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 Australia, an IPO gives investors the opportunity to buy shares at a certain price before they trade on the ASX. Investors can check out the prospectus of companies they may want to invest in on ASIC’s notice board and see any upcoming listings on ASX’s website here.
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.
Once documentation is prepared, marketing takes place. A prospectus is lodged with ASIC, then the formal listing of the shares is lodged with the ASX. The ASX then approves the application for the IPO, opens the offer for a period of weeks and then closes it.
You can find out more about the process and time lengths on ASX’s website here.
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 ASIC has, as of August 2020, relaxed regulatory rules to make this easier and cheaper.
For shareholders, an IPO might be the opportunity to invest in shares at a set price before they hopefully rise on the ASX. On the other hand, as IPOs occur for new companies, it might be a while until the investor sees dividends.
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 1800 730 617 or at firstname.lastname@example.org for a free chat.
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