Decades ago, publicly registered offerings were common for companies looking to raise capital through the sale of securities. With increased regulatory requirements, “going public” became an extremely costly and legally burdensome exercise. If a company was conducting an initial public offering, or IPO, it typically meant that it had grown to a significant size so as to be able to bear the costs and requirements. Recent changes to the securities laws are seeking, however, to provide a more diverse set of issuers with access again to the public markets as a capital tool.
When going public, most companies seek to list their securities on a securities exchange to provide liquidity, thereby enhancing the value of the securities, as the company grows.
Let’s take a quick look at the two dominant exchanges in the U.S. (we’ll take a look at other alternatives in future posts).
Nasdaq and NYSE
The Nasdaq Stock Market, founded in 1971 by the National Association of Security Dealers as the National Association of Securities Dealers Automated Quotations, and the New York Stock Exchange (NYSE), founded in 1792 and currently owned by Intercontinental Exchange, are two of the most prestigious markets on which companies may list and the two largest stock exchanges in the world. The NYSE lists about 2,400 companies, with market capitalization exceeding $30 trillion, and Nasdaq has about 3,900 listings, with market capitalization of about $10 trillion. Coincidentally, they both have headquarters in New York, separated by about a five-minute walk up Broadway. However they differ in ways that may impact your choice for listing.
Although not a hard-and-fast rule by any stretch, “brick and mortar” companies have historically chosen to list on the NYSE, while technology-forward innovators have favored Nasdaq. And those choices may partially reflect on one of the most significant differences between the two exchanges: their trading structures.
Trading on Nasdaq is entirely computer-based, meaning that traders process all transactions electronically, while the NYSE is an auction-style, equities trading platform through which transactions take place between individuals on the trading floor. NYSE relies on “designated market makers” to maintain orderly trading on site, and they facilitate price discovery both manually and electronically upon market opens, market closes, and periods of trading instability.
These exchanges only deal in registered securities (we’ll discuss publicly offered alternatives to registration in future posts). To register, you must first file a registration statement under the Securities Act of 1933 (Form S-1 or Form S-11) with the U.S. Securities and Exchange Commission to register the securities you intend to offer. You will also register the company itself as a reporting company under the Securities Exchange Act of 1934, and the company will have to comply with reporting requirements to maintain transparency. Those requirements will increase as your company grows in size.
Both the Nasdaq and NYSE are broken down into markets or tiers for which issuers can qualify on the basis of meeting one or more sets of standards based on financial performance, liquidity, float, market value or shareholders, amongst others.
Nasdaq has three market tiers:
- Global Select Market: This is Nasdaq’s large-cap tier, comprising 1,200 qualifying stocks. Companies in this tier must have, for example, a minimum of 1,250,000 shares publicly held, and those shares must have an IPO value of at least $45,000,000, and a value of $110,000,000 for “seasoned companies” ($100,000,000 if total stockholder equity is $110,000,000). Other requirements do apply.
- Global Market: Nasdaq’s Global Market, its mid-cap tier, generally lists companies with global leadership and international reach. There are 1,450 stocks listed here. Companies here have the most varied financial and liquidity requirements based on whether they choose to qualify under an Income, Equity, Market Value or Total Assets/Total Revenue Standard. They must also have 3 or 4 market makers depending on what Standard the issue qualifies.
- Capital Market: Like the name states, Nasdaq’s Capital Market focuses on raising capital for the companies listed. There are 1,200 stocks listed here. This is where small-cap issuers are to be found. These companies, amongst other requirements, must have 1,000,000 publicly held shares with a market value of at least $15,000,000, unless the company has $750,000 of net income in the last year or two of the last three years and must have 3 market makers.
The NYSE is generally broken down into the (1) NYSE and (2) the NYSE American Markets. The NYSE American, a fully electronic exchange, is NYSE’s equivalent to Nasdaq’s Capital Market, specifically designated for small to mid-cap companies.
Operating companies seeking to list on NYSE must have achieved aggregate revenue for last three fiscal years of greater than $10,000,000 (with each of two prior years having $2,000,000 or more and greater than $0 in each of prior three years) OR have $200,000,000 in global market capitalization. REITs are required to have $60,000,000 in shareholder equity. Applicants must also meet all of a variety of liquidity/distribution standards which include, but are not limited to 1,100,000 publicly held shares and a minimum $4.00 share price.
Companies seeking to list on NYSE American must meet one of five financial standards, which look at some combination of revenue, market cap, market value of shares, stockholder equity, minimum share price or operating history. Applicants must also meet one of three different liquidity/distribution standards that factor number of shareholders, public float and/or trade volume. Both standards have requirements that are significantly less stringent than their corollaries at NYSE.
Beyond these eligibility requirements, each exchange will require certain information to be delivered as part of the process so they can insure the infrastructure is in place to facilitate trading and meet governance standards.
Securing Your Company’s Path
Beyond these considerations, there are a plethora of other considerations beyond these in selecting whether or not to list and what exchange. Legal guidance on answering these questions and for complying with the multitude of associated regulatory frameworks is essential for securing your company’s future success. Contact us for advice on positioning your business to prepare for listing, and direction regarding the exchange that may be best for your shares.