Going public as one of the options for raising capital for a start-up

Stock market, what does it mean?

Speaking of the stock market, it is first necessary to make some introduction and approximate the basic concepts. The Stock Exchange is first and foremost a place to raise capital for companies listed on it and, very importantly, non-refundable capital that constitutes long-term financing and builds a company’s equity. 

The markets operated by the Exchange for issuers of shares are the WSE’s main market and the NewConnect Alternative Trading System.

The main market is a regulated market under the supervision of the Financial Supervisory Commission, also often referred to as the big or main trading floor. By definition, it is a platform for larger, more mature companies, which is primarily confirmed by the basic criteria for determining whether an issuer can be admitted to trading on this market, which are discussed later in this article.

The second major stock market, is the ATS NewConnect, which is a trading platform organized by the Stock Exchange, aimed primarily at small and medium-sized growing companies or young companies in various industries, including primarily the high-tech sector. Representatives of the IT, biotechnology, alternative energy, environmental protection or innovative services sectors are welcome here. This is a market designed for entities with strong growth prospects, which either do not want to support themselves with credit or are not reliable enough for banks.

The ATS can be a good alternative for start-ups, especially those commercializing the results of scientific research, which are still too small to think about the main market.

How to understand “going public”?

Having defined the basic markets on which companies can debut, it is also necessary to clarify what the term “going public” itself means. This is nothing more than the start of listing of financial instruments (for the purposes of this article – shares) on a given stock market. Most often it is the case that an IPO is accompanied by a stock offering to investors. It may take the form of an issue of shares by the company itself, in which case the funds raised from such an issue will go directly into the company’s finances. 

The second type of offering is the sale of shares by existing owners, when the funds raised from the offering go to the selling shareholders. The offering can also be also of a mixed nature and be a combination of the above two options. Sometimes, too, companies carry out a share capital increase and raise funds from the issue before going public on the WSE, so as to improve the balance sheet structure and increase the level of equity. This is because only companies large enough can think about “going public”. It is important to remember that in order to start listing shares on the stock market, one must meet the eligibility criteria specified in the regulations.

What are the criteria for listing a company on the stock market?

As for the smaller market, the ATS NewConnect, the admission criteria here are more lenient, which corresponds to the assumptions of this market, which is intended to be a platform for raising capital for smaller entities.

In particular, the basic criteria are:

• operation of the company in the form of a joint stock company,
• the availability of an appropriate information document containing financial statements for the last fiscal year, audited by a certified public accountant,
• no bankruptcy or restructuring proceedings are pending against the issuer,
• the nominal value of the shares is at least PLN 0.10,
• the issuer’s equity is at least PLN 500,000 (and this value may include funds from a share issue carried out prior to the debut on the NewConnect market),
• dispersion of shares – i.e. at least 15% of the shares included in the application for introduction are held by at least 10 shareholders, each of whom holds no more than 5% of total votes in the company (“minority shareholders”) and is not an affiliate of the issuer.

As for the criteria for candidates to become listed on a major trading floor, these are primarily:

• capitalization of the company amounting to at least PLN 60 million or the PLN equivalent of EUR 15 million (except for issuers whose shares of at least one issue have been traded for at least 6 months on another market, e.g. NewConnect, whose capitalization may be at least PLN 48 million or the PLN equivalent of at least EUR 12 million),
• dispersion of shareholding at a level of at least 15% held by minority shareholders, each of whom is entitled to exercise less than 5% of votes at the issuer’s general meeting,
• preparation of an appropriate information document and its approval by the FSA,
• unlimited transferability of shares,
• no bankruptcy or liquidation proceedings are pending against the issuer.

In practice, the company is supported by specialized consulting firms in completing the formal procedures and drafting the relevant information documents. In this regard, too, depending on the type of market, some differences between markets can be pointed out. The process of listing shares on the ATS is supported by the so-called NewConnect Authorized Advisor. In the case of a debut on a regulated market, it is necessary to use already a team of advisors, among them a brokerage house and a legal advisor, who assist the issuer in conducting the offering, drafting the prospectus and admission procedures. It is worth remembering that an IPO is only the first step. Being already listed, it is possible to make further issues, and it is also possible to change the listing market. It is not uncommon for a company to move from the NewConnect market to the main market. Thus, NewConnect, with its fewer formal requirements, can become only a stop on the way to the main market. A company considering the above path, in addition to meeting the formal eligibility criteria, should consider whether it can be attractive to potential capital providers, whether it can convince investors that it will be a good investment and, as a listed entity, will generate an appropriate return – whether in the form of share price growth or ultimately through dividend payments.

Obtaining the status of a public company – is there anything to be gained?

We have already mentioned one of the main benefits of going public and sharing the company on the stock market – it is, first of all, non-refundable and long-term capital. What’s more, once the company has gained the confidence of the market, it can seek to raise another round of financing on the market. Secondly, listing shares gives an immediate, daily valuation of a company’s stock. This generates multiple effects, including providing a benchmark for potential subsequent issues, share-settled operations and transactions, or incentive programs, the use of which is extremely popular in start-ups.

A debut on the WSE also has an image, promotional effect. Certainly, a listed company provides a greater level of transparency, credibility, is more recognizable. These are elements that can be important in relations with counterparties or in HR branding.

Consequences of becoming a public company

A key consequence of going public will be the need to meet new corporate requirements and fulfill the disclosure obligations of a public company. These mean that the issuer should immediately inform, in the form of current reports, of any material events or events indicated by special regulations, and periodically report on its financial position in the form of periodic reports. Usually, new shareholders are a minority in the shareholding and tend to be passive investors, not interfering in the running of the business, but they require transparent and well-conducted communication.

It should be borne in mind that in the case of the Alternative Trading System, a consequence of the debut will be the obligation under the stock exchange regulations to cooperate, for a period of at least three years, with a so-called Authorized Advisor, i.e. a company that supports the issuer in fulfilling information obligations and other aspects of the company’s operation on NewConnect. In the case of the main market, there are no analogous regulations requiring the use of advisors in the area of fulfillment of disclosure obligations and stock exchange compliance. Nevertheless, many companies use the support, specialized in this matter, of consulting companies.

Briefly summarizing the issues raised in this article, it should be emphasized that the stock market will not be a path for every start-up. There are entities whose size, stage of development or specifics speak in favor of using other forms of external financing. However, for some, the vision of going public can be an interesting and quite realistic scenario. Stock markets differ both in their requirements for entry thresholds and for functioning as a listed company. A company may first try its hand at the somewhat less demanding “small trading floor,” which will allow it to build up some experience and become only an intermediate station on the way forward to the “big stock exchange” and the regulated market. In turn, any requirements usually manage to be fulfilled with the help of a well-chosen team of advisors. The requirements of the public market should not be feared – you should prepare well for them!

The article was written by Alicja Kucińska, President of the Board at Good IR.

Good IR – a training and consulting company supporting issuers in meeting the basic reporting requirements for a company listed on the WSE in terms of current and periodic reporting. Its services also cover related issues related to the company’s presence on the capital market, including stock exchange compliance, the functioning of authorities and their committees, the organization of General Meetings, contacts with investors and market institutions.