[Federal Register Volume 86, Number 187 (Thursday, September 30, 2021)]
[Notices]
[Pages 54262-54267]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-21208]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93119; File No. SR-NASDAQ-2021-045]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To Modify Certain Pricing Limitations for 
Companies Listing in Connection With a Direct Listing Primary Offering

September 24, 2021.

I. Introduction

    On June 11, 2021, 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 modify certain pricing 
limitations for companies listing in connection with a direct listing 
primary offering in which the company will sell shares itself in the 
opening auction on the first day of trading on the Exchange. The 
proposed rule change was published for comment in the Federal Register 
on June 30, 2021.\3\ On August 12, 2021, 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. 92256 (June 24, 
2021), 86 FR 34815 (June 30, 2021) (``Notice''). Comments received 
on the proposal are available on the Commission's website at: 
https://www.sec.gov/comments/sr-nasdaq-2021-045/srnasdaq2021045.htm.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 92649 (August 12, 
2021), 86 FR 46295 (August 18, 2021). The Commission designated 
September 28, 2021, 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

    Nasdaq Listing Rule IM-5315-2 provides listing requirements for 
Nasdaq's Global Select Market for a company that has not previously had 
its common equity securities registered under the Exchange Act to list 
its common equity securities on the Exchange at the time of 
effectiveness of a registration statement \7\ pursuant to which the 
company will sell shares itself in the opening auction on the first day 
of trading on the Exchange (a ``Direct Listing with a Capital 
Raise'').\8\ Securities qualified for listing under Nasdaq Listing Rule 
IM-5315-2 must begin trading on the Exchange following the initial 
pricing through the mechanism outlined in Nasdaq Rule 4120(c)(9) and 
Nasdaq Rule 4753 for the opening auction, otherwise known as the Nasdaq 
Halt Cross.\9\ Currently, in

[[Page 54263]]

the case of a Direct Listing with a Capital Raise, the Exchange will 
release the security for trading on the first day of listing if, among 
other things, 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 \10\ (the ``Pricing Range Limitation''). The Exchange has 
proposed to modify the Pricing Range Limitation to provide that the 
Exchange would release the security for trading if (a) the actual price 
calculated by the Nasdaq Halt Cross is at or above the price that is 
20% below the lowest price, and at or below the price that is 20% above 
the highest price, of the disclosed price range; or (b) the actual 
price calculated by the Nasdaq Halt Cross is at a price above the price 
that is 20% above the highest price of such price range, provided that 
the company has certified to the Exchange that such price would not 
materially change the company's previous disclosure in its effective 
registration statement.\11\ The Exchange would use the high end of the 
price range in the prospectus at the time of effectiveness to measure 
the permitted 20% deviation from both the high end (in the case of an 
increase in the price) and low end (in the case of a decrease in the 
price) of the disclosed price range.\12\ The Exchange has also proposed 
to make related conforming changes.
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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\ A Direct Listing with a Capital Raise includes 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 Nasdaq Listing Rule IM-5315-2. See also 
Securities Exchange Act Release No. 91947 (May 19, 2021), 86 FR 
28169 (May 25, 2021) (order approving rules to permit a Direct 
Listing with a Capital Raise and adopting related rules concerning 
how the opening transaction for such listing will be effected) 
(``2021 Order''). The Exchange's rules provide for a company listing 
pursuant to a Direct Listing with a Capital Raise to list only on 
the Nasdaq Global Select Market.
    \9\ See Nasdaq Listing Rule IM-5315-2. ``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 Nasdaq 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 
Nasdaq Halt Cross. See Nasdaq Rule 4753(a)(5). Pursuant to Nasdaq 
Rule 4120, the Exchange will halt trading in a security that is the 
subject of an initial public offering (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 Nasdaq Rule 4120(a)(7) and (c)(8).
    \10\ The Exchange states that references in the proposal to the 
price range established by the issuer in its effective registration 
statement refer to the price range disclosed in the prospectus in 
such effective registration statement. See Notice, supra note 3, 86 
FR at 34816 n.5. Throughout this order, we refer to this as the 
``disclosed price range.''
    \11\ See proposed Nasdaq Rule 4120(c)(9)(C).
    \12\ See id.
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    Currently Nasdaq Rule 4120(c)(9)(B) states that, notwithstanding 
the provisions of Nasdaq Rule 4120(c)(8)(A) and (c)(9)(A), in the case 
of a Direct Listing with a Capital Raise, for purposes of releasing 
securities for trading on the first day of listing, the Exchange, in 
consultation with the financial advisor to the issuer, will make the 
determination of whether the security is ready to trade. The Exchange 
will 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 complies with the Pricing Range Limitation. 
The Exchange will postpone and reschedule the offering only if either 
or both of such conditions are not met.\13\ The Exchange states that if 
there is insufficient buy interest to satisfy the CDL Order \14\ and 
all other market orders, as required by the rule, or if the actual 
price calculated by the Nasdaq Halt Cross is outside the disclosed 
price range, the Nasdaq Halt Cross would not proceed and such security 
would not begin trading.\15\
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    \13\ See Nasdaq Rule 4120(c)(9)(B).
    \14\ A ``Company Direct Listing Order'' or ``CDL Order'' is a 
market order that may be entered only on behalf of the issuer and 
may be executed only in the Nasdaq Halt Cross for a Direct Listing 
with a Capital Raise. The CDL Order is entered without a price (with 
a price later set in accordance with the requirements of Nasdaq Rule 
4120(c)(9)(B)), must be for the quantity of shares offered by the 
issuer as disclosed in its effective registration statement, must be 
executed in full in the Nasdaq Halt Cross, and may not be canceled 
or modified. See Nasdaq Rule 4702(b)(16).
    \15\ See Notice, supra note 3, 86 FR at 34816. The Exchange 
represents that in such event, because the Nasdaq Halt Cross cannot 
be conducted, the Exchange would postpone and reschedule the 
offering and notify 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 would be cancelled back to the entering firms. See id.
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    According to the Exchange, based on conversations it has had with 
companies and their advisors, the Exchange believes that some companies 
may be reluctant to use the existing rules for a Direct Listing with a 
Capital Raise because of concerns about the Pricing Range 
Limitation.\16\ The Exchange states that the Pricing Range Limitation 
imposed on a Direct Listing with a Capital Raise (but not on a 
traditional IPO) increases the probability of a failed offering, 
because the offering cannot proceed without some delay not only due to 
lack of investor interest, but also if investor interest is greater 
than the company and its advisors anticipated.\17\ According to the 
Exchange, the Exchange believes that there may be instances of 
offerings where the price determined by the Exchange's opening auction 
will exceed the highest price of the price range disclosed in the 
company's effective registration statement.\18\ The Exchange states 
that, under the existing rule, a security subject to a Direct Listing 
with a Capital Raise cannot be released for trading by the Exchange if 
the actual price calculated by the Nasdaq Halt Cross is above the 
highest price of the disclosed price range.\19\ The Exchange further 
states that, in this case, the Exchange would have to cancel or 
postpone the offering until the company amends its effective 
registration statement, and that, at a minimum, such a delay exposes 
the company to market risk of changing investor sentiment in the event 
of an adverse market event.\20\ In addition, the Exchange states that 
the determination of the public offering price of a traditional IPO is 
not subject to limitations similar to the Pricing Range Limitation for 
a Direct Listing with a Capital Raise, which, in the Exchange's view, 
could make companies reluctant to use this alternative method of going 
public despite its expected potential benefits.\21\
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    \16\ See id. The Exchange states that a Direct Listing with a 
Capital Raise could maximize the chances of more efficient price 
discovery of the initial public sale of securities for issuers and 
investors, because, unlike in a traditional firm commitment 
underwritten public offering (``IPO'') the initial sale price is 
determined based on market interest and the matching of buy and sell 
orders in an auction open to all market participants. See id.
    \17\ See id. The Exchange states that if an offering cannot be 
completed due to lack of investor interest, there is likely to be 
substantial amount of negative publicity for the company and the 
offering may be delayed or cancelled. See id.
    \18\ See id.
    \19\ See id. at 34816-17.
    \20\ See id. at 34817.
    \21\ See id.
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    The Exchange has proposed to modify the Pricing Range Limitation 
such that even if the actual price calculated by the Nasdaq Halt Cross 
is outside the disclosed price range, the Exchange would release a 
security for trading if the actual price at which the Nasdaq Halt Cross 
would occur is at or above the price that is 20% below the lowest price 
of the disclosed price range and at or below the price that is 20% 
above the highest price of the disclosed price range, provided all 
other necessary conditions are satisfied, and that the company has 
specified the quantity of shares registered, as permitted by Securities 
Act Rule 457.\22\ In addition, under the proposal, the Exchange would 
release the security for trading, provided all other necessary 
conditions are satisfied, at a price more than 20% above the highest 
price of the disclosed price range, if the company has certified to the 
Exchange that such offering price would not materially change the 
company's previous disclosure in its effective registration 
statement.\23\
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    \22\ See id. See also infra notes 24 and 26 and accompanying 
text.
    \23\ See Notice, supra note 3, 86 FR at 34817.
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    The Exchange states that it believes that its proposed approach is 
consistent with Securities Act Rule 430A and staff guidance, which, 
according to the Exchange, generally allow a company to price a public 
offering 20% outside of the disclosed price range without regard to the 
materiality of the changes to the

[[Page 54264]]

disclosure contained in the company's registration statement.\24\ 
According to the Exchange, the Exchange believes such guidance also 
allows deviation above the price range beyond the 20% threshold if such 
change or deviation does not materially change the previous 
disclosure.\25\ The Exchange states that, accordingly, the Exchange 
believes that a company listing in connection with a Direct Listing 
with a Capital Raise can specify the quantity of shares registered, as 
permitted by Securities Act Rule 457, and, when an auction prices 
outside of the disclosed price range, use a Rule 424(b) prospectus, 
rather than a post-effective amendment, when either (i) the 20% 
threshold noted in Rule 430A is not exceeded, regardless of the 
materiality or non-materiality of resulting changes to the registration 
statement disclosure that would be contained in the Rule 424(b) 
prospectus, or (ii) there is a deviation above the price range beyond 
the 20% threshold noted in Rule 430A if such deviation would not 
materially change the previous disclosure, in each case assuming the 
number of shares issued is not increased from the number of shares 
disclosed in the prospectus.\26\ The Exchange proposes that the 20% 
threshold would be calculated using the high end of the disclosed price 
range and would be measured from either the high end (in the case of an 
increase in the price) or low end (in the case of a decrease in the 
price) of that range, and states that this method of calculation is 
consistent with the SEC Staff's guidance on Securities Act Rule 
430A.\27\
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    \24\ See id. The Exchange states that 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, and that the Exchange 
expects that companies selling shares through a Direct Listing with 
a Capital Raise will register securities by specifying the quantity 
of shares registered and not a maximum offering amount. See id. at 
34817 n.9. The Exchange also states that the Exchange believes that 
the proposed modification of the Pricing Range Limitation is 
consistent with the protection of investors, because, according to 
the Exchange, this approach is not substantively different from the 
pricing of an IPO where an issuer is permitted to price outside of 
the disclosed price range in accordance with the SEC Staff's 
guidance. See id. at 34818.
    \25\ See id. at 34817.
    \26\ See id.
    \27\ See proposed Nasdaq Rule 4120(c)(9)(C); Notice, supra note 
3, 86 FR at 34817.
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    The Exchange represents that in each instance of a Direct Listing 
with a Capital Raise, the Exchange would issue an industry wide trader 
alert \28\ to inform market participants that the auction could price 
up to 20% below the lowest price of the price range and would specify 
that price. The Exchange also represents that it would indicate in such 
trader alert whether or not there is an upside limit above which the 
Nasdaq Halt Cross could not proceed, based on the company's 
certification.\29\ According to the Exchange, if there is no upside 
limit, the Exchange would caution market participants about the use of 
market orders and explain that, unlike a limit order, a market order 
can be executed at any price determined by the Nasdaq Halt Cross.\30\
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    \28\ The Exchange states that a trader alert is an industry-
wide, subscription-based free service provided by the Exchange. See 
Notice, supra note 3, 86 FR at 34817 n.10.
    \29\ See id. at 34817.
    \30\ See id. The Exchange stated it believes that investors have 
become familiar with the approach of the pricing for a company 
conducting an IPO being outside of the price range stated in an 
effective registration statement. See id. at 34818.
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    Nasdaq Listing Rule IM-5315-2 provides that in determining whether 
a company listing in connection with a Direct Listing with a Capital 
Raise satisfies the Market Value of Unrestricted Publicly Held Shares 
\31\ for initial listing on the Nasdaq Global Select Market, the 
Exchange will deem such company to have met the applicable requirement 
\32\ 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). For this purpose, under current rules, the Market Value of 
Unrestricted Publicly Held Shares will be calculated using a price per 
share equal to the lowest price of the disclosed price range.\33\ The 
Exchange states that because the Exchange proposes to allow the opening 
auction to price up to 20% below the lowest price of the disclosed 
price range, the Exchange proposes to make a conforming change to 
Nasdaq Listing Rule IM-5315-2 to provide that the price used to 
determine such company's compliance with the required Market Value of 
Unrestricted Publicly Held Shares would be the price per share equal to 
the price that is 20% below the lowest price of the disclosed price 
range.\34\ The Exchange further states that this is the minimum price 
at which the company could qualify to be listed.\35\
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    \31\ See Nasdaq Listing Rule 5005(a)(23) and (45) for the 
definitions of ``Market Value'' and ``Unrestricted Publicly Held 
Shares,'' respectively.
    \32\ See Nasdaq Listing Rule 5315(f)(2).
    \33\ See Nasdaq Listing Rule IM-5315-2. The Exchange will 
determine that the company has met the applicable bid price and 
market capitalization requirements based on the same per share 
price. See id.
    \34\ See Notice, supra note 3, 86 FR at 34817.
    \35\ See id.
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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, including 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.\36\
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    \36\ See id. at 34818 (citing Nasdaq Listing Rules 5315(e)(1) 
and (2) and 5315(f)(1)).
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    Finally, the Exchange has proposed to amend Nasdaq Rules 
4753(a)(3)(A) and 4753(b)(2) to conform the requirements for 
disseminating information and establishing the opening price through 
the Nasdaq Halt Cross in a Direct Listing with a Capital Raise to the 
proposed amendment to allow the opening auction to price as much as 20% 
below the lowest price of the disclosed price range.\37\ Specifically, 
the Exchange proposes changes to Nasdaq Rules 4753(a)(3)(A) and 
4753(b)(2) to make adjustments to the calculation of the Current 
Reference Price, which is disseminated in the Nasdaq Order Imbalance 
Indicator,\38\ and to the calculation of the price at which the Nasdaq 
Halt Cross will execute, for a Direct Listing with a Capital Raise. 
Under these rules currently, where there are multiple prices that would 
satisfy the conditions for determining the price, the fourth tie-
breaker for a Direct Listing with a Capital Raise is the price that is 
closest to the lowest price of the disclosed price range. The Exchange 
states that, to conform these rules to the proposed modification of the 
price range within which the opening auction would proceed, the 
Exchange proposes to modify the fourth tie-breaker for a Direct Listing 
with a Capital Raise to use the price closest to the price that is 20% 
below the lowest price of the disclosed price range.\39\
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    \37\ See proposed Nasdaq Rules 4753(a)(3)(A)(iv)c. and 
4753(b)(2)(D)(iii).
    \38\ See Nasdaq Rule 4753(a)(3) for a description of the 
``Current Reference Price'' and the ``Order Imbalance Indicator.''
    \39\ See Notice, supra note 3, 86 FR at 34818. One commenter 
stated its general support for the proposal, including the proposed 
modifications to the pricing limitations in the opening auction of a 
Direct Listing with a Capital Raise. See Letter from Evan Damast, 
Global Head of Equity and Fixed Income Syndicate, Morgan Stanley 
(July 21, 2021). Another commenter stated in support of the proposal 
that it continues to support innovation in the capital markets that 
allow more transparency, fairness, and confidence of capital flows 
between investors and issuers, and that the proposed price 
flexibility would allow IPOs to be completed more seamlessly and 
provide both investor protections and issuer benefits. See Letter 
from Burke Dempsey, EVP Head of Investment Banking, Wedbush 
Securities Inc. (August 9, 2021). This commenter also stated that it 
believes the proposal would stimulate a vibrant ecosystem of data 
and analytics and fintech companies to further refine IPO pricing 
accuracy and broaden investor participation, thus improving capital 
intermediation for U.S. markets. See id.

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[[Page 54265]]

III. Proceedings To Determine Whether To Approve or Disapprove SR-
NASDAQ-2021-045 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.\40\ 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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    \40\ 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 and, in particular, with Section 6(b)(5) \41\ 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.\42\
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    \41\ 15 U.S.C. 78f(b)(5).
    \42\ Id.
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    The Commission has consistently recognized the importance 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.\43\
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    \43\ 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., 2021 Order, supra note 8, 86 FR at 28172 
n.47; 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., 2021 Order, supra note 8, 86 FR at 28172 n.47; NYSE 2020 
Order, 85 FR at 85811 n.55; 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 is proposing to modify the rules concerning the 
opening transaction on the first day of trading for a Direct Listing 
with a Capital Raise so that the opening transaction is not constrained 
by the Pricing Range Limitation, which limits the price of the opening 
transaction to the price range disclosed in the issuer's effective 
registration statement. Instead, the proposal would allow the opening 
transaction to proceed at a price up to 20% above or below the 
disclosed price range or at a price higher than 20% above the disclosed 
price range if the issuer certifies that the offering price would not 
materially change the issuer's disclosures in its effective 
registration statement.
    The Exchange, in support of its proposal, states that the proposed 
modification to the pricing limitation is consistent with the 
protection of investors because this approach ``is not substantively 
different'' from the pricing flexibility provided to firm commitment 
underwritten IPOs.\44\ The relevance of this comparison is unclear, 
particularly given the difference in timing of the determination of the 
IPO price, relative to the initiation of trading, between a firm 
commitment underwritten IPO and a Direct Listing with a Capital Raise. 
In a firm commitment underwritten IPO, the IPO price is determined 
prior to the time of sale to the underwriters and initial investors, 
which takes place in advance of the opening transaction on the 
Exchange. In contrast, in a Direct Listing with a Capital Raise, the 
IPO price is the opening price determined through the Nasdaq Halt 
Cross, which does not occur until after the Exchange receives bids to 
purchase the securities. The Exchange has not clearly addressed the 
differences in how information about the final offering price is 
communicated to investors in each type of offering or any differences 
in what information investors have at the time of their investment 
decisions about the final offering price or how much this price might 
deviate from the disclosed price range. Therefore, we have concerns 
about whether the Exchange has adequately justified why its proposal is 
consistent with the protection of investors under Section 6(b)(5) and 
other relevant provisions of the Exchange Act, given the differing 
circumstances of a Direct Listing with a Capital Raise, as compared to 
a firm commitment underwritten IPO.
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    \44\ See Notice, supra note 3, 86 FR at 34818.
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    Further, in the context of a firm commitment underwritten IPO, if a 
determination is made following effectiveness of the related 
registration statement to price the offering outside of the disclosed 
price range, the issuer and underwriters have the ability, prior to the 
completion of the offering, to provide any necessary additional 
disclosures that are dependent on the price of the offering. In 
contrast, under the proposal, the Exchange would release a security for 
trading in a Direct Listing with a Capital Raise if the price 
calculated by the Nasdaq Halt Cross is within 20% of the disclosed 
price range (or more than 20% above the disclosed price range if the 
company provides the required certification). Under the Exchange's 
proposal, it is unclear how companies would be able to disclose any 
additional material information related to the final offering price 
prior to the time of sale. In support of its proposal, the Exchange 
asserts that companies can ``generally . . . price a public offering 
20% outside of the [disclosed price range] without regard to the 
materiality of the changes to the disclosure contained in the company's 
registration statement.'' \45\ While Securities Act Rule 430A permits 
companies to omit specified price-related information from the 
prospectus included in the registration statement at the time of 
effectiveness, and later file the omitted information with the 
Commission as specified in the rule, it neither prohibits a company 
from conducting a registered offering at prices beyond those that would 
permit a company to provide pricing information through a Securities 
Act Rule 424(b) prospectus supplement nor absolves any company relying 
on the

[[Page 54266]]

rule from any liability for potentially misleading disclosure under the 
federal securities laws.\46\ The Exchange has not explained how an 
issuer would be able, under the proposed rule, to provide any 
disclosure necessary to avoid any material misstatements or omissions, 
including what methods an issuer may use to provide such disclosures to 
potential purchasers.\47\ In contrast, in a firm commitment 
underwritten IPO, the issuer has control over the timing of its initial 
sale, and can delay the offering, if necessary, to convey any 
additional material information necessary to provide accurate 
disclosure. The Exchange has not explained how the potential inability 
of an issuer to convey important material pricing information to 
investors in a timely manner under its proposal would be consistent 
with the investor protection requirements under Section 6(b)(5) of the 
Exchange Act.
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    \45\ See id. at 34817.
    \46\ See Securities Act Release No. 7168 (May 11, 1995) at n.32. 
(``While no post-effective amendment is required to be filed, 
issuers continue to be responsible for evaluating the effect of a 
volume change or price deviation on the accuracy and completeness of 
disclosure made to investors.'')
    \47\ For purposes of Sections 12(a)(2) and 17(a)(2) of the 
Securities Act, information conveyed to purchasers only after the 
time of sale will not be taken into account for purposes of 
determining whether a prospectus or oral statement, or a statement, 
respectively, included an untrue statement of a material fact or 
omitted to state a material fact necessary in order to make the 
statements, in the light of the circumstances under which they were 
made, not misleading at the time of sale. See Securities Act Rule 
159.
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    We also have concerns that the Exchange has not explained how the 
proposal is consistent with or would operate in conjunction with Item 
501(b)(3) of Regulation S-K, which requires non-reporting issuers to 
disclose a bona fide price range.\48\ Under Item 501(b)(3), an issuer 
conducting a Direct Listing with a Capital Raise would be required to 
disclose a bona fide price range. We are concerned that if the actual 
IPO price could fall outside of the disclosed price range, potentially 
with no upside limit, investors may not have adequate information to 
inform efficient price discovery. 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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    \48\ Instruction 1(A) to Item 501(b)(3) of Regulation S-K 
provides that if a preliminary prospectus is circulated and the 
registrant is not subject to the reporting requirements of Sections 
13(a) or 15(d) of the Exchange Act, the registrant must provide a 
``bona fide estimate of the range of the maximum offering price and 
the maximum number of securities offered.'' 17 CFR 229.501(b)(3), 
Instruction 1(A) to paragraph 501(b)(3).
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    In addition, the Exchange's proposal provides that the actual price 
at which the Nasdaq Halt Cross may proceed may be over 20% higher than 
the disclosed price range, if the company has certified to the Exchange 
that such offering price would not materially change the company's 
previous disclosure in its effective registration statement. The 
Exchange has not explained when such certification would occur and, in 
particular, if the certification would occur prior to the start of the 
process for opening the security on the first day of trading under 
Nasdaq Rule 4120(c)(8) or before market orders can be entered by 
investors.\49\ If certification would occur prior to the time the 
expected opening price in the Nasdaq Halt Cross is calculated, it is 
unclear how the company would be able to certify, in advance of knowing 
the expected opening price, that the opening price would not materially 
change the company's previous disclosure. The Exchange also has not 
explained what information would be included in the certification, 
including whether the certification would contain a representation 
about the potential opening price on the first day of trading on the 
Exchange and if it would contain detail about the factors that the 
company relied upon to make its materiality determination. Further, in 
addition to the lack of clarity in the proposal on the timing of the 
certification and the information that will be required, the Exchange 
has not explained what would happen if there were material developments 
relating to the company between the time the issuer makes its 
certification and the opening of trading. Given the potential that 
material news arising after a certification could impact the company's 
disclosure, it is unclear how the process as proposed would allow the 
company to meet its obligations under the federal securities laws. As a 
result, the proposed certification process raises concerns about the 
proposed rule change's consistency with investor protection and the 
public interest, and other relevant provisions, under Section 6(b)(5) 
of the Exchange Act.
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    \49\ Under Nasdaq Rule 4120(c)(8), market participants may enter 
orders in a security that is the subject of an IPO beginning at 4:00 
a.m. The process for opening the IPO begins with the commencement of 
a 10 minute Display Only Period followed by a Pre-Launch Period of 
indeterminate duration. See Nasdaq Rule 4120(c)(8).
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    The Exchange proposes to use the high end of the price range 
disclosed in the prospectus for purposes of calculating the permissible 
20% deviation from both the high and low end of the disclosed price 
range.\50\ This proposed provision, however, is not supported by the 
specific provisions of Securities Act Rule 430A. Specifically, the 
Instruction to paragraph (a) of Securities Act Rule 430A states, in 
part, that ``any deviation from the low or high end of the [offering 
price] range may be reflected in the form of prospectus filed with the 
Commission pursuant to Rule 424(b)(1) . . . if, in the aggregate, the 
changes in volume and price represent no more than a 20% change in the 
maximum aggregate offering price set forth in the `Calculation of 
Registration Fee' table in the effective registration statement.'' \51\ 
The proposal therefore raises investor protection concerns, among 
others, under Section 6(b)(5) of the Exchange Act.
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    \50\ The Exchange states that this part of its proposal, which 
it is requesting the Commission to approve under the Exchange Act, 
is consistent with SEC Staff guidance. See Notice, supra note 3, 86 
FR at 34817.
    \51\ See 17 CFR 230.430A, Instruction to paragraph (a).
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    Finally, the proposed rules would specify that the revised pricing 
limitation would apply ``provided that the Company specifies the 
quantity of shares registered, as permitted by Securities Act Rule 
457.'' \52\ The Exchange states that it ``expects that companies 
selling shares through a Direct Listing with a Capital Raise will 
register securities by specifying the quantity of shares registered and 
not a maximum offering amount.'' \53\ Given this stated ``expectation'' 
and the lack of a specific citation to Securities Act Rule 457(a) in 
proposed Nasdaq Rule 4120(c)(9)(C), it is not clear whether the 
Exchange would require companies in all cases to register a specified 
amount of securities pursuant to Securities Act Rule 457(a) \54\ in 
order for proposed Nasdaq Rule 4120(c)(9)(C) to apply. Further, it is 
not clear whether a company selling shares through a Direct Listing 
with a Capital Raise could instead choose to register securities by the 
proposed maximum aggregate offering amount, as permitted by Securities 
Act Rule 457(o), provided that the company agreed that the opening 
transaction on the first day of trading would proceed pursuant to 
Nasdaq Rule 4120(c)(9)(B) and its use of the Pricing Range Limitation. 
To the extent that the opening transaction on the first day of trading 
for a Direct Listing with a Capital Raise could

[[Page 54267]]

proceed under either Nasdaq Rule 4120(c)(9)(B) (utilizing the existing 
Pricing Range Limitation) or Nasdaq Rule 4120(c)(9)(C) (utilizing the 
modified pricing limitation), the Exchange has not explained how it 
would be consistent with the Exchange Act for the Exchange to use, in 
both contexts, the price that is 20% below the lowest price of the 
disclosed price range for purposes of Nasdaq Listing Rule IM-5315-2 and 
Nasdaq Rules 4753(a)(3)(A) and 4753(b)(2).\55\
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    \52\ See proposed Nasdaq Rule 4120(c)(9)(C).
    \53\ Notice, supra note 3, 86 FR at 34817 n.9.
    \54\ 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).
    \55\ The proposal would modify Nasdaq Listing Rule IM-5315-2, 
regarding the price used to determine a company's compliance with 
the initial listing requirements concerning the Market Value of 
Publicly Held Shares, bid price, and market capitalization, and 
would modify the fourth tie-breaker in Nasdaq Rule 4753(a)(3)(A), 
regarding the calculation of the Current Reference Price as 
disseminated in the Nasdaq Order Imbalance Indicator, and Nasdaq 
Rule 4753(b)(2), regarding the calculation of the price at which the 
Nasdaq Halt Cross will execute.
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    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.'' \56\ 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,\57\ 
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.\58\
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    \56\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \57\ See id.
    \58\ 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 \59\ to determine whether the proposal should be approved or 
disapproved.
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    \59\ 15 U.S.C. 78s(b)(2)(B).
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IV. 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.\60\
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    \60\ 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 October 21, 2021. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
November 4, 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-2021-045 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-2021-045. 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-2021-045 and should be submitted 
on or before October 21, 2021. Rebuttal comments should be submitted by 
November 4, 2021.
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    \61\ 17 CFR 200.30-3(a)(57).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\61\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-21208 Filed 9-29-21; 8:45 am]
BILLING CODE 8011-01-P


