Recently, the Executive Director of the Nigerian Stock Exchange (“NSE”) Haruna Jalo-Waziri announced the introduction of an alternative securities market for small and medium enterprises. This Alternative Securities Market (“ASeM”) is meant to help small and medium enterprises (“SMEs”) access funds from the public. Undoubtedly this will help SMEs grow (like the NSE said), but on the other hand such an initiative present its challenges.
The ASeM will be a stock market strictly for small and medium companies whose size and financial power cannot meet up with the requirements for listing under the NSE strict legal regime.[1] So it will be an opportunity for these small companies to get what could be huge investments (probably too much some handle) to their fledgling businesses. In other to help these small companies on the ASeM platform, the NSE will set up a kind of technical group known as designated advisers. These designated advisers will help guide these companies on technical issues.   
In spite of the efforts of the NSE to ensure a seamless floatation for these SMEs, some legal challenges will still need to be dealt with.
Firstly, most (if not all) of these companies are mostly private companies which means there is a restriction on the transfer of their shares and there is a limitation to the number of members (shareholders) these companies can have. Starting with the latter issue of limitation of their membership (shareholder structure). A private company is private because it has a limited number of members which is fifty. So where a company has members more than fifty, even fifty-one, then the company is no longer a private company. It must either then convert to a public company or remain fifty and below. On the other issue of restriction on the transfer of shares in the company, let us know that in private companies, there is a limitation of transfer of shares. Such that shares cannot be transferred to persons outside the company in the manner of public companies do. Good enough (as if in response to our fears about the status of these companies) the Listing Requirements by the NSE for these companies provide that they must be private companies. This means that like we have said before they must convert and restructure to become public companies. In so doing, they can then have an unlimited number of members and an unrestricted transfer of shares which is just what suits a quoted company. Although this raises another issue whether small and medium-scale companies who ab initio may have been private companies but suddenly converted to public companies can meet up with the demands of being a public company and having to report to a large (unlimited) number of shareholders.[2] Probably that is one of the areas where the ‘compulsory’ designated advisers and solicitors come in. (To help assuage any impending danger).
Apart from being public companies let’s look at some of the other listing requirements for interested SMEs. But just a reminder to note that we have also said they must appoint designated advisers. The designated advisers firstly will be in charge of coordinating the entire Initial Public Offer (IPO) process and ensure that the company meets the ASeM listing requirements and then the post-listing obligations. The designated adviser will also be in charge of other important floatation activities like book-building,[3] pre-float marketing and distribution. By the rules, a company on the ASeM platform must continue to maintain the services of a designated adviser for as long as it is listed. Other experts that will be needed by a company on ASeM include; issuing houses, reporting accountants, solicitors, receiving banks and registrars as the case may be. Apart from the designated advisers the role of solicitors cannot be overemphasized. The solicitors will be in charge of conducting legal due diligence for the company, act as solicitors to the issue, oversee the corporate restructuring process-as we pointed out initially, many, if not all, of the these companies will need to convert their status from private to public companies. The solicitors will also draft and verify the application documents and provide relevant legal opinions.
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][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] Interestingly, at the time of writing the Nigerian Stock Exchange had not set a threshold for what will constitute the threshold to be classified as an eligible SME for floatation on this platform. by threshold we mean a kindd of benchmark.
[2] Rather than just under fifty.
[3] Book building is the process of raising, generating, and recording investor demand for shares during an IPO or for other securities during their issuance. See  accessed on 10/06/13. The book building process is undertaken basically to determine investors appetite for shares at a particular price. See on 10/06/13. Bookbuilding is usually done before issuing an IPO and it helps determine the price and the number of shares to be issued. A bookrunner is the main underwriter or the lead manager in securities issuance. In the case of the AseM, the bookrunners are the designated advisers or those appointed by them.

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

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Nigerian Law Today

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