Securities Law Blog

On April 3, 2018, ordinary shares of Spotify Technology S.A., the music streaming service, began trading on the New York Stock Exchange under the ticker symbol SPOT.    While a tech company with a valuation of more than $25 billion going public would be newsworthy in and of itself, what made this debut particularly noteworthy was the manner in which Spotify went public.  The company took a non-traditional route by forgoing the traditional initial public offering (IPO) process and instead opting for a direct listing with the NYSE. As we previously reported in our April 20, 2017 blog post, a direct listing effectively separates the stock exchange listing from the “public offering” part of a traditional IPO in which capital is raised.

Spotify’s direct listing differs from a traditional IPO in that Spotify did not engage an investment banker to underwrite the offering. Spotify was able to do this because it was not looking to raise capital in connection with the offering. Rather, existing investors made their shares available on the open market.  In addition, unlike most companies which need to undertake a road show in order to explain their company to investors and generate interest, Spotify and its popular music streaming service were already well understood by potential investors.

Unlike a traditional IPO in which the issuer and its banker set an opening public offering price, the NYSE set a reference price late on the day prior to listing based on informal, private trading of Spotify’s shares.  The opening public offering price was determined by buy and sell orders collected by the NYSE from broker-dealers and a designated market maker’s determination of where buy and sell orders could be matched.

Spotify’s shares closed at $149.01 per share after its first day of trading, up from its initial reference price of $132 per share, but more than 10% below its opening price of $165.90 per share and its high price of the day of $169 per share. Having taken this non-traditional route without the involvement of an investment bank to underwrite the process and participate in opening day transactions that stabilize or maintain the market price of the shares, it is questionable as to whether the participation of a bank would have reduced this opening day volatility. Even with this moderate first day volatility, the listing appears to be off to a successful start.

Prior to the direct listing, there was no public market for Spotify’s ordinary shares, although shares did trade in private resale transactions.  The direct listing process enabled Spotify to make its shares available to a much wider market. By utilizing the direct listing process, Spotify avoided paying significant banker fees and the time and expense of a road show. From a pre-IPO shareholder perspective, they were able to avoid the lock up period that insiders are typically subject to in a traditional IPO and also avoid having their shares diluted.

While this direct listing process may seem like an attractive alternative for other tech companies looking to go public, potential issuers need to be cognizant of Spotify’s unique circumstances that enabled it to go public utilizing this non-traditional path.  In addition, as Spotify noted in the risk factors section of its prospectus, by pursuing a direct listing the offering did not have the same safeguards as an underwritten initial public offering, which could result in the price of its shares being volatile and declining significantly following its listing, or the failure of an active, liquid and orderly market for its shares to develop and be sustained.