At this
point we will be discussing FLOTATION OF SECURITIES….
For
proper understanding, we will implore you to try and read through from Part 1
of Company Securities in Nigeria.. Story so far;
1.
We
have discussed shares, classes of shares and ways of acquiring shares
2.
Share
certificate and issues related to transfer of shares
3.
Raising
debt capital through Debentures
4.
Issues
related with debentures under CAMA.
FLOTATION OF SECURITIES
What
should come to your mind when you hear flotation is that the company is trying
to raise capital which could be in form of raising equity capital or debt
capital, but it coverage of raising it involves the public at large.
There is
a need for us to familiarize ourselves with the regulatory laws and agencies
involve. And their various roles
At this
stage there is a presumption that we know the salient features of a Private
Company and a Public Company because the status of the company goes in long way
in understanding flotation.
COMPANY STATUS Versus FLOTATION
A PRIVATE
COMPANY by virtue of SECTION 22(5) CAMA, is prohibited, from
inviting the public for the subscription of its securities. BUT, this prohibition is
not on a public company.
PRIVATE COMPANY VIS A
VIZ FLOTATION
Two
questions we need to ask ourselves to have a better grasp;
1.
Can
a Private Company raise equity capital without going to the public?
2.
Assuming
a private company comes to you for advice that they want to go public what will
be your advise?
It is a
settled law that a Private Company is prohibited from inviting the public to
subscribe to its securities and the consequence for doing this is stated in
SECTION 23 CAMA, which states that they would cease to be entitled to
the privileges and exemptions conferred on a private company.
IMPLICATION: If the private company makes a
public offer of its securities, it will be subjected to the whims and caprices
of Securities and Exchange commission and by virtue of SECTION 67 ISA (INVESTMENT AND
SECURITIES ACT), a private company not being part of body corporate
that can make public offer, will make the company liable to a penalty of fine
of #500,000 (SECTION 67(2)ISA)
SO, what
should be our advice to the Private company he can do any of the following;
1.
Private
Placement
2.
Convert
to a Public Company.
PRIVATE PLACEMENT
This is
where a company makes selected and individualized invitation to specific
persons or institutions to take up shares or other securities in the company.
This form of invitation is very personal and discreet outside the prying eyes
of members of the public.
THE PROCEDURE is that the company will issue
out its shares or stock by inviting selected individuals among it clientele,
individual persons or trust funds to take up shares or stocks. These shares and
stocks are placed so to speak with specific individuals or institutional
investors.
TAKE NOTE, Private Placement is one of the modes
of public offer generally regulated by SECURITIES AND EXCHANGE COMMISSION, but
for a Private Company, that follows the aforementioned procedure, is action
will be presumed not to be a public offer strictly speaking. Reading through SECTION
69(2) ISA that provides that;
‘’An offer is not treated as an
invitation to public if it can properly be regarded in all circumstances as not
being calculated to result directly or indirectly, in the shares or debentures
becoming available for subscription or purchase by persons other than those
receiving the offer or invitation, or otherwise as being a domestic concern
of the persons making and receiving it’’
THEREFORE, a Private Placement in a Private
company is of domestic concern, and it will not be subject to SEC if
it stays to be a domestic concern.
HOWEVER, if the Purported Private
Placement carried out by the Private Company falls under the purview of SECTION
69 ISA, it will be deemed to be an invitation to the public and will be
subject to the regulations of SEC
The next
question would be what will be described as an invitation to the public.
This is defined in SECTION 69 ISA to mean an invitation;
i.
Published,
advertised or disseminated by Newspaper broadcasting, cinematography, or any
other means whatsoever
ii.
Made
to or circulated among any persons whether selected as members or as debentures
holders of the company concerned or as clients of other persons making or
circulating the invitation
iii.
Made
to anyone or more persons upon the terms that the person to whom it is made may
renounce or assign the benefit of the of the offer or invitation of any
securities to be obtained under it in favor of any other persons
iv.
Made
to any one or more persons to acquire any securities dealt in upon any stock
exchange or in respect of which the invitation states that application has been
or shall be made for permission to deal in those securities on a securities
exchange or capital trade point.
INTERPRETATION: If we read SECTION 69(2) and this
above SECTION together we can conclude that what will make an offer private is if
it is not capable of resulting, directly or indirectly, in the securities
becoming available for subscription by persons other than those receiving the
offer or invitation.
From NO (ii)
if the offer is made to a named person and the possibility of renunciation is available
then the offer will be a public one. If you remember in our PART 1 of COMPANY
SECURITIES, on the procedure of Allotment we said the company will deal with
letter of renunciation. This means that a private company claim to be doing a
Private Placement and the Named person have an option of renunciation of the
share, the offer will not be private but will be public one.
EXAMPLE: If Group4hub Nigeria Limited proceeds
to do Private Placement, and issue out share to certain named persons or
investors and they receive the offer, but upon allotting them shares, the terms
of the shares gives then opportunity to renounce or assign the shares to
another person other than themselves the offer will not be private but will be
public and SEC must regulate that.
So I can
conclude and say that a Private company can raise capital through Private
Placement without the prying eyes of SEC but the procedure must be
discrete that it does not fall under the options in SECTION 69(1) ISA
CONVERSION TO A PUBLIC COMPANY
Another
option open for the Private Company is to convert or re-register as a Public
company.
REMEMBER The reason it is doing this is
for the purpose of going to the public to
invite them to subscribe for its securities.
TAKE NOTE, the Procedure is stated in
SECTION 50 CAMA, but in doing this, our beloved Private Company must
also be ready to increase it authorized share capital (we dealt with this in our PART 2
while talking about Allotment)
THE PROCEDURE
1.
The
Board of Directors meet to pass a resolution proposing re-registration
2.
The
Secretary convenes a General Meeting stating in the Notice of the Meeting,
proposal for conversion
3.
At
the General meeting of the company, a
Special Resolution is passed for the conversion of the company to a Public
Company
4.
The
Memorandum and Articles of Association pursuant to the resolution is altered to
bring its status into conformity with the statutory requirement of a Public
Company
5.
Prepare
an Application to the Corporate Affairs Commission for conversion, which shall
be signed by at least one director and the Company Secretary accompanied by the
following documents;
a)
A
copy of the resolution passed by the members at the general meeting
b)
A
printed copy of the MEMART as altered
c)
A
written statement on oath by the Directors and Secretary showing the Paid-Up Capital
of the company which, as at the date of the application is not less than 25% of
the authorized share capital
d)
A
copy of the Balance Sheet of the company as at the date of the resolution or
preceding 6 Months, whichever is later
e)
A
statutory declaration by a director and the company secretary verifying that
the requisite Special Resolution was passed in the manner prescribed by law and
that the company’s net assets are not less than the aggregate of the paid up
share capital and undistributable reserves
f)
A
copy of any prospectus or statement in lieu of prospectus delivered within the
preceding 12 Months to the Securities and Exchange Commission.
6.
If
the commission is satisfied that the company may be re-registered, it will
retain and register the application and issue and the secretary obtain a
certificate of incorporation stating that the company is a public company.
REMEMBER, Private Company in its Article is
restricted from Transferring shares and Prohibited from inviting the public to
subscribe to its shares upon conversion the company’s MEMART will be Altered to
remove all this restrictions and Prohibition.
THEREFORE, Upon attainment of the Status of
a Public Company, the company can then make a public offer.
MODES OF PUBLIC OFFER
By
Virtue of RULE 279 SEC RULES, it provides that all securities subject to
Registration by SEC may be offered through the following
a)
Offer
for Subscription
b)
Offer
for sale
c)
Right
Issue
d)
Bonus
Issue
e)
Debt-equity
Conversion
f)
Private
Placement
g)
Offer
by introduction
h)
Debenture/
loan stock
i)
State
& Local Bond
j)
SUKUK
BEFORE, we explain this modes, we have to
discuss the Market involve in the buying and selling of Securities; CAPITAL
MARKET
CAPITAL MARKET
This
connotes the facilities for exchange of securities. In simple words it a place
where people buy securities such as Shares, debentures and bonds. We have two
types;
a)
PRIMARY
MARKETS:
This provides the avenue through which governments and corporate bodies
raise fresh funds through the issuance of securities.
b)
SECONDARY
MARKETS: This
provides investors the opportunity to buy or sell securities that were earlier
issued in the Primary Markets
DIFFERENCE:
The essential distinguishing feature between the primary market and the
secondary market is that the funds raised from the investors at the primary
market goes directly to the issuing entity; but in the case of the secondary
market, the proceeds from the transactions go to the investors
ROLES OF CAPITAL
MARKET
1.
It
provides opportunities for companies to borrow funds needed for long-term investment
process
2.
It
encourages inflow of foreign capital when foreign companies or investors invest
in domestic securities
3.
It
provides facilities that enable foreign business to offer their shares to
Nigerian Market
4.
It
regulates securities of public quoted company
5.
It
reduce over-reliance of the corporate sector on short-term financing for long
period
6.
It
improves our economic development
7.
Provides
employment opportunities for the ever growing labor force.
I saw
these questions in NLS BAR PART 2;
1.
What
are the requirements for Registration of a Legal Practitioner as a Capital
Market Expert?
2.
What
are the roles of Legal Practitioner in Capital Market?
SOLUTION 1: THE
REQUIREMENTS (RULE 178 (2)(B) SEC RULES
1.
Application
shall be made in FORM SEC 2 accompanied by the following;
a)
Certified
copy of certificate of buniess name (where applicable)
b)
Curriculum
vitae of at least two officers (known as sponsored individuals) including
details of activities arranged in order of time from secondary school till date
c)
Profile
of the firm including detail of past and current activities
d)
A
copy of the partnership deed (where applicable)
e)
Full
postal and electronic address of immediate past employer of sponsored
individuals
f)
Evidence
of minimum net worth of #2,000,000 for partnership and in the case of
individual #500,000
2.
A
sworn statement that the requirement of the Act have been complied with
3.
All
sponsored individuals of market experts are required to attach;
a)
A
copy of evidence of payment of other annual practicing fee
b)
Professional
indemnity insurance policy.
SOLUTION 2: THE
ROLES (RULE 180 SEC RULES)
1.
Review
the statutory corporate documents of an issue and other transaction parties to
ensure that they have the necessary legal capacity and authority to enter into
a transaction
2.
Carry
out due diligence to ensure that all information material to a transaction are
disclosed in the transaction documents
3.
Advise
on the legal structure of the transaction and on legal risks associated with it
4.
Negotiate,
draft and review all legal documents required for a transaction.
5.
Advise
parties on disclosure obligations and general observance of and compliance with
sound corporate governance principles, rules and regulations as they relate to
transaction
6.
Advise
parties on compliance with the requirements of the Corporate Affairs
Commission, the Securities and Exchange Commission and other relevant specific
regulatory requirements
7.
Certify
or obtain certification of compliance with all statutory requirements by the
issuer and other parties to a transaction
8.
Make
all statutory filings and provide confirmations (legal Opinion) as to the enforceability
and effectiveness of transaction documents
9.
File
necessary applications in court in support of transactions
10. Any other roles ancillary to any
of the above
POSER:
DOCUMENTS TO BE DRAFTED BY THE LEGAL PRACTITIONER
1.
Prospectus
2.
Offer/scheme
documents
3.
Trust
deeds
4.
Vending
Agreements
5.
Power
of Attorney
6.
Underwriting
Agreements
TO BE
CONTINUED!!!!! NEXT TIME ON COMPANY SECURITIES; Procedure for registration of
Securities, mode of offer explanation, issues related with Prospectus, parties
to Issue, Bonds and Collective investment scheme……..
READ
HARD
EAT HARD
PRAY
HARD
REST
HARD………ALL IS WELL!!! COUNTDOWN!!!!!
