Operators of small to medium sized enterprises (SMEs) are often like David fighting the Goliath of large scale competitors, cheap imports and expensive commercial borrowing. The Junior Stock Exchange was introduced in 2009 as a possible sling shot and pebble. While most of us may be familiar with the concept and potential benefits of listing on the Junior Market (“JM”), there are a few points worthy of repeating for those questioning if the JM is the right fit for them.
The concept of a junior stock exchange involves an exchange which lists small, emerging companies with generally low market capitalizations. The primary purpose of the JM is to enable SMEs to raise capital from the public. Companies that have opted to list have enjoyed the benefit of large capital injections (without the burden of traditional loans); tax-breaks; relaxed listing requirements and the exemption from transfer tax and stamp duty on transfers of shares over the exchange.
Not every small business will be an appropriate fit for the JM. In order to list on the JM a company must make an initial public offer (“IPO”). This is in essence, the process by which a company will offer its shares to the public for a fixed price. This also entails issuing a prospectus in accordance with the Companies Act and the Securities Act and its Regulations. It is a requirement for listing on the JM that, Post IPO the aggregate shareholder’s equity in the company must not be less than J$50 million and not exceed J$500 million.
Which business wouldn’t want a capital injection of at least J$50 million? Well it is important to note that under the Companies Act, no allotment can be made of any share capital of a company offered to the public for subscription, unless the amount stated in the prospectus as the minimum amount, which in the opinion of the directors must be raised in order to defray the expenses of the IPO and the other matters provided for under the Companies Act is obtained. In other words, if the minimum subscription amount is not met, all money received must be returned. The minimum subscription amount must therefore be a realistic target having regard to your business, your business plan and of course the market.
In determining whether to purchase shares in your company, potential investors will take into account a number of factors, such as the room for growth in your business, the likelihood of profitability in the future as well as the risk factors. Let’s say your business produces orange juice and maintained the same level of profitability for the last 10 years. Of recent, there have been many new entrants, foreign and local, in the juice market. Will the company be able to maintain its market share? Is orange juice an affordable beverage and is the company’s performance highly dependent on the state of the economy? Does the company export orange juice? If so, what impact would the changing regime of import restrictions and regulations in foreign countries have on the company?
A prudent investor will also consider what the worst case-scenarios are for your company? Does the company have one primary customer that operates a hotel chain? If so, what impact would it have on sales if this hotel went out of business? Hurricanes, other natural disasters and diseases undoubtedly will affect the bottom line of a producer of orange juice. What of the company’s leadership team? Do they inspire confidence and have they been in place long enough to demonstrate stability and consistency? What is the company’s plan for succession?
The JM is not only for existing SMEs, but is also intended to assist new or startup companies. On April 26, 2012 music publishing start-up, Caribbean 2 World (C2W), filed its prospectus with the JM and is seeking to raise up to J$140 million. It has also been reported in our local newspapers that Exponential Holdings Limited, a start up financial holding company, should soon be listing with the JM and will seek to raise J$500 Million. Potential investors will no doubt ask themselves the questions above, as well as others, and creating investor confidence will be crucial having regard to the fact that substantive historical audited financials will not be available for scrutiny.
Your company, whether an established SME or a startup, may check all of the key investors’ questions. However, the impetus will still be on the company, usually through a brokerage firm to gain the interest of potential investors. That said, the act of listing on the JM 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.
Family owned businesses are often also attracted to the JM. Generally speaking, such businesses tend to have somewhat informal arrangements in place with the family members they work with. For example, written agreements such as leases, employment contracts and even loan agreements may need to be put in place prior to listing. Separate and apart from the preparation of the prospectus and guidance through the listing process, this is often where having an experienced attorney comes in handy.
The tax incentives associated with listing on JM are certainly attractive to a number of companies. Some see this incentive as a worthwhile benefit to the cost of the IPO, regularizing its affairs and the continuing obligations the company will have to meet post listing. Other companies see this as an opportunity to cease using creative methods to avoid meeting tax obligations and enjoy the tax free status of the first five years of listing. However, with media reports of a push back from some private sector groups encouraging the Government to remove the tax break in years 6-10 of listing and the proposed lowering of corporate income tax, this should not be a company’s primary reason for listing.
Listing on the JM would be a big step for any company. A number of legal, practical and technical issues must be considered. Consultation with professional advisers, such as accountants, attorneys and brokers are a matter of necessity. Ultimately however, the JM may be the ammunition you need to slay Goliath.