On Tuesday April 3, 2018, music streaming service Spotify made its not-quite-initial public offering on the New York Stock Exchange (“NYSE”).[1] The direct listing was more flop than frenzy—only 3.1% of Spotify Technology SA’s 178 Million shares changed hands at the $165.90 opening price.[2] In fact, fewer shareholders sold their shares than advisers expected.[3] That said, demand also fell short of expectations[4] and, over all, the stock traded without a great deal of volatility, relatively speaking.[5] The stock closed at $149.01, 10% below its opening price.[6]
This may seem like an anti-climax considering the fanfare leading up to the unconventional offering. However, fireworks on the trading floor and rollercoaster price fluctuations were never the big attraction. Rather, most market watchers were interested in seeing how Spotify’s choice to forgo a traditional initial public offering (“IPO”) and instead directly list its shares on the NYSE would play out.[7] Now that the dust has settled, the results seem to be a resounding so-so.[8] But what does this mean for the future and will we see more large-cap direct listings?
What is a direct listing and what are the pros and cons?
A direct listing is when a company lists its existing shares on a public exchange and lets them trade.[9] This is different from an IPO, in which a company hires an investment bank to underwrite its shares.[10] There are some benefits of eschewing the traditional IPO in favor of a direct listing: no roadshows, lock-in provisions, dilutions, or new share issuances.[11] The shares just begin trading.[12]
Perhaps the biggest draw is that direct listings are cheaper: there is no need to hire an underwriter and so there are no underwriter fees.[13] Some analysts estimated that Spotify could have saved up to $300 million in fees.[14]
Furthermore, no IPO means no lockup period, which is an IPO provision that protects new investors from insiders offloading shares as soon as the company goes public.[15] Thus, a firm’s investors and employees can get immediate liquidity if so desired. “[Spotify CEO Daniel Ek] wasn’t desperately trying to raise capital, he was trying to do right by his employees,” noted Jim Cramer, host of CNBC’s Mad Money.[16] For a tech firm like Spotify, which has raised billions of dollars from venture capital in exchange for convertible debt and equity, this is a great way for insiders and employees to cash out.[17] Ek said as much in a blog post published a day before the company went public. “Spotify is not raising capital, and our shareholders and employees have been free to buy and sell our stock for years[,]” wrote Ek.[18] “So while tomorrow puts us on a bigger stage, it doesn’t change who we are, what we are about, or how we operate.”[19]
That said there are a number of downsides to direct listings. Without an underwriter, there is no “deal-support” to make sure that shares move on day one: no line of institutional investors there to scoop them up when trading starts.[20] There is also no “greenshoe” option provision that allows underwriters to alleviate volatility.[21] Thus, whether or not the stock trades and how it trades is left up to the market. Furthermore, because new shares aren’t issued, Spotify will not be raising any new funds.[22]
Why have I never heard of direct listings before?
Spotify is not the first company to go public via a direct listing, it was just the largest.[23] Ovascience, Nexeon MedSystems, Coronado Biosciences, and BioLine Rx all made direct listings.[24] You probably have not heard of these companies and that’s because there is no reason that you should have: they aren’t very big.[25] Erin Griffith of Fortune notes direct listings have been the tool of small-cap, biotechnology and life science companies.[26]
In addition, companies that trade on over the counter markets but aspire to move to the NYSE or Nasdaq normally employ direct listings.[27] It is very uncommon for private companies to go public via a direct listing: they normally do it with an IPO.[28]
Will there be more in the future?
The answer is perhaps. Airbnb Inc. is rumored to be closely watching the Spotify direct listing to see if it should go down the same path.[29] Direct listings will likely be attractive to other tech companies who, because copious amounts of venture capital, don’t need to raise more cash, but do need liquidity for their shareholders.[30] Normally an IPO is a great way to raise funds quickly.[31] That said, private funding is cheaper and does not come with the same litigation risks.[32]
Considering that Spotify’s direct listing was somewhat successful, other startups with tons of financing but little liquidity might consider forgoing the IPO. In addition, venture capitalists and other investors might push companies who’d rather stay private to go the direct listing route or put a direct listing at the other end of one of the strings attached to their funding.
[1] Matt Levine, Spotify’s Non-IPO Wasn’t Much of an IPO, Bloomberg (Apr. 5, 2018, 11:22 AM), https://www.bloomberg.com/view/articles/2018-04-05/spotify-s-non-ipo-wasn-t-much-of-an-ipo.
[2] Shira Ovide, Hold Off on the Spotify Champagne Toasts, Bloomberg (Apr. 3, 2018, 2:59 PM), https://www.bloomberg.com/gadfly/articles/2018-04-03/spotify-stock-listing-hold-off-on-the-champagne-toasts.
[3] Alex Barinka, Fewer Spotify Shares Sold Than Expected in Unusual Listing, Bloomberg (Apr. 5, 2018, 5:00 AM), https://www.bloomberg.com/news/articles/2018-04-05/fewer-spotify-shares-sold-than-expected-in-unusual-listing.
[4] Maureen Farrell & Chelsey Dulaney, Spotify’s Trading Slump Raises Questions About Listing Process, Wall Street J. (Apr. 4, 2018, 6:38 PM), https://www.wsj.com/articles/spotifys-trading-slump-raises-questions-about-listing-process-1522877730.
[5] Barinka, supra note 3.
[6] Levine, supra note 1.
[7] Charles Lane, Spotify’s Unusual IPO Model Will Test The Company’s Strength, NPR (Jan 25, 2018, 5:01 AM), https://www.npr.org/2018/01/25/580263402/spotifys-unusual-ipo-model-will-test-the-companys-strength.
[8] Nick Statt, Spotify’s IPO Was Both a Success and an Uncertain Forecast for the Future of Music, The Verge (Apr. 3, 2018, 4:51 PM), https://www.theverge.com/2018/4/3/17194208/spotify-ipo-nyse-music-streaming-market-valuation.
[9] Erin Griffith, How Will Spotify’s Direct Listing Work?, Fortune (July 31, 2017), http://fortune.com/2017/07/31/spotify-ipo-direct-listing-2/.
[10] Alexander Osipovich & Maureen Farrell, ‘Spotify Rule’ Would Help New York Stock Exchange Woo Unicorns, Wall Street J. (May 26, 2017, 8:31 PM), https://www.wsj.com/articles/spotify-rule-would-help-new-york-stock-exchange-woo-unicorns-1495791000.
[11] Erin Griffith, The Risky Side of Spotify’s Unusual IPO Plans, Fortune (Apr. 7, 2017), http://fortune.com/2017/04/07/spotify-ipo-direct-listing/.
[12] Id.
[13] Id.
[14] Stephen Wilmont, Spotify, Like Google, Wants to Reinvent the Tech IPO, Wall Street J. (Dec. 5, 2017, 7:20 AM), https://www.wsj.com/articles/spotify-like-google-wants-to-reinvent-the-tech-ipo-1512476451.
[15] Osipovich & Farrell, supra note 10.
[16] Elizabeth Gurdus, Cramer Talks Spotify, the ‘Anti-IPO’ Joining the Ranks of Netflix and Amazon, CNBC (Apr. 5, 2018, 6:32 PM), https://www.cnbc.com/2018/04/05/cramer-spotify-is-the-anti-ipo-in-the-league-of-netflix-and-amazon.html.
[17] Lauren Davidson, Spotify Valued at $8.53bn Valuation After Fresh Funding Round, The Daily Telegraph (Jan. 10, 2015, 8:52 AM), https://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms /11664186/Spotify-hits-8.53bn-valuation-after-fresh-funding-round.html; Douglas MacMillan, Spotify Raises $1 Billion in Debt Financing, Wall Street J. (Mar. 29, 2016, 6:50 PM), https://www.wsj.com/articles/spotify-raises-1-billion-in-debt-financing-1459284467.
[18] Daniel Ek, Spotify Lists on NYSE as SPOT, Spotify: Newsroom (Apr. 2, 2018), https://newsroom.spotify.com/2018-04-02/tomorrow/.
[19] Id.
[20] Griffith, supra note 11.
[21] Id.
[22] Id.
[23] Chuck Mikolajczak & Stephen Nellis, Spotify Shares Jump in Record-Setting Direct Listing, Reuters (Apr. 3, 2018, 5:35 AM), https://www.reuters.com/article/us-spotify-ipo/spotify-shares-jump-in-record-setting-direct-listing-idUSKCN1HA12B.
[24] Griffith, supra note 9.
[25] Id.
[26] Id.
[27] Osipovich & Farrell, supra note 10.
[28] Id.
[29] Id.
[30] Emily Bary, Spotify’s Non-IPO Could Serve as a Model — but only for a Certain Type of Company, Market Watch (Apr. 4, 2018, 7:37 AM), https://www.marketwatch.com/story/spotifys-non-ipo-could-serve-as-a-modelbut-only-for-a-certain-type-of-company-2018-04-03.
[31] Id.
[32] Id.
