Exploring Initial Public Offers (IPO) and the Regulatory Framework in Nigeria

Friday, April02, 2021 / 02:00PM/ By Raphael Irenen (Associate, AELEX) / Header Image Credit: Aelex

Regulatory Framework

Theprincipal statute governing securities offerings in Nigeria is the Investmentand Securities Act 2007 ("ISA"), which establishes the Securities andExchange Commission ("SEC"). The SEC is charged with regulating alloffers of securities by public companies and entities, and registering securitiesof public companies. The principal regulation governing securities offerings isthe SEC Consolidated Rules and Regulations as at 2013 ("SEC Rules"). TheSEC continually issues new rules and sundry amendments to the Regulations.

Securities Exchange for IPOs in Nigeria

Themajor securities exchanges in Nigeria are the Nigerian Stock Exchange ("NSE")and the FMDQ Securities Exchange Limited ("FMDQ Exchange"). We willexamine the operations of both exchanges briefly in this article.

TheNSE

Theprimary exchange for IPOs in Nigeria is the NSE, a registered company limitedby guarantee (LTD/GTE) founded in 1960. The NSE is licensed under theISA and is regulated by the SEC. TheNSE regulates the admission of securities to trading on the Main Board andissued the Rulebook of the NSE in 2015 ("NSE Rulebook"), a compilationof all rules, regulations and guidelines for dealing members, issuers,investors and other stakeholders. The NSE offers listing and trading services,licensing services, market data solutions and ancillary technology services.The NSE lists companies on the Main Board, Premium Board and Growth Board,depending on its size, scope, and growth stage.

The Main Boardis the NSE's founding board targeted at well-established companies with ademonstrable track record of commitment to high disclosure standards andcorporate governance. Listing on this board is based on profitability or marketcapitalisation criteria, which also determines whether an Issuer would belisted under Standard A, Standard B or Standard C. As of 30 September 2020,there were 141 equities listed on the Main Board with a market capitalisationof N7,268,180,185,351.90.

The Premium Boardwas introduced on 25 August 2015 as the listing segment for the elite group ofissuers that meet the NSE's most stringent corporate governance and listingstandards. As of 30 September 2020, there were 8 equities listed on the PremiumBoard with a market capitalisation of N6,735,087,809,212.00.

The Growth Boardwas launched on 28 January 2020 to encourage Start-Ups, Small and MediumEnterprises, and Fintech companies with high growth potential to seize theopportunity of raising long-term capital and promote liquidity in the tradingof their shares. The board is an improvement on the Alternative SecuritiesExchange Market ("ASeM") which is being phased out by the NSE, due toconsistent negative performance of the ASeM index and lack of traction inlistings.

Thus,on 30 November 2020, the NSE announced the migration of Chellarams Plc, LivingTrust Mortgage Plc, McNichols Plc, and The Initiates Plc from ASeM to theGrowth Board and the launch of the associated Growth Board Index.

FMDQ

TheFMDQ Exchange is the largest securities exchange in Nigeria, by trading volume, focusing ondebt and derivative products. The FMDQ Exchange's listing requirements aresimilar to those of the NSE, but it is different in its admission of commercialpapers for listing and its current operation of a sole quotation list.

Withthe FMDQ Group restructuring in 2019, the Group obtained SEC's approval toreflect the new status upgrade of the FMDQ Exchange from an OTC market to asecurities exchange. Therefore, there is a possibility that with the newstatus, the FMDQ Exchange will provide a platform for the listing of equitysecurities.

IPO and Listing on the NSE

TheNigerian IPO market attracts issuers from a variety of sectors. The NSE listsequities under 11 sectors: Agriculture, Conglomerates, Construction/RealEstate, Consumer Goods, Financial Services, Healthcare, ICT, Industrial Goods,Natural Resources, Oil and Gas, and Services. Currently, there are168 listedcompanies on the NSE¹.

In2019, the NSE recorded its first IPO in four years as Skyway Aviation HandlingCompany (SAHCOL) Plc concluded its offer for sale of 406.1 million sharesvalued at N1.89 billion in April 2019,albeit undersubscribed by 35%. This was followed by the dual listing by AirtelAfrica Plc on the London Stock Exchange ("LSE") and the NSE in July2019, raising $750 million through those activities.

However,as at late 2020, no IPOs had been recorded for the year 2020, mainly due to theimpacts of the COVID-19 pandemic and the macro-economic concerns of investors².

Nigerianissuers can also decide to list overseas. Foreign companies can list on the NSEhaving satisfied the general requirements for listing as contained in the NSERulebook and the additional requirements in the Cross Border Listing Rules.Foreign companies currently listed on the NSE include Ecobank TransnationalIncorporated and Airtel Africa Plc. Foreign companies seeking a dual listingare typically required to have an operating track record of at least two yearsand be incorporated or otherwise established in a jurisdiction where thestandards of shareholder protection are equivalent to those provided in Nigeria(as determined by the NSE). However, such a company is not required to haveoperations in Nigeria.

Issuersare required to register all securities of a public company before it can beissued, transferred, sold or offered for subscription by or sale to the public,with the SEC by filing a registration statement in respect of the securitiesproposed to be issued.

Listingunder the Main Board

Toqualify for listing on the Main Board of the NSE under Standards A, B, or C, anIssuer is required to submit an application in the prescribed form and satisfythe following conditions:

Be registered as a public limited company under the provisions of the Companies and Allied Matters Act 2020 with no restrictions on the transfer of fully paid shares;
Have a minimum of 3 years' operating track record (under Standards B and C, alternatively, the Issuer shall provide evidence of a core investor who has a minimum of 3 years' operating track record);

Have apre-tax profit from continuing operation of not less than N300million cumulatively for the last 3 fiscal years and a minimumof N100 million in 2 of these years(under Standard B, not less than N600millioncumulatively for the last 1 or 2 fiscal years; no requirement for Standard C);
Havefinancial statements which shall be compliant with the applicable SEC Rules andcovering the last 3 fiscal years, provided that the most recent statement atthe time of submission of the application is not more than 9 months old (underStandards B and C, alternatively the Issuer shall provide evidence of a strongtechnical partner who has a minimum of 3 years' operating track record withsubstantial equity and involvement in management and the financial statementsfor the last 3 years of the technical partner);
Ensurethat a minimum of 20% of the issued share capital is made available to thepublic and held by not less than 300 shareholders;
Haveshareholders' equity of not less than N3billion (Under Standard C, have a market capitalisation of not less than N4 billion at the time of the listing,calculated using the listing price and shareholders' equity);
Ensurethat if the listing is in connection with an IPO, the promoters and directorswill hold a minimum of 50% of their shares in the company for a minimum periodof 12 months from the date of listing and will not directly or indirectly sellor offer to sell such securities during that period;
Ensurethat the securities are fully paid-up at the time of allotment or registrationin compliance with the applicable SEC Rules; and
Undertaketo pay annual listing fees based on market capitalisation promptly.

Listing under the Premium Board

Foradmission to the Premium Board, a Company is required to satisfy one set of Listing Standards(i.e. Standard A or B or C) for the Main Board, as well as comply with thefollowing:

Meetthe minimum market capitalisation requirement of at least N200 billion on the date the NSE receives its application (or atthe time of listing - for new listings);
Evaluationunder the NSE's Corporate Governance Rating System ("CGRS") and achievea minimum rating score of 70%;

?é?À Satisfyeither:

a minimum free float requirement of 20% of its issued share capital, or
the value of its free float shares is equal to or above N40 billion on the date the Exchange receives its application to list.

Listingunder the Growth Board

Foradmission to the Growth Board (Entry or Standard), a Company is required tosatisfy the following:

Beregistered as a public limited company under the provisions of the Companiesand Allied Matters Act 2020 with no restrictions on the transfer of fully paidshares;
Have aminimum of 2 years' operating track record or a new business that can provide evidence ofinvestment in it by a core investor or a strong technical partner that has aminimum of two (2) years (4 years for Standard) operating track record, or amajority shareholder who is either a High 'Net Worth individual or is a directorof a listed company;
Havefinancial statements which shall be compliant with the applicable SEC Rules andcovering the last 2 fiscal years, provided that the most recent statement atthe time of submission of the application is not more than 9 months old orevidence of a strong technical partner with substantial equity holding andinvolvement in the Issuers' management, who has a minimum of 2 years' operatingtrack record and financial statements;
Thepublic shall hold a minimum of 10% of each class of equity securities, and thenumber of shareholders shall not be less than 21;
Have amarket capitalisation of not less than N50million(Entry) or N500 million (Standard) at the time of the listing, based on theissue price and issued share capital;
Ensurethat if the listing is in connection with an IPO, the promoters and directorswill hold a minimum of 50% of their shares in the company for a minimum periodof 12 months from the date of listing and will not directly or indirectly sellor offer to sell such securities during that period;
Ensurethat the securities are fully paid-up at the time of allotment or registrationin compliance with the applicable SEC Rules; and
Undertaketo promptly pay annual listing fees which is a fixed flat rate prescribed bythe NSE for Entry (currently set at a total fee of N450,000) for a new listing, while Standard isbased on marketcapitalisation.

Procedurefor Listing on the NSE

Followinga preliminary fact-finding process by a company desirous of being listed, thedecision to go public is taken from the board and shareholders and mandate isgiven to the Issuing House or financial adviser to commence the listingprocess. All parties to the issue are appointed, functions are allocated,timelines fixed, costs and fees are agreed upon, and all the parties proceed toprepare the application. The Issuing House applies to SEC to register theshares and receives approval. Anapplication for listing is submitted to the NSE for evaluation, along with allrequired fees. The NSE communicates with the stockbroker about the outcome ofthe application.

Theoffer documents are signed, and the application list is usually kept open for 4- 6 weeks in the case of a retail offer. Once the offer period has closed, ananalysis of share requests is prepared, the allotment made, and the rangeanalysis and allotment schedule sent to the SEC and the NSE for informationpurposes. All monies sent by prospective buyers as part of unsuccessful orrejected applications are returned. If the issue is under-subscribed, allsubscribers are allotted their full share request; the balance of the securityis cancelled and, if there is no standby underwriting, it reverts to theauthorised share capital of the Issuer. If the issue subscription is under 50%,the issue is aborted. After the allotment process, the Central Securities ClearingSystem Plc ("CSCS") credits the accounts of successful shareholders. Atthe same time, payments of the proceeds are made to the Issuer and commissionspaid to receiving agents (stockbrokers and banks).

Thecompany prepares and delivers to the NSE on its letterhead, its GeneralUndertaking (as set out in Appendix III of the Rules Governing Listing) and aDeclaration of Compliance (as set out in Appendix XIV of the Rules GoverningListing, with amendments to suit the method of offer). On the dayof the listing, a briefing on the importance of adhering to the post-listingrequirements of the NSE is held for the company's executives and registrar.Following the briefing, the shares are listed, with a 'facts behind thelisting' presentation at the close of the day's trading.?óÔé¼ÔÇ??óÔé¼ÔÇ?

Publicationof Prospectus for IPO

AnIssuer is required to publish a prospectus in connection with the IPO, whichshall be filed with the SEC as part of the registration statement, eitherelectronically or in printed form, in duplicate, and no longer in size than A4paper. However, in the case of issuers of securities through a capital tradepoint, the prospectus may be abridged in terms of content and may not be inprinted form.

Theinformation required in a prospectus is mandated to follow the prescribed orderin the SEC Rules. Any subsequent information included need not follow anyparticular order provided that the information is outlined in such a manner asnot to obscure any of the required information necessary to keep the requiredinformation from being incomplete or misleading.

Anyinformation outlined in a prospectus shall be presented in a clear, conciseEnglish language and under appropriate captions or headings reasonablyindicative of the principal subject matter set forth below it. The SEC Rules,in addition to the provisions of the third schedule of the ISA, sets outdetailed content requirements for a prospectus, including the front cover anddetailed table of contents making up the forepart, a second section describingthe offer and certain mandatory statements to be included in the prospectus, athird section disclosing the list of the directors of the Issuer and otherparties to the issue, in addition to other information such as risk factors,other statutory and general information and historical financial information.

TheNSE Rulebook also contains provisions on the contents of a prospectus and theNSE reserves the right to call for any further or additional information.

Restrictionson Publicity and Marketing during an IPO

TheSEC Rules provide that any advertisement relating to a public offer isprohibited from publication by an Issuer or Issuing House without the SEC'sprior approval. The information in any advertisement shall be restricted to theinformation in the offer documents. Any advertisement reproducing or purportingto reproduce any information in an offer document shall produce suchinformation in full and disclose all relevant facts and shall not be restrictedto select extracts relating to that item. The historical financial informationand all other information to be incorporated in advertisement materials shallnot exceed the period as contained in the approved offer documents. Evidence ofany award received by the Issuer to be stated in the advertisements shall beforwarded to the SEC for clearance before the advertisements.

Advertisementsshall be truthful and not misleading. An advertisement shall be considered tobe misleading if it contains:

statementsmade about the performance or activities of the company in the absence ofnecessary explanatory or qualifying notes, which may give an exaggeratedpicture of the performance than what it really is;
aninaccurate portrayal of past performance or its portrayal in a manner whichsuggests that past gains or income will be repeated in future.

Anadvertisement shall avoid extensive technical legal terminology or complexlanguage and the inclusion of excessive details that may distract the investor.The use of ambiguous and high-sounding words, slogans and terminologies thatcan mislead the investor such as "invest and haul in the future", "topoffer", "superior offer", "brighter future", is curtailed bythe law. An advertisement shall not contain statements which promise orguarantee a rapid increase in profits.

Also,no advertisement shall include any slogans or brand names for the issue exceptthe company's usual commercial name or brand names of its products already inuse. No slogans, expletives or non-factual and unsubstantiated titles shallappear in the advertisements. Models, celebrities, fictional characters,landmarks or caricatures or the likes shall not be displayed on or form part ofthe advertisements. Advertisements shall not appear in the form of crawlers(the advertisements that run simultaneously with the programme in a narrowstrip at the bottom of the television screen).

Allprint and electronic media advertisements are required to publish the followingadvisory clause as a footnote: "please read the Prospectus/Rights Circularand where in doubt, consult your stockbroker, fund/portfolio managers,accountant, banker, solicitor or any other professional adviser for guidancebefore subscribing".

Failureto comply with the legal requirements on advertising amounts to an offenceattracting a term of imprisonment or financial sanctions instead ofprosecution.

Enforcementof Sanctions for Breach of the Rules governing IPOs in Nigeria

TheSEC may impose sanctions including the suspension of registration of securitiesand fines for late registration and non-compliance with the ISA and the SECRules. Where a person issues, transfers, sells or offers for subscription orsale to the public, the securities of a public company without the priorregistration of the securities, such amounts to an offence which is punishable,upon conviction, with a fine of N1,000,000or a term of imprisonment of 3 years or both fine and imprisonment. The SEC mayimpose financial penalties instead of prosecution for each day the defaultcontinues. There are also civil and criminal liabilities imposed by the SEC forany misstatements in the prospectus.

Underthe NSE Rulebook, a listing is always granted subject to the condition thatwhere the NSE considers it necessary for the protection of investors or themaintenance of an orderly market, it may at any time suspend dealings in anysecurities or cancel the listing of any securities in such circumstances andsubject to such conditions as it thinks fit, whether requested by the Issuer ornot. The NSE may do so in any of the following instances:

AnIssuer fails, in a manner which the NSE considers material, to comply with theListing Rules; or
TheNSE considers that there are insufficient securities in the hands of thepublic; or
TheNSE considers that the Issuer does not have sufficient level of operations orsufficient assets to warrant the continued listing of the Issuer's securities;or
TheNSE considers that the Issuer or its business is no longer suitable forlisting.

Wherean Issuer is delisted for non-compliance with the Listing Rules of the NSE, theIssuer and its promoters shall not seek listing for 3 years from the date ofsuch delisting.

Footnotes

1. TheNigerian Stock Exchange. Available at http://www.nse.com.ng/issuers/listed-securities/listed-companies. Accessed on 20^thFebruary 2021.

2.TheNigerian Stock Exchange. Available at http://www.nse.com.ng/mediacenter/pressreleases/Pages/Onyema-Highlights-NSE-Performance-in-2020-Provides-Outlook-for-2021.aspx.Accessedon 20^th February 2021.