The past year has seen an increase of companies listing on public markets around the world, including AIM. AIM is a market operated by the London Stock Exchange (LSE), which is specifically designed for smaller high growth companies. With Alibaba’s recent record breaking IPO with a market capital of $25 billion, and some predictions showing that IPO funding in 2014 could see an increase of over 45% on 2013, there is considerable momentum in IPO activity and, in particular, within the booming technology sector. But, is going public the right decision for your business? Our Corporate team at BWB explore some of the advantages and disadvantages of an IPO.
What is an IPO?
An initial public offering (IPO) is the process by which a company obtains a listing on an investment exchange and its shares become available for the public to trade on that market. AIM is one of several recognised investment exchanges in the UK. As there are no minimum criteria to list on AIM (other than with regard to investing companies) relatively small companies are also able to consider listing. AIM is a truly international market with businesses from all round the world listed. It is also a lighter regulatory touch than the LSE’s main market, so the costs of joining and maintaining a listing are significantly less.
An alternative to raising capital by debt finance, is through issuing equity. While many companies raise this capital privately from angel investors, venture capital firms or private equity houses, this generally involves ceding a significant degree of control to the investors through special rights.
Going public allows companies to raise equity finance from institutional shareholders who acquire no special rights and tend to invest significant sums. It can assist with growth by allowing a company to more easily use its shares as consideration for an acquisition. The executive team usually retain control of the business although new members may join to plug gaps or enhance the management’s expertise.
Is an IPO suitable for your business?
In order for a board of directors to decide whether an IPO is in the best interests of shareholders, the directors might consider the following main advantages and disadvantages of joining AIM:
Good way to raise capital: companies can raise equity funding upon listing to expand, fund research and development, or even make acquisitions.
Subsequent finance can be raised relatively quickly: once listed, equity can be raised from new or existing shareholders in a matter of weeks.
Greater liquidity for shareholders: shares can be bought and sold more easily once listed because there is a public market for them.
Shares become a better acquisition tool: as issuers’ shares are publicly traded, they can be more readily used as consideration for acquisitions.
Shares can be used more readily as an employee incentive tool: with a publicly traded company the shares have a clear value and employees’ shares/options can (subject to lock-ins and market rules) be freely traded.
Public perception: listed companies generally have a higher public profile and a degree of prestige.
Debt financing easier: due to the level of transparency, publicly listed companies often find it easier to obtain debt finance.
Time consuming process: the IPO process usually takes a number of months and places a significant burden on the senior management team.
Increased disclosure, corporate governance and compliance requirements: once a company is publicly listed, all material information (good and bad) about the business must be shared in the public domain.
Less control: if equity is raised as part of the IPO process, the existing shareholders are likely to be diluted.
Expensive: becoming a listed company can be a costly process, but actual cost depends on the structure and complexity of the process.
No exit on day one: large shareholders and management are often locked-in and prevented from selling their shares for a period after the IPO, so there is no quick exit.
Ongoing costs: being on a public market adds an extra layer of costs to the business such as additional non-executive directors, the cost of a nominated adviser, brokers and registrars and higher audit fees. There are also costs of management time related to compliance, preparing the annual and interim reports and investor relations activities. This can be mitigated by a good non-executive team that can form a bridge with investors.
Still keen? See below for our top tips for preparing for an IPO
Get your house in order
Decide on a clear corporate strategy, including how much you want to raise and what you will do with it. Demonstrate you have a sound business model worthy of investment that will withstand scrutiny. A good investor presentation is a must!
Pick the right advisors
Picking the right team can be the difference between failure and success. You will need relevant commercial advice in many areas, so start looking for recommendations for well-informed nominated advisers, solicitors and reporting accountants. Do not overlook the value of expert financial PR advisers.
Form IPO team
You should decide who will co-ordinate the process internally. This person will have to give instructing advisers and source information and materials for those advisers. It is important that the issuer knows who this is going to be and that clear channels are created to funnel information through them to the advisers.
As part of the IPO process, advisers will carry out thorough legal and financial due diligence on the issuer to make sure it is fit for joining the market. Therefore, it is worth getting things in order and gathering this information in one place where it can be passed to advisers quickly.
So, at a time when the economy is showing signs of vitality and economic growth, suggesting the tech sector is positioned for robust expansion, this is a great time for businesses to think seriously about an IPO. If you would like to discuss your options further, please contact our Corporate Team at BWB; we have considerable experience advising companies looking to list on equity capital markets.
This article appears in the November issue of BWB Corporate and Commercial department's BWB Biscuit: Business issues to chew on. To subscribe to these regular e-newsletters, please email firstname.lastname@example.org.
Posted on 24/11/2014 in Legal UpdatesBack to Knowledge