A common question from companies considering an Initial Public Offering (IPO) is: what will be the cost?
Indeed, the costs in preparing for, and gaining, Australian Stock Exchange (ASX) listing, can be substantial and should be understood before any decision is made to go public.
Whilst the size of the offering (i.e. how much is raised) will be a key factor in determining these costs, there are many other factors to consider, including the size and complexity of the company, whether the offer is underwritten, whether a corporate advisor is retained and the extent of any pre-IPO restructuring needed.
An indication of some of the costs include:
Broking fee
This is typically the largest single cost of an IPO and, whilst it may be structured to include a fixed or retainer component, is usually a percentage of the gross proceeds of the issue.
The percentage will depend upon the size of the offer and its attractiveness. It may be as much as 5-6% for a smaller company, reducing to 2-3% for a very large offering. If the offer is underwritten, the fee will be higher to remunerate the broker for taking on the underwriting risk. If the minimum subscription under the offer is not achieved, the broking fee will not be payable.
Corporate advisor
Many companies engage a corporate advisor to assist in preparing the company for an IPO, including any pre-IPO restructuring, and to provide independent advice to the directors and/or shareholders on the pricing, structure and terms of the offer and related matters. The corporate advisor may also project manage the IPO, liaising with the ASX, broker and other advisors on behalf of the company.
They will generally charge a small retainer fee, but will be remunerated principally by way of a fee payable on successful completion of the IPO. Often, the corporate advisor will take shares in the company in lieu of a cash payment, or will have the option to do so.
Legal costs
The company's lawyers will typically chair due diligence meetings and coordinate preparation of the prospectus, in addition to carrying out legal due diligence and advising on and verifying the prospectus contents. The legal costs associated with an IPO vary widely dependent upon the extent of additional work required for pre-IPO restructuring, issues arising from due diligence, and drafting legal documentation in relation to directors' service agreements, share-based incentive schemes, or commercial arrangements. Whilst companies may negotiate fixed or capped fees, legal fees are generally based on time spent.
Accounting costs
A prospectus will generally include an investigating accountant's report on both historical and forecast financial information, if presented. The accountants may also participate in the due diligence committee and provide advice on accounting, taxation and other matters in connection with the IPO. There may be additional costs if the company's financial statements have not previously been subject to audit.
Other experts
Certain IPOs may require other independent reports to be included in the prospectus, such as a geologist's report for exploration-based companies, whilst those with novel technologies or new projects may need to address technical or commercial feasibility, supporting forecast assumptions made by management.
Communications consultants are also often used, particularly with media coverage to encourage investor interest in the company as an attractive investment. Costs will reflect the work involved in preparing each report.
ASX listing fees
The ASX charges companies fees to be admitted to listing, based on the initial market capitalisation.
For example, a company capitalised at $25 million will pay an initial fee of approximately $44,000, and will also be required to pay an annual listing fee on a pro rata basis for the remainder of the financial year.
Other costs
There are a number of other costs such as the cost of printing prospectuses, including associated graphic design work and proofing. Companies will also incur costs in relation to share registry, which is generally outsourced to a major service provider, and may also choose to arrange insurance to cover the potential liabilities of the directors in relation to prospectus disclosure.