Initial Public Offerings
Careful planning is required in initial public offerings (IPO) and a company must make the right market choice. There are a number of factors a company must consider in this process. The company must look into how accessible the potential investors are. The profile of other listed companies on the exchange is as important as the requirements to the entry of the company into the market and the level of monitoring going on and requirements for disclosure. By their very nature, a quoted company's shares are available to the public. The main aim of the company when it advertises for the shares is to reach as many investors as possible. Not only to have that but the investors need to be convinced that the company is worth investing in. The company therefore avails detailed financial and management information before being given admission to the market.
In bid to attract many customers with a lower price, the company ends up quoting a price of the share far much below its market value thus under pricing it. This under pricing leads to anomalous first-day trading profits in initial public offerings as the share prices shoot abnormally on the first day as they are floated on the stocks market. This initial return, it's understood, is more often money left on the table because the shares could still have been sold at a higher price hence raising more funds for the same stake in the company.
We have seen that the company must choose the type of market to offload its share when it is planning its initial public offering. There are several markets in which this offering can take place. However, there are several factors that will determine the primary decision made by the company. These factors are influenced by the fact that the markets provide the company with an opportunity to familiarize itself with the disclosure requirements and obligations for reporting public companies. As a point of concern, the size of the Company is very important. This is because smaller companies will find that AIM market is best for them while largest companies will find the Main Market suitable. Hence the size of the company is an important factor in determination of which market to offload the shares. Another factor is the age of the company since it's more usual to float shares on the AIM market while it would need to have operated for at least three years to enter the Main market.
The time and cost are very important because the drain on the management time and the floating cost must be considered. As a general rule, if the market is bigger then the disclosure will be more onerous and the professional costs will also be higher. Lastly, the company's objectives of seeking the floatation must be put into consideration because the conflicting needs of the business and the owners have a direct impact on the choice of markets, float method and choice of advisers.
IPO Main market Capitalization
In the main market we have 214 companies.
Market capitalisation= 103562.0071 million pounds
The UK listing Authority has a requirement that for a company to be listed on the main market, among other things, it must have a minimum market capitalisation on issue of £700,000. If this is put into consideration, the companies that are not qualified for listing on the main market are… and those qualified are.
Under pricing of Initial Public Offering in the UK: A comparison between the Main market and the AIM market
Actual data of London Stock Exchange IPOs including Year 2004-2007.
Data should be separated into 3 categories:
· AIM IPO: companies that are qualified for Main market listing criteria but choose to enter AIM instead
· AIM IPO: companies that doesn't qualified for main market listing criteria
With each company of all categories, the following data need to be obtained:
· First day return
· Initial return
· Market capital
· Money raised
Statistics published by PLUS demonstrate that companies tend to raise larger sums of money once they have been trading on PLUS for a period of time. This is probably due to the fact that larger investors, typically institutions, will wait to assess the initial performance of a company and its management in the public arena before committing capital. To date, IPOs on PLUS have raised £243 million and secondary issues have raised £923 million. An offer of shares to the public will generally be subject to The Public Offers of Securities Regulations 1995 (POS Regulations) and the company will need to publish a prospectus in accordance with those regulations. There are numerous exemptions listed in the POS Regulations which permit a company to make its shares available to the public without it having to comply with the POS Regulations (eg if the offer is to no more than 50 persons). However, even where exemptions do apply under the POS Regulations, consideration still needs to be given to the financial promotion regime in the Financial Services and Markets Act 2000. A company considering an offer of its shares to the public will require specialist legal advice.
A company making an application for its shares to join PLUS must do so through a corporate adviser who is both a member of PLUS and regulated by the FSA. Companies admitted to PLUS after 31 December 2003 must retain an PLUS corporate adviser to advise the company in relation to its continuing obligations under the PLUS Rules for Issuers. Companies from all sectors and all countries are eligible for admission.
Standard documentation is required as part of the PLUS application process, dependent on whether a company is proposing to be introduced or whether it wishes to raise capital. A prospectus may be required (see above) and this will be the company's main retting tool intended to give potential investors, and PLUS itself, a full description of the company, its future plans and objectives, details of its management team and, in some cases, financial projections. However, if a company is not making a public offer, an application is considered on the basis of questionnaires, historic accounts, and for new businesses, its business plan.
Companies should note that where a prospectus is not being produced as part of the application process, they must provide PLUS with information of an equivalent standard required under the general duty of disclosure for a prospectus under the POS Regulations. This general duty requires the disclosure of:
“all such information as investors would reasonably require, and reasonably expect to find there, for the purpose of making an informed assessment of the assets and liabilities, financial position, profits and losses and prospects of the issuer of the securities and the rights attaching to those securities”.
PLUS imposes no formal restrictions on the type of company that can be admitted and a company can be an established trading company or a start-up business. Either type of company will be eligible provided it meets PLUS's entry requirements.
An PLUS flotation is usually an offer for subscription made to the public at large because the main class of investors in PLUS companies, at least initially, is private investors. As a result there is often less certainty that funds will be successfully raised than there is for AIM flotations, which are more likely to involve placings to institutional investors. However, there is evidence of increasing appetite amongst the institutional investment community for holding shares in PLUS companies.
AIM opened in 1995. It is operated by the London Stock Exchange and is directed at young and growing companies. Typical market capitalisations range between £2 million and £100 million. Since it opened, over 1,300 companies have used it as a vehicle for growth and more than £11 billion has been raised.
AIM companies are not bound by the full Listing Rules of the UK Listing Authority and have their own set of rules, the AIM Rules. Unlike shares traded on the Main Market, shares traded on AIM (and PLUS) are unquoted for tax purposes. Consequently, there are certain tax incentives available which make investments in AIM companies attractive to both individual and institutional investors.
As with PLUS, there are no formal restrictions on the type of business or company that can apply to be admitted to AIM. Companies can be start-ups or established trading entities.
To join AIM, a company must appoint a nominated adviser (NOMAD) which will assess whether the company is appropriate for the market. A company's NOMAD is obliged to confirm to the Stock Exchange that the company it is introducing is appropriate. It will co-ordinate extensive due diligence to ensure that this is the case and will help the company to produce its admission document.
The entry requirements for AIM, and continuing obligations after admission, are less stringent than those for the Main Market. Nevertheless companies wishing to have their shares admitted to AIM must comply with relevant legislation (such as the POS Regulations) and adhere to the AIM Rules.
Each company wishing to be admitted to AIM must:
- appoint a NOMAD - it will advise on the procedure to apply to AIM, co-ordinate the work of other professionals and continue to give the company advice and guidance in relation to the AIM Rules after the company is admitted
- appoint a broker - this will be a securities house which is a member of the London Stock Exchange. A good broker is essential to the success of the fundraising
- submit a declaration that the company will adhere to the AIM Rules and each director must make a declaration of his business interests
- prepare an admission document which will include all relevant financial and management information
- make a pre-application announcement to the market about the company.
There is no minimum level of shares that needs to be held by the public. There is no trading record requirement and there is no minimum market capitalisation (subject to practical considerations). However, there must be no restriction on the transferability of a company's shares.
Like PLUS, companies listed on AIM are treated as being unquoted for tax purposes. As a result these tax advantages can make a company more attractive to potential investors and so widen the pool of investors willing to provide capital. A brief description of the main tax benefits available are set out below.
Under the Enterprise Investment Scheme (“EIS”), investors in new shares issued by an unquoted trading company can reduce their income tax liability on the cost of investment (subject to an annual investment limit of £200,000 for shares issued on or after 6 April 2004). They can also defer (“rollover”) a capital gains tax liability made on a sale of shares if an amount equal to the gain is reinvested into EIS shares within a specified period.
Provided the necessary conditions are met by an AIM company and the relevant procedures are correctly followed, an EIS investment can make an issue of shares by an AIM (or PLUS) company very attractive to private investors.
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