IPOs: What Are They and How Are They Evolving?

By Natasha Blackmore


WHAT IS AN IPO?

An Initial Public Offering (IPO) is when a private company becomes a public company, and their shares are listed and traded for the first time on a stock exchange. The central stock exchange in the UK is the London Stock Exchange, which includes the Main Market for large companies and the Alternative Investment Market (AIM) for smaller companies. Companies conduct IPOs for different reasons, such as to pay off debt, gain investors from the general public and to be able to issue additional shares or acquire companies in the future.



THE PROCESS

The IPO process involves different parties and can take several months. Lawyers facilitate the process, such as the restructuring of the business from a private company to a public company. This restructuring process includes creating new constitutional documents and legal due diligence reports and advising the public company’s board of directors. A prospectus, or an admission document for AIM listings, must also be made to inform potential investors about the company. The bank involved will decide a company’s offering price following discussions with institutional investors. Some companies choose to have a bank as the underwriter, which works with the company to coordinate the roadshow, underwrite certain risks and form a syndicate. The underwriter will sign an “all-or-nothing” or “best efforts” agreement with the company initiating an IPO. The difference in the two contracts is that the underwriter promises to buy all the stock offered and resell it to the public, or they make their best effort to sell the stock but have no obligations to purchase any unsold shares. Other parties involved include capital markets advisors, auditors and accountants.


THE CURRENT SITUATION

So far this year there have been fewer new listings. The coronavirus pandemic has created uncertainty, which in turn has caused volatility in the stock markets. However, this September is incredibly busy for listings. Set to complete next week with unconditional dealing beginning the 21st September, is London’s largest listing since 2017. The Hut Group seeks to raise up to £1.9 billion through an IPO, with the company’s valuation set at more than £5 billion. This recent example comprises traditional elements of an IPO, including a Cornerstone Agreement and current investors selling existing stock to a new shareholder base. Dragoneer Investment Group and BlackRock are two investors out of a list that has entered into a Cornerstone Agreement with The Hut Group. In this type of agreement, investors subscribe to a fixed monetary amount of a company's shares. Cornerstone investors gain security, knowing that they will receive the shares agreed in full, and it lowers the risk of shares not selling for the company going public. The Hut Group has £615 million committed investment for its IPO.


Although the conventional route of going public is still a trustworthy and viable option for companies, a growing number of companies are varying the IPO structure to resolve certain inefficiencies. The IPO process has inevitably changed as a result of the pandemic. However, there are also distinct features and changes to the structure of IPOs compared to the more standard model.


  1. Online IPO Process: Before the pandemic restricted travel, the underwriting firm would host a roadshow to pitch the stock to potential investors. Instead, this part of the process is conducted virtually via video calls between company bosses and investors, or through virtual events.

  2. ‘’Direct Listings": Although not a new change in the UK, the US has changed the rules regarding stock exchanges to allow “direct listings” (known as Introductions in the UK). “Direct Listings” are when a company puts shares on a stock exchange on a specific day and time. "Direct Listings" remove the role of an underwriter as they do not sell shares to investors beforehand. Companies sometimes prefer this model as it prevents investors from buying shares at discounted prices in advance of the official trading.

  3. Special Purpose Acquisition Companies: A special purpose acquisition company, or SPAC, raises money from investors and then buys other businesses with that money. SPACs conduct a reverse merger listing process by merging with growth start-ups or private companies and then listing them on a stock exchange. The process via a SPAC enables a company to negotiate its terms privately, without the need for a prospectus.

  4. Changes to IPO "Lock-ups": IPO “lock-ups” limit how soon investors can sell their shares after an IPO. Underwriters are trying to adapt the conditions of “lock-ups” to solve the issue of share price distortions on the day trading commences.

  5. New Bidding Process: An increasing number of tech companies are trying a new bidding process which asks prospective investors how many shares they want and at what price. According to a notice viewed by the Financial Times, Unity, a company that sells software to create video games, is trying out this new method through an online system managed by Goldman Sachs. Investors that make a bid above the price level chosen by Unity, will be allocated a fraction of the shares at the end of the offering of bids. This gives the company, in this case, Unity, the discretion to decide which investors get what proportion of shares. This model is more transparent compared to the regular IPO and gives the offeror the power to determine its investors and pricing.


In an application or interview, you should follow a recent example of an IPO in the news and learn about the different parties involved and the main elements of the flotation. Consider which department in a law firm advises on IPOs and how lawyers facilitate the process. Continue to look out for trends and changes to IPOs, as lawyers must stay up to date on the different strategies available to advise clients on the most appropriate route for their business.


It is also good to recognise that under the Legal Services Act 2007 and the creation of Alternative Business Structures; that law firms can also carry out IPOs. Gately Plc was the first law firm to do one in 2015, and Knights Plc was the biggest ever legal float at £50 million. Therefore, it is relevant to consider how law firms gain business through IPOs, as well as the reasons why a law firm might float, or might not float, on a stock exchange.

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