On April 3, 2018, shares of Spotify Technology S.A. (“Spotify”), the popular music streaming service, began trading on the New York Stock Exchange under the ticker symbol SPOT. However, the Spotify initial public offering (“IPO”) was conducted unconventionally through a direct listing process, rather than sell its securities through an underwriter in a traditional IPO process. The traditional IPO underwriter process involves using an investment banker who underwrites the securities being sold to the public. The underwriter facilitates the IPO process by buying the shares from the company and utilizing their vast network to find purchasers of the IPO. The intermediaries receive a significant portion of the capital raised through the IPO process as commission for their services.
However, in the direct listing process, the company sells shares directly to the public without the help of any intermediaries. Unlike a traditional IPO in which the issuer and underwriter determine the opening public offering price, the exchange sets a reference price late on the day prior to listing based on informal, private trading of Spotify’s shares.
There are several advantages with the direct listing approach. First, the company does not incur the high fees involved when selling the newly registered shares with an underwriter. For example, Spotify did not need the services of an underwriter to conduct a roadshow to generating interest in the Company’s shares, since the public is already familiar with Spotify’s business model. Furthermore, a direct listing is a logical option if the listing company is more concerned with making existing investors’ shares available on the open market rather than raising capital.
However there are risks that accompany the direct listing process that are less of a concern in the traditional IPO process. Without an underwriter purchasing and selling the shares, there is no support or guarantee for the sales to be sold.
Potential issuers need to be cognizant of Spotify’s unique circumstances that enabled it to go public utilizing this non-traditional path – while a direct listing process may seem like an attractive alternative for other companies looking to go public, Spotify noted in its risk factors that by pursuing a direct listing the offering did not have the same safeguards as an underwritten initial public offering. This could result in, among other things, 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.