After a listing, does the money go into the company or into the boss's pocket?

Hook

A company lists, and the prospectus says: three hundred million ringgit raised. A boss sees that number and his first reaction is that the company now has three hundred million in cash and can go and expand. Not necessarily. It is entirely possible that not one sen of that three hundred million ever passed through the company's account. This episode makes it plain: whose pocket does the money from a listing actually go into?

Two kinds of share, two destinations

The shares sold to the public in a listing come from only two sources. The first: new shares. The company prints new shares and sells them. The money goes into the company. The share count rises, and the existing shareholders' percentages are diluted. The second: existing shares sold. Nothing new is printed; an existing shareholder takes shares out of their own holding and sells them. The money goes into that shareholder's personal pocket. The company's share count is unchanged and the company gets not one sen. Remember it in one line: new shares, the money goes into the company; vendor shares, the money goes to a person. Most initial public offerings mix the two. A pure sale of existing shares is rarer, but it does happen. The prospectus will always set out how much is which, and what every ringgit is for. That page is the first page a retail investor should turn to.

So the question you should be asking is different

Once you separate the two, the question you ask changes. When you see a company take in a large sum by issuing new shares — the question is: where is this money going to be spent, and is it worth spending there? The money is in the company, you are a shareholder, and you have a share of it. When you see a major shareholder sell a lot of existing shares — the question is a different one: why is he cashing out at this price, at this time? That is not to say selling existing shares is always bad. A founder who has put in twenty years and takes a little cash off the table is perfectly normal. But that money goes into his account, not into the company's bank account — and those two things should not be run together.

The moratorium: why the boss cannot sell the moment he lists

Next, the moratorium. After a listing, not everybody can sell the following day. The group that is locked in is called specified shareholders in the rules — including the controlling shareholder, persons connected to the controlling shareholder, and executive directors who are substantial shareholders. The rule is blunt: for the first six months after listing, not one of their shares can be sold, transferred or registered to anybody else. After six months it is released gradually in stages — how many stages and how much in each differs between markets, and what governs is what that company's prospectus says. Why have this at all? To stop a boss dumping his shares on retail investors on listing day, taking the money and leaving behind a company nobody is minding. And there is another layer few people know about: people who got shares cheaply shortly before the listing are locked in too. If an investor who is not a specified shareholder obtained shares within the twelve months before the listing application was submitted, and at a price below the public issue price — those shares are locked for six months as well. That rule exists to stop "stuff a batch of cheap shares to friends before the listing and let them sell out the moment it lists".

Three routes to raising money after listing

Listing is not the finish line. The company still needs money, and there are three routes. First: a rights issue. It goes to every shareholder in proportion to their existing holding. Take it up and your percentage does not change; do not take it up and you are diluted. This is the fairest of the three, because it protects the percentage you already had. Second: a private placement. It is issued only to selected people — usually institutions or a strategic shareholder being brought in, and often at a discount. You have no share in it. So you are diluted for certain. Third: a rights issue with underwriting. Everybody gets their proportionate offer, and whatever is not taken up is absorbed by the underwriter. Separate those three and you can read an announcement and tell whether it is good news or bad: both are "the company got money", but a rights issue is everybody chipping in, and a private placement is you being watered down.

This one is for unlisted bosses too

By now you may feel this episode has nothing to do with you because you are not listed. It does. And it is the very same question. Tomorrow somebody wants to buy into your company, and by the end of the discussion you will always hit this sentence: is this money buying the shares you hold, or subscribing for new shares the company issues? Buying the shares you hold — the money goes into your pocket, the company is still the same company and still short of money. Subscribing for new shares — the money goes into the company, the company has money, but your percentage is diluted. Both are legal, and the consequences of the two are completely different. The difference is what you want: cash in hand, or the company getting bigger. A great many shareholder disputes start exactly where this sentence was never made clear: one side thought the money was going into the company and the other thought he was buying that man's shares.

To close

To close in one line: when you see "how much was raised", ask first — into the company, or to a person? A listed company has to write it in the prospectus. Your company writes it into the agreement you sign with the other side. Bringing in a shareholder, working out the dilution, getting it written down properly in the documents? Grab a coffee first and talk about your business. For the accounting, come to LTT. I am LTT, helping SME bosses get their accounts straight. Follow us, and see you next time.