Going Public | What it Means and How Companies Get Listed
July 17, 2019
2019 is proving to be another exciting year for the markets. Along with the cycles of ups and downs, there has been a lot of activity happening in the world of IPOs (initial public offerings) and companies “going public”. With a number of high profile companies already “going public” this year and more to come, we wanted to take an opportunity to discuss what this really means and the avenues that companies have to get there.
What does “going public” really means:
Going public is the process of selling shares that were formerly privately held to new investors for the first time. When a company takes their business public they are becoming a publicly traded and owned entity. Often, businesses go public to raise capital in hopes of expanding but it is not the only reason.
While IPO and “going public” are often used synonymously, a standard IPO is not the only route businesses can take to take their business public. Here are a few different ways that companies can ‘go public’ and some recent market examples:
IPO (Initial Public Offering):
An initial public offering is one of the most common ways that companies will take themselves public. In the last 20 years, the number of companies going public via an IPO (initial public offering) has ranged from a low of 35 in 2008 to a high of 486 in 1999.
The process of an IPO requires the engagement of an investment bank who acts as underwriters and divvy out the shares. The company would convert existing shares and offer new shares that would be available to the public to generate cash. IPOs are, therefore, used to raise new capital.
A recent IPO that got lots of attention was Beyond Meat (NASDAQ:BYND). This IPO was highly anticipated both due to product and industry but also due to market excitement. In fact, the company raised its initial offering, increasing the capital it would raise, shortly before the IPO. Beyond Meat continues to drive excitement in the market as it trades over 500% above the initial offering price.
DPO (Direct Public Offering):
A DPO enables a company to sell stock directly to investors, without using an underwriter, usually a large investment bank, as an intermediary which can provide significant cost savings versus an IPO. Companies that choose to go with a DPO can also be exempted many of the registration and reporting requirements of the Securities and Exchange Commission (SEC). There are a number of different types of DPOs that may match a companies needs. One risk for going DPO vs. IPO is that rather than the stock pricing being set ahead of launch by the underwriters who have already driven interest (made a market) for the stock at the determined listing price, the initial offer price is decided by the market on the day the shares become available. This is done simply by the exchange taking all the buy and sell orders to come to an opening price for the shares. If there isn't enough interest in the stock than the price could plummet and the capital raised could be significantly less than expected.
One of the recent examples is Slack (NYSE:WORK), who went public June 20th, 2019, through a DPO. Slack limited its risk by working with a few investment banks as advisers while preparing for their DPO but ultimately saved a substantial amount of money with no underwriters. One of the reasons that Slack chose a DPO was that the main goal was of the listing was not to raise significant capital, but instead to enable their investors to trade the stock and enable the markets to effectively price it. They also hoped to avoid some issues that companies have with their IPOs in that the first-day stock price often jumps and can be followed by large swings. Afteritst last funding round in August 2018, Slack was valued at $7.1 billing, and by the end of its first day on the market, it was valued at $19.5 billing, opening well above its initial reference price for trading.
RTO (Reverse Take Over):
This is another common path for companies to take to become publicly traded. The best known version of a Reverse Merger is when a private company merges with publicly traded company. The target public company still trades but may not have much happening in terms of business, so it is sold to a new company, often with a large “reverse” in issued shares. While with a reverse take over, no new capital is raised companies can leverage the upcoming merger or combination transaction to offer new shares and raise new capital.
Voleo (TSXV: TRAD) recently went public through a RTO with Logan Resources Ltd. (TSXV:LGR). Through this transaction, Voleo was not only made public but also was able to raise capital to further its business objectives of developing and commercializing its mobile-first, web enabled, equity and cryptocurrency trading platforms.
While companies may ‘go public’ for different reasons, and can take one of a number of paths to get there, simply the addition of new companies to the market can add incremental opportunity for your investments. Staying up to date on those in the pipeline and understanding the basic mechanics of some of the options can play a key role in your investment strategy and offer a great topic of discussion between you and your investment club team member
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Disclaimer: If specific securities are mentioned they are for illustrative purposes only and such mention shall not be seen as a recommendation to buy and/or sell. None of the opinions expressed by Voleo or participating guests should be construed as investment advice. Securities offered through Voleo USA, Inc. Member of the Financial Industry Regulatory Authority (FINRA), Securities Investor Protection Corporation (SIPC). Security products are not FDIC insured, not bank guaranteed, and will fluctuate in value. We do not solicit, recommend, or offer investment advice. Voleo USA, Inc. is a wholly owned subsidiary of Voleo, Inc.