Trading operation of IPO (Initial public offering), listing, OTC (Over-the-counter)
Trading operation of IPO (Initial public offering), listing, OTC (Over-the-counter) 30 March 2023 IPO (Initial Public Offering) refers to the initial public offering of a company’s shares. The company publicly offers its stocks for trading on the securities market in Taiwan, allowing investors to freely subscribe to them and raise funds for the company’s development. Once the IPO is completed, the company’s stocks can be traded on the public market (listed stocks on the stock exchange, and OTC stocks on the GreTai Securities Market). The following are explanations of different types of companies: I. Listed Companies: Companies whose stocks are publicly issued and listed for trading on the Taiwan Stock Exchange are considered listed stocks. Listed companies generally have higher requirements for paid-up capital and profitability. Besides having larger capitalization, the trading of stocks of listed companies tends to be more active. II.Over-the-Counter (OTC) Companies: Companies whose stocks are publicly issued and listed for trading in the over-the-counter market of the Taiwan OTC Exchange. OTC companies have lower requirements for capitalization and profitability compared to listed companies. III. First Listed or First OTC Companies: Refers to foreign companies coming to Taiwan to list their stocks for the first time on the Taiwan Stock Exchange or the GreTai Securities Market. This policy is designed to assist foreign companies, including Taiwanese businesses, in raising funds and helping them upgrade and grow. IV. Emerging Stock Companies: Currently, the GreTai Securities Market has both listed stocks and emerging stocks markets. The emerging stocks market serves as a preparatory market before listing or going public. Investors have the opportunity to get to know the publicly issued company during the emerging stock stage. The criteria for listing in the emerging stock market are relatively easier than listing or going public. The main purpose is to familiarize the publicly issued company with relevant securities market regulations, enhance the company’s visibility, and raise the necessary capital from the capital market. V. Innovation Stock (GISA): Innovation stocks primarily refer to the “Innovation Board” planned and established based on the US Jobs Act, which encourages exemptions for emerging growth companies and equity-based crowdfunding platform regulations. Public Offering and Listing Application: IPO: A publicly offering company refers to a company that applies to the Financial Supervisory Commission (FSC) for conducting an IPO process. Once approved, the company becomes a publicly offering company. The main difference between a regular company and a publicly offering company lies in the obligation of information disclosure. Important information regarding financial and business matters must be disclosed according to regulations on platforms such as the Taiwan Stock Exchange Market Observation Post. The general public can obtain information about the company’s financial and business situation through these disclosure platforms. Emerging Stocks: When a company meets the requirements for industry, establishment period, and financials, and is evaluated and recommended by at least two assisting securities firms, it can apply to be listed as an emerging stock company in the OTC market. Listing Application: After a company has been listed as an emerging stock company and traded for a minimum of six months, and also meets the listing or OTC requirements, it can apply for listing or going public. After passing the review of the Taiwan Stock Exchange or the GreTai Securities Market and receiving approval from the FSC’s Securities and Futures Bureau, the company can be listed for trading in the securities market and become a listed or OTC company.
Initial Public Offering (IPO) Equity Planning
Initial Public Offering (IPO) Equity Planning 30 March 2023 As their self-founded companies or family businesses steadily grow, entrepreneurs may consider the necessity of taking their businesses public through an IPO. The advantages of an IPO include the ability to raise capital from the capital market, increased stock liquidity, enhanced corporate equity value, heightened visibility, the flexibility to attract and retain talent through employee incentive programs, and the establishment of robust systems and a healthy corporate structure. For family businesses, choosing an IPO can help them achieve their long-term sustainability goals. However, the IPO process comes with various challenges and issues. The following analysis focuses specifically on IPO-related equity considerations. I. Requirements for Listing Capital The required IPO capital depends on the scale of business operations and growth. The listing requirements stipulate a minimum capital of NT$600 million for IPO applications, with a minimum of 30 million shares. For listing applications, the minimum capital is NT$50 million with a minimum of 5 million shares. The capital can be sourced from capital surplus or surplus reserve increase, cash increase, sale of existing shares, conversion of employee stock options, and other methods. Equity Distribution When applying for an IPO, companies must release at least 20% or 10 million shares to external shareholders. Additionally, for listing, the number of external shareholders must reach 500, while for over-the-counter listing, it must reach 300. By distributing equity, IPOs can strategically introduce strategic investors, partners, or use it for employee compensation programs, which positively contribute to the company’s operations. II. Investment Structure and Equity Composition During the process of external fundraising and equity distribution through an IPO, the ownership of company founders or family businesses may be diluted. Therefore, designing an investment structure and equity composition that ensures stability of management rights, reduces shareholder tax burden, and aligns with the goals of business succession is an important issue for entrepreneurs and family businesses to consider. 1. Investment Structure The pre-IPO investment structure restructuring needs to consider factors such as business development, external environment, investor requirements, and regulatory limitations. IPOs can be conducted domestically or internationally and can be listed on the Taiwan Stock Exchange or return to the domestic market. Different IPO entities also entail different tax burdens for shareholders. 2. Equity Composition Based on current practices under Taiwanese corporate law, there is a strong correlation between equity ownership and management rights. When planning equity distribution, the following equity structure considerations should be taken into account: – Absolute Control (over 2/3 or 67% equity): Enables complete control over major decisions through shareholder meetings (special resolutions such as amendments to articles of incorporation, removal of directors and supervisors, etc.), allowing complete dominance over significant corporate issues. – Relative Control (majority or 51% equity): Enables control over the company’s management rights through ordinary resolutions. – Protective Control (over 1/3 or 34% equity): Ensures stability of management rights and veto power over major proposals. If a company holds less than 1/3 of the shares, it is important to be aware that minority shareholders can easily acquire management rights through public market acquisitions. For example, under Article 173-1 (similar circumstances) of the Company Act, if a market party holds more than half of the shares for over three months, they can convene a shareholders’ meeting to elect new directors and supervisors. Furthermore, corporate equity control is an important tool for family business succession. To avoid the dispersal of equity and its impact on management rights, family businesses often choose to establish a holding company separate from the operating entity, effectively consolidating personal equity control through a closed holding company structure, facilitating multi-generational succession of the family business. III. Tax Considerations For companies going public in Taiwan, shareholders should be aware of tax considerations related to equity transfer and profit distribution. When transferring equity (prior to listing), securities transaction income generated should be subject to the minimum tax burden. It is advisable to complete the transfer of individual shareholders’ equity through gifting before the listing. In terms of profit distribution, individual shareholders’ dividend income can choose between (1) consolidated taxation: inclusion in comprehensive income tax, with a deductible rate of 8.5% capped at NT$80,000; or (2) separate taxation: separate taxation at a single tax rate of 28%. Corporate shareholders’ distributed dividends are not subject to income tax. However, if earnings are not distributed, a 5% tax on undistributed earnings applies.