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IPO – Going public on the stock exchange

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Obtaining financing via the capital market by means of the so-called IPO ("Initial Public Offering") has become very popular among investors and companies in recent years. In Germany, the focus is mainly on Frankfurt. The reasons for going public are manifold and include, in particular, raising additional equity capital for the future, approaching a national or international group of investors, achieving high free float, and increasing company awareness. 

Many steps need to be taken before the first placement of the shares on the stock exchange. In the following, we discuss the challenges awaiting first-time issuers and outline the essential steps of the flotation process.

Requirements and obligations

Implementing the right structure involving a listed (German) stock corporation or a European Company (SE) and meeting all other IPO readiness requirements usually takes at least 12 months. The company must first meet various legal requirements, board members and key employees must undergo appropriate training. Also the right stock exchange must be found. The admission requirements for an IPO depend on the so-called stock exchange segment – i.e. the sub-market of the stock exchange – in which trading is to take place.

Therefore, differences between the segments should be considered. While in the open market (OTC) the general terms and conditions of the respective stock exchange as well as the regulation for inside information and public disclosure of inside information must be taken into account, in the so-called regulated market all capital market regulations apply in full, in particular the Stock Exchange Act, the Securities Trading Act, the Securities Acquisition and Takeover Act as well as the German Corporate Governance Code as the so-called "soft law".

In the regulated market, there are two segments, the General Standard and the Prime Standard. In the General Standard segment, the statutory minimum requirements apply, i.e. issuers must publish an interim report, make ad hoc announcements and apply the International Financial Reporting Standards. In addition to the requirements of the General Standard, the so-called Prime Standard contains further follow-up requirements that are of particular relevance for international investors, because strict international transparency requirements apply in this case. These include publishing quarterly reports and ad hoc announcements in English, keeping a corporate calendar and holding at least one analysts' conference per year. 

When deciding between the OTC market and the regulated market, it is essential to bear in mind that institutional investors such as insurance companies, pension funds, etc. only want to or are only allowed to invest in issuers listed on the regulated market. Both in the OTC market and in the regulated market, the regulations of the Market Abuse Regulation (MAR) must be followed with regard to insider dealing, public disclosure of inside information, the so-called director's dealings and market manipulation. On closer look, it should therefore be considered whether it would not be better to seek a direct path to the regulated market, as the reliefs offered by the law for the OTC market issuers are still scant. 

The IPO Process

Companies looking to debut on the stock exchange will generally need the support of their underwriting bank or a banking syndicate. It must be checked in which kind of placement of the issuer's shares and in which stock exchange segment the bank has expertise. Depending on the size, scope and placement of the new shares (national/international), the ideal bank should be selected in a so-called "beauty contest". What is important for the underwriting banks, among other things, is the pursued trading volume and the pursued further growth to be achieved by means of possible future corporate actions. The following important steps should be taken in preparation for the IPO:

  • Preparation of a comprehensive securities prospectus
  • Preparation of other contractual documentation
  • Approval of the securities prospectus by the Federal Financial Supervisory Authori-ty (BaFin)
  • Official announcement of the intention to float
  • Pre-marketing with institutional investors in Germany/abroad.

From the moment the prospectus is approved, the so-called placement phase ("going public") starts, which includes the following steps:

  • Marketing campaign
  • Marketing including a "roadshow" for institutional investors in Germany/abroad
  • Often the so-called book-building process
  • Determination of the issue price
  • Approval by the admission board of the stock exchange 
  • Underwriting agreement
  • First listing on the quotation board.
Finally, during the listing phase ("being public"), if needed, the underwriting banks may stabilize the share price, contact with investors must be maintained ("investor relations") and follow-up requirements must be fulfilled. These requirements include ensuring compliance with the regulations arising from MAR, IFRS reporting (depending on the segment), and specific regulations under stock corporation law, such as presenting a system for remunerating the management board, disclosing related party transactions, and ensuring compliance with the reporting thresholds under the Securities Trading Act.

Conclusion

The capital market offers many opportunities for companies, especially to raise additional equity to finance further growth. It should always be borne in mind that an IPO involves special challenges that require strategic far-sighted planning. It is advisable to check already at an early stage which goals the IPO should fulfil, which stock exchange is the right one and which preparatory measures should be taken.

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