CIMA F3 Syllabus B. Sources of long term funds - The role of advisors - Notes ^{6 / 15}

Raising finance on the capital market requires input from a wide range of experts.

Sponsor

A sponsor, typically an investment bank or large accountancy firm, acts as the lead advisor in an Initial Public Offer (IPO) on the Main Market. 

Firms offering services as sponsors must be approved by the UK Listing Authority (UKLA) which forms part of the UK’s Financial Conduct Authority (FCA). 

The sponsor’s functions include:

• Project managing the IPO process

• Co-ordinating the due diligence and the drafting of the prospectus (the prospectus is the document in which the company offers its share for sale)

• Ensuring compliance with the applicable rules

• Developing the investment case, valuation and offer structure

• Managing the communication between the London Stock Exchange and the UKLA

• Advising the company’s board both before the IPO and after

Bookrunner

Share issues in the primary market may be underwritten by a financial institution, such as investment bank. 

The issue of debt may be underwritten in the same way. The underwriter is referred to as the bookrunner.

The bookrunner undertakes to raise finance from investors on behalf of the company. 

In the process, it helps to determine the appropriate pricing for the share or debt. 

If the bookrunner is unable to find enough investors, it will hold some of the share itself. 

In a public offering, shares are often underwritten by a syndicate of several bookrunners.

Reporting accountant

The directors bear legal responsibility for the integrity of the listing documents (including the prospectus). 

The sponsor, as the company’s lead advisor, risks considerable damage to its reputation should the prospectus be deficient. 

For this reason, the sponsor would usually require the company to engage a reporting accountant to review and report on the company’s readiness for the transaction.

The reporting accountant would typically report on the following:

• Financial reporting procedures - whether the company would be able to meet its reporting obligations as a public company

• Financial historical records - the equivalent of an audit opinion on the company’s entire financial track record.

• Working capital - whether the basis for the directors’ working capital statement in the prospectus is sound

• Other information - any other additional information provided in the prospectus, such as profit forecast and pro-forma financial information (for example, to illustrate the effects of an IPO)

Lawyer

The London Stock Exchange is governed by EU law, UK Acts of Parliament, the FCA’s Listing Rules and the Exchange’s own rules. 

Lawyers therefore play an important part in ensuring that the company meets the eligibility criteria for the listing, and continues to comply with the ongoing obligations of a public company.

Advantages of a listed company

• PR/image

  - Attract customers 
  -Credibility with suppliers

• Exit strategy for original owners

  - Sell part/all of holding 
  - Realise cash

• Wider pool of investors

  - Institutional investors 
  - Investment banks

• Growth by acquisition

  - Share for share exchanges possible

• Marketability of shares

  - Secondary market 
  - Investors have an exit route

• Raise significant funds

  - Investors with deep pockets

Disadvantages of a listed company

• Listing fees

• Increased reporting requirements

• Greater scrutiny

• Investor activism

• Hostile takeover

• Corporate governance