Spotify has filed for a direct public offering, a risky listing strategy that could see its ordinary shares dive "significantly and rapidly".

By Joe McDonough

Posted on March 1, 2018

Music streaming giant Spotify Ltd has filed for a direct listing of its shares on Wednesday, taking a risky and unconventional path to the US’ public markets.

The direct public offering (DPO) means Spotify will skip the traditional Wall Street route whereby shares are sold to institutional investors, like hedge and pension funds, and those buyers then sell those shares on an open exchange like the New York Stock Exchange (NYSE).

They are able to sell their shares for a higher price than what they secured during the IPO, as reward for taking the initial risk.

Using Snap — the company behind Snapchat — as an example, Recode explains what that means for the pre-IPO investors.

“Snap sold stock in its IPO last month for $17 a share. That means Snap’s early investors, like Benchmark, got $17 for every share they sold. But the next day, when those IPO investors sold shares on the NYSE, the stock traded at $24, a 41% pop above the IPO price,” it writes.

“Every penny above $17 is a penny Snap and its early investors didn’t get. So you could argue the pop was bad for the early owners of Snap. They left 41% on the table.”

The rationale behind the Sweden-based company’s direct listing is that it won’t be losing all that money to brokers and big funds, allowing maximum return for its existing investors. It also frees company insiders from any lockup period restricting them from selling their shares following the listing.

However, it’s not without risk. Spotify will not benefit from the marketing roadshow, and without underwriters conducting the book-building process, there is no safety net for the stock if investors turn off the company.

“The public price of our ordinary shares may be more volatile than in an underwritten initial public offering and could, upon listing on the NYSE, decline significantly and rapidly,” Spotify warned in its prospectus.

But Santosh Rao, the head of research at Manhattan Venture Partners — which has invested in the company in the secondary market, said Spotify’s strategy is likely to pay off.

“If this is a successful listing, I can see Airbnb doing it, Uber doing it,” Rao told Bloomberg. “But Uber and Airbnb are much bigger scale.”

The 10-year-old company headed by Daniel Ek, is roughly valued at $19 billion on Reuters calculations, and will list its shares on the NYSE under the ticker of “SPOT”.

Having pioneered music streaming — the largest segment in the music industry in the US – Spotify is in a formidable position. It has amassed 71 million paid subscribers globally (46% increase in 2017), and its revenue increased 39% year-on-year in 2017, totalling roughly $US5 billion, according to its filing.

But there is pressure coming from Apple Music, which has accrued 36 million subscribers in just three years. Inc and Alphabet Inc’s Youtube are the other major players.