When Spotify lists shares on the New York Stock Exchange next week, there won’t be much fanfare in the official sense – no raising new capital or traditional Wall Street underwriters, and definitely no roadshow (aside from the previous live-streamed “Investor Day” that took place on March 15).
Instead, the Swedish music streaming giant, one of the most anticipated tech IPOs of 2018, will take an unconventional approach: the fabled direct listing. Under a direct listing, no new shares are offered. Instead, existing shareholders – including employees – are able to sell their shares.
In a filing with the U.S. Securities and Exchange Commission made on March 20, the company says it suspects shareholders to sell up to 55.7 million ordinary shares when the stock begins trading on April 3rd.
“The traditional model for taking a company public isn’t good for us,” Daniel Ek, the company’s CEO and co-founder told investors during the live stream. “For us, going public has never been about the pomp or circumstance of it all.”
Spotify, which is valued somewhere in the realm of $19 billion on the private markets (the music streaming platform has yet to set an opening share price for the direct listing) will be the highest-profile company to take this approach on a U.S. exchange.
The streaming site had 71 million subscribers at the end of 2017 plus 92 million who use the free, advertising-backed version. But, like the music industry itself, the streaming giant has had its share of challenges. It posted a loss of $1.5 billion in 2017 – $1 billion of which came from a non-recurring expense due to convertible notes from a transaction with Tencent Holdings at the end of 2017 – and an operating loss of $461.3 million for 2017.
So why tread into less charted territory?
It can be pretty pricey pulling the investment bank underwriters in on the IPO process since they’re the ones putting their capital on the line. Under the usual IPO route, banks will buy a block of shares to “make a market,” buying more shares at the start of trading in order to stabilize the stock if it starts to dip. But under direct listing, the company saves the 5 percent or so that the underwriter would charge. It also means the banks won’t have a say in who receives which portion of the company’s shares.
However, just because they’re not calling on investment banks to underwrite the IPO doesn’t mean they’ll skip over the banks altogether. Spotify told the Wall Street Journal that it would pay $30 million to advisers at Goldman Sachs, Morgan Stanley, and Allen & Co, to help coordinate sales of shares between existing holders and new holders as well as “build a quasi-book of demand at various price points based on conversations with potential and existing investors.”
Another rationalization that analysts have pointed to is Ek’s distaste for post-IPO lockups, a situation where the company and big investors agree not to sell more stock for three months or, in some case, longer, in order to drive interest in the IPO. The idea is that if investors know more supply could show up on the market at any time, they feel less interest in buying at the IPO point (which is essentially a riff on scarcity marketing). It’s not mandatory but usually, the underwriters want a lockup to ensure the IPO goes smoothly.
Neglecting to have a lockup could be a sign that Spotify has an abundance of confidence, or perhaps some inside investors are looking to get out, music industry vet Bobby Owsinski wrote in a piece for Forbes.
“That could mean that they don’t see a long-term future for the company (and maybe even the streaming delivery side of the music industry in general), or don’t think the prospect of an acquisition to be very high,” he wrote. Otherwise, Owsinski suspects they would’ve followed a more traditional route or “at the very least imposed some sort of partial lock-up into the direct listing where only a certain percentage of stock could be sold.”
If the company’s direct listing proves successful, “Spotifying” could become a verb for all the tech companies who have thus far declined to go public. Ek’s made his intentions for the direct listing pretty obvious: He wants investors to be able to sell whatever, whenever they’d like. The shares that don’t trade hands may not hold much sway in the way of voting for the company, but they will send a vote of confidence for the direct listing approach. And you can’t discount the fact that if the company does go public somewhere in the realm of $20 billion, it’ll be in the top five biggest tech listings of all time.
Ek may have promised “you won’t see us ringing any bells or throwing any parties,” but if all goes well, there might be a parade.