Spotify, the streaming service which has taken the online music industry by storm, reportedly plans to soon list on the New York Stock Exchange. Only, it will miss a key component of listing the shares — the IPO. Spotify, the company which launched way back in October 2008, took six long years to acquire its first 10 million paid customers, a feet that Apple Music achieved in January 2016 — less than one year of its launch.
Since then, Apple Music’s growth has kept pace with that of Spotify. Both doubled their user base from 10 million to 20 million in just about one year, and while Spotify tripled it to 30 million in less than two years, Apple Music is also on the path to achieve the same with its 27 million users as of June 2017. But when it comes to sheer presence, Spotify has a much bigger market share with its 60 million users as of July 2017.
With that kind of user base and market presence, it does make sense for the company’s shareholders to monetise their equity holdings, and a public listing is one of the surest way to go. But is it equally wise to go for a direct listing, ie, without offering shares to investors in an initial public offering?
US regulations allow for direct listing of companies on stock exchanges. In such cases, shares begin trading on the bourses without being preceded by an IPO. Thus, the existing shareholders are free to sell their shares, and public investors are free to buy those shares, in the secondary market itself. While Spotify has never officially announced its listing plans, there are widespread news reports across various US media outlets that the company will list its shares on NYSE without opting for an IPO.
The biggest benefit to the company’s existing shareholders might be that without the issue of fresh equity shares, their would be no equity dilution, and they could sell their stock at full and fair value as determined by the market later. The company would also save on the long and complicated underwriting process and underwriting fees to an investment bank, since their will be no IPO at all. Further, Spotify’s existing shareholders would also avoid being locked out from selling their shares for a specified period of time according to the rules.
However, there may be a few downsides as well. A no-IPO listing would lead to a lack of an institutional share base, and Spotify’s stock price would be dependent on retail public support which may vary quickly with the change in the listening preferences of its audience. Also, the stock price may be highly volatile because the trading volumes might be very thin, which would further prevent institutional investors from buying it. While Spotify would save on the underwriting process, it will still have to hire an independent financial advisor to convince the stock exchanges\ that it meets the listing requirements.