PUBLIC LISTING

By floating or listing your company on a stock market through an initial public offering (IPO) you are selling some of the company’s shares to the public, either directly as individual shareholders, or indirectly where your shares are bought by pension schemes and other institutional investors.

There are many reasons why you might want to float your business which can include:

• finding capital to fund growth at a greater level than family and friends can afford to invest, or you can attract through a business angel or VC funding;
• enabling a founder or investor in the business such as a VC house to exit by selling their shares to the public;
• enabling you to use your shares as currency with which to buy other businesses;
• providing incentives for your staff by using shares or options; or
• improving your standing with customers and in the market, where being perceived as a listed business can give you an advantage over your competitors.

In the UK, the idea of listing is usually associated with the main market of the London Stock Exchange where the country’s main publicly known businesses are traded and is thus very much associated with big business. However, listing can also be of relevance to small and medium-sized businesses as a real alternative to raising venture capital.

There are actually three stock markets in operation in the UK today, which in ascending order of size are listed below.

Ofex

Ofex is an independent exchange operated by PLUS Markets that has been running since 1995 and which is fully regulated by the FSA.

This is a service where shares can be sold mainly to private investors and it offers a route for small companies that need to raise in the order of £lm to £10m. At the time of writing Ofex has just under 150 companies listed. For some advisers Ofex can be seen as one of the answers to the equity gap, particularly as the cost of listing on Ofex, which has a low regulatory burden, are significantly lower than those of AIM as discussed below.

Ofex, however, has a number of disadvantages which mean that many advisers are still sceptical. It has a relatively limited number of investors and those investors have only a relatively limited ability to trade their shares, which means that institutional investors are rare. These factors have therefore limited both the cash available through this market and the price obtained on flotations.

As a result, businesses which grow on Ofex will often trade up to list on AIM in order to access a wider variety of investors. Some advisers then see this as a double whammy as the businesses will incur the cost of listing on AIM as well as Ofex, when they could in theory have listed on AIM in the first instance.

There are suggestions at the moment that Ofex will be introducing services which will allow for greater trading in shares and which may therefore help to address this problem in future.

Alternative Investment Market (AIM)

AIM is part of the London Stock Exchange (LSE) and has also been running since 1995 since when about 1,200 companies have been listed.

As with Ofex, the AIM market is designed for small companies, including start-ups where no trading record is required, and as a result almost 30% of the listed businesses have a market value of less than £5m.

With stricter requirements, including the production of a full prospectus, the professional costs of listing on AIM are higher than those for Ofex, being estimated by Corporate Financier magazine in the order of £300,000 to achieve a £5m listing on AIM (as against £100,000 to £150,000 on Ofex). To be listed you will also need to have a nominated adviser (Nomad) at all times, who essentially will be responsible to the exchange for your conduct of the notation.

The advantages of AIM over Ofex are, however, that it is a higher profile exchange, being part of the LSE (although as a market designed for small businesses its regulation is much lighter than the main market), and there is a wider range of shareholders who have a greater ability to trade their investments. As a result there is a much greater participation by investment institutions and therefore more cash in the market.

It is also a market that attracts private investors because of the tax breaks available. Investments in companies with less than £15m gross assets that are not property investment or financial services companies can give investors under the Enterprise Investment Scheme 20% income tax relief and 40% capital gains tax rollover relief, while qualifying AIM shares that are held for over two years are free of inheritance tax.

In addition to floating a company on AIM in the normal way, many businesses have become listed on AIM by reversing into cash shells. These cash shells are companies which have raised cash and obtained a listing, but have no actual trading business. By allowing your business to be purchased by one of these shells you can have immediate access to not only the cash but their listing. Since a large number of these shells had become registered on AIM but were not conducting any transactions, the stock exchange has recently completed an exercise requiring all those shells which held less than £3m to have either completed an acquisition or started the process of delisting.

If you do list on AIM you will find that there are some restrictions. For example if your business has been trading for less than two years, you will have to keep your shares for at least a year after the flotation.

The London Stock Exchange main market (LSE)

Being listed on the LSE is known as having a full listing. This is usually only available to larger companies with a strong trading track record. If you are considering this step you will undoubtedly need to discuss all aspects of it with a firm of professional advisers.

Flotation issues

Whichever market you choose, flotation will be a complex and expensive process which will have huge implications for the way in which you manage your business before, during, and after the event, which is beyond the scope of this book. However, the LSE produces a very useful guide called The Practical Guide to Listing, which covers:

• all the issues surrounding the decision to float;
• its implications for how you manage your business in terms of corporate governance;
• the process of listing; and
• your ongoing obligations thereafter to your investors.

While it is clearly directed at companies looking to float on the main market is also quite applicable to companies listed on the other two exchanges, so if you are seriously considering whether a flotation is for you, you should download a copy from the LSE’s website at www.londonstockexchange.com.