What does “going public” mean? | IPO vs direct listing vs SPAC

Businesses have several options to go public, each with its own set of processes, requirements, and implications.

“Going public” refers to the process by which a privately held company offers its shares to the public for the first time, typically through a stock exchange. Although the traditional process is known as an IPO, there are a few other options for going public.

companies going public

What does it mean to go public?

Going public” refers to the process by which a private company becomes a publicly traded company, allowing the public to buy and sell its shares. This transition can be achieved through various methods, but the most common ones as IPOs, direct listings, and SPACs.

Why does a company go public?

There are several reasons why a company decides to go public, and here are the main ones:

Obtain long-term financing

Companies often go public to raise money for their future projects and business expansion. Going public allows them to issue shares and collect funds from investors. This capital is then used to support growth initiatives.

This process is costly and takes a lot of time, but it can provide the company with a large amount of cash.

Sell shares and obtain liquidity

Going public also enables a company to sell its shares in the stock market. This provides the company with liquidity, which means it can quickly turn its assets into cash. This liquidity can be crucial for financing new projects or covering short-term expenses. It also helps a company weather economic downturns.

Visibility and reputation

Another reason for going public is to gain visibility. When a company goes public, it becomes the focus of media attention and can use this exposure for marketing and branding purposes. Being a publicly traded company can enhance a company's reputation and credibility. In turn, the company may benefit from increased revenues, mainly thanks to the free marketing and promotion, and reach out to a broader audience.

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How to go public?

The most common methods are:

Initial Public Offering (IPO)

An IPO is the traditional method for a company to go public, and it involves issuing new shares of stock to the public for the first time.

The process begins with the company appointing advisors, usually investment banks, to help with the IPO process. These advisors assist in determining the value of the company, the number of shares to be issued, and the price range for the shares. The company then needs to prepare a prospectus, which is a detailed document providing comprehensive information about the company, its finances, operations, and the risks involved. This prospectus is reviewed and approved by the UK's financial regulatory body, the Financial Conduct Authority (FCA).

Once the prospectus is approved, the company promotes its offering to potential investors through a process known as a roadshow. This involves meetings and presentations to institutional investors, fund managers, and sometimes high-net-worth individuals. The aim is to generate interest and gauge the demand for the shares.

After the roadshow, the shares are priced based on this demand, and the company lists on a stock exchange, such as the London Stock Exchange (LSE). From the listing date, the shares are publicly traded, allowing investors to buy and sell them.

The IPO process in the UK is a crucial way for companies to raise capital, increase their visibility, and provide liquidity to existing shareholders, but it also requires adherence to regulatory standards and increased public and financial disclosure.

Examples of popular IPOs in the past years include Aston Martin (2018) and Deliveroo (2021).

Direct listing

A direct listing is an alternative method for a company to become publicly traded without conducting a traditional Initial Public Offering (IPO). In a direct listing, a company lists its shares directly on a stock exchange, such as the London Stock Exchange (LSE), allowing existing shareholders to sell their shares directly to the public.

Unlike an IPO, a direct listing does not involve issuing new shares or raising new capital. Instead, it provides a market for existing shareholders to sell their shares, which can include employees, early investors, or founders.

The process of a direct listing in the UK involves several steps. First, the company must meet the listing requirements of the chosen stock exchange and prepare detailed disclosures about its financials and operations, similar to the preparations for an IPO.

However, since there are no new shares being issued, there's no need for underwriters.

The company also does not set an initial offering price for the shares; instead, the opening price on the first day of trading is determined by the market based on supply and demand. Direct listings are seen as a way to provide liquidity for existing shareholders and are often chosen by companies that don't need to raise additional capital but want to allow their shares to be publicly traded.

London direct listings are very rare. However, an example is Wise (formerly known as TransferWise).

Special Purpose Acquisition Companies (SPACs)

A Special Purpose Acquisition Company (SPAC) is a type of company that is formed specifically to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing private company. A SPAC itself has no commercial operations at the time of its IPO; it's essentially a shell company with a pool of capital and a management team. Investors in a SPAC IPO buy shares in the hope that the management team will find a profitable company to acquire. The funds raised from the IPO are typically held in an escrow account and are used to fund the acquisition once a suitable target company is identified.

The process of a SPAC in the UK involves several steps. After raising funds through an IPO, the SPAC usually has a set timeframe (often 24 months) to identify and complete an acquisition. If the SPAC fails to complete an acquisition within this period, the funds are returned to the investors.

Once a target company is identified, the shareholders of the SPAC vote on the proposed acquisition. If approved, the target company becomes a publicly listed company through this merger process. The UK's Financial Conduct Authority (FCA) has set regulations to govern SPACs, focusing on investor protection and market integrity. This includes rules about shareholder approvals for acquisitions and the rights of shareholders to redeem their shares if they do not support the acquisition.

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Going public: summary

Traditional Initial Public Offerings (IPOs) remain a popular choice for raising capital and gaining market presence, while alternative methods like direct listings provide an avenue for companies to become publicly traded without fundraising, appealing to firms with established market values and investor bases.

Additionally, the evolving interest in Special Purpose Acquisition Companies (SPACs) reflects a dynamic market adapting to global trends, although it's under a more stringent regulatory environment compared to the US.

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How long does the process of an IPO typically take?

The IPO process in the UK can vary but typically takes between 6 to 9 months. This includes preparing a prospectus, undergoing due diligence, regulatory approvals from the Financial Conduct Authority (FCA), and conducting a roadshow to attract investors.

Can a foreign company go public in the UK?

Yes, foreign companies can list their shares on UK stock exchanges. They need to comply with the UK listing rules and regulations, which may include providing financial statements and other disclosures.

How does a company choose an exchange for listing?

Companies typically choose between the London Stock Exchange's Main Market and the Alternative Investment Market (AIM), depending on their size, maturity, and fundraising needs. The Main Market is suited for larger companies with a more established track record, while AIM caters to smaller, growing businesses with less stringent listing requirements.

Can a company delist from the stock exchange, and how?

Yes, a company can delist from a stock exchange, though the process involves significant steps. Reasons for delisting may include going private, acquisition, or financial difficulties. The company must notify its shareholders, the stock exchange, and often undergo a shareholder vote. The process is governed by the exchange's rules and UK regulatory requirements.

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