Primary Direct Floor Listing Approved-
The SEC has approved a new way for public companies to raise money in the capital markets called the Primary Direct Floor Listing. Proposed by the New York Stock Exchange and approved last December, this latest alternative to the traditional IPO allows companies to bypass the need for an underwriter.
Though the SEC has allowed Direct Listings for several years, the Primary Direct Floor Listing is uniquely different. While Direct Listings are reserved for existing investors who want to sell their shares, a Primary Direct Floor Listing still allows current investors to sell their shares, but those shares are part of a larger package that includes a company’s new offering.
In a Primary Direct Floor Listing, the company does not need to secure the commitment of an underwriter. Instead of pricing being set through negotiations with the underwriter, the initial price is set by the market. The NYSE contends it will lower costs and result in a potentially larger capital raise for the company. It also will potentially raise the number of listings on the exchange.
The Primary Direct Floor Listing reflects former SEC Chairman Jay Clayton’s call to make it easier for companies to raise capital in the public markets. Clayton had voiced concern about the steady decline in the number of U.S. IPOs since their peak of 397 IPOs in the year 2000. In 2016, the year prior to Clayton’s appointment to the SEC, the number of U.S. IPOs had fallen to only 133.
It is believed that Primary Direct Floor Listings will be mostly used by entrepreneurial companies with well-recognized names or easily understood business models.
However, following the public comment period, the Council of Institutional Investors filed a petition citing several concerns, including the ability of investors to “trace” the purchase of their shares to the offering document.
Several SEC commissioners, including current acting SEC Chair Allison Herren Lee, raised concerns that the lack of an underwriter might compromise investor protection.
In their dissenting statement, Commissioners Herren Lee and Commissioner Caroline A. Crenshaw commented: “Unfortunately, investors in primary direct listings under NYSE’s approach will face at least two significant and interrelated problems: first, the lack of a firm-commitment underwriter that is incentivized to impose greater discipline around the due diligence and disclosure process, and second, the potential inability of shareholders to recover losses for inaccurate disclosures due to so-called “traceability” problems.”
The two continued that “If underwriters are removed from the equation, investors will lose a key protection: a gatekeeper incented to ensure that the disclosures around these opportunities are accurate and not misleading.”
Stock Market Highs Spike Shelf Registrations
Public companies looking to take advantage of rising stock markets have filed nearly 60 Shelf Registrations in January, compared to 44 in the same period last year, marking the highest in a decade, according to Audit Analytics.
Faced with uncertainty over the duration and severity of the pandemic, companies filed shelf registrations to position themselves to be able to quickly access the capital markets, if needed. In 2020, 850 companies filed shelf registrations, representing a 40 percent increase over 2019.
Though sectors such as restaurants, leisure and travel were hard hit by the pandemic, the markets have remained strong for many industries such as technology, healthcare, and durable-goods companies, which took advantage of the tool.
A shelf registration allows U.S. companies to file an intent to sell shares within the following two years, without immediately committing to the offering. Once a shelf registration is filed and the paperwork is in place, companies can quickly take it down from the shelf — issue new shares, and secure fresh capital when they determine that market conditions are most favorable.
To qualify for a shelf registration, companies file form S-3 any time after they’ve been a public company for one year. Once the S-3 is filed, companies are required to file updated quarterly, annual, and related reports with the SEC.
SEC Wants More Disclosures During Volatility
In light of recent frenzy surrounding stocks such as GameStop, the SEC just announced that it will begin asking companies to provide additional specific disclosures if the company was planning to sell shares during a period of market volatility.
The SEC’s Corporate Finance Division has issued guidance asking companies to provide “tailored disclosures about market events and conditions, the company’s situation and potential impact on investors.”
The Division cautioned that such market and stock volatility can create risks for both companies and investors. These risks can be particularly acute when companies seek to raise capital during periods with:
- recent stock run-ups or recent divergences in valuation ratios relative to those seen during traditional markets,
- high short interest or reported short squeezes, and
- reports of strong and atypical retail investor interest (whether on social media or otherwise).
This new guidance is particularly relevant because it also applies to shelf registrations, which may be filed, but which may never be realized. Typically, the SEC doesn’t review documents related to an equity offering before the company actually triggers the offering.
To illustrate its goal, the Division issued a sample letter that it would send to companies which have filed for an offering asking for information regarding recent price volatility in a company’s stock, risk factors such as the effects of a potential “short squeeze due to a sudden increase in demand for your stock”, and use of proceeds. Based on answers provided, the company may be instructed to revise their financial disclosures.
Regional, Niche Auditors Dominate SPAC IPOs
Last month Simply Stated reported that a record 248 SPAC IPOs were filed in 2020, which was more than four times the previous year’s high of 2019. Bloomberg is now reporting that the vast majority of companies filing those SPACS, 229, turned to Regional and Niche Audit Firms to handle their audits. The Big 4, which traditionally dominate the IPO audit world, were left to share a mere 19 SPAC audits. Bloomberg notes that lower audit fees are a key factor driving companies to use smaller audit firms.
A SPAC, or Special Purpose Acquisition Company, is a company with no commercial operations that is formed to raise capital through an IPO for the purpose of acquiring an existing company or companies. The SPAC team has up to two years to make an acquisition.
Once a target is identified, SPACs, also called blank check companies, must file an S-4 which contains disclosure information similar to what is in the S-1 which is filed in a traditional IPO. If an acquisition is not found within the two-year period, the capital, which was being held is returned to investors, minus bank and broker fees.
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