It's Just Another Day at the Office for Spotify
Programming note: Money Stuff will be off tomorrow but back on Thursday.
Happy Spotify Day!
"U.S. stocks had their worst April start since 1929," reported Bloomberg News yesterday, and while careful technical analysis reveals that we are only one trading day into April, it was still a bad day. The S&P 500 was down 2.2 percent on the day, and closed below its 200-day moving average.
So, I dunno, would you launch an initial public offering into a market like that? If you are Spotify Technology SA, the answer is "ehhh whatever I don't care it's not really an IPO anyway." Typically you try not to launch an IPO when markets are lurching down, investors are worried, and no one has time to give a new public company the generous open-hearted attention that it wants. But with Spotify's direct listing, which is scheduled for this morning, who cares? If no one wants to buy stock this morning, that's fine, they won't, but it'll open and be here and they can buy stock this afternoon. (Er, I mean, maybe it'll open this afternoon: The opening auction takes time, and "the NYSE and others close to the deal have warned it could take an unusually long time to open.") If no one wants to sell into a choppy market, that's fine, they won't, but it'll open and be here and they can sell tomorrow. There is no symbolically important IPO price to care about, and Spotify isn't raising money, so there is no money to be left on the table by pricing in a bad market. You just quietly flip the public-market switch from Off to On and don't worry too much about what happens after that. It's sort of soothing.
We talked last month about how Spotify is getting rid of a lot of the annoying trappings of the IPO process -- lockups, greenshoes, roadshows -- in a way that might be appealing to other private companies. This is another one. Just do your thing when you were planning to do your thing. Don't have a bunch of bankers sitting around making serious noises about market conditions. The market conditions don't matter. They're just today's conditions, and there's nothing special about today. The market conditions will be different tomorrow, and you'll still be just as public tomorrow.
Elsewhere, here is a blog post from Spotify's co-founder and chief executive officer, Daniel Ek, about how no one should care about today's direct listing. ("But what’s even more important to me is that tomorrow does not become the most important day for Spotify.") And Bloomberg's Alex Barinka explains "Why Spotify Doesn’t Want a Stock Pop on Its First Day of Trading," and it seems that Spotify is worried, as I have been, that no one will sell:
The best case scenario would be modest intraday movement with trading volume similar to a typical IPO, in which 50 percent to 100 percent of tradable shares change hands, the people said. The worst would be a stock that swings wildly or lacks the available shares to trade smoothly. ...
A key aim has been getting as many of the existing shareholders who want to sell to agree to do so as quickly as possible, even before the open price is set, the people said. That could help manage volatility and generate sufficient supply to ward off a liquidity squeeze, in which a shortage of shares runs up their price.
If Spotify's market capitalization is $50 billion by the end of today, that will probably be a sign that something has gone wrong. Sadly, like it says above, Money Stuff will be off tomorrow, so we will have to meet back here on Thursday for a postmortem.
Private markets are the new public markets.
That's a thing that I say a lot, but here is a front-page Wall Street Journal article about it:
At least $2.4 trillion was raised privately in the U.S. last year. That widened a gap that emerged in 2011 with the public markets, which raised $2.1 trillion, according to the Journal’s analysis of tens of thousands of securities filings and data provider Dealogic. Deals known as private placements, the largest chunk of the private markets, raised at least $1.6 trillion for businesses last year, according to the Journal’s analysis of more than 40,000 filings.
The private markets are now where the money is. If you are a company that is raising money, the odds are that you are doing it privately. If you are a company that is doing a share buyback, on the other hand, the odds are that you are a public company. That sorting is not absolute, but it is a useful guide: You stay private to raise money and build your business and grow; you go public to allow your investors to cash out.
Obviously people are worried about this. One leading worry is that if the growing interesting speculative companies that need cash are increasingly private, while the public companies are increasingly boring, then the sorts of people who can only invest in public companies -- that is, most normal investors -- won't have great investment choices:
Securities laws keep ordinary investors out of these high-growth markets, forcing the “little guy” to stick with a stock market that Elizabeth de Fontenay, a law professor at Duke University, describes as becoming a “holding pen for massive, sleepy corporations.”
At an SEC conference last year, Michael Piwowar, a commissioner, questioned “the notion that nonaccredited investors are truly protected by regulations that prevent them from investing in high-risk, high-return securities available only to the Davos jet set.”
And it's reasonable enough, though I don't know how much of it is regulatory. Even in the absence of regulation, if you had a choice between raising money by going around to thousands of individual investors and asking each of them for a few thousand dollars, or just having SoftBank write a giant check, you might choose SoftBank. The private markets are just more flexible than the public markets, in part for regulatory reasons but also because dealing with identified sophisticated counterparties is often easier than dealing with mass anonymous markets. It might be nice for "Mr. and Ms. 401(k)" if they could invest in the next hot new startup, but you can't force the hot new startup to take them as investors.
But there's another worry that goes something like this:
Even when companies disclose private placements, the very limited information leaves most in the dark.
Telegram is a good example. It has said nothing about the fundraising for its planned new digital network and banking system. It isn’t even clear who owns the company. The website says Telegram is “supported” by Russian brothers Pavel Durov and Nikolai Durov, who were named as Telegram executives in the SEC filing for the $850 million funding.
Who are the "most" who are being left in the dark here? Telegram's investors, presumably, get the information that they want. I mean, perhaps they'd like more information, but they get the information that they require to invest, and if they don't, they don't have to invest. They are, by hypothesis, sophisticated; they can make the decision to invest with imperfect information, or to demand more information.
But other people are left in the dark. If companies don't go public, then they don't make public filings. They don't have to disclose much financial and business information to the public: They might disclose it to their investors, or they might not, but they don't publish it on the SEC's website for everyone to see. This is, of course, nice for them: They don't publish financial and business information for their competitors to see. But it is less nice for everyone else. It is less nice for competitors who want to understand the competition, and public-market investors who want to understand the industry, and journalists who want to write about them, and random bystanders who want to read about them.
Who cares? What right does anyone have to find out things about private companies? I think the real critique goes something like this: The corporation is a societal construct; we give limited liability and other rights to the corporate form, but we expect something of corporations too. Our expectations are poorly articulated: There's some tax stuff (but you can opt out of that), and you need to register the corporation, but in general most of the social expectations are informal and customary rather than legally ironclad. You can have a corporation -- even a big one -- without going public and filing with the SEC and giving your audited financial statements to anyone who wants them. But most big corporations used to do all that stuff, because it was more or less necessary in practice even if it wasn't legally required: Without doing that stuff, you couldn't raise money publicly, so you couldn't get big.
But now you can raise money privately and get as big as you like, and so a lot of the customary stuff is no longer necessary in practice, for the companies, or for their investors. The question now is which parts of the old corporate bargain are still necessary for society -- do we want the norm for big companies to be disclosed audited financials, or can we skip it? -- and how those parts should be implemented. Because the old way of implementing them seems to be losing its grip.
Facebook Inc. founder Mark Zuckerberg gave kind of a weird interview to Ezra Klein, in which Klein keeps prodding Zuckerberg about why Facebook keeps misleading people and spreading ethnic-cleansing propaganda in Myanmar and behaving like an unaccountable behemoth, and Zuckerberg responds with a series of clicks and whirrs:
Zuckerberg: You mentioned our governance. One of the things that I feel really lucky we have is this company structure where, at the end of the day, it’s a controlled company. We are not at the whims of short-term shareholders. We can really design these products and decisions with what is going to be in the best interest of the community over time.
Klein: That is one of the ways Facebook is different, but I can imagine reading it both ways. On the one hand, your control of voting shares makes you more insulated from short-term pressures of the market. On the other hand, you have a lot more personal power. There’s no quadrennial election for CEO of Facebook. And that’s a normal way that democratic governments ensure accountability. Do you think that governance structure makes you, in some cases, less accountable?
Zuckerberg: I certainly think that’s a fair question. My goal here is to create a governance structure around the content and the community that reflects more what people in the community want than what short-term-oriented shareholders might want. And if we do that well, then I think that could really break ground on governance for an internet community. But if we don’t do it well, then I think we’ll fail to handle a lot of the issues that are coming up.
If we govern the governance well then the governance will be well governed, but if we fail to govern governance well then there will not be well-governed governance, human. Well honestly what do you expect him to say? He had a deal with his investors. They gave him money, and they let him run the company with essentially no oversight, and in exchange he made them enormously rich. What's it to you, human? Everyone went into the deal with their eyes open, and Zuckerberg has held up his end of the deal. There is no problem here. If he governs the governance poorly, then people will continue to complain, and he will continue to control Facebook and shrug. Presumably he wanted to keep control of Facebook because he believed that his own instincts were benevolent and wise, and he seems unlikely to be moved off that view of himself just by some ethnic cleansing in a faraway country.
It's the same issue as in the private markets, isn't it? Facebook is a public company, but it is, as Zuckerberg says, a controlled one. The bargain between its entrepreneur-founder and its capital providers is well understood, and it basically works for all of them. (The stock is down 12 percent this year, but up 300 percent since its IPO.) The question is whether the bargain works for the rest of the world, and if not, what the rest of the world can do about it.
Fascinatingly, Zuckerberg has some ideas:
But over the long term, what I’d really like to get to is an independent appeal. So maybe folks at Facebook make the first decision based on the community standards that are outlined, and then people can get a second opinion. You can imagine some sort of structure, almost like a Supreme Court, that is made up of independent folks who don’t work for Facebook, who ultimately make the final judgment call on what should be acceptable speech in a community that reflects the social norms and values of people all around the world.
What even? Who would appoint the Supreme Court of Facebook? Would they have to be confirmed by the Senate of Facebook?
Elsewhere, "It's Weirdly Hard to Steal Mark Zuckerberg's Trash."
"I see us taking over as being the No. 1 company that people will use to use their crypto assets," a guy told the New York Times's Nathaniel Popper in October. "Once our proof of concept goes from beta to live, I think that we are going to take market dominance in the full aspect." Just reading those words you kind of knew he was going to be arrested for securities fraud, right? On Sunday he was arrested for securities fraud.
He and his co-founder (who "was arrested before he was able to board his flight" out of the country) ran Centra Tech. Inc., which raised money in an initial coin offering and which supposedly issued Visa and MasterCard cards that you could use to spend your Bitcoins and Ether and and other hard-to-spend cryptocurrencies. That's a useful product! You can see why people would want it, and would want to invest in it. "Neither Visa nor Mastercard, however, had any relationship or partnership with Centra," says the Securities and Exchange Commission's complaint, "and certainly none where Centra was authorized to issue, sell, or otherwise distribute Visa or Mastercard credit or other payment cards." Floyd Mayweather promoted the ICO on Twitter. They "raised at least $32 million from thousands of investors."
In other news:
Longfin Corp. took advantage of post-financial-crisis rules designed to create jobs and help young companies go public. But the financial-technology company, which was valued at $5.4 billion as recently as 10 days ago, is now under investigation by the Securities and Exchange Commission after it failed to disclose important information and left a trail of misstatements behind.
You might remember Longfin as the company founded by a self-proclaimed "financial wizard" who "believes that every piece of information is worth millions," which announced a fairly nonsensical pivot to the blockchain and then became worth billions of dollars. I am sure that will work out great for everyone.
Meanwhile, I am really looking forward to reading an article about how cryptocurrency hedge funds don't really hedge, and lost as much money as the broader crypto markets during this crypto downturn, and how you would have been better off just investing in a crypto index fund. I mean I don't know if any of that is true, but I have my suspicions, and you can certainly read the same sort of thing about regular hedge funds so why not the crypto ones? In any case:
The reckoning is starting for crypto hedge funds.
Demand and profits are drying up at many of the more than 150 funds that popped during last year’s spectacular surge in Bitcoin -- which brought cryptocurrencies to the attention of scores of institutional and individual investors. This year’s 50 percent plunge in the value of Bitcoin has many investors thinking twice. At about $7,000, the currency is at its lowest since November.
Elsewhere, "Hedge fund billionaire Alan Howard made sizable personal investments in cryptocurrencies last year and plans to put more of his own money into digital assets and the blockchain technology behind them." And: "Bitcoin Network Researchers See ‘Substantial’ Overvaluation." And: "The Truth Behind the Bitcoin 'Cult' Trying to Buy a Church in Brooklyn."
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