Sometime in 2011, the US Treasury Department convened a forum - Access to Capital Conference - to collate insights from capital market players on how to restore access to capital for emerging companies seeking public financing through the Initial Public Offer (IPO) market.
This initiative was happening against a concerning back drop. The US IPO market had been cooling from a one-year high of 791 IPOs in 1996 to an average of 157 IPO per year during the 2001-2008 period, with a low of 45 in 2008.
More worryingly, IPOs by smaller companies were showing the steepest declines. The outcome of the meeting was a report that had four game-changing recommendations that created additional flexibility for issuers in the offering process.
Preliminary evidence shows that since the US Regulation A changes were effected in 2015, there has been an increase in non-registered offering activity by small companies.
With more Kenyan Small and Medium Enterprises (SMEs) constrained of cash but choosing to stay private longer and deferring their IPOs, perhaps, the Capital Markets Authority (CMA) might need to borrow a leaf from the US.
That’s not to say, present regulations governing the public issuance of securities have failed – in fact, it’s possible that they may have dissuaded many “bad actors” from conning the public.
That being said, the stringent requirements also mean that “good actors” are shut out.
Currently, private companies have the rule 21 (a) of the CMA Regulations on Public Offers, Listing and Disclosures (2002) to work with.
Outside of its bounds (law requires securities not to be offered to more than one hundred persons, restricted to sophisticated groups and come with a hard minimum of a Sh100,000 per investor), private firms risk CMA reporting (even in the absence of a company having conducted a public offering).
Overall, the investor is the biggest loser as his/her investing options remain limited.
To follow the US example, CMA could relax triggers for reporting obligations. In my view, dropping the minimum to Sh10,000 per investor and increasing the number of investor pool to 300 would be ideal.
Why? Such a proposal would first erase the regulatory burdens on smaller companies and facilitate capital formation.
As an alternative source of capital to a traditional registered IPO, this channel could be most cost effective.
Two, expanding the above provisions “creates” a natural market for a potential future listing.
This is because these investors would at some point need a liquid market to trade their shares. Three; not all public issues are necessarily in the public interest.
To close, it’s important to remember that further “deregulating” private offers is meant to help the SME raise capital efficiently.
Implemented well, these measures hold the prospect of making a difference for SMEs in the country. Of course, some amount of vetting would be needed to ensure minimum abuse.
All the same time, expanding the current provisions means many deserving below-mid market SMEs get to achieve their funding goals ultimately creating jobs, expanding capital markets and contributing to the economy.