By Zhanna Korneva
On August 28, 2020, the SEC approved a new type of direct listing on the New York Stock Exchange that allows companies to sell new stock.
Existing investors were previously allowed to sell shares through direct listings, but companies could not use this process to raise new capital. Direct listing is expected to modernize the approach for companies to enter public markets, as it allows them to avoid the substantial costs of raising capital and some restrictions associated with the traditional IPO process. This new format also allows public investors to determine the value of a company’s shares at the outset of the process.
While the direct listing format is an attractive option for companies and investors, some expressed concerns that investors could be at a higher risk because of insufficient due diligence requirements. The SEC disagreed, as the companies will need to meet certain criteria to start raising capital, such as showing minimum market value of $250 million, or selling new shares above $100 million on the New York Stock Exchange and $110 million on the Nasdaq. The New York Stock Exchange also has a requirement for shares to be priced within the expected range, while the Nasdaq allows share prices to fall as low as 20% below the expected range. The Nasdaq has filed a similar proposal with the SEC.
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