Spotify’s direct listing throws spotlight on fundamental flaws in IPOs

News that Spotify was going to eschew a traditional IPO earlier this year in favour of a direct listing sparked a rash of media comment.

Amid a chorus of criticism, Barry McCarthy at the Financial Times put it most bluntly: “The US public offer market is broken” As innovation roars through virtually every economic sector, transforming how business is done, fundraising and capital markets have been slow to match this pace of change.

Spotify’s decision just highlights how out dated and ill-suited IPOs have become and how financially draining they are, with a requirement that ‘money is left on the table’ to keep existing investors and underwriters happy. Most importantly, they fail to provide growing companies with flexibility when it comes to fundraising.

Alternative equity raise strategies have already been developed in the private placement markets and many independent boutiques are placing ‘structured equity’ directly to asset managers. But often these are very relationship based and difficult for average, mainstream businesses to access.

Enter blockchain

ICOs too are touted as a possible solution, having raised more money in the first three months of 2018 ($6.3 billion) than the whole of 2017. Yet reputational and regulatory issues continue to bedevil the sector.

The real solution is the next generation of capital raising: blockchain securities. These are not ICOs, or ‘token sales’. Instead, blockchain provides a means of representing a security in digital form, which can more easily be accessed by multiple trading venues globally. This provides issuers with greater access to liquidity at a more cost-effective price, and with greater transparency. In addition, creating a security in blockchain form provides a more efficient mechanism for administering that security, and also improves the entire workflow of clearing and settling in the secondary market.

Advisory firms currently charge small businesses 10-15% of capital raised to list their equity on a small cap exchange, and large businesses 2-5% of capital raised. This pricing model is excessive and has to change. Effective use of blockchain and automation can potentially smash this level down to 3% for small businesses, and 0.5% for large businesses respectively.

That’s almost €5 billion that advisors are unnecessarily taking out of the economy, based on €176.4 billion raised through IPOs in 2017 and average advisory costs of 3%. Spotify’s direct listing of its shares was primarily in rebuke to these excessively high advisory costs.

Once issued how are they traded? Well there are several initiatives in progress that will facilitate the trading of blockchain securities. Last month the Swiss Stock Exchange announced the formation of a digital exchange for the trading and settlement of purely digital assets, the Gibraltar Stock Exchange has set up a blockchain exchange for digital assets, the SEC in the US is considering applications to offer blockchain-based securities and the UK’s FCA is also looking closely at this area.

In the future firms such as ourselves could work with regulators to tokenize existing types of securities, and so bring to them the benefits of cryptocurrency-based markets — such as 24/7 trading, real-time settlement, and chain-of-title. This will democratise access to capital markets for both companies and investors, lowering costs for all participants and bringing additional transparency.

Globacap has been part of the FCA’s recent regulatory sandbox and is launching a platform in the autumn that will allow companies to issue debt and equity in blockchain form, with FCA regulatory oversight, and include checks for Know Your Customer (KYC) and Anti Money Laundering (AML) rules.

We are working on a transformative solution to help improve the securities industry, paving the way for small and mid-sized businesses in particular to more efficiently, and more cost-effectively, access a wider pool of global capital.

We support moves like those of Spotify and some of the other initiatives we are seeing to formalise the trading of blockchain securities. Through innovation, we can improve the efficiency and overall financial markets processes for the benefit of all players in the ecosystem.

By Myles Milston, Founder and CEO of Globacap