A listing can result in greater stakeholder engagement, prestige and financial reward. However, going public can be a complex process, with more onerous reporting and regulatory rules, increased scrutiny, extra drains on company time and resources, as well as a range of new stakeholders to manage and navigate under a new IPO on the ASX.
The ASX is one of the largest stock exchanges globally, attracting many successful local and international companies each year. It has existed for more than 150 years and is the largest capital hub in the Asia Pacific region, raising over $60 billion in capital in 2019, according to the 2020 BDO publication IPO Handbook 2020: A Guide to Listing on the ASX.
The ASX has 2,150 listed companies and handles more than 100 new IPOS a year. It has a diverse base of listed companies, ranging from finance to mining and resources to technology, healthcare. Recent years have seen a shift towards more technology related businesses seeking an ASX IPO.
There are also currently over 140 foreign companies listed on the ASX, which has increasingly become a listing destination for overseas companies, as it provides access to the largest pool of institutional funds in the Asia Pacific region. The exchange has more than 6.7 million shareholders and until COVID-19 had an average daily turnover of more than $5 billion.
What is an IPO?
An initial public offering (IPO), or ‘float’, is when a private company lists on a stock exchange to raise funds by selling shares to investors, including members of the public.
Companies use IPOs to raise money that can then be reinvested to help grow the business. IPOs give investors the chance to buy shares at a set IPO listing price before the company begins trading on a stock exchange like the ASX, in the hope that those shares will rise over time. An IPO normally includes a minimum amount of shares that it requires investors to purchase.
Why should a company list?
Deciding whether to list involves considering these points:
Does the company have the resources, internal processes and structure to successfully operate as a public company?
Are existing ownership and management engaged in the IPO listing process?
Complying with the demands of being a public company requires commitment, time and resources across many aspects of a company.
Key steps for a successful ASX IPO include: Appointing advisors, financial due diligence, drafting a prospectus, preparing and lodging a listing application, verifying the prospectus, IPO marketing and setting an offer period.
Any company launching an IPO in Australia must lodge a prospectus with the Australian Securities and Investment Commission (ASIC), which contains important information you need to know about the company and the offer. All current IPOs from companies that have applied to list on the ASX are listed on the ASX website.
It’s important to understand whether or not the stock seems well priced during the IPO process. To understand whether a business has good prospects and is reasonably priced, consider its:
Long-term growth prospects
Anticipated balance sheet strength after the float
Predictability of earnings
Prospects for company earnings and the broader sector.
There are a number of key questions for any company deciding to list on the ASX. Does the company have the correct management, board, reporting, internal controls and appropriate staff? Is the management team engaged, and experienced enough to adequately support the company’s objectives? Are there enough resources to deal with extra time requirements involved in managing and reporting for a public company under the ASX reporting requirements for listed companies?
The decision to go public is based on a company’s medium to long term objectives, and must be rooted in a clear understanding of the listing process and post listing implications. So does management have a long-term vision and strategy for the company? How effectively can management articulate its operations, performance and history?
What is the IPO process?
Once a company has received all applications from investors to buy shares and closed its offer, it completes a process known as a ‘bookbuild’. While the prospectus contains an estimated price per share, the bookbuild determines the actual price that the shares will be worth on the day they begin trading. The bookbuild also determines how many shares will be allocated to each investor.
Once a company has successfully completed its bookbuild, it lists on the stock exchange and its shares can be bought and sold.
Risk versus reward
Investing in an IPO comes with different risks compared with a company that has a long listed history. Companies may offer shares at what they perceive to be a discounted rate or they may offer some form of added value to compensate investors for the risk of buying shares in an unproven listed company. However, it needs to be remembered that the value of shares can fall as well as rise, once listed.
The company may predict when it expects to make money, but, as with all share market investments, this can depend on many factors, including the global and Australian economy and the future of the relevant industry.
Additionally, not all companies will pay dividends to shareholders – new companies may be more likely to reinvest profits back into the business.
The Corporations Act 2001 (Cth) regulations which aim to ensure good governance require that a public company must have at least three directors, of which two must ordinarily reside in Australia. A foreign company must satisfy the ASX of the good character of each of its’ directors or proposed directors. This requires the company to provide criminal history and bankruptcy checks for each director from each country that they have resided in for the past 10 years.
A risk committee can be an effective way to independently assess key risks of the company. The risk committee is often a part of the audit committee and is responsible for evaluating risks and deficiencies in internal controls, and in doing so providing recommendations to the board. It is recommended that listed companies have a diversity policy in place, which includes goals and measurable metrics for the board and senior management. It is generally expected that at each financial period end the company will report the gender composition of both the board and senior management as well as the wider group. Once the decision to list on the ASX has been made, preparing for the IPO process should begin immediately. Extensive planning including a strategy for an upcoming IPO on the ASX is essential for a company to navigate the listing process.
Preparing to list
Companies seeking an ASX listing must satisfy requirements for “general admission” to the ASX. Under the ASX listing rules, the main key criteria that must be met include:
Satisfying either the profit test or assets test
Minimum shareholder spread
Minimum free float requirements
Constitutional and corporate governance conditions
Lodgment of a prospectus
Constitution and corporate governance
The ASX requires listed companies to have a constitution which is in line with the ASX Listing Requirements. The ASX has also set up the ASX Corporate Governance Council, which provides a number of recommendations. These are contained within the council’s Principles of Good Corporate Governance and Recommendations. The council’s recommendations are not mandatory or prescriptive, but rather provide a guide to best practices. Whilst these are not ‘one size fits all’, the ASX expects a reasonable explanation if a company does not follow a recommendation or deems it as inappropriate.
The primary role of the council is to develop and issue principles-based recommendations on corporate governance practices to be adopted by listed entities under ASX corporate governance. The recommendations are intended to promote investor confidence and to assist listed entities to meet stakeholder expectations in relation to their governance.
Under Listing Rule 4.10.3, ASX listed entities are required to benchmark their corporate governance practices against the Council’s recommendations and, where they do not conform, to disclose that fact and the reasons why.
The current version of the Council's Corporate Governance Principles and Recommendations (the Fourth Edition) was released on 27 February 2019 and takes effect for a listed entity's first full financial year commencing on or after 1 January 2020.
Board of directors
The council recommends the composition of the board of directors as follows:
The chairperson must be independent
The role of the chairperson and chief executive officer (CEO) must not be performed by the same person.
The board of directors must establish a nomination committee (for the purpose of examining and determining the company’s selection, appointment and evaluation process of directors).
The typical make up of a successful board includes an industry leader as chairman and other non-executive directors with appropriate skills.
Challenges of IPO boards
Directors must understand the opportunities and risks of governance of newly listed companies.
Some companies are formed to raise capital through a float. Others move quickly from private ownership to a public listing when capital is available, presenting challenges for newly formed boards.
More directors will be invited to join the boards of early-stage companies through an IPO, pending shareholder approval. Stronger IPO activity means more companies forming or expanding boards, and rising demand for directors. It also means considerable due diligence by directors before accepting these roles, such are the higher risks of joining the board of early-stage listed companies.
No place for unprepared directors
IPOs present unique opportunities and risks for prospective directors. Governing an emerging fast-growth company as it transitions to an ASX listing can be immensely rewarding, professionally and financially (for directors who receive shares or options).
The chair of an IPO, particularly for emerging companies, has a vital role in establishing governance structures, composing the board and ensuring the organisation has appropriate processes to meet its continuous disclosure obligations.
Boards of early-stage IPOs tend to be more hands-on than those of larger organisations – an attraction for directors who like greater involvement with management. Such roles can be a stepping stone in listed-company governance or round out the portfolio of a director who serves mostly on large organisations and wants the experience of small-venture boards.
But small IPOs come with extra governance risks. The company typically has no or limited history as a listed entity and often a short financial history. Directors doing due diligence on the IPO must rely on the prospectus and the independence of advisers who help prepare information for investors.
Founders of small-cap IPOs often remain the controlling shareholder after listing, causing problems for directors if the original owners cannot adapt to the higher governance requirements of listed companies, or if they see the board as “window dressing”.
Often, the board of an IPO is governing an organisation in rapid transition. Directors must know that the management and board composition is right for the current stage of the company’s lifecycle, and that controlling shareholders will allow it to change as needed.
Understanding the CEO’s traits and reputation – a key part of the due diligence process for any prospective director in early-stage IPOs – is another challenge. Successful small IPOs tend to have CEOs who are risk takers and excel at company promotion. Boards must be satisfied the CEO can “sell” the venture to the market, but not so much that he or she comprises the organisation’s governance, values or reputation.
Capital is another governance consideration. Some micro-cap IPOs, such as junior explorers, live from one capital raising to the next as they develop projects. Insolvency risks for the organisation, and by default its board, are heightened because there is no cash flow or profit in the company’s formative years.
A lack of information compounds these challenges. Many IPOs are too small to be researched by stockbroking firms or the media, or attract capital from institutional investors. There can be fewer people to talk to about the company as part of the director’s due diligence checklist.
Prospective directors should talk to the firm’s auditor and law firm before accepting a position. They don’t have to be top-tier firms for small-cap floats, but directors must feel confident the advisers have sufficient skill and independence.
Separate meetings with the company’s Chief Financial Officer and Company Secretary are valuable too, in order to assess if the executive team has the right experience and is capable of standing up to the CEO or board if needed. Analysing the share register is another part of the IPO due diligence report. Understanding what the CEO wants from the board also helps prospective directors in IPOs. Directors need to know they can add value to the board, that they are the right fit for the organisation, and that the executive team will benefit from the board’s good counsel and work ethic.