Detailed information on Initial Public Offerings (IPOs)


What is an IPO?

An initial public offering (IPO) is the first time a company sells its shares to the public on a public market. It is the process that takes a company from being a private one to public one. Private companies have fewer shareholders and are subject to less scrutiny than public companies.

In contrast, publicly listed companies have thousands of shareholders and are subject to strict rules and regulations in order to protect those shareholders.

The decision to take a company public is one of the most significant decisions that a company will face in its lifetime. The sheer amount of work that is required by the process is a daunting task, especially when conducted under the spotlight that comes with an IPO.

Markets and investors will want to know everything about the company, its history and its future plans. Therefore it is important to get specialised legal advice from commercial solicitors who specialise in this process and can ensure the company is floated successfully.

Why float?

If it is such a big effort, why do companies bother to list their shares on a public market? The answer is growth. Most companies find there is only so much they can achieve by selling their shares to private investors and issuing debt in order to raise finance. In order to raise the capital they need to grow significantly, selling to a much bigger pool of shareholders - the public - is necessary.

After the IPO a company can continue to raise finance by listing more stock if there is the demand for it. In addition, if a company wants to issue debt, it will get a better rate if it is a listed company because of the extra scrutiny that comes with mandatory regular financial reporting. By offering their shares to the public, a company can gain an objective market value of its business and a certain amount of prestige that comes with being a publically traded company.

Facebook and Twitter

Facebook recently became a publically traded company after its IPO in 2012. The company wanted to capitalise on its worldwide popularity and raise capital to continue its growth. It was the biggest IPO ever for a technology company and raised $16 billion (US).

However, the hype surrounding the IPO led to Facebook offering its shares at too high a price and the company subsequently lost half of its value. Investors were concerned about how the company would make a profit with the rise of mobile users.

Facebook is now bouncing back from the decline (it has recently been valued at $109 billion) but there is a lesson to be learnt on how to conduct an IPO for other technology companies.

Twitter recently announced its intention to go public and commentators are already saying how the micro-blogging site will ensure its IPO is different from Facebook’s in order to avoid the same share price crash.

Legal advice is therefore crucial to companies wishing to sell their shares to the public. An IPO can benefit a company hugely in terms of investment and generated interest but they must be managed with expertise and care.

Engaging specialist commercial solicitors is therefore highly recommended for any company wishing to start the IPO process.

What is the process of an IPO?

In the UK, companies sell their shares on the London Stock Exchange (LSE). The public markets of the LSE are the Main Market and the Alternative Investment Market (AIM), which is the market for smaller, growing companies. There are more than 1,400 companies on the Main Market, and over the past ten years £366 billion has been raised by these companies through IPOs and further share issues.

In order to get onto the Main Market a company must issue a prospectus and be admitted to the Official List which is run by the UK Listing Authority (UKLA). The role of the UKLA is to enforce the Listing Rules, the Prospectus Rules and the Disclosure & Transparency rules which all companies must follow in order to get onto and remain on the Official List.

The Listing Rules

The Listing Rules (LRs) contain all the listing requirements that a company must meet in order to be admitted to the Official List and issue their IPO. The LRs state that in order to be listed, a company must be fully incorporated and operating in conformity with its constitution (articles and memorandum of association). Importantly, the expected aggregate market value of the shares to be listed must be at least £700,000. Therefore £700,000 is the lowest amount a company can expect to receive as a result of an IPO.

The Prospectus

One of the requirements in the LRs is that a company must have issued a prospectus for the shares approved by the Financial Conduct Authority (FCA). A prospectus is a legal document that is issued by a company to give investors all the information they need to hopefully invest in the company and buy their shares.

The content in a prospectus is subject to the strict Prospectus Rules (PRs). This is because a company has to disclose information that will allow investors to make informed decisions and this cannot happen if the company only discloses information that it believes makes it look like a favourable investment.

The PRs cover the drawing up of the prospectus and its approval and publication. A prospectus must contain certain information that must be formatted in a specific way. It must include information on the company’s assets and liabilities, profits and losses, financial position and prospects. It must also detail the rights attached to the shares to be issued.

In addition, the prospectus must contain a summary. The summary is an important part of the document as it is meant to be used as an aid for investors when considering the rest of the prospectus. It must be written in clear, non-technical language and contain the key information about the shares.

The PRs require a company to submit their prospectus ten working days before the intended approval date of the prospectus. The FCA will only approve a prospectus if it finds it contains all the necessary information and complies with all the rules. Once the FCA has approved the prospectus, the company can publish their prospectus and start generating interest from investors.

Final applications

However, after all the hard work compiling the prospectus and gaining admission to the Official List, it may be surprising to learn that a company is still not able to float its stock on the Main Market. In order to do so, an application must be made to the LSE to be admitted to trading on the Main Market. Therefore a company wanting to issue its shares to the public for the first time must make two applications: one to the UKLA and one to the LSE.

In order to ensure the time-consuming and challenging process of issuing shares to the public for the first time pays off, companies are strongly advised to seek the legal advice of commercial solicitors who specialise in IPOs. Specialist solicitors will ensure all the necessary listing requirements are met, the prospectus is written according to the PRs and that the IPO is successfully completed.

As one of the most important periods in a company’s life, legal advice during the IPO is of paramount importance.

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