What is an IPO?
What is an IPO or Initial Public Offering?
An Initial Public Offering (IPO), also known as a ‘float or ‘going public”, is the initial sale of a private company’s stock to the public before it lists on the stock exchange. In the six months between February and July 2015, a total of 28 companies listed on the Australian Securities Exchange (ASX).
Why Would a Company Go Through an IPO?
The primary reason for a private company to go through the initial public offer in order to list on the stock market is to raise capital. The proceeds raised from the offer are mostly used to expand the business or to fund future operations. Being publicly listed on the stock market offers numerous advantages for a business as it facilitates access to funding now and in the future, often increases the value of the business, increases liquidity for existing shareholders and it boosts publicity for the brand. Raising capital on the stock market can assist a company in the purchase of other companies (‘acquisitions’), paying off debt or to simply to raise working capital in order to expand the business.
Whilst ‘going public’ provides many benefits for a company, there may also be disadvantages or hurdles. Compared to a private company, a listed company will likely have higher accounting, legal, administration and marketing costs of which many are ongoing. A company that decides to raise capital runs at risk that the required funding threshold is not reached. There will also be an ongoing requirement to adequately disclose financial and business information in a timely manner. Therefore a company needs to assess carefully if it is worth to ‘go public’.
Who Can Invest in IPOs?
An IPO in Australia can be offered in one or more of the following scenarios:
Institutional Offer: An offer where only Sophisticated or Professional investors can participate.
Retail Offer: An offer to the general public where any investor can participate.
Broker Firm Offer: An allocation of shares to certain clients of participating brokers.
Priority Offer: An offer to certain investors on a priority basis, for example employees or owners of a related company.
Typically, IPO’s are directed at Sophisticated or Professional Investors. To qualify as a sophisticated investor an investor must provide a certificate from their accountant indicating that they satisfy all requirements, dated within the last 6 months. Likewise, to qualify as a professional investor, an investor must prove that they have a financial services licence or control gross assets of at least $10 million. In some instances the IPO may consist of several offers.
In order to participate in an IPO your broker needs to have an allocation for the specific offer. Each IPO generally involves one or more investment banks, lead managers and brokers who handle the capital raising. You need to enquire directly with the company or the broker if you have access to the IPO or if you are eligible to participate.
How to Invest in an IPO
As part of the IPO process, a company is required to release a Prospectus. The prospectus will provide all the details about the company required for investors to make informed investment decisions, such as financial information, company related risks and hurdles or any information relevant to the matter.
Once an investor has completed their research and decided the IPO is worth investing in, they can choose to put forward and offer, but only if they qualify under one or more of the offer scenarios mentioned earlier.
Once the company has received all offers from eligible investors, it commences the process known as the bookbuild. The completion of the bookbuild will inform investors on how many shares they have been allocated and at what price. Following the bookbuild process and upon completion of all regulatory steps, the company will eventually list on the secondary market or also known as the stock market, where its shares can be bought or sold by the general public.
Does Wise-owl Cover IPOs?
Wise-owl’s weekly series called 'Float Watch' provides independent coverage of IPO's on the Australian Securities Exchange. The aim is to condense the 300 page prospectus into a concise one page analysis that every retail investor can understand. Each report receives a numerical rating out of five which gives the reader an understanding about the outlook of the respective IPO. Our subscribers can log on to the portal to view all present and past ‘Float Watch’ reports. If you are not a subscriber, please feel free to sign up for a free trial or call 1300 306 308 for more information about IPOs.