The listing of both large companies on regulated exchanges, such as the Nasdaq Main Market, and the listing of small and medium-sized companies on growth exchanges such as the Nasdaq First North Growth Market requires the company to be “stock market ready”. It is also referred to as the company “getting the ducs in a row” and involves clarification of a number of factors in the company both in accordance with the rules and legislations, as well as general prerequisites for a successful capital injection or IPO – conditions that Kapital Partner helps the company put in place. In this post, we review the most important and common factors that small and midcap companies typically face in connection with an IPO on Nasdaq First North Growth Market (Denmark or Sweden).
A complex corporate structure can easily act as a deterrent to investors, as e.g. cash flows and ownership can be difficult to oversee. Before an IPO, it may therefore be necessary to reorganize and simplify the legal corporate structure. This can be a complex and lengthy process that usually requires the assistance of auditors and lawyers. We therefore recommend that this process is initiated quickly if deemed necessary.
Before starting the stock exchange process, it is important that the relationship between the shareholders is clear, including the extent to which some of the shareholders will sell shares or acquire more shares. If there are shareholders who wish to dispose of their shares in whole or in part, it is our recommendation that these shares find new owners before the IPO, and preferably well in advance. This to establish a strong ownership foundation that can strengthen both the company’s IPO and later capital emissions.
In the event of an IPO, shareholders’ agreements will typically be terminated as they are incompatible with having shares listed on a stock exchange. As these agreements may have clauses that make an IPO difficult, it is crucial that the shareholders’ agreements are reviewed early in the IPO process so that the process of terminating them can be completed without adversely affecting the IPO.
Incentive structures are often good at attracting and retaining management and employees and are typically structured through a warrant program. Existing warrant programs are very often not tailored to a company that is or is to go public. The programs must therefore be reviewed and possibly fully or partially phased out before the IPO.
If the company, once listed, is expected to have a warrant program, the recommendation is that the program is established before the IPO, so that new investors know what the program entails and what negative impact it may have on their dilution. If the program is established only after the IPO, provisions must be made for the establishment of the program in the company’s articles of association before the IPO.
Review of existing program and establishment of new must always be done in close cooperation with the financial advisor and lawyer.
The articles of association of the company must be amended so that they meet the requirements of a listed company. In addition, various authorizations are often included for the company’s management to issue new shares, warrants, convertible debentures, etc. The articles of association are typically standard articles of association that are adapted to the individual company.
INTERNAL RULES AND MANAGEMETNT INSTRUCTIONS
An essential part of becoming a stock exchange ready company is a professionalization of the company’s organization and management. This means, among other things, clear rules and instructions for and to the executive management. In addition, legislation and stock exchange rules require that i.a. the company can meet the requirements for sending information to the stock markets and can handle internal information, and trading of its own shares. Therefore, a set of internal rules and instructions must be drawn up that specifically assists the company’s management to handle and comply with the rules andregulations.
The success of a company depends on its management and the composition of the right team. A successful IPO is also dependent on management – both in connection with the IPO itself and when the company is listed and must execute on the expectations promised to investors.
The Board of Directors is responsible for the Company’s prospectus and the members must therefore know the Company sufficiently to be able to assess whether the prospectus adequately describes the Company, its markets and earnings expectations, among other things. The Board of Directors must therefore be in well in advance of the IPO process.
The composition of the Board of Directors must cover the challenges facing the company. One of the challenges is, among other things, being a listed company, and it is therefore beneficial that the board members include one or more with experience from companies listed on an EU growth exchange or MTF (Multilateral Trading Facility).
The day-to-day management will be very involved in the IPO process itself. It is therefore essential that there are sufficient managerial resources to both handle both the IPO and run the company.
The reporting requirements for companies listed on a growth exchange are limited, but especially the speed of reporting requires that e.g. the finance function is upgraded, that the interaction with the company’s auditor is streamlined, and that internal reporting is systematized. A CFO (full- or part-time) is therefore a requirement.
The fact that the company achieves the objectives set at the IPO is typically based upon relatively few employees. The primary employees and functions must therefore not only be in place prior to the IPO but have proven that they can execute in order to ensure the company a successful existence as a listed company. If the capital from the IPO is to be used to hire key persons, it is therefore often better to raise capital before the IPO –through a pre-IPO investment – so that these key persons are fully integrated and can execute before the first trading day on the stock exchange.
In addition to being in control of the company and the organization, the company must meet the requirements for financial reporting and have ongoing insight into the company’s financial situation. The preparation of quarterly, half-yearly and full-year reports will be new for many companies, and the deadlines for this are stricter than under the Companies Act.
When a company goes public, accounts and budgets become much more of an object of interest to investors, and this also applies after the IPO process itself. Both the stock exchange and investors demand the company must be able to document its business both historically, in its current form and in relation to its future plans, making it crucial to be in control of both data and documentation. Therefore, it must be ensured that the company’s financial processes are adequate so that they can generate continuous, error-free, and robust accounting figures.
Accounting principles do not normally need to be changed, but some stock exchange lists, such as Nasdaq First North Premier, require the adoption of the IFRS accounting standard.
With more frequent reporting and shorter deadlines, it is crucial that there is a close collaboration with the company’s auditor, and that reporting is planned 12 months ahead.
BANKING AND DEMATERIALIZATION OF SHARES
In order for the shares to be admitted to trading on an exchange, it is a prerequisite that the shares are dematerialized (registered in electronic form). In Denmark, Euronext (VP Securities) handle this, but it will usually be a bank or other issuing agent that is responsible for the practicalities.
Dematerialization can generally be carried out quickly, but if there are many shareholders and/or some of these are resident abroad, it can be a slow process. In this case, it is good practice to start the process quickly.
The new shares must be issued through a bank/share-issuing institution, which does not have to be the company’s usual banking relationship, but may be an institution performing this task on a standalone basis.
As changing bank can be a slow process, the choice of share-issuing institution must be made early for this not to become a severe hurdle.
An IPO typically consists of two parts: 1) a capital injection/sale of shares and 2) admission of the company’s shares on a trading platform. Especially for small and medium-sized companies, the capital injection will usually not be the last, as there may also be a need for additional capital for growth or acquisitions in the future.
Clarification of the company’s overall future capital structure, including the expected size, timing and structure of the capital, is therefore essential and is a central part of the development of the investment case (see below).
The size of share sales – the so-called public offering – dictates which sets of rules the offer falls under. It is therefore important at the beginning of the process to estimate the expected share sale at the IPO as well as later.
THE INVESTMENT CASE
The investment case is the very basis for investors’ decision to invest in a company and must thus answer the questions: “Why should I invest in the company, and what is it that I should believe will happen with the company in the future?”. The most important elements of the investment case are usually the company’s solution/product/service, market position, business model, growth drivers, capital structure and future earnings.
Central parts of the investment case are therefore the company’s objectives and strategies for achieving them. However, companies often have insufficient focus on these factors. The most important part of the work for the financial advisor is thus typically to assist the company’s management with this work, including how objectives and strategies should be communicated. This is collectively called “shaping the investment case”.