The approval came just days after the Nasdaq filed a similar request with the SEC, which would also allow companies to sell new shares in a direct listing.
Historically, the NYSE and Nasdaq have allowed existing investors to sell shares in a direct listing, but companies couldn’t use the process to raise new capital.
"This is really big," Benchmark general partner Bill Gurley tweeted of the SEC's decision. "We could get to a modern approach where Silicon Valley companies, founders, employees, and investors don't have a 40% costs of capital to enter the public markets."
A vocal critic of traditional IPOs and their associated underwriting fees from banks, Gurley has argued that direct listings are a superior option for companies that don't need to raise additional capital.
"What we're trying to do is provide optionality and flexibility," said Jay Heller, head of capital markets at Nasdaq. "What you have now is different lanes in which you can travel."
The changes come at a time when companies have been scrambling for another IPO alternative: SPACs. Mergers with blank-check companies have been all the rage this year because they allow companies to raise capital from investors and go public without the typical IPO process.
Direct listings are distinct from both IPOs and SPAC mergers in that public investors—not institutional investors or big banks—determine the value of a company's shares from the outset.
The format has attracted well-capitalized tech companies like Asana and Palantir, which are both pursuing direct listings on the NYSE. Despite these notable examples, the IPO alternative remains rare. In theory, the new rules should broaden the scope of companies that can pursue one beyond those already flush with cash.
"Whether or not people start pounding on the door to start raising capital through direct listings is still to be determined," Heller said.
Some commenters on the NYSE's changes expressed concerns that the new rules would weaken investor protections and erode the due diligence that goes into an IPO. The SEC ultimately disagreed that the changes created a "loophole in the regulatory regime," according to its ruling.
Both the NYSE's new rule and the Nasdaq's proposal require that companies pass certain criteria to pursue direct listings. To qualify under either exchange’s guidelines, the company must show that its market value is greater than $250 million. Alternatively, a company could qualify by selling new shares above a certain threshold—$100 million by the NYSE and $110 million on the Nasdaq (or $100 million if the company meets specific criteria).
One notable difference between how the two exchanges approach the new direct listings is the pricing of shares. The NYSE has stipulated that shares in a direct listing must price within the anticipated range. The Nasdaq's proposals are more flexible, allowing for the share price to fall 20% below the expected range. The exchange would also not place a cap on the share price, so it could rise well above the range in the event of strong investor demand.
Featured image via Michael M. Santiago/Getty Images
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SEC expands direct listing options on NYSE as IPO alternatives abound - PitchBook News & Analysis
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