There are countless choices to be made from the moment you decide to undertake an initial public offering until your shares begin to trade for the very first time. Such as which attorneys, auditors or bankers to engage and whether to hire additional in-house expertise or retain outside advisors, like investor relations, tax or compensation consultants, and so on. In turn, each of these choices offers you any number additional options. There is, however, one choice to be made that doesn’t leave you with very many options at all: on which exchange will you list your securities, NYSE or Nasdaq?*
The BZX Exchange
Well, as of last week you officially have one more option. BATS Global Markets, the third largest equities market operator in the United States, announced that its BZX Exchange will begin accepting primary, as well as transfer, listings.
The BZX is comprised of two tiers, Tier I and Tier II, with listing and corporate governance standards that are comparable to those of the NYSE and Nasdaq. Although there is one notable difference, the BZX will use a Dutch auction process for new issuances of BZX-listed securities.
Dutch Auctions
A Dutch auction is a variation on the traditional offering process, whereby a company offers to sell a fixed number of securities within an estimated price range. Investors then bid for the number of shares they would like to purchase at the price per share they are willing to pay. When the bidding ends the company fixes the price per share at the lowest bid that clears the offering and the winning bidders purchase the shares they bid for at the clearing price.
Google’s IPO is an often-cited example of the Dutch auction process in action. By way of example, let’s assume Google offered 1,000 shares within an estimated price range of $10 and $20 per share, and that five investors participated in the auction making the following bids:
Investor A: 400 shares at $21 per share.
Investor B: 100 shares at $9 per share.
Investor C: 250 shares at $15 per share.
Investor D: 500 shares at $17 per share.
When the bidding ends the price will be fixed at $15 per share and Investor A will purchase 400 shares at $15 per share, Investor D will purchase 500 shares at $15 per share, and Investor C will purchase 100 shares at $15 per share (for a total of 1,000 shares sold). Investor B’s is a loosing bid.
Corporate Governance and Listing Standards
The BZX’s corporate governance standards are largely the same as those of the NYSE and Nasdaq, and include the need to maintain:
- a board of directors comprised of a majority of independent directors;
- a chartered audit committee comprised of at least three independent directors who are able to read and understand fundamental financial statements, have not participated in the preparation of the company’s financial statements at any time during the preceding three year period and one of whom qualifies as financially sophisticated;
- means by which the compensation of executive officers is determined, or recommended to the board for determination, by either a chartered compensation committee comprised entirely of independent directors, or a majority of the board’s independent directors;
- means by which director nominees are selected, or recommended to the board for selection, by either a chartered nominations committee comprised entirely of independent directors or a majority of the board’s independent directors; and
- a code of conduct and ethics.
The initial listing standards are also comparable to the NYSE and Nasdaq markets:
So, the only question that remains is who will be the first to test the BZX IPO?
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* Assuming, of course, you are only considering listing in the United States.
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