IPOs can provide access to a long-term source of funds and provide a source of liquidity for existing shares
Charles Schofield

Nothing generates more excitement in the field of investment than an initial public offe-ring (IPO). The popular vision of an IPO conjures up images of great wealth and glory realised in a short space of time. In reality, however, an IPO is a very demanding and heavily regulated process that can take a lot of effort to bring about.

Why an IPO?
IPOs are also typically one of the most expensive ways for a company to raise funds. Costs are incurred through underwriting fees, fees for professional advisors and management time. Hidden costs may also be incurred if the shares are underpriced or the issue of new shares causes a drop in the value of existing shares held by the founders.

Still, for some shareholders an IPO provides attractive advantages. It can provide access to a long-term source of funds and provide a source of liquidity for existing shares. It also provides an exit route for private equity investors to take profit from their initial investment. Therefore, IPOs remain popular although the thresholds are high.

Regulatory oversight
One of the primary reasons for the high costs of an IPO is the cost of complying with the extensive regulation applying to companies seeking to undertake it. These regulations are designed not only to protect investors who may subscribe for shares but also the integrity of the market itself, which will soon suffer if newly listed companies do not succeed.

The IPO rules are designed to ensure that only healthy and stable companies go for it
and that investors have sufficient accurate information to properly assess a share offering. The Capital Market Authority (CMA) oversees the listing of companies on the Muscat Securities Market. Usually CMA will be approached early on in the IPO process to confirm listing requirements and discuss any particular concerns CMA may have. The approval of CMA is a legal requirement before any IPO can proceed.

Role of the founders
The main facilitators of any IPO are the exis-ting shareholders of the company, who take it to the public. These shareholders are referred to as the founders or promoters.
The law requires a minimum of three founders for a public company. These founders have certain responsibilities and liabilities in respect of producing a prospectus for potential investors and preparing a report for the constitutive general meeting of the newly listed company.

There are also restrictions on the founders' shares. The founder members must hold between 30 per cent and 60 per cent of the shares in aggregate of the company once lis-ted. Further, no single founder may hold more than 20 per cent of the shares in the company. Founders are also placed under a two year restriction on a transfer of their shares (unless such transfer takes place between themselves or is by inheritance).

As a part of the CMA approval process, the founders are required to provide CMA with a considerable amount of detailed information about the company's activities, its organisation and the risks for investors.

The prospectus
The most important document submitted by the founders to CMA and investors is the prospectus. The prospectus is the key document issued to potential investors setting out the terms of the public share offering and important information about the company.
The founders are liable for all the information in a prospectus and also for any failure to provide necessary material information. It is therefore critical that it is as accurate and as complete as possible.

The founders may also opt for a 'verified prospectus'. This means that a legal adviser will independently verify each statement of fact in the prospectus. This increases the comfort investors may have with the prospectus, but can also take time and add to costs.

Underwriting
A company offering its shares for public subscription risks there not being enough
willing investors to subscribe for all of the offered shares.

This risk is often managed by entering into underwriting arrangements. Typically, an underwriter or syndicate of underwriters will agree to purchase any shares, which remain unsold at the end of the public offering.

In this way the company can be sure that it will receive a fixed amount of capital from the share offering. The risk of an unsuccessful offering is instead taken by the underwriter in return for an agreed fee.

Invitation to subscribe
Following receipt of all necessary regulatory approvals, the public can be invited to subs-cribe for shares in the company.

The founders must place an advertisement in at least two daily newspapers for two
consecutive days. Following advertisement of the IPO, potential investors usually have 30 days to subscribe to the offer. This time period can be extended by the CMA if it considers it appropriate to do so.

Following the closure of the subscription period the shares in the company are allotted to the investors who applied for shares. This allotment needs to be made on the basis set out in the prospectus.

Further formalities
As a part of the IPO process, a company changes its corporate form. All publicly listed companies in Oman must be a General Omani Joint Stock Company, known as an 'SAOG'. For most companies going through the listing process, this means transforming from a closed joint stock company into the general public form.

To make this transformation, there are additional requirements that must also be met. Aside from dealing with the formalities of registering an SAOG, an initial general meeting of the shareholders must be held. At this mee-ting, the founders submit a report on the IPO process for approval of the shareholders.

This is a high level overview of some of the processes that apply to IPOs in Oman. It is an onerous process that is designed to protect not only the investors but also the integrity of the market itself. It is therefore not surprising that there are only a limited number of IPOs each year. Despite all the hard work in getting an IPO to the market, they continue to provide a source of interest and excitement for investors in sharemarkets all over the world.