What constitutes an IPO?

31.10.2023

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A foreign initial public offering (IPO)

constitutes the process whereby a company makes an invitation to the investment community to acquire its equity stakes. Having elected to float an IPO overseas, a company must achieve total compliance with stringent reporting regulations instituted by the relevant national regulator. This necessitates adherence to

disclosure prerequisites,
corporate governance codes,
investor safeguards,
multifarious further aspects.

The firm purveying its equity stakes, termed the “issuer”, proceeds in alliance with investment banks. After the launch of the IPO, the shares become subject to open market trading dynamics. A listed company may raise additional finance down the line via a secondary offering, courtesy of its already established access to public markets by virtue of its IPO.

If you are seeking to float an IPO externally, is advised to prepare for

passing the due diligence for the company's IPO market debut,
drafting the Prospectus,
leading up attendant documentation.

On the whole, an IPO investment can yield returns. However, before deploying funds, it is imperative to grasp how the trading mechanics of these securities diverge from conventional equities, alongside the supplementary risks and regulations bound up with launching an overseas IPO scheme.

What constitutes an IPO?

The majority of companies secure their first funding via small business loans, private backers or venture capital. However, there arrives a juncture when a business necessitates further finance to enable additional expansion and development. In such circumstances, companies may opt to procure a stock exchange listing via an IPO.

An Initial Public Offering signifies the inaugural public vending of securities on an open exchange. An IPO is an indispensable financing mechanism that furnishes companies access to a vast raft of investors, culminating in augmented funding to finance development, business expansion, debt repayment and other attendant growth strategies. Companies typically decide to promulgate an overseas IPO to raise capital, not solely to bankroll growth initiatives, but also to heighten their public profile.

YB Case experts are on hand to elucidate the intricacies of procuring an overseas listing and the multifarious processes entailed in attaining a successful IPO launch within the requisite jurisdictional remit.

What impels companies to seek an IPO?

Companies elect to procure a stock exchange listing via an IPO for multifarious rationales. The predominant drivers are:

Capital raising

An IPO facilitates companies to raise finance from an extensive array of investors, tendering the opportunity to fund growth. The proceeds could also be deployed to finance research and development initiatives or redeem debt. This can be especially imperative for fledgling companies sans access to credit or alternative financing channels.

Enhanced liquidity

An IPO renders a company's shares available to a substantial body of investors. A stock market quotation on international exchanges is highly prestigious. This can boost the liquidity of the firm's shares.

Superior transparency

IPOs mandate companies to unveil information regarding their activities, stringently enforced by regulatory authorities. Investors and regulators thereby gain access to key data on companies' finances, operations, risks and strategic direction. This enables superior assessment of investment potential and risks, alongside elevating corporate governance and improving internal transparency.

Increased brand profile

An IPO can amplify a company's brand awareness and attract new customers and partners. In other words, launching an overseas IPO equates to an immense marketing drive.

Going public through IPO: A step-by-Step guide

1	Select an Underwriter: Choose an underwriter, often an investment bank, to guide and advise on the IPO launch.
2	Prepare for IPO: Work with the underwriter to prepare for the IPO, including compiling necessary paperwork and financial information.
3	File Application: Submit an IPO application to the relevant regulatory authority, such as the SEC in the US, providing essential details about the issuer, including financial metrics and ownership information.
4	Regulatory Approval: Upon approval, the underwriter issues a Prospectus, a document outlining the financial health of the company. Collaborate with the issuer to set the initial share price, allowing new investors to participate.
5	Offer Shares to Investors: The underwriter offers shares to investors, marking the commencement of exchange trading.

Note: Familiarize yourself with "Flipping"

Understand the concept of "flipping," which involves reselling IPO stock in the initial trading days to capitalize on volatility.
Newly listed stocks often experience significant fluctuations near listing; investors should be aware of and navigate these dynamics.

Stages of an overseas IPO listing

Stage	Activities
Preliminary stage
Evaluation of commercial indicators	Conduct a thorough business analysis, including historical performance and competitive forces.
Strengthening the structure	Meet regulatory governance prerequisites, establish a Board of Directors, and ensure financial reporting transparency.
Engage IPO underwriter	Select a reputable investment bank six months before market entry based on reputation, research capabilities, and sector expertise.
Underwriting agreement	Define capital raising details, security types, and charges in an agreement with the underwriter.
Ensure successful equity sale	Underwriters orchestrate the completion and sale of equity stakes at the target price.
Preparatory phase
Collaborate on IPO strategies	Multiple underwriters work together on strategies, select the intended stock exchange, and conduct due diligence.
Determine IPO parameters	Evaluate enterprise dynamics to determine IPO specifics, including shares issued, offer price, timing, and market conditions.
Due diligence	A team comprising bankers, lawyers, accountants, and regulatory experts conducts due diligence, gathering financial data.
File registration application	Submit an application with offer details, corporate information, financial statements, and legalities to the regulator.
Prospectus and Investment Memorandum	Draft a Prospectus adhering to regulations and an Investment Memorandum summarizing key data for investor understanding.
Main stage
Conduct investor roadshow	Present business, financials, and strategic vision over weeks or months to generate investor demand.
Regulator approval	Upon approval, set the IPO date. Investment banks submit bids for shares, and the underwriter holds preemptive purchase rights.
Seek expert advice	Consult experts for guidance on overseas IPO preparation requirements.
Final phase
Shares become publicly tradable	Marks the success of the IPO. An opening price above the IPO price signifies strong demand. Share prices remain subject to variability.

Phases post-IPO stock exchange listing

Once an IPO completes, a company becomes publicly listed, meaning its shares are purchasable and vendible on the stock exchange. This also necessitates the firm discloses information regarding its activities (enabling open access), including financial statements. Publishing financial data is an indispensable requirement for a listed company, enabling investors to evaluate financial performance and make informed share trading decisions.

An IPO also furnishes a company the facility to raise supplemental financing for corporate initiatives. Finally, a successful IPO signals the firm's prosperity and economic eminence. This owes to exacting prerequisites needing fulfilment to achieve an IPO listing, encompassing:

Positive operational track record
Robust financial constitution
Transparent and accountable management framework

We can advise on navigating the post-IPO landscape as a newly publicly listed company. We assist clients to comply with augmented reporting responsibilities, interface with regulators and shareholders, and capitalise on being a listed entity.

Benefits and drawbacks of an overseas exchange listing

Advantages for company owners:

Capital expansion via equity financing. Post-IPO, shares become publicly traded. Share price appreciation allows owners to profit through disposing of equity stakes.
Competitive talent acquisition. An IPO can aid recruitment through share ownership incentives made possible by a liquid stock market listing.
Uplift for early investors. Increased liquidity post-IPO renders shares more valuable and realisable. Prestigious exchanges like NYSE and NASDAQ further enhance status.

Drawbacks for company owners

Ceding control. By making shares widely available, owners forfeit control and the ability to execute unilateral decisions.
Augmented reporting. Significant transparency requirements around operations and finances must be fulfilled, benefiting competitors.
Heightened costs. Employing underwriters, lawyers, and advisors incurs hefty IPO expenditure. Top investment banks provide expert guidance but levy substantial fees.

Advantages for investors

Access and opportunity. The public listing furnishes access to the assets of coveted enterprises.

Drawbacks for investors

Downside risk. Despite upside potential, shares carry inherent volatility risks. Investors may sustain losses if post-IPO prices decline.
Information asymmetry. Opacity around startups and lesser known issuers exacerbates risks, especially where funded by venture capital.

Experts help to elucidate the nuances around cost-benefit analysis for both corporate issuers and prospective investors.

Motivations for seeking an exchange listing

The predominant impetus underpinning a foreign IPO is securing capital funding. This finances business expansion, R&D, and marketing initiatives pivotal to commercial growth. However, augmented transparency responsibilities arise; stringent periodic disclosure statements must enter the public domain.

Assessing IPO investment merit

IPOs do not unconditionally offer compelling propositions for investors, especially retail market participants. While potentially lucrative, IPO deployment bears an elevated risk profile. Moreover, listed firms often prioritise growth over profitability in the early post-IPO phase, engendering share price underperformance relative to wider indices over multi-year periods. Therefore, prospective IPO investors must conduct stringent evaluation of issuers.

Securing IPO access

Investing in IPOs necessitates opening a brokerage account to trade shares. Each IPO specifies a minimum capital sum for participation eligibility. With an account established, investors can submit applications via opening a brokerage account to participate in an IPO. Considerations include:

Selecting a broker furnishing access to desired IPOs
Closely reviewing IPO terms
Applying ahead of listing as invitation windows close swiftly

Notably, certain IPOs exclusively permit qualified investors packing requisite financial strength, market savvy and accredited qualifications. Such restrictions aim to ringfence participation to deter losses from exposure to higher-risk, fledgling issuers among less sophisticated investors.

Experts can advise on navigating the IPO landscape across jurisdictions to achieve optimal outcomes as an issuer or investor.

Executing an IPO

When promulgating an international IPO, stringent reporting regulations apply per the listing jurisdiction. To optimise outcomes, retaining specialised legal counsel versed in international offerings is advisable from project genesis.

Our multidisciplinary team proffers IPO expertise arising from extensive practical experience. We service entrepreneurs seeking venture scale, entities targeting international investment, and owners prioritising value maximisation.

Our IPO advisory services include:

Jurisdictional planning for establishing IPO issuers
Document preparation
Due diligence performance
Liaison with government bodies
Representing clients in stakeholder negotiations
Risk management strategic input
IPO-related dispute resolution

Therefore, entities contemplating an overseas IPO are encouraged to arrange personalised guidance around traversing the intricate listing processes across appropriate jurisdictions and exchanges to achieve their capital raising or liquidity objectives.

Lawyer's on investment projects hands-on support identifies optimal frameworks, timelines, and structures while navigating regulatory prerequisites. Contact our team to determine how an international IPO could align with your commercial plans.

Tags: IPO IPO regulation