Spotify's Direct Listing: Is it a Recipe for Gatekeeper Failure?

Abstract

On April 3, 2018, Spotify Technology S.A. — a music streaming company valued in excess of $20 billion — went public by direct listing on the New York Stock Exchange (NYSE). A direct listing is distinguishable from the more traditional initial public offering (IPO) in a number of ways, but the most important for purposes of this Article is that it foregoes the traditional underwriter.

First, this Article explains direct listings, why a company would choose to go public by direct listing, and the mechanics of a direct listing. Second, this Article explains that a direct listing — with its reliance on a financial advisor to shepherd the transaction to completion (as opposed to the underwriter-shepherded IPO) — is a danger to investors. In a traditional IPO, underwriters are incentivized to act as gatekeepers. Underwriters allow worthy companies to enter the public exchanges, and, conversely, exclude unworthy companies.

Financial advisors to a direct listing do not have the same incentives to act as gatekeepers. Financial advisors do not market or sell shares in a direct listing, and as such, are less likely to be held reputationally responsible for a flop. Neither do financial advisors face Securities Act liability, which would make them think twice before thrusting a troubled company on potential investors. The fact that financial advisors are less likely to be effective gatekeepers is an important finding. Several tech unicorns are likely to go public soon — they will attract billions of dollars of investors’ money — and are considering doing so by direct listing (Airbnb, Pinterest, and Uber are the prime candidates).

Finally, this Article assumes that direct listings are here to stay. As such, this Article presents for discussion some ideas for making direct listings safer for investors. The first, is to align the profitability of the financial advisor with the profitability of the company that is direct listing (deferred fees tied to long-term company performance is one possibility). Or second, financial advisors could be required to “opt in” to liability under Section 11 of the Securities Act of 1933.

Keywords: direct listing, Spotify, Securities Act, registration statement, gatekeeper, underwriter, investment bank, initial public offering, IPO, NYSE, NASDAQ

JEL Classification: K2, K22