Nasdaq quietly changed its rules in a move that pits it against rival NYSE in the war to lure top tech listings

Nasdaq filed a rule change with the Securities and Exchange Commission in February that will allow it to compete with rival NYSE for high profile direct listings.
The exchange said it has already conducted a handful of direct listings for small companies, but made the filing to offer additional clarity on the process.
The move, which comes a year after NYSE made a similar filing, indicates that a number of splashy tech companies looking to go public in 2019 could be considering a direct listing.

Nasdaq quietly tweaked a rule last month that will allow it to compete head-on with rival NYSE for direct listings of splashy tech companies.

While the New York-based exchange group has executed a handful of direct listing since 2014, it sought a rule change with the Securities and Exchange Commission to provide more clarity around the process. The filing also served another purpose, according to Jay Heller, Nasdaq’s head of capital markets and IPO execution: To show the Street Nasdaq is open for business when it comes to direct listings.

The move comes as unicorn startups like AirBnB and Slack are rumored to be considering a direct listing. Streaming music company Spotify went public via a direct listing last year on the New York Stock Exchange, and Slack also selected the exchange for its public offering.

Nasdaq’s filing, which is similar to NYSE’s last year, ensures the exchange is ready for the next company that might chose to take the non-traditional listing route, said Jay Ritter, a finance professor at the University of Florida.

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"The exchanges want to clarify the rules so that there is no ambiguity that might deter a company from listing on that exchange," Ritter told Business Insider. "It’s unlikely that Spotify is going to be a one-off direct listing. Some other prominent companies are very likely to use the procedure as well."

Heller said the rule change also served as a way to let the Street know that Nasdaq can indeed perform direct listings on its exchange.

"It was all about really making sure that people were thoroughly aware," Heller said.

Under the new rule change, companies looking to do a direct listing are that it lists on Nasdaq’s main market, has market valuation of at least $250 million, and has filed a registration statement and has bank acting as a financial advisor. The requirements are similar to that of NYSE, which filed its rule change to offer direct listing in February 2018.

In a direct listing, the company sells its shares directly to the market instead of having banks underwrite the initial shares. The process is risky, as the stock could be more susceptible to volatile price swings without the backing of the banks, which is why firms typically opt for a traditional IPO.

However, for well-funded companies that already have strong brand recognition, a direct listing allows them to save on commission fees and potentially avoid the lock-up period on selling stocks for current shareholders that typically comes with normal IPOs.

"A direct listing is not for everybody," Heller said. "But there are situations where companies have really exceeded and performed extremely well as being a private company but still need that platform or want a platform out there to provide potential liquidity and allow potential shareholders to come in over time if they choose to."

The idea of a large company direct listing first came into vogue last year when Spotify chose to take the non-traditional route.

Spotify’s listing succeeded, but bankers insisted the music-streaming platform’s listing wouldn’t change the overall IPO industry.

The move left some to question whether the industry would see a trend of direct listings among the large unicorns looking to move to the public markets in 2019. Generally, companies looking to do a direct listing need a high level of brand recognition to sell their shares directly into the market without the assistance of a bank.

"With certain companies that were in the limelight, I guess, and had the spotlight on them, that probably created a little bit more of people asking questions around this type of listing," Heller said. "Will we see a whole influx of direct listings? I guess time will tell."

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