Some Thoughts on Spotify's Direct Listing

Stockholm-based music streaming service Spotify has confidentially filed a registration statement with the US Securities and Exchange Commission ("SEC") to undertake a direct listing of its shares on the New York Stock Exchange ("NYSE").  This is very intriguing to me, as when I was an investment banker I worked on traditional firm-commitment initial public offerings.  I never worked on a direct listing of shares (probably because they are very rare and is there was little to no money to be made by the investment bankers. 

Spotify is eschewing the traditional IPO approach where the company typically raises money by hiring an investment banking syndicate to sell shares in an IPO.  In traditional IPOs, the investment bankers usually receive a fee of 7% of the price of the shares that are sold in the IPO.  As a direct listing, Spotify is not raising capital - it is simply registering its securities that will trade on the NYSE.  The trade-off here is that by not raising capital in an IPO, Spotify won't have to pay the standard 7% underwriter fee (note that this 7% commission is typically lower in very large IPOs).

To read more, please click "Read More" to the right below.

So why do a direct listing as opposed to holding a traditional IPO?​

In a traditional IPO:

• The company raises capital to be used for operations or acquisitions.
• Existing shareholders experience dilution in their percentage ownership of the company.
• The company pays the investment bankers 7% commission based on the IPO price.
• The investment banks organize a road show for the company to meet with institutional investors, which helps establish the IPO price.
• Institutional investors buy the bulk of the IPO, and the hope is that many of these institutional investors will hold the company's stock for the long haul, as opposed to quickly flipping the shares.
• Immediately after the IPO, the managing underwriters will stabilize the trading market, using what is known as an over-allotment option, or Green Shoe.
• After a period of time, the investment banks involved in the IPO will publish research on the company and its stock.  Research is important, as research coverage is used by institutional investors to evaluate whether to buy, hold or sell stock.
• Insiders are "locked-up" for a period of 180 days after the IPO in order to stabilize the market.

In a direct listing:

• The company does not raise capital.
• There is no equity dilution.
• Spotify has retained a few investment banks to advise it on the direct listing process.  This might include price-seeking activities such as meeting with institutional investors to obtain their view on pricing.
• No traditional road show, but see above.
• No post-IPO stabilizing mechanism.
• The investment banks that have been retained to advise Spotify on the direct listing process may have agreed to provide post-listing research coverage.
• No IPO lock-up period.

The concern about a direct listing is that the pricing after listing will be very volatile, as the usual IPO mechanisms don't exist.

I will be following the Spotify direct listing closely, and will provide updates.

Links to articles:
Exclusive: Spotify files for its IPO
https://www.axios.com/exclusive-spotify-files-for-its-ipo-2522109160.html 

Spotify Files to Go Public on New York Stock Exchange
 https://www.bloomberg.com/news/articles/2018-01-03/spotify-is-said-to-file-to-go-public-on-new-york-stock-exchange 

How Will Spotify's Direct Listing Work?
http://fortune.com/2017/07/31/spotify-ipo-direct-listing-2/ 

SEC Is Studying Spotify's Plan to Bypass IPO in NYSE Listing
https://www.bloomberg.com/news/articles/2017-08-21/sec-is-said-to-study-spotify-plan-to-bypass-ipo-in-nyse-listing 

 
© 2018 Allen J. Latta. All rights reserved.