SEC permission for the New York Stock Exchange to let companies raise capital through direct listings has been put on hold following a challenge from the Council of Institutional Investors.
The Securities and Exchange Commission granted NYSE's proposal less than a week earlier, on Aug. 26, but on Monday, SEC Assistant Secretary J. Matthew DeLesDernier told NYSE officials in a letter that it had received notice that CII intends to petition for review of the approval, putting it on hold for now.
Amy Borrus, CII executive director, said in an email Wednesday that CII took the unusual step after rising concern over traceable shares, an issue highlighted by Slack Technologies' 2019 public debut, selling shares directly to investors.
The direct listing route bypasses the cost and regulatory controls of a traditional initial public offering, but in Slack's case also led to legal challenges.
"The litigation over the direct listing of Slack raised the issue of whether investors can challenge a misleading registration statement if they cannot trace their shares to those offered in the registration statement. CII has urged the SEC to address this issue by establishing a system of traceable shares as a key component its long-overdue proxy plumbing project," Ms. Borrus said. "We think the SEC should fix the proxy infrastructure before approving an expansion of the direct listing regime."
NYSE officials will ask the SEC to reverse the stay, an NYSE spokeswoman said in a statement. "The ability to raise capital with an NYSE direct listing represents an innovative new path to the public markets and we intend to ask the SEC to lift its stay to make this important resource immediately available to issuers and investors."
On Monday, NYSE competitor Nasdaq filed its own direct listing proposal with the SEC.
The NYSE approval was the first time that the SEC allowed companies to raise new capital through direct listings. In its approval order, the SEC said it did not believe that it poses a heightened risk to investors.
The most recent version of NYSE's proposal, filed in June, allowed a company that has not previously had its common equity securities registered with the SEC to list those common equity securities on the exchange upon the effective date of a registration statement, with the company selling shares itself in the opening auction on the first day of trading on the exchange.
The NYSE would retain the existing standards for determining whether a company has met its market value of publicly held shares listing requirements, and would determine that a given company has met the $100 million aggregate market value of publicly held shares requirement based on a combination of both an independent third-party valuation and the most recent trading price for the company's common stock. A company would have to provide a valuation showing a market value of publicly held shares of at least $250 million.