owners of more than 10% of the 
company's common stock in calculations of Publicly Held Shares.\20\ In 
qualifying companies for listing in a Direct Listing with a Capital 
Raise, however, all shares sold by the company in the offering and all 
shares held by public holders prior to the offering will be included in 
the calculation of Publicly Held Shares. According to the Exchange, 
such investors may acquire in secondary market trades shares sold by 
the issuer in a Direct Listing with a Capital Raise that were included 
when calculating whether the issuer met the Market Value of 
Unrestricted Publicly Held Shares requirement for initial listing.\21\ 
The Exchange states, however, that a company listing in conjunction 
with a Direct Listing with a Capital Raise will be required to have a 
Market Value of Unrestricted Publicly Held Shares that is much higher 
than the Exchange's $45 million Market Value of Unrestricted Publicly 
Held Shares requirement that applies to a traditional underwritten 
initial public offering (``IPO'').\22\ The Exchange further states that 
this heightened requirement, along with the ability of all investors to 
purchase shares in the opening process on the Exchange, should result 
in companies using a Direct Listing with a Capital Raise having 
adequate public float and a liquid trading market after the completion 
of the opening auction.\23\
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    \20\ See Notice, supra note 9, 86 FR 12246. The Exchange states 
that these types of inside investors may purchase shares sold by the 
company in the opening auction, and purchase shares sold by other 
shareholders or sell their own shares in the opening auction and in 
trading after the opening auction, to the extent not inconsistent 
with general anti-manipulation provisions, Regulation M, and other 
applicable securities laws. See id.
    \21\ See Notice, supra note 9, 86 FR 12246. The Exchange states 
that it expects that a company expecting to sell a significant 
portion of its shares to officers, directors, and existing 
significant shareholders would not undertake a public listing 
through a Direct Listing with a Capital Raise, but rather would 
raise capital in a private placement or a similar transaction 
instead. See id. at 12248.
    \22\ See Notice, supra note 9, 86 FR 12246. See also Listing 
Rule 5315(f)(2)(C) (requiring a Market Value of Unrestricted 
Publicly Held Shares for initial listing on the Nasdaq Global Select 
Market, in connection with an IPO, of at least $45 million). The 
Exchange also states that, unlike a company listing in connection 
with a Selling Shareholder Direct Listing that could qualify for the 
price-based initial listing requirements based on a Valuation, a 
company listing in connection with a Direct Listing with a Capital 
Raise, like an IPO, must qualify for such requirements based on the 
minimum price at which it could sell shares in the offering. See id. 
at 12248.
    \23\ See Notice, supra note 9, 86 FR 12246.
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    The Exchange also states that it believes that it is consistent 
with the protection of investors to calculate the security's bid price 
and values derived from the security's price using a price per share 
equal to the lowest price of the price range disclosed by the issuer in 
its effective registration statement.\24\ The Exchange states that it 
will allow the

[[Page 28171]]

opening auction, otherwise known as the Nasdaq Halt Cross,\25\ to take 
place at a price as low as this price, but no lower, and so this is the 
minimum price at which a company could be listed.\26\
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    \24\ See Notice, supra note 9, 86 FR 12248.
    \25\ ``Nasdaq Halt Cross'' means the process for determining the 
price at which Eligible Interest shall be executed at the open of 
trading for a halted security and for executing that Eligible 
Interest. See Rule 4753(a)(4). ``Eligible Interest'' means any 
quotation or any order that has been entered into the system and 
designated with a time-in-force that would allow the order to be in 
force at the time of the Halt Cross. See Rule 4753(a)(5). Pursuant 
to Rule 4120, the Exchange will halt trading in a security that is 
the subject of an IPO (or direct listing), and terminate that halt 
when the Exchange releases the security for trading upon certain 
conditions being met, as discussed further below. See Rule 
4120(a)(7) and (c)(8).
    \26\ See Notice, supra note 9, 86 FR 12248.
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    The Exchange states that any company listing in connection with a 
Direct Listing with a Capital Raise would continue to be subject to, 
and required to meet, all other applicable initial listing 
requirements. According to the Exchange, this would include the 
requirements to have the applicable number of shareholders and at least 
1,250,000 Unrestricted Publicly Held Shares outstanding at the time of 
initial listing, and the requirement to have a price per share of at 
least $4.00 at the time of initial listing.\27\
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    \27\ See Notice, supra note 9, 86 FR 12246 (citing Listing Rules 
5315(e)(1) and (2) and 5315(f)(1)).
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    In addition, the Exchange has proposed to amend Rule 4702 to add a 
new order type, the ``Company Direct Listing Order'' or ``CDL Order,'' 
which would be used by the issuer in a Direct Listing with a Capital 
Raise. This would be a market order entered for the quantity of shares 
offered by the issuer, as disclosed in an effective registration 
statement for the offering, that will execute at the price determined 
in the Nasdaq Halt Cross.\28\ A CDL Order may be entered only on behalf 
of the issuer and the CDL Order may not be cancelled or modified. Only 
one Nasdaq member, representing the issuer, may enter a CDL Order 
during a Direct Listing with a Capital Raise. The price of the CDL 
Order would be set in accordance with Rule 4120(c)(9)(B) that requires, 
among other things, that the CDL Order is executed at or above the 
lowest price and at or below the highest price of the price range 
established by the issuer in its effective registration statement. The 
CDL Order must be executed in full at the price determined in the 
Nasdaq Halt Cross, and all orders priced better than the price 
determined in the Nasdaq Halt Cross also would need to be 
satisfied.\29\
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    \28\ See proposed Rule 4702(b)(16)(A) and (B).
    \29\ See proposed Rule 4702(b)(16)(A); Notice, supra note 9, 86 
FR 12247. The Exchange states that the proposed CDL Order is similar 
in some respects to a limit order because it cannot execute at a 
price less than the lowest price in the price range disclosed by the 
issuer in its effective registration statement. The Exchange also 
states that, as a market order, the CDL Order is guaranteed to 
execute in the Nasdaq Halt Cross. See Notice, supra note 9, 86 FR 
12247 n.20.
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    The Exchange has proposed that securities listing in connection 
with a Direct Listing with a Capital Raise must begin trading on the 
Exchange following the initial pricing through the Nasdaq Halt Cross, 
which is described in Rules 4120(c)(9) and 4753.\30\ As described in 
detail below, the Exchange has proposed to modify Rule 4120(c)(9) with 
respect to certain functions that are performed by an underwriter in an 
IPO or a financial advisor in a Selling Shareholder Direct Listing, to 
require that in the case of a Direct Listing with a Capital Raise, 
Nasdaq, in consultation with the financial advisor to the issuer, would 
make the determination of whether the security is ready to trade and 
Nasdaq would determine whether to postpone and reschedule the offering 
as described in Rule 4120(c)(8)(A).\31\ The Exchange states that the 
requirement that the company begin trading of the company's securities 
following the initial pricing through the Nasdaq Halt Cross will 
promote fair and orderly markets by protecting against volatility in 
the pricing and initial trading of securities covered by the proposal, 
because a substantial number of orders are expected to be executed in 
the Nasdaq Halt Cross at a single price rather than in the secondary 
trading at fluctuating prices.\32\ In addition, the Exchange has 
proposed to amend Rule 4120(c)(9) to specify that any services provided 
by such financial advisor to the issuer of a security under Rules 
4120(c)(8) and 4120(c)(9)(A) and (B), including a company listing in 
connection with a Direct Listing with a Capital Raise, must be provided 
in a manner that is consistent with all federal securities laws, 
including Regulation M and other anti-manipulation requirements.\33\
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    \30\ See proposed Listing Rule IM-5315-2. Rule 4120(c)(9) states 
that the process for halting and initial pricing of a security that 
is subject to an IPO is also available for the initial pricing of 
any other security that has not been listed on a national securities 
exchange immediately prior to the initial pricing, if a broker-
dealer serving in the role of financial advisor to the issuer is 
willing to perform the functions under Rule 4120(c)(8) that are 
performed by an underwriter with respect to an IPO, and if more than 
one broker-dealer is serving in the role of financial advisor, the 
issuer must designate one to perform these functions. The Exchange 
proposes to renumber this provision as Rule 4120(c)(9)(A). See 
proposed Rule 4120(c)(9)(A).
    \31\ See Amendment No. 2, supra note 11, at 14 n.19. As 
discussed further below, Nasdaq will postpone the offering only if 
there is insufficient buy interest to satisfy the CDL Order and all 
other market orders, or if the actual price calculated by the cross 
is outside the price range established by the issuer in its 
effective registration statement.
    \32\ See Notice, supra note 9, 86 FR 12248.
    \33\ See proposed Rule 4120(c)(9)(A). The Exchange states that 
this change will also apply to Selling Shareholder Direct Listings 
under Listing Rules IM-5315-1, IM-5405-1, and IM-5505-1. See Notice, 
supra note 9, 86 FR 12248.
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    With respect to the Nasdaq Halt Cross, the Exchange has proposed 
that, in the case of a Direct Listing with a Capital Raise, a security 
shall not be released for trading by Nasdaq unless the actual price 
calculated by the cross is at or above the lowest price and at or below 
the highest price of the price range established by the issuer in its 
effective registration statement.\34\ This requirement would be in 
addition to the existing process described in Rule 4120(c)(8)(A)(i), 
(ii), and (iii), as modified by the proposed changes to Rule 
4120(c)(9).\35\
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    \34\ See proposed Rule 4120(c)(9)(B).
    \35\ Rule 4120(c)(8)(A) provides that a security will not be 
released for trading until (i) Nasdaq receives notice from the 
underwriter of the IPO or financial advisor in the case of a Selling 
Shareholder Direct Listing that the security is ready to trade; (ii) 
the system verifies that all market orders will be executed in the 
cross; and (iii) the price determined in the cross satisfies a price 
validation test, in which the actual price of the cross may not 
deviate from the expected price of the cross that was last displayed 
to the underwriter or financial advisor by an amount greater than 
the selected price band of between $0 and $0.50.
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    Current Rules 4120(c)(8) and (9) provide that the underwriter of 
the IPO, or the financial advisor in a Selling Shareholder Direct 
Listing, respectively, provide notice to Nasdaq that the security 
subject to the Nasdaq Halt Cross is ``ready to trade.'' \36\ These 
rules also provide that the underwriter of the IPO, or the financial 
advisor in a Selling Shareholder Direct Listing, with concurrence of 
Nasdaq, may determine at any point during the Nasdaq Halt Cross process 
up through the conclusion of the pre-launch period to postpone and 
reschedule the pricing of the security subject to the Nasdaq Halt 
Cross. The Exchange has proposed to require that in the case of a 
Direct Listing with a Capital Raise, for purposes of releasing 
securities for trading on the first day of listing, Nasdaq, in 
consultation with the financial advisor to the issuer, would make the 
determination of whether the

[[Page 28172]]

security is ready to trade.\37\ Once Nasdaq has determined that the 
security is ready to trade, Nasdaq shall release the security for 
trading if (i) all market orders will be executed in the Nasdaq Halt 
Cross; and (ii) the actual price calculated by the Nasdaq Halt Cross is 
at or above the lowest price and at or below the highest price of the 
price range established by the issuer in its effective registration 
statement. Nasdaq shall postpone and reschedule the offering only if 
either or both such conditions are not met.\38\
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    \36\ Rule 4120(c)(8)(A)(i) provides that Nasdaq receives notice 
from the underwriter of the IPO that the security is ready to trade. 
The Exchanges states that the Nasdaq system will calculate the 
Current Reference Price at that time and display it to the 
underwriter. If the underwriter then approves proceeding, the Nasdaq 
system will conduct certain validation checks. According to the 
Exchange, under the proposal, Nasdaq would take over these functions 
of the underwriter. See Notice, supra note 9, 86 FR 12247 n.23. See 
also Rule 4853(a)(3) for a description of the ``Current Reference 
Price.''
    \37\ See proposed Rule 4120(c)(9)(B).
    \38\ See proposed Rule 4120(c)(9)(B).
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    According to the Exchange, if there is insufficient buy interest to 
satisfy the CDL Order, and all other market orders, as required by the 
proposal, or if the actual price calculated by the Nasdaq Halt Cross is 
outside the price range established by the issuer in its effective 
registration statement, the Nasdaq Halt Cross would not be allowed to 
proceed and such security would not begin trading.\39\ The Exchange 
represents that, if the Nasdaq Halt Cross cannot be conducted because 
these conditions are not met, the Exchange would postpone and 
reschedule the offering and notify market participants via a Trader 
Update that the Direct Listing with a Capital Raise scheduled for that 
date has been cancelled and any orders for that security that have been 
entered on the Exchange, including the CDL Order, would be cancelled 
back to the entering firms.\40\ The Exchange further states that 
because the CDL Order will be a market order, if the Nasdaq Halt Cross 
proceeds, that order will execute in full in the Nasdaq Halt Cross, 
along with orders priced at or better than the price determined in the 
Nasdaq Halt Cross.
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    \39\ See Notice, supra note 9, 86 FR 12247. The Exchange states 
that Nasdaq alone would make any determination to postpone and 
reschedule the offering and would do so only in the narrowly defined 
circumstances described in proposed Rule 4120(c)(9)(B). See 
Amendment No. 2, supra note 11, at 15 n.19. The Exchange also states 
that the price bands established by Rule 4120(c)(8) cannot act to 
cause the Nasdaq Halt Cross to occur outside of the price range 
disclosed by the issuer in its effective registration statement, 
because the actual price calculated by the Nasdaq Halt Cross is 
required to be at or above the lowest price and at or below the 
highest price of the price range established by the issuer in its 
effective registration statement. See Notice, supra note 9, 86 FR 
12248.
    \40\ See Notice, supra note 9, 86 FR 12247-48.
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    The Exchange states that, unlike in an IPO, a company listing 
through a Direct Listing with a Capital Raise would not have an 
underwriter to guarantee that a specified number of shares would be 
sold by the company at a price consistent with disclosure in the 
company's effective registration statement. However, the Exchange 
states that this would be achieved through the proposed requirements 
that (1) the Nasdaq Halt Cross occur only if the CDL Order, which must 
be equal to the total number of shares disclosed as being offered by 
the company in the effective registration statement, is executed in 
full; and (2) the Nasdaq Halt Cross occur at a price per share that is 
within the price range disclosed by the issuer in its effective 
registration statement.\41\ The Exchange states that it believes that 
the CDL Order and related provisions would clearly define the method by 
which the issuer participates in the opening auction, to prevent the 
issuer from being in a position to improperly influence the price 
discovery process, and assures an auction that is consistent with the 
disclosures in the registration statement.\42\
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    \41\ See Notice, supra note 9, 86 FR 12249.
    \42\ See Notice, supra note 9, 86 FR 12249. The Exchange states 
that, specifically, the CDL Order entered on the company's behalf 
could not be executed at a price below the low end or above the high 
end of the price range in the company's effective registration 
statement, and, as a market order, the full quantity of shares in 
the CDL Order would have to be executed in the opening auction. The 
Exchange states that, in addition, the CDL Order would not be able 
to be modified and the financial advisor to the company would be 
unable to reschedule the offering once it began. See id.
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    Finally, the Exchange has proposed to make adjustments to how it 
would calculate the Current Reference Price, which is disseminated in 
the Nasdaq Order Imbalance Indicator,\43\ and the price at which the 
Nasdaq Halt Cross would execute, for a Direct Listing with a Capital 
Raise. In each case, where there are multiple prices that would satisfy 
the conditions for determining the price, the Exchange would modify the 
fourth tie-breaker for a Direct Listing with a Capital Raise to use the 
lowest price of the price range disclosed by the issuer in its 
effective registration statement.\44\
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    \43\ See Rule 4853(a)(3) for a description of the ``Order 
Imbalance Indicator.''
    \44\ See proposed Rule 4753(a)(3)(A)(iv)(c) and (b)(2)(D)(iii). 
The Exchange states that the fourth tie-breaker used to calculate 
the Current Reference Price for an IPO is the price that is closest 
to the issuer's IPO price, and that a Direct Listing with a Capital 
Raise is similar to an IPO in that the company sells securities in 
the offering. See Notice, supra note 9, 86 FR 12249. The Exchange 
also proposes non-substantive changes to renumber the other 
alternatives for the fourth tie-breaker. See proposed Rule 
4753(a)(3)(A)(iv) and (b)(2)(D).
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III. Discussion and Commission Findings

    The Commission finds that the proposed rule change, as modified by 
Amendment No. 2, is consistent with the requirements of the Exchange 
Act and the rules and regulations thereunder applicable to a national 
securities exchange.\45\ In particular, the Commission finds that the 
proposed rule change, as modified by Amendment No. 2, is consistent 
with Section 6(b)(5) of the Exchange Act,\46\ 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; and are not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \45\ 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).
    \46\ 15 U.S.C. 78f(b)(5).
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    The Commission has consistently recognized the importance and 
significance of national securities 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.\47\ The standards, collectively, also provide 
investors and market participants with some level of assurance that the 
listed company has the resources, policies, and procedures

[[Page 28173]]

to comply with the requirements of the Exchange Act and Exchange 
rules.\48\
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    \47\ The Commission has stated in approving national securities 
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. 90768 
(December 22, 2020), 85 FR 85807, 85811 n.55 (December 29, 2020) 
(SR-NYSE-2019-67) (``NYSE 2020 Order''); 82627 (February 2, 2018), 
83 FR 5650, 5653 n.53 (February 8, 2018) (SR-NYSE-2017-30) (``NYSE 
2018 Order''); 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 has stated 
that 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. 
See, e.g., NYSE 2020 Order, 85 FR 85811 n.55; NYSE 2018 Order, 83 FR 
5653 n.53; Securities Exchange Act Release Nos. 87648 (December 3, 
2019), 84 FR 67308, 67314 n.42 (December 9, 2019) (SR-NASDAQ-2019-
059); 88716 (April 21, 2020), 85 FR 23393, 23395 n.22 (April 27, 
2020) (SR-NASDAQ-2020-001).
    \48\ ``Meaningful listing standards are also important given 
investor expectations regarding the nature of securities that have 
achieved a national securities exchange listing, and the role of a 
national securities exchange in overseeing its market and assuring 
compliance with its listing standards.'' Securities Exchange Act 
Release No. 65708 (November 8, 2011), 76 FR 70799, 70802 (November 
15, 2011) (SR-NASDAQ-2011-073). See also NYSE 2020 Order, supra note 
47, 85 FR 85811 n.56; Securities Exchange Act Release Nos. 65709 
(November 8, 2011), 76 FR 70795 (November 15, 2011) (SR-NYSE-2011-
38); 88389 (March 16, 2020), 85 FR 16163 (March 20, 2020) (SR-
NASDAQ-2019-089). The Exchange, in addition to requiring companies 
seeking to list to meet the quantitative initial listing standards 
and once listed the quantitative continued listing standards, also 
requires listed companies to meet other qualitative requirements. 
See, e.g., Listing Rules 5600 Series, Corporate Governance 
Requirements.
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    The Exchange's listing standards currently provide the Exchange 
with discretion to list a company whose stock has not been previously 
registered under the Exchange Act, where such company is listing in 
connection with a Selling Shareholder Direct Listing.\49\ The Exchange 
has proposed to allow companies to list in connection with a Direct 
Listing with a Capital Raise, which would provide a company the option, 
without a firm commitment underwritten offering, of selling shares to 
raise capital in the opening auction upon initial listing on the 
Exchange.\50\ The Commission notes that recently it approved a proposal 
by the New York Stock Exchange to allow a direct listing with a primary 
offering.\51\
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    \49\ See Nasdaq Listing Rules IM-5315-1, IM-5405-1, and IM-5505-
1. See also Securities Exchange Act Release Nos. 85156 (February 15, 
2019), 84 FR 5787 (February 22, 2019) (SR-NASDAQ-2019-001) (notice 
of filing and immediate effectiveness of proposal to adopt listing 
standards for direct listings on Nasdaq Global Select Market); 87648 
(December 3, 2019), 84 FR 67308 (December 9, 2019) (SR-NASDAQ-2019-
059) (order granting approval of proposal to adopt requirements for 
the Nasdaq Capital and Global Markets applicable to direct 
listings).
    \50\ See proposed Listing Rule IM-5315-2. In contrast, Listing 
Rule IM-5315-1 states that it permits companies ``to list on the 
Nasdaq Global Select Market, provided the Company meets all 
applicable initial listing requirements and lists at the time of 
effectiveness of a registration statement filed solely for the 
purpose of allowing existing shareholders to sell their shares. This 
Interpretive Material describes when a Company whose stock is not 
previously registered under the Exchange Act may list on the Nasdaq 
Global Select 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.'' Listing Rule IM-5315-1.
    \51\ See NYSE 2020 Order, supra note 47.
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    As explained further below, the following aspects of the proposal, 
as modified by Amendment No. 2, demonstrate that it is reasonably 
designed to be consistent with the protection of investors and the 
maintenance of fair and orderly markets, as well as the facilitation of 
capital formation: (i) Addition of the CDL Order type and other 
requirements that address how the issuer will participate in the 
opening auction; (ii) addition of the requirement that the opening 
price must occur at or above the lowest price and at or below the 
highest price of the price range established by the issuer in its 
effective registration statement; (iii) discussion of the role of 
financial advisors and addition of requirements providing that only 
Nasdaq, in consultation with the financial advisor, may determine that 
the security is ready to trade and limiting the circumstances pursuant 
to which Nasdaq could postpone or reschedule the offering; (iv) 
addition of language reminding financial advisors that specified 
activities are to be conducted in a manner that is consistent with the 
federal securities laws, including Regulation M and other anti-
manipulation requirements; and (v) clarification of how market value 
will be determined for qualifying the company's securities for listing.
    The Commission discusses below the Exchange's proposal to allow a 
Direct Listing with a Capital Raise. First, the Commission addresses 
the Exchange's proposed market value of unrestricted publicly-held 
shares requirement for a Direct Listing with a Capital Raise. Second, 
the Commission addresses concerns it raised in the Order Instituting 
Proceedings about the initial listing opening auction process for 
Direct Listings with a Capital Raise and the role of financial advisors 
in the Exchange's proposed rule change, prior to the changes made by 
Amendment Nos. 1 and 2. As discussed below, in the amended proposal the 
Exchange made several modifications to its proposal that were designed 
to address these concerns.\52\ Finally, the Commission addresses a 
commenter's concerns about whether the proposal is consistent with 
investor protection and the public interest given the lack of 
traditional underwriter involvement in a Direct Listing with a Capital 
Raise and concerns about Securities Act Section 11 liability.\53\ As 
discussed throughout this order, the Commission concludes that the 
Exchange has met its burden to demonstrate that its proposal is 
consistent with the Exchange Act, and therefore finds the proposed rule 
change to be consistent with the Exchange Act.
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    \52\ See supra notes 8 and 11. In the amended filing, the 
Exchange states that, following approval of this proposed rule 
change, the Exchange intends to file a separate proposal with the 
Commission that will seek to modify the process for a Direct Listing 
with a Capital Raise so that it would operate in a manner similar to 
the initial proposal, and the Exchange will seek to address the 
remaining issues raised in the Order Instituting Proceedings. See 
Notice, supra note 9, 86 FR 12245 n.9. This approval order pertains 
only to Nasdaq's current proposal before the Commission, and any new 
rules or changes to the rules being approved would require the 
Exchange to file a new proposed rule change pursuant to Section 
19(b) of the Exchange Act.
    \53\ In addition to the comments discussed below, one commenter 
stated general support for Nasdaq's proposed method of opening the 
transaction. See Letter from Rahul Chaudhary (October 13, 2020).
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A. Aggregated Market Value of Unrestricted Publicly Held Shares 
Requirement

    The Exchange has proposed that it will deem a company to have met 
the Market Value of Unrestricted Publicly Held Shares requirement if 
the amount of the company's Unrestricted Publicly Held Shares before 
the offering along with the market value of the shares to be sold by 
the company in the Exchange's opening auction in the Direct Listing 
with a Capital Raise is at least $110 million (or $100 million, if the 
company has stockholders' equity of at least $110 million). The 
Exchange would calculate the Market Value of Unrestricted Publicly Held 
Shares using a price per share equal to the lowest price of the price 
range disclosed by the issuer in its effective registration 
statement.\54\ According to the Exchange, a company may list in 
connection with a traditional underwritten IPO with a minimum $45 
million Market Value of Unrestricted Publicly Held Shares. The Exchange 
states that the ``heightened requirement'' for a Direct Listing with a 
Capital Raise, ``along with the ability of all investors to purchase 
shares in the opening process on the Exchange, should result in 
companies using a Direct Listing with a Capital Raise having adequate 
public float and a liquid trading market after completion of the 
opening auction.'' \55\
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    \54\ See supra notes 17-18 and accompanying text.
    \55\ Notice, supra note 9, 86 FR 12248. As described above, in 
determining that a company has met the Market Value of Unrestricted 
Publicly Held Shares requirement, the Exchange will consider the 
market value of all shares sold by the company in the opening 
auction, rather than excluding shares that may be purchased by 
officers, directors, or owners of more than 10% of the company's 
common stock, notwithstanding that generally the Exchange's listing 
standards exclude shares held by such insiders from its calculations 
of publicly-held shares. The Exchange states that it expects that a 
company expecting to sell a significant portion of its shares to 
these insiders would not undertake a public listing through a Direct 
Listing with a Capital Raise, but would raise capital in a private 
placement or similar transaction instead. See id.
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    The Exchange has shown that the proposed aggregate Market Value of 
Unrestricted Publicly Held Shares requirement provides the Exchange 
with a reasonable level of assurance that the

[[Page 28174]]

company's market value supports listing on the Exchange and the 
maintenance of fair and orderly markets.\56\ The Commission reaches 
this conclusion because the proposed market value standard for listing 
a Direct Listing with a Capital Raise is more than two times greater 
than the market value standard that currently exists under Exchange 
rules for an Exchange listing of an IPO. The proposed requirement is 
also comparable to the Market Value of Unrestricted Publicly Held 
Shares requirement used by the Exchange for initial listing in other 
contexts.\57\ Specifically, the Exchange's proposed Market Value of 
Unrestricted Publicly Held Shares requirement of at least $110 million 
(or $100 million, if the company has stockholders' equity of at least 
$110 million) is the same Market Value of Unrestricted Publicly Held 
Shares requirement applied to companies that list their primary equity 
securities on the Exchange, other than in the case of an IPO or spin-
off,\58\ in addition to being higher than the $45 million Market Value 
of Unrestricted Publicly Held Shares requirement applied to IPOs and 
spin-offs.\59\
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    \56\ A significant number of exchange-listed IPOs in the recent 
years had proceeds that fell below the $110 million threshold. Using 
information from Thomson Reuters SDC Platinum New Issues database, 
the Commission staff concluded that, among 146 exchange-listed IPOs 
conducted during the 2019 calendar year, the median offer size was 
$106.7 million. Among 196 exchange-listed IPOs conducted during the 
2020 calendar year, the median offer size was $175.4 million. 
Further, staff concluded that approximately 51.4 percent of the 
companies that went public via the IPO in 2019 and 33.7 percent of 
the companies that went public via the IPO in 2020 (63.6 percent in 
2019 and 34.6 percent in 2020 among NASDAQ IPOs only) had an offer 
size that fell below $110 million. Similarly, academic research 
finds that the median proceeds raised in exchange-listed IPOs in the 
United States were approximately $121 million during the 2019 
calendar year and $188 million during the 2020 calendar year. See 
Jay R. Ritter, Initial Public Offerings: Updated Statistics tbl.4f 
(March 10, 2021), available at https://site.warrington.ufl.edu/ritter/files/IPO-Statistics.pdf.
    \57\ See supra notes 17 and 22 and accompanying text.
    \58\ The existing market value requirement of at least $110 
million (or $100 million, if the company has a stockholders' equity 
of at least $110 million) in Listing Rule 5315(f)(2)(A) and (B) is a 
longstanding requirement that has supported the listing of companies 
on the Exchange since 2009. See Securities Exchange Act Release No. 
53799 (May 12, 2006), 71 FR 29195 (May 19, 2006) (SR-NASDAQ-2006-
007) (creating the Nasdaq Global Select Market and implementing 
initial listing requirements for that market). In 2019, when 
approving a proposal by Nasdaq to require that the calculation of 
market value of publicly-held shares be limited to unrestricted 
securities, the Commission stated that it believed that the 
revisions ``should help to ensure that the Exchange lists only 
securities with a sufficient market, with adequate depth and 
liquidity, and with sufficient investor interest to support an 
exchange listing.'' Securities Exchange Act Release No. 86314 (July 
5, 2019), 84 FR 33102, 33111 (July 11, 2019) (SR-NASDAQ-2019-009). 
The Exchange also applies this same market value requirement to 
Selling Shareholder Direct Listings if the company's security has 
had sustained recent trading in a Private Placement Market. See 
Listing Rule IM-5315-1(a); Securities Exchange Act Release No. 85156 
(February 15, 2019), 84 FR 5787 (February 22, 2019) (SR-NASDAQ-2019-
001).
    \59\ The existing $45 million market value requirement in 
Listing Rule 5315(f)(2)(C) is a longstanding requirement that has 
supported the listing of companies on the Exchange that are suitable 
for listing and has existed since 2010. See Securities Exchange Act 
Release No. 61904 (April 14, 2010), 75 FR 20651 (April 20, 2010) 
(SR-NASDAQ-2010-047) (lowering the market value of publicly-held 
shares requirement for the listing of IPOs, affiliates, or spin-offs 
from $70 million to $45 million).
---------------------------------------------------------------------------

    Further, as described below, using the lowest price in the price 
range established by the issuer in its registration statement to 
determine the minimum market value is a reasonable and conservative 
approach because the Direct Listing with a Capital Raise will not 
proceed at a lower price.

B. Opening Auction Process for Direct Listing With a Capital Raise and 
Role of Financial Advisors

    As discussed above, the Exchange has proposed to add the CDL Order 
as a new order type to be used in a Direct Listing with a Capital 
Raise. An issuer would be required to submit a CDL Order in the opening 
auction for the full quantity of offered shares, as reflected in the 
effective registration statement, and the CDL Order must be executed in 
full. Although the CDL Order would be entered as a market order, it 
would only execute at a price at or above the lowest price and at or 
below the highest price of the price range established by the issuer in 
its effective registration statement. The CDL Order cannot be modified 
or cancelled by the issuer once entered.\60\
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    \60\ See supra notes 28-29 and accompanying text. In addition, 
as discussed above, the Exchange proposes that it would modify the 
fourth tie-breaker used for the Current Reference Price disseminated 
in its Order Imbalance Indicator and for the price at which the 
Nasdaq Halt Cross will execute to equal the lowest price of the 
price range reflected in the effective registration statement. See 
supra notes 43-44 and accompanying text. The Commission believes 
that this is a reasonable price to use because the auction cannot 
occur at a lower price.
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    In the Order Instituting Proceedings, the Commission raised 
concerns about provisions in the original proposal regarding the price 
at which the Nasdaq Halt Cross could proceed on the first day of 
trading, and whether that price would be consistent with the 
disclosures in the issuer's Securities Act registration statement.\61\ 
Specifically, the Commission expressed concern about the lack of a 
proposed maximum price, above which the cross could not proceed, and 
that, without an upside limit, it was not clear how the issuer could 
ensure that the issuer's Securities Act registration statement would 
cover the full amount of securities to be sold in the offering.\62\ The 
Commission also expressed concern about a provision in the original 
proposal that would have allowed the opening cross to occur at a price 
up to 20% below the price range disclosed by the issuer in its 
effective registration statement, and that the Exchange had not 
explained how investors would know the minimum price at which the 
company could sell shares in the offering. Further, the Commission 
raised a concern that it was unclear from the proposed rules that the 
cross would not occur at a price that is below the price 20% below the 
disclosed price range due to the application of an existing provision 
that permits an underwriter or financial advisor to select price bands 
of up to $0.50 outside of the expected cross price and still have the 
cross proceed if the actual price is within the price band.
---------------------------------------------------------------------------

    \61\ If that price were not consistent with the disclosures in 
the issuer's Securities Act registration statement, in addition to 
any issues under the Securities Act, there would be concerns about 
whether the proposal was consistent with Section (6)(b)(5) under the 
Exchange Act, including whether the proposal was designed to prevent 
fraudulent and manipulative acts and practices, and to protect 
investors and the public interest.
    \62\ One commenter stated that it shared this concern. See 
Letter from Jeffrey P. Mahoney, General Counsel, Council of 
Institutional Investors (January 13, 2021) (``CII Letter II''). In 
the Order Instituting Proceedings, the Commission stated, among 
other things, that although issuers may file additional Securities 
Act registration statements to register additional securities needed 
to complete an offering, Section 5 of the Securities Act requires 
all of the related registration statements to be effective prior to 
the time of sale. To the extent Nasdaq's original proposal may have 
resulted in issuers needing to register additional securities beyond 
those included in an initial Securities Act registration statement, 
it was not apparent how an issuer could ensure that any additional 
required registration statement would be effective prior to the time 
of opening.
---------------------------------------------------------------------------

    In the amended proposal, the Exchange modified the permissible 
price range for the opening cross and provided that Nasdaq would 
release a security for trading only if the actual price calculated by 
the cross is at or above the lowest price and at or below the highest 
price of the price range established by the issuer in its effective 
registration statement.\63\ The

[[Page 28175]]

Commission believes that the changes to the proposed pricing provisions 
that the Exchange made in the amended proposal ensure that the actual 
price of the cross and the number of shares offered will be consistent 
with the issuer's disclosures in its effective registration statement. 
The Commission further believes that these changes adequately address 
the Commission's concerns arising from the price at which the cross 
would proceed.
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    \63\ With respect to the potential use of price bands allowed by 
Rule 4120(c)(8), the Exchange states that Nasdaq would set the price 
bands and that it intends to set these price bands at zero. The 
Exchange further states that the price bands cannot act to allow the 
cross to occur outside of the price range disclosed by the issuer in 
its effective registration statement because, under the proposal as 
amended, the actual price calculated by the cross is required to be 
at or above the lowest price and at or below the highest price of 
the price range established by the issuer in its effective 
registration statement. See supra note 39 and accompanying text.
---------------------------------------------------------------------------

    The CDL Order and related opening auction procedures proposed by 
the Exchange set forth the method by which the issuer participates in 
the opening auction, help to prevent the issuer from being in a 
position to improperly influence the price discovery process,\64\ and 
will help result in the Exchange conducting an auction that is 
otherwise consistent with the disclosures in the registration 
statement. Specifically, the issuer would be required to submit a CDL 
Order in the opening auction for the full quantity of offered shares, 
and the security would only be released for trading in the opening 
auction at a price that is within the disclosed price range, as 
reflected in the effective registration statement. Further, the CDL 
Order cannot be modified or cancelled by the issuer once entered. The 
Commission notes that it recently approved the use of a similar order 
for the opening process for a direct listing with primary offering on 
another national securities exchange, stating that an opening process 
using such order type provided reasonable assurance that the opening 
auction and subsequent trading promote fair and orderly markets, and 
that the proposed rules are designed to prevent fraud and manipulation 
and protect investors and the public interest, consistent with Section 
6(b)(5) under the Exchange Act.\65\
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    \64\ See supra note 60 and accompanying text. See also proposed 
Rule 4702(b)(16), which sets forth the requirements the issuer must 
follow in entering the CDL Order, and proposed Rule 4120(c)(9)(B), 
which sets forth the requirements for Nasdaq to release the security 
for trading in the opening auction for a Direct Listing with a 
Capital Raise.
    \65\ See NYSE 2020 Order, supra note 47, 85 FR 85813.
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    In the Order Instituting Proceedings, the Commission also expressed 
concern that the proposed rules appeared to permit the issuer's 
financial advisor broad discretion to postpone the offering, which 
would effectively cancel the CDL Order. In its original proposal, the 
Exchange contemplated that the financial advisor in a Direct Listing 
with a Capital Raise would determine when the security is ready to 
trade, similar to the role played by an underwriter in an IPO or a 
financial advisor in a Selling Shareholder Direct Listing, and could 
also postpone the offering at anytime prior to the opening.\66\ In the 
amended proposal, the Exchange proposed to modify its rules for the 
opening cross to provide that, for a Direct Listing with a Capital 
Raise, Nasdaq, in consultation with the financial advisor to the 
issuer, would make the determination of whether the security is ready 
to trade, and Nasdaq alone would make the determination of whether to 
postpone and reschedule the offering, rather than allowing the 
financial advisor to make these determinations. Nasdaq would postpone 
and reschedule the offering only if there is insufficient buy interest 
to satisfy the CDL Order and all other market orders, or if the actual 
price calculated by the cross is outside the price range established by 
the issuer in its effective registration statement.
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    \66\ Under current Rule 4120(c)(8) and (9), a security will be 
released for trading by the Exchange in its opening cross when the 
Exchange receives notice from the underwriter in an IPO (or the 
financial advisor in a Selling Shareholder Direct Listing) that the 
security is ready to trade and the security passes certain 
validation checks. Specifically, in the case of an IPO, the 
underwriter will notify the Exchange that the security is ready to 
trade. Then the Nasdaq system will calculate the Current Reference 
Price at the time and display it to the underwriter. If the 
underwriter approves proceeding, the Nasdaq system will conduct 
validation checks to determine that all market orders will be 
executed in the cross and that the actual price calculated by the 
cross does not differ from the price displayed to the underwriter by 
an amount in excess of the price band selected by the underwriter. 
In addition, the underwriter may determine at any point during the 
cross process to postpone and reschedule the offering. In a Selling 
Shareholder Direct Listing, a financial advisor performs these 
functions.
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    The Commission believes that providing Nasdaq exclusive discretion 
to determine whether to postpone or reschedule the offering, and 
limiting that discretion to cases where the CDL Order could not 
otherwise be executed, adequately addresses the concerns expressed in 
the Order Instituting Proceedings that the CDL Order, which by its 
terms may not be cancelled or modified, could indirectly be cancelled 
by virtue of the financial advisor's broad discretion to postpone or 
reschedule the offering.\67\ This will help ensure that the offering 
will proceed consistent with the disclosures in the issuer's Securities 
Act registration statement and, for the reasons noted above, consistent 
with Section 6(b)(5) of the Exchange Act.
---------------------------------------------------------------------------

    \67\ See supra notes 38-39 and accompanying text.
---------------------------------------------------------------------------

    In addition, the proposed rules contain a reminder to the financial 
advisor that any activities performed under Rules 4120(c)(8) and 
4120(c)(9)(A) and (B) must be conducted in a manner that is consistent 
with the federal securities laws, including Regulation M and other 
anti-manipulation requirements.\68\ This provision will help to ensure 
compliance by participants in the direct listing process with these 
important provisions of the federal securities laws and that the 
proposed changes are consistent with preventing manipulative acts and 
practices, and protecting investors and the public interest in 
accordance with Section 6(b)(5) of the Exchange Act.
---------------------------------------------------------------------------

    \68\ See proposed Rule 4120(c)(9)(A).
---------------------------------------------------------------------------

C. Lack of Traditional Underwriter Involvement in a Direct Listing With 
a Capital Raise and Securities Act Section 11 Standing

    One commenter recommended that the Commission disapprove the 
proposal because it believes that the proposed expansion of direct 
listings would compound problems that shareholders face in tracing 
their share purchases to a registration statement for purposes of 
claims under Section 11 of the Securities Act and may lead to a decline 
in effective corporate governance at U.S. public companies.\69\ This 
commenter stated that traceability concerns often arise when there have 
been successive offerings, as shareholders seek to establish their 
standing to litigate claims for material misstatements or omissions 
under Section 11 of the Securities Act.\70\ The commenter also stated 
that investor concerns about the traceability of shares in a direct 
listing were drawn into sharp focus in current litigation involving a

[[Page 28176]]

direct listing by Slack Technologies, Inc. (``Slack''), which is still 
under judicial review.\71\ The commenter further stated that, 
independent of the Slack case, direct listings raise important investor 
issues that the Commission should consider before opening U.S. capital 
markets up to the potential for a vastly increased number of direct 
listings.\72\ The commenter urged the Commission to explore updating 
its ``proxy plumbing'' regulations before approving an expanded direct 
listings regime.\73\ In response, the Exchange stated that the 
Commission has previously considered these concerns and stated that the 
Commission determined that investor protection concerns relating to 
tracing challenges are not unique to direct listings.\74\
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    \69\ See Letter from Jeffrey P. Mahoney, General Counsel, 
Council of Institutional Investors, at 2, 4 (October 8, 2020) (``CII 
Letter I''); CII Letter II, supra note 62. The commenter stated that 
on September 25, 2020, the Commission issued an order granting the 
Council of Institutional Investors' petition for review of an order, 
issued by delegated authority, granting approval of a proposed rule 
change by the New York Stock Exchange LLC relating to a proposed 
direct listing with a primary offering (``NYSE Proposal''). See CII 
Letter I, at 1-2. This commenter stated that the Exchange's current 
proposal is similar to the NYSE Proposal and cites its petition for 
review of the NYSE Proposal as further support for its 
recommendation that the Commission disapprove Nasdaq's proposal. See 
id. at 1-2 (citing Petition of Council of Institutional Investors 
for Review of an Order, Issued by Delegated Authority, Granting 
Approval of a Proposed Rule (September 8, 2020), available at 
https://www.sec.gov/rules/sro/nyse/2020/34-89684-petition.pdf). See 
also NYSE 2020 Order, supra note 47 (setting aside previous approval 
by delegated authority and approving proposed rule change).
    \70\ See CII Letter I, supra note 69, at 2-3. The commenter 
cited to a statement by Commissioners Lee and Crenshaw, issued 
contemporaneously with the Commission's approval of the NYSE 
Proposal, that raised a concern about the potential inability of 
shareholders to recover losses for inaccurate disclosures due to 
traceability problems. See CII Letter II, supra note 62, at 3.
    \71\ See CII Letter I, supra note 69, at 3. In that case, as 
noted by the commenter, the defendants sought dismissal of the 
Section 11 claims on the grounds that the plaintiffs could not trace 
their purchases to Slack's registration statement. The commenter 
stated with respect to this case that while the district court 
denied the motion to dismiss the Section 11 claims, it is uncertain 
whether the Ninth Circuit Court of Appeals, which has agreed to 
consider the Section 11 standing issue on an interlocutory basis, 
will uphold the district court's reasoning. See id. See also Pirani 
v. Slack Technologies, Inc., No. 20-16419 (9th Cir. July 23, 2020), 
Docket No. 1.
    \72\ See CII Letter I, supra note 69, at 3.
    \73\ See CII Letter I, supra note 69, at 4.
    \74\ See Notice, supra note 9, 86 FR 12249 (citing NYSE 2020 
Order, supra note 47, 85 FR 85816).
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    In addition, this commenter stated that it is concerned that the 
Exchange's proposal would result in a significant increase in the use 
of direct listings, and that more direct listings may lead to a decline 
in the effective corporate governance of U.S. public companies to the 
detriment of long-term investors and the capital markets generally.\75\ 
The commenter stated that a recent direct listing of Palantir 
Technologies Inc. had a multi-class structure that is viewed by many 
market participants as inconsistent with effective governance.\76\ In 
response, the Exchange stated that it believes that the concern about a 
decline in effective corporate governance is unsubstantiated and 
challenges in this context are not of such magnitude as to render the 
proposal inconsistent with the Exchange Act. The Exchange also pointed 
to the Commission's prior conclusion that it did not view a firm 
commitment underwriting as necessary to provide adequate investor 
protection in the context of a registered offering.\77\
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    \75\ See CII Letter I, supra note 69, at 4.
    \76\ See CII Letter I, supra note 69, at 5. See also CII Letter 
II, supra note 62, at 3 (raising a concern about the lack of a firm 
commitment underwriter).
    \77\ See Notice, supra note 9, 86 FR 12250 (citing NYSE 2020 
Order, supra note 47, 85 FR 85815).
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    As the Commission stated previously, the Securities Act does not 
require the involvement of an underwriter in registered offerings.\78\ 
Moreover, given the broad definition of ``underwriter'' \79\ in the 
Securities Act, a financial advisor to an issuer engaged in a Direct 
Listing with a Capital Raise may, depending on the facts and 
circumstances including the nature and extent of the financial 
advisor's activities, be deemed a statutory ``underwriter'' with 
respect to the securities offering, with attendant underwriter 
liabilities.\80\ Thus, the financial advisors to issuers in Direct 
Listings with a Capital Raise have incentives to engage in robust due 
diligence, given their reputational interests and potential liability, 
including as statutory underwriters under the broad definition of that 
term.\81\ Moreover, even absent the involvement of a statutory 
underwriter, investors would not be precluded from pursuing any claims 
they may have under the Securities Act for false or misleading offering 
documents, nor would the absence of a statutory underwriter affect the 
amount of damages investors may be entitled to recover.
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    \78\ See, e.g., Item 508(c) of Regulation S-K (``Outline briefly 
the plan of distribution of any securities to be registered that are 
to be offered otherwise than through underwriters.''). See also NYSE 
2020 Order, supra note 47, 85 FR 85815.
    \79\ Section 2(a)(11) of the Securities Act defines 
``underwriter'' to include ``any person who has purchased from an 
issuer with a view to, or offers or sells for an issuer in 
connection with, the distribution of any security, or participates, 
or has a direct or indirect participation in any such undertaking, 
or participates or has a participation in the direct or indirect 
underwriting of any such undertaking.'' For purposes of this 
definition, ``issuer'' includes, in addition to an issuer, any 
person directly or indirectly controlling or controlled by the 
issuer, or any person under direct or indirect common control with 
the issuer.
    \80\ Whether a person would be considered a statutory 
underwriter would be evaluated based on the particular facts and 
circumstances, in light of the definition of underwriter contained 
in Section 2(a)(11). See, e.g., SEC v. Platforms Wireless Int'l 
Corp., 617 F.3d 1072 (9th Cir. 2010); Harden v. Raffensperger, 
Hughes & Co., 65 F.3d 1392 (7th Cir. 1995); SEC v. Int'l Chem. Dev. 
Corp., 469 F.2d 20 (10th Cir. 1972); SEC v. Chinese Consol. 
Benevolent Ass'n, 120 F.2d 738 (2d Cir.), cert. denied, 314 U.S. 618 
(1941).
    \81\ Depending on the facts and circumstances, an analysis of 
activities engaged in by financial advisors in the context of 
selling shareholder direct listings could lead to a conclusion that 
such advisors are statutory underwriters. The Commission understands 
that practices surrounding direct listings continue to evolve. The 
Commission will continue to monitor such activities and any 
developments, and will evaluate whether further action in this area 
would be appropriate.
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    In addition, issuers, officers, directors, and accountants, with 
their attendant liability, play important roles in assuring that 
disclosures provided to investors are materially accurate and complete. 
The Commission therefore does not view a firm commitment underwriting 
as necessary to provide adequate investor protection in the context of 
a registered offering. Indeed, exchange-listed companies often engage 
in offerings that do not involve a firm commitment underwriting.
    Moreover, as the Commission stated previously, the commenter's 
concerns regarding shareholders' ability to pursue claims pursuant to 
Section 11 of the Securities Act due to traceability issues are not 
exclusive to nor necessarily inherent in a direct listing with a 
primary offering, including the proposed Direct Listing with a Capital 
Raise.\82\ Rather, this issue is potentially implicated anytime 
securities that are not the subject of a recently effective 
registration statement trade in the same market as those that are so 
subject. Where a registration statement, at the time of effectiveness, 
contains an untrue statement of a material fact or omits to state a 
material fact required to be stated therein or necessary to make the 
statements therein not misleading, Section 11(a) of the Securities Act 
provides a cause of action to ``any person acquiring such security,'' 
unless it is proved that at the time of the acquisition the person 
``knew of such untruth or omission.'' \83\ In the context of 
conventional public offerings, courts have interpreted this statutory 
provision to permit aftermarket purchasers (i.e., those who acquire 
their securities in secondary market transactions rather than in the 
initial distribution from the issuer or underwriter) to recover damages 
under Section 11, but only if they can trace the acquired shares back 
to the offering covered by the false or misleading registration 
statement.\84\ Tracing is not set forth in Section 11 and is a 
judicially-developed doctrine. The application of this doctrine and, in 
particular, the pleading standards and factual proof that potential 
claimants must satisfy vary depending on the particular facts of the 
distribution and judicial district, and may be affected by pending 
litigation.\85\
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    \82\ See NYSE 2020 Order, supra note 47, 85 FR 85815.
    \83\ Section 11(a) of the Securities Act.
    \84\ See, e.g., In re Century Aluminum Co. Sec. Litig., 729 F.3d 
1104 (9th Cir. 2013).
    \85\ See, e.g., Pirani v. Slack Techs., Inc., 2020 U.S. Dist. 
LEXIS 70177 (N.D. Cal., April 21, 2020) (addressing Securities Act 
Section 11 standing and stating that ``[i]f the text is ambiguous, 
the Court `may [also] use canons of construction, legislative 
history, and the statute's overall purpose to illuminate Congress's 
intent.' '' (quoting Pac. Coast Fed'n of Fishermen's Ass'ns v. 
Glaser, 945 F.3d 1076 (9th Cir. 2019)).

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[[Page 28177]]

    Although it is possible that aftermarket purchases following a 
Direct Listing with a Capital Raise may present tracing challenges, it 
is not yet known whether a court would find that this investor 
protection concern is applicable to a Direct Listing with a Capital 
Raise. We expect judicial precedent on traceability in the direct 
listing context to continue to evolve,\86\ but the Commission is not 
aware of any precedent to date in the direct listing context which 
prohibits plaintiffs from pursuing Section 11 claims. The Commission is 
actively monitoring this issue and will be able to respond to such 
concerns when and if they arise.
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    \86\ For example, the Ninth Circuit Court of Appeals has agreed 
to consider the issue of Section 11 standing at issue in Pirani v. 
Slack Techs., Inc., 2020 U.S. Dist. LEXIS 70177 (N.D. Cal., April 
21, 2020) on an interlocutory basis. See Pirani v. Slack 
Technologies, Inc., No. 20-16419 (9th Cir., July 23, 2020), Docket 
No. 1.
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    With respect to the commenter's concern that Nasdaq's proposal 
could lead to a significantly increased use of direct listings, we 
acknowledge that the ability to raise capital in connection with a 
direct listing may lead more issuers to pursue this alternative method 
of becoming publicly traded.
    With respect to the commenter's concern that Nasdaq's proposal 
could lead to a decline in effective corporate governance,\87\ the 
commenter suggests that the involvement of banks and underwriters in 
conventional IPOs may help investors encourage issuers to revise 
corporate governance arrangements, such as dual-class structures, that 
are not favored by such investors. The commenter cited as an example a 
recent secondary direct listing in which founders of the listed 
company, as a result of the company's multi-class structure, would 
retain effective voting control over the company as long as they 
collectively owned a specified minimum amount of the company's shares. 
Under existing listing rules, nothing precludes companies with multi-
class structures that give their founders disproportionate voting 
rights from listing on an exchange in connection with a traditional 
firm commitment IPO; indeed, such listings are not uncommon. Moreover, 
the Commission does not believe that investors will be precluded from 
raising concerns about governance structures in the context of direct 
listings; to the extent a company's corporate governance structures are 
of sufficient concern to investors, they may be able to influence 
companies' governance practices, notwithstanding the lack of a firm 
commitment underwriting, through signaling their unwillingness to 
purchase a company's shares through a direct listing. In this way, 
investors may be able to persuade companies to adopt preferred 
governance provisions, whether the company becomes listed through a 
direct listing or a firm commitment IPO.
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    \87\ See supra notes 75-77 and accompanying text.
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    The Commission finds that the proposed rule change is consistent 
with the protection of investors. The proposed rule change will require 
all Direct Listings with a Capital Raise to be registered under the 
Securities Act, and thus subject to the existing liability and 
disclosure framework under the Securities Act for registered offerings. 
Among other disclosures, these registration statements will require 
both bona fide price ranges \88\ and audited financial statements 
prepared in accordance with either U.S. GAAP or International Financial 
Reporting Standards as issued by the International Accounting Standards 
Board.\89\
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    \88\ See, e.g., Instruction 1 to Item 501(b)(3) of Regulation S-
K.
    \89\ See Rule 4-01(a) of Regulation S-X.
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    The Commission further believes that Direct Listings with a Capital 
Raise will provide benefits to existing and potential investors 
relative to firm commitment underwritten offerings.\90\ First, because 
the securities to be issued by the company in connection with a Direct 
Listing with a Capital Raise would be allocated based on matching buy 
and sell orders, in accordance with the proposed rules, some investors 
may be able to purchase securities in a Direct Listing with a Capital 
Raise who might not otherwise receive an initial allocation in a firm 
commitment underwritten offering. The proposed rule change therefore 
has the potential to broaden the scope of investors that are able to 
purchase securities in an initial public offering, at the initial 
public offering price, rather than in aftermarket trading.
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    \90\ See also NYSE 2020 Order, supra note 47, 85 FR 85816.
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    Second, because the price of securities issued by the company in a 
Direct Listing with a Capital Raise will be determined based on market 
interest and the matching of buy and sell orders, Direct Listings with 
a Capital Raise will provide an alternative way to price securities 
offerings that may allow for efficiencies in IPO pricing and 
allocation.\91\ In a firm commitment underwritten offering, the 
offering price is informed by underwriter engagement with potential 
investors to gauge interest in the offering, but ultimately decided 
through negotiations between the issuer and the underwriters for the 
offering. The underwriters then sell the securities to the initial 
purchasers at the public offering price. When the securities begin 
trading on the listing exchange, however, the price often varies from 
the IPO price. The opening auction in a Direct Listing with a Capital 
Raise provides for a different price discovery method for IPOs which 
may reduce the spread between the IPO price and subsequent market 
trades, a potential benefit to existing and potential investors. In 
this way, the proposed rule change may result in additional investment 
opportunities while providing companies more options for becoming 
publicly traded.\92\
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    \91\ A frequent academic observation of traditional firm 
commitment underwritten offerings is that the IPO price, established 
through negotiation between the underwriters and the issuer, is 
often lower than the price that the issuer could have obtained for 
the securities, based on a comparison of the IPO price to the 
closing price on the first day of trading. See, e.g., Patrick M. 
Corrigan, Article: The Seller's Curse and the Underwriter's Pricing 
Pivot: A Behavioral Theory of IPO Pricing, 13 Va. L. & Bus. Rev. 
335; Jay R. Ritter, Initial Public Offerings: Underpricing tbl.1 
(December 29, 2020), available at https://site.warrington.ufl.edu/ritter/files/IPOs-Underpricing.pdf.
    \92\ While the Commission acknowledges the possibility that some 
companies may pursue a Direct Listing with a Capital Raise instead 
of a traditional IPO, these two listing methods may not be 
substitutable in a wide variety of instances. For example, some 
issuers may require the assistance of underwriters to develop a 
broad investor base sufficient to support a liquid trading market; 
others may believe a traditional firm commitment IPO is preferable 
given the benefits to brand recognition that can result from 
roadshows and other marketing efforts that often accompany such 
offerings. Thus, we do not anticipate that all companies that are 
eligible to go public through a Direct Listing with a Capital Raise 
will choose to do so; the method chosen will depend on each issuer's 
unique characteristics.
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    The Commission finds that the Exchange's proposal will facilitate 
the orderly distribution and trading of shares, which promotes fair and 
orderly markets, and helps the Exchange ensure that its rules prevent 
fraudulent and manipulative acts and practices, promote just and 
equitable principles of trade and protect investors and the public 
interest.\93\ The proposal also will foster competition by providing an 
alternative method for companies of sufficient size that decide they 
would rather not conduct a firm commitment underwritten offering to 
list on the Exchange, thereby removing potential impediments to free 
and open markets consistent with Section 6(b)(5) of the Exchange Act 
while also supporting capital formation. For the reasons discussed 
above, the Commission finds that, on balance, the proposed rule change 
to permit Direct Listings with a

[[Page 28178]]

Capital Raise is consistent with the Exchange Act.
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    \93\ See 15 U.S.C. 78f(b)(5). See also 15 U.S.C. 78k-
1(a)(1)(C)(i).
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IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment No. 2, is consistent with the 
Exchange Act and the rules and regulations thereunder applicable to a 
national securities exchange.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\94\ that the proposed rule change (SR-NASDAQ-2020-057), 
as modified by Amendment No. 2 thereto, be, and it hereby is, approved.
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    \94\ 15 U.S.C. 78s(b)(2).
    \95\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\95\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-10968 Filed 5-24-21; 8:45 am]
BILLING CODE 8011-01-P