INITIAL PUBLIC OFFERING

An Initial Public Offering, also known as an IPO, is the process that a private corporation takes to become a public corporation by listing its shares on a stock exchange. The simple difference between a private corporation and public corporation is the number of shareholders allowed by law, and the ease with which one can buy and sell the shares. Public corporations are valued on a daily basis based on the trading of stock, while the valuation of private corporations is more opaque. Public corporations are also subject to more stringent financial disclosure rules, such as publishing financial statements quarterly, as well as issuing formal press releases of any material change to the business. Private corporations are only required to file financial statements annually, and there is no requirement to disclose these documents to the public.

Why an Initial Public Offering for Companies?

To Raise Capital

One of the main reasons a corporation would choose to list its shares on an exchange and face the higher level of financial disclosure and scrutiny is that the availability of capital is greater for public corporations. Due to the restriction on the number of shareholders a private corporation can have, after a certain threshold raising enough capital for expansion or acquisition plans becomes difficult. A large corporation may require tens of millions of dollars in capital to finance an expansion and this amount of capital may be too large for a small number of shareholders.

Owner Succession

Another common reason for a company to pursue an initial public offering is for succession plans. Many family or private corporations do not have a clear succession plan and the founding shareholder may want to sell all or a portion of his/her ownership stake to diversify his/her portfolio, or simply cash out.

Government De-Regulation

Government-owned corporations may become public corporations when governments go through a privatization program. Since the 1980’s there has been a trend of governments reducing their involvement in owning businesses. For example, the Canadian government privatized Air Canada by selling their stake to the public through an Initial Public Offering. Canada is not the only nation that has pursued this route. In 2016, Saudi Arabia announced it would list 5-20% of the state-owned oil company, Saudi Aramco, by listing the shares on stock markets in NY, London and Riyadh. Privatization has tended to take place in the airline, utilities, resource and banking industries, but major privatization programs like the one undertaken by Russia after the fall of communism was not restricted to these common sectors and included automakers and government-owned retail operations. The theory behind privatization is the reduction of corruption, providing governments with capital for other operations, and giving citizens a stake in the economy, among others.

Why an Initial Public Offering for Investors?

Investors and stock brokers often consider looking at an Initial public offering as a way to get a bit of a jump on the market before the stock rises in value. Sometimes this can be a great buying strategy as often, companies can become more successful after they’ve gone public, increasing their stock prices later on. Other times, however, the excitement of an already successful private company going public can inflate prices at the time of initial public offering, and in some cases it’s better to hold off until the IPO excitement has diminished.

IPOs in Different Jurisdictions

Each jurisdiction will have slightly different regulations governing the minimum requirements to satisfy an IPO. The specific regulations is beyond the purpose of this article. A company undergoing an initial public offering In Canada and the United States must issue a Prospectus, which is a document that details the risks of the investment, risks of the company, financial statements, information on the officers and directors, previous share sales as well as stock option information, and other material information. An investor should read through a prospectus before deciding on allocating capital towards an IPO. Some specific reasons different jurisdictions may be chosen are liquidity and speciality of the exchange.

The Initial Public Offering in Canada

The Canadian stock markets, the Toronto Stock Exchange and the TSX Venture Exchange are resource heavy indexes. A very large percentage of mining and oil and gas firms list in Canada. The TSX Venture Exchange hosts most of the world’s mineral exploration companies.

Liquidity

Certain stock exchanges are more liquid than others, more trades per day and higher number of market participants. Exchanges such as the NYSE, London and Hong Kong Exchange trade higher volumes than other regional exchanges. Large multinational firms who want international investor ownership would likely target the largest of the regional exchanges (NYSE, London and Hong Kong for example).

Home Bias

Most companies list on their home turf and possibly a large international exchange. Most companies are best known in their home market and by listing on that exchange the investors most likely to invest have an opportunity to do so.

Exchange Specialization

Certain exchanges are known for hosting the listing of certain sectors. The Toronto or Australian Stock Exchanges are well known for being the home to resource corporations and the NASDAQ, for technology companies. A company may choose its exchange based on the other companies listed on that exchange.