"The SGX also wants to scrap a 40-year-old rule that requires a newly listed
firm to have at least 1,000 shareholders. It proposes that the limit be cut to
500 investors. " - Straits Times 31 July 2008
SGX is proposing a new listing rule whereby IPO aspirants only need to ensure they have 500 shareholders at the point of listing instead of the current 1,000 requirement. During the bull run, this requirement seems to be a 'non-issue' but during current stale market sentiments, this rule seemed to be a very 'heavy burden' for IPO managers, underwriters and companies applying for listing. How do they get 1,000 people to subscribe for the shares when the market sentiment is poor (like now) ?!
Rationale behind the 1,000 shareholders.
Let's try to understand the rationale for this magical 1,000 shareholders. I had a discussion with an experienced IPO manager and understands that this 1,000 shareholders requirement in only applicable at the point of listing because no one can ensure how many shareholders there are post-listing as so many shares changed hands after a company is listed. In my opinion, the 1,000 shareholders listing requirement is to ensure that the shares are properly distributed so that it is more difficult for any one to corner the stock or control the prices post-listing. If you remember the mid-continental IPO saga, the share price experienced a sharp ramp up post-listing as 90% of its shares were placed with 5 shareholders. Even the then-DPM Lee has to answer queries with regards to Mid Continental saga in the parliament. As such, the motive behind the 1,000 shareholders is a good one, however, this listing criteria may prove to be a tough one during the bad times.
What do underwriters do to meet this 1,000 shareholders criteria?
As this is a very sensitive topic, i will not mention the names of the underwriters here. Let us first understand the IPO process for this part of the story. Before any listing, the underwriter and IPO managers will source for 'strong hands' to place out the shares to. Then they will place out the remaining shares to the clients who are interested to apply for the shares. After which they will then launch the public tranche of the IPO to ensure they meet the minimum 1,000 shareholders criteria. If they can meet this 1,000 criteria during the private placement tranche, they will be even happier.
There are a few ways in which the underwriters try to meet this criteria:
1. IPO club. Some firms will have IPO clubs to place out the shares to clients. Members of the IPO club have to 'eat' the shares in good times and bad and have to take the shares no matter if the issue is good or bad for a 6 months or 12 months period. During this time, any IPO that is underwritten by the firm will be placed out to IPO club members.
2. Large brokerage firm. Some IPO managers prefer to work with large brokering houses because of the huge clientele. It is easier for a large brokerage firm to ensure the 1,000 shareholders criteria is met.
3. Sub placement. Sometimes small brokerage firm may not have the capacity to meet this criteria, so they will 'sub out' the placement tranche to a bigger firm.
4. Special incentive fees. Dont be surprised if you hear of people being approached to apply for 1 lot of the IPO public tranche. They will give you a 'reward' to cover your expenses for the trouble to apply and sell the shares and to cover any potential losses.
5. Public tranche. The IPO tranche is another way to ensure they meet the 1,000 shareholders criteria. And to ensure they meet this "1000 shareholders" rule, an investor cannot take the private placement shares and apply for the public tranche shares as well so that there will not be 'multiple application' or double counting.
Let's see if the newly proposed minimum 500 shareholders rule will be push through. While it is easier to push through the amendments during bad times, dont be surprised if retail investors start to bang the table again and question about 'fairness' of the IPO allocation when they find it so difficult to get the IPO shares during a hot market and wants the "thousand" rule to be "reinstated". :P
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