There are many ways to raise money to fund a business. Many people would usually start off by using their own money or borrowing from friends, family or banks. When the business grows, they may probably get funding from angel investors, venture capitalists or government grants. For some companies, when their business has grown to a certain stage/size, it might be time for them to go to the public to raise more money.
What is an IPO?
A company that issues its shares to the public for the first time is known as an initial public offering (“IPO”). IPO occurs when a private limited company switch to a public listed company.
There are essentially 2 main categories of companies: private and public. A private limited company has fewer shareholders (minimum 2 individual shareholders, maximum 50) and its owners do not have to disclose that much information about the company. Forming a private limited company is relatively easy and straight-forward. Most small businesses start off as a private limited company. No one can buy the shares in a private limited company without the owners’ consent. On the other hand, a public listed company has thousands of shareholders and it is subject to strict rules and regulations, including an obligation to report its financial information to the regulator every quarter. Anyone can buy and sell the shares in a public listed company on the stock exchange in Malaysia.
When is the best time to list your company?
In determining when your company should go public, there are 2 benchmarks in which your company will be assessed.
Your company will need to meet these 2 benchmarks in order for you to ascertain whether your company is ready for a listing and whether it will be able to garner investors’ confidence to buy the shares in your company.
Your company will need to comply with the listing rules and regulations such as the Capital Markets and Services Act 2007, Securities Commission Malaysia’s Equity Guidelines and Bursa Malaysia’s Listing Requirements.
There are essentially 2 markets on the stock exchange in Malaysia, namely:
Main Market: This is for established companies with a profit track record of 3-5 full financial years or companies with a sizeable business; and
ACE Market: This is an alternative sponsor-driven market designed for companies with excellent growth potential. There is no need to show profit track record. Companies listed on the ACE Market may subsequently apply for a transfer to the Main Market provided they meet the profit track record requirement for the Main Market. Many technology companies and startups prefer to list on the ACE Market due to its less stringent requirements. Recently, Bursa Malaysia announced that loss-making or companies with low profitability could still be approved to list if they were an innovative company in IT or research and development, provided they have taken steps to improve their financial performance or have strategies to revive their business.
Generally, a company should have the following attributes to meet the regulatory benchmark:
- there is an identifiable core business that serves as the principal source of revenue or after-tax profits;
- the company’s core business and its industry are expected to have a visible growth trajectory within the foreseeable future;
- the company has a team of capable directors who are aware of their fiduciary duties and management personnel who are able to manage the day-to-day operations of the company professionally;
- there is no conflict of interest situation;
- there is a strong business prospect that is well-positioned to generate profits;
- the company’s financial position is in a healthy condition;
- the company demonstrates strong corporate governance policies and practices;
- there is a commitment to ensure continuous compliance with the relevant rules and regulations; and/or
- there are internal control and risk management systems in place.
There is no prescribed set of rules for market benchmark as it is purely driven by market expectations, which are the perceived value of your company based on the attributes of your company, which include:
- your company’s financial performance when compared to your competitors in the same or similar business or industry;
- the track record of promoters; directors and management personnel of your company;
- your company’s stage of development vis-à-vis the industry’s business cycle; and/or
- your company’s position in the industry vis-à-vis your competitors (market share).
Why go public?
These are some of the reasons why your company should go public and list itself on a stock exchange:
- raise additional capital to meet your company’s expansion plans and goals;
- enable your current shareholders to realise their investment;
- reward your loyal and committed employees and attract top talent via an employee share option scheme;
- enhance the credibility and prestige of your company as a public listed company due to the increased scrutiny and continuous reporting obligations;
- broaden the shareholder base and attract reputable institutional investors who may facilitate wider business networks and opportunities; and/or
get better rates when you issue debt.
However, there are also factors which you should consider before deciding whether your company should go public:
- IPO is a long and challenging process. You and your management team must be prepared to put in significant time, efforts and resources into making it happen as the preparatory work will take up to 1 year or more;
- you and your management team will need to make timely, relevant and accurate disclosure about your company’s financial results and significant corporate development;
- IPO is not cheap. There are fees payable to the Securities Commission, Bursa Malaysia and professional advisers and parties such as principal adviser, sponsor (for listing on the ACE Market), lawyers, reporting accountants, underwriters, book-runner, public relations firm, issuing house, valuers, independent market researches and tax advisers, etc.;
- you must be prepared to be transparent and take on greater accountability. Your company’s affairs and financial performance must be disclosed to the public and your company must conform to high standards of corporate governance;
- control by the existing shareholders will be diluted. Once your company is listed, at least 25% of the shares must be in public hands; and/or
- you will need to have a strong investor relations programme to engage in continuous communication with your investors as your listed company’s performance will also be affected by the perceived outlook on your company.
How to launch an IPO?
These are the 11 steps involved in listing your company:
Step 1: Appoint a principal adviser and other professionals such as lawyers, accountants, etc.
Step 2: Enhance your corporate structure, composition of your Board of Directors, corporate governance and internal controls framework.
Step 3: Appoint at least 2 independent directors or one-third of the members of your Board of Directors, whichever is higher.
Step 4: Decide on a suitable equity structure and value of your company.
Step 5: Prepare a listing application and Prospectus. The information must be true, accurate and not misleading.
Step 6: Submit listing application and Prospectus and attend to questions and enquiries from the Securities Commission and Bursa Malaysia.
Step 7: You will be issued a letter of approval and an approval-in-principle for the registration of the Prospectus.
Step 8: Register your Prospectus, print and distribute to the public. Sign an underwriting agreement with your underwriter whereby the underwriter will guarantee a certain price for a certain number of shares to the soon-to-be-listed company for a fee. With an underwriting agreement, you will be assured of raising at least a pre-determined minimum amount from the IPO exercise.
Step 9: Offer period begins by launching road shows, briefings and presentations to investors by your company’s directors and promoters.
Step 10: Once the offer period ends, balloting of the share applications will commence. Your company’s shares will be allotted to successful applicants.
Step 11: Congratulations! Your company’s IPO will be marked by a listing ceremony at Bursa Malaysia and trading of your company’s shares will commence on that day.