Guide to IPO

Companies should be aware of the following key issues often encountered when undertaking the process of capital raising and listing on a stock exchange.

Restructuring prior to listing

The business and corporate structure of a company’s operating group is an important issue to consider at the onset.

In some industries and/or jurisdictions, investors may favor companies that are narrowly focused on a core profit generating service or product over those that offer a wide range of services or products. Investor preferences such as these—which may shift over time—can factor into a company’s structuring decisions early on in the listing process.

There may also be foreign ownership restrictions that impact on the pre-IPO restructuring plans and legal advice should be taken at an early stage. Likewise, some jurisdictions may have more regulatory approval requirements than others in implementing a restructuring.

For corporate governance, tax or marketing reasons, a company may decide to reincorporate out of its home jurisdiction to another location. Companies that wish to take advantage of more flexible governance requirements or a different tax structure will often explore a reincorporation in conjunction with an initial listing.

IP protection

The pathway for a company to obtain intellectual property protection for its products and/or services can differ from industry to industry. In some cases, there is a well trodden path, whereas in others, obtaining intellectual property protection may historically have been a challenging business issue for companies.

Though in many jurisdictions, technology software and computer programs can be protected by both copyright law and patent law, wider IP requirements may not be so easily dealt with. Accordingly, it will be important for any company considering an IPO to assess its IP requirements as early in the process as possible, with a view to ensuring that all relevant patents, copyrights, licenses etc. are obtained or at least an application for such has been made before publicly disclosing key information as part of any IPO.

A company should also ensure that it maintains its intellectual property portfolio and continues to monitor and address any infringement risks as an ongoing governance matter.

Privacy and data protection

Data is extremely important to all companies, with there being an exponentially increasing number of ways in which organizations can collect, store, use and potentially disclose personal or sensitive information.

Given the importance of such data and the fact that respective jurisdictions will have their own implementation and enforcement systems in place, pre-listing efforts must focus on identifying the locations where data is collected and/ or held, and on ensuring that existing business processes are compliant with the relevant data protection and privacy laws. Consideration should also be given to identifying any barriers to compliance with privacy or data protection regimes in new target markets.

Data protection and privacy regimes typically require companies to secure personal data from unauthorized loss or disclosure. As a result, IT security arrangements are another important element to be examined and tested, such that full and accurate disclosure can be provided as part of any listing.

Due diligence

The due diligence investigation for companies undergoing an IPO may become more specialized than for most other companies, if the company in question operates in a certain industry, such as healthcare, real estate or mining. For example, for biopharma and health tech companies, due diligence will have a heavy focus on technology and intellectual property rights, protections and controls.

In all IPOs, it is essential to have those individuals who help to run the business – whether they are employees, consultants or others – to be available to assist the deal parties in their due diligence efforts.

In all cases, the due diligence investigations will focus both on areas generic to all industries and on areas particularly relevant to the industry of the IPOing company.

These latter areas may include:

• Governmental permits.
• Certificates, licenses and product registrations.
• Privacy and data protection compliance.
• Advertising restrictions.
• Directions, labelling and packaging requirements.
• Safety and credibility ratings.
• Sales commitments.
• Labor issues and union awards.
• Equipment financing and leasing arrangements.
• Environmental impact, offsets and remediation.

Understanding the exposure to potential changes in laws, regulations and governmental policies can be critical. In addition to analyzing those changes in the context of both general compliance and revenues, a governmental entity itself may be a company’s major customer, either directly or indirectly.

Key employees

Identifying key employees is important for securing services that may be necessary for the ongoing success of the company.

Highlighting the team’s relevant credentials may provide investors and regulators with confidence in the company and its prospects of developing in the manner described to investors in the prospectus. It is therefore important for issuers to devise appropriate incentive plans to retain talent, whether before or after listing.

Describing the business

The key prospectus drafting challenge is to provide explanations that are accurate and complete, while satisfying the requirements of both investors and regulators for cogent, easily understood information.

Companies should also carefully consider the key risks associated with their business model or with a subset of products or services. A proper explanation of key business risks specific to the company, and how the company is managing and preparing for those risks, is an important aspect of prospectus disclosure.

Formulating a strong equity story is also important for marketing and book building purposes. The company will often need to work with the investment banks for this exercise.

Business risks of particular prevalence to consider include:

• Ownership and control of assets.
• Reliance on a set of core products or services, or failure to develop and successfully launch new products or services.
• Liquidity for future operations and product development.
• Fast-paced changes in the competitive landscape.
• Compliance with the regulatory regimes applicable to the business in existing markets, and potential regulatory hurdles in target markets.
• Resourcing and reliance on key employees.

Enhanced prospectus disclosures

In certain jurisdictions, companies operating in certain industries, such as healthcare, real estate or mining, should be mindful that they may be required, either by the regulatory authority or simply to meet market expectation, to provide enhanced prospectus disclosure.

Additional disclosure may therefore be required in respect of some or all of the following:

• Information on strategic objectives.
• Operating licenses.
• Manufacturing and inventory control policies.
• Employees engaged in quality control.
• New technology substitution and systems failures.
• Product and technology commercialization delays.
• Current and expected market competitors.
• Any dependence on a limited number of customers or suppliers.
• Compliance with all applicable laws (particularly privacy and data protection laws).
• Claims, litigation or material adverse findings in investigations in respect of product liability, personal injury and/or wrongful death.
• Collective expertise, experience of key technical staff and the extent to which the business is dependent on key individuals.
• Collaborative development and research agreements. • Any assets necessary for production that it does not own.

In addition, some regulatory authorities may ask for an asset valuation or other expert’s report to be included in the prospectus.

Disclosure obligations after listing

Once listed, a company can face challenges in meeting ongoing disclosure obligations to keep the market appropriately informed.

Ongoing requirements of the exchange and securities regulator may be more stringent in some jurisdictions, which can result in significant continuing compliance costs. For example, depending on the exchange, a listed company may be required to comply with specific financial reporting requirements, frequent material event notifications and disclosures related to significant stock ownership.

In some jurisdictions, a reporting code or similar guidance may exist to help listed companies. These can include disclosures covering matters such as research and development, regulatory approvals, intellectual property rights, and licensing.

However, it is important for a company to determine early on whether it will be able to meet all ongoing regulatory obligations for a chosen exchange.

Assets and income mix

The assets and income mix for certain companies could affect the degree of regulatory and reporting compliance required.

In some jurisdictions, by virtue of their asset and income mix, companies may be subject to additional levels of securities regulation. In other jurisdictions, these companies may be subject to additional reporting requirements after listing. These additional reporting requirements may include providing more regular reports on cash flow and expenditures, as well as reporting on commitments to implement business objectives.

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