In the second part of our article, we focus on Spotify, a digital music service that utilised a direct listing to become a public company, the key steps they took that differed from a traditional IPO, and how the NSE can modify its current regulatory framework to include direct listings.
Case Study: Spotify Technology S.A (Societe Anonyme)
On 3 April 2018, Spotify, a tech company, offered the largest direct listing in corporate history. Spotify became a public company by offering its shares through a direct listing on the New York Stock Exchange (“NYSE”).
The goals that Spotify wanted to achieve were:
- To offer greater liquidity to its existing shareholders, without raising capital and without the restrictions imposed by standard lock-up agreements;
- Provide unfettered access to its shares, giving its existing shareholders the ability to sell their shares immediately after listing at market prices; and
- To conduct its listing process with maximum transparency and enable market-driven price discovery.
Therefore, in order to achieve these goals, Spotify and its advisors had to take a different path towards listing on the NYSE:
- Pre-Listing Concerns
The US Security and Exchange Commission (“US SEC”) highlighted the risks of direct listings and noted that due to the novel nature of a direct listing, the price of the shares and the volume of shares traded on the day of listing may be more unpredictable than an IPO as investors tend to rush at anything deemed novel or new.
2. Use of Peculiar Security and Exchange Commission Forms
Since the company was departing from a traditional IPO, instead of filling forms to register its shares, what Spotify did with the US SEC was to register with the US SEC, a resale registration statement. A resale registration statement is a registration statement filed with the SEC that registers under the US Securities Act the resale of outstanding shares by the holders of such shares pursuant to the registration statement as long as the registration statement remains effective.
3. Price of Shares
Usually, the Prospectus of a company that wishes to go public, contains the expected price of the shares but this was not the case for Spotify as the company used a preliminary Prospectus (the first draft of a prospectus subject to change by the company or any other relevant party in the process of going public) to explain how the price of the shares would be achieved and also gave a brief history of the company’s private placements.
4. Distribution of Shares
Since there were no underwriters in the transaction, there was no offering of the shares by a group of financial specialists as is usually done in an IPO. Instead, there was a Distribution section in the resale registration statement which described the process of the distribution of the shares.
5. Financial Advisors
Again, due to the absence of underwriters, Spotify appointed financial advisers (Goldman Sachs & Co. LLC, Morgan Stanley & Co. LLC, and Allen & Company LLC) who had specific roles during the direct listing process such as market markers, public communication and advising on how to prepare the registration statement.
The Success Story
On 3 April 2018, the NYSE published to the market pre-trading that Spotify shares were going to sell at $132.50 per share. The opening prices of the shares were actually $165.90 and 30,526,500 shares were traded with 178,112,840 shares outstanding on the first day. The exchange closed on the first day with shares of Spotify trading at the price of $149.01 per share. As at April 2020, Spotify shares were trading at $156.57 per share and the lowest share price the company has experienced on the NYSE is $109.18 according to the NYSE.
This unprecedented effect of Spotify’s direct listing and the fact that the company achieved its goals, has caused the NYSE to consider publishing rules to allow companies raise fresh capital through direct listings. As of today, the NYSE has filed a proposal with the US SEC to allow companies go public through a direct listing and raise fresh capital from the public.
The Nigerian Stock Exchange and Direct Listings
According to the Nigerian Stock Exchange Greenbook (the “NSE”), there are five ways of listing on the NSE. The types of listings that are similar to direct listings are Listing by Introduction and Direct/Dual Listings.
1. Listing by Introduction
In a Listing by Introduction, the company’s shares are listed without an IPO. The company must meet the listing requirements set by the NSE such as a minimum number of public shareholders and a minimum public float (number of shares to be held by the public). The company should have raised capital prior to the listing.
2. Direct/Dual Listing
For a Direct/Dual Listing, a company must be listed on another stock exchange before listing on the NSE or the company will list on the NSE and another stock exchange but the latter will be its primary listing. The company need not have an office in Nigeria or even conduct business in Nigeria but it must have an operating track record of two years, and the jurisdiction it has been listed in or wishes to be listed in must have shareholder protection equivalent to Nigeria.
Perhaps, the Nigerian Stock Exchange could combine the principles of the two methods aforementioned and create direct listings for entities that have complied with the listing requirements spelt out in the NSE Greenbook. This means that a private company that has an:
- operating track record of at least two years;
- has met the minimum requirements of the NSE and has been screened by the Nigerian Securities and Exchange Commission and its sector-specific regulator; and
- has a minimum private float that will be determined by the NSE;
can go public without an IPO, by listing on the Nigerian Exchange through a direct listing, allowing its shareholders sell their shares to the general public through brokers and also allow the company sell its outstanding shares.
A direct listing is a viable path for tech companies that wish to go public but it is not for everyone. Companies must consider factors like capital requirements, shareholder composition and the goals and objectives of going public. Tech companies that wish to go public by this means must also ensure that they have a shareholder base comprising of high net-worth Individuals and the company’s valuation is close to “Unicorn status”. One thing is certain, direct listings are here to stay and Nigeria with its large tech ecosystem needs to consider the new alternative for tech companies who wish to go public.