Spotify moves for a direct listing

At the end of December, music streaming leader Spotify filed documents with the US Securities and Exchange Commission for an initial public offering, as reported by Axios.

The documents were filed confidentially utilising the “stealth filing option”, a new process introduced by the SEC in July intended to make the listing process more efficient. Companies, regardless of their revenue, can now file their draft statements of registration confidentially before filing their financial details. Spotify has yet to comment on whether or not the confidential filing has in fact taken place, or to confirm any of the details.

Spotify appears to be seeking a direct listing on the New York Stock Exchange, rather than a traditional public float.  This is a faster, cheaper route to public listing, without the “roadshow” process of making presentations to investors, underwriting fees and tackling other administrative hurdles.

Spotify has been valued at around $19 billion and would be the first major company to attempt direct listing.  Spotify is the biggest global music streaming company of its type: recent estimates suggest that it has 70 million paying subscribers as of January 2018 (compared with Apple Music’s 30 million), and over 140 million active users.  Streaming now accounts for over half of all UK music consumption (read more on UK streaming statistics in our BPI article).

Effectively, Spotify is trading off the public awareness of its value, and eliminating the cost of using an investment bank as a broker.  Some estimates suggest that the broker fees would have been as much as $300 million.

There have, however, been suggestions that investors may be wary of a company that remains unprofitable due to its substantial operating costs.  Leaked financial documents show that Spotify recorded a net loss of $568 million in 2016.  When paired with this possible investor wariness, the absence of underwriters could lead to volatility in Spotify’s stock.

Spotify’s public listing ambitions proceed in spite of active copyright infringement proceedings brought against it by Wixen Music Publishing, Inc. in a California District Court.  Wixen, which represents artists including Missy Elliott, The Beach Boys, Al Green and Janis Joplin, is seeking $1.6 billion in damages and injunctive relief for Spotify’s alleged use of its songs without a licence.  Wixen claims that Spotify failed to obtain the appropriate rights in the underlying compositions for the songs streamed on its platform.  Still, Wixen may well try to settle its claim for a smaller sum, rather than proceeding to trial and jeopardising its relationship with one of the streaming industry’s main players.

If Spotify’s direct listing is successful, which is reportedly planned to go ahead in March or April 2018, it could set a precedent for the way that large technology companies go public in the future.  Major record labels (investors in Spotify) and other industry stakeholders will be taking a keen interest in the success or failure of Spotify’s listing, as Spotify’s meteoric rise has driven a streaming-led resurgence in the industry as a whole.  A success could solidify Spotify’s reign and help to carry on improving revenues for music rights-holders.

Ed Weidman, Associate and Thomas Moore, Trainee Solicitor, Simkins LLP