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Preparing a company for an IPO

By Kathleen Wang

What is an IPO?

An IPO, or an Initial Public Offering, allows a private company to offer its shares to the public through a stock issue. This allows the company to raise capital. When a private company undergoes an IPO, it becomes a publicly listed company on a stock exchange. This article discusses the steps for a company preparing for an IPO on the London Stock Exchange (LSE).

Who is involved in an IPO?

There are many actors involved in the IPO process, including the following three:

The company’s management board – these include the board of directors of the company. These individuals make the ultimate strategic decisions about embarking on an IPO.

Investment bank – primarily, an investment bank underwrites the IPO by placing an overall value on the company and acquiring shares at a discounted price to later be distributed in the public market, both to earn a profit and increase the market value of the company. Significantly, through the valuation process, the bank also determines the price at which the company’s shares should be offered in the IPO.

Law firms – law firms help ensure compliance with the relevant laws and regulations involved in an IPO, such as the UK Listing Rules (UK Listing Authority). They also undertake the legal aspects of re-registering the company as a public company, rewriting the company’s constitutions, and implementing new corporate governance procedures after the IPO.

Steps in an IPO

Determining the market – First, the company must determine which market to list its stocks on. This decision can be influenced by factors such as access to potential investors, entry/listing requirements of different markets, level of regulation involved, and anticipated price performance on a particular market.

If a company chooses to launch an IPO on the LSE, it must then determine between two principal markets: the Main Market and the AIM (Alternative Investment Market). The Main Market is the principal market for UK and overseas companies, but contains more stringent regulatory and admissions requirements, such as a minimum expected market value. As a result, smaller/growing companies may prefer the AIM, which benefits from a more flexible regulatory environment and less stringent admission requirements.

Preliminary assessments – The company must then assess the suitability of undergoing an IPO. This is typically done by the company’s sponsor or advisor, who will determine issues like the structure and composition of the board, the IPO timeline, and the best method of bringing the company to market.

Under the UK Listing Rules, a company seeking to launch on the Main Market must appoint a sponsor from an approved list by the UKLA. In addition to its advisory role, sponsors also undertake certain responsibilities to the UKLA in respect to the company. For companies seeking to launch on the AIM, they need only appoint a nominated advisor.

Due diligence – Due diligence is required to determine the suitability of a company for IPO. Importantly, due diligence allows the company to determine the price at which its shares can be issued. This involves a comprehensive investigation of the company’s business, financial position, corporate management, prospects, and major risks. As a result of this wide-scale research, due diligence for an IPO can be very time consuming and costly.

The company may engage in business due diligence; this will involve looking at both the company’s individual business prospects and the wider industry in which it operates, the company’s strategy and forecast and its relationship with shareholders.

During financial due diligence, the company will investigate its financial and management history, working capital, and assets (such as property holdings).

Lastly, legal due diligence looks at, among others, the company’s structure, constitution (Articles of Association), business activities (such as material agreements), legal titles to any investments/properties, intellectual property, ongoing litigation/risks of future litigation, and regulatory framework.

The information obtained during due diligence may then be included in the company’s prospectus.

Preparing the prospectus – For companies seeking to launch on the Main Market, a prospectus is required for potential investors. The Prospectus Regulation Rules sets out certain required information to be included. This is so that potential investors can make an informed decision about whether to invest based on knowledge of the company’s assets and liabilities, financial position, prospects and risks and the rights attaching to the shares.

Information required in a prospectus include, among others, the business of the company, the company’s financial information, risk factors, significant shareholders, company management and corporate structure, rights attached to issued shares and the share price. The prospectus must then be verified and approved by the Financial Conduct Authority (FCA).

Companies seeking to list on the AIM only need to prepare an Admissions Document, which requires less information than a Prospectus.

Regulatory hurdles – before the company can be registered on the LSE and its shares publicly traded, it must meet various regulatory and admissions requirements. The LSE Admission and Disclosure Standards and the UK Listing Rules contain entry requirements for a company seeking admission to the market and listing on the Official List respectively.

Under the Admission Standards, a company seeking to launch on the Main Market must prepare to offer a minimum 25% of its shares to the public, and must have a previous 3-year record of trading. In addition, the admission documents the company prepares is subject to pre-vetting by the Financial Conduct Authority (FCA).

For a company’s securities to be listed on the Official List, it must meet the eligibility requirements as set out by the UK Listing Rules. Among others, the company must be duly incorporated (usually in the form of a public limited company), its shares must be admitted to trading on a regulated market with a minimum total expected share value of £700,000. In addition, the FCA must also approve the company’s prospectus before it can be listed.

A company seeking to launch on the smaller, more flexible AIM does not face the minimum trading requirements, trading record requirement, or pre-vetting of admissions documents by the FCA. It is also not bound by the Listing Rules.

Effects of an IPO

Increased regulatory burden from being a listed company – if a company is listed on the Main Market, it then becomes subject to a host of regulations, including Market Abuse Regulations, Transparency Rules and Corporate Governance Rules. Market Abuse Regulations, amongst other things, require the prompt and public disclosure of inside information. Transparency Rules contain obligations for the disclosure of certain documents. Finally, the Corporate Governance Rules require issuers to appoint an audit committee.

If a company is listed on the AIM, it is subject to less regulations, but still must abide by the AIM Rules and Market Abuse Regulations.

Case Studies

Flutter Entertainment’s £13.9bn IPO – (June 2020) Flutter Entertainment’s IPO was the largest IPO on the London Stock Exchange in the first six months of 2020. The bookmaking holding company’s market capital opening price onto the Main Market was set at £13.9bn.

Hut Group files for IPO – (August 2020) British e-commerce firm The Hut Group announced its plans to file for an IPO on the LSE’s Main Market, with an initial market value of £4.5bn. If successful, this would mark the largest UK IPO of 2020, and could help boost European listing volume, which hit their lowest in eight years following the pandemic.

Ant Group files for dual Asia listing – (August 2020) Ant Group, the fintech arm of Alibaba and China’s dominant mobile payments firm, has filed for dual IPO in Hong Kong and Asia. The Group plans to raise as much as $30bn in its IPO, surpassing Saudi Aramco’s 2019 $29bn IPO to become the largest IPO in history.

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