Entrepreneurs build companies to see their companies grow and prosper. Once commercially de-risked, with revenue traction and profitability, further funding may be required to take growth to the next level prompting some embark on listing exercises.
There are several methods where a business can begin its journey towards listing. The traditional way to go public is through an Initial Public Offering (IPO), where a company collaborates with an investment bank to underwrite and prepare an IPO prospectus. This document, after thorough due diligence, is submitted to the securities regulator and stock exchange for approval.
In most jurisdictions, the prospectus is a “liability document” to ensure proper disclosure rather than promote the company as a “sales document”. It is almost always “backward looking” in that information is historic, and forward-looking statements are not allowed. Once approved, investors can subscribe to the shares, which are then traded on the listing date. The IPO process, involving multiple stakeholders, typically takes six to 12 months with non-approval risks even if listing criteria are met.
Another option in going public for a privately held company is through a Reverse Takeover (RTO) or a “backdoor listing.” In this process, the private company arranges with an investment bank to be “acquired” by an existing listed company, often one in a declining industry or a distressed state. The private company then injects itself into the listed company in exchange for shares, making its shareholders the largest or controlling block post-RTO. This allows the private company to utilise the listed company’s status to achieve a public listing.
Due diligence is crucial in an RTO to uncover hidden liabilities or litigation in the listed company. Some stock exchanges require industry similarity between the companies or impose time restrictions on ownership changes. While RTOs can be less costly and faster than IPOs, they may face regulatory challenges and risk non-approval by securities regulators.
Special Purpose Acquisition Company (“SPAC”) – An Alternative RTO
The SPAC concept was invented in the U.S. in 1993 and is today allowed in some major stock exchanges such as the New York Stock Exchange (“NYSE”), the NASDAQ Stock Exchange, the London Stock Exchange (“LSE”), the Hong Kong Exchanges (“HKEx”), Bursa Malaysia, the Singapore Stock Exchange (“SGX”), the Korea Stock Exchange (“KSE”) and more.
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