What is an IPO? In simple terms, this is one of the ways to raise funds by placing shares of a startup on the stock exchange. This option can be the fuel for creating a recognizable brand with a wide reach. But improper preparation for an IPO can be costly for a startup and even an already developed and established business. Below we will discuss Initial Public Offering guide and the main features of the implementation of this mechanism in commercial activities.
Our company is an expert in the establishment and licensing of commercial structures. We provide an extensive range of consulting and practical corporate services. Our lawyers will answer all your questions regarding the implementation of the IPO.
Introduction to IPO Preparation Steps
Every company strives to raise capital to develop its business. At the initial stage – at the startup stage – it is difficult to attract a bank loan or find an “angel” willing to invest in her development. And then the company issues shares that are offered to investors. Anyone who buys a share of a startup becomes a co-owner.
If a business is successful, then it requires additional capital for further development. Of course, you can take out a loan or issue bonds or bills. But the most profitable option is to issue shares for circulation on the stock exchange. This potentially allows you to attract millions of investors and billions of dollars in investments.
There are several main purposes of an IPO, the importance of which may vary depending on the specific case:
- Attracting capital to a company: An IPO allows a company to gain access to capital from a much larger pool of investors.
- The presence of shares traded on the capital market provides the most objective assessment of the company’s value, which can be used as a tool for assessing the performance and motivation of managers, or a benchmark for mergers and acquisitions.
- The company’s shareholders have the opportunity to sell all or part of their shares and thereby capitalize on the company’s expected future earnings.
- The liquidity of shareholders’ capital after an IPO also increases sharply, for example, banks are much more willing to issue loans secured by shares of listed (public) companies than closed (private) companies.
Financial Readiness for IPO
It is very difficult to accurately answer how much this procedure might cost, since the final amount depends on several factors: the specifics of the exchange, the current state of affairs in the company, the features of the advertising campaign, etc.
In addition, going public preparations it is necessary to pay for underwriting services – organizing the entry of a business on the stock exchange. The cost of such services can reach up to 12% of the cost of the placement itself (but the larger the placement amount, the less% the organizer charges for their services). If a startup has potential and is promising from the point of view of stakeholders, then investment banks may even compete with each other for the right to provide relevant services.
If we form general IPO checklist, whole costs are:
- underwriting services;
- costs of attracting other specialists – audit, legal advice and consulting, PR consulting and others;
- payment for exchange services (depending directly on the type of platform);
- recruitment of personnel for reporting preparation.
In order for the IPO to have a chance at life and the shares to be placed at a favorable price, it is necessary to assess your real capabilities and carry out a set of preparatory measures. Our specialists will provide you with comprehensive professional assistance.
To participate in an IPO, you need a brokerage account. It must contain a certain amount of money that you want to invest in stocks. In addition, there is a minimum amount that you need to have to participate – it varies from placement to placement. It depends on the company and the price of its securities.
Buying shares of a large international company that goes public can be very expensive and not everyone can afford it. In addition, some IPOs are limited to qualified investors.
Legal Compliance for IPO, Regulatory and Operational Correspondence
In the process of preparing for an IPO, it is necessary to work out the following key points:
- creation of an IR department;
- clear and effective information disclosure policies;
- development of IPO marketing strategies (including the official website);
- reliable corporate governance system.
It is also worth considering the nuances of taxation. As a result of the use of various schemes, official financial reporting indicators are distorted. As a result, the owner’s idea of the profitability of his business differs from the real situation. Investors are only interested in clearly-functioning business, without the prospect of losing invested funds due to violations of the law.
In addition to other IPO process essentials, it is necessary to ensure strict consistency between accounting and management audits. Often, due to insufficient financial literacy, the owner independently develops and puts into practice intuitive methods for assessing the effectiveness of his/her business. But in the end, when conducting a full audit in accordance with generally accepted standards, it turns out that it is too early for a startup to think about an IPO.
Key factors for a successful IPO are:
- guarantee of strong investor relations in IPO;
- growth/cash flow generation prospects;
- a clear and achievable development strategy;
- experienced, strong management;
- strong positioning relative to competitors;
- preparatory work of the issuer:
- availability of audited financial statements for the last three years;
- legally transparent ownership structure;
- consolidation of all profit centers and cash flows;
- high standards of corporate governance;
- high standards of information disclosure;
- attracting the optimal pool of organizing banks to carry out the IPO;
- involvement of other specialized consultants (auditors, legal consultants, PR agencies, etc.);
- selection of the optimal structure and basic placement parameters.
A larger volume of placement and a higher percentage of shares in free float have a positive effect on liquidity, increasing the turnover of securities, the number of securities on offer on the market, and ultimately, all other things being equal, have a positive effect on the company’s valuation.
An important aspect in the placement structure is the ratio of funds raised into the company, called primary shares, and shares sold by current shareholders, called secondary shares. The choice of this parameter is dictated by the need to attract new capital to the company and corresponds to the presented development strategy of the issuer.
If you want to successfully implement the IPO procedure, contact our company for help. We will provide you with comprehensive consulting and practical support not only in this matter, but also in the development of your business as a whole.
The article’s author is Denys Chernyshov – founder and CEO of the globally-famous organization Eternity Law International.
