Initial public offering (IPO) is a very popular way for companies to raise money for growth. For beginners, IPO is when a public company sells its shares on a stock exchange. This is done through a process of offering shares of a private company to the public in a new stock issuance. Public share issuance allows a company to raise capital from the general public.

In addition, IPO, not only helps a company in raising capital but also is used by early investors to exit the company especially institutional ones such as venture capitalists. Ordinarily, in a typical IPO process, a private company works with underwriters (mostly investment banks) to bring their shares to the public, which requires tremendous amounts of due diligence, marketing (road shows), and regulatory scrutiny.

Startups usually find it difficult to access money from traditional banks and other lenders and they rely heavily on earlier stage investors who provide money to the companies through debt or equity financing. In return, these investors expect to get their invested money back with profit when the company undergoes a material transaction, practically, IPO, merger and acquisition, secondary sale, and so on.

In Rwanda, IPOs are not quite a popular option for young companies for whatever reason. With only one young but fast growing stock exchange, the Rwanda Stock Exchange (RSE), there are just ten companies listed on the bourse and all these companies at the time of listing were far from being young. In this article we look at the legal requirements for a young company to list on Rwanda Stock Exchange and how favorable they are for our infant startup ecosystem.

What are the requirements to list on SMEMS?

RSE has two main market segments. One reserved for big companies, Main Market Segment (MMS), and the other established to help small and medium enterprises to have access to the exchange, Small Medium Enterprise Market Segment (SMEMS). The difference between the two is that the latter has more relaxed requirements and scrutiny from the stock exchange and the regulatory body to list on it.

For a company, to list on Rwanda Stock Exchange (SMEMS), it must fulfil various requirements including among others, that the company; is a public company limited by shares, provides the RSE with recent audited financial statements, has entered into a minimum of two years with a sponsor and that the application concerns the admission of shares issued as a result of capital increase through partial or full restriction of the pre-emptive rights of the existing shareholders.

Other conditions include capital increase through private placement, the company’s memorandum and articles of association do not prevent the transfer and circulation of the shares to be traded nor prevent the shareholders from exercising their rights; the shares to be listed are freely tradable as ordinary shares, its founding shareholders are committed to the company at for a three year period.

If you fulfill these conditions you can apply to RSE for a listing however, the listing fee is computed basing on value of securities to be listed subject to a minimum of 1 million Rwandan francs.

Who is a sponsor?

RSE requires the applicant to have a sponsor (who acts as an underwriter) who the listing rules refer to as a company or person qualified to give capital market advice. A sponsor in this case would refer to licensed members of the Rwanda Stock Exchange.

Sponsors include; a company or person who holds a license as a broker dealer/sponsor/advisor or; hold a license as an investment advisor and have signed an agreement with a broker/dealer/sponsor/advisor licensed by Capital Markets Authority (CMA).

Sponsor plays a huge role throughout the whole process of listing on the SEMS and carries out a tremendous amount of duties including participating in the application process, project managing the floatation process in terms of setting a timetable, allocating responsibilities and ensuring that all parties adhere to the programme. Sponsors also come in handy in submitting to the Rwanda Stock Exchange at the time of application a sound business plan covering at least 3 years and demonstrating clearly the sustained viability of the applicant; regularly sponsor reviews the company’s actual trading performance and financial conditions; liaises with the Rwanda Stock Exchange and with the company where requested to during the listing period.

Why are SMEs reluctant to list on the exchange?

Whereas Rwanda Stock Exchange SEMS requirements generally seem relaxed, one wonders why there is no company listed on the segment so far.

This is attributed to several whys and wherefores including the fact that some requirements are too steep for the companies’ i.e; audited accounts (some of the companies don’t have them) and finding a sponsor (who are expensive for a SME to afford). Some other reasons feature; the nature of our financial market which is still evolving, the overall economic outlook, lack of financial literacy (founders don’t know much about capital markets), founders fear of losing decision making power to new shareholders (this is especially a concern for family businesses) and so on. As a result, IPO is a story of tomorrow for SMEs. It must be noted that lack of vibrant IPO and mergers and acquisitions atmosphere, sabotages investments in the ecosystem due to the fact that investors do not see a clear channel of getting back their invested money in a reasonable time. Though, Rwanda is already doing well in terms of venture capitalists investments as it has recorded $126 million raised in funding in 2019 according to the AfricaArena recent report, it is undisputed that if Rwanda’s IPO market was a go zone for startups the numbers may even go much higher.

Conclusively, it may be argued that, as Rwanda positions itself as an investment hub and financial products one stop center with a bunch of fiscal and non-fiscal incentives for private equity investors, IPOs should be strategically restructured to build more lively industry.  However, this is only possible, if, among other things RSE, CMA, media and other financial market players would increase their intense financial markets literacy campaigns among Rwandans as well as early know-how help on corporate governance and structuring for the startup companies.

The views expressed in this article are of the author and do not constitute legal advice. Please seek professional advice in relation to any particular matter you may have.

The writer is a corporate and commercial lawyer and Trainee Associate at K-Solutions & Partners

Email; felix@ksolutions-law.com