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If you’re a member of the public looking to invest in some shares, you might be interested in purchasing shares through an IPO at a set price before the shares are listed on the stock exchange. If you’re a business wanting to raise capital and your profile at the same time, you might choose to go through an IPO.
What Does IPO Stand For?
IPO stands for ‘initial public offering’. An IPO is the first sale of shares to the public a company makes and can sometimes be called a ‘float’.
In the UK, an IPO gives investors the opportunity to buy shares at a certain price before they trade on exchange markets. As the London Stock Exchange (LSE) is the most prominent institution in the UK, we’ll be referring exclusively to the LSE in this article.
What Is The Process For An IPO?
An IPO is used when a company first decides to go public. Prior to an IPO, the company would have been a private company and used other methods of capital raising with limited shareholders. (Think angel investors, raising capital with friends and family, etc).
To qualify for an IPO, a company usually must have a certain profit or value potential or already be highly valued.
The process of an IPO consists of the pre-marketing phase, and the actual initial public offering.
The company hires an underwriter and a team of professionals such as lawyers and accountants to undertake the process. The underwriter prepares documentation, does due diligence, and proposes what the price of the shares should be, how many shares should be offered and on what date.
A prospectus is created based on this information and any other relevant documentation.The prospectus will then need to be viewed and approved by the Listing Authority prior to proceeding.
Once documentation is prepared and approved, marketing takes place.
The documentation is made public and the IPO officially opens. During this time, members of the public can purchase shares in the company. The IPO will then close at a predetermined date, however it can be sooner if it was highly popular among investors.
After the offer closes, all the shareholders are informed of their share percentage. As the shares are now open on the LSE, investors can buy and sell their shares at will.
Once an IPO occurs, existing shares become the same value as the IPO price. Many existing shareholders may sell their shares at this point.
Why Go Through An IPO?
Companies may choose to have an IPO because of the huge capital raising opportunity an IPO presents. An IPO opens up investment to the public, and increases visibility through the marketing stage that occurs before the IPO.
Other advantages include more straightforward share conversions and valuations, the potential to raise more funds after the IPO through further public offerings and availability of ESOPs for staff.
Some disadvantages are the cost and therefore risks of running a public company, the onerous reporting obligations of a public company, and less control as there are more shareholders with voting rights.
Given the high cost of an IPO, if your company is thinking of going through an IPO, you may be interested to know, the Financial Conduct Authority (FCA) established new rules in December 2021 to supplement further growth in the market.
For shareholders, an IPO might be the opportunity to invest in shares at a set price before they hopefully rise on the LSE. On the other hand, as IPOs occur for new companies, it might be a while until the investor sees dividends.
What’s Next?
If you’re curious about the best form of capital raising for your company, feel free to reach out to our corporate lawyers for a consultation. You can contact Sprintlaw on 08081347754 or at [email protected] for a free chat.
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