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UPDATE 2-SEC rejects NYSE's proposal on U.S. direct listings

By Joshua Franklin

(Updates with detail on how NYSE proposal would work)

By Joshua Franklin

Dec 6 (Reuters) - The U.S. Securities and Exchange Commission (SEC) has rejected a proposal by the New York Stock Exchange for a rule change that would allow U.S direct listings to raise new capital like in an initial public offering (IPO), NYSE said on Friday.

The rejection is a setback for NYSE's attempts to marry some of the benefits of direct listings with those of IPOs. The bourse operator said that it would continue to discuss the matter with the SEC, however.

"We remain committed to evolving the direct listing product. This sort of action is not unusual in the filing process, and we will continue to work with the SEC on this initiative," an NYSE spokesman said in a statement.

NYSE said last week it had filed with the SEC to allow companies going public through a direct listing to also be able to raise capital by selling new shares.

Venture capital investors have generally been supportive of direct listings because they do not require them to commit to lock-up restrictions on the subsequent sale of stock. The companies going public also do not have to pay hefty investment banking fees, as is often the case with IPOs.

On the downside, the companies going public do not have the support of the investment banks and investors do not have the security of the restrictions on sales.

Under NYSE's proposed model, the shares sold during a direct listing are acquired directly at the moment of the company's stock market debut. In an IPO, the company going public sells the shares to investment banks acting as underwriters the night before, and the underwriters sell the shares to investors the following day.

It was not immediately clear what the SEC's objections to NYSE's proposal were. An SEC spokeswoman did not immediately respond to a request for comment.

In 2018, music streaming business Spotify Technology SA pioneered direct listing followed in 2019 by communication platform Slack Technologies Inc. Both had successful market debuts but their share prices have since struggled. (Reporting by Joshua Franklin in New York Editing by Chizu Nomiyama and Sonya Hepinstall)