54454 Federal Register / Vol. 85, No. 170 / Tuesday, September 1, 2020 / Notices

the Commission believes that, by the risks of clearing such contracts. The For the Commission, by the Division of improving LCH SA’s ability to assess Commission therefore believes these Trading and Markets, pursuant to delegated 19 and validate the CDS changes should help to ensure that LCH authority. Framework, the changes described in SA’s margin system considers, and Jill M. Peterson, Section II.B above should help to ensure produces margin levels commensurate Assistant Secretary. the continued performance of the CDS with, the risks and particular attributes [FR Doc. 2020–19191 Filed 8–31–20; 8:45 am] Margin Framework and, therefore, LCH of CDS contracts on the ESG Index. BILLING CODE 8011–01–P SA’s ability to calculate margin using Moreover, as discussed above, the the CDS Margin Framework. For similar Commission believes the changes reasons, the Commission believes the SECURITIES AND EXCHANGE changes described in Section II.C above described in Section II.B above should COMMISSION should improve the CDS Margin improve LCH SA’s ability to assess and validate the CDS Margin Framework. [Release No. 34–89684; File No. SR–NYSE– Framework, and LCH SA’s ability to 2019–67] calculate margin using the CDS Margin The Commission further believes this Framework, by correcting drafting aspect of the proposed rule change Self-Regulatory Organizations; New errors. should help LCH SA to identify any York Exchange LLC; Order Because they should improve LCH possible errors in, and make Approving a Proposed Rule Change, SA’s ability to calculate margin using improvements to, the CDS Margin as Modified by Amendment No. 2, To the CDS Margin Framework, the Framework. Similarly, as discussed Amend Chapter One of the Listed Commission believes that the changes above, the Commission believes the Company Manual To Modify the described in Section II.B and Section changes described in Section II.C above Provisions Relating to Direct Listings II.C above should enhance LCH SA’s should improve the CDS Margin ability to use margin to avoid losses that Framework by correcting drafting errors. August 26, 2020. could result from miscalculating the The Commission further believes this I. Introduction risks associated with clearing aspect of the proposed rule change On December 11, 2019, New York transactions. The Commission further should help resolve possible errors in LLC (‘‘NYSE’’ or the believes that these losses could applying the CDS Margin Framework ‘‘Exchange’’) filed with the Securities negatively affect LCH SA’s ability to and reduce the possibility for confusion and Exchange Commission clear and settle transactions and or mistakes in using the CDS Margin (‘‘Commission’’), pursuant to Section safeguard funds. Therefore, the Framework. Finally, by helping to 19(b)(1) of the Securities Exchange Act Commission believes that by improving improve the CDS Margin Framework, of 1934 (‘‘Exchange Act’’) 1 and Rule LCH SA’s ability to avoid losses that resolve possible errors, and reduce the 19b–4 thereunder,2 a proposed rule could result from mismanaging the risks possibility for confusion or mistakes, change to amend Chapter One of the associated with clearing transactions, the Commission believes that the Listed Company Manual (‘‘Manual’’) to these aspects of the proposed rule changes described in Section II.B and modify the provisions relating to direct change should promote the prompt and Section II.C above should help to ensure listings. On December 13, 2019, the accurate clearance and settlement of that LCH SA’s margin system considers, Exchange filed Amendment No. 1 to the CDS contracts and transactions and and produces margin levels proposed rule change, which amended assure the safeguarding of securities and commensurate with, the risks and and replaced the proposed rule change funds which are in the custody or particular attributes of the transactions in its entirety. The proposed rule control of LCH SA or for which it is cleared by LCH SA. change, as modified by Amendment No. responsible. 1, was published for comment in the For these reasons, the Commission For these reasons, the Commission Federal Register on December 30, finds that the proposed rule change is finds that the proposed rule change is 2019.3 On February 13, 2020, pursuant consistent with Section 17A(b)(3)(F) of consistent with Rule 17Ad-22(e)(6)(i).14 to Section 19(b)(2) of the Exchange Act,4 the Act.12 IV. Conclusion the Commission designated a longer B. Consistency With Rule 17Ad– period within which to either approve 22(e)(6)(i) On the basis of the foregoing, the the proposed rule change, disapprove Commission finds that the proposed the proposed rule change, or institute Rule 17Ad–22(e)(6)(i) requires that rule change is consistent with the LCH SA establish, implement, maintain, proceedings to determine whether to requirements of the Act, and in disapprove the proposed rule change.5 and enforce written policies and particular, with the requirements of procedures reasonably designed to cover On March 26, 2020, the Commission Section 17A(b)(3)(F) of the Act 15 and instituted proceedings to determine its credit exposures to its participants by Rule 17Ad–22(e)(6)(i) thereunder.16 establishing a risk-based margin system whether to approve or disapprove the IT IS THEREFORE ORDERED that, at a minimum considers, and 19 produces margin levels commensurate pursuant to Section 19(b)(2) of the Act 17 17 CFR 200.30–3(a)(12). that the proposed rule change, as 1 15 U.S.C. 78s(b)(1). with, the risks and particular attributes 2 modified by Amendment No. 1 (SR– 17 CFR 240.19b–4. of each relevant product, portfolio, and 3 See Securities Exchange Act Release No. 87821 market.13 As discussed above, the LCH–SA–2020–002), be, and hereby is, (December 20, 2019), 84 FR 72065 (December 30, Commission believes the changes to the approved.18 2019) (‘‘Original Notice’’). Comments received on the proposal are available on the Commission’s CDS Margin Framework described in website at: https://www.sec.gov/comments/sr-nyse- 14 Section II.A above should facilitate LCH 17 CFR 240.17Ad–22(e)(6)(i). 2019-67/srnyse2019-67.htm. 15 SA’s clearing of CDS contracts on the 15 U.S.C. 78q–1(b)(3)(F). 4 15 U.S.C. 78s(b)(2). 16 ESG Index by modifying LCH SA’s 17 CFR 240.17Ad–22(e)(6)(i). 5 See Securities Exchange Act Release No. 88190 17 margin calculations to take into account 15 U.S.C. 78s(b)(2). (February 13, 2020), 85 FR 9891 (February 20, 18 In approving the proposed rule change, the 2020). The Commission designated March 29, 2020, Commission considered the proposal’s impact on as the date by which it should approve, disapprove, 12 15 U.S.C. 78q–1(b)(3)(F). efficiency, competition, and capital formation. 15 or institute proceedings to determine whether to 13 17 CFR 240.17Ad–22(e)(6)(i). U.S.C. 78c(f). disapprove the proposed rule change.

VerDate Sep<11>2014 19:00 Aug 31, 2020 Jkt 250001 PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 E:\FR\FM\01SEN1.SGM 01SEN1 jbell on DSKJLSW7X2PROD with NOTICES Federal Register / Vol. 85, No. 170 / Tuesday, September 1, 2020 / Notices 54455

proposed rule change, as modified by the purpose of allowing existing combination of both (i) an independent Amendment No. 1.6 On June 22, 2020, shareholders to sell their shares.12 The third-party valuation (‘‘Valuation’’) of the Exchange filed Amendment No. 2 to Exchange has proposed to define this the company; and (ii) the most recent the proposed rule change, which type of direct already permitted trading price for the company’s common superseded the proposed rule change as by the Exchange’s rules as a ‘‘Selling stock in a trading system for modified by Amendment No. 1.7 On Shareholder Direct Floor Listing.’’ 13 In unregistered securities operated by a June 24, 2020, the Commission addition, the Exchange has proposed to national securities exchange or a extended the time period for approving recognize an additional type of direct registered broker-dealer (‘‘Private or disapproving the proposal to August listing in which a company that has not Placement Market’’).16 Alternatively, in 26, 2020.8 The proposed rule change, as previously had its common equity the absence of any recent trading in a modified by Amendment No. 2, was securities registered under the Exchange Private Placement Market, the Exchange published for comment in the Federal Act would list its common equity will determine that such company has Register on June 30, 2020.9 The securities on the Exchange at the time met its market value of publicly-held Commission is approving the proposed of effectiveness of a registration shares requirement if the company rule change, as modified by Amendment statement pursuant to which the provides a Valuation evidencing a No. 2. company would sell shares itself in the market value of publicly-held shares of at least $250 million.17 II. Description of the Proposal, as opening auction on the first day of With respect to a Primary Direct Floor Modified by Amendment No. 2 trading on the Exchange in addition to, or instead of, facilitating sales by selling Listing, the Exchange has proposed that Section 102.01B, Footnote (E) of the shareholders (a ‘‘Primary Direct Floor it will deem a company to have met the Manual states that the Exchange Listing’’).14 Under the proposal, the applicable aggregate market value of generally expects to list companies in Exchange would, on a case-by-case publicly-held shares requirement if the connection with a firm commitment basis, exercise discretion to list company will sell at least $100 million underwritten initial companies that are listing in connection in market value of the shares in the (‘‘IPO’’), upon transfer from another with a Selling Shareholder Direct Floor Exchange’s opening auction on the first market, or pursuant to a spin-off, but Listing or a Primary Direct Floor day of trading on the Exchange.18 also allows for the possibility of using 15 Alternatively, where a company is 10 Listing. a direct listing, as described below. With respect to a Selling Shareholder conducting a Primary Direct Floor Currently, Footnote (E) states that the Direct Floor Listing, the Exchange Listing and will sell shares in the Exchange recognizes that companies proposal retains the existing standards opening auction with a market value of that have not previously had their regarding how the Exchange will less than $100 million, the Exchange common equity securities registered determine whether a company has met will determine that such company has under the Exchange Act, but that have its market value of publicly-held shares met its market value of publicly-held sold common equity securities in a listing requirement. The Exchange will shares requirement if the aggregate private placement, may wish to list their continue to determine that such market value of the shares the company common equity securities on the company has met the $100 million will sell in the opening auction on the Exchange at the time of effectiveness of aggregate market value of publicly-held first day of trading and the shares that a registration statement 11 filed solely for shares requirement based on a are publicly held immediately prior to the listing is at least $250 million, with 6 See Securities Exchange Act Release No. 88485 12 (March 26, 2020), 85 FR 18292 (April 1, 2020) See Section 102.01B, Footnote (E) of the such market value calculated using a (‘‘OIP’’). Manual. See also Securities Exchange Act Release price per share equal to the lowest price No. 82627 (February 2, 2018), 3 FR 5650 (February 7 Amendment No. 2 to the proposed rule change of the price range established by the 8, 2018) (SR–NYSE–2017–30) (‘‘NYSE 2018 Order’’) revised the proposal to, among other things, (1) issuer in its registration statement.19 delete the proposed changes to Section 102.01A of (approving proposed rule change to amend Section the Manual that would have provided additional 102.01B of the Manual to modify the provisions 16 time under certain circumstances for companies relating to the qualifications of companies listing See proposed Section 102.01B, Footnote (E) of listing in connection with a direct listing to meet without a prior Exchange Act registration in the Manual. The Exchange will attribute a market the initial listing distribution standards; (2) add connection with an underwritten IPO and amend value of publicly-held shares to the company equal provisions specifying how companies listing in the Exchange’s rules to address the opening to the lesser of: (i) The value calculable based on connection with a direct listing would qualify for procedures on the first day of trading for such the Valuation; and (ii) the value calculable based on listing if it includes both sales of securities by the securities). the most recent trading price in a Private Placement company and possible sales by selling shareholders; 13 See proposed Section 102.01B, Footnote (E) of Market. See Section 102.01B, Footnote (E) of the (3) add a new order type for companies to use when the Manual. Under the proposal, the Exchange Manual. For specific requirements regarding the selling securities in a direct listing and describe would specify that such company may have Valuation and the independence of the valuation how such companies would participate in a direct previously sold common equity securities in ‘‘one agent conducting such Valuation, see Section listing auction; and (4) remove references to direct or more’’ private placements. The Exchange also 102.01B, Footnote (E) of the Manual. Section listing auctions from Rule 7.35C, Exchange- has proposed to move the description of this type 102.01B, Footnote (E) of the Manual also sets forth Facilitated Auctions. Amendment No. 2 to the of direct listing as involving a company ‘‘where specific factors for relying on a Private Placement proposed rule change is available on the such company is listing without a related Market price. Generally, the Exchange will only rely Commission’s website at https://www.sec.gov/ underwritten offering upon effectiveness of a on a Private Placement Market price if it is comments/sr-nyse-2019-67/srnyse201967-7332320- registration statement registering only the resale of consistent with a sustained history over a several 218590.pdf. shares sold by the company in earlier private month period prior to listing evidencing a market 8 See Securities Exchange Act Release No. 89147 placements’’ so that this description appears in value in excess of the Exchange’s market value (June 24, 2020), 85 FR 39226 (June 30, 2020). The conjunction with the definition of ‘‘Selling requirement. Commission designated August 26, 2020, as the Shareholder Direct Floor Listing.’’ See id. 17 See Section 102.01B, Footnote (E) of the date by which it should either approve or 14 See proposed Section 102.01B, Footnote (E) of Manual. Shares held by directors, officers, or their disapprove the proposed rule change. the Manual. A Primary Direct Floor Listing would immediate families and other concentrated holdings 9 See Securities Exchange Act Release No. 89148 include any such listing in which either (i) only the of 10 percent or more are excluded in calculating (June 24, 2020), 85 FR 39246 (June 30, 2020) company itself is selling shares in the opening the number of publicly-held shares. See Section (‘‘Notice’’). auction on the first day of trading; or (ii) the 102.01A, Footnote (B) of the Manual. 10 See Section 102.01B, Footnote (E) of the company is selling shares and selling shareholders 18 See proposed Section 102.01B, Footnote (E) of Manual. may also sell shares in such opening auction. See the Manual. 11 The reference to a registration statement refers id. 19 See proposed Section 102.01B, Footnote (E) of to a registration statement effective under the 15 See proposed Section 102.01B, Footnote (E) of the Manual. The Exchange states that, for example, Securities Act of 1933 (‘‘Securities Act’’). the Manual. Continued

VerDate Sep<11>2014 19:00 Aug 31, 2020 Jkt 250001 PO 00000 Frm 00113 Fmt 4703 Sfmt 4703 E:\FR\FM\01SEN1.SGM 01SEN1 jbell on DSKJLSW7X2PROD with NOTICES 54456 Federal Register / Vol. 85, No. 170 / Tuesday, September 1, 2020 / Notices

According to the Exchange, a market after completion of the opening DMM would not conduct a Direct company may list on the Exchange in auction.24 Listing Auction for a Primary Direct connection with an IPO with a market The Exchange states that any Floor Listing if (1) the Auction Price value of publicly-held shares of $40 company listing in connection with a would be below the lowest price or million and, in the Exchange’s Primary Direct Floor Listing or a Selling above the highest price of the Primary experience in listing IPOs, a liquid Shareholder Direct Floor Listing would Direct Floor Listing Auction Price trading market develops after listing for continue to be subject to and need to Range; or (2) there is insufficient buy issuers with a much smaller value of meet all other applicable initial listing interest to satisfy both the IDO Order requirements. According to the 30 publicly-held shares than the Exchange and all better-priced sell orders in full. Exchange, this would include the The Exchange states that if there is anticipates would exist after the requirements of Section 102.01A of the insufficient buy interest and the DMM opening auction in a Primary Direct Manual to have 400 shareholders of cannot price the Auction and satisfy the Floor Listing under the proposed market round lots and 1.1 million publicly-held IDO Order as required, the Direct value of publicly-held shares at the time of initial Auction would not proceed and such 20 requirements. Consequently, the listing, and the requirement of Section security would not begin trading.31 The Exchange believes that these 102.01B of the Manual to have a price Exchange represents that, if a Direct requirements would provide that any per share of at least $4.00 at the time of Listing Auction cannot be conducted, company conducting a Primary Direct initial listing.25 the Exchange would notify market Floor Listing would be of a suitable size The Exchange has proposed a new participants via a Trader Update that the for Exchange listing and that there order type to be used by the issuer in Primary Direct Floor Listing has been would be sufficient liquidity for the a Primary Direct Floor Listing and has cancelled and any orders for that security to be suitable for auction proposed rules regarding how that new security that had been entered on the market trading.21 The Exchange also order type would participate in a Direct Exchange, including the IDO Order, states that, with the exception of the Listing Auction.26 Specifically, the would be cancelled back to the entering proposed requirement for Primary Exchange has proposed to introduce an firms.32 Direct Floor Listings, shares held by Issuer Direct Offering Order (‘‘IDO Currently, Rule 7.35A(h) generally officers, directors, or owners of more Order’’), which would be a Limit Order provides that, once an Auction Price has to sell that is to be traded only in a than 10% of the company stock are not been determined, better-priced orders Direct Listing Auction for a Primary included in calculations of publicly- are guaranteed to participate in the Direct Floor Listing.27 The IDO Order Auction at the Auction Price, whereas held shares for purposes of Exchange would have the following requirements: at-priced orders are not guaranteed to listing rules.22 The Exchange states that (1) Only one IDO Order may be entered participate and will be allocated such may acquire in secondary on behalf of the issuer and only by one according to specified priority rules.33 market trades shares sold by the issuer member organization; (2) the limit price The Exchange has proposed that an IDO in a Primary Direct Floor Listing that of the IDO Order must be equal to the Order would be guaranteed to were included when calculating lowest price of the price range participate in the Direct Listing Auction whether the issuer meets the market established by the issuer in its effective at the Auction Price.34 If the limit price value of publicly-held shares initial registration statement (the price range is of the IDO Order is equal to the Auction listing requirement.23 The Exchange defined as the ‘‘Primary Direct Floor Price, the IDO Order would have further states that it believes that Listing Auction Price Range’’); (3) the priority at that price.35 The Exchange because of the enhanced publicly-held IDO Order must be for the quantity of states that providing priority to an at- shares requirement for listing in shares offered by the issuer, as disclosed priced IDO Order would increase the connection with a Primary Direct Floor in the prospectus in the effective potential for the IDO Order to be Listing, which is much higher than the registration statement; (4) an IDO Order executed in full, and therefore for the Exchange’s $40 million requirement for may not be cancelled or modified; and Primary Direct Floor Listing to a traditional underwritten IPO, and the (5) an IDO Order must be executed in proceed.36 neutral nature of the opening auction full in the Direct Listing Auction.28 process, companies using a Primary Consistent with current rules, a The Exchange states that because an IDO Order Direct Floor Listing would have an Designated (‘‘DMM’’) would not be entered by the DMM, the Exchange would effectuate a Direct Listing has proposed to include IDO Orders among the adequate and liquid trading types of Auction-Only Orders that are not available Auction manually, and the DMM would to DMMs. See Notice, supra note 9, 85 FR at 39248, be responsible for determining the n.21. See also proposed Rule 7.31(c). An ‘‘Auction- if the company is selling five million shares in the 29 opening auction, there are 45 million publicly-held Auction Price. Under the proposal, the Only Order’’ is a Limit or Market Order that is to shares issued and outstanding immediately prior to be traded only in an auction pursuant to the Rule 7.35 Series (for Auction-Eligible Securities) or listing, and the lowest price of the price range 24 See Notice, supra note 9, 85 FR at 39247. routed pursuant to Rule 7.34 (for UTP Securities). disclosed in the company’s registration statement is 25 See Notice, supra note 9, 85 FR at 39247. See Rule 7.31(c). See also Rule 7.31(a)(1) for the $10 per share, then the Exchange will attribute to 26 Under current Rule 1.1(f), the term ‘‘Direct definition of ‘‘Market Order.’’ the company a market value of publicly-held shares Listing’’ means ‘‘a security that is listed under 30 See proposed Rule 7.35A(g)(2). A buy (sell) of $500 million. See Notice, supra note 9, 85 FR at Footnote (E) to Section 102.01B of the Listed order is ‘‘better-priced’’ if it is priced higher (lower) 39247. Company Manual.’’ The Exchange has proposed to than the Auction Price, and this includes all sell 20 See Notice, supra note 9, 85 FR at 39250. modify this definition to specify that the term Market Orders and Market-on-Open Orders. See 21 See Notice, supra note 9, 85 FR at 39250. ‘‘Direct Listing’’ may refer to either a Selling Rule 7.35(a)(5)(A). See also Rule 7.31(c)(1)(B) for 22 Shareholder Direct Floor Listing or a Primary Direct See Notice, supra note 9, 85 FR at 39247. The the definition of ‘‘Market-on-Open Order.’’ A buy Floor Listing. See proposed Rule 1.1(f). See also Exchange states that these types of inside investors (sell) order is ‘‘at-priced’’ if it is priced equal to the Rule 7.35(a)(1) for the definition of ‘‘Auction’’ and may purchase shares sold by the company in the Auction Price. See Rule 7.35(a)(5)(B). opening auction, and purchase shares sold by other Rule 7.35(a)(1)(E) for the definition of ‘‘Direct 31 See Notice, supra note 9, 85 FR at 39249. shareholders or sell their own shares in the opening Listing Auction.’’ 32 auction and in trading after the opening auction, to 27 See proposed Rule 7.31(c)(1)(D). See also Rule See Notice, supra note 9, 85 FR at 39249. the extent not inconsistent with general anti- 7.31(a)(2) for the definition of ‘‘Limit Order.’’ 33 See Rule 7.35A(h)(1) and (2). manipulation provisions, Regulation M, and other 28 See proposed Rule 7.31(c)(1)(D)(i)–(v). 34 See proposed Rule 7.35A(h)(4). applicable securities laws. See id. 29 ‘‘Auction Price’’ is defined as the price at 35 See proposed Rule 7.35A(h)(4). 23 See Notice, supra note 9, 85 FR at 39247. which an Auction is conducted. See Rule 7.35(a)(5). 36 See Notice, supra note 9, 85 FR at 39249.

VerDate Sep<11>2014 19:00 Aug 31, 2020 Jkt 250001 PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 E:\FR\FM\01SEN1.SGM 01SEN1 jbell on DSKJLSW7X2PROD with NOTICES Federal Register / Vol. 85, No. 170 / Tuesday, September 1, 2020 / Notices 54457

In addition, the Exchange has Listing or a Primary Direct Floor Listing auctions.47 The Exchange states that, proposed to specify that two existing (the ‘‘financial advisor’’) and the DMM because of the importance of the DMM provisions would apply in the case of a assigned to that security must provide to the Direct Listing Auction, if a DMM Selling Shareholder Direct Floor Listing such services in a manner that is is unable to manually facilitate a Direct only. Currently, a DMM will publish a consistent with all federal securities Listing Auction, the Exchange would pre-opening indication before a security laws, including Regulation M and other not proceed with a Selling Shareholder opens if the Auction Price is anticipated anti-manipulation requirements.43 The Direct Floor Listing or a Primary Direct to be a change of more than the Exchange states that, for example, when Floor Listing.48 Applicable Price Range 37 from a a financial advisor provides a III. Discussion and Commission specified Indication Reference Price.38 consultation to the Exchange as required Findings Under the proposal, the Indication by Rule 7.35A(d)(2)(a)(iv), when the Reference Price for a security that is a DMM consults with a financial advisor After careful review, the Commission Selling Shareholder Direct Floor Listing in connection with Rule 7.35A(g)(1), or finds that the proposed rule change, as that has had recent sustained trading in when a financial advisor otherwise modified by Amendment No. 2, is a Private Placement Market prior to assists or consults with the DMM as to consistent with the requirements of the listing would be the most recent pricing or opening of trading in a Exchange Act and the rules and transaction price in that market or, if Selling Shareholder Direct Floor Listing regulations thereunder applicable to a none, would be a price determined by or Primary Direct Floor Listing, the national securities exchange.49 In the Exchange in consultation with a financial advisor and DMM will not act particular, the Commission finds that financial advisor to the issuer of such inconsistent with Regulation M and the proposed rule change, as modified security.39 Further, when facilitating the other anti-manipulation provisions of by Amendment No. 2, is consistent with opening on the first day of trading of a the federal securities laws, or Exchange Section 6(b)(5) of the Exchange Act,50 Selling Shareholder Direct Floor Listing Rule 2020.44 The Exchange represents which requires, among other things, that that has not had a recent sustained that it has retained the Financial the rules of a national securities history of trading in a Private Placement Industry Regulatory Authority exchange be designed to prevent Market prior to listing, the DMM would (‘‘FINRA’’) pursuant to a regulatory fraudulent and manipulative acts and consult with a financial advisor to the services agreement to monitor such practices, to promote just and equitable issuer of such security in order to effect compliance with Regulation M and principles of trade, to remove a fair and orderly opening of such other anti-manipulation provisions of impediments to and perfect the security.40 The Exchange states that the federal securities laws, and Rule mechanism of a free and open market these provisions are not applicable to a 2020.45 The Exchange has proposed a and a national market system, and, in Primary Direct Floor Listing because, new commentary that states that, in general, to protect investors and the unlike for a Selling Shareholder Direct connection with a Selling Shareholder public interest; and are not designed to Floor Listing, the registration statement Direct Floor Listing, the financial permit unfair discrimination between for a Primary Direct Floor Listing would advisor to the issuer of the security customers, issuers, brokers, or dealers. include a price range within which the being listed and the DMM assigned to The Commission has consistently company anticipates selling the shares it such security are reminded that any recognized the importance of exchange is offering.41 consultation that the financial advisor listing standards. Among other things, In the case of a Primary Direct Floor provides to the Exchange as required by such listing standards help ensure that Listing, the Exchange has proposed a Rule 7.35A(d)(2)(A)(iv) and any exchange listed companies will have new measure of the Indication consultation between the DMM and sufficient public float, base, Reference Price. Specifically, for a financial advisor as required by Rule and trading interest to provide the depth security that is offered in a Primary 7.35A(g)(1) is to be conducted in a and liquidity necessary to promote fair 51 Direct Floor Listing, the Indication manner that is consistent with the and orderly markets. Reference Price would be the lowest federal securities laws, including price of the Primary Direct Floor Listing 47 See proposed Rule 7.35C(a), (a)(3), (b)(1), and Regulation M and other anti- (b)(3). 42 46 Auction Price Range. manipulation requirements. 48 The Exchange states that any services See Notice, supra note 9, 85 FR at 39249. Finally, the Exchange has proposed to 49 15 U.S.C. 78f(b). In approving this proposed provided by a financial advisor to the remove references to Direct Listing rule change, the Commission has considered the issuer of a security listing in connection Auctions from Rule 7.35C, which proposed rule change’s impact on efficiency, with a Selling Shareholder Direct Floor concerns Exchange-facilitated competition, and capital formation. See 15 U.S.C. 78c(f). 50 15 U.S.C. 78f(b)(5). 37 The ‘‘Applicable Price Range’’ for determining 43 See Notice, supra note 9, 85 FR at 39249. 51 whether to publish a pre-opening indication, with The Commission has stated in approving 44 See Notice, supra note 9, 85 FR at 39249 (citing exchange listing requirements that the development limited exception, is 5% for securities with an Rule 2020, which provides that ‘‘No member or Indication Reference Price over $3.00 and $0.15 for and enforcement of adequate standards governing member organization shall effect any transaction in, the listing of securities on an exchange is an activity securities with an Indication Reference Price equal or induce the purchase or sale of, any security by to or lower than $3.00. See Rule 7.35A(d)(3)(A). of critical importance to the financial markets and means of any manipulative, deceptive or other the investing public. In addition, once a security 38 See Rule 7.35A(d)(1)(A). fraudulent contrivance’’). has been approved for initial listing, maintenance 39 See proposed Rule 7.35A(d)(2)(A)(iv). 45 See Notice, supra note 9, 85 FR at 39249. The criteria allow an exchange to monitor the status and 40 See proposed Rule 7.35A(g)(1). The Exchange Exchange further represents that it expects to issue trading characteristics of that issue to ensure that has proposed a non-substantive change to this regulatory guidance in connection with a company it continues to meet the exchange’s standards for provision to modify a reference to ‘‘Private conducting a Primary Direct Floor Listing, and that market depth and liquidity so that fair and orderly Placement’’ to utilize the defined term ‘‘Private such regulatory guidance would include a reminder markets can be maintained. See, e.g., NYSE 2018 Placement Market.’’ See id. to member organizations that activities in Order, supra note 12, 83 FR at 5653, n.53; Securities 41 See Notice, supra note 9, 85 FR at 39249. connection with a Primary Direct Floor Listing, like Exchange Act Release Nos. 81856 (October 11, 42 See proposed Rule 7.35A(d)(2)(A)(v). The activities in connection with other listings, must be 2017), 82 FR 48296, 48298 (October 17, 2017) (SR– Exchange states that, for example, if the Primary conducted in a manner not inconsistent with NYSE–2017–31); 81079 (July 5, 2017), 82 FR 32022, Direct Floor Listing Auction Price Range is $10.00 Regulation M and other anti-manipulation 32023 (July 11, 2017) (SR–NYSE–2017–11). The to $20.00, then the Indication Reference Price provisions of the federal securities laws and Rule Commission has stated that adequate listing would be $10.00. See Notice, supra note 9, 85 FR 2020. See id. at 39249, n.28. standards, by promoting fair and orderly markets, at 39248, n.22. 46 See proposed Rule 7.35A, Commentary .10. Continued

VerDate Sep<11>2014 19:00 Aug 31, 2020 Jkt 250001 PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 E:\FR\FM\01SEN1.SGM 01SEN1 jbell on DSKJLSW7X2PROD with NOTICES 54458 Federal Register / Vol. 85, No. 170 / Tuesday, September 1, 2020 / Notices

The Exchange’s listing standards provide investors a broader array of experience in listing IPOs, a liquid currently provide the Exchange with attractive investment opportunities.56 trading market develops after listing for discretion to list a company whose stock The Commission believes that a issuers with a much smaller value of has not been previously registered number of the changes set forth in publicly-held shares than the Exchange under the Exchange Act, where such Amendment No. 2 support a finding anticipates would exist after the company is listing in connection with a that the proposal is consistent with the opening auction in a Primary Direct Selling Shareholder Direct Floor Act. More specifically, the Commission Floor Listing.’’ 57 In Amendment No. 2, Listing.52 The Exchange has proposed to believes that the following aspects result the Exchange clarified that market value allow companies to list in connection in a proposal for a Primary Direct Floor would be calculated using a price per with a Primary Direct Floor Listing, Listing that is reasonably designed to be share equal to the lowest price of the which would for the first time provide consistent with the protection of price range multiplied by the number of a company the , without a firm investors and the maintenance of fair shares being offered, as set forth by the commitment underwritten offering, of and orderly markets, as well as the issuer in its registration statement.58 selling shares to raise capital in the facilitation of capital formation: (i) One commenter expressed the view that opening auction upon initial listing on Addition of the IDO Order type and the proposal, as originally noticed for the Exchange.53 other requirements which address how comment, appropriately updated the Several commenters expressed the issuer will participate in the publicly-held shares and distribution support for the proposed expansion of opening auction; (ii) discussion of the requirements associated with direct direct listings to permit a primary role of financial advisors; (iii) addition listings in order to ensure the offering.54 One commenter, for example, of the Commentary that provides that development of a liquid trading stated that it supports alternative specified activities are to be conducted market.59 formats for IPOs, including direct listing in a manner that is consistent with the proposals like the one proposed by the federal securities laws, including The Exchange’s proposed aggregate Exchange, and expressed the view that Regulation M and other anti- market value of publicly-held shares issuers should be offered choices that manipulation requirements; (iv) requirement provides the Exchange with match their objectives so as they retaining of FINRA to monitor a reasonable level of assurance that the protect the integrity of the markets and compliance with Regulation M and company’s market value supports listing are fair and clear to investors, using other anti-manipulation provisions of on the Exchange and the maintenance of transparent processes.55 Another the federal securities laws and NYSE fair and orderly markets. The proposed commenter believed that allowing for Rule 2020; (v) clarification of how requirements are comparable to or multiple pathways for private market value will be determined for higher than the aggregate market value companies to achieve exchange listing qualifying the company’s securities for of publicly-held shares required by the would encourage more companies to listing; and (vi) elimination of the grace Exchange for initial listing in other 60 participate in public equity markets and period for meeting certain listing contexts. Specifically, the Exchange’s requirements. proposed minimum market value are consistent with Section 6(b)(5) of the Exchange With respect to the aggregate market requirements, which are designed in Act, in that they are, among other things, designed value of publicly-held shares part to ensure sufficient liquidity, of to prevent fraudulent and manipulative acts and $100 million and $250 million for practices, promote just and equitable principles of requirement, the Exchange proposes to trade, and protect investors and the public interest. require that it will deem a company to Primary Direct Floor Listings are higher See, e.g., NYSE 2018 Order, supra note 12, 83 FR have met such requirement if the than the $40 million minimum market at 5653, n.53; Securities Exchange Act Release Nos. company will sell at least $100 million value requirement for IPOs 61 and 87648 (December 3, 2019), 84 FR 67308, 67314, comparable to the $100 million and n.42 (December 9, 2019) (SR––2019–059); in market value of shares in the 88716 (April 21, 2020), 85 FR 23393, 23395, n.22 Exchange’s opening auction on the first $250 million minimum market value (April 27, 2020) (SR–NASDAQ–2020–001). day of trading. Alternatively, where a requirements for Selling Shareholder 52 See Section 102.01B, Footnote (E) of the company will sell shares in the opening Manual. See also NYSE 2018 Order, supra note 12, 57 Notice, supra note 9, 85 FR at 39250. As 83 FR at 5654. auction with a market value of less than described above, in determining that a company has 53 $100 million, the Exchange will deem See NYSE Listed Company Manual Section met the market value of publicly-held shares 102.01B, Footnote (E) of the Manual which states the company to have met such standards the Exchange will consider the market in part that the Exchange expects to list companies requirement if the aggregate market value of all shares sold by the company in the in connection with a firm commitment opening auction, rather than excluding shares that underwritten IPO, upon transfer from another value of the shares the company will may be purchased by officers, directors, or owners market, or pursuant to a spin-off. sell in the opening auction on the first of more than 10% of the company’s , 54 See Letter from Stephen John Berger, Managing day of trading and the shares that are notwithstanding that generally the Exchange’s Director, Global Head of Government & Regulatory publicly held immediately prior to listing standards exclude shares held by such Policy, Citadel Securities (February 18, 2020) listing is at least $250 million. insiders from its calculations of publicly-held (‘‘Citadel Letter’’), at 1; Letter from Paul According to the Exchange, a company shares. The Exchange asserts that the Primary Direct Abrahimzadeh and Russell Chong, Co-Heads, U.S. Floor Listing will have an adequate public float and Equity Capital Markets, Citigroup Capital Markets may list in connection with an IPO with liquid trading market after completion of the Inc. (February 26, 2020) (‘‘Citigroup Letter’’); Letter a market value of publicly-held shares opening auction given the higher market value from Matthew B. Venturi, Founder & CEO, requirement than that required for listing an ClearingBid, Inc. (January 21, 2020) (‘‘ClearingBid of $40 million and, ‘‘in the Exchange’s underwritten IPO. See Notice, supra note 9, 85 FR Letter’’), at 5; Letter from David Ludwig, Head of at 39247. Americas Equity Capital Markets, Goldman Sachs 56 See Goldman Sachs Letter, supra note 54. This 58 Group, Inc. (February 7, 2020) (‘‘Goldman Sachs commenter also referenced the recent direct listings See Notice, supra note 9, 85 FR at 39247 and Letter’’); Letter from Burke Dempsey, Executive by Spotify Technology S.A. and Slack note 19, supra, and accompanying text. Vice President Head of Investment Banking, Technologies, Inc., and expressed the view that the 59 See Citadel Letter, supra note 54, at 1. Wedbush Securities (April 20, 2020) (‘‘Wedbush development of a direct listing approach to 60 See Section 102.01B of the Manual. Letter’’). becoming a public company has been a significant 61 In addition to the $40 Million standard, the 55 See Citigroup Letter, supra note 54. This step forward in providing companies greater choice Exchange’s current listing standards require an commenter also stated its belief that the direct in their path to going public, and that the ability aggregate market value of publicly held shares of listing format would afford broad participation in to include a primary capital raise in a direct listing $100 million for companies that list other than at the capital formation process and help establish a will further enhance this flexibility. See id. See also the time of an IPO, spin-off, or initial firm shareholder base that has a long-term interest in Citadel Letter, supra note 54, at 1; Wedbush Letter, commitment underwritten public offering. See partnering with management teams. See id. supra note 54. Section 102.01B of the Manual.

VerDate Sep<11>2014 19:00 Aug 31, 2020 Jkt 250001 PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 E:\FR\FM\01SEN1.SGM 01SEN1 jbell on DSKJLSW7X2PROD with NOTICES Federal Register / Vol. 85, No. 170 / Tuesday, September 1, 2020 / Notices 54459

Direct Floor Listings.62 The Commission price is equal to the limit price of the any consultations with the financial further believes that using the lowest IDO Order (i.e., the low end of the adviser must be conducted in a manner price in the price range established by Primary Direct Floor Listing Auction consistent with the federal securities the issuer in its registration statement to Price Range), the IDO Order would have laws, including Regulation M and other determine the minimum market value is priority over other sell orders at that anti-manipulation requirements.66 The a reasonable and conservative approach price.64 The Commission believes that Exchange also represents that it has given that, as described below, the the IDO Order and related clarifications retained FINRA to monitor such Primary Direct Floor Listing will not proposed by the Exchange assure that compliance and that it plans to issue proceed at a lower price. the method by which the issuer regulatory guidance in this area. The In the Order Instituting Proceedings, participates in the opening auction is Commission believes that these are the Commission expressed concern that, clearly defined, that the issuer is not in reasonable steps to help assure with a Primary Direct Floor Listing, the a to improperly influence the compliance by participants in the direct company could be the only seller (or a price discovery process, and that the listing process with these important dominant seller) participating in the auction is otherwise consistent with the provisions of the federal securities laws opening auction and thus could be in a disclosures in the registration statement. and that the proposed changes are position to uniquely influence the price The Commission further believes it is consistent with preventing manipulative discovery process, and stated that the appropriate for the IDO Order to have acts and practices, and protecting Exchange had not explained how its priority over other sell orders at the investors and the public interest in opening auction rules would apply in a same price if the auction price is at the accordance with Section 6(b)(5) of the Primary Direct Floor Listing.63 limit price of the IDO Order, because the Exchange Act. In Amendment No. 2, the Exchange auction will not occur at all unless the Finally, several commenters proposed to add the IDO Order as a new IDO Order is satisfied in full, and this expressed concerns that the lack of order type to be used by the issuer in would assure that both the issuer and traditional underwriter involvement in a Primary Direct Floor Listing, and to better priced sell orders are able to sell direct listings generally would increase clarify in its rules how the DMM would securities in the auction.65 The risks for investors, suggesting that direct conduct the opening auction for such Commission believes that the IDO Order listings circumvent the traditional due listings. As discussed above, the issuer requirements described above help to diligence process and traditional would be required to submit an IDO mitigate concerns about the price underwriter liability.67 One commenter Order in the opening auction with a discovery process in the opening believed that approval of the proposal limit price equal to the low end of the auction and would provide some would likely increase the number of Primary Direct Floor Listing Auction reasonable assurance that the opening companies that forego the traditional Price Range, and for the full quantity, as auction and subsequent trading promote IPO process,68 and significantly increase reflected in the registration statement. fair and orderly markets and that the the risks for retail investors, including The IDO Order cannot be modified or proposed rules are designed to prevent by circumventing the due diligence canceled by the issuer once entered. manipulative acts and practices, and process.69 This commenter expressed Further, the DMM would conduct the protect investors and the public interest opening auction only if the auction in accordance with Section 6(b)(5) of the 66 See Notice, supra note 9, 85 FR at 39249, and price is within the Primary Direct Floor Exchange Act. proposed Rule 7.35A, Commentary .10. See also Listing Auction Price Range disclosed in In Amendment No. 2, the Exchange supra note 45 and accompanying text noting that the registration statement, and the IDO the Exchange will be issuing a regulatory circular added language to its proposal, to remind member organizations that activities in Order and all better priced sell orders discussed above, reminding a financial connection with a Primary Direct Floor Listing, like can be satisfied in full. If the auction adviser to an issuer and the DMM that activities in connection with other listings, must be conducted in a manner not inconsistent with Regulation M and other anti-manipulation 62 One commenter raised a concern that the 64 In addition, as discussed above, the Exchange provisions of the federal securities laws and NYSE Exchange does not provide any data to support its proposes that the DMM will publish a pre-opening conclusion that there would be adequate liquidity indication in a Primary Direct Floor Listing if the Rule 2020. 67 for a security listing in connection with a Primary auction price is expected to be outside a price range See, e.g., Letter from Christopher A. Iacovella, Direct Floor Listing. See Letter from Jeffrey P. around an ‘‘Indication Reference Price’’ equal to the Chief Executive Officer, ASA (December 12, 2019) Mahoney, General Counsel, Council of Institutional low end of the price range reflected in the (‘‘ASA Letter I’’), at 1. Investors (July 16, 2020) (‘‘CII Letter III’’), at 5. registration statement. The Commission believes 68 The Commission acknowledges the possibility While the Exchange did not provide the data this is a reasonable and conservative reference price that some companies may pursue a Primary Direct specifically referenced by the commenter, as noted because the auction cannot occur at a lower price, Floor Listing instead of a traditional IPO. The above, the proposed minimum market value and if the auction occurs at a higher price the Commission also believes that some companies may requirements are comparable to or higher than those proposal errs on the side of requiring opening pursue a Primary Direct Floor Listing that would applied by the Exchange in other contexts. See indication information to be disseminated to market not otherwise go public, or that would wait to supra notes 16–17 and accompanying text. The participants. pursue a traditional IPO until a later stage of existing $40 million and $100 million market value 65 In addition, the Commission believes that the development, both of which would potentially requirements in Section 102.01B of the Manual are proposed changes to Rule 7.35C to remove the reduce opportunities for public shareholders to longstanding requirements that have supported the references to Direct Listing Auction would assure share in growth opportunities. Thus, the listing of companies on the Exchange that are that all direct listings occur with a DMM that will Commission believes that the proposed rule change suitable for listing over many years. The facilitate the opening auction manually, and should may result in additional investment opportunities Commission also previously approved the help promote fair and orderly markets in while providing companies more flexible options standards for Selling Shareholder Direct Floor connection with direct listings, because of the role for becoming publicly traded. Listings as supporting listing on the Exchange and of the DMM in ensuring that the conditions 69 See ASA Letter I, supra note 67, at 1–2. This the maintenance of fair and orderly markets thereby described above to conduct the auction have been commenter believed that allowing companies to protecting investors and the public interest in met. The Commission also believes that the raise primary capital through a direct listing accordance with Section 6(b)(5) of the Exchange Act proposed changes to (i) Section 102.01B of the ‘‘would be a complete end run around the (see NYSE 2018 Order, supra note 12, 83 FR at Manual, Footnote (E) to clarify the description of a traditional underwriting process and . . . create a 5654). Selling Shareholder Direct Floor Listing, (ii) Rule massive loophole in the regulatory regime that 63 One commenter expressed general support for 1.1(f) to amend the definition of ‘‘Direct Listing,’’ governs the offerings of securities to the public.’’ Id. the proposal and offered a variety of observations and (iii) Rule 7.35A(g)(1) to use the defined term at 1. In this commenter’s view, two recent high- beyond the scope of the proposal, including with ‘‘Private Placement Market’’ will provide clarity to profile direct listings—Spotify and Slack—did not respect to the importance of opening auction the Exchange’s rules, consistent with the protection work out particularly well for retail investors, and information. See ClearingBid Letter, supra note 54, of investors and the public interest under Section a robust underwriting process would have at 1. 6(b)(5) of the Exchange Act. Continued

VerDate Sep<11>2014 19:00 Aug 31, 2020 Jkt 250001 PO 00000 Frm 00117 Fmt 4703 Sfmt 4703 E:\FR\FM\01SEN1.SGM 01SEN1 jbell on DSKJLSW7X2PROD with NOTICES 54460 Federal Register / Vol. 85, No. 170 / Tuesday, September 1, 2020 / Notices

concern that direct listings could caused by untrue statements of fact or As to the comments concerning weaken certain shareholder investor material omissions of fact within underwriter liability and due diligence, protections, and recommended that the registration statements associated with the Commission agrees, as noted by the Commission make clear that financial direct listings.72 Exchange, that the Securities Act does advisors, exchanges, control On the other hand, one commenter not require the involvement of an shareholders, and directors involved in supported direct listings as a suitable underwriter in registered offerings. a direct listing automatically incur option for certain issuers, and took the Moreover, given the broad definition of statutory underwriter liability under the position that ‘‘[d]ue diligence is already ‘‘underwriter’’ 78 in the Securities Act, a Securities Act and are required to hold ably done by the legions of experienced financial advisor to an issuer engaged in the regulatory capital necessary to act as accountants, lawyers, consultants, rating a Primary Direct Floor Listing may, a de facto underwriter.70 agencies, etc.’’ 73 depending on the nature and extent of Another commenter recommended In response, the Exchange stated that the financial advisor’s activities and on that the Commission disapprove the it disagrees that the absence of the facts and circumstances, be deemed proposal and expressed concern that underwriters creates a loophole in the a statutory ‘‘underwriter’’ with respect shareholder legal rights under Section regulatory regime that governs offerings to the securities offering, with attendant 11 of the Securities Act may be of securities to the public.74 According underwriter liabilities.79 In addition, particularly vulnerable in the case of to the Exchange, while involvement of given the broad definition of direct listings, and that investors in a traditional underwriter is often underwriter, required involvement of direct listing companies may have fewer necessary to the success of an IPO or financial advisors, and the financial legal protections than investors in other public offering, underwriter advisors’ reputational interests and IPOs.71 The commenter stated that it participation in the public capital- potential liability, including as statutory could not support direct listings as an raising process is not required by the underwriters, the Commission believes alternative to IPOs if public companies Securities Act, and companies regularly that the financial advisors to issuers in could limit their liability for damages access the public markets for capital Primary Direct Floor Listings will be raising and other purposes without incentivized to engage in robust due uncovered more of these companies’ vulnerabilities using traditional underwriters.75 In the diligence, notwithstanding the lack of a before these securities were offered to the public. firm commitment underwriting See id. at 2. Another commenter stated that these Exchange’s view, the due diligence direct listings may have been successes for private process in Primary Direct Floor Listings agreement. Even absent the involvement investors, but the retail and public investors that is the responsibility of the gatekeepers of a statutory underwriter, investors purchased stock in Spotify and Slack were under who participate in the transaction, such would not be precluded from pursuing water for years, and one company is facing a any claims they may have under the lawsuit because of how direct listings are modeled. as the company’s board of directors, its See Letter from Anonymous (June 30, 2020). senior management, and its Securities Act for false or misleading 70 See ASA Letter I, supra note 67, at 2; Letter independent accountants.76 The offering documents, nor would the from Christopher A. Iacovella, Chief Executive Exchange further stated that a company absence of a statutory underwriter affect Officer, American Securities Association (March 5, pursuing a Primary Direct Floor Listing the amount of damages investors may be 2020) (‘‘ASA Letter II’’), at 2–3. Several additional entitled to recover. commenters raised a variety of concerns with the would go through the same process of use of a direct listing to conduct a primary offering. publicly filing a registration statement In addition, issuers and other For example, one commenter expressed the view as an underwritten offering, and if a gatekeepers, with their attendant that ‘‘bailing out’’ private market investors with company’s business model exhibits liability, play important roles in reduced offering requirements would incent assuring that disclosures provided to weaknesses, they will be exposed to the companies to remain private longer, reduce investors are materially accurate and transparency, and impair price discovery. See Letter public prior to listing.77 from Anonymous (December 4, 2019). Another complete. The Commission therefore commenter took the position that direct listings are 72 See CII Letter I, supra note 71, at 2–3; CII Letter does not view a firm commitment a method for insiders to ‘‘rip-off’’ IPO investors. See II, supra note 71, at 3. This commenter was underwriting as necessary to provide Letter from Allan Rosenbalm (December 4, 2019). particularly concerned about positions taken by the adequate investor protection in the Yet another commenter was critical of direct issuer in a recent lawsuit relating to the direct listings for a variety of reasons, and expressed the context of a registered offering. Indeed, listing of Slack, and expressed the view that the view, among other things, that they are ‘‘an attempt exchange-listed companies often engage issuer ‘‘relies on (1) attacking the right of secondary to bypass the independent skilled investment market purchasers to bring a Section 11 claim; and in offerings that do not involve a firm banking and investment management professionals (2) the inability to determine what shares were commitment underwriting. Given that when establishing the initial market value of the ‘covered’ by Slack’s registration statement.’’ CII company.’’ Letter from Anonymous (January 3, Letter I, supra note 71, at 2. Among other things, 2020). And another commenter stated that a shareholders in Primary Direct Floor Listings does the commenter urged the Commission to explore primary capital raise would have many red flags, not create -term price instability, and that at establishing a system of traceable shares before questioned how to trust a private company’s most it shifts the timing of such instability from six approving a direct listing regime. See id. at 2–3; CII accounting methods that are not consistent with the months after the offering to closer to the time of Letter III, supra note 62, at 4. public markets, and stated that a direct listing is listing. See id. 73 ‘‘fraudulent with no liability.’’ See Letter from Wedbush Letter, supra note 54. 78 Section 2(a)(11) of the Securities Act defines Anonymous (July 1, 2020). The Commission 74 See Letter from Elizabeth K. King, Chief ‘‘underwriter’’ to mean ‘‘any person who has acknowledges these concerns, but believes the Regulatory Officer, ICE, General Counsel & purchased from an issuer with a view to, or offers proposed rule change is consistent with investor Corporate Secretary, NYSE (March 16, 2020) or sells for an issuer in connection with, the protection in light of the fact that Primary Direct (‘‘NYSE Response Letter’’), at 2. distribution of any security, or participates, or has Floor Listings will be registered under the 75 See NYSE Response Letter, supra note 74, at 2– a direct or indirect participation in the direct or Securities Act, and that such registration statements 3. indirect underwriting of any such undertaking.’’ will require both bona fide price ranges and audited 76 See NYSE Response Letter, supra note 74, at 2– 79 The Commission does not agree, as asserted by financial statements prepared in accordance with 3. The Exchange took the position that IPOs carry one commenter, that financial advisors, exchanges, either U.S. GAAP or International Financial a certain amount of risk for investors, that an control shareholders, and directors involved in a Reporting Standards (IFRS) as issued by the underwritten IPO does not insulate investors from direct listing will automatically incur statutory International Accounting Standards Board. that risk, and that there is no reason to believe that underwriter liability under the Securities Act. See 71 See Letter from Jeffrey P. Mahoney, General companies with direct listings will perform any ASA Letter I, supra note 67, at 2; ASA Letter II, Counsel, Council of Institutional Investors (January better or worse than companies with underwritten supra note 70, at 2–3. Whether or not any person 16, 2020) (‘‘CII Letter I’’), at 2; Letter from Jeffrey IPOs. See id. at 3. would be considered a statutory underwriter would P. Mahoney, General Counsel, Council of 77 See NYSE Response Letter, supra note 74, at 4. be evaluated based on the particular facts and Institutional Investors (April 16, 2020) (‘‘CII Letter The Exchange also took the position that the circumstances, in light of the definition of II’’), at 2; CII Letter III, supra note 60, at 3–4, 6. absence of lock-up agreements with pre-IPO underwriter contained in Section 2(a)(11).

VerDate Sep<11>2014 19:00 Aug 31, 2020 Jkt 250001 PO 00000 Frm 00118 Fmt 4703 Sfmt 4703 E:\FR\FM\01SEN1.SGM 01SEN1 jbell on DSKJLSW7X2PROD with NOTICES Federal Register / Vol. 85, No. 170 / Tuesday, September 1, 2020 / Notices 54461

the proposed rule change will require particularly in the context of aftermarket SECURITIES AND EXCHANGE all Primary Direct Floor Listings to be securities purchases. Purchasers in a COMMISSION registered under the Securities Act, and registered offering may face difficulty [Release No. 34–89679; File No. SR–FINRA– in light of the fact that the existing tracing their shares back to the 2020–024] liability framework under the Securities registration statement whenever a Act for registered offerings will apply to company conducts a registered offering Self-Regulatory Organizations; all such Primary Direct Floor Listings, for less than all of its shares. Thus, even Financial Industry Regulatory the Commission concludes the proposed in the context of traditional firm Authority, Inc.; Notice of Filing of a rule change is consistent with investor commitment offerings, the ability of Proposed Rule Change To Delete the protection. existing shareholders who meet the FINRA Order Audit Trail System The Commission further believes that conditions of Rule 144 to sell shares on (OATS) Rules Primary Direct Floor Listings may an unregistered basis may result in provide benefits to existing and August 26, 2020. potential investors, relative to firm concurrent registered and unregistered Pursuant to Section 19(b)(1) of the commitment underwritten offerings. sales of the same class of security at the Securities Exchange Act of 1934 First, because the securities to be issued time of an exchange listing, leading to (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 by the company in connection with a difficulties tracing purchases back to the notice is hereby given that on August Primary Direct Floor Listing would be registered offering.81 Although judicial 14, 2020, Financial Industry Regulatory allocated based on matching buy and precedent on this topic may continue to Authority, Inc. (‘‘FINRA’’) filed with the sell orders, in accordance with the evolve, the Commission is aware of only Securities and Exchange Commission proposed rules, some investors may be one court that has considered this issue (‘‘SEC’’ or ‘‘Commission’’) the proposed able to purchase securities in a Primary in the direct listing context to date, and rule change as described in Items I, II, Direct Floor Listing who might not that court ruled in favor of allowing the and III below, which Items have been otherwise receive an initial allocation in plaintiffs to pursue Section 11 claims.82 prepared by FINRA. The Commission is a firm commitment underwritten The Commission does not believe that publishing this notice to solicit offering. The proposed rule change the proposed rule change to permit comments on the proposed rule change therefore has the potential to broaden Primary Direct Floor Listings poses a from interested persons. the scope of investors that are able to heightened risk to investors, and finds I. Self-Regulatory Organization’s purchase securities in an initial public that the proposed rule change is Statement of the Terms of Substance of offering, at the consistent with investor protection. the Proposed Rule Change price, rather than in aftermarket trading. For the reasons discussed above, the Second, because the price of securities FINRA is proposing to eliminate the issued by the company in a Primary Commission finds that the proposed Order Audit Trail System (‘‘OATS’’) Direct Floor Listing will be determined rule change, as modified by Amendment rules in the FINRA Rule 7400 Series and based on market interest and the No. 2, is consistent with the Exchange FINRA Rule 4554 (Alternative Trading matching of buy and sell orders, some Act. Systems—Recording and Reporting Requirements of Order and Execution believe that Primary Direct Floor IV. Conclusion Listings may be a more accurate way to Information for NMS ) once price securities offerings.80 In a firm It is therefore ordered, pursuant to members are effectively reporting to the commitment underwritten offering, the Section 19(b)(2) of the Exchange Act,83 consolidated audit trail (‘‘CAT’’) and the offering price is decided through that the proposed rule change (SR– CAT’s accuracy and reliability meet negotiations between the issuer and the NYSE–2019–67), as modified by certain standards, as described below. underwriters for the offering. The Amendment No. 2 thereto, be, and it The Rule 7400 Series and Rule 4554 are collectively referred to herein as the opening auction in a Primary Direct hereby is, approved. Floor Listing provides for a different ‘‘OATS Rules.’’ price discovery method for initial public For the Commission, by the Division of The text of the proposed rule change offerings which some believe may result Trading and Markets, pursuant to delegated is available on FINRA’s website at authority.84 in more appropriate pricing for the http://www.finra.org, at the principal offered shares, a potential benefit to Jill M. Peterson, office of FINRA and at the existing and potential investors. The Assistant Secretary. Commission’s Public Reference Room. Commission believes that the proposed [FR Doc. 2020–19203 Filed 8–31–20; 8:45 am] II. Self-Regulatory Organization’s rule change, by providing an opening BILLING CODE 8011–01–P Statement of the Purpose of, and process in which buy and sell orders are Statutory Basis for, the Proposed Rule matched, in accordance with the Change proposed rules, to determine the In its filing with the Commission, offering price, may allow for efficiencies FINRA included statements concerning in the way IPOs are priced and allocated the purpose of and basis for the without sacrificing investor protection. proposed rule change and discussed any Commenters also raised concerns comments it received on the proposed about shareholder claims pursuant to rule change. The text of these statements Section 11 of the Securities Act. The may be examined at the places specified Commission notes that this issue is not 81 In a Primary Direct Floor Listing, all company in Item IV below. FINRA has prepared exclusive to Primary Direct Floor shares will be sold in the opening auction, making summaries, set forth in sections A, B, Listings but rather is a recurring issue, it potentially easier to trace those shares back to the registration statement than in other contexts. and C below, of the most significant 82 See Pirani v. Slack Techs., Inc., 2020 U.S. Dist. aspects of such statements. 80 See Matt Levine, Soon Direct Listings Will LEXIS 70177 (N.D. Cal., April 21, 2020). Raise Money, Bloomberg, available at https:// www.bloomberg.com/opinion/articles/2019-11-27/ 83 15 U.S.C. 78s(b)(2). 1 15 U.S.C. 78s(b)(1). soon-direct-listings-will-raise-money. 84 17 CFR 200.30–3(a)(12). 2 17 CFR 240.19b–4.

VerDate Sep<11>2014 19:00 Aug 31, 2020 Jkt 250001 PO 00000 Frm 00119 Fmt 4703 Sfmt 4703 E:\FR\FM\01SEN1.SGM 01SEN1 jbell on DSKJLSW7X2PROD with NOTICES