Every year, dozens of companies join the public market and are listed on the various stock exchanges around the world. While many go unnoticed, there are usually a few companies that catch investor’s eyes beforehand. This year, the popular music streaming service Spotify is the name that’s making headlines, not only due to the company’s popularity but also because it is choosing a somewhat unusual path to going public. The Spotify stock will be available for trading and investing on eToro shortly after the company goes public.
Spotify filed for public listing on the NYSE with the SEC on Wednesday, February 28th, 2018, under the symbol SPOT. A public listing is different than an Initial Public Offering (IPO), which is the method usually chosen by companies when offering up their shares for sale. An IPO is a complicated process, which serves as a means for raising funds. In an IPO an initial number of shares is sold to investors before the stock is available to the general public, enabling the company to raise capital. This method involves recruiting a major financial institution to serve as an underwriter and selling them stock inventory before the listing. Spotify opted to skip this stage and go directly to the market, at an estimated valuation of up to $23 billion.
What is a public listing?
Unlike an IPO, if a company chooses a public listing, its stocks become available for trading and investing from the very beginning. Instead of giving early investors the chance to buy shares, existing shareholders can sell their stocks as soon as the company becomes public. While this gives the company instant liquidity on the market, it also leaves its stock to the mercy of supply and demand. The fact that Spotify has a steady revenue stream generated from more than 70 million subscribers worldwide could explain why the company chose this path. Also, this public listing could set a precedent for a new standard in the tech space.
The advantages of not raising money
While it might seem counterproductive, there are concrete advantages to Spotify’s choice. Firstly, the public listing process involves a lot less ‘red tape’ than an IPO. Since a direct listing has no share pre-sale, the company needn’t recruit an underwriter to comply with SEC regulations. Second, with a company like Spotify, that already has an active revenue stream, surrendering its market cap to speculation could go against its best interests.
The case of the SNAP IPO
The Snap Inc. IPO of 2017 could serve as an example of how an IPO could backfire. The maker of Snapchat went public in March of that year, and its stock initially showed impressive gains. The reason for its early surge was speculators wanting to get in on the stock early with the hopes of making a profit. However, since Snap had no solid business model, and declared it might never become profitable, within just four months, share prices plunged to below their IPO price. A similar scenario happened with Twitter, whose stock has been trading below its IPO price for more than two years.
A different way of going public
Spotify’s choice of a direct public listing could counter much of the volatility that would’ve been created with an ordinary IPO. If Spotify’s market cap remains stable or increases over time, a public listing could be the new preferred method for tech companies who want to go public and have a regular revenue stream. Removing much of the speculation could contribute to the stock’s stability, reflecting the company’s actual value, rather than being driven by early adopter’s hopes and dreams.
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