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SEC Is Studying Spotify's Plan to Bypass IPO in NYSE Listing

96 points by marcopolis 9y ago

5trokerac3 9y ago
One of two possibilities, IMHO: 1. They're trying to avoid a Twitter-like hype bubble on their stock, because they have so much brand recognition. 2. They're trying to drive a hype bubble and remove restrictions on cashing out their stocks before it pops. Either way, gonna need to see that earnings report.
- ProAm 9y ago
  I think it's just a way to allow early investors and employee stock holders to exit.
  - Animats 9y ago
    Right. They don't need to raise money.
    - charlesdm 9y ago
      They don't? Didn't they just quite recently raise a bunch of debt finance? Maybe their idea is to borrow more with interest rates being so low, rather than diluting the equity holders.
    - adventured 9y ago
      They're absolutely going to need to raise money, soon. They've lost $822 million in the last two years, with their losses skyrocketing last year to $581 million. At least $400m to $500m of their prior VC from years ago (2008-2013) is guaranteed to be long gone at this point. They're down to less than 12 months of capital unless they've suddenly figured out how to make money in the last few months with a blackhole business model that can never produce meaningful profit because they don't own most of the content and the licensing will perpetually squeeze them to death.
notyourwork 9y ago
What determines the initial listing price if this approach is taken? (Sorry I am not well versed on IPO's and moving to a public company.)
- kgwgk 9y ago
  The same thing that determines the price when the market open on the first day of trading following an IPO: the point where sellers and buyers meet. But if liquidity is scarce and trading volumes are low, price discovery will indeed be hard.
- sdkmvx 9y ago
  There is none. On the first day of trading there would be an opening auction as is done with every other stock listed on the NYSE. Prior to open, everyone interested in trading submits his orders. Then as many shares as can be traded are traded at the price at which the maximum number of shares can be traded. That is, the price is determined by supply and demand. The IPO price is the price at which shares are sold by the company to the public and represents the new money invested in the company. Then on the morning on which trading opens there is an opening auction as described. Ideally this price is near the IPO price, meaning that neither the company nor the investors left money on the table. Spotify is proposing to skip the IPO, and not raise further money. They must think that their stock is already widely held enough to support trading, and that they have no need of further money. It will be interesting to see what happens if they go forward with this. While the mechanics are no different than any other day of trading, I suspect the type of trading will be very different. Currently all holders of Spotify stock are long-term investors, simply because there is no market. Until traders acquire enough of it, liquidity will be bad and the price will probably jump around a lot. In addition, many people will want to invest, so they will buy. Will current holders want to sell? I suspect they will want to watch trading instead of selling at the first possible moment. I think we'll see a rapid rise in Spotify's price due to high demand and lack of supply. The current holders will undoubtedly be looking to reduce their stake. Will demand keep up as they begin selling, or will price rapidly fall as trading becomes, for lack of a better term, "normal."
  - 9y ago
joshjkim 9y ago
IPOs accomplish two concrete, positive things: 1. raise funds and 2. provide liquidity to investors. they also make a company seem more legit (at least in some cases, and in some circles). on the negative side, IPOs expose the company's financials and business plans, are expensive up front and on an ongoing basis to comply with SEC regulations (quarterly and annual reports, proxy statements, etc.), and also open the company up to major scrutiny and attack on the public market, with investors looking at the business performance quarter to quarter and activist investors looking for weak companies to push around (probably the nicest characterization, but you know what i mean). On the positive side, direct listing basically provides only for liquidity to investors (though of course they can try and raise funds in the public market down the line if they want). In spotify's specific case, they are also probably being pushed by their later stage investors, who's deal specifically contemplates achieving liquidity in the relative short term (the investors did a convertible loan where investor terms improve the longer it takes spotify to go public). In any case, spotify has good brand awareness, so really the direct listing is all about liquidity. On the negative side, since Spotify is a european company, even as a private company it already exposes its annual financials publicly (though only on a delayed annual basis and without as much required discussion of the business), but a direct listing would still open the company up to major scrutiny and attack from activist investors. in most cases, IPOs are considered motivated as much by fundraising as by liquidity (at least that's what the foudners / investors want you to think), and in fact big investors or founders selling big positions is generally taken as a negative signal (if they "really believed" in the long-term potential of the business, wouldn't they hold it? or so the theory goes). hence the lock-ups that most founders and pre-IPO investors agree to, which guarantee that at least for a set period of time, pre-IPO investors don't dump the stock en masse and introduce massive volatility into the market. In spotify's case, I think the SEC and the markets will want to look closely at the lock-up periods or other restrictions on sale for various investors, founders and the employees (if any), and try to determine exactly why and on what terms and in what amounts the various pre-IPO shareholders want to achieve liquidity. off the top of my head, there are three main views: 1. viewed generously, you can say: "well, they've been doing this for a long time, built a great business and still believe in the long-term future of the company, but they all want to sell 5% because they are only human, will die someday at some point and can't wait forever to cash out of their business". 2. viewed less generously, you can say: "well, the management and main investors who know the business best are not certain about the long-term potential for the business and so want to cut and run before the downward trend realizes itself, and so we should read their push for liquidity as a negative signal for the business". 3. another very spotify specific case could be: "management believes long term and could give a shit about going public, but TPG and other late investors are demanding this and they have different objectives, and if we can satisfy those without diluting the business, I guess we'll just do that". of course, it's probably a combo of those and other factors, but as an investor i'd be mostly trying to read and see if this is just earlier investors trying to dump shares because of lack of long-term faith - if so, be weary! on the compliance side, the SEC's main job is just to ensure proper disclosures are made (even if the business is less than ideal), but i'd probably want to see what I can do to minimize the potential impact of the less generous interpretation of motivations and any scenario where pre-IPO investors make a bunch of money by dumping their shares on the less-informed-about-the-business average investor.
mankash666 9y ago
Institutions that add little to no value in transactions: 1> IPO underwriter 2> Title/Escrow company in a home sale 3> Payment processors like Visa 4> Property manager for a rental home 5> Realtors These middlemen need to be bypassed to keep more value in these high value transactions and reduce costs! I'm glad Spotify is doing this, hopefully other big names will follow
- notyourwork 9y ago
  Not to diverge topics away from Spotify's stock but why do you suggest payment processors like Visa provide no value?
  - SEJeff 9y ago
    Their value really is that they exist and are more or less a monopoly, so you have to pay the fees to use them (as a merchant) or turn away the overwhelming majority of customers.
    - notyourwork 9y ago
      Prior to their existence what mechanism provided the same avenue for transaction? Especially as the world moved online I would argue they became more relevant for transactions. I don't disagree with the monopoly part but that doesn't discredit their value in my opinion.
      - deleted 9y ago
        [deleted]
    - recursive 9y ago
      Not only do they exist, but they provide some kind of infrastructure to transfer payments. How do you do this without a middleman? Even mailing a check relies on banks and a postal system.
    - berberous 9y ago
      I think they clearly have value, but the problem is that it's hard for the market to settle on the true value because of the games they play with credit card points. They've tricked consumers into thinking that credit cards incur no costs, but in fact give them cash back and points. If points were banned, and consumers instead paid the credit card fee as a line item on their receipt next to taxes, you might find more downward pricing pressure or consumers willing to pay cash.
hammock 9y ago
To all of the commenters in here, selling stock is not the only way to raise money. Direct listing does not mean "they don't need to raise money." In today's environment it's much better for a lot of companies to be issuing debt instead.
- hkmurakami 9y ago
  For many companies yes. But for companies with relatively poor financial fundamentals, debt is not that cheap. Tesla's 8 year bonds are currently yielding close to 6% (and they got a great deal on this too). They're rated junk. Spotify would likely have to pay a higher coupon than Tesla. Debt for them is not that cheap. That being said, if you can issue investment grade bonds, then debt is very cheap.
bitJericho 9y ago
haha, you need to learn how to negotiate. (All fees are negotiable)
- gervase 9y ago
  I think they know exactly what they're doing. You can't walk away without losing your earnest money, so you've already given up your best move before negotiation even started. It doesn't help that trying to buy a house in many markets is restricted to those who can pay entirely in cash within 2 days of listing.
  - xiaomai 9y ago
    In my experience, you can switch lenders if you are having a difficult time negotiating fees (the escrow is a different party).
  - bitJericho 9y ago
    Earnest money is used when you've already made an offer. How do you make an offer while not including the cost of the fees in the sale? That sounds like poor negotiation.
- sharkweek 9y ago
  While I will confess to being a bad negotiator, have you bought a house? It's the most confusing (intentionally, I'm sure) process I've ever endured.
- ryandrake 9y ago
  This comment adds no value whatsoever. Perhaps you could share your glorious secrets as to how you manage to negotiate "all fees"?
  - Simon_says 9y ago
    Same way you negotiate everything else: have a real willingness to walk away.
hellbanner 9y ago
Is there any reason to buy stock in a company if they don't provide dividends, besides the bigger fool theory?
- jakelarkin 9y ago
  Mostly it comes down to investor preference. For companies experiencing a high rate of growth and good long term ROI, many investors would prefer the company reinvest the net revenue instead of paying dividends. Some investors prefer capital gains due to tax treatment (long term gains vs income tax). Many companies oblige this with stock buybacks.
- deleted 9y ago
  [deleted]
- ThrustVectoring 9y ago
  You have a right to a portion of the proceeds from a merger or acquisition. Whether or not the company ever actually pays out its earnings as dividends, there's little way to access those earnings without divvying them up amongst the company's shareholders.
  - andrewflnr 9y ago
    > there's little way to access those earnings without divvying them up amongst the company's shareholders. This is interesting. So someone has to make a choice between re-investing profit or offering a dividend? Where is this specified?
    - ThrustVectoring 9y ago
      Re-investing the profit is a choice by management that turns company assets into more company assets. It doesn't turn company assets into outbound cashflow to owners and investors.
      - andrewflnr 9y ago
tmaly 9y ago
There is one downside to bypassing the IPO. If the larger banks miss out on their fees, these large institutional buyers can hold a grudge against you. This can impact your stock price over a medium term.

96 points by marcopolis 9y ago

One of two possibilities, IMHO: 1. They're trying to avoid a Twitter-like hype bubble on their stock, because they have so much brand recognition. 2. They're trying to drive a hype bubble and remove restrictions on cashing out their stocks before it pops. Either way, gonna need to see that earnings report.

ProAm 9y ago
I think it's just a way to allow early investors and employee stock holders to exit.
- Animats 9y ago
  Right. They don't need to raise money.
  - charlesdm 9y ago
    They don't? Didn't they just quite recently raise a bunch of debt finance? Maybe their idea is to borrow more with interest rates being so low, rather than diluting the equity holders.
  - adventured 9y ago
    They're absolutely going to need to raise money, soon. They've lost $822 million in the last two years, with their losses skyrocketing last year to $581 million. At least $400m to $500m of their prior VC from years ago (2008-2013) is guaranteed to be long gone at this point. They're down to less than 12 months of capital unless they've suddenly figured out how to make money in the last few months with a blackhole business model that can never produce meaningful profit because they don't own most of the content and the licensing will perpetually squeeze them to death.

notyourwork 9y ago

What determines the initial listing price if this approach is taken? (Sorry I am not well versed on IPO's and moving to a public company.)

kgwgk 9y ago
The same thing that determines the price when the market open on the first day of trading following an IPO: the point where sellers and buyers meet. But if liquidity is scarce and trading volumes are low, price discovery will indeed be hard.
sdkmvx 9y ago
There is none. On the first day of trading there would be an opening auction as is done with every other stock listed on the NYSE. Prior to open, everyone interested in trading submits his orders. Then as many shares as can be traded are traded at the price at which the maximum number of shares can be traded. That is, the price is determined by supply and demand. The IPO price is the price at which shares are sold by the company to the public and represents the new money invested in the company. Then on the morning on which trading opens there is an opening auction as described. Ideally this price is near the IPO price, meaning that neither the company nor the investors left money on the table. Spotify is proposing to skip the IPO, and not raise further money. They must think that their stock is already widely held enough to support trading, and that they have no need of further money. It will be interesting to see what happens if they go forward with this. While the mechanics are no different than any other day of trading, I suspect the type of trading will be very different. Currently all holders of Spotify stock are long-term investors, simply because there is no market. Until traders acquire enough of it, liquidity will be bad and the price will probably jump around a lot. In addition, many people will want to invest, so they will buy. Will current holders want to sell? I suspect they will want to watch trading instead of selling at the first possible moment. I think we'll see a rapid rise in Spotify's price due to high demand and lack of supply. The current holders will undoubtedly be looking to reduce their stake. Will demand keep up as they begin selling, or will price rapidly fall as trading becomes, for lack of a better term, "normal."
- 9y ago

joshjkim 9y ago

IPOs accomplish two concrete, positive things: 1. raise funds and 2. provide liquidity to investors. they also make a company seem more legit (at least in some cases, and in some circles). on the negative side, IPOs expose the company's financials and business plans, are expensive up front and on an ongoing basis to comply with SEC regulations (quarterly and annual reports, proxy statements, etc.), and also open the company up to major scrutiny and attack on the public market, with investors looking at the business performance quarter to quarter and activist investors looking for weak companies to push around (probably the nicest characterization, but you know what i mean). On the positive side, direct listing basically provides only for liquidity to investors (though of course they can try and raise funds in the public market down the line if they want). In spotify's specific case, they are also probably being pushed by their later stage investors, who's deal specifically contemplates achieving liquidity in the relative short term (the investors did a convertible loan where investor terms improve the longer it takes spotify to go public). In any case, spotify has good brand awareness, so really the direct listing is all about liquidity. On the negative side, since Spotify is a european company, even as a private company it already exposes its annual financials publicly (though only on a delayed annual basis and without as much required discussion of the business), but a direct listing would still open the company up to major scrutiny and attack from activist investors. in most cases, IPOs are considered motivated as much by fundraising as by liquidity (at least that's what the foudners / investors want you to think), and in fact big investors or founders selling big positions is generally taken as a negative signal (if they "really believed" in the long-term potential of the business, wouldn't they hold it? or so the theory goes). hence the lock-ups that most founders and pre-IPO investors agree to, which guarantee that at least for a set period of time, pre-IPO investors don't dump the stock en masse and introduce massive volatility into the market. In spotify's case, I think the SEC and the markets will want to look closely at the lock-up periods or other restrictions on sale for various investors, founders and the employees (if any), and try to determine exactly why and on what terms and in what amounts the various pre-IPO shareholders want to achieve liquidity. off the top of my head, there are three main views: 1. viewed generously, you can say: "well, they've been doing this for a long time, built a great business and still believe in the long-term future of the company, but they all want to sell 5% because they are only human, will die someday at some point and can't wait forever to cash out of their business". 2. viewed less generously, you can say: "well, the management and main investors who know the business best are not certain about the long-term potential for the business and so want to cut and run before the downward trend realizes itself, and so we should read their push for liquidity as a negative signal for the business". 3. another very spotify specific case could be: "management believes long term and could give a shit about going public, but TPG and other late investors are demanding this and they have different objectives, and if we can satisfy those without diluting the business, I guess we'll just do that". of course, it's probably a combo of those and other factors, but as an investor i'd be mostly trying to read and see if this is just earlier investors trying to dump shares because of lack of long-term faith - if so, be weary! on the compliance side, the SEC's main job is just to ensure proper disclosures are made (even if the business is less than ideal), but i'd probably want to see what I can do to minimize the potential impact of the less generous interpretation of motivations and any scenario where pre-IPO investors make a bunch of money by dumping their shares on the less-informed-about-the-business average investor.

mankash666 9y ago

Institutions that add little to no value in transactions: 1> IPO underwriter 2> Title/Escrow company in a home sale 3> Payment processors like Visa 4> Property manager for a rental home 5> Realtors These middlemen need to be bypassed to keep more value in these high value transactions and reduce costs! I'm glad Spotify is doing this, hopefully other big names will follow

notyourwork 9y ago
Not to diverge topics away from Spotify's stock but why do you suggest payment processors like Visa provide no value?
- SEJeff 9y ago
  Their value really is that they exist and are more or less a monopoly, so you have to pay the fees to use them (as a merchant) or turn away the overwhelming majority of customers.
  - notyourwork 9y ago
    Prior to their existence what mechanism provided the same avenue for transaction? Especially as the world moved online I would argue they became more relevant for transactions. I don't disagree with the monopoly part but that doesn't discredit their value in my opinion.
    - deleted 9y ago
      [deleted]
  - recursive 9y ago
    Not only do they exist, but they provide some kind of infrastructure to transfer payments. How do you do this without a middleman? Even mailing a check relies on banks and a postal system.
  - berberous 9y ago
    I think they clearly have value, but the problem is that it's hard for the market to settle on the true value because of the games they play with credit card points. They've tricked consumers into thinking that credit cards incur no costs, but in fact give them cash back and points. If points were banned, and consumers instead paid the credit card fee as a line item on their receipt next to taxes, you might find more downward pricing pressure or consumers willing to pay cash.

hammock 9y ago

To all of the commenters in here, selling stock is not the only way to raise money. Direct listing does not mean "they don't need to raise money." In today's environment it's much better for a lot of companies to be issuing debt instead.

hkmurakami 9y ago
For many companies yes. But for companies with relatively poor financial fundamentals, debt is not that cheap. Tesla's 8 year bonds are currently yielding close to 6% (and they got a great deal on this too). They're rated junk. Spotify would likely have to pay a higher coupon than Tesla. Debt for them is not that cheap. That being said, if you can issue investment grade bonds, then debt is very cheap.

bitJericho 9y ago

haha, you need to learn how to negotiate. (All fees are negotiable)

gervase 9y ago
I think they know exactly what they're doing. You can't walk away without losing your earnest money, so you've already given up your best move before negotiation even started. It doesn't help that trying to buy a house in many markets is restricted to those who can pay entirely in cash within 2 days of listing.
- xiaomai 9y ago
  In my experience, you can switch lenders if you are having a difficult time negotiating fees (the escrow is a different party).
- bitJericho 9y ago
  Earnest money is used when you've already made an offer. How do you make an offer while not including the cost of the fees in the sale? That sounds like poor negotiation.
sharkweek 9y ago
While I will confess to being a bad negotiator, have you bought a house? It's the most confusing (intentionally, I'm sure) process I've ever endured.
ryandrake 9y ago
This comment adds no value whatsoever. Perhaps you could share your glorious secrets as to how you manage to negotiate "all fees"?
- Simon_says 9y ago
  Same way you negotiate everything else: have a real willingness to walk away.

hellbanner 9y ago

Is there any reason to buy stock in a company if they don't provide dividends, besides the bigger fool theory?

jakelarkin 9y ago
Mostly it comes down to investor preference. For companies experiencing a high rate of growth and good long term ROI, many investors would prefer the company reinvest the net revenue instead of paying dividends. Some investors prefer capital gains due to tax treatment (long term gains vs income tax). Many companies oblige this with stock buybacks.
deleted 9y ago
[deleted]
ThrustVectoring 9y ago
You have a right to a portion of the proceeds from a merger or acquisition. Whether or not the company ever actually pays out its earnings as dividends, there's little way to access those earnings without divvying them up amongst the company's shareholders.
- andrewflnr 9y ago
  > there's little way to access those earnings without divvying them up amongst the company's shareholders. This is interesting. So someone has to make a choice between re-investing profit or offering a dividend? Where is this specified?
  - ThrustVectoring 9y ago
    Re-investing the profit is a choice by management that turns company assets into more company assets. It doesn't turn company assets into outbound cashflow to owners and investors.
    - andrewflnr 9y ago

tmaly 9y ago

There is one downside to bypassing the IPO. If the larger banks miss out on their fees, these large institutional buyers can hold a grudge against you. This can impact your stock price over a medium term.