What Is Flotation?
Flotation (also called “going public” in the United States) is the process by which a privately held company converts to a public company by issuing shares and making them available for purchase by the general public. The most common form is an initial public offering (IPO), but the term also covers later issuance of new shares (follow‑on offerings).
Key takeaways
– Flotation raises equity capital from public markets, providing funds that do not need to be repaid as debt. [1]
– It creates liquidity for early investors and founders but brings regulatory, disclosure, governance, and market‑pressure obligations. [1][2]
– Flotation is resource‑intensive: legal, accounting, underwriting, and marketing (roadshow) costs and management time are significant. [1][3]
– Alternatives include private equity/venture capital, private placements, debt financing, bank loans, and crowdfunding. [1]
Understanding flotation
Why companies float
– Raise large amounts of capital to finance growth, M&A, R&D, inventory, capital expenditure, or to repay debt.
– Provide liquidity to founders, employees, and early investors.
– Increase public awareness and credibility, which can help with sales, recruiting, and business development.
Stages where flotation is used
– Early‑stage flotation: Rare because young companies often lack the scale, predictable earnings, and governance maturity investors expect. When it happens, careful timing and governance preparation are critical. [1]
– Later‑stage flotation: More common; mature firms with revenue, profitability prospects, and audited financials can better absorb the costs and scrutiny of public markets. [1]
– Follow‑on offerings: Public companies often issue additional shares after the IPO to raise more capital. These are also considered forms of flotation. [1]
Is flotation a good strategy?
It can be, but suitability depends on the company’s goals, capital needs, governance readiness, and tolerance for public scrutiny:
– Good fit when large, durable capital is needed and management is ready to operate under investor scrutiny and regulatory compliance.
– Poor fit when the company can meet capital needs through private routes or wishes to avoid disclosure and governance burdens.
Alternatives to flotation
– Private equity / venture capital rounds
– Private placement to accredited investors
– Bank loans or corporate debt issuance
– Convertible notes or venture debt
– Equity crowdfunding (where permitted)
– Small business loans and grants
Each option has tradeoffs: cost of capital, dilution, control, covenants, and disclosure requirements. Many private firms prefer these to avoid public reporting and the full cost of an IPO. [1]
Advantages and disadvantages of flotation
Advantages
– Access to large amounts of equity capital without scheduled repayment.
– Liquidity for early investors and employees (easier to realize returns).
– Increased public profile and credibility.
– Potentially lower cost of capital over time if market values company favorably.
Disadvantages
– High upfront costs (underwriting fees, legal and accounting fees, listing fees).
– Ongoing costs and regulatory compliance (periodic reporting, audits).
– Greater public and media scrutiny and pressure to meet quarterly expectations.
– Dilution of existing ownership and possible loss of control.
– Share price volatility unrelated to operational performance. [1][2][3]
Flotation process — step‑by‑step (practical steps)
Below is a practical sequence companies typically follow; timing varies widely (often 6–18 months from decision to listing, depending on readiness and market conditions).
1. Internal readiness assessment
– Evaluate strategic reasons for flotation and compare alternatives.
– Assess financial history, growth prospects, governance maturity, and management bandwidth.
– Prepare a high‑level timeline and budget for the process.
2. Assemble advisors and management team
– Select lead underwriter(s)/investment bank(s).
– Hire legal counsel experienced in securities law and IPOs.
– Engage auditors (if not already audited to public company standards).
– Retain investor relations and public relations advisors for communications.
– Consider corporate governance advisors to set up a board and committees. [2][3]
3. Corporate restructuring and governance
– Adopt public‑company governance practices (independent directors, audit committee, remuneration policies).
– Implement or upgrade internal controls and financial reporting systems (SOX readiness in the U.S. if applicable).
4. Financial preparation and audits
– Prepare and audit historical financial statements to meet regulatory filing requirements (typically multiple years).
– Ensure accounting policies align with standards required by the jurisdiction (e.g., U.S. GAAP or IFRS).
5. Due diligence and drafting the prospectus/registration statement
– Underwriter and legal counsel perform due diligence on operations, legal matters, contracts, IP, and risks.
– Draft registration statement (in the U.S., Form S‑1) or prospectus required by the listing jurisdiction. This document discloses risks, financials, use of proceeds, and management discussion. [2]
6. Regulatory filing and review
– File registration documents with the relevant regulator (e.g., SEC in the U.S.). The filing triggers a review period; the company cannot sell securities until the regulator declares the registration effective. [2]
– Respond to regulator comment letters and revise filings as necessary.
7. Marketing (roadshow) and bookbuilding
– Underwriters and management conduct a roadshow to institutional investors to explain the business and gauge demand.
– Bookbuilding: underwriters collect investor demand to help set the offering price and allocation.
8. Pricing and allocation
– Finalize the size and price of the offering based on demand, comparable valuations, and market conditions.
– Underwriters allocate shares to investors. A greenshoe option (overallotment) is commonly used to stabilize the aftermarket.
9. Listing and trading
– Once the registration is effective, shares are issued and begin trading on the chosen exchange.
– Underwriters may engage in price stabilization measures for a short period.
10. Post‑IPO obligations and stabilization
– Implement investor relations program, regular earnings reporting, and regulatory filings.
– Observe lock‑up periods (often 90–180 days) during which insiders cannot sell shares, to reduce early selling pressure.
– Monitor shareholder base and corporate governance compliance continuously.
Fast fact
– Any company that offers securities to the public in the U.S. must register the offering with the SEC and cannot sell securities until the registration is declared effective. [2]
Practical checklist before you decide to float
– Clear strategic rationale and estimate of how much capital is needed.
– Management bandwidth and willingness to become a public company.
– Audited financials for required periods and strong internal controls.
– Governance: board structure, committees, and independent directors.
– Legal review of contracts, IP, and potential liabilities.
– Budget for underwriting, legal, accounting, exchange listing fees, and IR.
– Communication plan for employees, customers, and investors.
– Contingency plan if market conditions deteriorate.
Costs and timeline considerations
– Costs include underwriting fees (typically the largest single expense), legal and accounting fees, listing fees, and management time. Exact percentages and amounts vary by jurisdiction, deal size, and complexity. [1][3]
– Timeline depends on readiness and jurisdictional review cycles; plan for months to over a year for a traditional IPO process.
Post‑flotation governance and operations (practical steps)
– Strengthen financial reporting cadence (quarterly/annual filings as required).
– Establish investor relations as a formal function.
– Monitor compliance, insider trading policies, and disclosures.
– Train executives and board members on earnings calls and analyst interactions.
– Plan capital allocation and consider whether further follow‑on offerings will be needed.
Follow‑on offerings (practical steps)
– Assess market conditions and company needs.
– Coordinate with underwriters to design the offering (secondary sale vs. primary issuance).
– Update prospectus or file additional registration statement if required by law.
– Communicate clearly with shareholders about the purpose and expected use of proceeds. [1]
Is flotation the right strategy for your company?
Ask these pragmatic questions:
– How much capital is needed and could that be raised privately?
– Can your management and board handle ongoing public scrutiny and reporting?
– Are the company’s financials and controls audit‑ready?
– Is market timing favorable (investor appetite for your sector and comparable companies)?
– Are founders and early investors willing to accept dilution and possible loss of control?
Downsides and risks (practical mitigation)
Downsides:
– High costs and ongoing compliance burden.
– Short‑term market pressure can conflict with long‑term goals.
– Risk of reputational damage if results miss expectations.
Mitigation strategies:
– Prepare comprehensively before filing to reduce surprises.
– Build a strong communications program to set realistic expectations with investors.
– Phase capital needs: consider staged financing or smaller follow‑on offerings rather than a single large IPO if appropriate.
– Retain some control mechanisms (e.g., dual‑class shares) only where permitted and with consideration of investor reception.
Regulatory requirement: must securities be registered with the SEC?
– Yes. In the U.S., a private company issuing shares to the public must register the securities with the SEC and cannot begin sales until the SEC declares the registration effective. Different jurisdictions have similar registration and prospectus requirements. [2][3]
The bottom line
Flotation is a powerful tool to raise equity capital and provide liquidity, but it comes with significant costs, governance changes, and public scrutiny. Companies should weigh the capital and strategic benefits against the immediate expenses, ongoing reporting obligations, and potential loss of control. Careful pre‑IPO planning, the right advisors, and realistic market timing are essential to maximize the chances of a successful flotation.
Sources and further reading
1) Investopedia. Flotation. https://www.investopedia.com/terms/f/flotation.asp
2) U.S. Securities and Exchange Commission. Going Public. https://www.sec.gov/reportspubs/investor-publications/investorpubs-goingpublicguidehtm.html
3) Chartered Governance Institute UK & Ireland. Company Directors: The Pitfalls of Preparing to Float.
4) Global Legal Group. Initial Public Offerings Laws and Regulations 2024.
If you want, I can:
– Convert the practical steps into a customizable checklist or timeline for your company’s specific situation.
– Outline typical fees and fee‑sensitivity by company size (general ranges).
– Draft a sample S‑1 outline or investor presentation (non‑confidential example). Which would be most helpful?