Initial Public Offering (IPO)

IPO or Initial Public Offering is the first time a company’s stocks is offered to the public for
purchase, the issuing company being the only seller and with a set IPO price.

Small companies looking to expand often use an IPO as a way to generate capital. Capital can be
used to fund research and development, fund capital expenditure, or even used to pay off an
existing debt. Another advantage is an increased public awareness of the company because IPOs
often generate publicity by making their products known to a new group of potential customers.
Subsequently this may lead to an increase in market share for the company. At the same time, an
IPO may also be used by founding individuals as an exit strategy. Many venture capitalists have
used IPOs to cash in on successful companies that they helped start-up.

Main and SME Board

Since 2013, the Philippine Stock Exchange (“PSE”) has been operating a system that consists of
two boards: the Main board and the Small Medium and Emerging (SME) Board. Generally, the
boards are distinguished by its minimum capitalization requirement. Corporations listed under
the main board are required to have an authorized capital stock of at least PhP 500 million, while
corporations that seek to be listed on the SME Board are required to have an authorized capital
stock of GOING PUBLIC at least PhP 100 million, at least 25% of which is subscribed and fully
paid. The two boards are also distinguished by more specific criteria as discussed below.

1. General Criteria (Applicable to Both Boards)

1. Positive Stockholder’s Equity in the fiscal year immediately preceding the filing of its
application;

2. Operating history of the corporation: 3 years prior to its listing;

3. All subscribed shares of the same type and class applied for shall be paid in full;

4. Minimum offering to the public for initial listing are as follows:

Market Capitalization Public Offer

Not exceeding PhP 500M 33% or PhP 50M, whichever is higher

Over PhP 500M to PhP 1B 25% or PhP 100M, whichever is higher

Over PhP 1B to PhP 5B 20% or PhP 250M, whichever is higher

 Over PhP 5B to PhP 10B 15% or PhP 750M, whichever is higher

Over PhP 10B 10% or PhP 1B, whichever is higher

5. When required by PSE, the corporation shall engage the services of an independent appraiser
accredited by the SEC to determine the value of its assets;

6. The Corporation shall have an investor relation program. Such program shall include, at the
minimum, a corporate website which contains, the following information:

a. Corporation information
b. Corporation news
c. Financial report
d. Disclosures
e. Investor FAQs
f. Investor Contact
g. Stock Information

2. Specific Criteria

MAIN BOARD SME BOARD

a. The applicant should have a cumulative
consolidated earnings before interest, taxes,
depreciation and amortization (EBITDA),
excluding non-recurring items, of at least
PhP 50M for three (3) full fiscal years
immediately preceding the application for
listing;
a. The applicant should have a cumulative
EBITDA, excluding non-recurring items, of at
least PhP 15M for three (3) full fiscal years
immediately preceding the application for
listing;

b. The applicant should have a minimum b. The applicant must have a positive EBITDA,
EBITDA of PhP 10M for each of the 3 fiscal generated in at least two of the last 3 fiscal years,
years; including the fiscal year immediately preceding
application;

c. The applicant must be engaged in c. The applicant must be engaged in materially

materially the same business/es and must
have a proven track record of management
throughout the 3 years prior to the
application.This admits of the following
exceptions:
1) if the applicant has been operating for at
the same business and must have a proven track
record of management throughout the last 3
years prior to the application;The Applicant
Company shall demonstrate its stable financial
condition and prospects for continuing growth
by providing a business plan indicating the steps
least 10 years and has a cumulative EBITDA
of at least PhP 50M for at least two of the
three fiscal years prior to the application;
2) the applicant is a newly formed holding
company which uses the operational track
record of its subsidiary.
d. The applicant must have a minimum
authorized capital stock of PhP 500M, with
at least 25% being subscribed and fully paid.
The minimum Market Capitalization is PhP
500M.
e. Upon listing, the minimum number of
shareholders should at least be 1,000 with
each owning stocks equivalent to at least one
board lot.
f. No divestment of shares in operating
subsidiary;
g. N/A
h. No secondary offering for companies
invoking exemption of track record.
i. Lock-up Requirements. The applicant
shall cause its existing shareholders who
own at least 10% of the issued and
outstanding shares to refrain from selling,
assigning or disposing the shares for a
period of 180 days after listing – if track
record requirement is met; otherwise, 365
days.
Note: In case, there is an issuance/transfer
within 180 days prior to the offering period
and transaction price is lower, all shares
shall be subject to a lock up period of 365
days.This lock-up shall be stated in the AOI
that have been taken and to be undertaken in
order to advance its business over a period of
five (5) years.
d. The applicant must have a minimum
authorized capital stock of PhP 100M, with at
least 25% being subscribed and fully paid.
e. Upon listing, the minimum number of
shareholders should at least be 200 with each
owning stocks equivalent to at least one board
lot.
f. No holding, portfolio and passive income
companies;
g. No change in the primary purpose and/or
secondary purpose for a period of 7 years
following its listing;
h. No offering of secondary securities for
companies exempt from track record and
operating history requirements
i. Lock-up Requirements. The applicant shall
cause its existing shareholders to refrain from
selling, assigning or disposing the shares for a
period of: 1 year after listing.
Note: In case, there is an issuance/transfer within
6 months prior to the start of the offering and
transaction price is lower, all shares shall be
subject to a lock up period of 1 year.This lock-
up shall be stated in the AOI of the applicant.
of the applicant.

Key Parties to the IPO

1. Financial Advisor

- Reviews the company’s capital structure and funding requirements

- Reviews quantitative and qualitative information
- Conducts detailed discussions with senior management on business strategies
- Conducts share price valuation

2. Issue Manager

- Coordinates and supervises the over-all work

- Oversees and supervises the preparation, finalization and submission of IPO
documents
- Oversees and supervises obtaining regulatory approvals
- Organizes and manages investor briefings

3. Underwriter

- Acts as the intermediary between the company issuer and the IPO investors
- Establishes the underwriting syndicate
- Conducts extensive business due diligence
- Builds the order book
- Allocates the offer shares
- Recommends the final offer price and no. of shares

4. Legal Firm

- Provides transactional advice that cover all legal issues relating to conducting an IPO
- Provides advice on the regulatory requirements of public offerings
- Assists the company in complying with disclosure and other governance requirements
5. External Auditor

- Consolidates and reviews the company’s existing financial records according to

comprehensive basis of accounting
- Provides independent assurance on financial and nonfinancial information to meet the
IPO requirements
- Ensures accurate and honest financial records and statements of the company

Advantages of going IPO

Fund raising

Companies often issue shares to the public to raise capital. Business owners believe that by
conducting an IPO, one can raise significant capital that can then be used to develop new
products and services, increase capacity, expand to new markets or acquire new businesses.

Access to debt and equity markets

Public companies have easier access to equity and debt markets. It can have follow-on offerings
if additional capital is required to fund future plans. Unlike the IPO, follow-on offerings will
require much less preparation and lower friction costs.

The growth capital raised during the IPO would have also strengthened the company’s balance
sheet. This, coupled with the perceived improvement in corporate governance and transparency
as a public entity, makes it easier to raise debt financing.

Currency for future acquisitions

Given the ready valuation for publicly listed shares and assuming sufficient liquidity, public
companies can also use their shares to acquire other businesses. This allows companies to
expand faster without draining its stash of cash or incurring more debt.

If, after this introspection, the shareholders still decide to launch an IPO, we suggest looking at
the following aspects to assess the readiness of the organization to go public:

Financial performance and strong track record

Aside from this being a requirement of the Philippine Stock Exchange, studies show that
companies that performed well and were profitable before going public are more successful.
Companies who had weak financial performance before their IPO are more likely to drop out of
the exchange.

Investors will be attracted to put money in companies that have proven business models and
only need capital boost to grow. Track record provides evidence of management being able to
deliver on the strategy and add value to the business.

Financial reporting
Public companies have to comply with rigorous financial reporting under the rules of the stock
exchange. Before doing an IPO, the company has to evaluate its readiness to provide financial
information to management, investors and all stakeholders on a timely basis. The financial
reporting system should be reliable, not prone to material errors and should be due-diligence
ready.
Human resource and culture
The quality of management is very important since in an IPO, investors are betting on
management to grow their investments. As most investors will take minority position, they will
not play an active part in managing the day-to-day operations of the investee company.

HR policies and the rewards system should likewise be aligned with the company’s overall
strategic ambitions. Running a public company will be different in many ways, so the key
management team should have the right behavior and culture to adapt to change.

Governance
Good governance is critical to a company that is looking to have an IPO. It gives comfort to
investors that the company is led by a professional team and a well-functioning board, working
together to safeguard the interest of all stakeholders. The pressure to consistently show great
results can lead to a short-term mindset for managers at the expense of the company’s long-term
goals. Without the appropriate check and balance, this may lead to questionable practices. This
risk is further magnified if compensation is linked to movement in the company’s share price,
possibly leading management to perform somewhat questionable practices in order to boost
earnings.

Governance extends beyond the IPO. Even if the company decides not to push ahead with its
plans to list, practicing good governance will result in significant benefits to the company,
including improved credit rating, reduced risk, better access to credit and higher valuation in the
case of a strategic sale. It also prepares the company for succession.

Investor intelligence, communication and external reporting

A huge part of being in the public eye is managing the perception of the investing public, as
well as those that may influence their decisions like analysts, security brokers and investment
advisors. While a private corporation can keep its business affairs to itself, a public corporation
must comply with regular reporting and disclosure requirements including major business
decisions, long-term commitments entered into as well as compensation of key management.

The company aiming to go public must also understand its target investor base, their needs and
information requirements. A good and effective communication strategy should be in place to
manage investor confidence and public trust long after the IPO.

Taxation and corporate structure

Prior to going public, the company should assess whether or not its tax structure is optimized
for IPO and life as a public company. Tax strategy and tax planning should be first in the
agenda to avoid any leakages as a result of going public.
Resolving tax issues as early as possible will reduce tax risks, which might impact not just the
valuation of shares but the appetite of more conservative investors.

Yet, the IPO is not the end goal. Rather, it only sets the stage to help companies grow faster and
achieve their strategic objectives. We’ve seen companies that failed after a successful IPO
because the founders lost focus, were not able to follow through their business plan, and the
reasons why they went public in the first place. These companies are examples of wasted
opportunity.

Another advantage of having a corporation’s shares public listed is the beneficial rate of stock
transaction tax (0.5% of the gross selling price), as opposed to 5-10% rate of capital gains tax
imposed on shares not listed with the Philippine Stock Exchange. Listing is also used by
companies to boost public awareness and interest for a company and its products.