I. Introduction

On March 21, 2022, The Nasdaq Stock Market LLC (“Nasdaq” or the “Exchange”) filed with the Securities and Exchange Commission (“SEC” or “Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act”) ^[1] and Rule 19b-4 thereunder,^[2] a proposed rule change to modify certain pricing limitations for companies listing in connection with a direct listing with a primary offering in which the company will sell shares itself in the opening auction on the first day of trading on the Exchange. The proposed rule change was published for comment in the Federal Register on April 8, 2022.^[3] On May 19, 2022, pursuant to Section 19(b)(2) of the Exchange Act,^[4] the Commission designated a longer period within which to either approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to disapprove the proposed rule change.^[5]

On May 23, 2022, the Exchange filed Amendment No. 1 to the proposed rule change, which superseded the proposed rule change as originally filed. Amendment No. 1 was published for comment in the Federal Register on June 2, 2022.^[6] The Commission has received no comments on the proposal. This order institutes proceedings under Section 19(b)(2)(B) of the Exchange Act ^[7] to determine whether to approve or disapprove the proposed rule change, as modified by Amendment No. 1.

II. Description of the Proposal

Nasdaq Listing Rule IM-5315-2 provides listing requirements for Nasdaq's Global Select Market for a company that has not previously had its common equity securities registered under the Exchange Act to list its common equity securities on the Exchange at the time of effectiveness of a registration statement ^[8] pursuant to which the company will sell shares itself in the opening auction on the first day of trading on the Exchange (a “Direct Listing with a Capital Raise”).^[9] Securities qualified for listing under Nasdaq Listing Rule IM-5315-2 must begin trading on the Exchange following the initial pricing through the mechanism outlined in Nasdaq Rule 4120(c)(9) and Nasdaq Rule 4753 for the opening auction, otherwise known as the Nasdaq Halt Cross.^[10] Currently, in the case of a Direct Listing with a Capital Raise, the Exchange will release the security for trading on the first day of listing if, among other things, the actual price calculated by the Nasdaq Halt Cross is at or above the lowest price and at or below the highest price of the price range established by the issuer in its effective registration statement ^[11] (the “Pricing Range Limitation”).

The Exchange has proposed to modify the Pricing Range Limitation to provide that the Exchange would release the security for trading if: (a) the actual price calculated by the Nasdaq Halt Cross is at or above the price that is 20% below the lowest price of the disclosed price range; or (b) the actual price calculated by the Nasdaq Halt Cross is at a price above the highest price of such price range. For the Nasdaq Halt Cross to execute at a price outside of the disclosed price range, the company would be required to publicly disclose and certify to the Exchange that the company does not expect that such price would materially change the company's previous disclosure in its effective registration statement and that its effective registration statement contains a sensitivity analysis explaining how the company's plans would change if the actual proceeds from the offering are less than or exceed the amount in the disclosed price range.^[12] The Exchange would calculate the 20% threshold below the disclosed price range based on the maximum offering price set forth in the registration fee table in the company's effective registration statement, which the Exchange argues is consistent with the Instruction to paragraph (a) of Securities Act Rule 430A.^[13] The Exchange has also proposed to make related conforming changes.

Currently Nasdaq Rule 4120(c)(9)(B) states that, notwithstanding the provisions of Nasdaq Rule 4120(c)(8)(A) and (c)(9)(A), in the case of a Direct Listing with a Capital Raise, for purposes of releasing securities for trading on the first day of listing, the Exchange, in consultation with the financial advisor to the issuer, will make the determination of whether the security is ready to trade. The Exchange will release the security for trading if: (i) all market orders will be executed in the Nasdaq Halt Cross; and (ii) the actual price calculated by the Nasdaq Halt Cross complies with the Pricing Range Limitation. The Exchange will postpone and reschedule the offering only if either or both of such conditions are not met.^[14] The Exchange states that if there is insufficient buy interest to satisfy the CDL Order ^[15] and all other market orders or if the Pricing Range Limitation is not satisfied, the Nasdaq Halt Cross would not proceed and such security would not begin trading.^[16]

According to the Exchange, based on conversations it has had with companies and their advisors, the Exchange believes that some companies may be reluctant to use the existing rules for a Direct Listing with a Capital Raise because of concerns about the Pricing Range Limitation.^[17] The Exchange states it believes “that the Pricing Range Limitation imposed on a Direct Listing with a Capital Raise (but not on a traditional IPO) increases the probability of a failed offering because the offering cannot proceed without some delay not only for the lack of investor interest, but also if investor interest is greater than the company and its advisors anticipated.” ^[18] According to the Exchange, the Exchange believes that there may be instances of offerings where the price determined by the Exchange's opening auction will exceed the highest price of the price range disclosed in the company's effective registration statement.^[19] The Exchange states that, under the existing rule, a security subject to a Direct Listing with a Capital Raise cannot be released for trading by the Exchange if the actual price calculated by the Nasdaq Halt Cross is above the highest price of the disclosed price range.^[20] The Exchange further states that, in this case, the Exchange would have to cancel or postpone the offering until the company amends its effective registration statement, and that, at a minimum, such a delay exposes the company to market risk of changing investor sentiment in the event of an adverse market event.^[21] In addition, the Exchange states that the determination of the public offering price of a traditional IPO is not subject to limitations similar to the Pricing Range Limitation for a Direct Listing with a Capital Raise, which, in the Exchange's view, could make companies reluctant to use this alternative method of going public despite its expected potential benefits.^[22]

The Exchange has proposed to modify the Pricing Range Limitation such that even if the actual price calculated by the Nasdaq Halt Cross is outside the disclosed price range, the Exchange would release a security for trading if the actual price at which the Nasdaq Halt Cross would occur is as much as 20% below the lowest price of the disclosed price range or above the highest price of the disclosed price range, provided all other necessary conditions are satisfied, and that the company has specified the quantity of shares registered, as permitted by Securities Act Rule 457.^[23] In such circumstances, the company's registration statement would be required to contain a sensitivity analysis explaining how the company's plans would change if the actual proceeds from the offering are less than or exceed the amount assumed in the disclosed price range, and, as stated above, the company would be required to certify to the Exchange that it has met this requirement.^[24] In addition, the company would be required to publicly disclose and certify to the Exchange prior to the beginning of the Display Only Period ^[25] that the company does not expect that such offering price would materially change the company's previous disclosure in its effective registration statement.^[26] If the company's certification submitted to the Exchange in that regard includes an upside limit, the Exchange would not execute the Nasdaq Halt Cross if it would result in ( printed page 41782) an offering price above such limit.^[27] The Exchange states that the goal of these requirements is to have disclosure that allows investors to see how changes in share price ripple through critical elements of the disclosure.^[28]

The Exchange states that it believes that its proposed approach is consistent with Securities Act Rule 430A and staff guidance, which, according to the Exchange, generally allow a company to price a public offering 20% outside of the disclosed price range without regard to the materiality of the changes to the disclosure contained in the company's registration statement.^[29] According to the Exchange, the Exchange believes such guidance also allows deviation above the price range beyond the 20% threshold if such change or deviation does not materially change the previous disclosure.^[30] The Exchange states that, accordingly, the Exchange believes that a company listing in connection with a Direct Listing with a Capital Raise can specify the quantity of shares registered, as permitted by Securities Act Rule 457, and, when an auction prices outside of the disclosed price range, use a Rule 424(b) prospectus, rather than a post-effective amendment, when either: (i) the 20% threshold noted in the instructions to Rule 430A is not exceeded, regardless of the materiality or non-materiality of resulting changes to the registration statement disclosure that would be contained in the Rule 424(b) prospectus, or (ii) there is a deviation above the price range beyond the 20% threshold noted in the instructions to Rule 430A if such deviation would not materially change the previous disclosure, in each case assuming the number of shares issued is not increased from the number of shares disclosed in the prospectus.^[31] The Exchange states that, for purposes of this rule, the 20% threshold would be calculated based on the maximum offering price set forth in the registration fee table, and that this method of calculation is consistent with the SEC Staff's guidance on Securities Act Rule 430A.^[32]

The Exchange states that the burden of complying with the disclosures required under federal securities laws, including providing any disclosure necessary to avoid any material misstatements or omissions, remains with the issuer.^[33] The Exchange further states that, in that regard, the Post-Pricing Period (as defined below), which is applicable in circumstances where the actual price calculated by the Nasdaq Halt Cross is outside of the disclosed price range, provides the company an opportunity, prior to the completion of the offering, to provide any additional disclosures that are dependent on the price of the offering, if any, or to determine and confirm to the Exchange that no additional disclosures are required under federal securities laws based on the actual price calculated by the Nasdaq Halt Cross.^[34]

The Exchange also proposes to adopt a new Price Volatility Constraint and disseminate information about whether the Price Volatility Constraint has been satisfied, which will indicate whether the security may be ready to trade.^[35] The Exchange states that prior to releasing a security for trading, the Exchange allows a “Pre-Launch Period” of indeterminate length, during which price discovery takes place.^[36] The “Price Volatility Constraint” would require that the Current Reference Price has not deviated by 10% or more from any Current Reference Price during the Pre-Launch Period within the previous 10 minutes.^[37] The Pre-Launch Period would continue until at least five minutes after the Price Volatility Constraint has been satisfied.^[38] The Exchange states that this change would provide investors with notice that the Nasdaq Halt Cross nears execution and allow a period of at least five minutes for investors to modify their orders, if needed, based on the Near Execution Price, prior to the execution of the Nasdaq Halt Cross and the pricing of the offering.^[39] The Exchange also states that to assure that the Near Execution Price is a meaningful benchmark for investors and that the offering price does not deviate substantially from the Near Execution Price, the Exchange proposes to require that the Nasdaq Halt Cross may execute only if the actual price calculated by the Nasdaq Halt Cross is no more than 10% below or above the Near Execution Price (the “10% Price Collar”), in addition to the other existing conditions stated in proposed Nasdaq Rule 4120(c)(9)(B)(vii).^[40]

The Exchange states that an imbalance between buy and sell orders could sometimes cause the Current Reference Price to fall outside of the 10% Price Collar after the Price Volatility Constraint has been satisfied.^[41] According to the Exchange, such price fluctuations could be temporary and the Current Reference Price may return to and remain within the 10% Price Collar, or the price fluctuation could be lasting such that the Current Reference Price remains outside of the 10% Price Collar.^[42] The Exchange proposes to assess the Current Reference Price as compared to the 10% Price Collar 30 minutes after the Near Execution Time.^[43] If at that time the Current Reference Price is outside of the 10% Price Collar, all requirements of the Pre-Launch Period would reset and ( printed page 41783) would need to be satisfied again.^[44] Alternatively, if at that time the Current Reference Price is within the 10% Price Collar, price formation would continue without limitations until the Exchange, in consultation with the financial advisor to the issuer, makes the determination that the security is ready to trade and the conditions in proposed Nasdaq Rule 4120(c)(9)(B)(vii) and (viii) are met, at which time the Pre-Launch Period would end.^[45]

According to the Exchange, given that there may be a Direct Listing with a Capital Raise that could price outside of the disclosed price range and that there may be no upside limit above which the Nasdaq Halt Cross could not proceed, the Exchange proposes to enhance transparency by providing readily available, real time pricing information to investors.^[46] To that end, the Exchange states that it would disseminate, free of charge, the Current Reference Price on a public website, such as Nasdaq.com, during the Pre-Launch Period and indicate whether the Current Reference Price is within the disclosed price range.^[47] Once the Price Volatility Constraint has been satisfied, the Exchange would also disseminate the Near Execution Price, the Near Execution Time, and the 30-minute countdown from such time.^[48] The Exchange states that, in this way, investors interested in participating in the opening auction would be informed when volatility has settled to a range that would allow the opening auction to take place, would be informed of the price range at which the auction would take place, and, if the price remains outside of that range for 30 minutes, would have at least five minutes to reevaluate their investment decision.^[49]

The Exchange also proposes to prohibit market orders (other than by the company through its CDL Order) from the opening of a Direct Listing with a Capital Raise.^[50] The Exchange states that this would protect investors by assuring that investors only purchase shares at a price at or better than the price they affirmatively set, after having the opportunity to review the company's effective registration statement, including the sensitivity analysis describing how the company would use any additional proceeds raised.^[51] The Exchange states that, accordingly, an investor participating in a Direct Listing with a Capital Raise would make their initial investment decision prior to the launch of the offering by setting a price in their limit order above which they will not buy shares in the offering, but would also have the opportunity to reevaluate their initial investment decision during the price formation process of the Pre-Launch Period based on the Near Execution Price, and would have at least five minutes once the Near Execution Price has been set and before the offering may be priced by the Exchange to modify their order, if needed.^[52]

In addition, the Exchange states that to protect investors and assure that they are informed about the attributes of a Direct Listing with a Capital Raise, the Exchange proposes to impose specific requirements on Nasdaq members with respect to a Direct Listing with a Capital Raise.^[53] These rules would require members to provide to a customer, before that customer places an order to be executed in the Nasdaq Halt Cross, a notice describing the mechanics of pricing a security subject to a Direct Listing with a Capital Raise in the Nasdaq Halt Cross, including information regarding the location of the public website where the Exchange would disseminate the Current Reference Price.^[54]

The Exchange states that to assure that members have the necessary information to be provided to their customers, the Exchange proposes to distribute, at least one business day prior to the commencement of trading of a security listing in connection with a Direct Listing with a Capital Raise, an information circular to its members.^[55] This information circular would describe any special characteristics of the offering and the Exchange's rules that apply to the initial pricing through the mechanism outlined in Nasdaq Rule 4120(c)(9)(B) and Nasdaq Rule 4753 for the opening auction, including information about the notice that members must provide to their customers.^[56] This information circular would also describe other requirements that: (a) members use reasonable diligence in regard to the opening and maintenance of every account, to know (and retain) the essential facts concerning every customer, and concerning the authority of each person acting on behalf of such customer; (b) members in recommending transactions for a security subject to a Direct Listing with a Capital Raise have a reasonable basis to believe that (i) the recommendation is suitable for a customer given reasonable inquiry concerning the customer's investment objectives, financial situation, needs, and any other information known by such members, and (ii) the customer can evaluate the special characteristics, and is able to bear the financial risks, of an investment in such security; and (c) members cannot accept market orders to be executed in the Nasdaq Halt Cross.^[57] The Exchange states that these member requirements are intended to remind members of their obligations to “know their customers,” increase transparency of the pricing mechanisms of a Direct Listing with a Capital Raise, and help assure that investors have sufficient price discovery information.^[58]

The Exchange represents that in each instance of a Direct Listing with a Capital Raise, the Exchange's information circular would inform market participants that the auction could price up to 20% below the lowest price of the disclosed price range and would specify that price. The Exchange also represents that it would indicate in such circular whether or not there is an upside limit above which the Nasdaq Halt Cross could not proceed, based on the company's certification.^[59]

The Exchange states that to assure that the issuer has the ability, prior to the completion of the offering, to ( printed page 41784) provide any necessary additional disclosures that are dependent on the price of the offering, the Exchange proposes to introduce to the operation of the Nasdaq Halt Cross a brief Post-Pricing Period, in circumstances where the actual price calculated by the Nasdaq Halt Cross is outside of the disclosed price range.^[60] Specifically, in such circumstances, the Exchange would initiate a “Post-Pricing Period” following the calculation of the actual price.” ^[61] During the Post-Pricing Period, the issuer must confirm to the Exchange that no additional disclosures are required under the federal securities laws based on the actual price calculated by the Nasdaq Halt Cross. Further, during this period no additional orders for the security could be entered in the Nasdaq Halt Cross, and no existing orders could be modified.^[62] The Exchange states that the security would be released for trading immediately following the Post-Pricing Period.^[63] However, if the company cannot provide the required confirmation, then the Exchange would postpone and reschedule the offering.^[64]

The Exchange also proposes to clarify several provisions of existing rules by restating the provisions of Nasdaq Rule 4120(c)(8)(A) and (c)(9)(A) in a clear and direct manner in proposed Nasdaq Rule 4120(c)(9)(B) without substantively changing the requirements.^[65] Specifically, the Exchange proposes to clarify the mechanics of the Nasdaq Halt Cross by specifying that the Exchange will initiate a 10-minute Display Only Period only after the CDL Order has been entered and that the Exchange shall select price bands for purposes of applying the price validation test in the Nasdaq Halt Cross in connection with a Direct Listing with a Capital Raise.^[66] The Exchange proposes to clarify that the “actual price,” as the term is used in the rule, is the Current Reference Price at the time the system applies the price validation test.^[67]

Nasdaq Listing Rule IM-5315-2 provides that in determining whether a company listing in connection with a Direct Listing with a Capital Raise satisfies the Market Value of Unrestricted Publicly Held Shares ^[68] for initial listing on the Nasdaq Global Select Market, the Exchange will deem such company to have met the applicable requirement ^[69] if the amount of the company's Unrestricted Publicly Held Shares before the offering, along with the market value of the shares to be sold by the company in the Exchange's opening auction in the Direct Listing with a Capital Raise, is at least $110 million (or $100 million, if the company has stockholders' equity of at least $110 million). For this purpose, under current rules, the Market Value of Unrestricted Publicly Held Shares will be calculated using a price per share equal to the lowest price of the disclosed price range.^[70] The Exchange states that because the Exchange proposes to allow the opening auction to price up to 20% below the lowest price of the disclosed price range, the Exchange proposes to make a conforming change to Nasdaq Listing Rule IM-5315-2 to provide that the price used to determine such company's compliance with the required Market Value of Unrestricted Publicly Held Shares would be the price per share equal to the price that is 20% below the lowest price of the disclosed price range.^[71] The Exchange further states that this is the minimum price at which the company could sell its shares in the opening transaction for a Direct Listing with a Capital Raise and thus assures that the company will satisfy the listing requirements at any price at which the opening auction successfully executes.^[72]

The Exchange states that any company listing in connection with a Direct Listing with a Capital Raise would continue to be subject to, and required to meet, all other applicable initial listing requirements, including the requirements to have the applicable number of shareholders and at least 1,250,000 Unrestricted Publicly Held Shares outstanding at the time of initial listing, and the requirement to have a price per share of at least $4.00 at the time of initial listing.^[73] The Exchange also proposes to amend Nasdaq Listing Rule IM-5315-2 to specify that a company offering securities for sale in connection with a Direct Listing with a Capital Raise must register securities by specifying the quantity of shares registered, as permitted by Securities Act Rule 457(a), and that securities qualified for listing under Nasdaq Listing Rule IM-5315-2 must satisfy the additional requirements of Nasdaq Rule 4120(c)(9)(B).^[74]

Finally, the Exchange has proposed to amend Nasdaq Rules 4753(a)(3)(A) and 4753(b)(2) to conform the requirements for disseminating information and establishing the opening price through the Nasdaq Halt Cross in a Direct Listing with a Capital Raise to the proposed amendment to allow the opening auction to price as much as 20% below the lowest price of the disclosed price range.^[75] Specifically, the Exchange proposes changes to Nasdaq Rules 4753(a)(3)(A) and 4753(b)(2) to make adjustments to the calculation of the Current Reference Price, which is disseminated in the Nasdaq Order Imbalance Indicator,^[76] and to the calculation of the price at which the Nasdaq Halt Cross will execute, for a Direct Listing with a Capital Raise. Under these rules currently, where there are multiple prices that would satisfy the conditions for determining the price, the fourth tie-breaker for a Direct Listing with a Capital Raise is the price that is closest to the lowest price of the disclosed price range. The Exchange states that, to conform these rules to the proposed modification of the price range within which the opening auction would proceed, the Exchange proposes to modify the fourth tie-breaker for a Direct Listing with a Capital Raise to use the price closest to the price that is 20% below the lowest price of the disclosed price range.^[77]

III. Proceedings To Determine Whether To Approve or Disapprove SR-NASDAQ-2022-027 and Grounds for Disapproval Under Consideration

The Commission is instituting proceedings pursuant to Section 19(b)(2)(B) of the Exchange Act to determine whether the proposal should be approved or disapproved.^[78] Institution of such proceedings is appropriate at this time in view of the legal and policy issues raised by the proposed rule change, as modified by Amendment No. 1, as discussed below. Institution of disapproval proceedings does not indicate that the Commission ( printed page 41785) has reached any conclusions with respect to any of the issues involved.

Pursuant to Section 19(b)(2)(B) of the Exchange Act, the Commission is providing notice of the grounds for disapproval under consideration. The Commission is instituting proceedings to allow for additional analysis and input concerning the proposed rule change's consistency with the Exchange Act and, in particular, with Section 6(b)(5) ^[79] of the Exchange Act, which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest; and are not designed to permit unfair discrimination between customers, issuers, brokers, or dealers.^[80]

The Commission has consistently recognized the importance of national securities exchange listing standards. Among other things, such listing standards help ensure that exchange-listed companies will have sufficient public float, investor base, and trading interest to provide the depth and liquidity necessary to promote fair and orderly markets.^[81]

The Exchange is proposing to modify the rules concerning the opening transaction on the first day of trading for a Direct Listing with a Capital Raise so that the opening transaction is not constrained by the Pricing Range Limitation, which limits the price of the opening transaction to the price range disclosed in the issuer's effective registration statement. Instead, the proposal would allow the opening transaction to proceed, provided other requirements are satisfied, at or above the price that is as low as 20% below the lowest price in the disclosed price range; or at a price above the highest price of such price range.

Specifically, under the proposal, to execute at a price outside of the disclosed price range, the company has to certify to Nasdaq and publicly disclose that the company does not expect that such price would materially change the company's previous disclosure in its effective registration statement and that the company's registration statement contains a sensitivity analysis explaining how the company's plans would change if the actual proceeds from the offering were less than or exceeded the amount assumed in such price range.

In support of its proposal, the Exchange states that allowing an opening transaction to proceed at prices not within the disclosed price range is consistent with the protection of investors because it “is similar to the pricing of an IPO where an issuer is permitted to price outside of the price range disclosed by the issuer in its effective registration statement.” ^[82] Nasdaq also states that various aspects of its proposal are designed to protect investors, including, among others, those intended to increase the transparency and information available to investors on the price discovery process during the opening auction, provide investors an opportunity to modify their orders after notice that the Nasdaq Halt Cross nears execution, and ensure that the offering price does not deviate substantially from the Near Execution Price.^[83] Nasdaq also states that allowing Direct Listings with a Capital Raise to price up to 20% below the lowest price and at a price above the highest price of the disclosed price range would be consistent with Chair Gensler's recent call to treat “like cases alike.” ^[84]

We have concerns about whether the Exchange has met its burden to demonstrate that its proposal to expand the conditions under which Direct Listings with a Capital Raise are permitted ^[85] is consistent with the protection of investors and the public interest, and other relevant provisions under Section 6(b)(5) and the Exchange Act and the rules and regulations thereunder. Under existing Nasdaq rules that permit Direct Listings with a Capital Raise, such offerings are required to price within the price range disclosed in the issuer's effective registration statement. When these rules were approved in 2021, the Commission considered that required feature and also stated that the related registration statements would include, among other disclosures, a bona fide price range.^[86] The Exchange has indicated that it believes that some companies may be reluctant to use the existing rules for a Direct Listing with a Capital Raise because of concerns about the Pricing Range Limitation.^[87] Permitting Direct Listings with a Capital Raise to price outside of the disclosed price range could increase the frequency of such offerings and may raise investor protection concerns.

While the Exchange has indicated that the proposal is intended to treat like cases alike with respect to pricing flexibility, it has not addressed certain differences between listings that would occur under this proposed rule change and firm commitment underwritten initial public offerings on the Exchange that may affect investor protection, including the lack of a named underwriter,^[88] any challenges to ( printed page 41786) bringing claims under Section 11 of the Securities Act due to the potential assertion of tracing defenses,^[89] and how those differences could affect the consistency of the proposal with Section 6(b)(5) of the Exchange Act.^[90] It is not clear from the proposal what consideration, if any, the Exchange has given to addressing these issues, or why it believes the proposal is consistent with investor protection, as required by Section 6(b)(5) of the Exchange Act, in light of the pricing flexibility proposed by the Exchange.

In a firm commitment underwritten initial public offering, issuers often adjust the price range disclosed in their registration statements prior to effectiveness in light of pricing feedback received from market analysts and potential investors. These revisions to the disclosed price range may provide valuable information to potential investors as to the issuer's valuation. If, under the proposal, the opening auction can proceed at any price above the disclosed price range, and up to 20% below the low end of the disclosed price range, it is not clear whether issuers pursuing Direct Listings with a Capital Raise would make similar revisions to the disclosed price range based on investor or market analyst sentiment, and whether the absence of any such corrective price signaling would detrimentally affect investors.

In the absence of a named underwriter in a direct listing where the opening price is executed outside of the disclosed price range, there may not be an adequate assurance that a party who may meet the definition of underwriter will review the information disclosed in the registration statement and take the steps necessary to claim a “due diligence” defense. To assert such a defense, a party must establish that, after reasonable investigation, the party had reasonable ground to believe and did believe, at the time the registration statement became effective, that the statements therein were true and that there was no omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading.^[91] Underwriters play a critical role in the securities offering process as gatekeepers to the public markets.^[92]

The Exchange's proposed expansion of its rules permitting Direct Listings with a Capital Raise could potentially result in increased regulatory arbitrage, if and to the extent that issuers and intermediaries, including financial advisors, are not subject to equivalent liability standards in the direct listings context as they would be in traditional firm commitment underwritten initial public offerings. Any ability of issuers or intermediaries to minimize potential liability through choosing a direct listing over other methods to become listed on the Exchange could be inconsistent with Section 6(b)(5) of the Exchange Act.

Although financial advisors may, depending on facts and circumstances, be held liable as statutory underwriters, absent greater clarity as to a financial advisor's status as a statutory underwriter in listings that would occur under this proposed rule change, investors would have no way to know whether financial advisors named as assisting with the direct listing would face Section 11 liability for the disclosure in the registration statement. Investors also may assume that financial advisors would incur equivalent liability, without any assurance that such is the case. Some legal observers have raised concerns that, without clarity on whether financial advisors would be held liable as statutory underwriters, any due diligence may not be as robust as that performed by named underwriters in traditional initial public offerings.^[93] Less robust due diligence could result in reduced disclosure quality and lead investors to improperly value the securities offered under the proposed rules. As the proposed rules would permit direct listings to be conducted at prices outside of the disclosed price range, would investors be able to make reasonable pricing decisions without greater clarity as to whether financial advisors would face liability as statutory underwriters? Without increased clarity on this point, would the proposed rule change be inconsistent with investor protection and the public interest?

There are a number of additional questions relating to investor protection and Securities Act liability that merit examination in connection with our consideration of whether the Exchange has met its burden to demonstrate its proposal is consistent with Section 6(b)(5) of the Exchange Act. It is not clear what role a financial advisor would perform, in relation to price range disclosures, in a direct listing where the offering can price outside of the disclosed price range. Would additional transparency into the functions performed by financial ( printed page 41787) advisors in a direct listing where the offering can price outside of the disclosed price range be necessary for investors to determine how much reliance to place on issuer disclosures?

Would any tracing concerns be exacerbated, thus raising investor protection concerns, in the context of direct listings where the offering can price outside of the disclosed price range? ^[94] What are the implications if the expansion of Direct Listings with a Capital Raise, as proposed by the Exchange, resulted in fewer investor protections in a direct listing? If under the proposal to modify the Pricing Range Limitation there is continued uncertainty as to whether a financial advisor would be liable as a statutory underwriter, is the liability of any other gatekeepers in the offering sufficient to protect investors?

The Commission also has concerns about the potential effect of the proposed rules on the usefulness of price range disclosure provided to investors in Securities Act registration statements.^[95] Given the possibility under the proposed rules that the offering might price far outside the disclosed price range, would issuers be less likely to update their disclosed price ranges, compared to firm commitment underwritten initial public offerings? ^[96] Similarly, would disclosed price ranges for direct listings be less reliable as indicators of management's perceived valuation of the issuer? How would the ability to ultimately conduct the auction up to 20% below or anywhere above the disclosed price range affect issuer decisions as to what price range to disclose in the registration statement? Would this impact the usefulness of price range disclosure to potential investors or market analysts? If so, this raises concerns about the consistency of the proposal with investor protection and the public interest under Section 6(b)(5) of the Exchange Act.

Finally, it is not clear whether the proposed changes would result in the Exchange using the minimum price at which the opening auction could occur as the per share price for purposes of evaluating whether the issuer satisfies the applicable market value of publicly held shares requirement and other applicable bid price and market capitalization requirements. The Exchange proposes to amend Nasdaq Listing Rule IM-5315-2 to provide that the Exchange would calculate the market value of unrestricted publicly held shares, as well as applicable bid price and market capitalization requirements, using a price per share equal to the price that is 20% below the lowest price of the price range disclosed by the issuer in its effective registration statement.^[97] The Exchange also proposes to specify in Nasdaq Rule 4120(c)(9)(B) that “[t]he 20% threshold below the Price Range will be calculated based on the maximum offering price set forth in the registration fee table, consistent with the Instruction to paragraph (a) of Securities Act Rule 430A.” ^[98] Further, the Exchange states its belief that the proposed change to Nasdaq Listing Rule IM-5315-2 for calculating the market value of unrestricted publicly held shares, bid price, and market capitalization conforms these rules to the modifications of the Pricing Range Limitation and “is the minimum price at which the company could sell its shares in the Direct Listing with a Capital Raise transaction and so assure that the company will satisfy these requirements at any price at which the auction successfully executes.” ^[99] Is further clarification needed as to the precise manner of computing the 20% threshold under proposed Nasdaq Rule 4120(c)(9)(B) and whether that computation would lead to the same minimum price contemplated by the proposed revisions to Nasdaq Listing Rule IM-5315-2? Similarly, there are questions about whether the proposed change to the fourth-tie breaker in a Direct Listing with a Capital Raise that proposes to use “the price that is 20% below the lowest price of the price range disclosed by the issuer in its effective statement” to “conform these rules to the modifications to the Pricing Range Limitation” ^[100] would also result in using the minimum price at which the opening auction could occur given the proposed changes described above in Nasdaq Rule 4120(c)(9)(B) for calculating the price that is 20% below the lowest price of the Price Range.

Under the Commission's Rules of Practice, the “burden to demonstrate that a proposed rule change is consistent with the Exchange Act and the rules and regulations issued thereunder . . . is on the self-regulatory organization [`SRO'] that proposed the rule change.” ^[101] The description of a proposed rule change, its purpose and operation, its effect, and a legal analysis of its consistency with applicable requirements must all be sufficiently detailed and specific to support an affirmative Commission finding,^[102] and any failure of an SRO to provide this information may result in the Commission not having a sufficient basis to make an affirmative finding that a proposed rule change is consistent with the Exchange Act and the applicable rules and regulations.^[103]

For these reasons, the Commission believes it is appropriate to institute proceedings pursuant to Section 19(b)(2)(B) of the Exchange Act ^[104] to determine whether the proposal should be approved or disapproved.

IV. Commission's Solicitation of Comments

The Commission requests that interested persons provide written submissions of their views, data, and arguments with respect to the issues identified above, as well as any other concerns they may have with the proposal. In particular, the Commission invites the written view of interested persons concerning whether the proposal is consistent with Section 6(b)(5) or any other provision of the Exchange Act, or the rules and regulations thereunder. Although there do not appear to be any issues relevant to approval or disapproval that would be facilitated by an oral presentation of views, data, and arguments, the Commission will consider, pursuant to Rule 19b-4, any request for an opportunity to make an oral presentation.^[105]

Interested persons are invited to submit written data, views, and arguments regarding whether the proposal should be approved or disapproved by August 3, 2022. Any person who wishes to file a rebuttal to any other person's submission must file that rebuttal by August 17, 2022.

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's internet comment form (http://www.sec.gov/​rules/​sro.shtml); or
• Send an email torule-comments@sec.gov. Please include File Number SR-NASDAQ-2022-027 on the subject line.

Paper Comments

• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2022-027. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's internet website ( http://www.sec.gov/​rules/​sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NASDAQ-2022-027 and should be submitted on or before August 3, 2022. Rebuttal comments should be submitted by August 17, 2022.