What is an Initial Public Offering?
An Initial Public Offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. Public share issuance allows a company to raise capital from public investors. It is a necessary step which enables a private company to become a listed public company with a quoted share price and potentially, thousands of shareholders.
Prior to an IPO, a company is considered private. As a private company, the business would have grown with a relatively small number of shareholders, including early investors, such as the founders, family and friends, along with professional investors such as angel investors. When a company reaches a stage in its growth process where it believes it is mature enough for the rigors of being a Public Limited Company, along with the benefits and responsibilities to public shareholders, the company will begin to advertise its interest in going public.
An IPO is a significant step for a company, as it provides the company with access to raising money, this in turn provides the company with a greater ability to grow and expand. An IPO is a significant move, tying up large amounts of management time and requiring careful planning, but the potential rewards for a successful flotation on the London Stock Exchange (LSE) are significant. When a company goes public, the previously owned private share ownership converts to public ownership, and the existing private shareholders’ shares are valued at the public trading price.
Share underwriting can also include special provisions for private to public share ownership. Generally, the transition from private to public is a key time for private investors to sell their shareholdings at the best price.
IPO Listing Requirements?
Companies listing on the LSE can choose a premium, standard or high listing on the main market, or a listing on the junior Alternative Investment Market (AIM). AIM offers a less strict regulatory system than a main market listing, with no maximum level of capitalisation and no minimum trading requirements. This is regulated by the United Kingdom Listing Authority (UKLA), a division of the Financial Conduct Authority.
The company must have a duly incorporated PLC structure in the UK. It’s shares must be admitted to trading on a regulated market, the shares must be issued in accordance with the company’s constitution and the issued share capital must meet the required minimum. Furthermore, the application for listing must relate to all shares of the same class issued or due to be issued and an approved prospectus must be provided.
The main market listed company will need a stock broking firm or merchant bank to act as sponsor for the initial listing and for certain transactions thereafter, but there is no requirement to permanently retain the sponsor.
The AIM market is operated and regulated by the LSE. The key to regulation of AIM listed companies is the nominated advisor, the equivalent of the sponsor. AIM listed companies are required to retain the nominated advisor during the initial listing and throughout the lifespan of the listed company.
The nominated advisor is responsible to the LSE for ensuring that the company is suitable for initial listing and complies with ongoing requirements under the AIM rules. The nominated advisor will normally be a stock broking firm, investment bank or accountancy firm, but should not be the same as the reporting accountant or auditor (unless adequate safeguards to guarantee independence can be put in place).
Due diligence is a vital part of any IPO. The sponsor or the nominated advisor for the company will require a comprehensive report covering all aspects of the company from a financial, legal and business perspective. Effective due diligence is essential to satisfy the sponsor or nominated advisor that the company is suitable for listing and to protect against any inaccuracies or misleading statements in the prospectus (main market) or the admission document (AIM).
Timing and Marketing
Timing an IPO well is important because the first few days after the shares start trading can be crucial in determining the success or failure of the offering. Seasonal businesses should time the IPO to coincide with their busiest trading months, while major UK public holidays and the traditional European summer break in July/August should be avoided. Marketing the shares and participating in investor roadshows are important in ensuring a successful flotation and adequate time should be set aside after the due diligence and prospectus preparation have been completed to allow for marketing activities.
Corporate Governance and Continuing obligations
Companies seeking a premium listing on the main market need to either comply with the UK Corporate Governance Code or explain in their annual report the areas in which they have not complied.
The Governance Code is designed to protect shareholders’ interests and cover issues including directors’ remuneration, equality/diversity policies and the make-up and activities of the audit committee. The Code also requires a full and honest statement of the company’s financial position and future prospects.
It is important to note that these are continuing corporate governance obligations and a publicly listed company will have to comply with these throughout its public lifespan. Main market listed companies will need to comply with the Disclosure and Transparency Rules and all significant information pertaining to the running of the company, its finances and proposed dealings should be made public. AIM listed companies must comply with the reduced disclosure obligations in the AIM rules.
In order to comply with the Code, the roles of Chairman and Chief Executive should be split and the board membership should include non-executive directors. These non-executive directors are not full or part time employees of the company; they are effectively independent advisors who devote only part of their time to their role on the board.
Reputational issues and Disclosure Obligations
Protecting the company’s reputation and brand is essential in preserving the value of the company’s shares. This will require much greater care for a PLC rather than an unlisted company. When a company is listed on the LSE, it is under a duty to disclose significantly more information than a private company. Not only will financial results and directors’ interested be publicised, but the company, its staff and its executives will come under increased scrutiny from the trade press and even national media.
The company must regularly update the market on its progress against financial targets and on major acquisitions or takeover plans in order to comply with Disclosure and Transparency Rules and AIM rules.
How can Audley Chaucer help?
The benefits of an IPO in London are significant. Audley Chaucer can act as co-ordinators to pull together the various necessary threads by working with other advisors including due diligence, drafting the prospectus (main market) or admission documents (AIM) and in addition, the marketing of the IPO. Please contact John Szepietowski for more information on how we can help you take the next steps to secure this form of funding.