IPO: Issuing shares

An IPO or share issue can be a very important step for a company. By listing shares on the stock exchange, the company’s capital can be significantly increased. However, before the shares are actually listed on the stock exchange, various conditions must be met. And there are not only advantages, but also a number of disadvantages to a share issue.

Share issue by an issuer

A company that is large enough and needs capital can choose to issue shares on the stock exchange. However, that is not simply possible. Various requirements must be met. First of all, an issuer must be chosen. This could be a bank, syndicate or broker. The issuer is responsible for the placement of the shares on the stock exchange. The issuer assumes the risk for the sale of all shares. If not everything is sold, the issuer will buy the remaining shares itself. So there is quite a risk involved. In return, the issuer receives a takeover commission or guarantee commission of between 2.5 and 5% of the takeover price of the shares.

Conditions for a stock exchange listing for the issuer

The issuer must be convinced that the company’s IPO has a good chance of success. After all, he himself also runs a considerable risk. A number of conditions that an issuer will impose:

  • The issuer finds out whether the company’s management is capable of managing the company properly.
  • The size of the company must be such that trading in the shares will occur. This concerns both turnover and the total value of the company.
  • The issuer also examines the extent to which there is a realistic vision of the future. What does the company’s management plan to do in the coming years, what does the financial planning for the coming period look like?
  • Finally, the issuer must always be subject to market conditions. If market conditions on the capital market are unfavorable, the share may decline in value immediately after it is put on the market. To prevent this, the issuer may decide to cancel the introduction of the share for the time being.

Regulations of the Securities Trading Association

In addition to the condition that the issuer imposes on the share issue, the Securities Trading Association also sets certain requirements for shares and bonds for which people want to be listed on the Amsterdam Stock Exchange. These regulations are included in the Fund Regulations. Minimum requirements that a company must meet are:

  • The company must have existed for more than 5 years.
  • The company must have an equity of at least 5,000,000.
  • The shares that are issued must have a combined value of 5,000,000 or more.
  • A profit must have been made for at least 3 years in the past 5 years.
  • The company must have a track record of at least 3 years.

If a company does not meet certain conditions, shares can sometimes still be issued. Additional rules will then be imposed, including the lock-up rule. The lock-up rule means that the founders and major shareholders are not allowed to sell their shares in the first six months. In some cases there is even a lock-up period of one year.

Approvals for a share issue

In the Netherlands, only a public limited company (NV) can list on the stock exchange. In many cases the articles of association will therefore have to be amended. Before the company actually becomes a public limited company, approval must first be given by Euronext and a declaration of no objection must be obtained from the Ministry of Justice. A further important condition for issuing shares is the preparation of a prospectus, in which extensive information is provided to (potential) shareholders. The prospectus is written by the issuer in collaboration with the company and must be approved by Euronext. Topics covered in the prospectus include: the history of the company, business activities, marketing and distribution, destination of the proceeds of the IPO, shareholders, dividend policy, management and future prospects.

Benefits of issuing shares

A company raises capital by issuing shares. The money paid for the shares goes to the company. This allows them to invest further and expand their activities. When a company goes public, the existing shareholders – often the founders or their heirs – can sell their shares. They thus obtain liquidity : the capital that is ‘tied up’ in the company can be converted into liquid assets. The existing shareholders are of course not obliged to sell their shares. When a lock-up rule has been set, this is even prohibited for a certain period. Because the company must meet certain requirements before it can go public, issuing shares also confers a certain status. For customers or clients, a stock exchange listing is an additional assurance of the stability of the company. Issuing shares also provides publicity . A stock exchange listing provides more opportunities to get into the news. However, this does not always have to be positive; a stock exchange listing can also be a cause of negative publicity. Shares can also be used as a means of payment at certain times. The company then issues new shares and pays with them instead of with cash. This happens, for example, when paying dividends to shareholders. Instead of cash, shareholders receive new shares as a profit distribution.

Disadvantages of issuing shares

A share issue costs a company a lot of time and money. All kinds of requirements must be met and additional administration must be conducted. A stock exchange listing obliges the company to provide information to the shareholders. And that does not end with drawing up a prospectus. Shareholders must be able to stay informed about the fortunes of the company. For example, the annual figures must be made public. That not only means a lot of snoopers, which you may not want as a company; it can also affect the financial health of the company. If too many shares end up in the hands of one particular party, there is a possibility that the company will be taken over. Although there are all kinds of options for companies to protect themselves against this, the danger of a takeover can never be completely ruled out. A final disadvantage is the risk of price movements. By going public, the value of the company is strongly influenced by the value of its shares. This partly depends on the performance of the company, but general economic developments and the stock market climate also have an important influence.

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