That's more or less how a direct listing works. Historically direct listings have been rare, but recently Spotify and Slack have successfully done it.
The main downsides (aside from it just being unusual and therefore a bit risky) is that for regulatory reasons the company can't sell new shares this way, so it's just a means to go public and doesn't raise any money.
However, once the company is public (and has an established price) nothing is stopping them from doing a secondary offering.
> Slack Technologies Inc. is set to go public on Thursday using a nontraditional process called a direct listing. Only one other big company, Spotify Technology SA, has gone public in this way.
Spotify is doing something like that (direct listing makes the stock be subject to the usual auction-like mechanism of the stock market from the moment it goes public).
> Spotify AB has filed confidentially with the Securities and Exchange Commission to go public via a direct listing, in which it won't sell shares in an initial public offering but will instead just one day declare that it is public and let anyone who wants to trade its shares.
The article also explains why Google's case was more akin to a traditional IPO than Spotify's.
Not sure if the comments were supposed to be connected, but just to be clear, Elastic NV (ESTC) did a traditional IPO. Spotify was the first to do this direct IPO and Slack would be the second.
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.
The comment you're replying to is describing a regular IPO, and is not incorrect. The direct listing process is not a type of IPO; it's skipping the IPO.
Apparently the traditional underwritten approach is engineered fairly specifically to aim for that first day "pop" to build excitement about the new stock, and also seems with a lot of publicity which the banks can provide.
According to the article, direct listing does seem to be better for employees though:
* Spotify would likely issue no new shares (less dilution).
* No expensive underwriter necessary.
* Existing shareholders won’t have pre-sell any of their shares to new investors, which could mean that they capture more of the upside given that the stock has been purposely underpriced for the pop (and so the new investors capture more).
The primary reason for doing a direct listing is because you don't need to raise capital. It's mostly reserved for the case where you want your pre-existing shareholders to access the liquidity of the public markets.
In contrast, if you're actually going public to raise more capital, direct listings are a lot riskier. Basically the point of the IPO, and paying investment banks huge fees, is to select and handhold the new investors.
The investment bankers perform a lot of work around actually getting supply to meet demand. They're doing roadshows in front of potential investors, getting feedback on the best way to present the company, trying to determine what the market would price the company, etc. They're also making some effort to curate a higher-quality investor base, i.e. those who actually believe in the company's vision and aren't likely to flip the shares for easy money or sell out at the first sign of trouble.
The reason for the traditional IPO pop mostly has to do with compensating these types of investors for making a commitment and taking a risk on an unproven stock.
Now if it's definitely debatable whether what the company pays in the form of investment banking fees and systematic underpricing is actually worth it. But the point is that for a company like Slack, which isn't raising capital, it's almost certainly not worth it. On the flip side the success of this particular doesn't necessarily tell you anything about how much value a traditional IPO does or doesn't add.
A direct listing is definitely the most likely option which is why they didn’t call it an IPO anywhere. They already have huge numbers of institutional and strategic investors. I’m not sure who you think they are waiting to get investment from. Crunchbase lists 53 investors including YC, Sequoia, Andreesen Horowitz, Greylock, Founder’s Fund, CapitalG, and TCV. They turned down SoftBank funding. Their shares have been owned by mutual funds from Vanguard, Fidelity, Morgan Stanley, Principal, T. Rowe Price, and Hartford for at least five years. They’ve already raised the warchest that you’re talking about.
Spotify and Slack had fine initial listings, but they are both losing tons of money so the market reacted negatively as their quarterly earnings made this more and more clear. Not a great comparison to a company that has been printing money and hasn’t raised a serious round in years.
A direct listing is definitely not the most likely option. Only two major tech companies have done direct listings and there are also a lot more reasons you would want to do an IPO instead of a direct listing
1) Neither SPOT or WORK has done great, especially WORK
2) IPO allows you to choose your investors. This gives you the opportunity to choose major institutional investors that are in for the long term which will help reduce stock volatility.
3) Even if you don't need money, raising billions can open up a lot of opportunities for the business and give you a warchest to derisk potential market downturns.
That's not what the article says. It says they paid some money in fees, and more than the average IPO. It does not say they paid more or the same as a percentage than the average IPO. I can't find any information on how much money they/their shareholders ultimately raised, so it's difficult to contextualize that $30M number. But, for example, if only ten percent of the shares were sold in the IPO, that would amount to $500M in sold shares. The typical IPO nets 5% in fees, which would be $35M. On the other hand, if 20% of the company changed hands in the IPO, that would amount to $70M in expected fees.
To me, ten percent seems pretty conservative, so I'd say it's a safe bet Spotify saved money. I expect Slack would not do the direct listing if they didn't also expect to save money on the deal.
This has nothing to do with ICOs. A lot of cash-rich tech companies (e.g. Slack, Palantir, Asana) have been foregoing IPOs in the last couple of years and choosing to list shares directly on the market, and so the SEC realized the best way forward is to formalize it.
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