March 27, 2018

Spotify’s Non-IPO: Don’t Lock Me Up, Bro!

Spotify’s novel approach to the IPO process – and by that I mean, not having an IPO process – has attracted a lot of media attention.  Media reports dutifully check-off all the ways that Spotify’s direct listing differs from an IPO, but the one that I find most intriguing is the absence of a lock-up to prevent insiders from selling shares for 6 months after the deal.

Bloomberg’s Matt Levine writes that if this goes well, Spotify may inspire other unicorns to emulate many of the aspects of its non-IPO – even if they opt for the traditional IPO route.  This excerpt suggests that this may include leaning on the underwriters to forget about a lock-up and some other terms “near & dear” to bankers’ hearts:

More substantively, if you want to do an IPO but don’t want to lock up your existing shareholders from selling stock for three to six months afterwards, maybe you could say no to that too? Or if you want to do an IPO but don’t want to give the banks a “greenshoe” option to help them stabilize the shares? The banks will freak out about this and tell you that these are essential elements of the IPO process, and that eliminating them is risky and almost unprecedented. But if Spotify eliminated them and did fine, then why can’t you?

No lock-up? No shoe? “Oh brave new world that has such creatures in it!” Naturally, the push-back against Spotify’s assault on the citadel appears to have already started – check out the excerpt from this Forbes article:

Spotify’s direct listing with no lock-up seems to indicate that at least some of the insiders can’t wait to bail on this thing. That could mean that they don’t see a long-term future for the company (and maybe even the streaming delivery side of the music industry in general), or don’t think the prospect of an acquisition to be very high. Otherwise, they would have endured a traditional IPO along with its customary lock-up period without a blink of an eye, or at the very least imposed some sort of partial lock-up into the direct listing where only a certain percentage of stock could be sold.

So, depending on your point of view, Spotify’s non-IPO is either a bold strike at “Big IPO” or just an innovative new way for insiders to bail-out of an investment whose best days are behind it. However innovative Spotify’s approach may be, the reaction to it proves once again that “for every buyer, there’s a seller. . .”

Theranos: A Wake-Up Call for Private Companies 

Unless you’ve been in a coma, by now you’re aware of the SEC’s recent enforcement action against Theranos and two of its executive officers.  This recent blog from Kevin LaCroix says that the case has important lessons for unicorns:

The simple but important point that should not be lost amidst the more attention-grabbing aspects of this situation is that a private company and its executives can be held liable for violations of the federal securities laws. While there is nothing revolutionary or even new about this point, it is one that is often overlooked when distinctions are being drawn between private and publicly traded companies.

Private companies and their execs are every bit as subject to liability under the securities laws as their public company counterparts.  As Co-Director of Enforcement Steve Peikin put it in the SEC’s press release announcing the proceeding, “there is no exemption from the anti-fraud provisions of the federal securities laws simply because a company is non-public, development-stage, or the subject of exuberant media attention.”

Theranos: When Unicorns “Neither Admit Nor Deny” They’ve Gone Bad

Speaking of the Theranos press release, the SEC did one of the things that it does regularly when announcing settlements that just leaves me shaking my head.  The release alleges a “Massive Fraud”  and says that CEO Eleanor Holmes was stripped of control for “defrauding investors” in an “elaborate, years long fraud.”  Of course, several paragraphs – six but who’s counting? –  after this chest thumping comes the inevitable coda:

  “Theranos and Holmes neither admitted nor denied the allegations in the SEC’s complaint.”

You can count me among those who think that “neither admit nor deny” settlements are generally a good idea.  But when you throw around phrases like this and accompany them with a “neither admit nor deny” settlement, you set yourself up for the inevitable question – if it was so bad, why was this all you got?

Remember when Ohio State’s then-president Gordon Gee infamously remarked that the school’s desultory 13-13 tie with Michigan in 1992 was “one of our greatest wins ever?”  This isn’t quite at that level, but there’s a similar disconnect between rhetoric and reality here, and media reports like this MarketWatch article suggest that it undermines the Division of Enforcement’s credibility.

John Jenkins