Capital Markets: SMEs & the JSE Junior Market in 2023
The year 2022 saw a number of Junior Market listings on the Jamaica Stock Exchange. Listings commenced immediately in January 2022 with Spur Tree Spices Jamaica Limited, whose initial public offering was oversubscribed, setting the train in motion for those to follow. While some financial pundits have predicted that one-third of the world economy will be in recession in 2023, operators of Small and Medium Sized Enterprises (“SMEs”) can continue to explore listing on the Junior Market and its accompanying benefits.
The ability to raise capital from the public
The primary reason why most operators of SMEs opt to list on the Junior Market is because of the ability to raise capital from the public, a wider cross-section of investors when compared to a private capital raise. This type of financing is known as “equity financing”. It generally involves a company allotting shares to a third party in exchange for some consideration (usually money), which will constitute “capital” for the company. The major benefit of equity financing is that there is no obligation to repay the money received. The capital can be utilized by the company for growth and development and the investor who provided the capital would get a return, when the company makes a profit and declares dividends.
To list ordinary shares on the Junior Market, no less than 20% of the fully paid subscribed participating voting share capital should be held by not less than 100 new shareholders. Companies listing on the Junior Market must also raise a minimum of J$50 million in new funds prior to applying to be listed, and its stated capital must not exceed J$500 million following the raise and during its life on the Junior Market. The JSE has also reportedly indicated plans for the maximum cap to be increased to $750 million if the Ministry of Finance approves this request.
Junior Market companies by virtue of the Income Tax (Amendment) Act of 2016, can benefit from tax incentives, namely exemption from payment of corporate income tax (ordinarily taxed at rate of 33 1/3 per cent for regulated entities and 25 per cent for unregulated entities) in the first five years after admission to the Junior Market; and in the subsequent five-year period, the company would be exempt from payment of 50 per cent of such tax. To enjoy this benefit, however, the entity must remain listed on the Junior Market for at least fifteen years.
In addition, shares of Junior Market companies benefit from the exemption from transfer tax and stamp duty for shares transferred over the Jamaica Stock Exchange. This is attractive to investors. If shareholders of an SME were to seek to sell shares in a private (i.e. unlisted) company, the sale of those shares would attract transfer tax (currently at a rate of 2%) and stamp duty.
Improved branding and visibility
The act of listing on the Junior Market has the automatic effect of raising your company's profile and creating a perception of transparency and stability while increasing public awareness of your products or services. Listing therefore increases brand equity. Brand equity can add to the market value of your company’s share price.
With great benefits, of course, comes great responsibilities. A company that wishes to become listed will need to take a number of preparatory steps before the actual application to list is made. This includes, amending the Articles of Incorporation (for example ensuring there are no restrictions on the transfer of shares), re-registering the company where the company is a private company rather than a public company, preparing the Prospectus, obtaining a valuation of the shares of the company, ensuring the company’s financials are up to date, creating or fine tuning the company’s branding, ensuring there are proper corporate governance practices in place, ensuring that company’s board composition will be meet best practice standards, establishing board committees and holding the necessary board and shareholder meetings to pass the appropriate resolutions.
Another consideration is the regulatory requirements that the listed company will be required to comply with on an ongoing basis pursuant to the JSE Rules, in addition to the compliance requirements under the Companies Act. A company preparing to list should ensure that they have human resources both at the board level and management level to ensure they are able to meet all the obligations to list and stay listed, including a team of able professional advisors.
As with any material business decision, one must weigh the pros and cons of pursuing a Junior Market listing. Warnings of a recession can result in investors being cash conservative and more discerning when considering IPOs. But there is no time like the present to consult a licensed securities dealer and experienced attorney to determine if a 2023 Junior Market listing is what’s best for your SME.
Simone Bowie Jones is a Partner and Shaniel May Brown is an Associate at Myers, Fletcher & Gordon and are members of the firm's Commercial Department. They may be contacted via email@example.com, firstname.lastname@example.org or www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.