March 30, 2018 | Blog

Spotify’s Direct Listing: A Historic Event For Private Capital Markets?

Spotify’s IPO next week could mark a sea change on how late stage private growth firms go public. The company is directly selling its shares to the public vs. hiring investment bankers to plug the stock prior to the IPO.

Such a direct listing is rare, even more so for such a large, high profile offering like Spotify. For one thing, the company offered its financial data to everyone at the same time. Normally, a company pursuing an IPO through bankers would give a select group of investors some extra information, giving those investors a distinct trading advantage once the opening bell sounds on Wall Street.

But Spotify has taken its financial transparency to another level. The company released some rather remarkable data in its prospectus: detailed history of trading prices for its common shares in private secondary transactions estimated from June 2017 to through March 14, 2018. The chart below illustrates share prices adjusted on a retroactive basis per the 40-to-1 share split effectuated on March 14, 2018.

Source: Spotify F-1 dated March 23, 2018.

In Spotify’s eyes, during this period, the price per share more than doubled from $50.70 to $120.50. The company said it calculated the number based on an accounting technique called the Probability Weighted Expected Return Method (PWERM). Developed by the American Institute of Certified Public Accountants, PWERM assigns an enterprise value to each class of stock based on events like a sale or IPO and the likelihood those events will happen.

Even more interesting, Spotify’s valuation includes how its shares fared on the secondary market. In fact, the company last December boosted its weighing of secondary market pricing so that the data accounted for 50 percent of its estimated fair market value for ordinary shares, compared to 20 percent during the previous months.

In many ways, Spotify’s approach validates the very mission of SharesPost, which is to bring greater transparency and liquidity to the market for private unicorn shares. Since private firms don’t need to disclose information like publicly-traded companies, unicorn investors often lack sufficient information to make decisions.

But Spotify’s actions suggests the company believes that more information, not less, is crucial to the success of its direct listing and we wholeheartedly agree.

With that said, Spotify is still taking an enormous risk. Should the company’s IPO fall short of its expectations, disclosing such detailed pricing information will only call more attention to the discrepency between how the public markets value Spotify versus private investors.

But if Spotify succeeds with its IPO, the company could very well lay out a path for the other approximately 250 existing unicorns to follow should they choose to go public.

PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

This article does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or prudence of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

Securities referenced in this article may be offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, and SharesPost Investment Management are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.

Copyright SharesPost, Inc. 2020. All rights reserved.

PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

This article does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or prudence of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

Securities referenced in this article may be offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, and SharesPost Investment Management are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.

Copyright SharesPost, Inc. 2020. All rights reserved.