I’m attorney Laura Anthony founding partner of Legal & Compliance, a full service corporate,
securities, and business transactions law firm.
Today is the first in a LawCast series talking about direct public listings.
On April 3, 2018, Spotify made a big board splash by debuting on the NYSE without an
IPO.
Instead, Spotify filed a resale registration statement registering the securities already
held by its existing shareholders.
The process is referred to as a direct listing.
As most of those shareholders had invested in Spotify in private offerings, they were
rewarded with a true exit strategy and liquidity by becoming the company’s initial public
float.
In order to complete the direct listing process, the NYSE had to implement a rule change.
NASDAQ already allows for direct listings, although it has historically been rarely used.
To the contrary, a direct listing has often been used as a going public method on the
OTC Markets and in the wake of Spotify, may gain in popularity on national exchanges as
well.
As I will discuss in this LawCast series, there are some fundamental differences between
the process for OTC Markets and for an exchange.
In particular, when completing a direct listing onto an exchange, the exchange issues a trading
symbol up front and the shares are available to be sold by the selling stockholders at
prevailing market prices at any time after the registration statement is qualified and
the listing has been achieved.
In an OTC Markets direct listing, a company must work with a market maker to file a 15c2-11
application with FINRA to obtain a trading symbol.
Moreover, the registered securities may only be sold by the listed selling shareholders
at the registered price, regardless of prevailing market prices.
However, once a company is trading on the OTCQB or OTCQX tiers of OTC Markets, and as
long as the offering is not considered an indirect primary offering, the company could
amend the registration statement to allow shares to be sold at market price.
Generally, an offering will be considered indirect primary if more than 30% of the float
is being registered for resale.
In a direct listing process, a company completes one or more private offerings of its securities,
thus raising money up front, and then files a registration statement with the SEC to register
the shares purchased by the private investors.
Although a company can use a placement agent/broker-dealer to assist in the private offering, it is not
necessary.
A benefit to the company is that it has received funds much earlier in the process, rather
than after a registration statement has cleared the SEC.
The cost of completing an audit and legal fees associated with the registration process
is expensive and is usually borne up front prior to receiving investor funds in a traditional
IPO process, which is one of the reasons for the popularity of bridge loans.
Where a broker-dealer assists in the private placement, the commission paid to the broker-dealer
for the private offering may be slightly higher than the commissions in a public offering.
One of the reasons is that FINRA regulates and must approve all public offering compensation
and commissions, but does not limit or approve private offering placement agent fees.
A second reason that a broker-dealer may charge a higher commission is that there is higher
risk to investors in a private offering, and that those investors do not have an immediately
available public exit strategy.
I’m securities attorney Laura Anthony, founding partner of Legal & Compliance, and producer
of LawCast.
Should you have any questions about today’s topic, please visit SecuritiesLawBlog.com
and LawCast.com, or contact me directly.
Inquiries of a technical nature are always encouraged.