Latham & Watkins recently advised the largest global music streaming subscription service in the world, Spotify, on its successful New York Stock Exchange (NYSE) listing using a novel direct listing process.
Spotify’s direct listing did not involve a primary or secondary offer. In addition, no underwriters were appointed, no roadshow process was undertaken, and no IPO-specific lock-up agreements were entered into with existing shareholders.
Instead, these pillars of a typical underwritten IPO were replaced with an offer structure based on a purely market-driven approach to price setting with existing shareholders being free to sell all or part of their shares from day one without the usual 180 – 360 day post-admission restrictions. In addition, the roadshow process was replaced with a public investor day that was available to view live on its website by both institutional investors and retail investors. While certain banks acted as financial advisors in respect of the listing, they had no role in advising on investor meetings, facilitating price discovery activities, or conducting after-market stabilisation activities.
Despite the key benefits to existing shareholders and the equality of information amongst investors inherent in the direct listing process, Spotify’s listing presented a risk of volatile post-listing trading. By not conducting a book build, no price range was set to guide the market with respect to opening trades on the NYSE. Furthermore, without restricting existing shareholders from selling all or part of their shares there was a risk of oversupplying the market with shares. Without post-listing stabilisation activity, there was no ability to correct any volatility in the initial post-listing trading of Spotify. However, in the time since Spotify became a public company, its stock has been notably stable.
The direct listing process was well-suited to Spotify for a number of reasons. Spotify had no immediate requirement to raise capital so did not need to make a primary offer for its shares. Spotify also had a large and diverse existing shareholder base to provide the supply side of the equation. In addition, Spotify did not need to conduct a significant roadshow process as it enjoyed the benefit of a large existing institutional shareholder base coupled with an easily understood subscription business model and a well-known brand.
At first glance, markets such as London may not appear ripe for direct listings. An issuer seeking a premium listing is required to appoint a sponsor, adding a further regulatory burden and costs to the process. However, the Spotify IPO demonstrates that direct listings still require the assistance of investment banks. These regulatory differences alone are unlikely, therefore, to drive direct listings away from Europe. However, whether we will see an issuer use a direct listing in Europe will more likely depend on whether a specific issuer possesses similar traits to Spotify.
