Clearer disclosure of IPO investment proceeds needed
The public should know the use of funds upfront, in terms of every S$1 invested – not every S$1 the company receives
WHEN companies prepare to go public, their marketing efforts tend to revolve around growth prospects, market opportunities and possibly their strategies to drive future success.
Yet one critical element, namely how the proceeds from the initial public offering (IPO) will actually be used, is often buried deep within prospectuses which tend to run into hundreds of pages, rather than highlighted in promotional materials.
This raises a valid question: If investors are providing capital, shouldn’t the deployment of that capital be front and centre? After all, it’s only natural when money is lent to ask what the money is for, so why isn’t this the case for IPOs?
Stated differently, since an IPO aspirant is effectively taking money from the public, shouldn’t the public be told upfront where their money is going? There are several reasons why the “use of funds” typically stays in the background.
One, IPO marketing prioritises aspiration and storytelling. Roadshows and investor presentations are designed to build confidence and excitement, focusing on the company’s trajectory and competitive edge.
The aim is to paint a picture of a future that feels both compelling and credible. Talking too much about mundane uses of funds – such as repaying debts, refinancing existing facilities, or covering listing expenses – doesn’t necessarily add sparkle. For some IPO candidates, a portion of proceeds goes to existing shareholders cashing out, or vendor shares, rather than to business expansion. This is hardly the most marketable message.
Two, if an IPO issuer highlights that a substantial chunk of the proceeds will go towards repaying debt or that vague, catch-all term “working capital’’, investors might wonder whether the company is struggling financially.
By downplaying granular disclosures, the issuer reduces the risk of investors fixating on potential weaknesses rather than broader growth potential.
However, should the rules cater to what the industry wants? Or should the right approach be to ask what would be useful to investors?
Going with the latter, to give investors the right information for informed decisions, a good starting point would be to mandate the proper disclosure of the use of funds.
This disclosure should be clear and simple to understand, detailing the use in terms of every dollar invested: every S$1 put in by the investor, not every S$1 received by the company – which is the practice in some cases.
Note that there is a difference, which is that the amount the company receives is net of listing as well as underwriting expenses and vendor shares.
For proper transparency, the breakdown must be from the viewpoint of the funds provided by investors and not the net amount that the company eventually deploys.
Furthermore, such information should appear clearly on the cover of all issue documents and promotional materials. It could go along these lines: “Dear investor, for every S$1 you give us, xx cents will be used to build a new manufacturing facility, xx cents to boost our marketing efforts in China, xx cents to repay debt, xx cents for working capital, and xx cents to pay off our major shareholder via vendor shares’’.
It really isn’t rocket science when you think about it.
