Recent SEC Announcements Facilitate Public and Private Company Funding
September 29, 2020
The U.S. Securities and Exchange Commission (“SEC”) recently announced two changes that would expand companies’ access to funding. These changes are amendments to direct listings on the New York Stock Exchange (“NYSE”) and updates to the rules for accredited investors.
Direct listings provide a way for companies to sell shares without going through the initial public offering (“IPO”) process. Companies can offer shares without the need to underwrite the transaction, thereby avoiding what could be substantial costs and restrictions generally surrounding an IPO. It is important to note, however, that direct listing transactions would not be subject to certain protections offered under the IPO process.
The latest approvals by the SEC allow listed companies on the NYSE to issue new shares through a direct listing. Prior to this change, only existing shareholders were permitted to sell stock this way. The number of direct listings thus far have been limited due to lack of qualification. Slack and Spotify are a couple of notable exceptions recently. It is possible the changes to the direct listing process will give companies more accessibility to public investors. IPOs in 2020 have already topped 240, compared to 233 for all of 2019, which may indicate a future uptick for direct listings.
The SEC’s updates broaden the definition of who qualifies as an accredited investor. Previously, an accredited investor was typically defined as (1) an individual with a net worth of more than $1 million or annual income greater than $200,000; or (2) an entity that meets specifically defined legal requirements. These criteria help determine whether an entity or individual is permitted to invest in private companies. The amendments to the definition of an accredited investor now include people with relevant expertise based on certain professional credentials, such as holding a Series 7 license, which expands the pool of potential investors to which private companies have access.
Predicting how investors will respond to these latest updates is difficult in this time of heightened uncertainty, but the latest SEC actions perhaps indicate that they are focused on promoting additional options for both public and private companies looking to raise much-needed capital.