The U.S. Securities and Exchange Commission is expected to clear the way for music-streaming service Spotify to go public using the unusual method of a direct listing. The successful music-streaming service Spotify will release its stocks to the public in 2018 through a direct offering instead of the traditional IPO.
Before Spotify can directly list its shares, the New York Stock Exchange must win approval from the SEC to change its rules. “The NYSE has applied for such a change and the SEC has indicated to Spotify it’s likely to approve,” The Wall Street Journal reported.
The commission has not yet made an official decision and “could potentially reject [the NYSE’s proposal] or ask for further amendments,” the WSJ cautioned. “Spotify could also still change its mind and decide to delay or even not move forward with a direct listing.”
Spotify, which was valued at $8.5 billion during a private funding round in 2015, now has a valuation closer to $20 billion. It has been targeting March or April for its stock market debut.
Companies have shied away from a direct listing in part because there is a greater risk that the shares could flop since there are no underwriters to set and prop up the price. Nasdaq has completed about half a dozen direct listings since 2006 while the NYSE has had none, according to the two exchanges.
A direct listing may appeal to Spotify because it would provide liquidity to its shareholders.
“The company provides a path for patient investors to sell their shares as soon as the listing is effective,” CNBC said. “There’s no underwriter lock-up and there’s no dilution to existing shareholders because the share count doesn’t increase, as it does with a traditional IPO.”
Using an investment bank for is an easier way for a new company to raise cash. Investment banks help the issuing company fulfill all legal requirements, which can otherwise be costly and time-consuming. Also, the underwriter will most often buy all the newly issued shares from the company so that the business knows exactly how much new capital it has raised. For these services the underwriter earns a “spread,” or commission.
Nevertheless, Spotify would still be required to go through pre-listing hoops including due diligence and prospectus drafting and, after it is listed, would be subject to quarterly financial reporting and accountable to many more shareholders.
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