The IPO-Fits-All Model Needs To Be Reformed. Here’s How.
By Danny Toe, CEO and Co-Founder
The first ever initial public offering was the Dutch East India Company back in 1602. Many have followed since, from the Bank of North America’s IPO around 1783, to Saudi Aramco’s record-breaking IPO just last year. Since the beginning, however, the basic model of how they work hasn’t changed much.
The basic template goes like this: A growing company reaches a point where it needs significant additional capital to take the next step in its evolution and simply cannot find it within the private markets. The company must then prepare to undergo the rigours of regulatory oversight by selecting an investment bank, conducting road shows to potential investors and spending the countless hours and millions of dollars required for listing. Eventually, an IPO price is set, the company enters the public markets and the company can raise money.
Before going any further, I just want to make clear that this article is not intended as a manifesto against all IPOs. IPOs still can and do serve the needs of many companies. Instead, it’s intended as an argument against the IPO-fits-all model that far too many companies and investors find themselves trapped in. The saying goes, ‘don’t hate the player, hate the game’. But it’s hard not to be at least bothered by a game when it’s the only one in town.
In this article, I’m going to talk about the problems of this model and what can be done to move past it.
1) The High Costs Of Going Public: Time & Money
The process of going public usually takes one to two years (if everything goes well), and the costs incurred throughout that period are significant. Many factors play a role in determining the exact cost for individual firms, but, for the vast majority, it will be well over $1 million with the average cost clocking in between $10 million to $35 million, depending on the revenue and the deal size involved. And this is just the cost in dollars.
Because the registration statement does not require a report of indirect costs, these costs are very hard to reasonably estimate. However, the opportunity and restructuring costs faced by companies looking to go public should not be underestimated. Countless employee hours must be spent preparing reports, financial statements, and implementing new reporting and accounting systems to adhere to the regulatory requirements. Restructuring costs arise from the formation of new teams, such as an internal legal department, a tax department, an investor relations department, an internal audit department and audit committee, along with the added costs of the drafting of by-laws, the creation of new employee benefit plans, and the creation and documentation of internal controls.
And all of these costs impact more than just the company – they will be passed on to the eventual investors in the company.
A potential investor then has two options: He or she can either participate in the IPO process, paying all the costs and fees involved (provided they even have the funds and connections to do so) or wait for secondary shares to be listed on a public exchange. As we’ll see below, even this option is less than ideal.
2) Forcing Investors To Wait Until After IPO Locks Them Out Of Opportunity
As clearly evident in the era of tech unicorns, the highest growth-period of a company in its lifecycle is before it goes public. You can read more about what I mean here in our Unicorn Insights report commissioned by ADDX. There is no debate on the point that if you get in early on such high performing private unicorns, the returns can be very significant. The issue is that most investors just can’t. The majority of existing investors today – and I even include most of those who could qualify to be accredited investors here – are unable to participate in these opportunities as they generally require an extremely high level of wealth and often good connections to even get access.
This locks out all but the very wealthy and the very-well connected from potential investment opportunities. In the larger scheme of things, this is quite detrimental to investors and to the emergence of new ventures. After centuries of the same process repeated over and over, the current model needs an upgrade.
I believe that what is needed are safe, effective and easy alternatives to the IPO process, which allow growing companies to raise capital and investors to get access to fast growing companies like unicorns – without having to deal with the IPO process. ADDX, for example, addresses the issues above by sidestepping the IPO process altogether and allowing accredited investors to invest – and issuers to raise funds – within the private market on a safe, easy-to-use MAS-compliant and SGX-backed platform.
3) Safety And Transparency Must Be Paramount
This leads us to my final point. Safety and transparency. Throughout history, financial fraud has been a regular risk for investors. Examples range from the Dutch Tulipmania phenomenon to the South Sea bubble to the Mississippi Company scam. More recently, we have notable culprits such as Enron, Worldcom, Luckin Coffee and Wirecard. Scams have and will continue to impact both public and private markets. However, the risk of fraud, scams and dishonest practices are higher in the private markets than the public ones since they are subjected to fewer checks and scrutiny both from a regulatory and a legal standpoint. I strongly believe that alternatives to the IPO-fits-all model need to take these risks extremely seriously and go above and beyond to provide investors with a safe, secure and transparent environment. ADDX, for example, has an extremely strong and vigilant listing team and committee to ensure each investment opportunity on the ADDX platform has passed through rigorous scrutiny and oversight.
Conclusion:
By no means will IPOs disappear anytime soon (or likely ever) but the new age of fintech, investors and companies alike now have unprecedented opportunities. In coming years, I expect many fintech players to grow into the future financial giants of the 21st century. At ADDX, we are doing our part by making investing and raising capital within the private markets easier, faster, and far less expensive for companies and investors. While the world adapts to a changing reality, ADDX will continue to serve our customers, communities and fellow citizens.
ADDX is your entry to private market investing. It is a proprietary platform that lets you invest from USD 10,000 in unicorns, pre-IPO companies, hedge funds, and other opportunities that traditionally require millions or more to enter. ADDX is regulated by the Monetary Authority of Singapore (MAS) and is open to all non-US accredited and institutional investors.