Spotify also made its investor education process more transparent to the public through its Investor Day. However, Spotify could not conduct investor education without an appropriate preliminary prospectus. Abstract. As a result, Spotify filed its resale registration statement on Form F-1 and Spotify filed its results for the first quarter of 2018, and Spotify also filed a prospectus supplement to update the resale registration statement. Spotify said it chose this process because it allows the company to list without selling shares, offers liquidity to shareholders, and would provide equal access to buyers and sellers. Shareholders in a private company face a basic limitation—they can’t freely resell their shares on a securities exchange. Spotify’s Direct Listing A Look Under – the Hood April 17, 2018 . Spotify's direct listing IPO is scheduled to begin trading Tuesday, April 3, 2018, according to its most recent F-1/A registration statement.. SPOT … Since there was no underwritten offering, the registration statement did not include an underwriting section. As a foreign private issuer, [6] Spotify used a Form F-1 registration statement to register its shares with the SEC. The NYSE generally expects to list companies in connection with an IPO with a firm underwriting commitment, upon transfer from another market, or pursuant to a spin-off; in each situation, companies must demonstrate they meet specified public float thresholds. The company opened at $165.90 a share, giving it a $29.5 billion valuation based on the 178,112,840 ordinary shares outstanding. To provide some certainty as to this question, but without conceding that its direct listing constituted a distribution for Regulation M purposes, Spotify sought and received a no-action letter from the SEC Staff. Nonetheless, even companies pursuing traditional firm commitment IPOs may look at aspects of Spotify’s direct listing and apply them in their offerings. The success of Spotify’s direct listing was due in part to Spotify being a well-capitalized company with no immediate need to raise additional capital, while also having a large and diverse shareholder base that could provide sufficient supply-side liquidity on the first day of trading, as well as a well-recognized brand name and an easily understood business model. Spotify is the only large company that has used a direct listing, debuting last year on the New York Stock Exchange. Spotify now has a higher market value than Snapchat owner Snap … Since the financial advisors did not participate in investor meetings with Spotify, Spotify relied on the strength of its internal investor relations team to lead the investor education effort. First, once Spotify was subject to the reporting requirements of the Exchange Act, it wanted to further its goal of transparency by issuing standard public company-style guidance to the market with its financial outlook for the first quarter and full year 2018 and then to allow this information to season with investors before listing and the beginning of trading. The direct listing by the Stockholm-founded company was the largest on record. Nevertheless, the disclosure accomplished Spotify’s goal of providing liquidity to its shareholders without implicating an organized sale process that could be deemed an underwriting. Instead of the usual IPO road show targeted to institutional investors, Spotify hosted an Investor Day presented by its entire leadership team that was publicly streamed live and viewable around the world. (go back), 4 See Renaissance Capital IPO Intelligence, “Mega Deals Drive Biggest First Quarter in a Decade,” available at http://www.renaissancecapital.com/review/RenCap1Q18_US_IPO_Review.pdf. Companies less well-known would likely need bankers to market shares, while Spotify … Finally, as is typical practice in an IPO, the Investor Day materials were consistent with the information contained in the registration statement. Much of the work required to effect such deposits needed to occur after the effectiveness of the registration statement. It also wanted the process to be transparent and allow the market to set the price of shares. The cover page of the preliminary prospectus explained that the opening public price of Spotify’s shares would be determined by buy and sell orders collected by the NYSE from broker-dealers. Spotify was the first significant tech company to go that route, in 2018. The registration statement instead included a plan of distribution section that is typical of a resale registration statement. Pro Music Rights’ plans for a Spotify-style direct listing came to light in late December of 2020, in a Form S-1 that the PRO submitted to the … (go back), 9Forms S-1 and F-1 require the inclusion of the information required by Item 508 of Regulation S-K. Why such a gap? There are other terms – such as common share, ordinary share, or voting share – that are equivalent to common stock. Morgan Stanley was also appointed by Spotify to serve as the financial advisor for purposes of consultation with the NYSE’s designated market maker as required by the NYSE’s direct listing rules. Eschewing middlemen, Spotify chose to go public using a “direct listing” instead of an initial public offering. Companies that do not share these traits may not be the right fit for a direct listing. In 2017, the average first-day return for IPOs was 11.8%, up slightly from 11.4% in 2016, but below the long-term average of 13%. Spotify registered shares held by employees to address any regulatory concerns that resales of shares by employees occurring around the time of the direct listing may not have been entitled to an exemption under the Securities Act. These meetings are designed to help the underwriters build an order book of indications of interest from investors, which helps them gauge the level of demand for a stock. Since there is no underwritten offering, a direct listing does not require the participation of underwriters. But Spotify's direct listing — unusual enough on its own — is further different because the company is both direct listing and offering shares for the first time without the banks' underwriting assistance. (go back), 8 If an issuer has not been subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act for a period of at least 90 days immediately before a sale, then Rule 144(d) requires that a minimum of one year must elapse between the latter of the date of the acquisition of the securities from the issuer or an affiliate of the issuer and any resale of such securities in reliance on Rule 144 for the account of either the acquirer or any subsequent holder of those securities. Prior to being subject to those reporting requirements, neither affiliates nor non-affiliates who had held shares for less than a year would have been able to sell shares pursuant to Rule 144. In a direct listing, a company’s outstanding shares are listed on a stock exchange without either a primary or secondary underwritten offering. By forgoing the underwritten offering process, Spotify was able to accomplish its goal of providing liquidity without imposing IPO-style lock-up agreements upon listing, and, as a result, the Spotify shareholders were free to sell their shares on the New York Stock Exchange (NYSE) immediately. As a result, in order to amend its rules to permit the direct listing of a company like Spotify, in March 2017, the NYSE began the formal rule filing process with the SEC. [5] With this increased transparency, and without any lock-up agreements, Spotify believed that market-driven supply and demand forces would allow its share price to reach a natural equilibrium. [7] This permitted existing shareholders whose shares were registered on the registration statement to resell their shares as long as the registration statement remained effective and the prospectus was current. Spotify’s market valuation upon listing on the NYSE was the product of market forces at work—an unlimited number of willing buyers and willing sellers brought together through the facilities of a US stock exchange. Given that there were no underwriters and no organized sales by the existing shareholders, the method of distribution was narrower than many resale registration statements. "Spotify is unique. On March 26, 2018, a week before trading in its shares commenced, Spotify issued guidance to the market consistent in scope of an already public company with its financial outlook for the first quarter and full year 2018. Spotify held its Investor Day on March 15, 2018 after the first public filing of its registration statement on February 28, 2018. Pricing is a three-way process, with the issuer, the managing underwriters, and the largest mutual funds all having a voice. An IPO solves that problem, but at the cost (among other things) of contractual lock-up agreements. A direct listing is an innovative structure that provides companies with an alternative to a traditional IPO in the path to going public. FPIs enjoy a number of key benefits not available to domestic US issuers. While Spotify proved that a direct listing is a viable alternative to an underwritten IPO, the process is certainly not right for every issuer. Global Business and Financial News, Stock Quotes, and Market Data and Analysis. While neither option is cheap, DPO fees tend to … Because its shares did not trade in a private placement market, and since the aggregate market value of its publicly held shares was higher than US$250 million, Spotify was able to take advantage of the new NYSE rule to effectuate its direct listing. In a traditional IPO, the cover page of the preliminary prospectus contains a price range of the anticipated sale price of the shares. Spotify is able to do this for two main reasons. [2]. [4] On April 3, 2018, when Spotify opened for trading on the NYSE, the NYSE’s initial reference price that was published to the market pre-trading was US$132.00 per share and the opening price of the shares was US$165.90 per share, or approximately 25.7% higher than the NYSE reference price. Spotify's direct listing is different from IPOs because the company is both listing and offering shares at the same time without banks' help. Since Spotify was not offering any shares, and since. This version is usually called the “retail road show.”(go back), 12A “red herring” prospectus meeting the requirements of Section 10(b) of the Securities Act is required in order for an issuer to make written offers and, subject to certain exceptions, use an FWP. Moreover, since there was no “allocation” of Spotify shares, FINRA’s new issue allocation rules were likewise not applicable. On March 23, 2018, the SEC declared Spotify’s registration statement effective after being in registration with the SEC for just more than three months, approximately the same timing as an IPO. The IPO has been a success; the stock has traded in a fairly narrow range above the reference price of $132. It also didn't need to do a roadshow because investors were familiar with the company and what it does. The shares experienced relatively low volatility in trading on a high volume of shares (day one trading volume of 30,526,500 shares with 178,112,840 shares outstanding) and closed the first day of trading at a price of US$149.01 per share. With respect to this second prong, the NYSE looks for a sustained trading history over several months. (Some companies have direct listed on the exchange in the past, but those have essentially always been either spin-offs, companies coming out of bankruptcy, or companies moving from another exchange.). The path to a direct listing involved many features not usually found in the traditional IPO, the most significant of which are highlighted below. Marc D. Jaffe and Greg Rodgers are partners at Latham & Watkins LLP and Horacio Gutierrez is General Counsel at Spotify Technology S.A. Additionally, any person who is an affiliate of a reporting issuer, or any person who was an affiliate at any time during the 90 days immediately before a sale, must also satisfy, among others, Rule 144(c)(1), which requires the reporting issuer to have been subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act for a period of at least 90 days immediately before a sale. Spotify wanted to provide all buyers and sellers of its shares with unfettered access to the markets. — CNBC's Sara Salinas contributed to this report. (go back), 3See Renaissance Capital IPO Intelligence, “2017 IPO Market: Good, But Not Great,” available at http://www.renaissancecapital.com/review/2017USReview.pdf. Retail investors are offered a video recording of the road show, which is made freely available on the internet. With an intraday volatility of 12.3% on the first day of trading, Spotify’s shares experienced low volatility compared to other large technology IPOs in the past decade. As a result, Spotify needed to either register all shareholders’ shares or ensure that an exemption from registration (such as Rule 144) would allow shareholders to sell without registration. [3]. With a “direct listing,” Spotify essentially posted available shares on the New York Stock Exchange and let the market figure out a fair price, rather than … While most of the information in the registration statement tracked the information ordinarily included in a registration statement for an IPO, there were important differences, including (1) the shares registered on the registration statement; (2) the “bona fide estimate” of the price range for the cover of the preliminary prospectus; and (3) the plan of distribution section of the prospectus, which delineates how shares may be sold under the registration statement. Since Spotify first announced its intention to become a public company using this groundbreaking and innovative structure, it has generated enormous interest from the financial press and market participants. (go back), 6A foreign private issuer, or FPI, is an entity (other than a foreign government) incorporated or organized under the laws of a jurisdiction outside of the US unless: (1) more than 50% of its outstanding voting securities are directly or indirectly owned of record by US residents; and (2) any of the following applies: (i) the majority of its executive officers or directors are US citizens or residents; (ii) more than 50% of its assets are located in the United States; or (iii) its business is administered principally in the United States. Even in the context of an IPO, a road show is not required to be filed pursuant to Rule 433(d)(8)(ii) if the issuer makes “at least one version of a bona fide electronic road show available without restriction by means of graphic communication to any person, including any potential investor in the securities … .” In an IPO, it is common to record the first road show presentation and post it on the internet for viewing by all prospective investors. The financial advisors assumed clearly defined roles, which included helping Spotify to define objectives for the listing, advising on the registration statement, and assisting in preparing presentations and other public communications. The lockup plan could limit insider trading, … 3 Now, direct listings are not intended for all companies. However, in order to be eligible to use a Form S-3 or F-3 registration statement, a company must, among other requirements, have been subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act for at least 12 months. Got a confidential news tip? Sign up for free newsletters and get more CNBC delivered to your inbox. If Spotify’s direct listing were a song, it would surely be at the top of the Today’s Top Hits [1] playlist for 2018. The NYSE set Spotify's reference price — which is not the same as an IPO price — at $132 ahead of Tuesday's trading. Thus Spotify is in a unique scenario. While Item 508 of Regulation S-K is entitled “Plan of Distribution,” it is market practice in a registration statement for an underwritten IPO that the information required to be disclosed under Item 508 is included in a section entitled “Underwriting,” mainly because the disclosure requirements regarding the underwriters in that section. Spotify is pursuing an atypical “direct listing”, which means they will not use the traditional syndicate approach of issuing new shares to raise capital. The plan of distribution also clarified that the activities of the designated market maker in opening the shares for trading and facilitating an orderly market for Spotify’s shares would be conducted without coordination with Spotify. Spotify finally went public on April 3, following an unusual path known as “direct listing” – the shares started trading on the New York Stock Exchange, without any of the contractual or marketing arrangements that attend a typical IPO. [11]. (go back), 11Securities Act Rule 433(h)(4) provides the formal definition of “road show” as an offer (other than a statutory prospectus) that “contains a presentation regarding an offering by one or more members of an issuer’s management … and includes discussion of one or more of the issuer, such management and the securities being offered.” Securities Act Rule 433(h)(5) defines a “bona fide electronic road show” as a road show that is a written communication transmitted by graphic means. As a result, for the first 90 days after Spotify was subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, neither affiliates nor non-affiliates who had held shares for less than a year would have been able to sell shares pursuant to Rule 144. In its comment letters on the Form F-1, the SEC Staff appeared focused on ensuring that Spotify highlighted the direct listing structure as a novel method for going public and noting that, as a result, the trading volume and share price could be more volatile than in a traditional IPO. Spotify had chosen to submit its registration statement for confidential review and was therefore required by the SEC to publicly file its registration statement at least 15 days before commencing a road show or, in this case, hosting its Investor Day. © 2021 CNBC LLC. [12] One of the key features of a red herring prospectus is a “bona fide estimate” of a price range on the cover, which, as noted above, Spotify satisfied by explaining the method by which the price would be determined and providing the high and low sales prices per share of recent private transactions. This process was successfully completed in February 2018, when the SEC approved a new NYSE rule that permits issuers to effect a direct listing of their shares upon effectiveness of a resale registration statement under the Securities Act and without a related underwritten IPO. For example, could IPOs without lock-up agreements or with shorter lock-up periods begin to enter the market? On April 3, 2018, Spotify opened for trading on the NYSE. [10]. Offer greater liquidity for its existing shareholders, without raising capital itself and without the restrictions imposed by standard lock-up agreements, Provide unfettered access to all buyers and sellers of its shares, allowing Spotify’s existing shareholders the ability to sell their shares immediately after listing at market prices, Conduct its listing process with maximum transparency and enable market-driven price discovery, Commenced five business days (the typical pre-pricing period in a traditional IPO) prior to the designated market maker’s determination of the opening price of the Spotify shares on the NYSE, Ended with the commencement of secondary market trading on the NYSE. Spotify had a number of important goals that it wanted to achieve along with going public, and a direct listing enabled it to do so. Spotify had a number of important goals that it wanted to achieve along with going public, and a direct listing enabled it to do so. The company is now public; it took the unusual step of pursuing a direct listing… The Investor Day was streamed live to anyone with interest and an internet connection. The publicly filed registration statement needed to include a “red herring” prospectus meeting the requirements of Section 10(b) of the Securities Act. Despite its unique features, Spotify’s Investor Day qualified as a road show under the SEC’s rules. In the absence of an underwriting syndicate, Spotify turned to Goldman Sachs & Co. LLC, Morgan Stanley & Co. LLC, and Allen & Company LLC to serve as its financial advisors. NYSE President Tom Farley told CNBC it will "likely will not be common" to see other companies qualify for the direct listing process. Spotify registered shares held by employees to address any regulatory concerns that resales of shares by employees occurring around the time of the direct listing may not have been entitled to an exemption under the Securities Act. Spotify’s Direct Listing in the U.S. and Lessons from the UK If all goes well with its February 28 filing with the Securities and Exchange Commission, Spotify will be the first firm to go public in the U.S. via a direct listing on a stock exchange. When Spotify came to Latham in May of 2017 with its goal of becoming a publicly traded company, it also wanted to achieve a number of other important objectives that did not necessarily align well with a traditional US IPO process. The SEC Staff agreed (subject to the facts and circumstances presented) that it would not recommend enforcement action against Spotify, Spotify’s financial advisors, or the registered shareholders if the restricted period observed in this context (in relation to communications or activities not otherwise excepted under Regulation M) both: By obtaining this no-action letter, Spotify was able to provide clarity to its shareholders and the market regarding the types of activities and communications permissible in the context of the direct listing and signaled that normal course trading activity was expected to resume on the listing date (essentially, after the first trade on the exchange). As of March 28, 2018, the average first-day return for 2018 IPOs was 13.2%. (go back), Posted by Marc D. Jaffe, Greg Rodgers, and Horacio Gutierrez, Latham & Watkins LLP, on, Harvard Law School Forum on Corporate Governance, on Spotify Case Study: Structuring and Executing a Direct Listing. Existing shareholders, such as employees and early-stage investors, become free to sell their shares on the stock exchange, but are not obligated to do so. The ideal candidate is a company In a direct listing, you hire these banks as financial advisers to help you navigate the process. In early April 2018, Spotify Technology SA (Spotify) had planned a rare direct listing on the New York Stock Exchange. Spotify Technology S.A. went public on April 3, 2018 through a direct listing of its shares on the New York Stock Exchange. These include, among others: (1) FPIs may file financial statements in US Generally Accepted Accounting Principles (GAAP), the English-language version of International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board or local GAAP; (2) FPIs are not required to file quarterly reports on Form 10-Q or current reports on Form 8-K; (3) the financial information of FPIs goes stale more slowly in a registered offering; (4) FPIs are exempt from the US proxy rules; (5) FPIs are exempt from Regulation FD; (6) FPIs are exempt from Section 16 reporting; (7) annual reports of FPIs on Form 20-F are not due until 120 days after fiscal year-end; and (8) FPIs enjoy exemptions from SEC and stock exchange corporate governance and other requirements. The NYSE’s designated market maker, in consultation with a financial advisor to Spotify (as discussed further below) and pursuant to applicable NYSE rules, would use those orders to determine an opening price for the shares. The plan of distribution section also described in detail the roles of the NYSE’s designated market maker, including the NYSE’s requirement that the designated market maker consult with Spotify’s financial advisor with respect to the establishment by the designated market maker of the opening price. All non-affiliated shareholders who had held their shares for at least one year were free to resell their shares without registration pursuant to Rule 144. The direct listing processes for Spotify and Slack closely mirrored one another, and while nothing is certain, they could shine light on what is to come for Palantir. The story of Spotify’s direct listing is told by a series of articles in the Wall Street Journal. With a listing ecosystem designed around a traditional underwritten IPO process, Spotify had to work closely with the US Securities and Exchange Commission (SEC) Staff, the NYSE, and its financial and legal advisors to achieve its goals for the direct listing within the confines of the Securities Act, the Exchange Act, NYSE listing rules, and investor expectations. The new rule provides an exception to the private placement market trading requirement for issuers that (1) have a recent valuation from an independent third party indicating at least US$250 million in aggregate market value of publicly held shares; and (2) engage a financial advisor to be consulted by the NYSE’s designated market maker in determining the opening trading price. To accomplish this, Spotify provided traditional public company-style guidance prior to listing. The major difference between a direct listing and an IPO is that one sells existing stocksCommon StockCommon stock is a type of security that represents ownership of equity in a company. "I'm not quick to jump to 'hey if this is a success it's a revolutionary overhaul of the IPO process,'" Farley said on CNBC's "Squawk on the Street.". A direct listing is an innovative structure that provides companies with an alternative to a traditional IPO in the path to going public. Data is a real-time snapshot *Data is delayed at least 15 minutes. First, it doesn't need to raise capital because the company is cash flow positive. Spotify and Slack, the two companies that paved the way for direct listings, didn't have such a lockup period. To achieve this, Spotify registered shares held by affiliates and non-affiliates who had not held the shares for at least one year or otherwise did not meet the requirements for selling under Rule 144.