Initial Public Offering  -  IPO

An IPO is the first sale of shares to the general public on an open stock market, such as the London Stock Market and the AIM market in the UK, or New York Stock Exchange and NASDAQ in the USA.

An IPO enables a company to raise levels of capital to fund expansion that would likely not be available from only private or venture capital investors. While the Alibaba IPO of 2014 raised US$22 billion, more typical might be the £15m raised by Redx Pharma in April or the £30m secured by Gloo Networks in August 2015.

In addition to access to cash, an IPO may provide the company with additional advantages. The perceived increased status and public profile of being a ‘plc’ may open up new trading opportunities, giving access to larger contracts or better trading terms, attract higher quality management or facilitate the ability to acquire other companies in return for shares rather than cash. Once floated, the company has the option to raise further cash both to fund additional growth and to cover periods of financial difficulty.

Business plans often suggest an IPO as a potential exit route for the investors in a company (typically alongside the alternative of a trade sale). The stakeholders in a company should however be cautious about pursuing an IPO solely to facilitate an exit. Indeed some pre-IPO investors (angels and VCs), and almost certainly the company founders, may find that the legal conditions of a particular IPO actually prohibit them from selling their shares until some months after the company has gone public in order to maintain share price stability. After the IPO, management in particular will have additional restrictions on the periods when they can sell (or buy) shares, under the stock market rules intended to prevent management benefiting from ‘insider knowledge’. Early stage investors often appear somewhat sceptical when an IPO is suggested as an exit route, not least because in practice only a very small percentage of companies do float.

The University of New Hampshire estimates that 73,400 US companies received angel funding in 2014 but there were just 365 IPOs. And while the UK has the most active IPO market in Europe, it still only achieved 17 in the first half of 2015, compared with 67 in the US. The advantages a company may have from access to substantial additional capital resulting from a successful IPO need to be balanced against the significant financial costs and management time associated with the flotation and later to maintain the listing. These, combined with the need to disclose extensive financial and business information, at the time of the IPO and on an on-going basis, can be significantly off-putting, particularly to younger companies still engaged in extensive research and development for example.

 

Nelson Gray
LINC Scotland

 

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