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Eversheds Sutherland - Navigating the LSE AIM IPO process - Irokotv 2019

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Based on our direct conversations with stockbrokers, NOMADs, auditors and lawyers, an LSE AIM listed company valued at $100m would need to have (ultra conservatively) $8–10m in revenue and $0–1m in EBITDA.

https://jason.com.ng/a-120-150m-ipo-for-iroko-in-2021/

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Eversheds Sutherland - Navigating the LSE AIM IPO process - Irokotv 2019

  1. 1. Navigating the IPO process A summary guide for companies
  2. 2. Navigating the IPO process A summary guide for companies 2 Contents Foreword 3 Why an IPO? 4 What does a listed/quoted company look like and how do you get there? 6 Who are the key parties involved in an IPO and what do they do? 9 Which market should you choose? 13 What are the principal documents on an IPO and what do they cover? 16 Fundraising as part of your IPO 22 When do you need a prospectus? 25 Appendix 1: Illustrative high-level IPO timetables 28 Appendix 2: High-level comparison of continuing obligations on different markets 30 Appendix 3: Contents of a prospectus/admission document 40 Appendix 4: The Eversheds Sutherland UK Equity Capital Markets team 43 Appendix 5: Our IPO and secondary fundraising credentials 44 Appendix 6: High-level overview of the IPO process in the United States 46 Appendix 7: The Eversheds Sutherland US Capital Markets and Investments team 51
  3. 3. Navigating the IPO process A summary guide for companies 3 Foreword An initial public offering (“IPO” or “flotation”) is one of the most significant events that can occur in the lifetime of a company, not only for the company itself but also for all of its stakeholders. An IPO is not something to be taken lightly and should only be undertaken when the directors and the company’s significant shareholders are sure that it is the right thing for the company to do, at that point in time, in order to pursue its business plan and to realise its growth strategy. An IPO requires a significant amount of planning and preparation well in advance of the scheduled “impact date” to ensure that the company is fit for purpose once it commences life as a listed or quoted company, as well as the devotion of a significant amount of senior management time during the “execution” phase of the process. This can be a drain on the resources of some companies and divert attention away from running the business. However, whilst there are sacrifices to be made, a successful IPO can be a hugely rewarding experience for a company’s management and employees, with a company emerging from the process better organised and with management and employees more incentivised (and with their interests better aligned with shareholders) to drive the business forward. This brochure is intended to provide a generic, high-level overview of some of the key aspects of the IPO process and the principal issues that companies, and their directors and senior managers, most commonly encounter. It is aimed at businesses, shareholders and managers who have only a limited knowledge of the IPO process (and who have not been through it before) and should not be taken as a comprehensive guide to all matters (including applicable law, rules and regulation) that may be relevant to an IPO. This brochure is also not a substitute for obtaining detailed, tailored legal advice and we would strongly encourage you to make contact with any member of the Eversheds Sutherland team listed at the end of this guide as soon as possible if you are considering an IPO for your company. We hope that this brochure gives you a flavour of what is involved in the IPO process so that you can consider the question of whether an IPO is right for your company from a more informed perspective. We wish you all the best on this exciting journey! Stephen Nash Partner, Head of Equity Capital Markets and Public Company Takeovers T: +44 20 7919 4861 M: +44 795 720 5498 stephennash@ eversheds-sutherland.com
  4. 4. Navigating the IPO process A summary guide for companies 4 Why an IPO? There are many different factors to consider when deciding whether or not an IPO is right for your company and an IPO can have many advantages but also some disadvantages. It is therefore essential that all of these are weighed up at the outset, before any significant work towards an IPO is undertaken, to ensure that no significant costs are incurred if it is ultimately decided that an IPO is not the right way forward. The table below sets out the key factors that should be taken into account: Advantages Disadvantages ü greater access to capital – an IPO provides access to a broader investor base than is available to a private company and the opportunity for a company to raise equity capital both at the IPO itself and also on an ongoing basis following the IPO ü liquidity – the IPO itself constitutes a “liquidity event” for the company’s existing institutional and other shareholders. On an ongoing basis following the IPO (and the expiry of initial lock-in undertakings) existing shareholders (including employee shareholders) will have more opportunities to sell shares in the company than they would have had in a private context ü increased profile – an IPO generally gives a company a higher profile because of the public exposure it brings (see below), increases awareness of its brand and gives a company greater credibility with customers, finance providers and other trading partners ü public exposure – access to stock exchange regulatory information services provides greater opportunities for press and media exposure ü facilitates future acquisitions – publicly-traded shares can be used as an acquisition currency following an IPO as the trading liquidity an IPO brings makes them more attractive to the vendors of potential acquisition targets than shares in a private company ü company valuations – following an IPO, a valuation of a company can generally be reached quickly based on the market capitalisation of that company at close of trading. This also facilitates further investment into the company as the value of new shares issued is usually based on the prevailing market price of the company’s shares. In addition, the greater public disclosure obligations applicable to a listed or quoted company when compared to those applicable to a private company reduce uncertainty around performance and the amount of due diligence that may be required, thereby generally leading to higher valuations than might be achievable in a private context ü management/employee incentivisation – an IPO provides the opportunity to incentivise and reward key employees through the operation of share incentive schemes (as well as to retain and attract employees going forward) û time consuming – the time and commitment involved in an IPO process should not be underestimated. A typical IPO process can take up to six months and can be highly distracting and time-consuming to management who will need to divert their focus from their “day jobs” û IPO and ongoing compliance costs – there is significant cost associated with an IPO, both in terms of the IPO itself and ongoing compliance costs. Such costs include maintaining a board of directors compliant with prevailing corporate governance requirements, the costs of complying with ongoing reporting and other obligations (see Appendix 2 to this brochure for further information), auditors, legal advisers, other professional advisers (such as PR agents) nominated adviser/sponsor costs and corporate broker costs û potential loss of control – becoming a listed/quoted company inevitably results in the existing directors and shareholders ceding a degree of control over the company as a consequence of becoming required to comply with a new set of rules and regulations (requiring increased disclosure and transparency) and becoming susceptible to market conditions beyond their control. û shareholders’ expectations – in a public arena, with a potentially significant number of institutional investor shareholders and in a climate of increasing shareholder activism, management will be under increased shareholder scrutiny than they may have been in a private context and potentially subject to increased pressure to perform û limited window of opportunity – there are generally limited windows of opportunity to access IPO markets and in times of economic uncertainty and volatility these windows may be further constricted than normal, meaning that compromise on IPO issue price and/or sell-down may be necessary and the valuation for the company anticipated at the outset of the process may not be achieved û corporate governance/compliance – a consequence of bringing a number of non-executive directors on to the board, making a number of improvements to financial processes and procedures and reporting controls, and the implementation of policies and procedures to ensure compliance with disclosure guidance and transparency rules and other continuing obligations (see Appendix 2 to this brochure for further information), will likely result in significant increased ongoing costs
  5. 5. Navigating the IPO process A summary guide for companies 5 Navigating the IPO process A summary guide for companies 5
  6. 6. Navigating the IPO process A summary guide for companies 6 What does a listed/quoted company look like and how do you get there? Having weighed up the pros and cons of “going public” and concluded that an IPO is the right way forward for the company, you will need to consider whether the business has actually reached a stage where an IPO is feasible and, if so, establish what further preparatory work needs to be undertaken to achieve that goal. In order to be ready to IPO, a great deal of preparation is required, some of it a significant period in advance even of the “kick-off” meeting with a company’s advisers that commences the IPO process in earnest (see Appendix 1 to this brochure which sets out, in Part A, an illustrative high-level timetable for an IPO and the workstreams to be undertaken at each phase). However, this should not be viewed as an inconvenience but, instead, as a means of making the business leaner and fitter, standing it in good stead following the IPO. What are the key areas a company needs to review in advance in order to ensure that it is ready for an IPO? Share Capital Structure To float on the London Stock Exchange, a UK-incorporated company must be a public limited company (“plc”) in order to be able to offer its shares to the public. It will also be required to have a single class of ordinary shares. The Companies Act 2006 sets out the criteria a company must satisfy in order to re-register as a plc, e.g. it must have a minimum of £50,000 of share capital (paid up to at least a quarter of its nominal value and any premium) and its net assets must not be less than the aggregate of its called-up share capital and undistributable reserves. Depending on the nature of the company and its trading history, it may not be possible to satisfy these criteria without undertaking certain actions, for example, to create distributable reserves. Alternatively, it may be necessary to insert a new holding company as the IPO vehicle by way of a share-for-share exchange but this analysis can be complex and will require professional advice (including tax structuring advice) and should not be left to the last minute. In addition, frequently, private companies will have had one or more pre-IPO fundraising rounds involving issues of shares of possibly different classes with different rights and nominal values to a number of different shareholders. It will therefore be necessary to reorganise such a share capital structure (potentially by way of share capital reductions, sub-divisions, consolidations and bonus issues) to arrive at a single class of ordinary shares which will have the right nominal value to reflect the IPO issue price. Again, there are a number of considerations, not least managing the logistical exercise of obtaining the necessary approvals from the company’s shareholder base (which can often be a significant task involving the collection of powers of attorney and other shareholder documentation) and so early planning is vital in order to produce a workable plan so that the IPO vehicle has a capital structure fit for purpose at the time of the IPO. Corporate Governance Structure New investors in the company at IPO will need to know that there is an appropriate corporate governance structure in place that complies with the relevant corporate governance code applicable to the company, which depends on its size, nature and stage of development at the time of, and the market which it has chosen for, the IPO. For Main Market- traded companies, the relevant code is the UK Corporate Governance Code and for AIM-traded companies, the relevant code is generally the Quoted Companies Alliance Corporate Governance Code for Small and Mid-Size Quoted Companies (although AIM companies may also elect to apply the UK Corporate Governance Code to the extent applicable if they wish to). An amendment to AIM Rule 26 which came into effect in September 2018 also now requires AIM companies to publish on their websites details of the corporate governance code that they have elected to apply as well as details of how they comply with that code. At the very least, the company will need to have an appropriate combination of executive and independent non- executive directors on the board, with appropriate skillsets, expertise and experience, not only in terms of the industry or sector in which the company operates but also in terms of previous listed or quoted company experience. In addition, one of the independent non-executive directors should have an appropriate financial qualification and experience in order to be able to chair the company’s audit committee. Ethnic and gender diversity may also be relevant factors to consider in selecting non-executive candidates to join the board ahead of the IPO. For FTSE350 Main Market-traded companies, the UK Corporate Governance Code stipulates that at least half the board, excluding the chairman, should comprise independent non-executive directors. For companies outside the FTSE 350, there must be at least two independent non-executive directors. For companies complying with the QCA code referred to above, there must be at least two independent non-executive directors on the board (although one of those can be the chairman provided he or she was independent at the time of appointment). For these purposes, “independence” broadly means independent from the company and its management but significant shareholdings (or being a representative of a significant shareholder) or having an interest in a significant trading relationship with the company may also affect a director’s “independence” – see “Relationships with Controlling Shareholders” below.
  7. 7. Navigating the IPO process A summary guide for companies 7 Identifying and recruiting the most suitable candidates takes time and so this part of the IPO process should not be overlooked or left to the last minute. Early consultation with the company’s sponsor/nominated adviser and legal advisers is essential and often those advisers are able to introduce companies to a number of suitable non-executive director candidates through their contacts and links from other transactions and relationships with other companies. In addition to achieving the right board composition, audit, remuneration, nomination and potentially other board committees comprising the independent non-executive directors will need to be constituted with appropriate terms of reference and an appropriate division of responsibilities between the chairman and chief executive established. All of the directors will also need service agreements (or letters of appointment (for non-executive directors)) which contain provisions as to pay and remuneration and notice periods/ payment in lieu of notice provisions which accord with market norms, meaning that the executive management team may need their own independent legal advice. Equity Story In order to be able to attract new investors, the company will need to have an easily understandable and compelling “equity story” (or sales message). This is a combination of a successful and attractive product and/or service offering, a solid customer or client base and leading positions in strong markets (both geographically and demographically) with favourable industry/sector trends and good growth prospects. The company should also be aware of, and be able to articulate succinctly, its key strengths and understand and be able to explain how they can be exploited via a well-defined growth strategy that incorporates a series of clear development milestones, and thereby be able to convince investors that it has a predictable growth trajectory as well as a clear understanding of its future working capital requirements. Relationships with Controlling Shareholders If there are any significant/controlling shareholders (who will retain a significant stake in the company (i.e. over 25% - 30%) following the IPO), there will need to be a relationship agreement put in place with them (and their associates) to ensure that the company can operate independently from them going forward (e.g. that any transactions with them will be on an arm’s length basis and on normal commercial terms, that the controlling shareholder (and/or its associates) will not do anything which would prevent the company from complying with its obligations under the Listing Rules or AIM Rules (as the case may be) and that the controlling shareholder (and/or its associates) will not propose shareholder resolutions designed to circumvent the proper application of those rules). These agreements are compulsory if the company intends to be admitted to trading on the Main Market (for 30% shareholders) and generally expected to be in place by investors and the nominated adviser if admission to trading on AIM is sought. Selection of Advisers, Market and Offering Structure A company will need to select which professional advisers it will need to help it complete its IPO successfully. Normally, it will select its sponsor or nominated adviser first, or possibly its legal advisers, and some companies appoint an independent adviser to organise and manage the process for them and run ‘beauty parades’ of potential sponsors, nominated advisers, legal advisers, reporting accountants and other advisers, for example, property valuers, IP/patent agents and public/investor relations advisers. In addition, one of the most important decisions a company will need to make, in conjunction with its advisers, is which market is most suitable for its IPO and also what type of offering structure should be used to raise the equity capital it is seeking in connection with its IPO. These matters are all discussed in the following sections of this brochure. Internal Controls, Procedures, Processes and Working Capital In order for the company’s sponsor or nominated adviser to be able to give the declaration referred to under the heading “Due Diligence” below, the sponsor or nominated adviser also needs to be comfortable that the company has in place appropriate financial reporting, budgeting and forecasting processes and controls (“Financial Position and Prospects Procedures” or “FPPP”) as well as appropriate procedures and policies to ensure that it will be able to comply with applicable ongoing regulatory obligations following the IPO under the Listing Rules and Disclosure Guidance and Transparency Rules (for Main Market-traded companies), the AIM Rules (for AIM-quoted companies) and the HGS Rules for HGS companies (see Appendix 2 to this brochure for further information). In addition, a requirement of applying for admission to either the Main Market or AIM is that the company has sufficient working capital to be able to operate its business for a period of at least 12 months from the date of publication of the prospectus (Main Market) or admission (AIM) (typically based on projections looking ahead 18 to 24 months). The company’s reporting accountants will produce reports covering all of these matters addressed to the company and sponsor or nominated adviser to give them the appropriate comfort in these areas. Financial Track Record and Trading History Whilst not generally required (unless the company is seeking admission to the Premium listing segment of the Main Market – see the section of this brochure headed “Which market should you choose?” below), and not possible for certain companies, e.g. scientific research or pharmaceutical companies yet to commercialise their products, it is generally beneficial (and helps to support the equity story) for the company to be able to demonstrate a strong operating, balance sheet and cash-flow performance over at least three full financial years demonstrating strong, predictable growth with recurring revenues and rising profits.
  8. 8. Navigating the IPO process A summary guide for companies 8 Due Diligence Investors will not invest at the IPO if they do not have the confidence that the company is fit for purpose with no hidden material liabilities and no other material operational issues that might hamper its growth and/or prevent the implementation of its strategy. In addition, the company’s sponsor or nominated adviser has to make a declaration to the relevant regulator (the FCA for the Main Market or the LSE for AIM) that, essentially, the company is fit and proper to be brought to the market. Investors (and the company’s sponsor or nominated adviser) will not be able to obtain the necessary comfort unless a thorough due diligence exercise on the company’s business and operations is undertaken by its legal advisers and reporting accountants to ensure that all risks inherent in the business are identified and, where possible, addressed and eliminated or minimised prior to the IPO or their materiality ascertained and an appropriate disclosure made in the public documentation to be produced in connection with the IPO. Whilst the company’s reporting accountants focus on the financial performance (and tax position) of the business and the risks thereto, its legal advisers look into its contractual arrangements, including those with existing shareholders, whether they be supply or other trading arrangements, property leases or other relationships, to ensure that they are on arm’s length terms and properly documented. If they are not, changes may be required to ensure that they are. If the company is substantially reliant on certain key assets that may be owned by shareholders and made available to it, it may be necessary to transfer those assets to the company prior to the IPO (although bear in mind that if the relevant shareholder is also a director of the company, this may require shareholder approval). In addition, it will be necessary to look into many areas of the business in some detail (including those listed below) and, possibly, to take remedial actions to make sure that all issues are resolved prior to the IPO or disclosed in the public documentation as a risk factor: - real estate (to confirm that the company has the relevant rights to occupy and use its properties for the purposes for which they are used) and environmental (to ensure there are no contaminative activities that may potentially attract significant clean-up or other remedial liabilities) - material disputes and litigation - third party contractual arrangements, including any joint venture arrangements (to ensure that terms are appropriate and there are no change of control issues, for example, in the context of the IPO) - historic acquisitions and disposals (to establish if there are any material ongoing liabilities to which the company is subject) - intellectual property (to ensure that the company owns or has the rights to use any material intellectual property it relies on in connection with the conduct of its operations and has not infringed any third party rights) - employment, pensions and share incentive arrangements, to ensure that these are appropriate for a listed or quoted company and there is no significant pension scheme deficit requiring remedial action or disclosure
  9. 9. Navigating the IPO process A summary guide for companies 9 Who are the key parties involved in an IPO and what do they do? The Company’s Senior Executive Management Team Probably the most important party involved in any IPO is the company’s senior executive management team, particularly the chief executive officer and chief financial officer. They will have the requisite, in-depth knowledge about the company, its business, operations and financial performance that will be essential to achieving a successful IPO and will be required to work with all of the company’s advisers throughout the process, for example: - its legal advisers in relation to the legal due diligence exercise and in drafting certain sections of the prospectus or admission document, including a description of the company and its principal activities and also the operating and financial review (see the section of this brochure headed “What are the principal documents on an IPO and what information do they contain?”) - its reporting accountants, in relation to the preparation of the short form report on the company’s audited consolidated historical financial information for the three year period (and any subsequent interim period, where applicable) for which such information is, in most cases, required to be included in the prospectus or admission document and the long form financial due diligence report - the investment bank, in terms of briefing the investment bank’s research analyst(s) (as well as, potentially, unconnected research analysts of investment banks who are not advising on or marketing the IPO) on the company and its business and operations, formulating the company’s equity story and selling message for potential investors and delivering the “roadshow” presentations to potential institutional investors once the IPO has reached the marketing phase As a consequence of their importance to the success of the entire IPO process, the company’s senior executive management team are pulled in a number of different directions throughout and the IPO process can be a significant drain on their time, diverting their attention away from their “day job” which is, of course, continuing to run the company’s business. The IPO cannot be allowed to have a detrimental effect on the company’s financial and trading performance as that, in turn, might jeopardise the IPO. It is for this reason that, particularly on larger IPOs or where a company’s business might be particularly complex or have a multitude of different facets that require considerable time and effort to keep abreast of and manage, some companies may appoint internal project managers to assist in running the IPO process, co-ordinating all the various workstreams, internal stakeholders within the company and its external advisers to ensure that the IPO process continues to run to its timetable and that everybody delivers their respective inputs on time. Any person appointed to this role will need not only to be familiar with the company, its staff (so that they can access the relevant knowledge and experience within the company when necessary) and its business and operations, but also with how an IPO process is conducted so that they can liaise effectively with all interested parties to produce a successful outcome. They will also need to have sufficient authority to be able to take important decisions in relation to the IPO without always having to have recourse to the company’s senior executive management team, whose attention may be directed elsewhere and who may not always be available because of other demands on their time as part of the process. Existing Shareholders Existing shareholders may have differing roles, with varying degrees of significance and influence, in an IPO, depending on the size of their shareholdings in the company. At the very least, all such shareholders will likely need to participate in any pre-IPO reorganisation of the company’s share capital structure which will involve them in signing powers of attorney and/or otherwise entering into the various legal documents required to put the desired share capital structure in place. In addition, if they have significant shareholdings in the company, existing shareholders may wish to sell down some, or all, of their shareholdings in the company in connection with any fundraising conducted as part of the IPO. This will involve them being a party to various other legal documents, such as the placing/underwriting agreement with the investment bank that will be responsible for placing shares in the company with institutional and other investors to raise the necessary funds; lock-in agreements with the company and/or the investment bank pursuant to which such existing shareholders will agree not to sell their shares in the company at all for a specified period post-IPO without the consent of the investment bank acting as the company’s sponsor/ nominated adviser and/or corporate broker and not to sell them otherwise than through the investment bank (so that it can maintain an orderly market in the company’s shares) for a further specified period following the IPO once the initial “lock-in” period has expired.
  10. 10. Navigating the IPO process A summary guide for companies 10 Such shareholders, where they have significant shareholdings (and are likely to retain significant shareholdings post-IPO), are also likely to be involved in the discussions between the company and the investment bank as to the size of any fundraising to be effected in connection with the IPO and the pricing and allocation of the company’s shares to investors at IPO. In addition, if such shareholders retain a stake in the company greater than 25% to 30%, then it is likely that the investment bank/new institutional investors will expect (and this will be mandatory for 30% shareholders of companies seeking admission to trading on the Main Market) that they enter into a relationship agreement with the company and the investment bank pursuant to which they will agree to permit the company to carry on its business and take decisions independently from them. As stated above in the section of this brochure headed “What does a listed/quoted company look like and how do you get there?”, where significant shareholders of the company own material assets used in the company’s business or are party to significant trading relationships that are key to the company’s business on an ongoing basis, then they may need to take certain actions to formalise or amend the terms of those arrangements prior to the IPO. Professional Advisers Any company considering an IPO should appoint its team of advisers at an early stage. As noted above, securing good quality corporate advisers, who understand the company’s business, growth strategy and equity story and, perhaps most important of all, have a good working relationship and personal rapport with the company’s senior executive management team is one of the key aspects of preparing for an IPO (an IPO is a long-term process that can take a number of months and, in some cases, years and the company’s management team and its advisers will be working closely together on an almost daily basis). Many companies will, no doubt, have existing accountants and lawyers and so it may be natural to look to those advisers to assist with the IPO in the first instance. However, IPOs are a complicated process and, whilst the company’s incumbent advisers may be very capable firms, they may lack the specialist experience and expertise to be able to execute this type of transaction successfully. In most cases, therefore, a company may wish to look further afield to ensure that it appoints the most suitable advisers. Since the recovery of the IPO market following the financial crisis in 2008, a number of companies looking to float have appointed an independent financial adviser to guide them through their IPOs and to manage and organise the process for them, including helping them to choose the most appropriate advisory team by holding competitive ‘beauty parades’ to select the investment bank to be the company’s sponsor, nominated adviser or key adviser, its legal advisers and its reporting accountants, amongst others. As well as assisting the company in comparing and assessing the merits of the various advisers’ pitches for the roles, such independent financial advisers will also help the company to negotiate the various different advisers’ engagement terms, including their remuneration packages, for advising on the transaction. However, this approach does not necessarily suit all companies and many will often select the investment bank who will be their sponsor, nominated adviser or key adviser (as the case may be) first and then that investment bank may help them to select the other advisers required. Other companies may have good relationships with their lawyers, appoint them first and they may be able to recommend suitable investment banks to perform the sponsor, nominated adviser or key adviser role. There is no right or wrong approach to the way in which the company selects its advisory team. However, it must ensure that it appoints the advisory team that is the best fit for its business and will be most likely to help it secure a successful IPO. However the company selects its advisers, it will typically need some or all of the following to perform the following roles: Investment Bank The investment bank will be primarily responsible for organising and managing the IPO process, for preparing the transaction timetable (and ensuring that the company and its other advisers adhere to it), co-ordinating the company and the other advisers to ensure that they perform the tasks they need to complete by the deadlines specified in that timetable and generally ensuring that the process runs as smoothly as possible. In addition, the investment bank will also carry out some or all of the following roles: - Sponsor, nominated adviser or key adviser – As noted above, a company applying for a Main Market listing will need a sponsor, a company applying for admission to AIM will require a nominated adviser, or “nomad”, and a company applying for admission to the High Growth Segment will require a key adviser. When acting in any of these capacities, the company’s investment bank has a very important role to fulfil. Whereas a sponsor’s/key adviser’s primary duty is to the company that appointed it, a nominated adviser’s primary duty is owed the LSE (rather than the company). In this role, the investment bank will first need to assist the company in selecting which market is most appropriate for its IPO and, in so doing, assess its eligibility for listing. It will also advise on the structure and composition of the board (in terms of the combination of executive and independent non-executive directors and the appropriate combination of skills and experience) and act as a conduit for communications between the company and the UKLA (in the case of a Main Market or HGS listing). - Financial adviser – In this capacity, the investment bank’s role will include advising the company on its corporate governance structure, its valuation, the likely issue price achievable for its shares, the most appropriate capital structure for the company, the timing and structuring of the offering, the marketing strategy and process and any ongoing post-IPO arrangements with significant shareholders, e.g. in terms of the requirement for, and contents of, a relationship agreement.
  11. 11. Navigating the IPO process A summary guide for companies 11 - Bookrunner and/or underwriter – As a “bookrunner”, the investment bank will be responsible for selling the company’s shares to potential investors following the investor “roadshow” presentations delivered by the company’s executive management team and “building a book” for the shares being offered in connection with the IPO. The investment bank may use its “reasonable endeavours” to find purchasers or subscribers for the existing shares to be sold in the IPO by existing shareholders or the new shares to be issued by the company to raise capital, respectively, but, if it cannot find sufficient purchasers or subscribers, it will not be obliged to subscribe for the shares available itself. Alternatively, it may act as “underwriter”, i.e. if it is unable to identify sufficient investors to take all of the shares available, it will purchase or subscribe for those shares itself using its own balance sheet (a “hard underwriting”) or, if having signed up investors to purchase or subscribe for the company’s shares, those investors do not actually pay the cash for them, the investment bank will step in and purchase or subscribe for them but will not otherwise be required to purchase or subscribe for shares it has not signed up investors for (a “soft” or “settlement risk” underwriting). Because of the greater risk involved in a “hard underwriting”, the investment bank will generally expect a greater commission for performing that role. “Hard underwritings” tend only to be used on the larger, Main Market IPOs where the size of the offering is very significant and are generally rare on AIM IPOs where fundraisings are generally smaller. Depending on the size of the offering, one or more investment banks may be appointed to act as bookrunners and/or underwriters (and may each publish their own research reports – see below). - Research analyst – It is common for the investment bank’s independent research analyst to publish investment research on the company prior to the IPO in order to condition the market to the IPO and provide potential investors with additional “independent” information about the company following the publication of the company’s own information in the form of a registration document or prospectus.* - Corporate broker – In this capacity, the investment bank acts as the main interface between the company and the stock market/institutional investors. Its role is to monitor changes in market conditions and keep the company updated about them, to assess demand for the company’s shares among institutional and other investors and to market the shares to those investors and to advise on the most appropriate size of the offering. Legal Advisers Lawyers are involved in an IPO in several capacities and may be appointed by a number of different parties: - Company’s legal advisers – The role of the company’s lawyers is to advise it on the legal aspects of the IPO, including: - advising on and carrying out any pre-IPO share capital reorganisation, re-registration of the company as a public limited company or insertion of a new holding company by way of a share-for-share exchange - carrying out the legal due diligence exercise into the company’s affairs and advising on and, where necessary, effecting any remedial actions required to be taken prior to the IPO and identifying any risk factors and other relevant disclosures for inclusion in the public documentation to be published by the company - drafting, in conjunction with the company and certain of its other advisers, the prospectus/admission document to be published by the company in connection with the IPO - advising on and drafting service agreements and letters of appointment (incorporating provisions consistent with prevailing market and corporate governance practice) for the company’s executive and non‑executive directors - advising on and drafting the new listed/quoted company articles of association to be adopted prior to the IPO by the company - drafting the corporate governance documentation to be adopted by the company compliant with the relevant requirements of the corporate governance code to be adopted by the company, e.g. terms of reference for board committees, documentation setting out the division of responsibilities between the chairman and chief executive and the company’s share dealing code - advising on the most appropriate share incentive schemes for the company to be adopted with effect from the IPO and drafting the relevant scheme rules and option/award grant documentation - negotiating the placing/underwriting agreement and the sponsor/nominated adviser agreement with the legal advisers to the investment bank acting as bookrunner and sponsor/nominated adviser - briefing the company’s board on their roles and responsibilities in connection with the production of the prospectus/admission document and advising them of their ongoing duties and responsibilities as directors of a listed/quoted company (see Appendix 2 to this brochure for further information) - providing any other legal advice that the company/ directors may require in connection with the transaction and, together with the investment bank, generally guiding the company through the IPO process
  12. 12. Navigating the IPO process A summary guide for companies 12 - Investment bank’s legal advisers – The role of the investment bank’s legal advisers is to: - advise the sponsor/nominated adviser in relation to its duties and responsibilities as a sponsor/nominated adviser and the “comfort package” to be provided by the company and its other advisers in order to enable the investment bank to give the relevant declarations that it is required to give to the relevant regulator in relation to company in connection with the IPO (including reviewing the legal and financial due diligence exercises carried out by the company’s legal advisers and reporting accountants and reviewing the working capital and financial position and prospects procedures review exercises undertaken by the company’s reporting accountants) - draft and negotiate the placing/underwriting agreement and the sponsor/nominated adviser agreement on the investment bank’s behalf - review the disclosure in the prospectus/admission document to ensure that the company/its legal advisers have disclosed all material risks and other information and otherwise complied with their disclosure obligations as set out in the relevant rules In addition, any significant shareholders who are party to the placing/underwriting agreement (in a selling shareholder capacity) or required to sign a relationship agreement may retain their own legal counsel. Reporting Accountants The reporting accountants are distinct from the company’s auditors (although those two roles may be performed by different teams within the same firm). The reporting accountants’ main function is to review and report on the company’s financial track record for the benefit of the sponsor/nominated adviser and investors. They will produce two key documents, the private long form report (which is effectively a financial due diligence report on the operating and financial performance and tax position of the company and the processes, procedures and controls that it has in place and the key risks in relation thereto) and the short form report, which is a report on whether the company’s audited consolidated historical financial information for the previous three year period (and, if applicable, any subsequent interim period) gives a true and fair view of the state of affairs of the company over that period and which is included in the prospectus/admission document. In addition to the above two key reports, the reporting accountants will also produce the “FPPP report”, which is a report on the financial position and prospects and procedures that the company has adopted in readiness for its IPO. The reporting accountants review and test those controls and procedures in order to ensure that they are adequate, appropriate and robust enough for a listed/quoted company. The reporting accountants will also review the company’s working capital model and working capital/cashflow projections (looking forward 18 to 24 months following the IPO) and test various scenarios and sensitivities that might occur in the future to ensure that, on each of those hypothetical scenarios, the company will have sufficient working capital to be able to continue to operate its business. This exercise underpins the working capital statement that the company is required to make in the prospectus/admission document and also provides comfort to the sponsor/ nominated adviser that it can make the declaration it needs to make to the relevant regulator that the company is eligible to be admitted to the relevant market. The reporting accountants are also responsible for providing several additional comfort letters to the company and its sponsor/nominated adviser in connection with the IPO, including in relation to matters such as the accuracy of the taxation section of the prospectus/admission document, that financial information referred to elsewhere in the prospectus/ admission document has been accurately extracted from the company’s audited consolidated historical financial information and accounting records, that there has been no significant change in the financial and trading position of the company since the date to which its audited consolidated historical financial was prepared (to support the statement the company is required to make to that effect in the prospectus/admission document) and various other matters, such as their independence from the company. Other Advisers In addition to the investment bank, legal advisers and the reporting accountants, a number of other advisers may be involved on an IPO in various capacities, such as financial public relations consultants, registrars (who deal with applications for shares and setting up and maintaining the company’s share register following the IPO), certain specialist advisers depending on the nature of the company and its business, for example, property valuers if the company is a property investment company, IP or patent agents if the company’s business involves it in acquiring and maintaining a significant IP and/or patent portfolio, and specialist technical experts in the case of mineral extraction or oil and gas exploration and production companies who review and report on the company’s purported geological resources and reserves to ensure that the company owns or has rights to access them and to ensure that any statements made by the company in relation thereto, e.g. its ability to extract them over a specific period of time and in specific amounts, stand up to scrutiny. * Note: New rules and practices for disclosing information around IPOs were introduced by the FCA on 1 July 2018. The FCA’s stated aim in implementing the changes was to provide for a more efficient and well-informed IPO process where: (i) an approved registration document or prospectus is the central IPO document available to investors when they need it; (ii) firms observe high standards of conduct, particularly re management of conflicts, in the preparation and distribution of research; and (iii) conditions exist to allow publication of unconnected research during the IPO process where there is demand. The principal impact of the rule changes is: (i) earlier publication of the registration document or prospectus in the IPO timetable, ie prior to publication of research; (ii) reducing the prominence of connected research in pre-deal investor education and bookbuilding; (iii) greater access to the registration document/prospectus and the company’s management for unconnected analysts (either at the same time as connected analysts receive access or in a way that results in unconnected analysts receiving the same information); and (iv) changes to current market practice which the FCA considered increased the risk of bias in connected research. The new rules do not apply currently to IPOs on multi-lateral trading facilities (“MTFs”), such as AIM, albeit that the FCA is encouraging providers of placing/underwriting services to larger companies seeking admission to trading on AIM to apply the new rules and will review their application to MTFs in 2019. The effect of the new rules on the back-end of the IPO timetable is illustrated in Part B of Appendix 1 to this brochure. Given the relatively limited number of IPOs since the new rules came into effect, it will take some time for their real impact to be felt and practice to develop and adjust. Further commentary and advice can be obtained by contacting a member of the Eversheds Sutherland Equity Capital Markets team (see Appendix 4 for contact details).
  13. 13. Navigating the IPO process A summary guide for companies 13 Introduction One of the most important decisions for the company to take on its IPO journey is the choice of market on which to launch an IPO. This is dependent on a wide range of considerations, some of which may be more relevant or have more importance than others, including the following: - the eligibility criteria and entry requirements for each market - access to potential investors as certain types of investor may have internal rules prohibiting them from investing in shares on certain markets and may also have different investment limits depending on which market a company’s shares are traded on. In addition, only Main Market companies are eligible for inclusion in certain indices, such as the FTSE 100, 250 and 350 - the anticipated price performance and liquidity of trading in the company’s shares following the IPO - the ability to carry out further equity fundraisings quickly and cost-effectively following the IPO (generally easier on AIM as it is not a regulated market and, provided there is no offer of transferable securities to the public (or an exemption available), no requirement to produce a prospectus) - the ability to carry out acquisitions, disposals and other corporate transactions quickly, efficiently, cost-effectively and without having to obtain prior shareholder approval - under the AIM rules, prior stakeholder approval is required only for transactions with a much larger size threshold than applies to companies whose shares are listed on the Premium segment of the Official List (see below) - the ongoing regulatory and compliance burden applicable to each market following the IPO. AIM has a lighter regulatory regime than the Main Market. Broadly, the rules of the Main Market will require the company to appoint a sponsor or key adviser in connection with significant or related party transactions whereas the AIM Rules require the company to have a nominated adviser at all times The Main Market (Premium and Standard listings) The Main Market is the UK’s principal market for listed companies from the UK and overseas. There is a two-stage admission process for companies who wish to IPO on the Main Market: - the company must apply to the UK Listing Authority (“UKLA”), a division of the Financial Conduct Authority (“FCA”), for its shares to be admitted to the Official List - the company must apply to the LSE for its shares to be admitted to trading on the Main Market A company undertaking a Main Market IPO will have to satisfy the eligibility criteria set out in the Listing Rules promulgated by the UKLA (see below for more information). In addition, because an IPO on the Main Market generally involves an offer of securities to the public in the UK (where a company avails itself of the opportunity to raise equity capital by issuing shares to new investors) and/or an application for admission to trading on a regulated market, the company will be required to produce a prospectus (see the section of this brochure headed “What documents does the company have to produce?” below) which has to contain the requisite disclosures, and be presented in the format, prescribed by the Prospectus Rules promulgated by the UKLA. Before the IPO can happen, the company’s prospectus will need to be formally approved or “stamped” by the UKLA. Once a company’s shares are admitted to trading on the Main Market, it will be subject to: - the Listing Rules, which contain, amongst other things, rules in connection with significant transactions, transactions with related parties and other ongoing announcement and reporting obligations (see Appendix 2 to this brochure for further information) - the Disclosure Guidance and Transparency Rules, which contain, amongst other things, rules in connection with the publication of periodic financial reports and the notification of major holdings of voting rights and obligations on the dissemination of regulated information and communications with shareholders (see Appendix 2 to this brochure for further information) - the Prospectus Rules, which set out the circumstances in which a prospectus is required to be approved and published, the exemptions to the requirements for the publication of a prospectus and also the content requirements for a prospectus - the Admission and Disclosure Standards of the London Stock Exchange The Main Market listing regime has a two-tier structure with a “Premium” and “Standard” listing segment. A Premium listing requires the issuing company to meet super-equivalent standards and is only available for equity shares that meet the full set of requirements. A commercial company can choose whether its equity shares have a Premium or a Standard listing. Which market should you choose?
  14. 14. Navigating the IPO process A summary guide for companies 14 Companies with shares admitted to the Premium listing segment of the Official List are required to engage an authorised firm, known as a sponsor, both in relation to the initial application to have their shares admitted at IPO and also to advise them on, and liaise with the FCA in relation to, certain important transactions (as prescribed by the Listing Rules) that they may enter into from time to time following their IPO. Companies with their shares admitted to the Standard listing segment are not subject to this requirement. AIM AIM was designed to meet the needs of smaller, growth companies, at an earlier stage of development than Main Market companies, and for which a more flexible regulatory environment is more appropriate in order to enable them to raise further equity capital more quickly and more regularly than might be possible on the Main Market. The eligibility criteria for AIM make it possible to IPO without a trading record (unlike for a Premium listing on the Main Market) and there is also no minimum free float requirement or number of shareholders (unlike for a Premium or Standard listing on the Main Market). AIM companies have to comply with the AIM Rules (see Appendix 2 to this brochure for further information in relation to AIM companies’ key continuing obligations under the AIM Rules) but need not comply with the Listing Rules or, other than Chapter 5 (vote holder and issuer notification rules) of the Disclosure Guidelines and Transparency Rules sourcebook. AIM is not a “regulated market” which means that AIM companies do not have to comply with the Prospectus Rules when applying to have their shares admitted to AIM. However, it is important to note that, as set out above, there are two tests as to when a prospectus, and therefore compliance with the Prospectus Rules, is required and the second is if a company is making an offer of transferable securities (such as shares) to the public in the UK. Therefore, where an AIM company is proposing to issue further shares, unless one of the applicable exemptions applies (see the section of this brochure headed “When do you need to produce a prospectus?” below), such as the offer is being made to fewer than 150 persons per EEA member state, then an AIM company will nevertheless be required to produce a prospectus in connection with that offer and have it approved by the UKLA. Companies admitted to AIM are required to retain a nominated adviser, or “nomad”, both in connection with their IPO and at all times while their shares are traded on AIM, unlike companies admitted to the Premium listing segment and High Growth Segment of the Main Market, which are required to engage a sponsor or key adviser, respectively, only in relation to certain transactions into which they enter, as specified in the Listing Rules or HGS Rules, respectively. High Growth Segment The High Growth Segment (“HGS”) of the Main Market was launched by the LSE in March 2013 and was designed to encourage mid-sized growth companies, particularly internet and technology businesses, to seek a London IPO rather than to consider private MA exits for founder shareholders or IPOs on overseas exchanges, such as NASDAQ in the United States, which had become potentially easier and less burdensome following the introduction of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) in the United States. The HGS was launched to complement the other London markets and to offer a transitional route to those companies who eventually aspire to a Premium listing and admission to the Official List but who may not yet be eligible. Unlike AIM and the Premium and Standard segments of the Official List, admission to the HGS is only available for the equity securities of companies incorporated in the UK or elsewhere in the EEA. It is also restricted to issuers with trading businesses rather than investment vehicles or mineral exploration companies. Like AIM, the HGS is operated and regulated by the LSE. Companies admitted to the HGS have to comply with the High Growth Segment Rulebook (issued by the LSE). The HGS Rules cover matters such as the initial eligibility criteria, the admission process and an issuer’s continuing obligations (see Appendix 2 to this brochure for further information). They therefore contain similar concepts and, in some cases, identical rules, to those found in the AIM Rules. Like the sponsor regime for Premium listed companies, companies with their shares admitted to trading on the HGS must engage an authorised firm, known as a “key adviser”, both in connection with their IPO and for certain other matters. As the HGS is a segment of the Main Market, that is, a regulated market, in addition to the HGS Rules, HGS issuers and applicants must comply with the: - Disclosure Guidance and Transparency Rules - Prospectus Rules - Admission and Disclosure Standards of the London Stock Exchange Comparison of Eligibility Criteria The table opposite sets out the principal eligibility criteria for each of AIM, the Premium and Standard listing segments of the Official List and also the High Growth Segment:
  15. 15. Navigating the IPO process A summary guide for companies 15 Market Capitalisation Free Float Accounts Trading Record Business Control of Assets Working Capital Designated Adviser on an Ongoing Basis AIM No minimum. Nominated adviser to assess suitability. No requirement. Nominated adviser to assess suitability. Admission document to contain 3 year audit (or such shorter period as the company has been in operation). No requirement. No requirement. No requirement. But, if issuer’s business has not been independent and revenue- earning for at least two years, directors, substantial shareholders and applicable employees must enter into one year lock-in. Statement required that in opinion of directors, sufficient working capital exists for present requirements (12 months post- admission). Nominated adviser required at all times issuer is on the market and issuer must seek guidance from nominated adviser in all relevant circumstances. Premium Listing Segment of Main Market £700,000 minimum. 25% minimum. Issuer must have published audited consolidated accounts for 3 year period ending no more than 6 months before the date of the prospectus and not more than 9 months before shares admitted to listing. 75% of issuer’s business must be supported by historic revenue earning record covering the period for which accounts are required. Issuer must carry on independent business as its main activity. Issuer must control a majority of its assets and have done so for the period for which accounts are required. Issuer to satisfy UKLA that sufficient working capital for next 12 months from date of prospectus. Sponsor required for certain transactions (i.e. publication of prospectus, class 1 circular, related party circular or, in some cases, circulars relating to share buy- backs). Standard Listing Segment of Main Market £700,000 minimum. 25% minimum. Prospectus to contain 3 year audit (or such shorter period as the company has been in operation). No requirement. No requirement. No requirement. Statement required that in issuer’s opinion it has sufficient working capital for its present requirements, or how it proposes to provide additional working capital. No requirement. High Growth Segment of Main Market No specific requirement but, because of free float requirement (see next box), normally £300 million minimum. 10% minimum and value of those shares must be at least £30 million, most of which must be raised at admission by a new issue or sale of shares to be admitted to trading. Prospectus to contain 3 year audit (or such shorter period as the company has been in operation). Issuer must be able to demonstrate revenue growth of at least 20% on a compound annual growth rate basis for the prior three financial years. Issuer must be a trading business (investment entities not eligible). Issuer must control majority of its assets from point of admission. Statement required that in issuer’s opinion it has sufficient working capital for its present requirements, or how it proposes to provide additional working capital. Issuer to seek advice of key adviser for certain key events (major transactions, related party transactions, reverse takeovers, further share issues, share buy-backs, severe financial difficulty, cancellation of admission).
  16. 16. Navigating the IPO process A summary guide for companies 16 An IPO process typically requires the preparation of a significant number of documents by both the company and its various advisers. This section looks at some of the principal documents that are required. Prospectus/Admission Document Depending on whether the company has elected to IPO on the Main Market (or High Growth Segment) or on AIM, it will need to produce and publish a prospectus or an admission document, respectively. The “look and feel” and contents of a prospectus and an admission document are, in general, fairly similar. The contents of both are derived from the EU Prospectus Directive (2003/71/EC) and the Prospectus Regulation (809/2004), which, together, set out a single regime throughout the EU governing the content, format, approval and publication of prospectuses. In the UK, the contents requirements for prospectuses specified in the Prospectus Directive and Prospectus Regulation are copied across into the Prospectus Rules promulgated by the UKLA and are set out in the “building block” annexes in Appendix 3 to the Prospectus Rules. The annexes divide a prospectus into three basic parts (albeit that, in most cases, prospectuses are produced as a single document): (i) a summary; (ii) a registration document (mainly covering information in relation to the company, its business activities, and the markets in which it operates (and risk factors relating thereto), its directors and employees and historical financial information); and (iii) a securities note (mainly covering information relating to details of the shares to be issued or sold in connection with the IPO (and risk factors relating there to) and the rights attaching to them). Where prospectuses are produced as a single document, whilst they must include all relevant information required by the relevant annexes, they do not necessarily need to present that information in the order in which it appears in the annexes (save as referred to below) and most prospectuses (and admission documents) tend to follow a market practice of presenting the requisite information in a particular way. In addition, the content requirements above are supplemented in certain areas by recommendations issued by the European Securities and Markets Association (“ESMA”), which provide additional guidance on the nature and extent of the information to be included in the prospectus, particularly in respect of the contents of the operating and financial review section, the format and content of capitalisation and indebtedness statements, the financial information to be included in the prospectus and additional information requirements for specialist issuers, for example, the contents of property portfolio valuation reports to be included in prospectuses produced by property investment companies. The AIM Rules, which specify the content requirements for admission documents, adopt by cross-reference a significant number of the prospectus content requirements specified in the “building blocks” but not all of them, meaning that AIM admission documents, whilst they generally look similar to prospectuses, dispense with some sections that one would normally see in a prospectus. In addition, as stated above, the Prospectus Directive and Prospectus Regulation (and the Prospectus Rules) specify a particular format for prospectuses and a rigid order in which certain sections and information have to appear in the document which does not apply to admission documents, with companies preparing the latter generally having more freedom as to the order in which they disclose certain sections or pieces of information. That being said, a general “market practice” has developed which means that the majority of admission documents generally present the requisite information in a familiar and consistent format and order. The format and high-level contents of a prospectus and an admission document are set out in the comparison table opposite (and in more detail in Appendix 3 to this brochure): What are the principal documents on an IPO and what do they cover?
  17. 17. Navigating the IPO process A summary guide for companies 17 Content Requirement Prospectus Admission Document Summary Summary required and has to appear as the first section of the document (after the cover page and table of contents) and has to be presented in a specified tabular format including specified “elements” and contain certain specific language. Summary has to be a certain length and no longer (no more than 15 pages or 7% of the total length of the document, whichever is the longer) No summary required but may, at the issuer’s option, be included Risk factors (relating to the company and its business and operations and the shares being offered by the company to investors in connection with its IPO) Required to be included and must appear as the first main section of the document immediately after the summary Required to be included but flexibility as to where this should be included. Typically, it does not appear at the front of the document (as with a prospectus) Information on the company and its group Required to be included but order in which appears not specified, although typically appears as first section after the risk factors Required to be included but flexibility as to where this should be included. Typically appears as first main section of the document Operating and financial review (discussing and analysing key trends/ drivers in financial and operating performance (balance sheet, profit and loss and cashflow and financing) over the three year period covered by the company’s audited consolidated historical financial information) Required to be included but order in which appears not specified, although typically appears either before or after the historical financial information on the company Not required to be included Audited consolidated historical financial information covering prior full three year period Required to be included but order in which appears not specified, although typically appears before or after the operating and financial review Required to be included (but may be for shorter period if full three years not available) but no requirement as to where in the document it should appear Information on the shares and details of the offer Required to be included but no specification as to where this should be included Required to be included but flexibility as to where this should be included Additional information including description of the share capital history of the company, directors’/PDMRs’ interests in shares/share options, shareholders’ major interests in shares, directors’ other current and past directorships, descriptions of material contracts/litigation, descriptions of directors’ service contracts/letters of appointment and remuneration, no significant change and working capital statements etc. Required to be included and usually the last main section of the document Required to be included but flexibility as to where this should be included. Usually the last main section of the document
  18. 18. Navigating the IPO process A summary guide for companies 18 Approval of the prospectus An additional point to bear in mind is that, before it can be published and distributed to investors, a prospectus has to be approved and “stamped” by the UKLA. In most cases, therefore, companies have to submit a number of drafts to the UKLA so that it can review the document and confirm that it complies with the various, specific content requirements and also that the company has complied with the general obligation to disclose, in a form which is comprehensible and easy to analyse, and has not omitted to disclose: “The information necessary to enable investors to make an informed assessment of (a) the assets and liabilities, financial position, profits and losses, and prospects of the issuer of the securities; and (b) the rights attaching to those securities” (the “informed assessment test”). On an IPO, the UKLA has a period of 10 business days to review and comment on the first draft submitted to it and thereafter a further period of 5 business days to review and comment on subsequent drafts (although the UKLA will often return comments quicker than this towards the end of the process). The company’s sponsor is generally responsible for submitting the prospectus (which must include margin annotations referring to which element of the relevant annexes referred to above a particular piece of information relates to) to the UKLA for review in electronic form via the Electronic Submission System on the FCA website and, on each occasion a submission is made, the relevant checklists (usually completed by the company’s legal advisers) showing where in the prospectus the information required to be included by the annexes referred to above can be found must also be submitted with it. The UKLA then returns its comments to the sponsor at the end of each review period. All comments have to be “cleared”, i.e. answered to the UKLA’s satisfaction (either by a response on the comment sheet or through relevant drafting in the prospectus itself), before the UKLA will approve the document for publication. A fee is payable by the company to the UKLA in respect of the approval service (the amount of which depends on the type of company and prospectus and is set out on the UKLA’s website). While an admission document has to include certain information prescribed by the annexes referred to above, there is no equivalent approval process as there is with the UKLA for prospectuses with AIM Regulation (the dedicated team at the London Stock Exchange responsible for regulating AIM companies and their nominated advisers). It is the company’s responsibility to ensure that all material information is disclosed and all applicable content requirements complied with before an admission document is published and the nominated adviser is asked to confirm as such to the LSE. Responsibility for the prospectus/admission document The company, its directors, the company’s reporting accountants (in respect of the short form report) and any other experts (e.g. property valuers, patent agents or mineral or geological experts) who have produced reports which have also been included in the prospectus/admission document are required to accept responsibility (by way of inclusion of a statement to that effect) in the relevant document. Accordingly, these persons are all potentially liable to the extent that they have not taken all reasonable care in the production of the document and it is subsequently found to contain a material misstatement of fact or material omission which causes investors to incur losses. Such persons may potentially have: - statutory liability to compensate investors under section 90 of the Financial Services and Markets Act 2000 (“FSMA”) (in relation to prospectuses only) (see below) - civil liability in contract (for a breach of the contract with investors which is embodied in the prospectus or admission document (as the case may be)) or for misrepresentation (by omission or otherwise and whether deliberate or innocent) - civil liability in tort (for negligent misstatements or omissions) - civil liability under FSMA (for potential market abuse offences) - criminal liability (under sections 89 (dishonest or reckless false or misleading statements) and 90 (intentional or reckless false or misleading impressions as to the market in, or price or value of, securities) of the Financial Services Act 2012 and, potentially, under the Fraud Act 2006 and the Theft Act 1968) The directors of the company will usually be provided with a memorandum from the company’s legal advisers (and given a face-to-face training session by them and the sponsor/ nominated adviser) in relation to their duties and obligations (and potential liabilities) in connection with, amongst other things, the production of a prospectus/admission document. As part of the IPO process, each director will be asked to sign a letter addressed to the sponsor/nominated adviser confirming, amongst other things, that he or she accepts responsibility for the prospectus/admission document and has had their duties and obligations explained to them (and that they understand them). This, together with certain other documents, provides comfort to the sponsor/nominated adviser, that they can make the declaration they are required to make to FCA or the LSE (as the case may be) that the company has complied with all relevant requirements of the Prospectus Rules or the AIM Rules (as the case may be) and that all matters known to it which, in its reasonable opinion, should be taken into account by the FCA or the LSE in considering the application for admission have been disclosed with sufficient prominence in the relevant document. The sponsor/nominated adviser will also seek similar comfort letters from the reporting accountants and, potentially, other experts who produce reports for inclusion in the document.
  19. 19. Navigating the IPO process A summary guide for companies 19 Although they may be involved in formulating the equity story and the key selling messages to be conveyed in the prospectus/admission document and whilst it is essential for the directors of the company to be familiar with the contents of the document and to be comfortable that it is true, accurate and not misleading, save in certain cases for the chief executive officer and chief financial officer, they will not be intimately involved with the actual drafting of the document (which is generally left to other members of the company’s senior executive management team and its advisers, particularly its legal advisers). Therefore, one of the principal means by which the directors can be satisfied that they have discharged their duty to ensure the document has been prepared with due care and attention is by means of the “verification” exercise. Verification is broadly the process by which each material statement (both of fact and opinion) made in the prospectus/ admission document is checked to ensure that it is true, accurate and not misleading (for example, by omission of certain relevant information) which may cause potential investors to reach erroneous conclusions, or to make incorrect assumptions, about certain aspects of the company, its business and operations, financial or trading performance and/or prospects and/or the shares being offered. As such, together with the due diligence process (referred to in the section of this brochure headed “What does a listed/quoted company look like and how do you get there?”), it is one of the principal means by which the directors can minimise (and establish a defence against) any potential liabilities that they may incur under the heads referred to above for any inaccuracies or omissions in the prospectus/admission document as it assists in demonstrating that they took all reasonable steps, and made all reasonable enquiries, to ensure that the relevant document was true, accurate and not misleading. While, in most cases, much of the verification exercise will be delegated to more junior people at the company designated to provide certain source materials or background information (with the directors only being called upon to confirm certain statements (usually of opinion, expectation, intention or belief) which cannot be independently verified by reference to third party or other appropriate source materials), the directors should always ensure that they are comfortable that the process has been conducted properly and that the people within the company to whom responsibility for the exercise has been delegated on a day- to-day basis are appropriate and have sufficient experience and expertise to be able to undertake the exercise, with the assistance of the company’s legal advisers, properly. If responsibility for the process is delegated to people who are not appropriate or suitable, it could undermine the exercise’s value as a potential defence to any liabilities that may be incurred. The verification process should be taken into account when planning the overall IPO timetable. The prospectus/admission document should be sufficiently advanced (i.e. not subject to significant change or redrafting) before the process is commenced in earnest so that it can be completed quickly and efficiently with minimal recourse to the company, but, at the same time, sufficient time must be allocated to allow the process to be completed properly and to enable any issues that may be raised as a result of the exercise to be addressed appropriately. Verification can be done in a number of ways (from writing lengthy notes and answers to annotating the source document and attaching the relevant verification source materials). In essence, it does not matter how it is carried out provided that it serves the purpose for which it is intended and what may be the most appropriate method for any particular company will depend on the circumstances and be subject to discussion and agreement with the company and its advisers (particularly, the sponsor/nominated adviser (and their legal advisers) and the company’s legal advisers). Any statements that cannot be satisfactorily verified should either be amended so that they can or be removed from the prospectus/admission document in their entirety. Other key documents required in connection with an IPO In addition to the prospectus/admission document, an IPO involves the production of a multitude of other documents, the principal ones of which are described below (being those IPO-related documents that will normally require disclosure in the relevant document as a material contract). In addition to these, there will be a number of further documents, including share incentive scheme rules, a share dealing code, terms of reference for board committees, articles of association appropriate for a listed/quoted company, various comfort letters, opinions and reports from legal advisers and the reporting accountants (e.g. the legal due diligence report, long form report, working capital report and FPPP report), directors’ memoranda briefing them on their duties and obligations in connection with the production of a prospectus/admission document and their ongoing duties and responsibilities as directors of a listed or quoted company (as the case may be) (see Appendix 2 to this brochure for further information in relation to the continuing obligations of listed/quoted companies that the directors will need to ensure that the company complies with) and the documentation required in connection with the application for admission to listing and/or to trading on the relevant market.
  20. 20. Navigating the IPO process A summary guide for companies 20 What are the other key documents produced in connection with an IPO? Placing/Underwriting Agreement The placing/underwriting agreement (produced by the investment bank’s legal advisers) is the key document which sets out the investment bank’s duties and obligations (in its capacity as placing agent/bookrunner in connection with the IPO) in connection with the offer of shares to be made by the company (and, possibly, existing selling shareholders) in connection with the IPO. They tend to be relatively standard form documents for the most part, with broadly consistent provisions in respect of conditions, repetition of representations and warranties, limitations on the directors’ liability in respect of breaches of those representations and warranties, indemnities given by the company, termination rights for the investment bank and undertakings given by the company. They also contain the fees, commissions and expenses to which the investment bank is entitled for performing the roles it is performing under the agreement. Placing/underwriting commissions are set as a percentage of the total amount raised. In particular, the placing/underwriting agreement will contain an obligation on the investment bank to use its reasonable endeavours to procure subscribers and/or purchasers for the shares. Whether the investment bank will be required to subscribe for, or purchase, the shares itself in the event that it is unable to procure sufficient investors to take the shares will depend on whether the offer is to be underwritten (and, if it is, whether it is to be a “hard” or “soft” underwriting) (see the section of this brochure headed “Who are the key parties involved in an IPO and what do they do?” and the discussion under the heading “Investment Bank” above for further information). The company will also be obliged to take all necessary action to procure the admission of the shares to listing and/or trading on the relevant market and to procure their acceptance for trading through CREST etc. The investment bank’s obligations under the placing/ underwriting agreement will be subject to a number of conditions, e.g. admission of the shares to listing and/or trading on the relevant market occurring by a particular date; the shares placed with investors being validly allotted and issued by the company (where relevant); there being no breach of any representations or warranties contained in the agreement when repeated at any time up to admission and the company delivering certain documents to the investment bank by the times and dates specified in the agreement. If any of these conditions is not fulfilled (or, where applicable, waived) the investment bank will be entitled to terminate the agreement and the placing will not occur. The investment bank will also expect the company (and the directors as well as any existing shareholders selling down in connection with the IPO) to give a range of representations and warranties. The company and the executive directors are normally expected to give the full package of representations and warranties (covering matters such as the accuracy and completeness of the prospectus or admission document (as the case may be) and any other public documentation (such as investor presentations and announcements) produced in connection with the IPO and the share offering; the veracity of the verification exercise conducted in relation thereto; the historical financial information of the company reproduced in the prospectus or admission document and the company’s available working capital; the share capital and corporate structure of the company and its group members any share capital reorganisation or other corporate restructuring carried out in connection with the IPO; the procedures and controls that the company has in place (both in relation to financial reporting and compliance with the company’s ongoing obligations following the IPO); the operations and activities of the company and its business (covering all of the areas analysed in the context of the due diligence exercise); the accuracy of the information provided to the company’s legal advisers and reporting accountants in connection with the work undertaken by them, e.g. legal and financial due diligence, working capital and FPPP review; and that the company and the directors have not sought to offer or market the company’s shares in overseas jurisdictions otherwise than as contemplated by the applicable offering structure). The non-executive directors may be expected to give the full suite of representations and warranties given by the company and the executive directors but, recognising their supervisory rather than day-to-day role in the business and that they may only have been relatively recently appointed, qualified by their awareness after having made due and careful enquiry. Alternatively, they may only be required to give the representations and warranties relating to the accuracy and completeness of the public documentation and the information contained therein relating to them. Selling shareholders (other than directors) will typically be expected only to represent and warrant that they own the shares they are selling in the IPO free of encumbrances and that they have not sought to offer or market the company’s shares in overseas jurisdictions otherwise than as contemplated by the applicable offering structure. Unlike in an MA transaction, there is no disclosure letter in relation to the representations and warranties in the placing/underwriting agreement. The prospectus/admission document serves as the “disclosure letter” for these purposes. The company’s liability for breach of representation or warranty is generally uncapped both in time and amount. The directors’ liability is generally capped in amount (typically as a multiple of their salary and any sale proceeds (whichever is the higher) net, in each case, of any tax and/ or sales commissions payable thereon). In terms of time limits on claims for breach, for non-tax representations/ warranties, this is normally linked to the first audit cycle of the company post-IPO so, generally speaking, between 18 and 24 months from the IPO. For breach of tax representation/ warranty claims, this may be extended to 6 or 7 years post- IPO. Representations/warranties are deemed to be repeated by the persons giving them throughout the IPO process, e.g. when the placing/underwriting agreement is entered into and, again, at admission and the company/directors will be expected to deliver a certificate to the investment bank at each such point confirming that there has been no such breach.
  21. 21. Navigating the IPO process A summary guide for companies 21 Breaches of representations/warranties will also be covered by the indemnity given by the company to the investment bank, which will also indemnify the investment bank for, for example, any losses, fees and expenses it incurs in connection with the public documentation produced by the company in connection with the IPO and the share offering being (or alleged to be) inaccurate, incomplete or misleading; and the proper performance of its duties and obligations in connection with the IPO as sponsor/nominated adviser and bookrunner etc. (although any losses caused by the contributory gross negligence or wilful default of the investment bank, as finally judicially determined by a court of competent jurisdiction, are usually carved out of the indemnification provisions). The investment bank will also reserve the ability to terminate the placing/underwriting agreement prior to admission of the shares to trading on the relevant market upon the occurrence of certain events, e.g. breach of representation/warranty; a material adverse change in the company’s financial, operating or trading position or prospects (or any development which might reasonably be expected to lead to such a change); or any banking moratorium or material disturbance or disruption to any UK, US (or other relevant) stock exchange which may, in the investment bank’s opinion, make it inadvisable or impractical to proceed with the IPO. Finally, the placing/underwriting agreement will contain a suite of undertakings to be given by the company and, in some cases, the directors in favour of the investment bank to consult with, or obtain the consent of, the investment bank prior to taking certain actions following the IPO, e.g. further share issuances, releasing announcements of material developments to the company’s business or financial or trading updates, paying dividends, making material amendments to the company’s constitutional documents or making non-ordinary course material amendments to the executive directors’ service contracts. Lock-in Agreements with Selling Shareholders and Directors For a company applying for admission of its shares to trading on AIM, AIM Rule 7 requires that where its main activity is a business which has not been independent and earning revenue for at least two years, it must ensure that all related parties (principally directors, substantial shareholders and applicable employees) agree not to dispose of any interest in its shares for one year from admission (subject to certain exceptions, i.e. in the event that they are required to do so by an intervening court order, death of the relevant party or acceptance of a takeover offer for the company open to all shareholders). This agreement is typically obtained by means of a lock-in agreement between the company, its nominated adviser and the relevant person. For Main Market companies and non-AIM Rule 7 companies, it is also common practice for the company, any significant shareholders and the directors to agree to a lock-in that restricts: (i) in the case of the company, its ability to issue any new shares (save upon exercise of share options and/ or awards under the company’s share incentive schemes); and (ii) in the case of shareholders and directors, to sell their shares at all for an agreed period post-IPO without the consent of the sponsor/nominated adviser (but subject to certain exceptions similar to, but slightly more extensive than, those referred to above for an AIM Rule 7 lock-in). The reason for these lock-ins is that investors want to understand that the significant shareholders and directors of the company (i) continue to have some “skin in the game” following the IPO and have an interest in ensuring the company’s actual financial performance meets or exceeds the market’s expectations (ensuring that share price performance is also positive) as otherwise the value of their own shareholdings/interests will be adversely affected; and (ii) will also not damage that share price performance by being able to dispose of potentially large quantities of stock on the market, thereby potentially depressing the company’s share price. The duration of the initial lock-in period referred to above varies but is generally somewhere between 6 months and 12 months, or, in some cases, possibly even longer. Following the expiry of that period, there is then generally a further “orderly market” period (again, of generally 6 to 12 months but, again, sometimes potentially longer) during which the relevant locked-in person cannot sell shares otherwise than through the investment bank (acting as the company’s broker). This is to ensure that an orderly market in the company’s share price is maintained and that, again, disposals of shares are effected in such a way that they do not significantly depress the prevailing share price. Nominated Adviser Agreement The nominated adviser agreement (as with the placing/ underwriting agreement, produced by the legal advisers to the nominated adviser) sets out the investment bank’s obligations acting in its role as nominated adviser to the company. There is significant overlap between the provisions of this agreement and the placing/underwriting agreement, particularly in terms of the representations and warranties, indemnities and undertakings given by the company to the investment bank. In addition, the agreement will contain the investment bank’s retainer and provisions relating to the circumstances in which the investment bank’s appointment may be terminated (and when the investment bank may terminate the agreement). On a Main Market IPO, the obligations of the sponsor (and its remuneration) are generally covered in the placing/underwriting agreement rather than in a separate arrangement. Because there is no ongoing requirement for a company to retain a sponsor post-IPO (one is only needed to be engaged by a company in relation to particular transactions specified in the Listing Rules), sponsors tend to be engaged on a transaction-by-transaction basis rather than through a standing agreement. Relationship Agreement Please see the information under the heading “Relationships with Controlling Shareholders” in the section of this brochure headed “What does a listed/quoted company look like and how do you get there?”.
  22. 22. Navigating the IPO process A summary guide for companies 22 Methods of Issue There are a number of methods by which a company can issue its shares in an IPO (a “primary fundraising”) and also by which existing shareholders of the company can sell down some, or all, of their shareholdings as part of the IPO (a “secondary fundraising”). In a primary fundraising, as the shares being sold to new investors are new shares issued by the company, the company receives the proceeds of such subscription (less fees, commissions and other expenses payable to the investment bank which places the shares with those investors on behalf of the company). In a secondary fundraising, as the shares being sold to new investors are existing shares held by existing shareholders in the company, those shareholders (rather than the company) receive the proceeds of such sale (less fees, commissions and other expenses payable to the investment bank which places the shares with those investors on their behalf as well as, in the case of a company to be admitted to the Main Market, stamp duty that would otherwise be payable by the relevant new investors but which it is market practice for the selling shareholders to bear – there is no stamp duty payable in respect of transfers of shares in companies quoted on AIM). Offer for Sale or Subscription An offer for sale is an invitation to the public by or on behalf of a third party (for example, the investment bank which has already subscribed for the shares or existing shareholders seeking a return on their investment) to purchase existing shares in the issuer. An offer for sale therefore raises money for existing shareholders and is therefore a “secondary” fundraising. An offer for subscription is an invitation to the public by or on behalf of the issuer to subscribe for new shares in the company. An offer for subscription therefore raises money for the company and is therefore a “primary” fundraising. An IPO may have both an offer for sale and an offer for subscription and those offers may be underwritten, meaning that, to the extent that sufficient numbers of investors are not found by the investment bank to purchase or subscribe for the shares, then the investment bank and/or other institutions will purchase or subscribe for the shares for a fee. This provides the company issuing the shares and the existing shareholders selling their shares with certainty that the relevant funds will be raised but is more expensive than if the offering is not underwritten in this way. Note that there are several forms of “underwriting” (as described in the section of this brochure headed “Who are the key parties involved in an IPO?” where the role of the investment bank as an underwriter is discussed). Placing A placing usually involves the offer of shares (which, again, can be existing or new shares) to a select base of institutional investors (often fund managers or other institutional investors with whom the investment bank has relationships). This is a cheaper method of raising capital and potentially gives the company more discretion to select the investors it wants to have on its share register going forward. However, it can result in a narrower shareholder base at IPO than a public offering which will mean less liquidity in the company’s shares, at least at the outset. A placing is often used as the method for offering shares to institutional investors and an offer for subscription or sale is used for the retail element of any offering. Introduction An introduction is where a company floats on a particular market without raising any capital at all and is often the least expensive way of joining the public markets. Generally, a company can only use this method for a Main Market listing if over 25% of its shares are already in public hands and there is already a relatively wide and diverse shareholder base (the appropriate free float falls to be assessed by the company’s nominated adviser in relation to a company seeking admission to AIM and is 10% (with those shares having a value of £30 million) in relation to companies seeking admission to the High Growth Segment) (see the section of this brochure headed “Which market should you choose?” and, in particular, the sub-section headed “Comparison of Eligibility Criteria”). An introduction might be used in a situation where a company is already listed/quoted, demerges a division or business unit and offers the shares in it to its existing shareholders. Types of Offering Institutional Offering An institutional offering is an offering of shares to sophisticated, institutional investors in the UK and, possibly, overseas (subject to compliance with the relevant securities law requirements in those jurisdictions), and is usually effected by means of a private placing rather than an offer to the public. Institutional offerings are normally conducted on a “bookbuilt” basis where, following publication of a “pathfinder” prospectus or admission document (essentially a near final version of the document but without any dates, share capital numbers or references to the issue price of the company’s shares) and the delivery of a number of “roadshow” presentations by members of the company’s executive management team to various potential institutional investors, the investment bank acting as placing agent/ bookrunner assesses demand for the company’s shares (at a range of valuations and potential issue prices) and “builds a book” of demand based on indications of interest that it Fundraising as part of your IPO

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