
SEC Is Studying Spotify's Plan to Bypass IPO in NYSE Listing - marcopolis
https://www.bloomberg.com/news/articles/2017-08-21/sec-is-said-to-study-spotify-plan-to-bypass-ipo-in-nyse-listing
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mankash666
Institutions that add little to no value in transactions:

1> IPO underwriter 2> Title/Escrow company in a home sale 3> Payment
processors like Visa 4> Property manager for a rental home 5> Realtors

These middlemen need to be bypassed to keep more value in these high value
transactions and reduce costs!

I'm glad Spotify is doing this, hopefully other big names will follow

~~~
jasode
_> 1> IPO underwriter_

The underwriter provides value by being _one_ convenient transaction to sell
my company's shares. Instead of haggling with 1000 individual investors on
"price", I haggle with just the bankers at Goldman Sachs or Merril Lynch. The
investment bank then wires me the money and I get to concentrate my efforts
elsewhere (like the product) instead of fundraising. (Damnit Jim I'm a tech
CEO and not a hedge fund portfolio salesman!) The investment bank is now on
the hook for selling the shares to those 1000 investors. Also, the investment
bank has the prestige and the rolodex of potential buyers. For me (say a young
20-something) to replicate that would require many golf games and champagne
dinners that take my time away from improving the product. Saving me _time_ is
worth _something_ , right? (Maybe not a 3% underwriting fee but it's
definitely worth something.)

Cutting out the underwriter also means I leave "money on the table" because
many investors would rather buy initial shares from a reputable intermediary
like Goldman Sachs rather than a startup like me.

If you as a company, prefer to _do_ the same investor relationship work that
underwriters do, by all means, skip the underwriter fees.

~~~
dlubarov
> Instead of haggling with 1000 individual investors on "price", I haggle with
> just the bankers at Goldman Sachs or Merril Lynch.

Well in an ideal world, companies shouldn't have to haggle at all -- a public
auction should determine the IPO price. Or better yet, companies should be
able to just submit sell orders as they see fit, without being required to
make any volume or price commitments beforehand.

~~~
beejiu
> a public auction should determine the IPO price

An IPO is (usually) for a small amount of a company (5-10%) - hence the term
"initial". Once the stock is traded, the market is continuously setting prices
(essentially a continuous auction) and companies are able to sell more stock
if they so wish. The reason IPOs are not also auctions (or market priced) is
because that model has been tried and it doesn't work.

~~~
nordsieck
It seemed to work just fine for Google. What evidence do you have that it
doesn't work well?

~~~
beejiu
Google's IPO auction famously just scraped the low-end of its estimate (after
the range was revised down). It "popped" 18% on its first day of trading which
- at very best - shows that dutch auction is no better than underwriting.

" The offer price of $85 was well below initial expectations"
([https://www.vcexperts.com/buzz_articles/252](https://www.vcexperts.com/buzz_articles/252))

~~~
dlubarov
According to [https://www.iposcoop.com/the-ipo-buzz-a-dirty-dutch-
auction/](https://www.iposcoop.com/the-ipo-buzz-a-dirty-dutch-auction/) "the
mean average of all 21 [auction IPO] opening-day gain[s] was 1.25 percent". So
it seems like Google was an anomaly, but Dutch IPOs in general are not leaving
much money on the table compared to traditional IPOs.

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hammock
To all of the commenters in here, selling stock is not the only way to raise
money. Direct listing does not mean "they don't need to raise money." In
today's environment it's much better for a lot of companies to be issuing debt
instead.

~~~
hkmurakami
For many companies yes. But for companies with relatively poor financial
fundamentals, debt is not that cheap. Tesla's 8 year bonds are currently
yielding close to 6% (and they got a great deal on this too). They're rated
junk. Spotify would likely have to pay a higher coupon than Tesla. Debt for
them is not that cheap.

That being said, if you can issue investment grade bonds, then debt is very
cheap.

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notyourwork
What determines the initial listing price if this approach is taken? (Sorry I
am not well versed on IPO's and moving to a public company.)

~~~
sdkmvx
There is none. On the first day of trading there would be an opening auction
as is done with every other stock listed on the NYSE. Prior to open, everyone
interested in trading submits his orders. Then as many shares as can be traded
are traded at the price at which the maximum number of shares can be traded.
That is, the price is determined by supply and demand.

The IPO price is the price at which shares are sold by the company to the
public and represents the new money invested in the company. Then on the
morning on which trading opens there is an opening auction as described.
Ideally this price is near the IPO price, meaning that neither the company nor
the investors left money on the table.

Spotify is proposing to skip the IPO, and not raise further money. They must
think that their stock is already widely held enough to support trading, and
that they have no need of further money.

It will be interesting to see what happens if they go forward with this. While
the mechanics are no different than any other day of trading, I suspect the
type of trading will be very different. Currently all holders of Spotify stock
are long-term investors, simply because there is no market. Until traders
acquire enough of it, liquidity will be bad and the price will probably jump
around a lot. In addition, many people will want to invest, so they will buy.
Will current holders want to sell? I suspect they will want to watch trading
instead of selling at the first possible moment.

I think we'll see a rapid rise in Spotify's price due to high demand and lack
of supply. The current holders will undoubtedly be looking to reduce their
stake. Will demand keep up as they begin selling, or will price rapidly fall
as trading becomes, for lack of a better term, "normal."

~~~
notyourwork
So basically the IPO is a way to formalize the initial price of the stock. By
bypassing that process, they will sell for whatever the market dictates for
better or worse, is that correct?

If this is the case, is it possible the market could drive the price way up or
way down (more volatile?)

Additionally, is it possible that all private share holders could prior to
first day of listing come to an agreement on a minimum price they would sell
for? This would essentially be them setting their own price. Now whether
people are willing to pay at that price is another story.

~~~
sigstoat
> So basically the IPO is a way to formalize the initial price of the stock.

no. it is the company selling their stock to the public for the first time, to
raise cash. the company chooses a price it is willing to sell at.

further, "formalizing" the price of the stock isn't a thing. the price of the
stock is whatever somebody will sell it to you for.

> By bypassing that process, they will sell for whatever the market dictates
> for better or worse, is that correct?

once the stock is on the market, it sells for whatever someone will buy it.
the IPO happens shortly before it hits the market.

> Additionally, is it possible that all private share holders could prior to
> first day of listing come to an agreement on a minimum price they would sell
> for?

sure, they could. but there are probably already hundreds or thousands of
them.

~~~
adventured
> no. it is the company selling their stock to the public for the first time,
> to raise cash.

That's incorrect. The company is not raising cash with this IPO. The insiders
are doing the IPO to sell, which should tell you what's actually going on. By
direct listing, they avoid the traditional lock-up, so they can liquidate
immediately.

~~~
sigstoat
> The company is not raising cash with this IPO.

...there isn't an IPO, which is the whole point of the article, and these
comment threads.

i think in the context of the comment i was replying to, it was fairly clear i
was explaining what an IPO is normally for.

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5trokerac3
One of two possibilities, IMHO:

1\. They're trying to avoid a Twitter-like hype bubble on their stock, because
they have so much brand recognition.

2\. They're trying to drive a hype bubble and remove restrictions on cashing
out their stocks before it pops.

Either way, gonna need to see that earnings report.

~~~
ProAm
I think it's just a way to allow early investors and employee stock holders to
exit.

~~~
Animats
Right. They don't need to raise money.

~~~
adventured
They're absolutely going to need to raise money, soon.

They've lost $822 million in the last two years, with their losses
skyrocketing last year to $581 million. At least $400m to $500m of their prior
VC from years ago (2008-2013) is guaranteed to be long gone at this point.

They're down to less than 12 months of capital unless they've suddenly figured
out how to make money in the last few months with a blackhole business model
that can never produce meaningful profit because they don't own most of the
content and the licensing will perpetually squeeze them to death.

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hellbanner
Is there any reason to buy stock in a company if they don't provide dividends,
besides the bigger fool theory?

~~~
ThrustVectoring
You have a right to a portion of the proceeds from a merger or acquisition.

Whether or not the company ever actually pays out its earnings as dividends,
there's little way to access those earnings without divvying them up amongst
the company's shareholders.

~~~
hellbanner
A merger or acquisition would only happen if the buyer expected to make money
from the transaction. This looks like an Even Bigger Fool Theory. It is a
little different because the CEO could take dividends whereas I, as a
stockowner, cannot.

Potentially, a company's performance being good would motivate someone else to
buy the company. But what I'm getting out of this is that you don't buy
(dividendless) stocks because a company's doing well but ONLY if A) you think
they will be sold or Bigger Fool Theory

[https://en.wikipedia.org/wiki/Greater_fool_theory](https://en.wikipedia.org/wiki/Greater_fool_theory)

~~~
ThrustVectoring
If a company has a billion dollars more cash than liabilities, it's worth at
least a billion dollars in a M&A deal today. You don't need a bigger fool,
just someone who's willing to wind down a business to net assets. See what
happened to Yahoo as a creative example of this - the operating business was a
net liability, but it owned a good chunk of valuable Alibaba stock that made
the stock positive-value, so it got split up, sold off, and wound down.

The dividends don't matter, IMO. It's net assets and net profits that do.

------
joshjkim
IPOs accomplish two concrete, positive things: 1. raise funds and 2. provide
liquidity to investors. they also make a company seem more legit (at least in
some cases, and in some circles). on the negative side, IPOs expose the
company's financials and business plans, are expensive up front and on an
ongoing basis to comply with SEC regulations (quarterly and annual reports,
proxy statements, etc.), and also open the company up to major scrutiny and
attack on the public market, with investors looking at the business
performance quarter to quarter and activist investors looking for weak
companies to push around (probably the nicest characterization, but you know
what i mean).

On the positive side, direct listing basically provides only for liquidity to
investors (though of course they can try and raise funds in the public market
down the line if they want). In spotify's specific case, they are also
probably being pushed by their later stage investors, who's deal specifically
contemplates achieving liquidity in the relative short term (the investors did
a convertible loan where investor terms improve the longer it takes spotify to
go public). In any case, spotify has good brand awareness, so really the
direct listing is all about liquidity. On the negative side, since Spotify is
a european company, even as a private company it already exposes its annual
financials publicly (though only on a delayed annual basis and without as much
required discussion of the business), but a direct listing would still open
the company up to major scrutiny and attack from activist investors.

in most cases, IPOs are considered motivated as much by fundraising as by
liquidity (at least that's what the foudners / investors want you to think),
and in fact big investors or founders selling big positions is generally taken
as a negative signal (if they "really believed" in the long-term potential of
the business, wouldn't they hold it? or so the theory goes). hence the lock-
ups that most founders and pre-IPO investors agree to, which guarantee that at
least for a set period of time, pre-IPO investors don't dump the stock en
masse and introduce massive volatility into the market.

In spotify's case, I think the SEC and the markets will want to look closely
at the lock-up periods or other restrictions on sale for various investors,
founders and the employees (if any), and try to determine exactly why and on
what terms and in what amounts the various pre-IPO shareholders want to
achieve liquidity. off the top of my head, there are three main views:

1\. viewed generously, you can say: "well, they've been doing this for a long
time, built a great business and still believe in the long-term future of the
company, but they all want to sell 5% because they are only human, will die
someday at some point and can't wait forever to cash out of their business".

2\. viewed less generously, you can say: "well, the management and main
investors who know the business best are not certain about the long-term
potential for the business and so want to cut and run before the downward
trend realizes itself, and so we should read their push for liquidity as a
negative signal for the business".

3\. another very spotify specific case could be: "management believes long
term and could give a shit about going public, but TPG and other late
investors are demanding this and they have different objectives, and if we can
satisfy those without diluting the business, I guess we'll just do that".

of course, it's probably a combo of those and other factors, but as an
investor i'd be mostly trying to read and see if this is just earlier
investors trying to dump shares because of lack of long-term faith - if so, be
weary! on the compliance side, the SEC's main job is just to ensure proper
disclosures are made (even if the business is less than ideal), but i'd
probably want to see what I can do to minimize the potential impact of the
less generous interpretation of motivations and any scenario where pre-IPO
investors make a bunch of money by dumping their shares on the less-informed-
about-the-business average investor.

~~~
mywittyname
It's very possible that employees just want the opportunity to liquidate what
has been the bulk of their compensation for the past x years.

At some point, this becomes a recruitment issue: what's the point in working
for a company that pays you in stock that you can never sell and that doesn't
pay dividends?

~~~
chii
Wouldn't the price tank if the majority of insiders want to cash out?

~~~
sigstoat
> Wouldn't the price tank if the majority of insiders want to cash out?

that depends on the demand. if the insiders have more shares they really want
to sell than there are matching buyers, sure. if the market is full of buyers
will to pay huge sums of money, then no.

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tmaly
There is one downside to bypassing the IPO. If the larger banks miss out on
their fees, these large institutional buyers can hold a grudge against you.
This can impact your stock price over a medium term.

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bitJericho
haha, you need to learn how to negotiate. (All fees are negotiable)

~~~
gervase
I think they know exactly what they're doing. You can't walk away without
losing your earnest money, so you've already given up your best move before
negotiation even started.

It doesn't help that trying to buy a house in many markets is restricted to
those who can pay entirely in cash within 2 days of listing.

~~~
xiaomai
In my experience, you can switch lenders if you are having a difficult time
negotiating fees (the escrow is a different party).

