I’m back! Huge thanks to Polina Marinova, Jen Wieczner and Robert Hackett for filling in. Today I’m diving into direct listings.
Remember early 2017, when the IPO market looked bright and full of possibility?
The reality has been a bit… meh.
Two things could change that in the back half of the year: One, all companies can now benefit from the JOBS Act’s option to file in stealth mode, as Fortune’s Jeff John Roberts reported recently:
The stealth filing option, which is already available to firms with under $1 billion in revenue, is intended to let companies work out kinks in the registration process out of the public eye. … Under the new rules, they only have to do so 15 days before their so-called “roadshow”—a tour where they make presentations to investors.
The policy applies to both IPOs and direct listings, which brings me to my second point:
A successful direct listing from Spotify could prompt a wave of startups following the company’s footsteps. Direct listings – where a company starts selling its stock on the public markets without going through the whole roadshow song-and-dance process – are not new, but they’re extremely rare. I found a handful of examples: Ovascience (market cap: $55 million), Nexeon MedSystems, Coronado Biosciences, and BioLine Rx (market cap: $83 million). You’ve never heard of these companies because direct listings have been limited to small-cap companies, mostly in biotech and life sciences.
Spotify, last valued by private market investors at $8.5 billion, would likely be the first large company to go public via direct listing. In another first, Spotify is expected to list on NYSE, which recently changed its rules to accommodate for this exact transaction. Previously direct listings only happened on Nasdaq.
Companies undergoing direct listings file something called a Form 10. If they’re foreign, like Spotify, they file a Form 20-F.
As we’ve outlined before: There are plenty of benefits to this experiment. No investment bank. No dilution. No lock-up period. No underwriters. (“If an IPO is like a wedding, a direct listing is running off to elope. A faster, easier, cheaper route to the same result.”)
And there are major risks: No deal support from the bankers. No guaranteed “safe” long hold investors. No greenshoe, and no buffer against volatility.
Anna Pinedo, a partner with the law firm Morrison & Forrester, has worked on several direct listings in the past. In her experience, there has never been more than a handful of direct listings in a given year. Thanks to the news of Spotify’s plans, she says more large companies have been inquiring about it. Given how quickly this could happen, I posed a few questions so we’re totally not caught off-guard some random morning when Spotify stock is suddenly trading on the free market.
Term Sheet: IPOs are designed to attract long-hold investors, the ideal kind of investors a company wants buying its stock. It’s easier for them to buy big chunks of stock all at once in an IPO. Less so in a direct listing, where limited shares will be for sale and pricing might be volatile. Will this make it harder for them to invest?
Anna Pinedo: In the past, maybe, but now so many of the unicorns and even the biotech companies have done these late stage private placements. [Public market investors] have gotten into those through their crossover funds that have invested already.
The part that’s most curious to me is, ‘How do you settle on that price at which you list?’ Usually in the process of doing an IPO, there is intense back and forth regarding the valuation model, discussions with research analysts and the investment banks underwriting it and will eventually cover the company. Is that process occurring already because a company has gotten so large that it’s having those discussions anyway?
What’s the reaction been like from the banking side?
People are just scratching their heads thinking, ‘Okay, I didn’t realize this was an approach.’ I’ve gotten a lot of questions about how does this functionally work, how would you go about doing this, why haven’t people done this before. It’s more the unknown and unfamiliar that has attracted everyone’s attention.
Is the preparation any different from a normal IPO?
It’s comparable. The 20-F or Form 10 is a pretty robust document, very much like a registration statement. It’s the same process you would go through with the accountant, but without doing a comfort letter, the IPO fees, probably not paying an underwriter, or going through the same kinds of drafting sessions and discussions about positioning the company or describing the company. It can be a process that the company controls a bit more than the IPO process, where it relinquishes some control to the underwriter and the working group as a whole.
THE LATEST FROM FORTUNE…
• Serena Williams op-ed: How Black women can close the pay gap.
• Bitcoin avoids a massive breakup, gets a little one instead.
• Court says politicians can’t block people on social media.
• Pokemon Go fans sue parent company Niantic Labs.
• Actually Putin is the world’s richest person…
• How casino billionaire Steve Wynn lost $10 million on baccarat.
• DotC United Group, a Shanghai-based mobile application developer, raised $350 million in Series B funding. Zeus Entertainment led the round.
• Carwow, a London-based platform that helps customers buy a new car, raised $39 million in Series C funding, according to TechCrunch. Investors include Vitruvian Partners, Accel Partners, and Balderton Capital. Read more.
• ExecOnline, a New York-based learning platform for business executives, raised $16 million in Series B funding. NewSpring Growth Capital led the round. Existing investors including Osage Venture Partners, New Atlantic Ventures, Kaplan, and Thomas Lehrman participated.
• A Cloud Guru, a London-based on-demand cloud computing training platform, raised $7 million in Series A funding from Elephant Venture Capital.
• SimplyCook, a London-based recipe kit company, raised £2 million ($2.6 million) in funding, according to TechCrunch. Investors include Maxfield Capital, Episode 1 Ventures, and 500 Startups.. Read more.
• The Big Willow, a Wilton, Conn.-based marketing platform, raised funding of an undisclosed amount. Investors include Connecticut Innovations and Stonehenge Growth Capital.
• FanAI, a Santa Monica, Calif.-based AI-driven audience monetization platform focusing on e-sports, raised funding of an undisclosed amount. Deepen Parikh of Courtside Ventures led the round, and was joined by investors including Greycroft GC Tracker Fund, BDS Capital, CRCM Ventures, Sterling.VC, Loot Ventures, Expansion VC, QB1 Ventures, Rosecliff Ventures and Jason Robins.
PRIVATE EQUITY DEALS
• SoundCloud Ltd. is close to a deal to sell stakes in the company to a pair of private equity firms. Combined, the two private equity firms would own a majority of SoundCloud. Read more at Fortune.
• Newgate Private Equity LLP acquired Arle Capital Partners Limited, a London-based private equity firm. Financial terms weren’t disclosed.
• AE Industrial Partners acquired CDI Corp (NYSE:CDI) for $8.25 per share in an all-cash tender offer and follow-on merger. The offer represents a premium of about 33% to CDI Corp’s closing price on July 28.
• Snapdeal, an India-based shopping site operator, ended discussions around a possible acquisition by bigger rival Flipkart, according to Reuters. Snapdeal’s board had in-principle agreed to Flipkart’s revised buyout bid of up to $950 million. Read more.
• Emerson Collective, a U.S. nonprofit led by Laurene Powell Jobs, will buy a majority stake in The Atlantic, a Washington, D.C.-based publisher. Financial terms weren’t disclosed.
• Charter Communications (Nasdaq:CHTR) says it has “no interest” in merging with Sprint. The proposed merger would have combined Sprint and Charter into a new publicly traded entity controlled by SoftBank, which currently controls a majority stake in Sprint. Read more at Fortune.
• FiscalNote acquired VoterVoice, a Baton Rouge, La.-based grassroots-advocacy and community-engagement company. Financial terms weren’t disclosed.
• Stitch Fix, a San Francisco-based online fashion retailer, has confidentially filed to go public, according to TechCrunch. The company has raised $42.5 million in venture funding. Backers include Benchmark, Baseline Ventures, and Lightspeed Ventures. Read more.
• Purple, an Alpine, Utah-based direct-to-consumer mattress startup, agreed to be acquired by Global Partner Acquisition Corp. (Nasdaq: SPAC) for $1.1 billion in a reverse merger that will take the company public.
• Contura Energy, a Bristol, Texas-based coal company, set the terms of its IPO. It plans to sell 6 million shares priced between $23 and $27 a share, and would raise $150 million if it priced at the midpoint of its range. Shareholders include Davidson Kempner Funds (19.2%), Mudrick Funds (13.2%), Whitebox Funds (11.1%), and Bain Funds (5.2%). The is expected to trade on the NYSE under the symbol CTRA. Citigroup and Jefferies served as the lead underwriters on the deal.
• Evotec AG will buy Aptuit, a Greenwich, Conn.-based drug discovery services provider, for $300 million. The seller was Welsh, Carson, Anderson & Stowe.
• Equistone Partners Europe agreed to acquire Bruneau, a France-based online distributor of office furniture and supplies. The seller was Weinberg Capital Partners. Financial terms weren’t disclosed.
• H.I.G. Capital sold Albertville Quality Foods Inc, an Albertville, Ala.-based whole muscle protein items, to OK Foods, a subsidiary of Industrias Bachoco SAB. Financial terms weren’t disclosed.
FIRMS + FUNDS
• Kiva Dickinson is joining CircleUp Funds as a principal, and Alison Ryu is joining as a managing director. Previously, Dickinson was at TPG Capital and Ryu was at TSG Consumer Partners.
• Richard “Rick” Sherlund joined Perella Weinberg Partners as a partner.