The IPO Endgame: What are the Considerations for Start-ups?

This article is originally written by Nexia TS.

Entrepreneurs have big dreams to grow their business to its fullest potential and reach a status of recognition. Other than a solid vision and much hard work, growth and business expansion require substantial capital. While entrepreneurs may rely on their own funds and even financial support of venture capitalists to begin with, the capital market presents vast funding opportunities to accelerate growth and achieve market leadership. Initial Public Offerings (IPOs) are generally seen as the effective means to capital, visibility and credibility. Moreover, IPO makes an attractive viable exit strategy for private investors and venture capitalists. Hence, “public listing” is often viewed as the ultimate endgame for many emerging companies.

Start-ups are attracted to a public listing for the numerous potential benefits, including easy access to capital markets to raise money through equity and bond offerings, gaining liquidity and daily valuation for shares, increased brand recognition and prestige, enhanced ability to attract and retain management and employees through stock options, and having a new M&A currency through shares.

Not withstanding the benefits, start-ups must also be fully aware of the potential drawbacks of going public. Companies can expect to incur high IPO flotation costs of at least S$1-S$2 million on professional fees and other listing related expenses during the IPO process. In addition, post-listing operational costs may increase by approximately 20% – 50% for new corporate headcount, directors’ remuneration, statutory obligations and financial reporting infrastructure to cater to the stringent continual listing obligations. Other drawbacks include holding lower stake in the company and gaining new investors with voting rights, the burden of dealing with shareholders’ expectations and corporate governance duties, and loss of privacy and limitations on management’s freedom to act.

Listing on the Singapore Exchange

The Singapore Exchange (SGX) offers the options of Mainboard and Catalist for aspiring companies. SGX Mainboard, with its high profit and market capitalisation criteria, tends to attract large established companies with longer operating history. Hence, it is perceived to be more prestigious and draws greater interest from institutional investors. On the other hand, Catalist caters to fast-growing enterprises due to the absence of profit requirement. Companies favour the Catalist platform for the shorter listing process due to its sponsor regime and less involvement by SGX in reviewing the listing documents. The continuous listing obligations are also less stringent for Catalist issuers in some areas, hence allowing for more ease and flexibility in executing corporate actions. However, the relaxed rules may be detrimental to investors’ protection and position Catalist issuers as weaker in governance.    

Below sets out a comparison between Mainboard and Catalist

Mainboard Catalist
Operating Record At least S$30 mil consolidated pre-tax earnings in the latest financial year; or
market cap of not less than S$150 mil,
both with at least 3 years of operating record
No minimum quantitative criteria required by SGX
Shareholder Spread25% public float for Market
Cap < S$300m
At least 500 public shareholders
15% public float

At least 200 public shareholders
Listing DocumentsReviewed by SGX and MAS
Prospectus lodged on MAS OPERA
Reviewed by Sponsor and SGX
Additional 12-month working capital statement is required.
Offer Document lodged on SGX Catalodge website
Independent Directors (ID)2 Singapore resident IDs for foreign companies2 IDs (Min.1 Singapore resident ID for foreign companies)
MoratoriumAfter IPO, promoters will be locked up for 6 months and may only sell up to 50% of their shareholdings thereafter for the next 6 months. At IPO, promoters with more than 50% of the post-invitation share capital may sell up to 50%.
After IPO, promoters cannot sell any shareholdings for 6 months but may sell up to 50% of their shareholdings thereafter for the next 6 months.
Listing MaintenanceMainboard issuers will be placed on the Watch-list, under either of the following:—
(1) Financial Entry Criteria
Records pre-tax losses for the 3 most recently completed consecutive financial years (based on audited full year consolidated accounts); and an average daily market capitalisation of less than S$40 mil over the last 6 months.
(2) Minimum Trading Price (“MTP”) Entry Criteria
Records a volume-weighted average price of less than S$0.20 and an average daily market capitalisation of less than S$40 mil over the last 6 months.
Watch-list companies have 36 months to comply with above criteria or else be delisted.
Not subject to watch-list requirements. Catalist companies who are unable to retain sponsors will be delisted.
Issuance of SharesMainboard companies can issue pro-rata shares up to 50% under annual general mandate. For non pro-rata issue of shares, the limit for Mainboard issuer is 20%.Catalist companies can issue pro-rata shares of up to 100% under annual general mandate. For non pro-rata issue of shares, Catalist may seek for general mandate passed by Special Resolution to increase limit from 50% to 100%.
Share Option Scheme and Share SchemeThe total amount of shares issued for all schemes must not exceed 15% of all existing issued shares. For each scheme, there are also specific limits on each class or category of participants.No specific limits for each scheme.
Major TransactionsMore stringent as shareholder approval is required at 20% threshold for both Acquisitions and Disposals.Less stringent as shareholder approval is required for Acquisitions at 75% threshold and Disposals at 50% threshold, or for fundamental change in business.
Very Substantial Acquisitions/Reverse TakeoversAny business that Mainboard issuers acquire must be profitable.No profitability requirement for Catalist issuers.
SGX Listing feesHigher initial listing fee of min. S$100,000 and annual listing fee of min. S$35,000Lower initial listing of min. S$30,000 and annual listing fee of min. S$15,000
Annual sponsor retainer fees apply.

Estimated IPO Timeline

Note: Preparation of listing documents may require 3 to 6 months and vary subject to restructuring, audit and other due diligence work carried out.

The entire IPO preparation and execution requires at least 6 to 12 months, with much time, money and resource committed into the process.  Therefore, how can start-ups prepare for the IPO journey to work towards a successful listing?

Demonstrate a sustainable business model with reasonable revenue

First and foremost, start-ups must demonstrate sustainable business models and have attained reasonable revenue track record. Investors are interested in IPO companies that have performed well with a solid track record, supported by historical financials, and have an actionable plan that can sustain growth and justify the use of IPO funds. These form the backbone of a strong equity story. In addition, start-ups should work towards outperforming their competitors on both financial and non-financial indicators. This will distinguish them apart from peers and maximize their valuation.

Evaluate various possible capital raising or strategic options.

Living under the public’s scrutiny may not suit every company. The start-up needs to consider the direction of its existing business, and its future business plan post the IPO before planning for an Initial Public Offering. Business owners shouldconsider other alternatives such as sale to strategic buyer or financial investor and other financing transactions which may replace the IPO route. Start-ups may also undertake pre-IPO transactions such as strategic acquisitions and joint ventures, in tandem with IPO planning, to accelerate the development of the business and increase valuation of the company for the IPO transaction.   Having successfully completed pre-IPO acquisitions would add credibility to any post-IPO acquisition driven growth story.

Conduct an IPO Readiness Assessment.

Start-ups should approach the IPO as a transformational process rather than just a financing event.  It is advisable to conduct an IPO readiness assessment to evaluate and fine-tune the financial reporting structure, internal controls, risk management and business structure. The IPO readiness process allows the pre-listed company to make corporate improvements and function like a public company even prior to the IPO.

Perform a diagnosis on the financial accounts. 

The financial accounts ofstart-ups may have been unaudited in the past. As part of the IPO readiness assessment, start-ups should engage professional advisers to perform a health check to flag out any accounting irregularities and financial non-compliance so that rectifications can be made early and the financial accounts can be correctly presented as the company proceeds into the IPO transaction.     

Implement the appropriate financial reporting structure and systems.

Due to their relative small scale of operation, start-ups often outsource their accounting function and tend to be weak in accounting or finance related systems and documentation. Hence, it is crucial to recruit competent finance personnel and improve or implement adequate accounting policies and procedures to deal with the expanded financial disclosures e.g. segment reporting, frequency of reporting for a public company and a whole host of compliance obligations post listing. 

Enhance internal control practices and implement corporate governance framework.

Proper internal controls and corporate governance are almost non-existent inmoststart-ups since they typically operate with smaller headcount and resources are better channelled towards business development rather than compliance matters. The mentality will have to change with a potential IPO in contemplation. Both investors and SGX hold companies to a high standard of corporate governance and internal controls. Public companies are expected to adopt corporate governance principles and policies that protect shareholders’ interests. This include recruiting qualified independent directors and form various committees such as the audit committee to provide the financial oversight of the business and transparency in the reporting of related party transactions.  

Assemble a right team of professional advisors to guide you on the IPO transaction.

It is vital to have an experienced team of professionals comprising, bankers, lawyers, accountants, and investor relation advisors to help navigate through the listing requirements, conduct proper due diligence, comply with prospectus disclosures and advise on financial, tax and corporate restructuring etc. Good professional advisors will serve business owners and hand-hold them through the challenges of an IPO process.  A quality external team, coupled with a strong competent management team will successfully lead the company through the rigor of the IPO process.

Conclusion

Planning an IPO is not an overnight task and requires a thorough consideration of the company’s motivations and evaluation of the pros and cons before embarking on the IPO route.  Once the start-up is prepared to go public, launching an IPO will require meticulous planning and execution, the right window opportunity and the right pricing to ensure that the IPO is a success.

Nexia TS serves more than 10% of the public listed companies on the SGX and has assisted in more than 30 successful public listing engagements to-date through its capabilities as Reporting Auditors, Pre-IPO consultants and Pre-IPO Internal Controls advisors.  For more information and guidance on IPO planning and execution, please get in touch with our IPO specialists:

Ms Grace Lui
Director – Valuation & Transaction Services
Ms Chan Siew Ting
Director – Assurance & Capital Markets Transaction
DID: +65 6597 7297
Email: gracelui@nexiats.com.sg
DID: +65 6597 7290
Email: chansiewting@nexiats.com.sg

About Nexia TS

Nexia TS was founded in 1993 by two experienced chartered accountants – Henry Tan and Sitoh Yih Pin. After working as managers for one of the international accounting firms, they saw a vision and an opportunity to establish their own organisation – not any accounting firm – but one which is unique in their personalised and well-qualified expertise.

To date, Nexia TS is recognised as an established mid-tier local accounting firm. We have grown significantly in size over the years. Being an independent member firm of Nexia International, we are affiliated to accounting firms in many parts of the world. This means that our clients will get to enjoy personalised, comprehensive and quality services at competitive rates in Singapore and globally. Our reputation for quality has been recognised by clients and accounting professionals. As testimony to this, we are among the first few local accounting firms to be accredited by the Institute of Chartered Accountants in Australia to provide supervision of professionals undergoing traineeship to qualify as Chartered Accountants.

Headquartered in Singapore, Nexia TS has established a strong presence in various countries across the region. Nexia China is a one-stop centre providing advisory services for foreign-invested enterprises in China. NTS Malaysia and NTS Myanmar provide a full suite of corporate advisory services for our clientele with operations and new foreign investments in the respective countries.

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