Those just starting out learning about the stock market might have heard of the term “IPO”, but may not know what it means or what it stands for.
To know more, let’s understand the 5W1H (what, why, where, who, when, and how) of an IPO.
IPO is an acronym for “initial public offering”. As the term suggests, an initial public offering is a process whereby a private company is offering its shares to the public for the first time. The once-private company then becomes a public-listed company.
Why do companies go public, you may ask.
Companies would want to go public for various reasons.
The main reason is usually to raise funds from the public to fund its growth, both by reinvesting into its own business (organic growth) or by buying other companies (inorganic growth).
Other reasons to file for an IPO include regulatory reasons, to enhance a company’s brand image, achieve higher valuation than private firms, or for original investors to exit the business.
An example of a company listing for regulatory reason is that of NetLink NBN Trust (SGX: CJLU). The business trust went public in 2017 in what was the biggest IPO in Singapore since 2011.
Singapore Telecommunications Limited (SGX: Z74), or Singtel for short, fully owned NetLink before the IPO. However, Info-communication Media Development Authority (IMDA) required Singtel to divest at least 75% of NetLink by 22 April 2018 as part of structural separation requirements for the state-led Next Generation Nationwide Broadband Network (NG-NBN) project.
The next question on your mind might be, “Where do IPOs list”?
IPOs occur on a stock exchange. For example, the only stock market operator in our city-state is Singapore Exchange Limited (SGX: S68).
IPOs can “pop” on the opening day, with share prices rising by many times. For example, 2019 stock market debutant, TrickleStar Ltd (SGX: CYW), saw its shares close for the first day around 31% above its IPO price of S$0.26.
On the other hand, there are companies like Eagle Hospitality Trust (SGX: LIW) that do not perform up to expectations on their first day as a public entity. The stapled group, which was in the news recently, dropped around 6% on its debut day.
That is why IPOs contain so much hope, promise, optimism and at the same time, fear.
The Who And When
Who can IPO, and when can companies go public?
Any company can decide to go public when it has achieved a specific scale and wants to grow its business further.
However, there are specific listing requirements to follow for companies wanting to list on the Singapore Exchange (SGX). The requirements vary depending on whether the company intends to list on SGX’s Mainboard or its Catalist board. Listing on the Catalist board is less stringent, and it usually caters to growth companies under a sponsor-supervised scheme.
Lastly, how can a company go public?
To transition from a private company to a public company, there are specific processes to follow. These include pre-listing preparation, submission to the stock exchange and regulatory body, lodgement of prospectus, registration of prospectus, and finally, the launch and trading of the shares. There are companies out there to specifically help private firms list on stock exchanges.
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The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock. The writer may have a vested interest in the companies mentioned.