In April, Spotify signed a deal with Universal Music Group Inc. to make its platform more attractive to top-selling artists like Adele, Lady Gaga, and Coldplay by letting them release albums exclusively to premium users. Spotify is also working towards deals with Warner Music Group and Sony Music in the run-up to the IPO.

With deals and negotiations in the works, Spotify is aiming for a direct listing on the New York Stock Exchange when it is expected to go public late 2017 or early 2018, according to Axios.

Dan Primack of Axios offered his thoughts about Spotify’s reported direct listing:

“A direct listing would save Spotify some Wall Street underwriting fees, but that isn’t the music streaming company’s motivation. Instead, Spotify has watched the wild, post-IPO share price ride of consumer-facing companies like Facebook and Snapchat, and believes that a direct listing’s lack of a quiet period could help the stock reach “equilibrium” quicker.”

Dan Primack also shed some light on why Spotify is pushing to go public now:

“Spotify doesn’t have immediate cash needs, with $1.7 billion on its balance sheet, but the company is 11 years-old and early shareholders (particularly employees) want some liquidity.”

The direct listing will give Spotify employees the ability to cash out their holdings without the company having to pay the underwriting fees that are normally involved with an IPO.

According to Reuters, Spotify was most recently valued at $US 13B ($CAD 17.6B). Spotify is working closely with investment banks Morgan Stanley, Goldman Sachs Group Inc. and Allen & Co. to advise them on the process.

The direct listing route is also beneficial to the company because “Spotify raised $1B in convertible debt in March 2016 from TPG, Dragoneer and clients of Goldman Sachs. Terms of the deal were described by TechCrunch as “devilish,” with the note-holders able to convert to common equity at a 20% discount to Spotify’s eventual IPO price. Moreover, that discount began climbing by 2.5% every extra 6 months, assuming that Spotify didn’t go public one year after the debt issuance (which it didn’t).

Here’s the big rub: Spotify isn’t going to have an IPO price if it does a direct listing.” Dan Primack called this the wildcard of the direct listing route that Spotify is pursuing.

So what’s the difference between a traditional IPO and a direct listing?

Traditional IPO:

  • Investment bank underwriters sell new shares of a company to the public
  • Price determined on investor feedback
  • Underwriters are backed by an IPO syndicate, comprising of several banks
  • Share the responsibility of selling and allocating shares to investors

Direct Listing:

  • Company doesn’t raise money by offering new shares
  • Makes existing shares of employees and investors available to the public
  • Employees and investors can buy and sell as they wish
  • No “lock-up” period to prevent early investors and employees from selling their shares

Although the direct listing route is less popular than the traditional IPO, it has been around for decades and has been done by many companies. According to NY Times, Ben & Jerry’s and Annie’s Homegrown are some examples of companies that have gone this route. NY Times also says that California has some 150 to 200 direct offerings annually. While traditionally used for smaller companies, Spotify will be the first major company to carry out a direct listing on the New York Stock Exchange. Typical for a company that is continually disrupting the industry.