17 Oct Requirements for Initial Public Offering
A Public Offering is an invitation to the general public to subscribe or purchase securities of a company. This takes the form of Initial Public Offering (IPO) & Subsequent Public Offering (SPO). Our main focus in this snippet will be on Initial Public Offering.
An Initial Public Offering (IPO) is the very first sale of shares issued by a Company to the public. Prior to an IPO, the Company is considered private, with a relatively small number of shareholders made up primarily of early investors and professional investors. An IPO however will not only provide the Company with access to capital, it will also fuel the growth and expansion of the Company.
The first step therefore is to convert the Company from a private to public company.
Section 67 of the Investments and Securities Act, 2007 (“ISA”” or The Act”) provides that no person shall make any invitation to the public to acquire or dispose of any securities of a body corporate or to deposit money with anybody corporate for a fixed period or payable at call…unless the body corporate is:
- A public company, whether quoted or unquoted…
- A statutory body or bank established by or pursuant to an Act of the National Assembly and is empowered to accept deposits and savings from the public or issue its own securities…”
The following needs to be done to convert a private company to a public:
- Special resolution by members of the Company to change Company to Public
- Alter the Memorandum & Articles of Association of the Company to reflect the Public Limited Liability Company status.
- Prepare a statutory declaration
- Increase share capital to meet statutory requirement
Over the years, the Nigerian stock market has played a fundamental role in enabling businesses raise capital and is often looked upon as the most significant source for companies to raise additional capital for expansion by selling shares of the company to the public whilst being regulated by the Securities and Exchange Commission.
It is trite that a public company making an invitation to the public to invest money in it should prior to making such an invitation obtain written consent from the Securities and Exchange Commission (“SEC” or “The Commission”) and that such invitation should only be made in accordance with the conditions and restrictions imposed by the Commission. The Commission however reserves the right in its absolute discretion to grant or withhold such consent.
The following are some of the prerequisites to commencement of an IPO process:
- Obtaining relevant Regulatory Approval such as SEC, CBN etc.
- Ensuring registration of the securities
- Submission of Registration Documents/Statements
- Close of Offer
- Filling of Allotment Proposal
- Filing of Post Allotment Compliance Report
The essence of registration is to provide full and correct disclosure of material and provable facts concerning the Company (“Issuer”) and the securities it proposes to offer for sale or subscription. Additionally, this is to ensure that an investor is given all the relevant information that will serve as a guide to make a realistic evaluation of the merits of the securities and to decide whether or not to invest in a Company and at what price.
The requirements for the registration of the securities in an Initial Public Offering are as follows:
1. Filing of application on SEC FORM 6: Some of the information requested in the form are as follows:
- the company’s nominal value,
- the organizational, financial structure and nature of business of the company,
- bonus and profit arrangement,
- schedule of claims and litigation,
- management and service contracts,
- evidence of property ownership and transfer
- any other material information etc
2. A copy of the Shareholder’s resolutions authorizing the offer and certified by the Company Secretary;
3. Two copies of the Memorandum and Articles of Association (including amendments thereto) of the Issuer, certified by the Corporate Affairs Commission (CAC);
4. Copy of Certificate of Incorporation certified by the Company Secretary;
5. Signed copy of audited accounts for the preceding 5 years or number of years for which the company has been in operation (if less than 5 years);
6. Two copies of draft prospectus. The Prospectus is the legal offering/disclosure document that is made available to investors. A Prospectus is defined to mean “any prospectus, notice, circular, advertisement, or other invitation, offering to the public for subscription or purchase any shares or debentures of a company and includes any document which save to the extent that it offers securities for a consideration other than cash, is prospectus”. The content of a Prospectus usually includes the following:
- Name and RC. No. of the Issuer & the issuing house;
- Type of offer (offer for subscription or sale), summary & description;
- Securities being offered, the price and amount payable in full on application;
- Date of the prospectus, which shall be the date of publication;
- Approval and registration clause;
- Price & amount payable on the offer;
- a detailed table of contents;
- Directors and Parties to the Prospectus;
- Purpose of Issue, use of proceeds;
- Capital structure, Principal shareholders, Dividends;
- Type of Underwriting (if any);
- Litigation and related matters, Material Contracts;
- Expert opinions (solicitors, Accountants, etc.)
- Financial information;
- Other Parties to the issue (Issuing house, Solicitors, Receiving Banker, Registrar, Brokers, Underwriters, Trustees, Accountants, Receiving Banker etc.);
- Duration of the offer;
- And Other Statutory and General Information.
7. Copies of the draft underwriting agreement (and sub-underwriting agreement where applicable). This ensures that the issuing houses undertake the risk involved in the offer. In a public offer, there can be firm, standby or best effort underwriting. The content of the underwriting agreement includes the following:
- Level of commitment of Underwriter
- Underwriting commission
- Authorization Clause
- Indemnity Clause
- Responsibilities of Parties
- Termination Clause etc.
8. Copies of vending agreement: This is the Agreement between the Issuer and the Issuing House for the packaging and marketing of the issue. Some of the contents of the Vending Agreement will include:
- Names & Addresses of Parties
- The board resolution authorizing the issue and the appointment of the Issuing House;
- Obligations of the Issuing House,
- Obligations of the Issuer,
- Representations and Warranties
- Liability Clause for payment of vending fees where the issue is stalled or aborted.
- Termination Clause
- Arbitration and Applicable Law Clause
9. Where there is more than one issuing house, the agreement regulating the relationship between the joint issuing houses in respect of the offer shall be filed with the Commission;
10. Letters of consent of the Directors and other parties to the issue;
11. Copies of material contracts (if any);
12. Any other document required by the Commission under the Rules and Regulations.
There is no doubt that the public offer of securities is a significant step in the growth of a Company as it provides the Company an avenue to raise additional capital.
The Nigerian capital market is highly regulated and governed by Statutes that requires strict adherence. It is therefore important that stakeholders in the capital market and all Companies involved in a public issue adhere strictly to the provisions of the relevant statutes.
Companies are therefore advised to ensure they engage the services of registered capital market operators early when considering an IPO to avoid any pitfalls, errors, mistakes and/or penalties by the relevant regulators.
Berkeley Legal is a registered Capital Market Solicitor with SEC and advises on all aspects of the Capital Market including inter alia Equity and Debt Offerings, Corporate Restructuring, Mergers and Acquisitions, Collective Investment Schemes and Schemes of Arrangement.
The information provided in this article is for general informational purposes only and does not constitute legal advice. If you require specific legal advice on any of the matters covered in this article please contact firstname.lastname@example.org