[Federal Register Volume 85, Number 247 (Wednesday, December 23, 2020)]
[Notices]
[Pages 84025-84029]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28319]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90717; File No. SR-NASDAQ-2020-057]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change 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

December 17, 2020.

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\ This order institutes proceedings under Section 19(b)(2)(B) 
of the Exchange Act \6\ to determine whether to approve or disapprove 
the proposed rule change.
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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) (``Notice''). 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). The Commission designated 
December 20, 2020, as the date by which it should approve, 
disapprove, or institute proceedings to determine whether to 
disapprove the proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposal

    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 
\7\ 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 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'').\8\
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    \7\ The reference to a registration statement refers to a 
registration statement effective under the Securities Act of 1933 
(``Securities Act'').
    \8\ See proposed 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 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 \9\ requirements based on the lesser of: (i) An independent 
third party valuation of the company (a ``Valuation''); \10\ and (ii) 
the most recent trading price for the company's common stock in a 
Private Placement Market \11\ where there has been sustained recent 
trading. For a security that has not had sustained 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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    \9\ ``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 Rule 5005(a)(37). ``Unrestricted 
Securities'' means securities that are not Restricted Securities. 
See Rule 5005(a)(46). ``Unrestricted Publicly Held Shares'' means 
the Publicly Held Shares that are Unrestricted Securities. See Rule 
5005(a)(45). See also Rule 5005(a)(23) and (35) for definitions of 
``Market Value'' and ``Publicly Held Shares.''
    \10\ IM-5315-1 describes the requirement for a Valuation, 
including the experience and independence of the entity providing 
the Valuation.
    \11\ 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 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).\12\ 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 price that is 20% below 
the lowest price of the price range disclosed by the issuer in its 
registration

[[Page 84026]]

statement.\13\ 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.\14\
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    \12\ See proposed IM-5315-2.
    \13\ See proposed 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 $400 million, 
based on an $8 price per share, which is 20% below the bottom of the 
disclosed range. See Notice, supra note 3, 85 FR at 59350, n.7. The 
Exchange also states that, as described below, the opening auction 
would not execute at a price that is more than 20% 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 Notice, supra note 3, 85 FR at 59350, n.6.
    \14\ See proposed 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.\15\ In 
qualifying companies for listing in a Direct Listing with a Capital 
Raise, however, such officers, directors and owners of 10% or more of 
the company's common stock will be included in determining whether the 
company meets the Market Value of Publicly Held Shares requirement. 
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 
meets the Market Value of Unrestricted Publicly Held Shares requirement 
for initial listing.\16\ 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 of 
Unrestricted Publicly Held Shares requirement that applies to a 
traditional underwritten initial public offering (``IPO'').\17\ 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 completion of the opening auction.\18\
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    \15\ See Notice, supra note 3, 85 FR at 59350. 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.
    \16\ See Notice, supra note 3, 85 FR at 59350. 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. See id. at 
59352.
    \17\ See Notice, supra note 3, 85 FR at 59350. 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 59352.
    \18\ See Notice, supra note 3, 85 FR at 59350.
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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 price that is 20% below the lowest price of the price 
range disclosed by the issuer in its registration statement.\19\ 
According to the Exchange, Commission rules and interpretations 
generally allow the sale of securities pursuant to an effective 
registration statement at a price that is 20% below the lowest price of 
the price range disclosed by the issuer in its registration 
statement.\20\ The Exchange states that, as a result, the Exchange will 
allow the opening auction, otherwise known as the Nasdaq Halt 
Cross,\21\ 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.\22\
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    \19\ See Notice, supra note 3, 85 FR at 59352.
    \20\ See Notice, supra note 3, 85 FR at 59352.
    \21\ ``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 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).
    \22\ See Notice, supra note 3, 85 FR at 59352.
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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 be 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.\23\
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    \23\ See Notice, supra note 3, 85 FR at 59351 (citing Rules 
5315(e)(1) and (2), and 5315(f)).
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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.\24\ 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 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.\25\
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    \24\ See proposed Rule 4702(b)(16)(A) and (B).
    \25\ See proposed Rule 4702(a)(16)(A); Notice, supra note 3, 85 
FR at 59351.
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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)(8) and Rule 4753. The Exchange 
further has proposed that, to allow such initial pricing, the company 
must, 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 IPO.\26\ 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

[[Page 84027]]

trading of securities covered by the proposal.\27\ 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, including a company listing in connection with a Direct 
Listing with a Capital Raise, must provide such services in a manner 
that is consistent with all federal securities laws, including 
Regulation M and other anti-manipulation requirements.\28\
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    \26\ See proposed 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 security 
exchange immediately prior to the initial pricing, if a broker-
dealer serving in the role of financial 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).
    \27\ See Notice, supra note 3, 85 FR at 59352.
    \28\ See proposed Rule 4120(c)(9)(A).
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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 expected price 
at which the cross would occur (as defined in Rule 4120(c)(8)(A)(i)) is 
at or above the price that is 20% below the lowest price of the price 
range established by the issuer in its effective registration 
statement.\29\ This requirement would be in addition to the existing 
conditions described in Rule 4120(c)(8)(A)(i), (ii), and (iii), which 
would continue to apply.\30\ The Exchange notes 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 
asserts 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 no less 
than 20% below the lowest price of the price range disclosed by the 
issuer in its registration statement.\31\
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    \29\ See proposed Rule 4120(c)(9)(B).
    \30\ Rule 4120(c)(8)(A) provides that a security will not be 
released for trading until Nasdaq receives notice from the 
underwriter of the IPO or financial advisor in the case of a Direct 
Listing that the security is ready to trade, the system verifies 
that all market orders will be executed in the cross, and the price 
determined in the cross satisfies a price validation test.
    \31\ See Notice, supra note 3, 85 FR at 59352.
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    The Exchange states that, because the financial advisor would be 
responsible for determining when the security subject to the Nasdaq 
Halt Cross is ready to trade, the proposal would make the financial 
advisor responsible for determining whether the Nasdaq Halt Cross for a 
Direct Listing with a Capital Raise can proceed.\32\ According to the 
Exchange, if there is insufficient buy interest to satisfy the CDL 
Order as required by the proposal, the Nasdaq Halt Cross would not 
proceed and such security would not begin trading.\33\ The Exchange 
represents that, if the Nasdaq Halt Cross cannot be conducted, the 
Exchange would notify market participants via a Trader Update that the 
Direct Listing with a Capital Raise has been cancelled and any orders 
for that security that had been entered on the Exchange, including the 
CDL Order, would be cancelled back to the entering firms.\34\ 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.\35\ The Exchange 
notes that, while the Nasdaq Halt Cross would not proceed if the price 
calculated is 20% or more below the lowest price disclosed by the 
company in its effective registration statement, there would be no 
upper limit to the price determined in the Nasdaq Halt Cross.\36\
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    \32\ See Notice, supra note 3, 85 FR at 59351.
    \33\ See Notice, supra note 3, 85 FR at 59351.
    \34\ See Notice, supra note 3, 85 FR at 59351.
    \35\ See Notice, supra note 3, 85 FR at 59351.
    \36\ See Notice, supra note 3, 85 FR at 59351.
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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, and the price at which the Nasdaq 
Halt Cross would execute, for a Direct Listing with a Capital 
Raise.\37\ 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 price that is closest to the price that is 20% below the 
lowest price of the price range disclosed by the issuer in its 
effective registration statement.\38\
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    \37\ See Rule 4853(a)(3) for a description of the ``Current 
Reference Price'' and ``Order Imbalance Indicator.''
    \38\ 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 3, 85 FR at 59352. 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. Summary of Comment Letters Received

    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 and may lead to a 
decline in effective governance at U.S. public companies.\39\ The 
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 federal securities law.\40\ The commenter stated that investor 
concerns about the traceability of shares in a direct listing were 
drawn into sharp focus in current litigation involving a direct listing 
by Slack Technologies, Inc. (``Slack''), which is still under 
consideration.\41\ The commenter further stated that, independent of 
the Slack case, the Exchange's proposal raises 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.\42\ The commenter urged the Commission to explore updating 
its ``proxy plumbing'' regulations before approving an expanded direct 
listings regime.\43\
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    \39\ See Letter from Jeffrey P. Mahoney, General Counsel, 
Council of Institutional Investors, at 2, 4 (October 8, 2020) (``CII 
Letter''). 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 id. at 1-2. See also 
Securities Exchange Act Release No. 90001 (September 25, 2020), 85 
FR 61793 (September 30, 2020) (SR-NYSE-2019-67) (Order Granting 
Petition for Review, Scheduling Filing of Statements, and Denying 
New York Stock Exchange LLC's Motion to Lift the Stay). 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 the Exchange's proposal. See CII Letter, 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).
    \40\ See CII Letter, supra note 39, at 2-3.
    \41\ See CII Letter, supra note 39, at 3. The commenter stated 
with respect to this case that while the district court denied a 
motion to dismiss a Section 11 claim on the grounds that the 
plaintiff could not trace its purchases to Slack's registration 
statement, the court of appeals has agreed to hear the matter on an 
interlocutory basis, so it is unclear whether the district court 
case will be upheld. See id. See also Pirani v. Slack Technologies, 
Inc., No. 20-16419 (9th Cir. July 23, 2020), Docket No. 1.
    \42\ See CII Letter, supra note 39, at 3.
    \43\ See CII Letter, supra note 39, at 4.
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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

[[Page 84028]]

decline in the effective corporate governance of U.S. public companies 
to the detriment of long-term investors and the capital markets 
generally.\44\ The commenter stated that a recent direct listing of 
Palantir Technologies Inc. had a dual-class structure that is viewed by 
many market participants as inconsistent with effective governance.\45\
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    \44\ See CII Letter, supra note 39, at 4.
    \45\ See CII Letter, supra note 39, at 5.
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    Another commenter simply stated support for the proposed method of 
opening the transaction.\46\
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    \46\ See Letter from Rahul Chaudhary (October 13, 2020).
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-
NASDAQ-2020-057 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Exchange Act to determine whether the proposal 
should be approved or disapproved.\47\ Institution of such proceedings 
is appropriate at this time in view of the legal and policy issues 
raised by the proposed rule change, as discussed below. Institution of 
disapproval proceedings does not indicate that the Commission has 
reached any conclusions with respect to any of the issues involved.
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    \47\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Exchange Act, the Commission 
is providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis and input concerning the proposed rule change's consistency 
with the Exchange Act \48\ and, in particular, with Section 6(b)(5) of 
the Exchange Act, 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.\49\
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    \48\ 15 U.S.C. 78f(b)(5).
    \49\ 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.\50\
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    \50\ 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. 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 2018 Order, 83 FR at 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).
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    The Exchange proposal states that for a Direct Listing with a 
Capital Raise, the Nasdaq Halt Cross on the first day of trading for 
the security would not proceed unless the price would be at or above 
the price that is 20% below the lowest price of the price range 
established by the issuer in its effective registration statement.\51\ 
The proposal, however, has no maximum price above which the Nasdaq Halt 
Cross may not proceed.\52\ Therefore, the proposed rule would permit 
issuers to sell, in the opening, the quantity of shares disclosed as 
offered in the prospectus included in the effective registration 
statement at a price that is above the price range disclosed in the 
effective registration statement. As there is no proposed upside limit 
on the price at which the opening auction could occur, it is not clear 
how the issuer could ensure that the issuer's Securities Act 
registration statement covers the full amount of securities to be sold 
in the offering.\53\ 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 proposal may result in issuers needing 
to register additional securities beyond those included in an initial 
Securities Act registration statement, it is not apparent how an issuer 
could ensure that any additional required registration statement would 
be effective prior to the time of opening. Nor is it apparent how an 
issuer would be able to determine whether an additional Securities Act 
registration statement would be required before the opening occurs. 
Thus, we have concerns that Nasdaq's proposed rule may not provide 
adequate safeguards to ensure that issuers conducting a Direct Listing 
with a Capital Raise are able to comply with Section 5 of the 
Securities Act. The Exchange has not explained how this would be 
consistent with the investor protection requirements under Section 
6(b)(5) and other relevant provisions of the Exchange Act.
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    \51\ See supra note 29 and accompanying text.
    \52\ See supra note 36 and accompanying text.
    \53\ Securities Act Rule 457 permits issuers to register 
securities either by specifying the quantity of shares registered, 
pursuant to Rule 457(a), or the proposed maximum aggregate offering 
amount, pursuant to Rule 457(o). For issuers that register 
securities based on the proposed maximum aggregate offering amount, 
it is not clear how the issuer could ensure that the total amount 
sold by the issuer in the opening auction does not exceed the amount 
of securities registered under the Securities Act.
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    In addition, the Exchange states that ``investors know the minimum 
price at which the company can sell shares in the offering.'' \54\ The 
Exchange has not explained how investors would know that price, as the 
opening could occur if the price obtained in the Nasdaq Halt Cross is 
up to 20% below the price range disclosed by the issuer in its 
effective registration statement.
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    \54\ Notice, supra note 3, 85 FR at 59350.
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    Further, the Exchange asserts, throughout its proposal, that the 
Nasdaq Halt Cross will not occur at a price lower than 20% below the 
low end of the issuer's disclosed price range, but it is unclear from 
the Exchange's rules that this would always be the case. Specifically, 
proposed Rule 4120(c)(9)(B) states that the security will not be 
released for trading unless ``the Expected Price is at or above the 
price that is 20% below the lowest price of the price range 
established'' in the effective registration statement.\55\ Rule 
4120(c)(8), however, appears to permit the underwriter or financial 
advisor to select price bands of up to $0.50 outside of the Expected 
Price, and provide that the Nasdaq system would view the price 
validation test as having been passed and permit the security to be 
released for trading, so long as the actual price calculated by the 
cross differs from the Expected Price by no more than the price 
band.\56\ The Exchange has not

[[Page 84029]]

explained this apparent inconsistency in its rules.
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    \55\ ``Expected Price'' under Rule 4120(c)(8)(A)(i) means the 
Current Reference Price at the time the Exchange receives notice 
that the security is ready to trade from an underwriter or financial 
advisor.
    \56\ Under Nasdaq Rule 4120(c)(8)(B) a financial advisor in a 
Direct Listing with a Capital Raise would select ``price bands'' 
that are defined as the amounts by which the actual price may not be 
lower, or higher, than the Expected Price. The rule states that 
available price bands, set by Nasdaq, shall include $0 but shall not 
be in excess of $0.50. Under the proposal, the financial advisor in 
a Direct Listing with a Capital Raise is not restricted from 
selecting price bands in accordance with Rule 4120(c)(8)(B).
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    Finally, although the Exchange has proposed that the CDL Order may 
not be cancelled or modified, the Exchange's rules appear to permit the 
issuer's financial advisor broad discretion to postpone the offering, 
which would effectively cancel the CDL Order. Specifically, Rule 
4120(c)(8) provides that the validation needed to open the security 
only occurs after the Expected Price is displayed to the financial 
advisor and the financial advisor then approves proceeding. Rule 
4120(c)(8) also permits the financial advisor, with the concurrence of 
Nasdaq, to determine at any point during the Nasdaq Halt Cross process 
up through the conclusion of the pre-launch period to postpone and 
reschedule the offering. The financial advisor therefore could 
effectively ``cancel'' the CDL Order, on behalf of the issuer, by 
deciding not to proceed with the offering for a variety of reasons, 
including being dissatisfied with the Expected Price. The Exchange has 
not explained why its rules appear to allow the financial advisor this 
discretion in the case of a Direct Listing with a Capital Raise, or why 
doing so would be consistent with Section 6(b)(5) and other relevant 
provisions of the Exchange Act.
    The Commission notes that, under the Commission's Rules of 
Practice, the ``burden to demonstrate that a proposed rule change is 
consistent with the Exchange Act and the rules and regulations issued 
thereunder . . . is on the self-regulatory organization [`SRO'] that 
proposed the rule change.'' \57\ The description of a proposed rule 
change, its purpose and operation, its effect, and a legal analysis of 
its consistency with applicable requirements must all be sufficiently 
detailed and specific to support an affirmative Commission finding,\58\ 
and any failure of an SRO to provide this information may result in the 
Commission not having a sufficient basis to make an affirmative finding 
that a proposed rule change is consistent with the Exchange Act and the 
applicable rules and regulations.\59\
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    \57\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \58\ See id.
    \59\ See id.
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    For these reasons, the Commission believes it is appropriate to 
institute proceedings pursuant to Section 19(b)(2)(B) of the Exchange 
Act \60\ to determine whether the proposal should be approved or 
disapproved.
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    \60\ 15 U.S.C. 78s(b)(2)(B).
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V. Commission's Solicitation of Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
view of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Exchange 
Act, or the rules and regulations thereunder. Although there do not 
appear to be any issues relevant to approval or disapproval that would 
be facilitated by an oral presentation of views, data, and arguments, 
the Commission will consider, pursuant to Rule 19b-4, any request for 
an opportunity to make an oral presentation.\61\
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    \61\ Section 19(b)(2) of the Exchange Act, as amended by the 
Securities Act Amendments of 1975, Public Law 94-29 (June 4, 1975), 
grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Act Amendments of 
1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 
75, 94th Cong., 1st Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by January 13, 2021. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
January 27, 2021.
    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 rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2020-057 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-2020-057. 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/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 such 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-2020-057 and should be submitted 
on or before January 13, 2021. Rebuttal comments should be submitted by 
January 27, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\62\
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    \62\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-28319 Filed 12-22-20; 8:45 am]
BILLING CODE 8011-01-P


