The last segment of our fundraising series is all about public markets. Raising money on the stock exchange is arguably the pinnacle of a privately held company’s achievement; to list on the stock exchange means not only have you achieved incredible growth, but that your business is worth a great deal. To list on the stock exchange, companies will tend to have a valuation of £20 million or more; anything smaller and the stock market probably isn’t right. It can be a fantastic way of raising vast sums of money, but there are a lot of regulations in place that must be followed. Intrigued? Follow our guide to get a better understanding of the process.
What do you need to do to successfully raise money on the stock market?
First of all, you need to identify the right market. For UK based companies AIM (The Alternate Investment Market) is a tried and tested route. It’s been in existence for over 20 years and currently has 1,254 businesses listed. NASDAQ Stockholm is another option for the European market; it is the Swedish subsidiary of NASDAQ (North American Securities Dealers Automated Quotations). You’ll then need to produce an admission document. This will need to be verified and validated by both the company’s solicitors and external accountants. It will need to be one of the big 4, or at least the next tier of chartered accountants, as well as one of the top legal firms, to be a credible IPO (Initial Public Offering). There are significant costs associated with preparing this document, so companies must ensure they set aside funds for this.
In addition, the best standards of corporate governance require that the company’s board be made up of a combination of executive and non-exec directors. It is a good sign for companies coming to market to already have this structure in place, as it shows they are taking corporate governance seriously. Businesses will also need to have 3 years of audited financial statements, which again comes with a cost. The rest of the admission document is essentially a business plan which sets out where the company is going, what it plans to do with the money and that the risk factors are. It is a complex process, but it is something that Add then Multiply can help you with. David spent 8 years as CFO of two AIM listed companies and has done a lot of work with admissions and subsequent offering documents.
How does it work?
Similar to venture capital and private equity, institutional investors play a big role. They invest heavily in public markets, and make up the majority of the capital. These institutions manage pension and insurance company funds, as well as other people’s assets. It is a highly regulated process, and therefore in order to raise money on the stock exchange, as well as involving accountants and lawyers, the company will need a stock broker. The broker will manage the relationship between the company and the stock market, and will use their contacts to reach out to institutional investors with the aim of raising capital for the business. This differs from the previous routes, where the founders themselves will go out and seek funds directly.
Individuals can also invest in the stock market; however this too will need to be done through a stock broker. It is heavily regulated, and there are a lot of processes involved, but don’t let this put you off. The stock market is open to all, and is the fairest market out there. Success can lead to enormous growth. Davidworked with a group that raised £60 million over a three-year period, and another that was able to buy out its biggest competitor, thanks to the money raised.
What kinds of businesses can use public markets?
Any kind. It doesn’t matter what sector you are in, whether it’s a hot industry or run of the mill. As long as you have a successful business, with a valuation of around £20 million or more (although one entrepreneur we know had great success with a cash shell he listed that had an initial valuation of £3 million) and can prove consistent growth, you can use the stock exchange to raise funds.
How involved are the investors?
This is where the stock exchange differs quite clearly from venture capital and private equity. Investors in the latter can be very involved, having a seat on the board and directing business strategy. Institutional investors in public companies are far less involved because of the rules associated with the stock exchange. Because it’s a public market, there are regulations in place which clearly divide company and investor, in order to avoid insider trading. The investors will receive regular communications and will be invited to formal meetings when the company publishes its half-year and annual results, but they are not involved with the day-to-day.
Investors will rely on the UK combined code, which, among other things, requires listed businesses to have a certain number of non-exec directors on the board. These people will be required to have experience in public markets, with a solid track record and ability to make independent decisions. The chairman is also key; they are responsible for running the board and therefore must be independent from the chief executive. As well as this, every year the shareholders will be invited to an annual meeting, however, unless you area larger, well-known company, it is unlikely that more than a dozen people will show up!
Conclusion
Raising money via public markets can be a fruitful route, yet it is highly regulated. If you are a public company you will be required to publish a certain amount of information, and this must be done through the stock exchange’s regulatory news service. Anything that could have an impact on the price of the company, such as changes in directors and the publication of financials must be communicated carefully.
It is a tricky process, but one that we can help you with. As well as this, being a publicly listed business means you are on a very public platform. This can be really helpful for hiring new staff or meeting new customers, but when things get tough and people get fired it is out there for all to see, so this also is something to bear in mind. That being said, the stock exchange has deep pockets and is a fantastic route for growing businesses. Whether by acquisition, or hiring more staff, the money raised on the stock exchange can take your business to fantastic heights. Almost every business that is now a household name started out on the stock market, so as long as you play by the rules, you can certainly have success!
That concludes our fundraising series, next week we introduce a new feature; The Entrepreneur Spotlight! Tune in next week to find out more.
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