SEC Is Studying Spotify's Plan to Bypass IPO in NYSE Listing - Bloomberg

Spotify Ltd. executives have met with U.S. regulators scrutinizing the music company’s plan to skip a traditional share sale and list directly on the New York Stock Exchange, according to people with knowledge of the matter.

Senior Spotify executives met with U.S. Securities and Exchange Commission officials last month, said the people, who asked not to be identified discussing private meetings. Regulators asked for the meeting to get details on the plan by the world’s largest paid music streaming service to do an end-run around an initial public offering -- the conventional route to listing shares. The company has remained in touch with SEC officials since the meeting, the people said.

Spotify aims to list late this year or early next on the New York Stock Exchange. With a stream of cash from its more than 60 million paying subscribers and awareness among investors, the company isn’t seeking to raise money or make itself known to potential stockholders -- key IPO objectives. A direct listing also avoids underwriting fees and restrictions on stock sales by current owners, and doesn’t dilute the holdings of executives and investors.

It also introduces uncertainty, since underwriters in a typical IPO set a price based on investor feedback and have buyers lined up. Even then, some new issues crater. Just a handful of companies have done direct listings over the past decade on the Nasdaq Stock Market. Spotify would be the biggest, and the first for the New York Stock Exchange.

While standard share sales can move quickly through approval, it’s common for SEC staff to spend more time examining offerings that involve new types of structures or products. It’s possible regulators simply want a better understanding of how Spotify’s listing will work. The agency declined to comment.

The company’s plan poses an early test for how far SEC Chairman Jay Clayton is willing to go to boost new U.S. listings.

The agency has been weighing a proposed rule change at the New York Stock Exchange that would allow the listing to go forward. Clayton, a former Wall Street deals lawyer who took over the agency in May, has for months decried a two-decade decline in the number of public companies as “a serious issue for our markets and the country.”

While he hasn’t yet laid out a comprehensive policy agenda, he’s widely expected to craft rules that would encourage more companies to go public and do so sooner.

Spotify has hiredGoldman Sachs Group Inc., Morgan Stanley and Allen & Co. to assess its options. The company has already raised more than $1 billion in equity and obtained a $1 billion convertible loan from investors led by TPG in March 2016.

The conversion was tied to a public offering, with the terms growing more favorable to TPG the longer that takes. By choosing a direct listing instead, Spotify will have to reach a new agreement with the private-equity company.

Spotify’s equity was valued at $8.5 billion two years ago when it raised $526 million. The company would be one of the largest consumer technology providers to go public in recent years.

The music-streaming company’s unusual approach to going public is reminiscent of Google’s 2004 IPO, when the tech giant chose a rarely used Dutch-auction format. That approach, which also let Google pay its underwriters less, also drew SEC scrutiny. The complicated share sale suffered from a series of missteps.

Among online music companies, Spotify has thrived while Pandora Media Inc. and SoundCloud Ltd. have struggled. Pandora has had four chief executive officers in the past two years and is raising money by selling a large minority stake to satellite radio company Sirius XM Holdings Inc. SoundCloud just fired 40 percent of its workforce and sold a majority stake to a pair of financial firms. Even Apple Inc., Spotify’s biggest competitive threat, is a distant second in paid streaming.

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Spotify has grown from 20 million subscribers in two years and had more than 140 million people using the service between the free and paid options as of July. The company reported sales of 2.93 billion euros ($3.45 billion) in 2016, up 52 percent from a year earlier, and its growth has lifted the entire music industry. Record sales have grown two years in a row for the first time since the late 1990s.

Spotify will still have to convince investors that streaming music is a good business. The company lost 539 million euros last year despite its growth. It pays out more than 80 percent of revenue in royalties to music rights holders and streaming-delivery costs, leaving little margin for investments in technology and new staff.

The company has dabbled in podcasting and video, content that could bring in new customers and advertisers while reducing the share of sales that go to the music industry, but hasn’t made a commitment to those areas.

Before going public, Spotify must also sign a long-term licensing agreement with Warner Music Group, the smallest of the three major record labels. Vivendi SA’s Universal Music Group and Sony Corp.’s music division signed new deals with Spotify earlier this year.

— With assistance by Benjamin Bain, and Annie Massa

https://www.bloomberg.com/news/articles/2017-08-21/sec-is-said-to-study-spotify-plan-to-bypass-ipo-in-nyse-listing