Joining Markets without an IPO: The Spotify Way

Online streaming company Spotify provides users with a platform to listen to their choice of music through the Spotify app available on Android and Apple’s operating system, iOS. It was founded in April 2006 and currently has offices in 20 locations in different parts of the world. Boasting a personnel of more than 1,600 people, the firm serves users by allowing them to listen to podcasts, music and other recordings it provides. It gains its revenue through the advertisements it places on the free versions of its app. Further, Spotify users can upgrade to premium membership where their paid subscriptions allow them access to more content as well as the option to listen to audios offline. The platform currently has an estimated 100 million users, with 50 million of these being premium account holders.

As a result of its continual growth and increased revenue, the company has recently sought to go public. However, it plans to make its way to trading floors in a rather unconventional way: without the initial sale of shares in a one-off ceremony. Instead of the usual offering, Spotify will have venture capitalists and other personnel who own shares in the firm sell them directly to members of the public. The method, while possible, is rather a contrast to what most companies seeking to be publicly traded do so as to get a ticker on the New York Securities Exchange. First, it should be noted that the method is entirely possible and could lead to the firm being publicly traded. However, what does Spotify have to gain from such an event? We discuss the potential benefits below.

Most directly affected would be underwriters. Since the company’s stock is not being consolidated and being prepared for sale, Spotify’s release would not require book-running, lead or co-managers. As such, the firm will not need to pay for the services of these financial institutions in arranging the release. The part of the revenue typically set aside to pay underwriters can thus be used for different purposes altogether including the expansion and improvement of services.

Further, sales in this context would avoid the firm’s stock being underpriced which happens for a lot of companies. Since banks frequently recommend a sudden rise in shares on first-day trading, some underwriters may make miscalculations in valuing the company and hence sell shares at a lower price than they could have fetched. This conventionally “leaves money on the table” leading to lower business revenue than could have been achieved.

By the direct sale of shares without involving a public offering, the company does not require to abide by SEC rules concerning issuances. As such, Spotify can freely promote the sale of the company’s stock through the media during the period building up towards the firm being listed under the New York Securities Exchange.

However, going public in this way is also inherently risky. Through a more traditional IPO, the company would be able to raise hundreds of millions of dollars based on its valuation and growth patterns. The revenue generated would be enough to pay underwriters’ fees while spurring additional expansion. Direct sales, however, are likely to raise lesser liquidity for the firm’s running. Since the company is currently in debt, lower returns from listings would prove to be counter-intuitive.

If Spotify pulls this off, then many other firms are likely to follow suit.