Going Public

Process in which a company raises external equity capital by offering its shares to public investors

Going Public is usually considered to be a synonym for initial public offering (IPO).

In the original sense, Going Public refers to the change in a company’s legal form when it is converted from private ownership – e.g., from a partnership, limited liability company – to a stock corporation, thereby giving the public the opportunity to invest in it.

In the meantime, however, Going Public has come to be used in a broader sense, in which it is understood to mean the initial listing of a company’s shares on the stock exchange, also called IPO. An IPO is usually planned and carried out in conjunction with an underwriting bank, or in the case of large new issues, a syndicate. The bookbuilding procedure has become the accepted method of determining the issuing price of a stock.

The primary advantages of Going Public are that it enables the company to raise additional equity capital and gives the original venture capitalists the opportunity to exit. Moreover, it is a form of publicity for the company, and serves to distribute the equity capital among a broader shareholder base. The best time for a company to go public is during a bull market, when it is more likely that all new shares will be bought, as this will lower the cost of capital.

Often, companies that are planning an IPO over the medium term will issue warrant-linked bonds and convertible bonds, which entitle the owner to subscribe to shares issued as part of the future IPO. If the IPO does not take place or is postponed, the bond is usually bought back by the issuer at above par.

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Global depositary receipt (GDR)

Security representing a foreign share

Global depository receipts (GDRs), which were developed on the basis of American depositary receipts (ADRs), securitize the ownership in shares. A GDR can relate to one or several shares, or a mere proportion of a share. GDRs are traded instead of the original shares on exchanges worldwide and are denominated in euro.

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German Stock Corporation Act

In law in Germany pertaining to stock corporations (AG) and commercial partnerships limited by shares (KGaA).

The German Stock Corporation Act (Aktiengesetz), enacted on 6 September 1965, regulates in particular the founding of a company, the legal relationships between the company and its partners or shareholders, capital, changes to the capital stock, and the dissolution of the company.

General Standard

Deutsche Börse listing segment for companies fulfilling the transparency requirements prescribed by German law

Admission to General Standard does not require any action on the issuers’ part; it occurs automatically with the listing in either the Official or Regulated Market.

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Exchange trader

Exchange traders are employees of firms admitted to exchange trading (see market participant).

Exchange traders conclude transactions on the exchange in the name of and for the account of their employer, or on behalf of a third party.

In order to be admitted to trading, exchange traders must demonstrate that they possess the necessary aptitude and sense of responsibility for trading on the exchange in an exam administered by the board of examiners at FWB® Frankfurter Wertpapierbörse (Frankfurt Stock Exchange). Traders who are active only in currency trading are not required to take the exam.

Exchange traders are permitted to trade only on behalf of their employer or a third party, and may not participate in own-account trading. In floor trading, each trader can represent only one firm; in electronic trading, one exchange trader can act on behalf of several firms.

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Entry Standard

Capital market access provided by Deutsche Börse for small and medium-sized companies as an alternative to EU-regulated segments

Entry Standard is a transparency standard within the Open Market (Regulated Unofficial Market) with additional requirements. Companies in Entry Standard must meet the following criteria and publish on their website:

• significant company news or circumstances that may be significant for the valuation of the respective stock/issuer
• the audited consolidated financial statements and management report (respective national accounting principles or IFRS) no later than six months after the end of the reporting period
• a brief, up-to-date profile of the company and a calendar of company events
• an interim report no later than three months after the end of the first half.

Inclusion in Entry Standard does not equal admission to a regulated market in the sense of article 2, para. 5 of WpHG (German Securities Trading Act). In Entry Standard, the provisions for organized markets do not apply. This particularly concerns the following stipulations:

• admission to the stock exchange (article 3, para 2 of AktG – German Stock Corporation Act)
• obligation to publish ad-hoc announcements (article 15 of WpHG – German Securities Trading Act)
• notification when threshold levels are reached (article 21 of WpHG – German Securities Trading Act)
• mandatory offer in the case of a change of control (WpÜG – German Securities Takeover Act)
• publication of a prospectus in the case of a private placement (article 3 of WpPG – German Securities Prospectus Act)

Therefore, Entry Standard is primarily aimed at qualified investors in the sense of article 2, para. 6 of WpPG (German Securities Prospectus Act), who are able to assess and accept the potential risks related to the investment in shares of the respective organization. Investors must be aware of the fact that this part of the Open Market (Regulated Unofficial Market) on the Frankfurt Stock Exchange is not subject to the high Europe-wide transparency standards and strict provisions for investor protection on organized markets.

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Electronic exchange

A largely automatic, computer-based system for securities trading

An electronic exchange is a trading platform in which order entry and forwarding, matching of buy and sell orders, and price determination are performed by a computer. In most cases, the system also includes functions for clearing and settlement procedures, market supervision, and the publication of relevant information.

Unlike a trading floor, which requires the physical presence of participants, an electronic exchange can be accessed from any location. Trading can take place 24 hours a day, or during established hours. The advantages of an electronic exchange are low costs, error-free settlement, quick reaction times, flexible markets and access from anywhere in the world.

Germany has two electronic exchanges: Eurex® for derivatives, and Xetra® for the cash market. Participants in an electronic exchange must be admitted to electronic trading.

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Clearing

The netting and settlement of claims and liabilities arising from securities and derivatives transactions

Clearing is typically performed by a central institution, the so-called clearinghouse. The clearinghouse determines the bilateral net debt of buyers and sellers involved in exchange transactions, and, at the end of the trading day, provides its members with a summary of their transactions, as well as the resulting net claims and liabilities. In the case of derivatives transactions, the clearinghouse will inform its members of the funds they must put up to meet their margin requirements.

To become a member of a clearinghouse, an institution must have a license, a securities account and a money settlement account with the clearinghouse. Moreover, it must furnish material, organizational and financial collateral as specified in the licensing agreements.

In its capacity as the central settlement institution for stock exchange transactions, the clearinghouse functions as a counterparty to trades, thereby guaranteeing the proper execution of trades as well as the settlement of the net debt. Eurex Clearing AG is the clearinghouse affiliated with Deutsche Börse AG.

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Dual Listing (DL)

A second listing on an exchange that isn’t the company’s domestic bourse

With a dual listing, also called a secondary listing, a company’s shares are placed on an exchange other than its domestic exchange. This can happen at the behest of the company or a market maker. A second listing is therefore not an initial public offering: It isn’t the worldwide debut of the company’s shares or a public offer, and the company is not required to produce a prospectus.

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Double listing

The listing of a security on more than one exchange.

Companies become listed on a second exchange in order to reach a broader-based public and attract additional investors. Because the fragmentation of share capital between different exchanges often results in diminished liquidity, companies usually undertake a capital increase in connection with a double listing.

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