IPO Process: How can a Company Go Public in the Philippines

Last Updated Oct 27, 2021 @ 1:47 pm

Imagine you’re an entrepreneur who owns a promising corporation. As your company matures and gains more potential, the natural thing to do is make it bigger so it can achieve greater heights. 

The Philippine Stock Exchange or PSE is currently encouraging small and medium enterprises to go public since the rules for Initial Public Offerings or IPOs have become more relaxed. In 2021, PSE changed its listing framework, and this was approved by the Securities and Exchange Commission or SEC.1 

Under this framework, the country’s rules are now at par with the corporate regulations of other ASEAN countries. The rules for SME follow a sponsor-driven model which includes the removal of the requirement of positive Earnings Before Interest Taxes, Depreciation, and Amortization or EBITDA.

This was replaced by the Cumulative Net Sales or Operating Revenues. The required operating history has also been shortened from three to two years, and the Php100 million minimum authorized capital stock requirement has also been removed. 

To help you gain a better understanding of the IPO process, we’ve compiled this guide to help you. 

What is an IPO?

What do successful companies like BDO, Ayala Corporation, Aboitiz Equity Ventures, BPI, and San Miguel Corporation all have in common? 

They are all publicly traded. 

Every company’s growth starts from somewhere, and one way to do this is by offering shares to the public through the Philippine Stock Exchange. This process is called Initial Public Offering or IPO. 

An IPO or Initial Public Offering enables companies to raise more funds from public investors. This form of equity financing involves founders giving up a percentage of their ownership in exchange for more capital so they can avoid loan financing options

When companies transition from private to public, they can maximize their growth. At the same time, investors can also gain from the stock investment.  


How does IPO work?

Before an IPO, companies are owned privately by their founders. In some cases, founders own the company with a group of lenders. Founders give these lenders equity or part of the company in place of cash because if the company fails, giving it away won’t cost any money. After a company goes public, this stock that used to be worth nothing will have a sizable value. 

However, because the shares of a non-IPO company are not publicly traded, it’s hard to place value on them. Mostly, the value of a private company is hugely dependent on its revenue, assets, income, and growth, among other factors. When a company goes public, buyers will immediately know how much each share is. 

When companies decide to go through the IPO process, the news may barely register with the masses. However, when large companies become public, people start to take notice. Regardless of whether you are a known company or not, investors would still want to buy IPOs when it becomes available. 


IPO Process in the Philippines

Before you know the IPO process in the country, you must understand that many parties are involved in an IPO such as the regulators (SEC1 and PSE2), the issuer, agents, legal counsel, advisory team, and trading participants, among many others.

Because publicly trading your company is a hard process, you can’t immediately go public a month after you decide to go through with it. It can take six month to three years to process due diligence, regulatory approvals, and documentation.

As with other major decisions for your company, the IPO process is something that should not be taken lightly and you have to prepare for it. 

Step 1: Preparatory Stage

Before going through the IPO process, you and your team need to dedicate effort and resources to it. Here’s what you need to do beforehand.

Settle all your financials

All successful IPOs must have organized financial records because they will be heavily audited and examined. Your senior management, finance, and accounting teams must have strong skills. When not done right, these financial reports can hamper your approval. 

If you still have not automated your financial reports, make sure to prioritize them. All proper systems should be in place so information is accurate. Do not forget to pay close attention to the metrics that affect your business results. This way, you can anticipate and solve potential dips before it happens. 

Prioritize leadership

When a company goes public, chances are, the employees won’t be able to feel the difference.

However, the founder and top executives will since these people need to follow new rules and regulations. For example, some of the important things you must master include how to attract and impress investors, and build a strong media connection to safeguard your future. 

More than that, you need to make sure you have top-tier leadership. A strong board of directors will do wonders to help your business grow. These people will also help oversee the financial reporting process. 

Shift your focus to the future

Your long-term business goals will be put in the spotlight during the IPO process since investors and regulators want to know what your clear plan is.

What you can do is to clearly identify how you want to use the proceeds of your IPO in your business plan. 

Think if you’re ready to lose confidentiality

When you go through an IPO process, you will lose some portion of your company’s confidentiality since it will be part of your obligation to disclose documents and sensitive information.

Are you willing to do these even if it means your competitors will have access to it? And are you okay with people seeing poor results that can affect your public image? 

Set aside money

Before you go through with the IPO Process, make sure to set aside money. Public companies are usually in great financial shape, but you still need money to cover huge expenses, and to serve as your financial cushion in case things go south.

Keep in mind that the IPO process is not free and there are initial costs you need to shoulder, as well as annual costs that come with being an issue. This includes the following:

  • IPO tax
  • SEC fees
  • Listing and maintenance fees
  • Underwriters’ fee
  • Accounting fees
  • Legal fees 

All IPO management processes must also be planned accordingly to ensure that your day-to-day operations are not affected. 

Step 2: Filing and Approval Stage

Now that you’ve prepared everything, you’re ready to file your IPO. Here are the different steps involved. 

Select an investment bank

An investment bank will provide underwriting services and advise you on your IPO. When choosing a bank, make sure to keep in mind the following factors:

  • Reputation
  • Industry expertise
  • Quality of research
  • Previous relationship with the bank
  • Distribution of issues securities to investors

File it 

File your registration statement with the SEC, as well as your listing application with the PSE. After this comes the evaluation of the two documents, as well as the issuance of and replies to comment letters.

Before the SEC pre-effective letter and approval of the PSE board of directors is released, there needs to be an ocular inspection and company presentations. 

Step 3: Road Show and Book Building Stages

For this stage, the anchor and cornerstone investors will be secured. The offer will also be presented to potential investors. 

Then, you need to take part in analyst briefings.

On the day before your effective date, the company and underwriter need to decide on your offer price or the price at which your shares will be sold, as well as the number of shares that will be made available. The following factors will determine your price:

  • Goal of the company
  • Outcome of the roadshows3
  • Market economy condition

It is normal for IPOs to be underpriced to make sure the issue is oversubscribed or fully subscribed by investors even if the company will not receive the full value of its shares. Because it is underpriced, the investors can also expect an increase in its price and demand. 


Criteria & Requirements for Being Listed in PSE

The Philippine Stock Exchange (PSE) operates a system that has two boards namely the mainboard, and the SME board. The difference between these boards is their minimum capitalization requirement.  

The general criteria that apply to both boards are as follows:

  • Positive Stockholders Equity in the fiscal year preceding the filing of its application
  • 2-3 years operation before its listing
  • All subscribed shares of the same type and class applied for shall be paid in full
  • The minimum offerings are as follows:
    • Not exceeding Php500 million: 33% or Php50 million, whichever is higher
    • Over Php500 million to Php1 billion: 25% or Php100 million, whichever is higher
    • Over Php1B to Php5 billion: 20% or Php250 million, whichever is higher
    • Over Php5B to Php10 billion: 15% or Php750 million, whichever is higher
    • Over Php10 billion: 10% or Php1 billion, whichever is higher
  • The corporation must engage the services of an independent appraiser when required by the PSE. The appraiser must be accredited by the SEC.
  • The corporation must have an investor relation program that includes a corporate website with the following information:
    • Corporate News and information
    • Financial report
    • Investor FAQs
    • Disclosures
    • Investor contact
    • Stock information

Other specific criteria for the main board are: 

  • The applicant should have cumulative consolidated earnings before interest, taxes, depreciation and amortization (EBITDA), excluding non-recurring items, of at least Php50 million for three full fiscal years immediately preceding the application for listing;
  • The applicant should have a minimum EBITDA of PhP 10M for each of the 3 fiscal years;
  • The applicant must be engaged in the same business/es and must have a proven track record of management throughout the 3 years before the application. This admits of the following exceptions:
    • If the applicant has been operating for at least 10 years and has a cumulative EBITDA of at least Php 50 million for at least two of the three fiscal years before the application;
    • The applicant is a newly formed holding company that uses the operational track record of its subsidiary.
  • The applicant must have a minimum authorized capital stock of Php500 million, with at least 25% being subscribed and fully paid. The minimum Market Capitalization is Php500 million.
  • Upon listing, the minimum number of shareholders should at least be 1,000 with each owning stocks equivalent to at least one board lot.
  • No divestment of shares in operating subsidiary;
  • No secondary offering for companies invoking exemption of track record.
  • Lock-up Requirements. The applicant shall cause its existing shareholders who own at least 10% of the issued and outstanding shares to refrain from selling, assigning, or disposing of the shares for 180 days after listing – if the track record requirement is met; otherwise, 365 days.

Note: In case there is an issuance or transfer within 180 days before the offering period, and the transaction price is lower, all the shares will be subjected to a 365-day lockup period. This shall be stated in the AOI of the applicant. 

Specific criteria for SME board:

  • The applicant must have:
    • A cumulative EBITDA, excluding non- recurring items, of at least Php15 million for the two fiscal years immediately preceding the application or such shorter period as the company has been operating; OR 
    • A cumulative Operating Revenues or Sales of at least Php150 million for the last two fiscal years immediately preceding the filing of the listing application or such shorter period as the company has been operating, with an average net sales or operating revenue growth rate of at least 20% for the 2 fiscal years immediately preceding the listing application filing
  • The applicant must be engaged in materially the same business and must have a proven track record of management throughout the last 2 years before the application;
  • The Applicant Company shall demonstrate its stable financial condition and prospects for continuing growth by providing a business plan indicating the steps that have been taken and to be undertaken to advance its business over five (5) years.
  • The stockholder equity requirement must be at least Php25 million for the most recent fiscal year
  • Upon listing, the minimum number of shareholders should at least be 200 with each owning stocks equivalent to at least one board lot.
  • No holding, portfolio, and passive income companies;
  • No change in the primary purpose and/or secondary purpose for 7 years following its listing;
  • No offering of secondary securities for companies exempt from track record and operating history requirements
  • Lock-up Requirements. The applicant shall cause its existing shareholders to refrain from selling, assigning, or disposing of the shares for 1 year after listing.

Note: In case there is an issuance or transfer within 6 months before the start of the offering and the transaction price is lower, all shares shall be subject to a lock-up period of  365 days. This lock-up shall be stated in the AOI of the applicant.


Benefits of Going Public (IPO) in the Philippines

The Initial Public Offering (IPO) process in the Philippines is both time-consuming and expensive, so why should you do it? Here are some of the benefits of going public. 

Raise capital

One of the biggest advantages of companies that go through the IPO process is they can raise capital by selling or creating shares.

Unlike loans, the capital derived from these shares is not seen as debt. These shares can even be used as compensation for the employee to increase their morale. When the company’s value increases, they too can enjoy the benefits. 

Increased brand trust and prestige 

Financial institutions, investors, and even employees and customers will see the company differently after it goes public since they have proven to be a reputable player in the industry. 

This increased recognition can be extremely beneficial since it gives free advertising and an edge in public relations. When more people know about your company, the opportunities for more revenue will increase. 

Improved access to debt and equity providers

When a company is publicly traded, it will enjoy better access to equity and debt markets if they need additional capital for future projects to scale the company.

Unlike IPO, the future offerings will not need intense preparation. Companies also have a higher chance of getting approved loans because IPOs have strengthened their balance sheet. 

Higher liquidity

IPOs can give higher liquidity to the founder, pre-IPO investors, and employees that hold stocks for the company.

While there is a lockup period for the pre-IPO investors, the future value of their stock will increase.

Tax benefits

Using business stock for acquisition decreases a company’s need for cash. Public companies can now complete transactions without using the proceeds from the IPO to inspire more growth.

The acquisitions made with the stocks are also considered tax-free. Therefore, businesses can enjoy gains from the sale while deferring the tax. 

Generate capital influx

Usually, businesses sell a huge number of shares the moment they go public. This drives an influx of capital.

The money derived from the shares can be used in any way by the business as long as it is outlined in their stock prospectus. 


IPO Process in the Philippines FAQs

By now, you’ve learned a lot about the IPO process, but you may still have questions in mind. We’ve gathered the most frequently asked questions about the IPO process below.

When is a company ready to go public?

Before a company goes public it should answer the following questions:

1. Will the benefits of the IPO process outweigh its costs?
2. Do the products and services of the company interest the investing public, and are they highly visible?
3. Does the company have a great track record to impress investors?
4. Is the current management capable of committing time and effort to meet deadlines and deliverables to the PSE and SEC? 
5. Is the company at a point where the prospects to maintain steady earnings and growth are good?
6. Is the market condition right? 

If the answer to all those questions is a resounding YES, then you are ready to go public. 

How to determine if an IPO is worth investing in? 

Investing in an IPO should not be taken lightly. Investors should research the company, as well as the industry they belong to see its potential. Reading the prospectus of the company and as well taking a look at their track record is also crucial.

Additionally, it is recommended to assess a company’s expansion plans after the IPO. Investors should only put their money in companies that have clearly outlined their growth through any of these ways:

1. Acquisition of new companies
2. Expand to new markets
3. Open new branches
4. Buy new equipment
5. Research and develop new products

Taking into consideration all these factors will ensure that you can weigh the risks and rewards of your investment properly. 

What are the requirements for an IPO in the Philippines?

According to PSE, the criteria for the main board includes:

1. A Minimum of 3 years engaging in materially the same business
2. Minimum of 7 directors, 2 of which or 20% of the board have to be independent, and each director should have at least 1 share in his name
3. Profit test: 

a. Cumulative net income, excluding non-recurring items, of at least Php75 million for three full fiscal years immediately preceding the application for listing; AND
b. Minimum net income of Php50 million for the most recent fiscal year

For this purpose, the Applicant Company shall submit to the Exchange audited consolidated financial statements for the last three full fiscal years preceding the filing of the application. The financial statements must be accompanied by an unqualified external auditor’s opinion.

4. Stockholders’ equity must be at least Php500 million for the most recent fiscal year
5. At least 1000 stockholders, each owning stocks equivalent to at least one board lot
6. Minimum public offering of 20% upon and after listing

For SME Boards, the criteria are as follows:

1. Two years of engaging in materially the same business
2. Minimum of seven directors, two of which or 20% of the board have to be independent, and each director should have at least one share in his name
3. Applicant must satisfy oneof the following requirements:

a. Cumulative EBITDA, excluding non-recurring items, of at least Php15 million for the three fiscal years immediately preceding the application or such shorter period as the company has been operating; OR
b. Cumulative Operating Revenues or Sales of at least Php150 million for the last three (3) fiscal years immediately preceding the filing of the listing application or such shorter period as the company has been operating, with an average net sales or operating revenue growth rate of at least 20% for the 2 fiscal years immediately preceding the listing application filing

4. Stockholders’ equity must be at least Php25 million for the most recent fiscal year
5. At least 200 stockholders, each owning stocks equivalent to at least one board lot
6. Minimum public offering of 20% upon and after listing
7. Submission of a business plan containing steps to advance the company’s business over five years


Sources

  1. SEC.gov.ph
  2. PSE.com.ph
  3. The Business Professor

About MJ de Castro

MJ de Castro is the lead personal finance columnist at Grit PH.

MJ started her career as a writer for her local government’s City Information Office. Later on, she became a news anchor on PTV Davao del Norte.

Wanting to break free from the shackles of her 9-to-5 career to live by the beach, she pursued remote work. Over the years, she has developed a wide specialization on health, financial literacy, entrepreneurship, branding, and travel.

Now, she juggles writing professionally, her business centering on women’s menstrual health, and surfing.

Education: Ateneo de Davao University (AB Mass Communication)
Focus: Personal Finance, Personal Development, Entrepreneurship, & Marketing

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *