“If I had another life, I would keep my company private,” said Jack Ma, speaking before the Economic Club of New York in 2015.
A year before, Ma’s company, Alibaba, raised $25 billion from the New York Stock Exchange. It was the world’s largest IPO.
But, as Ma explains, running a company after an IPO comes with its own unique challenges: “Life was tough before the IPO. After IPO, much worse.”
In this guide, I’ll break down what IPOs are and why companies choose them.
I’ll cover the following:
What is an IPO?
Why have an IPO?
What are the costs of an IPO?
What are law firm IPOs?
Imagine you own a private company in the UK. It’s not a small company, but it’s not as large as you want it to be.
You want to open international offices, but you don’t have enough capital to finance an expansion. You’ve tried to approach banks, but they’re unwilling to lend you large sums of money.
Instead, you decide to raise equity finance.
But who do you raise equity finance from?
You could ask:
Unfortunately, these sources of investment aren’t enough. Your cash needs are larger, and these investors won’t be able to fund your international expansion.
Instead, you offer shares in your company to the general public for the first time. This is an initial public offering or “IPO”. It’s also known as “going public” or a “flotation”.
Now, you are lucky. IPOs aren’t feasible for most companies. In fact, few companies ever reach the size and scale to successfully float. But your company is large enough to attract investment and capable of complying with all the regulations that come with an IPO.
Most companies are like yours – they’re privately owned. Private companies are easier to set up and subject to fewer regulations than public companies.
So, why would you ever want to become a public company?
Well, public companies – unlike private companies – are allowed to offer their shares to the public. And, importantly for an IPO, public companies can have their shares officially listed and traded on a stock exchange.
So, as you want to raise money through an IPO, you will have to re-register as a public company.
To offer your shares to the public, your shares need to be listed on a stock exchange — a market place where shares, among other things, can be bought and sold.
If you have any existing investors, your listing will allow them to sell the shares they own in your company, which is useful if they want to exit or reduce their investment.
But first, you need to choose the stock exchange you want to list on. Let’s look at some options.
The largest stock exchanges in the world by market capitalisation are:
Sometimes, companies will list on the stock exchange in a foreign market. For example, in 2017, nine of the ten largest IPOs on the London Stock Exchange by size came from outside the UK.
But, let’s suppose you decide to list on your domestic market.
As your company wants to list on the London Stock Exchange, you have to choose from two markets to list on, the Main Market or AIM.
AIM is more suitable for smaller, growing companies that are not yet ready for the Main Market. It’s lightly regulated, largely because AIM-listed companies are not subject to the more onerous EU securities law of the Main Market. Companies can also access capital more cheaply and quickly on AIM.
But, as you have a larger, more-developed company, you will be better off listing your company on the Main Market. This is a bigger market, and you will be able to raise more money from a wider pool of investors. You will also benefit from the reputational value of listing on the Main Market as your company has to adhere to higher regulatory standards.
The primary reason companies go public is to raise capital. By accessing the public markets, your company can raise more money from a far wider pool of investors than a private investment. You can then use this money to fund your growth and international expansion plans.
There are also other benefits from an IPO:
When your company goes public, you will face the burden and cost of complying with stringent rules derived from EU laws. These laws are in place in order to protect public investors who may buy shares in your listed company. These shareholders may be passive investors who aren’t involved in the day-to-day management of a company or unsophisticated investors who know little about investing. Either way, you will have to determine whether you want to be accountable to these investors.
You also need to prepare for the impact of an IPO on the running of your company. Your company will go from listening to a small number of private investors to being accountable to thousands of shareholders. These shareholders could have a substantial influence on the company if they buy enough shares or act together, such as voting to appoint or dismiss directors or voting to approve or dismiss a particular transaction.
Usually, companies will enter into an underwriting agreement with the investment bank. This may involve a firm commitment, where the underwriter agrees to buy your issued shares and re-sell it to the public. If this is the case, the underwriter guarantees that your shares in an IPO will be sold and holds on to any unsold shares. On the other hand, you may only agree a best efforts underwriting, where the investment bank agrees to do their best to sell your shares to the public.
Underwriting fees are usually the largest direct cost of an IPO. The London Stock Exchange estimates this is an average of 3-4% of the total IPO proceeds for European exchanges and 6.5-7% for US transactions.
A company will also appoint other external advisers:
Regulations apply when you want to list on a stock exchange. For example, you must produce a prospectus – which is, in effect, a marketing document for investors – that complies with all the legal requirements.
There are also obligations that continue to apply once your company is listed. For example, listed companies must publish regular financial reports, disclose how they apply the Corporate Governance Code, and must ensure at least 25% of its shares are in the public hands at all times.
Two months before Snap went public, a former employee filed a lawsuit alleging Snap had inflated its user metrics to mislead investors.
Going public opens up a company to liability risks. A shareholder may accuse information in a prospectus to be misleading. A director may trade on inside information. Appropriate information about a company may not be disclosed.
The company is also open to scrutiny. Listed companies must disclose information about their business, such as their remuneration policies and their financial information to the public. This transparency means competitors, customers and suppliers have access to valuable information about the company. If a company suffers from a poor financial quarter, it won’t be long before its share price plummets.
It all started with the Legal Services Act 2007. For the first time, law firms could convert to an alternative business structure, and accept investment from non-lawyers. The act had made law firm IPOs a possibility.
Then in 2015, Gateley, a mid-market law firm, kicked things off when it became the first UK law firm to float. At the time, some spectators believed Gateley’s listing was about to start a flood of law firm IPOs. But, it took two years for the next one. In 2017, Gordon Dadds and ‘virtual law firm’ Keystone Law also listed on the UK’s junior stock exchange, raising £20m and £15m respectively.
2018 was the first sign that this might be changing, which is why law firm IPOs may have been on your radar recently. Rosenblatt Solicitors raised around £43m in May, closely followed by Knights who raised £50m in June, in the largest-ever legal float.
Towards the end of June, DWF announced it was entertaining the prospect of an IPO, and rumours suggested Fieldfisher was also exploring a float. This was an interesting proposition. Both firms are bigger, and far more international than the rest. If they listed, it would be a radical change in the legal market.
Now, why would a law firm want to IPO?
Much for the same reasons a company would. An IPO means a law firm can raise a substantial sum of money, without having to rely on debt finance or partners’ capital. The money can then be used in a variety of ways. Keystone Law used some of the proceeds to pay off its debt. Knights said it plans to acquire three companies over the next two years. Rosenblatt said the IPO would allow the firm to better align employee remuneration with firm performance.
There are also benefits to being a listed company. The disclosure rules for public companies mean that clients and lawyers can see how well a law firm is doing, which can enhance its reputation in the market. This level of information is generally kept under wraps by law firms.
But, as we know, IPOs are expensive. Law firms must restructure their partnership model, hire advisers and comply with onerous regulations. It also paves the way for shareholders to scrutinise and influence how a law firm is run, which could – at least in theory – run into conflict with the partnership way of running a law firm.
Despite all this, it remains to be seen whether the top end of the legal market will consider an IPO. Many law firms are reluctant to move away from the partnership structure. Other firms don’t need an IPO to grow their business, especially when the costs are so high.