Direct listing guide: Part 1 (Deciding to list)
Part 1 summary
A direct listing is a fast and streamlined way to get listed on the NZX Main Board. It does not involve raising new money from the public.
A direct listing is becoming a common way to get listed. There were 4 direct listings on the NZX Main Board in the last 12 months.
A listing provides access to public capital markets and liquidity for existing shareholders. It may be an attractive option for companies that find it difficult to find private exit opportunities.
Listing criteria on the NZX include initial market capitalisation ($10 million), shareholder spread (at least 20% of the shares being held by 100 or more non-affiliated holders) and strict corporate governance and reporting requirements.
There may be more suitable alternatives to listing on the NZX - ASX, Syndex, Catalist and other private market options.
A direct listing is where a company becomes publicly listed and its shares are tradable on the stock exchange. Crucially, the company is listed without making a public offer of securities, which is the norm with traditional initial public offerings (IPOs). Also called a “compliance listing”, the purpose of a direct listing is to gain status as a listed issuer and for a company to prove itself to the public market. The listing provides liquidity to the founders, employees and other early shareholders, and also helps the listed company to access the public capital markets for new capital in the future.
A direct listing is becoming a common way for often widely held private companies to list on the NZX Main Board. This is mainly due to its faster and streamlined process, and the perception that the listing is less affected by the public market conditions. In the last twelve months, NZX has seen four direct listings of Radius Care, NZ Automotive Investments, Third Age Health and Greenfern Industries.
I have attempted to set out below all key processes involved in a direct listing on the NZX Main Board. Part 1 (this update) talks about the decision to list. Part 2 will talk about getting a team together, and the due diligence and planning stage. The final update, Part 3, will talk about the application process for listing, and what happens on and after listing. They should run in chronological order of a listing process.
Deciding to list
The first and most critical decision to make is the decision to list. A direct listing is most suitable for companies who may want to access the public capital market in the future for growth or acquisitions. (There is a 3 month wait period after listing before you are allowed to raise money from the public). The public capital market is in theory much deeper than the private market, which is generally restricted to wholesale investors.
They may also want to provide liquidity for founders, employees or early shareholders through the public market, who may have found it harder to sell their shares in a private company (full or partial). These shareholders have the option to sell down slowly over time if they still want to be part of the business and also diversify their wealth. As with liquidity, there is also better price discovery because the shares are traded continuously and transparently. For example, mature businesses that have strong cash flow but have low-to-medium growth may not be an attractive target for private M&A transactions. Direct listing can preferable for those companies than accepting a low valuation on a private exit scenario. These businesses may want to list on the NZX, prove their strong cash flow (consistent dividend yield) and sell at a price that reflects their strong yield.
For others, a direct listing will not make sense. They may be in a fast-growing industry and have strong private equity or trade buyer interests. So there could be readily available alternatives (including attractive exit opportunities) to a direct listing option. The shareholders will be hesitant to commit to the cost of going through a listing and of ongoing compliance costs afterwards. Also, if the company does not have a wide shareholder base, the illiquidity of shares may be an issue. This could result in wild swings in share prices after listing as the lack of sellers (and maybe buyers) can affect price discovery.
Another key factor when deciding to list is whether the company can practically meet the NZX listing requirements and the ongoing obligations of listed issuers. These include:
Market capitalisation: On listing, the company must have an initial market capitalisation exceeding NZ$10 million. While this is the minimum requirement, realistically, a market cap of NZ$50 million would be reasonable to justify the listing and also to attract institutional investors’ interest. Unlike in an IPO where the investment bank will engage the market for an acceptable valuation (prior to listing), the initial market capitalisation for directly listed companies is self-determined and then tested (or “discovered”) on listing by the market of sellers and buyers. More on this below.
Spread requirement: At least 20% of the shares in the company must be held by at least 100 people that are “Non-Affiliated Holders” – which are shareholders other than those who hold 10% or more of the shares or have the power to appoint one or more directors. The spread requirement ensures that the shares have a level of liquidity and is not thinly traded from day one. However, it can also be a major issue for companies that are closely held and considering a listing. How does a company, say, with 5 shareholders increase its shareholder base to 100 or more? To solve this issue, companies often carry out look pre-listing capital raises to wholesale investors, their employees and other close business associates to increase the spread prior to listing. Another way to meet the spread requirement is to seek NZX’s confirmation that the company will have an appropriate spread to ensure a sufficiently liquid market for the shares being listed. This is like a waiver to the technical minimum spread requirement. This confirmation is not easily given, and you must be able to show a credible liquidity plan, for example, of future sell-downs to achieve the spread within 12 months of listing.
Governance: Among other governance requirements, the company must have at least two independent directors, and have subcommittees as mandated under the NZX Listing Rules and NZX Corporate Governance Code. These are not necessarily deal-breakers to a listing. However, the effort and time needed to put in place the right corporate governance structure prior to listing cannot be underestimated.
Financials/audit requirements: As part of a listing, the company needs to share its audited historical financial statements. Most private companies are not likely to have had their financial statements audited, so some planning will need to go into place here. However, like the governance requirements, the preparation of financial statements are not deal-breakers and can generally be worked through as part of the listing process.
Depending on what exactly a company needs, there may also be alternatives to direct listing that may make better sense. These include an IPO-path, private exit/capital raise options, continuing the status quo, listing on alternative stock exchanges – such as ASX, Syndex and Catalist. Syndex and Catalist are marketed particularly for small to medium businesses and structured so that as the company grows it can transition to the NZX Main Board. Businesses may want to engage an investment bank, the NZX Relations team, and the representatives of the alternative exchanges, to think through the listing options.
So if you decide to list, what’s next? More to come in Part 2 (getting a team together, and the due diligence and planning).
Josh Woo is an NZX-approved solicitor for listing. If you have any questions or comments regarding this article or would like to discuss capital raising or exit options, please get in touch with Josh (e: josh.woo@jwlegal.co.nz | p: +642102938699).
