Last week we started discussing the newly introduced Alternative Securities Market by the Nigerian Stock Exchange. We did point that it is a capital market for SMEs. We also about the first challenge for interested SMEs which is that if they are private companies (as we foresee) they must first change their status because of two legal barriers that we pointed out. We also talked about a key listing requirement for the survival of any interested SME. See all that here on Nigeria Law Today.
This week we will start by outlining other listing requirements and then discuss about other challenges for interested SMEs.
The other listing requirements are that;
a.      The company must first be registered as a public limited liability company under the Companies and Allied Matters Act.
b.      The company must pass a business viability test by providing a comprehensive two years business plan. This plan it should be noted is just for the medium term, smart companies will actually also have long term business plans. But for listing what is required is a 2-year plan.
c.       The company must have an operating track record meaning it must have been in operation for at least two years preceding the listing. This is a fairly minimal requirement as many a company will not find that difficult to fulfil.
d.      The promoters will have to retain 50% of their pre-IPO shares for 12 months. This presumably means that they must continue to hold at least 50% of their pre-IPO shares for at least twelve must after the IPO.
e.      The number of public shareholders must be at least 51 for equity shares. Meaning before listing, the company must have had at least 51 public shareholders on its books.
f.        All shares are to be fully paid up at the time of allotment.
g.      It must pay a total of fee of N300,000 (Three Hundred Thousand Naira). This comprises an application fee of N100,000 and an annual listing fee of N200,000. All the fees are at flat rates.
h.      The company must submit quarterly, semi-annual, and annual statements to the NSE. The listing requirements did not specify whether the statement must be pre-listing, although that is implied. It did not also specify the time within such statement must be must and the acceptable limit as to the age of the statement.[1]
A second challenge we see; is whether the ‘small and medium-sized’ companies have the requisite corporate governance structure to hold public investments. A ‘small’ company basically account to its owners (or alter ego) but public companies  account to the public. How will a company that’s used to reporting to its owners and ‘saving its dirty linen’ from public eye suddenly face the challenge of reporting to the public and being under constant public scrutiny? How these companies will meet up the corporate governance requirements remains to be seen as most of them are still nascent companies.
Another challenge is whether these companies can succeed where the big companies have failed in terms of insider trading and fraud. It is common knowledge that one of the issues that led to the crash of the Nigerian stock market in the recent past was the issue of insider trade, fraud and margin loans. If the large public companies with well-structured departments and vast resources to engage expert auditors and solicitors could fall prey to insider trade and fraud what would be the fate of smaller companies (who probably audit their accounts but not with the best of hands) who are just fine with the ‘just getting bye’ style. Of course, it is hoped that strict regulation and enforcement of the listing rules will help in this regard. But that in itself is another challenge. Can these ‘small and medium-sized’ enterprises survive strict enforcement of the rules? Can they survive zero tolerance for violation of the rules?  As we said before, these are companies who ordinarily are not used to regulation at this level may struggle to meet-up with a strict regime. But on the other hand, a loose application of the rules may once again lead to the level where there is a bubble and then a sudden disastrous burst.
Also one cannot forget to point out that these companies may not have the corporate governance structure to hold public investments.
To Conclude
The Nigerian economy has not yet got the level where what obtains in the famous Silicon Valley in the United States-where giant companies invest in start-ups (smaller companies) to promote value and viability-would hold sway here. But by the ASeM, the NSE is introducing a profound innovation. We must say that the idea of providing a platform for smaller companies to seek public investments on a massive scale such as a securities market is laudable. But as we have said above, this innovation comes with some legal challenges. The companies who most likely are predominantly private are will as of necessity convert its status to a public company. They will need a wide range of professionals to be able to effect floatation, which comes at huge expense for a company with say less than five million naira turnover. They will have to restructure their existing corporate governance structures to meet up with the demands of holding public investments, etc.
There is no telling that some of these companies because of their growth and growth potentials will be positioned rightly to deal with these challenges but for some it will another struggle to ‘meet up’ in an economy that leaves much to be desired be for SMEs.

[1]For the full listing requirements see  accessed on 10/06/13.

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Nigerian Law Today

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