IPO

What is an IPO?

IPO (Initial Public Offering, stock market flotation) refers to the first public offering of a company's shares, combined with the admission of those shares to trading on a stock exchange. The German terms Börseneinführung (stock exchange introduction) and Erstemission (initial issue) are synonymous. The offering may consist of new shares from a capital increase, with which the company raises equity (primary tranche), of existing shares sold by current shareholders (secondary tranche), or of both. A company with few owners thus becomes one whose shares any investor can buy through their securities account.

An IPO is both a financing instrument and a possible exit route for the existing shareholders. On the offering side are the company and the selling existing shareholders, that is, the current holders of shares. A consortium of issuing banks takes over the shares and places them with investors. Law firms and auditors contribute to the prospectus, and the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) approves it. The framework is formed chiefly by the EU Prospectus Regulation, the German Stock Exchange Act (Börsengesetz) with the Stock Exchange Admission Regulation (Börsenzulassungsverordnung), the German Securities Trading Act (Wertpapierhandelsgesetz), the Market Abuse Regulation and the German Stock Corporation Act (Aktiengesetz, AktG).

Requirements for an IPO: legal form and capital market readiness

Companies eligible for listing are those whose shares are structured as freely tradable shares: the stock corporation (Aktiengesellschaft, AG), the partnership limited by shares (Kommanditgesellschaft auf Aktien, KGaA) and the European company (Societas Europaea, SE). Shares in a GmbH (German limited liability company) cannot be traded on a stock exchange, if only because their assignment requires notarisation (Section 15(3) of the German Limited Liability Companies Act, GmbHG).

Change of legal form from a GmbH to a stock corporation

Most German technology companies are organised as a GmbH and change their legal form before the IPO, generally by converting into an AG under Sections 190 et seq. of the German Transformation Act (Umwandlungsgesetz, UmwG). The shareholders' meeting resolves on the conversion by a majority of at least three quarters of the votes cast, in notarial form. It takes effect on registration in the commercial register; the legal entity remains the same.

Because the formation rules of the German Stock Corporation Act apply by analogy, a formation report and a formation audit are required. The net assets must cover the future share capital, which amounts to at least EUR 50,000. At the same time, the management structure changes: the management board (Vorstand) runs the company on its own responsibility and, unlike the management of a GmbH, is not bound by instructions from the shareholders. A supervisory board (Aufsichtsrat) appoints and oversees it.

Capital market readiness

Irrespective of the legal form, banks and investors examine whether the company can meet the requirements of the capital market on a lasting basis. These include robust planning, accounting with reliable and timely financial statements, an internal control system and a compliance organisation. The management must be able to convey a credible equity story, that is, a coherent rationale for growth and value creation. Parent companies whose securities are admitted to a regulated market must prepare their consolidated financial statements under the International Financial Reporting Standards (IFRS), not under the German Commercial Code (Handelsgesetzbuch, HGB).

Course of an IPO

From the decision to the first listing, 1 to 2 years often pass in practice. The public phase from the start of marketing to the first trading day usually lasts only a few weeks.

1. Preparation and selection of banks. The company selects the consortium banks, one or more of which lead the transaction as global coordinators. In parallel, the change of legal form, the switch of accounting standards and a due diligence by the banks and their law firms take place.
2. Prospectus and approval. A securities prospectus under the EU Prospectus Regulation is in principle required for the public offering and the admission to the regulated market. BaFin approves it after checking it for completeness, comprehensibility and consistency; it does not examine the economic quality of the investment. Those responsible are liable for incorrect information under the rules on prospectus liability.
3. Marketing and bookbuilding. After publication of the price range and offer period, the management presents the company to institutional investors on a roadshow. The investors submit purchase orders stating quantity and price limit, which the banks collect in an order book. This procedure is called bookbuilding.
4. Pricing and allocation. At the end of the offer period, the company, the selling shareholders and the banks set the placement price on the basis of the order book and allocate the shares. The basis is an underwriting agreement in which the banks take over the shares and place them with investors.
5. Admission and first listing. The issuer applies to the stock exchange for admission to the regulated market, together with a credit institution or securities firm. Trading begins with the first listing, the first determined stock exchange price, at the Frankfurt Stock Exchange (Frankfurter Wertpapierbörse) predominantly via the electronic trading system Xetra.
6. Stabilisation. The banks often allocate more shares than the base offering comprises and borrow these from existing shareholders. If the price falls below the placement price, they buy back on the exchange and support the price. If it rises, they acquire the additional shares through the over-allotment option (greenshoe) at the placement price. The Market Abuse Regulation permits this only for a limited period and with disclosure.

Market segments: regulated market and open market

The regulated market is governed by statute and harmonised across Europe; the most comprehensive obligations apply here. In addition to the approved prospectus, the Stock Exchange Admission Regulation requires an expected market value of the shares of at least EUR 1 million. Since February 2026, a minimum free float of 10% of the shares in the hands of the public has in principle been sufficient; previously it was 25%. In Frankfurt, the regulated market is divided into the General Standard, with the statutory minimum obligations, and the Prime Standard, with additional obligations such as quarterly statements and reports also in English.

The open market (Freiverkehr) is organised under private law by the stock exchange and imposes lower requirements; in Frankfurt, the Scale segment there is aimed at small and medium-sized companies. The insider rules of the Market Abuse Regulation nevertheless also apply here if the issuer has applied for or approved inclusion in trading. The segment chosen determines costs, obligations and the investor base that can be reached.

Lock-up periods and obligations after the IPO

Lock-up periods

In the underwriting agreement, the company and the existing shareholders undertake towards the banks not to issue or sell further shares for a certain period after the first listing. 6 to 12 months are common, in some cases longer for the management board and founders. The lock-up periods rest on contract, not on law, and are disclosed in the prospectus.

Ongoing obligations in the regulated market

• Financial reporting: annual financial report at the latest four months, half-yearly financial report at the latest three months after the end of the reporting period, as regulated in the Securities Trading Act.
• Ad hoc disclosure: inside information that directly concerns the issuer must be published without delay under Article 17 of the Market Abuse Regulation. In addition there are insider lists and notifications of managers' transactions.
• Voting rights notifications: shareholders report when they reach, exceed or fall below statutory thresholds, starting at 3% of the voting rights.
• Corporate governance: the management board and supervisory board declare annually whether they follow the recommendations of the German Corporate Governance Code (Section 161 AktG).
• Takeover law: anyone who acquires at least 30% of the voting rights must in principle make a mandatory offer to all shareholders under the German Securities Acquisition and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz).

Worked example: issue proceeds, dilution and free float in an IPO

A stock corporation (AG), created by the conversion of a GmbH, has 20 million shares before the IPO. 5 million new shares from a capital increase and 2 million shares from existing shareholders are offered, plus an over-allotment of 15% of the base offering. The placement price is EUR 16. For the example, bank commissions of 3% of the placement volume and other costs of the company of EUR 4 million are assumed.

• Valuation before the offering: 20 million shares × EUR 16 = EUR 320 million
• Gross proceeds of the company: 5 million × EUR 16 = EUR 80 million
• Net proceeds of the company: EUR 80 million minus EUR 2.4 million commission minus EUR 4 million costs = EUR 73.6 million
• Market capitalisation after the offering: 25 million shares × EUR 16 = EUR 400 million
• Dilution of existing shareholders: 5 million new shares / 25 million shares = 20%
• Proceeds of the selling existing shareholders: 2 million × EUR 16 = EUR 32 million, EUR 31.04 million after EUR 0.96 million commission
• Over-allotment: 15% of 7 million shares = 1.05 million shares, equivalent to EUR 16.8 million
• Free float (share of the shares in the hands of widely dispersed investors) with full exercise of the greenshoe from borrowed existing shares: 8.05 million / 25 million = 32.2%
• Free float if the banks buy back all over-allotment shares for stabilisation: 7 million / 25 million = 28%

Only the primary tranche supplies capital to the company. The secondary tranche and the over-allotment from existing holdings are sales by the existing shareholders. Investors pay attention to the ratio of the tranches, because a high proportion of shares sold is taken as an indication of exit intentions.

Distinction: IPO, direct listing, trade sale and secondary sale

• Direct listing: admission of already issued shares to stock exchange trading without an accompanying sale through banks. The company raises no new capital, and no bookbuilding takes place.
• Trade sale: sale of the company to a strategic buyer. It usually allows a complete exit at a single point in time, whereas existing shareholders in an IPO generally sell only part of their holding.
• Secondary sale: sale of existing shares to new investors outside the stock exchange. Economically it corresponds to the secondary tranche, but without admission and without ongoing obligations.

Common mistakes

• Change of legal form started too late. The conversion, formation audit and new governance structure need lead time. They should be completed before marketing begins so that they do not dictate the timetable.
• IPO planned as a complete exit. Lock-up periods and the market's capacity to absorb shares limit how many shares existing shareholders can sell. The exit is usually spread over several years.
• Placement price set too high. A price at the upper end of what the order book supports can lead to price losses after the first listing that permanently damage investors' trust.
• Follow-on costs not budgeted. Reporting obligations, investor relations, supervisory board and compliance cause ongoing costs that are often missing from the planning before the IPO.

Frequently asked questions

Can a GmbH go directly to the stock exchange?

No. Shares in a GmbH are not eligible for listing. The company must first be converted into an AG, KGaA or SE, for technology companies usually by conversion into an AG.

How is the issue price set in an IPO?

Through bookbuilding: the company, the selling shareholders and the banks set it at the end of the offer period on the basis of the purchase orders, usually within the published price range. In a public offering, retail investors subscribe through their custodian bank and, where the offering is oversubscribed, often receive only part of the shares they want. From the first listing, the price forms freely and may be above or below the issue price.

Is a prospectus required for every IPO?

For admission to the regulated market and for a public offering, in principle yes, unless an exemption applies. If, without a public offering, only inclusion in the open market is applied for, no prospectus under the EU Prospectus Regulation is required; the stock exchange then requires its own documents.

May founders sell shares in the IPO?

Yes, within the secondary tranche, provided that banks and investors support this. Contractual lock-up periods generally apply to the remaining shares.

What happens to the preferential rights of the venture capital investors?

They generally end with the IPO. Liquidation preferences (priority in the distribution of sale proceeds), anti-dilution protection and consent rights do not fit a listed company. The shareholders' agreement is terminated, and the shareholders then usually hold shares of the same class.

The Roemer Capital view

For growth investors in a Series A to C, the IPO is above all a possible exit route: they include it in their return considerations, and shareholders' agreements contain provisions for this case. We make sure that such clauses do not make a later change of legal form and the termination of the preferential rights more difficult.

For most of the companies we support, the capital market readiness of the finance function is closer to hand. As a fractional CFO, that is, a finance function on a temporary basis, we build up reporting, planning and investor communication. If an IPO is on the table as an alternative in a sale process, we set both routes side by side with proceeds, timetable and conditions.