Thankfully most company flotations are ultimately successful, but a small number do run into major problems. Although a good team of professional advisers should be able to alert the company to any potential deal breakers to a float at an early stage, occasionally things can go seriously wrong.
>See also: What does it mean to IPO a company?
What can sink a float?
So, what can sink a float? Usually this is down to a key issue or event that is not resolved (or simply doesn’t happen) within the planned timeframe. Often assumptions are made at the start of the admission process that certain key factors are “simply legal formalities” but unfortunately some matters can prove far from simple.
#1 – Director ineligibility
In recent years we have seen the FCA take a hard line on eligibility for Standard listings on the main London Stock Exchange market and in particular the history of the company’s directors needs close examination before an IPO is considered. If any directors have had involvement with companies which went through insolvent liquidations or had failed in their regulatory obligations either in the UK or other jurisdictions, then the FCA will probably raise an objection to the IPO on grounds of eligibility.
#2 – Intellectual property issues
Intellectual property rights can cause significant problems particularly with technology and software companies. Young companies in their eagerness to grow can overlook important issues regarding, patents, trademarks and licences. These issues will inevitably crop up at the due diligence stage which is well down the admission path. Intellectual property issues should be addressed well before embarking on the flotation.
#3 – Permits and exploration licences
Another possible deal breaker is the matter of permits and exploration licences. Clearly this is a major issue for natural resource companies. Frequently the granting of such permits is a drawn-out process without a definite end date. This can play havoc with the admission process and ultimately may stall it indefinitely. Unforeseen problems can be caused by a number of factors including the politics of federal as well as local governments, socio-economic considerations and in some cases religious opposition.
Companies that occupy land should be careful to address environmental issues particularly if there is any possibility of contamination. The potential liability for clean up costs or restoring the land back to its original state can be prohibitive and may well put off a potential investor.
#4 – Contingent liabilities
There is also the broader issue of contingent liabilities. These are not always highlighted in the accounts and particularly if the company has not been subject to an audit. The due diligence process can expose certain aspects of the company’s business practices and accounting which may be open to challenge. There could well be a large potential PAYE or NI liability due to the use of casual workers or perhaps a VAT liability due to the misapplication of certain VAT rules. Alternatively, a legal dispute with a major supplier or customer will also have a very negative effect on potential investors. All of these issues need to be resolved by the company prior to contemplating a float.
>See also: Benefits of IPO for a company
Latest changes to float rules
When the LSE Main Market Standard Listing regime was introduced in April 2010 it became a very attractive route for smaller companies seeking an IPO and looking for access to a prestigious market. The market capitalisation required was under £1m and so it was also attractive for cash shells, more recently called SPACs (Special Purpose Acquisition Companies). A number of SPACs successfully listed on this market until the rules changed at the end of 2021.
The listing rule changes implemented in December 2021 by the Financial Conduct Authority regarding the criteria relevant to the admission of cash shells on to the Standard Market segment of the LSE jumped to a market capilisation of £30m. Obviously this is a daunting fund-raising task for a cash shell/SPAC. Although SPACs that were already in the “queue” for listing were allowed to continue under the old criteria, those which failed had little chance to restart the process.
Sawin & Edwards LLP acted for several SPACs which managed to “cross the line” under the old criteria.
Cost of things going wrong
These are just some of the examples of things that can and do go wrong. The costs of a failed float and fundraising can be crippling especially in a start up situation.
While some of the professional advisers may be on a success fee basis, others will still require payment for their work out of the company’s existing funds.
Given the costs of failure, companies considering a float should seriously consider carrying out some up front due diligence so that potential deal breaker issues are identified and resolved before they embark on the flotation process.
Witold Sawin is founding partner of chartered accountant Sawin & Edwards LLP
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