The Initial Public Offerings Law Review: South Africa
Activity in South African and African capital markets is dominated by the Johannesburg Stock Exchange (JSE), although recent years have seen a number of smaller new exchanges springing up. The JSE remains the dominant exchange in South Africa, however. The JSE attracts listings from various sectors, including mining, oil and gas, property and financial services. According to information released by PricewaterhouseCoopers in 2019,2 capital raised from 43 initial public offerings (IPOs) by companies on the JSE amounted to US$5.9 billion and represented 57 per cent of the total African IPO capital in the equity space between 2014 and 2018. This excludes the 2018 inward listing of Vivo Energy, which raised approximately US$800 million and had a market capitalisation of approximately US$2.8 billion. The latter half of 2018 saw a slowdown in IPO activity, caused by, inter alia, the general domestic and international economic uncertainty, and investors adopting a wait-and-see attitude prior to general elections in May 2019. Capital markets continued to be subdued for the remainder of 2019, in part due to fears of an impending sovereign ratings downgrade for South Africa by Moody's Investor Services and the uncertainty arising from Brexit and the trade war between the United States and China.
Other than the JSE itself, key regulators include the Financial Sector Conduct Authority (FSCA) (established in terms of the Financial Markets Act 2012 (FMA)) and the Companies and Intellectual Property Commission (CIPC).
i Main stock exchanges
The JSE is the overwhelmingly dominant licensed exchange for IPOs in South Africa. It comprises two primary boards: the Main Board and an alternative exchange (AltX) for small and medium-sized companies. The AltX prescribes significantly less onerous eligibility criteria for listing than the JSE Main Board and it tends to attract more junior and development companies.
Four smaller stock exchanges have started trading in South Africa in the past three years, namely ZAR X, 4AX, A2X and the Equity Express Securities Exchange. These largely aim to attract smaller companies in the market with lower barriers to entry (i.e., lower costs and less public free float), although, upon launch date, the A2X primarily aimed to commence with secondary listings of large JSE-listed companies. For the time being, the JSE remains South Africa's primary exchange – accordingly, for the purpose of this chapter we have focused primarily on equity IPOs on the JSE, and in particular on the JSE's Main Board.
The South African IPO market primarily attracts domestic issuers, although several international issuers have inward secondary listings on the JSE. A notable trend has been the increased interest of international issuers to have an inward listing on the JSE.3 Inward listings are largely driven by South Africa's exchange control regulations, which place certain limitations on South African residents' ability to hold shares in international issuers. Foreign shares that are listed on a South African exchange are treated as 'domestic assets' for exchange control purposes, which means that the shares can be held freely by South African residents without restriction. This is particularly relevant for South African institutional investors who have restrictions on the percentage of investments held by them that can be foreign assets.
Domestic companies tend to list on the JSE, although certain large South African companies have dual listings on other exchanges, or have moved their primary listing to a European exchange such as the London Stock Exchange or Frankfurt. Several South African companies, including a number of mining companies, have accessed foreign markets utilising American depository receipts or global depository receipt programmes.
ii Overview of listing requirements
The approval of the relevant exchange is required for the listing of equity securities. The JSE Listings Requirements impose certain eligibility criteria to be met by any company listing on the JSE. To list on the Main Board of the JSE, the criteria include, inter alia, three years of audited financials, a recent profit history and a free float of 20 per cent held by public shareholders. The AltX provides less stringent eligibility requirements. The company is also required to appoint a sponsor to officiate liaison between the company and the JSE. All applications for listing must be submitted to the JSE through a sponsor. In response to recent corporate scandals, speculation and innuendo that characterised South African financial markets in 2017 and 2018, amendments were made to the JSE Listing Requirements aimed at strengthening the listing entry criteria for both primary and secondary listings. The objective of the amendments is to protect investors by enhancing disclosures, strengthening corporate governance and improving the integrity of financial information.4
Applicants seeking to list any securities on the exchange operated by the JSE are required to submit a number of documents to it for review and approval. The key document that must be prepared (and approved by the JSE) prior to public distribution is a pre-listing statement, which must include the information prescribed under the JSE Listings Requirements. As many large South African IPOs also typically include an international offering component, a South African pre-listing statement circular typically includes a number of elements that are not prescribed under South African legislation, but that international investors would expect to see (including risk factors and a management analysis of the financials).The JSE will also need to approve the company's constitutional documents and the rules of any share incentive scheme. The directors of the company must typically also provide the JSE with a resolution undertaking to comply with the JSE Listings Requirements and accept responsibility for representations made in the pre-listing statement.
To the extent that an IPO also constitutes a public offering of securities in terms of the South African Companies Act of 2008 (the Companies Act), a prospectus will also be required to be prepared and registered with the CIPC. The content requirements for a prospectus are generally similar to those of a pre-listing statement, and the pre-listing statement and prospectus will typically be consolidated where both are required.
The JSE has made provision for an accelerated fast-track listing process for companies listed on one of the major international exchanges that wish to have a secondary inward listing on the JSE. In such a case, an entire pre-listing statement is not required, and the company will be required to publish a pre-listing announcement subject to simpler requirements.
A special purpose acquisition company (SPAC) may also be listed in terms of the JSE Listings Requirements. A SPAC is effectively a special purpose vehicle established for the purpose of facilitating the raising of capital to enable the acquisition of viable assets in pursuit of a listing on either the Main Board or the AltX. Among other criteria for listing as a SPAC, the capital raised by a SPAC must be retained in escrow, and the SPAC must in its pre-listing statement or prospectus disclose to investors the acquisition criteria it will employ to identify viable assets. Within two years of the date of listing, the capital proceeds must be utilised to acquire viable assets, being assets that on their own will enable the SPAC to qualify for a listing on the Main Board or AltX. If an acquisition of viable assets is not completed within two years of the date on which the SPAC is listed (or an alternative date as the JSE may permit), the SPAC is required to return the monies initially invested to its shareholders, plus accrued interest, but minus certain permissible expenses.
Listings on the platforms operated by the smaller exchanges must be made in accordance with their listings requirements, where, in some cases, application may sufficiently be made by filling out a form.
If the IPO is conducted in conjunction with an underwritten offer, the underwriting agreement must be filed with the CIPC and the JSE.
Lastly, although the South African Constitution provides for class actions, the position in South Africa differs from the United States, which has a long history of litigation and class action lawsuits for securities loss gains.5 No laws have been passed in South Africa to regulate the procedure to be followed for class actions. Several cases brought before the courts have started to build a framework to guide class actions, and although there have not been any class actions involving an IPO-related claim so far, theoretically, this may occur in the future.
iii Overview of law and regulations
The JSE Listings Requirements are the key regulations applicable to all companies listed or that intend to list on the JSE – the key regulator in this regard being the Issuer Division of the JSE. The JSE Listings Requirements are secondary legislation, published by the JSE in accordance with the FMA.
The Companies Act is equally important in an IPO context and regulates the basis on which offers can be made to the public in South Africa. It provides for a number of safe harbours that can be used to avoid an offer being classified as an offer to the public, and thus avoiding, inter alia, the prospectus registration requirements referred to above.
The key safe harbours that are typically relied on are offers made to:
- various types of institutional investors, including brokers and pension funds; and
- investors who subscribe in their capacity as principal for shares that are worth a minimum prescribed amount (currently 1 million South African rand).
An offer of securities (including equity and debt securities) to the public can be made only by a South African public company or a company incorporated outside South Africa that has filed its incorporation documents with the CIPC. A public offer will also require the preparation and registration of a prospectus with the CIPC. The Companies Act also applies if the offeror is a South African company, as it regulates, inter alia, the manner in which the offering can be made and prescribes certain corporate governance requirements that must be met by the company. The key regulators in relation to the Companies Act are the CIPC and the Companies Tribunal.
In addition, the FMA regulates and controls, among other things, exchanges, securities and ancillary matters (such as market abuse and insider trading). The FSCA, previously known as the Financial Services Board, is the primary regulator overseeing exchange-related matters.
Exchange controls seek to regulate capital outflows from South Africa. In an IPO context, this inter alia, regulates the listing of shares of non-South African companies on the JSE (inward listings). In this regard, the primary regulator is the Financial Surveillance Department (FSD) of the South African Reserve Bank.
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.
Public companies are subjected to various ongoing compliance requirements in the Companies Act, which include holding annual general meetings at which a directors' report, audited financial statements for the immediately preceding financial year and an audit committee report must be presented to the shareholders; directors must be elected in certain cases; and an auditor and an audit committee must be appointed for the ensuing financial year.
As public companies are considered 'regulated companies' in the Companies Act, the Takeover Provisions in Chapter 5 of this Act and the Takeover Regulations must be complied with, which require approval from the Takeover Regulation Panel in some instances (such as where an 'affected transaction' is being concluded, which includes, inter alia, mergers, amalgamations and schemes of arrangement). Incremental shareholding acquisitions and disposals that cross threshold multiples of 5 per cent will need to be notified to the Takeover Regulation Panel.
In addition, various corporate governance requirements are set out in the JSE Listings Requirements, which include various rules regulating the composition of the company's board and board committees, and place an obligation on companies to comply with the Code of Corporate Practices and Conduct as set out in the King Report IV on Corporate Governance. Companies typically set out their compliance details in their pre-listing statement on an 'apply and explain' basis (application disclosure) and annual reports, and are expected to uphold these obligations post-IPO.
The JSE Listings Requirements set out the following requirements, among others:
- establishment of a nominations committee, an audit committee, a social and ethics committee, and a risk and nominations committee for certain businesses;
- compliance with the King IV composition requirements;
- appointment of a chief executive officer, a chair and, in most cases, a lead independent director;
- appointment of an executive financial director, subject to exceptions; and
- implementation of a formal policy for the appointment of directors.
To a certain extent, similar requirements must also be in place for smaller exchanges.
Outlook and conclusion
Previously, the securities exchange operated by the JSE was the only platform for public listings in South Africa. The smaller exchanges (ZAR X, A2X, 4AX and the Equity Express Securities Exchange) are disrupting the monopoly held by the JSE, and are likely to provide useful benefits for publicly listed companies, including lower costs and improved liquidity for public M&A activity.
International issuers have showed an increased interest in inward listings (both primary and secondary) on the JSE over the past three years. While the new administration of President Cyril Ramaphosa continues to implement structural reforms aimed at tackling corruption and stimulating the economy, the South African economy has remained sluggish. In the first half of 2020, investors will be keeping a keen eye on whether ratings agency, Moody's, will keep South Africa's sovereign credit rating at investment grade or whether it will downgrade South Africa to sub-investment grade, following the examples of Fitch and S&P.
A rise in the prominence of cryptocurrencies (otherwise commonly referred to as coins and tokens) in South Africa has resulted in South African regulators instigating various public workshops and discussions to establish regulations that address the emerging trends. Regulators appear to be following a pro-innovative approach, and based on their public statements so far, they are expected to regulate tokens rather than ban them. Currently, tokens are not considered to be 'securities' by the FSCA, and digital currency exchanges are not formally required to have FSCA exchange licences to operate tokens. Once regulations have provided more clarity on the treatment of tokens, or theoretically, even before that, it is possible that existing South African stock exchanges may start to list derivatives or exchange-traded funds that track returns on tokens. It is unclear whether the regulators will prescribe a process to be followed in respect of initial coin offerings and whether these will be dealt with in a similar way to IPOs.
1 Ezra Davids is chair of corporate and M&A, David Yuill and Ryan Wessels are partners, and Sibonelo Mdluli is a senior associate at Bowmans.
2 PwC, 2018 Africa Capital Markets Watch. Available at https://www.pwc.co.za/en/publications/africa-capital-markets-watch.html.
3 Loni Prinsloo, 'JPMorgan Sees a Busy Season for London IPOs Out of Africa'. Available at https://www.bloomberg.com/news/articles/2018-06-06/jpmorgan-sees-busy-season-for-london-ipos-coming-out-of-africa.
4 Johannesburg Stock Exchange, 5 November 2019. Available at https://www.jse.co.za/articles/jse-announces-amendments-to-listing-requirements-to-strengthen-primary-and-secondary-listings%E2%80%99-
5 Loni Prinsloo op. cit. note 3, p. 78.