When a company first lists on a stock exchange such as the Australian Securities Exchange (ASX), it is called a float, or an Initial Public Offering (IPO). These terms are used interchangeably by investors.
Companies primarily use an IPO as a way of raising funds for their business. They do this by selling a set number of shares in the company to the public, usually at a fixed price per share. These shares are then listed on a stock exchange where they can be traded between buyers and sellers at the market price.
As investing in a float or IPO involves buying shares directly from the company rather than a seller on a stock exchange, a range of brokers, investment bankers, lawyers and accountant are usually needed to manage the transaction and listing requirements for the company.
To deepen you understanding of IPO investing, it is important to understand some background about how companies come to be listed on the ASX.
ASX Listing Rules
There are several requirements that must be met by a company to list on the ASX.
One of the more significant listing rules is admissions test, which has two parts, the ‘profit test’ and the ‘assets test’.
The profit test sets the minimum profit levels that the company must have maintained for the previous three years to be eligible for listing, currently $1 million p.a. The assets test sets out the minimum net tangible asset value, currently $3 million. A company seeking to list on the ASX must pass either (not both) of these tests. These rules serve to ensure that only companies of a reasonable size can list on the ASX.
ASX listing rules also require that each company have a minimum investor base of at least 300 shareholders with a parcel or shares worth at least $2,000; and the issue price of the shares must be 20 cents per share or greater. These rules help to ensure a liquid market for the shares.
Once listed, companies must keep shareholders informed about any company event that may affect its share price. It is stated that, “Timely disclosure must be made of information which may affect security values or influence investment decisions, and information in which security holders, investors and ASX have a legitimate interest.” This rule is to ensure that shares are traded in a fair and orderly fashion.