DUMMIES GUIDE TO IPO

1. Introduction
Initial Public Offering (IPO), also referred to simply as a "public offering", is when a company issues common stock or shares to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded.

2. IPO Readiness
IPOs can be a risky investment. For the individual investor, it is tough to predict what the stock or shares will do on its initial day of trading and in the near future since there is often little historical data with which to analyse the company. Furthermore, most IPOs are of companies going through a transitory growth period, and they are therefore subject to additional uncertainty regarding their future value.

Questions to ask when considering whether you are “IPO ready” may include the following:

Are you listing for the right reasons?

Are you at the right stage in your business?

Are your major stakeholders ready to “let go” and agree on the IPO features?

Do you meet ASX listing requirements?

Is you board composition right?

Will you have a sufficient and stable aftermarket?

All of these questions are important when deciding whether to execute an IPO. It is important to weigh up the advantages and disadvantages of listing. The advantages might be that it could be a profitable exit strategy for you, creates a trading facility for your securities, makes your securities a form of currency and increases your profile. The disadvantages might be that you lose control of your business, your vulnerable to a takeover, the IPO diverts from running your business and you become subject to a number of new regulatory, corporate governance and shareholder influences.

3. IPO Preparation
Before executing an IPO, you should appoint your IPO management team and advisers which will, but not necessarily make up the composition of the board after the IPO. Your team should include the chairman, the managing director, the chief financial officer, company secretary/in-house lawyer and perhaps an IPO coordinator. If you are a proprietary company, you must convert into a public company before your prospectus is lodged (usually 5-6 weeks). You will also need to comply with corporate governance requirements. These include director’s and officers’ insurance, deeds of indemnity and corporate policies.
The role of advisers includes:

Underwriter – coordinates IPO, markets you, provide commercial input, writes prospectus, advice on how to price your IPO

Accountant – prepare guidelines for due diligence findings, certify that your account history is IPO suitable, review prospectus forecast, assist you to prepare accounts related sections of prospectus

Lawyers – due diligence planning memorandum, verification of prospectus, legal compliance of IPO guidelines

Tax Adviser – tax due diligence, IPO related tax issues
Industry Experts – complexity of industry issues impact on the IPO and the prospectus

4. Prospectus Regime
A prospectus is required for an offer to issue securities or an offer to sell securities off-market by a controller. The prospectus requirement applies to any offer of securities received in Australia, unless the issue of sale is to an exempt person. The main exemption include personal offers accepted by less than 20 investors which raise less than $2 million in any rolling 12 month period, offers where the amount paid results in a total investment by a person of at least $500,000 in a class of securities. In addition a prospectus must contain a disclosure test. The prospectus must be lodged with ASIC in addition to lodgement of a listing application with ASX within 7 days of the prospectus lodgement. Other issues which you may want to consider might be prospectus liability and ASIC exposure perid and printing the prospectus.

5. ASX Listing Requirements
You must satisfy the profits test or the assets test. It is preferable to satisfy the profits test as ASX will then not usually impose trading restrictions on the existing security holder. To meet the profits test, you must be a going concern, your main business activity must have been substantially the same for the last three financial years and your total operating profit must be more than $1 million (before tax) for the last three financial years and at least $400,000 for the last 12 months. To meet the assets test, you must have net tangible assets of at least $2 million after deducting the costs of fundraising, or market capitalisation of at least $10 million.
The accounts lodgement requirements are stricter under the profits test. Under the profits test, you must give ASX audited accounts for the last 3 full financial years accompanied by an unqualified audit report. Unless ASX agrees that it is not required, you must also provide a pro-forma balance sheet reviewed by your auditor.
Following listing, you must disclose in your annual report the extent to which you comply with The Principles of Good Corporate Governance and Best Practice Recommendations of the ASX Corporate Governance Council.
You will also need to undertake due diligence to meet the prospectus disclosure test and to maximise your ability to rely on the prospectus due diligence defence. Furthermore, your prospectus must also include all information that investors and their advisers reasonable require to make an informed assessment of the prospects of the issuer (Forecasts).

6. Product Disclosure Statement Regime
You must prepare a product disclosure statement if you offer or issue interests in a managed investment scheme to a retail investor. Like prospectuses, there are anti-avoidance provisions designed to ensure that a PDS must be given in respect of an on-sale of financial products to a retail investor within 12 month of issue if such products were issued without a PDS.
The content requirements for a PDS and a prospectus are similar. A PDS must contain the specific information required by a reasonable retail investor for the purpose of making a decision whether to acquire the relevant product. This includes:
- Information about the benefits associated with the product;
- Information about any significant investment risks;
- Information about the product;
- Taxation implications of the product; and
- Dispute resolution system, cooling – off regimes and if the product has an investment component, information about whether certain considerations are taken into account in investment decisions.
A PDS mist also contain:
“any other information that might reasonably be expected to have a material influence on the decision of a reasonable person, as a retail client, whether to acquire the product.”

7. Post-listing Obligations
After listing, your primary Listing Rules obligations are:
- immediately disclose to ASX materially price sensitive information relating to your listed securities, unless the confidentiality carve out exception applies. ASX has the power to require an entity to respond to market or media speculation to correct a false market;
- notify ASX of the occurrence of certain events such as the AGM date, changes of officers and auditors, dividends, new issues of securities, securities coming out of escrow, lodgement of a disclosure document with ASIC, prepared addresses delivered at a general meeting and results of voting at meetings;
- each director(other than a managing director) must stand for re-election at least every 3 years;
- give ASX annual, preliminary annual and half yearly financial documents, generally within 60 days of the relevant reporting period;
- give ASX details of director’s shareholdings and interests and notify any changes to ASX within 5 business days of the change occurring;
- give ASX drafts of certain documents for prior approval before these are sent to shareholders; and
- obtain security holder approval for certain transactions.