Most companies are private – that’s to say their shares are owned, bought and sold privately and not traded openly. Their owners are normally the founder(s), their family, friends and maybe some funders like angel investors. If the aim of a business is to grow however, once it reaches a certain size and maturity the founders often think about a floatation and becoming listed on an exchange. Since a listing is quite an involved and complicated process, and the rules to qualify are complex, it’s a major step. But, since a listing gives a business access to considerable funds, and is a good indicator of the company’s stability and business credentials, it can be a great way for an entrepreneur to take their business to the next stage of success.
- What is initial public offering (IPO)?
- What are the IPO/AIM requirements?
- What is the initial public offering process?
- What due diligence is required?
- What documents are required for an IPO?
- How to decide the price offered for shares?
- Advantages of initial public offering
- Disadvantages of initial public offering
- How to judge the success of an IPO process
What is initial public offering (IPO)?
An IPO is a procedure by which a company places its shares for sale on an exchange. An IPO is attractive to business owners as it often enables them to realise gains on their existing shareholdings that are worth more after the process.
There are a number of different exchanges in the UK on which a company can list their shares, the main ones being the London Stock Exchange or Main Market and the Alternative Investment Market (AIM).
What exchange you choose to list on depends on a variety of factors, including the amount being raised, how attractive your shares are, the sector your company operates in, and its size. It’s very important to engage experienced legal and other advisers to help you decide which market is best for you and what kind of offering you will make.
You will need to engage the following advisors if you’re planning an IPO:
- A firm of corporate solicitors to co-ordinate due diligence and the listing process, and help you prepare the listing documents.
- Accountants to prepare the documents needed as part of due diligence and report on financial information.
- An investment bank to be the lead advisor on the IPO process. They may also act as an advisor on the exchange rules, broker, underwriter, and communications advisors.
- A Sponsor (if listing on the Main Market) or a Nomad if listing on the AIM.
In order to qualify to become listed on an exchange, companies must demonstrate that they meet good corporate governance principles and other stringent requirements, and the process takes around 6 months (shorter for the AIM). The requirements for listing include due diligence, preparation of a prospectus or AIM admission document, and various other documents such as financial reports.
If your listing is on the Main Market, you’ll need to prepare a full prospectus that, as well as being used to advertise and market your shares, helps investors get a picture of the business so they can decide whether to invest. The prospect needs to be approved by the listing authority, the Financial Conduct Authority (FCA). After the prospectus has been released, the business’s senior team will hold a series of road shows where they take questions from potential investors.
If you plan to list on the AIM, you won’t need a prospectus, but will instead prepare an AIM admission document that’s similar in content and can also be used for marketing purposes. Unless your shares will be offered to the public as part of an AIM listing, your admission document will not normally need approval by the listing authority.
Once orders for shares have been received, the final price for the shares will be determined, the prospectus or AIM admission document submitted to the exchange and trading can commence.
What are the IPO/AIM requirements?
The London Stock Exchange is regulated by the London Stock Exchange Rules, and the AIM by the AIM Listing Rules. These rules describe the process a company needs to go through to be admitted onto the exchange.
If you’ve decided to consider an IPO, you’ll need to review the rules to make sure your company is suitable, that you meet the eligibility requirements, and that you have a regime in place to meet the ongoing reporting requirements that are required by listed companies.
In order to prepare for an IPO, you will at a minimum need to demonstrate that you have a solid business plan including a strategy for future growth, a record of good sales and profits and growing market share, an experienced and high-performing management team, and good corporate governance practices and financial procedures. This information will be packaged up and presented as part of your prospectus or admission document. A key factor in a successful IPO is the ability to turn this information into a compelling marketing tool, so having a good PR or communications specialist to help you package this up is vital, and a good website is a must.
These are the main characteristics and requirements of Main Market listings:
- You need to show a three-year record of trading.
- You need to offer at least 25% of your shares to the public.
- You may need to get shareholder approval for major decisions in the future.
- Your prospectus will need prior approval.
- You’ll need an official Sponsor.
- Your company must have a minimum capitalisation of £700,000.
- You’ll need to show compliance with the UK Corporate Governance code.
For the AIM, here are the main characteristics and requirements:
- No minimum number of shares offered to the public or previous trading record requirement.
- You generally won’t need to get shareholder approval for major company decisions.
- Your admission document normally won’t need approving.
- You’ll need a Nomad and a broker.
- There is no minimum market capitalisation.
- You’ll need to show compliance with the Corporate Governance Code.
- If you have traded, you’ll need to show your financial records that need to meet a certain minimum standard.
- You’ll need at least 12 months of working capital and solid financial reporting procedures.
- You may need to provide a profits forecast.
In an AIM listing, the Nomad will review your company and its trading history, and make sure that the AIM Rules are complied with during the IPO. They will also carry out due diligence and act as a point of contact with the AIM exchange.
What is the initial public offering process?
The IPO process consists of the following steps:
- Appointing your advisors such as your lawyer, broker, financial experts, and PR team.
- Initial and essential pre-IPO admin such as restructuring of your executive team, appointment of directors, obtaining legal, financial and tax advice and preparation of management accounts.
- Discussions with initial and existing investors and review of any existing documents such as shareholders agreement.
- Legal advisors carry out due diligence.
- Marketing activities including preparing the prospectus/AIM document.
- Conducting roadshows and related marketing activities.
- Obtaining subscriptions.
- Notice of intention to float and floatation.
What due diligence is required?
The reason that due diligence is required is so that your lawyers can find out any potential issues or problems with the business, its legal affairs, its management team or any other issues that need to be disclosed in the prospectus or AIM admission document. It’s very important that these documents are clear, accurate and do not contain any misleading statements. Your reporting accountants will do their own investigation into your financial affairs, and your lawyers will look at the company’s constitutional documents and other books and records such as records of directors’ meetings. They will also ask you about existing or potential disputes with customers and suppliers, ask about your assets like business premises, and check that you have good relationships with your existing investors and lenders. Due diligence will also be carried out by your Sponsor if you’re listing on the Main Market or your Nomad if your listing is on the AIM.
What documents are required for an IPO?
The principal documents needed for a Main Market listing are as follows:
- Application for approval of a prospectus.
- A Sponsor’s declaration confirming that the company has satisfied the listing rules, the prospectus rules, and various other requirements.
- An application for admission, supplementary documents, and confirmation of the number of shares to be issued.
- After the application has been considered by the Financial Conduct Authority, a statement of how many shares were issued.
The main documents needed for an AIM listing are:
- An AIM admission document
- An early notification
- A 10-day announcement
- Admission document and related forms and applications
How to decide the price offered for shares?
You may already have a view on your company’s value, but when you carry out an IPO, this is verified by the various experts you engage as part of the process. The value will depend on the state of the market, your business sector and the value of your competitors, demand for the shares and similar factors.
Advantages of initial public offering
The main advantages of an IPO are:
- The initial shareholders’ shares receive an uplift in value or premium as a result of the IPO.
- The company can raise investment from outside sources such as the general public.
- Because the company has demonstrated good corporate governance, it is easier (and cheaper) for it to borrow money.
- As the company has been officially valued, it may be easier to sell as the share price is known.
- It may be easier for a public company to attract talent because it can offer publicly traded shares as part of its compensation package.
- A listing can enhance a company’s credentials in terms of increased sales and make it easier to deal with suppliers.
Disadvantages of initial public offering
The main disadvantages of an IPO are:
- The process is quite complex, especially if you are planning a listing on the Main Market. An AIM listing is normally a shorter and less involved process.
- Because a company needs to publish a prospectus or AIM listing document, it must reveal details of its business and financial performance to the public.
- Maintaining a listing requires ongoing administration and this can be time-consuming.
- The IPO may not be successful in terms of funds raised, and this can damage a company’s reputation.
- The existence of outside shareholders can lead to a loss of control over decision-making.
How to judge the success of an IPO process
An IPO can fail if the company doesn’t raise the funds it’s looking for. You can therefore judge the success of an IPO process if, at the time of the listing, the shares are over-subscribed – you have more requests for shares than there are shares on offer.
A successful IPO process usually has the following features:
- Experienced legal and other advisors to conduct a thorough due diligence process and prepare the necessary documents in good time.
- A prospectus or AIM admission document that tells a good story and paints a compelling picture of the company and its future prospects so it’s attractive both to institutional investors and the general public.
- A confident, fluent, experienced, and well-briefed CEO and management team to answer questions during the roadshow.
- A sufficiently long (around two weeks), comprehensive (up to eight meetings per day) and well-marketed roadshow process.
- Excellent PR and communications to advertise and market the IPO.