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An introduction to IPOs

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An appetite for investment is seeing a resurgence of new companies wanting to go public and list on the stock exchange.

Analysts believe that renewed business confidence will see more companies floating next year, with 10 companies due to list before the end of this year, including Nine Entertainment.

CMC Market analyst Ric Spooner says that if the market stays up, Australia will see a continuing trend next year.

“We’ve seen the beginning of it, but it may continue for a while.”

There were 19 newly-listed companies over September and October, with a rising trend in this financial year.

This follows a global downturn in IPOs from 2010 to 2012 in both the number of companies and their value.

What does it mean when a company floats on the ASX?

To list on the ASX, a company must go through an Initial Public Offering  (IPO), which is the first time a private company offers its shares for public trading.

Morgans CIMB analyst James Wilson says the type of company that wants to float in this way can vary.

“It can be a very early stage company that’s thinking to list on the ASX in order to raise money so they can progress their work further,” Mr Wilson said.

“At the other end of the spectrum this month, you’ve seen Twitter.

“They are a very advanced company, worth multi-billions of dollars and they’ve been private this whole time and they want to unlock the value of their shares by selling them to other parties. The management who own the stock want to dilute their stock and take some profit out of the company somehow.”

The basic idea is that a company will be able to generate capital.

For example, on November 15 Freelancer.com.au will list on the ASX selling 30 million shares at an initial price of 50 cents per share to raise $15,000,000.

Freelancer.com.au has grown in revenue since its launch in 2009, but is listing on the ASX to accelerate the growth.

How does a company float on the ASX?

The how of going public is slightly more complicated.

Firstly, a company must meet certain requirements before it can float.

It will also need to write a prospectus on its business model. 

In addition, it must pay listing fees for the ASX, and possibly commission independent technical reports as well as hold meetings to organise the listing.

And it’s not an impulse move. Mr Wilson says a “cheap listing” would cost about $150,000 and a more expensive one around $500,000.

“A prospectus might require several technical reports in the case of mining explorers. They have to have an independent technical report to give people a third party overview as well.”

The company’s IPO means it will need to attract at least 400 shareholders to publicly list. Morgan’s Mr Wilson says this is so the risk is spread over a number of investors.

Depending on the type and popularity of the stock, this is not always achievable and companies may have to extend or withdraw their initial offering.

“You say we are a small explorer with no drill rigs, no tenements, and we’ve got three people working for us and no money in the bank, but we want to be worth $25 million – and people like me think it’s a bit risky and no one invests,” he said.

“So they’ll go back and think they might have to change the IPO price and they’ll probably have to re-write the prospectus and maybe certain sections of the technical report. It can cost money so you really don’t want to do it.”

What happens after a company has floated?

Once a company has listed on the ASX, the benefit of trading as a public entity comes with a whole range of requirements. CMC’s Mr Spooner says these obligations come at a cost.

“Listed companies have a significant obligation to make public information about the company, keeping investors informed and including things like half yearly reports on profitability,” Mr Spooner said.

“It also requires directors to comply with continuous disclosure obligations, where they are required to make available any material or new information.”

In addition, it means the company will need to attract credible directors for the board, which also costs money.

Buyer beware

For investors, an IPO is like any other investment – you must do your homework.

High profile floats often skyrocket, like Twitter, but Mr Wilson says they do not always hold their price and some will decrease in value.

“Just because it’s new doesn’t mean it’s cheap.

“As we’ve seen, a stock can go down on the first day. It might list at 40 cents or a dollar, but it might be 20 cents at the end of the day.”

He says investors must read the company’s prospectus and understand what they’re getting into.

What’s next?

In general terms, the short-term future for IPOs looks bright. CMC’s Mr Spooner says there is an increase in demand to invest in newly-listed companies, but also in ventures looking to make the jump.

“We are in a situation where shares have been restored to more normal levels,” he said. “To some extent, there’s been a bit of pent-up demand among people who’d like to float their company but haven’t had the opportunity to do so.”

Mr Wilson says there will likely be a lull over Christmas. There are 10 companies set to float before December 15, with others to be assigned a date.

“There is a rush of stuff coming into Christmas for people to raise money to get things done prior to the big break over the next two months.”

He says there had been big drop-off in the number of resources companies wanting to list in the past 12 months, but that was likely to change next years.

“The resources industry has been in a lull. If we see an increase in prices and see a resurgence in the US and China as prices rise there will be a lot more excitement for IPOs and more value for new companies coming into market.”