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Spotify is gambling its stock with an IPO that it concedes is risky

Most companies don’t take chances with the pomp and circumstance of an IPO. Here’s what Spotify is doing differently.

A street sign that reads “Wall St” with a building and an American flag in the background

When startups prepare to sell their shares to the public for the first time, they tend to follow a tightly controlled and heavily scripted playbook that makes bankers, customers and, generally, CEOs happy.

Spotify, for better or worse, is trying something truly innovative.

The Swedish company on Wednesday spelled out how exactly it would execute its so-called direct listing, and it amounts to a gamble that mom-and-pop investors will understand and appreciate their music business.

But the company made a number of disclosures acknowledging the risk it’s accepting by selling shares directly to the public.

There are no bankers that will underwrite the listing, meaning no one is trying to make a market for shares. There are no institutional investors who will get first dibs at their shares who could prop up Spotify’s value. And a lot of the rules that are meant to keep a stock from soaring or crashing are out the window.

In short: Expect a wild first day of trading as people try to figure out whether they should buy or sell Spotify, or SPOT, all on their own. Shares in 2017 swung from as low as $37.50 to as high as $125.00.

“The public price of our ordinary shares may be more volatile than in an underwritten initial public offering and could, upon listing on the NYSE, decline significantly and rapidly,” Spotify says in its filing with the SEC as one of its “risk factors,” or the dire-sounding warnings that the company is required to list.

Here’s what that means:

  • There is no pomp and circumstance of the “roadshow,” during which big institutions get a chance to kick the tires on the company and decide if it makes sense to buy or sell shares. The company only promises an “investor day” — with a presentation to be posted online for others — as part of an attempt to educate possible buyers on the business.
  • There is no opening share price in advance of trading. Morgan Stanley is advising the company on what Spotify calls a “novel” transaction, but underwriters are not purchasing shares early and structuring the first-day trading with their pricing.
  • There is virtually no “lock-up” that prevents company insiders from selling shares for a certain amount of time in order to keep the price stable. The only Spotify owner who must hold shares — for three years from the date of listing — is Tencent and its affiliate.

Other startups are watching closely. If Spotify, last valued at more than $20 billion in private secondary transactions, falls sharply below that valuation, it probably won’t look like such a helpful roadmap to follow.

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