An extract from The Initial Public Offerings Law Review, 4th Edition
The offering process
i General overview of the IPO process
As discussed in Section II.ii, it is necessary for a company to prepare and publish a pre-listing statement in order to be listed on the exchange operated by the JSE. An announcement containing an abridged pre-listing statement must also be published. A pre-listing statement circular must include specific information regarding the company and its business (including its directors and officers, its borrowings, material acquisitions and disposals, related-party arrangements and material litigation); salient details in relation to the offering; and certain historical and pro forma financial information (including three years of audited historical financials). As noted above, it has become market practice for South African pre-listing statement circulars, particularly those that relate to an international offering, to include additional non-prescribed information such as risk factors, management analysis of the company’s financial conditions and results of operations. Additional information is required for companies from certain sectors. For example, a mining company must include a competent persons report setting out its reserves and resources, and a property company must provide valuation reports on its property portfolio.
If a prospectus is required in terms of the Companies Act, the Act specifies that a prospectus must contain all the information that an investor may reasonably require to assess the assets and liabilities, financial position, profits and losses, cash flow and prospects of the company in which the shares are to be acquired, and to assess the securities being offered and rights attached to them. However, since the content requirements of a prospectus and a pre-listing statement are substantially similar, they will typically be consolidated into the same document.
A company may apply for a dispensation from including certain information (which may be desirable for confidentiality reasons in certain instances) in terms of both the JSE Listings Requirements and the Companies Act.
With regard to the timeline applicable to an IPO in South Africa, this will ultimately vary depending on applicable factors, including the complexity of the transaction, the work involved in preparing the company for listing and life as a public company, market conditions and the timing of the company’s financial reporting. It can take between four and 12 months to complete and will also be influenced by factors such as market conditions and appropriate windows for IPO offerings (January, April and December are typically avoided because of South African holidays), and if the offering is international, international offering windows will also be taken into account.
The process usually commences with a preparatory stage involving extensive due diligence on the company and preparing the company for listing, including converting it to a public company, adopting a new JSE-compliant memorandum of incorporation (i.e., the constitutional document of the company), and putting in place the appropriate board and committee structures and charters. The drafting of the pre-listing statement (circular) or prospectus will also be considered during this stage.
A JSE approval process follows, which usually involves at least three submissions (although often more, by election) to the JSE of the pre-listing statement (circular) and related documents (such as the memorandum of incorporation). The JSE review process commonly takes about three to four weeks, as there are certain prescribed timelines that the JSE is required to follow (five business days for a first submission, three business days for the second submission (informal approval) and two business days for the final submission (formal approval)). Within this period, initial preliminary marketing activities are conducted, subject to the relevant regulatory limitations in this regard in the relevant jurisdictions. If a prospectus is required, it will also need to be submitted to the CIPC for approval. The CIPC now has a specific JSE-dedicated office to streamline this process, and typically this should not significantly delay the overall process.
Where an international issuer has listed shares on the JSE, the FSD of the South African Reserve Bank may need to be approached for prior approval under South Africa’s exchange control regulations. Approval may also be required from the relevant sector-specific regulator (e.g., in the banking, insurance, mining and communications sectors).
Once JSE and CIPC approvals have been obtained, the pre-listing statement (including the price range) will then be distributed and a management roadshow will be conducted whereby presentations are made to key investors, domestically and, if applicable, internationally. At the end of the roadshow process, a book-build will be conducted, the listing price determined and allocations made. The results of the book-build and listing price will be announced in a pricing announcement, and closing and settlement will then take place three trading days later, as the JSE operates on a T+3 settlement cycle.ii Pitfalls and considerations
First, a company should always ensure that a prospectus is prepared, issued and filed with the CIPC in respect of any offer to the public as contemplated in the Companies Act. This is subject to the safe harbour exceptions, which have been set out in Section II.iii.
Second, when providing offering-related documentation to local investors, a company must consider the marketing of securities restrictions under the Companies Act, the Collective Investment Schemes Act 2002 (CISCA), and the Financial Advisory and Intermediary Services Act 2002 (FAIS). For instance, under the Companies Act, an advertisement relating to a public offer must meet certain prescribed requirements. Failure to do so is an offence. However, this only applies in the context of a public offer. CISCA regulates offerings by collective investment schemes, whereas FAIS regulates the provision of any investment advice or recommendation that must typically only be given by a registered financial service provider. A disclaimer is typically included in a pre-listing statement or prospectus, stating that it includes only factual information and does not constitute an investment recommendation or advice.
Generally, any communication made (orally, on the internet or otherwise) or written documentation disseminated – which could reasonably be construed as inviting, inducing or influencing investors to participate in an offer of securities or relate to the future profits or losses or valuation of a company or its securities, prior to, during and immediately following an offering of securities – should be:
- fair and accurate, and not misleading or untrue;
- if written, contain appropriate disclaimer language;
- be consistent with (and not contradict) the information that will be contained in any offering document; and
- in a listed context, if it contains any price sensitive information, be released in a way that is appropriate and complies with relevant insider dealing legislation and stock exchange rules.
Typically, in the context of security offerings, publicity guidelines are pre-agreed to effectively manage the release of communication from a regulatory and market practice compliance perspective.
There are no specific restrictions dealing with the publishing of research reports by underwriters, but the considerations set out above apply equally.
Third, a company should be aware of sanctions that securities regulation authorities could impose for breach of securities offering regulations. For instance, a breach of the JSE Listings Requirements would typically be referred to the JSE Investigation Division. The JSE has various remedies available to it, in relation to those persons who fall under its ambit, including issuers and their directors, sponsors and certain advisers (such as JSE-accredited auditors). Remedies include private or public censure, suspension or termination of listing, a fine or withdrawal of accreditation (in the case of sponsors or JSE-accredited advisers).
A breach of the FMA (of insider trading or market abuse rules) can be referred to the FSCA, which was established by the Financial Services Board Act 1990 as an enforcement committee to discipline certain professionals operating in the securities sector. After the FSCA has considered the matter, it may impose an administrative penalty on the person who provides securities services, or it may require this person to pay a compensatory amount. The Directorate of Market Abuse (DMA) is empowered by the FMA, to investigate cases of insider trading, prohibited trading practices and the making of false, misleading or deceptive statements, promises or forecasts in respect of listed securities. The DMA can refer cases of insider trading to the FSCA, which has the power to impose administrative penalties on an offender. The DMA may also hand the matter over to the prosecuting authorities for consideration or take civil action against an alleged offender.
A breach of the Companies Act may expose the company to certain administrative sanctions or financial penalties, or in some cases constitute an offence.iii Considerations for foreign issuers
The Companies Act provides that an offer of securities to the public may only be made by a South African public company or an international issuer (incorporated outside South Africa) that has lodged its constitution and details of the board of directors with the CIPC.
Prior FSD approval is required by an international issuer wishing to list on the JSE. If a foreign entity is conducting business in South Africa, it may be required to register as an external company. Under the Companies Act, the making or offering of securities should not, in and of itself, constitute ‘conducting business’. The JSE requires confirmation that an international issuer has registered as an external company or an opinion that it is not required to do so. In addition, unless the international issuer has at least 20 per cent free float on its South African register, the JSE Listings Requirements stipulate that the foregoing issuer must make arrangements to ensure that sufficient scrip is available on the South African register for settlement purposes. Current guidance provided to the market by JSE Clearing and Settlement is to have a 5 per cent holding of the total issued percentage in South Africa ring fenced for the JSE Settlement Authority to fulfil its role in mitigating risk through occasionally facilitating lending and borrowing within the South African market. In practice, selling shareholders have typically agreed to make this scrip available.
International issuers with an inward listing are allowed to use shares as acquisition currency in South Africa and to include South African shareholders in a rights offer. A foreign entity with an inward listing that raises capital in South Africa must open a special bank account in South Africa for the duration of the listing for purposes of recovering and recording the capital raised. The capital raised must be deployed as soon as possible but not later than one month after being raised and recorded in the special bank account. There are no additional registration or filing processes for international issuers raising capital in South Africa (over and above the prospectus or placing document required by any local exchange) other than the requirement to file its constitution and board composition with the CIPC.