In a bid to attract tech companies operating in Nigeria to list on the Nigerian Stock Exchange, the Nigerian Exchange Group (NGX), operators of the Nigerian bourse, announced in February 2022 that they intend to revise listing rules to make them startup-friendly. They further indicated they would develop a board tailored after the National Association of Securities Dealers Automated Quotation (NASDAQ).
Currently, the NSE Rulebook 2015 broadly requires that companies must have broken even; that is, achieved parity between profits and operating costs, before they can be listed. Listing on the Main Board, for example, requires amongst other things, a pre-tax profit of N300 million to N600 million cumulatively for one to three previous fiscal years, depending on the listing standard.
The nature of most startups requires that they go through a series of funding in a bid to acquire customers rapidly, develop novel product offerings and enter several markets before they can achieve profitability. Consequently, in order to replicate the conditions that make Nigerian tech companies prefer foreign initial public offerings (IPOs) and provide entry and exit opportunities for local investors, the NGX announced in October 2022 that it was working with the Securities and Exchange Commission (SEC), the Central Securities Clearing Systems (CSCS), and the Nigerian Pension Funds Operations Association (PenOp) to introduce a specialized tech board.
This collaborative approach finally came to fruition, as on December 15, 2022, SEC approved the ‘Rules for Listing on NGX Technology Board (‘the Rules’)’.
In the first part of this article, we explored the relevance of the Tech Board and the preference of start-ups for foreign listings. In this concluding part, we will review the requirements for listing on the Tech Board, among others.
General trends in tech companies currently listed on the NGX
Generally, tech companies in Nigeria, with the sole exception of MTN (the only tech company listed on the Premium Board), have not fared well on the NGX, further dampening real interest for other tech companies to consider local listing and IPOs.
For instance, Chams Plc, a provider of smart card technologies, payment collection and identity management systems was listed on the Main Board in 2008 with a share price of N2.62; but its share price has ranged between N0.29 on the high side and N0.20 on the low side, with a market cap of N1.13 billion ($2.46 million).
Similarly, Omatek a computer equipment manufacturer, distributor, seller and engineering services provider, listed on the Main Board in 2008 with a share price of N5.14. Its share price has ranged from N0.34 on the high side, and N0. 20 on the low side, with a market cap of N588 million ($1.28 million).
Courteville Business Solutions Plc started as a provider of financial services but pivoted to tech. It was listed on the Main Board of the NSE in 2009 with a share price of N2.50. Its share price has however trended downwards to N0.20, with a market cap of N1.63 billion ($3.54 million).
When the market cap of these companies is juxtaposed with the requirements for the less stringent NASDAQ, none of them is eligible for listing on that board. Combined with weak share prices and devaluation of the currency over time, there is little to suggest that tech companies listed on the NGX have gained much from it as most shareholders have lost 80 – 90% of their shareholding value since listing.
While general macroeconomic trends in the country have also trended downwards, contributing to weaker share prices, the overall customer base and real market demand for their services may also contribute to the weak valuations of tech companies listed on the NGX.
We will now consider how the approved Rules and the Tech Board may improve the situation and possibly provide benefits that match with the NASDAQ or NYSE.
The rules for listing on the Technology Board of NGX (The Exchange)
The Technology Board (the Tech Board) is described as a specialized platform for tech-based companies to list and raise capital on The Exchange. It introduces two segments, namely, the Startup Tech Segment, and the Big Tech Segment.
The Big Tech Segment is a Tech Board’s platform for tech companies with a market capitalization between $100 million and $1 billion, while the Startup Tech Segment is the platform for startups and fintech companies with a market capitalisation between $1 million and $100 million. By creating these distinct segments, the NGX hopes to entice big tech companies already operating in Nigeria to list locally.
Listing on the Startup Tech and Big Tech segments of the Tech Board
An issuer within the stated market cap for the Startup Tech or Big Tech Segments who wishes to be listed will make a written application to the NGX. The Board of the NGX will authorize listing if several requirements are met by the issuer. These requirements are largely the same for both segments, save for the number of shareholders, free float requirements, and market capitalisation. The common requirements are as follows:
a. A public company limited by shares or where a private company, incorporates a special purpose vehicle (SPV) or holding company as the public company to be listed;
b. A core investor or strong technical partner with at least a one-year operating track record;
c. Operating for at least 12 months prior to the receipt of the application for listing;
d. Undertake to ensure that its promoters or directors retain at least 50% of their shares in the issuer, for at least six months from the date of listing (the lock-up period), and will not directly or indirectly sell or offer to sell the securities during that period; and
e. Other listing requirements as may be stipulated by the NGX from time to time.
Differences in listing requirements between the Startup Tech and Big Tech segments
The listing requirements for both segments are largely similar, but there are important additional requirements that are unique to each segment, which prospective issuers should take note of. They are set out as follows:
there is little to suggest that tech companies listed on the NGX have gained much from it as most shareholders have lost 80 – 90% of their shareholding value since listing.
Startup Tech Segment Big Tech Segment
– A minimum of two shareholders or such number of shareholders as the NGX may determine from time to time; – A minimum of five shareholders or such number of shareholders as the NGX may determine from time to time;
– A minimum market capitalisation of not less than $1 million but not more than $100 million at the CBN NAFEX conversion rate, on the date the NGX receives application for listing; The NGX has the discretion from time to time to review the capitalisation requirements – A minimum market capitalisation of not less than $100 million and not more than $1 billion at the NAFEX conversion rate, on the date the NGX receives application for listing; The NGX has the discretion from time to time to review the capitalisation requirements
– If raising capital at the point of listing, should have a minimum float of 5% of its issued share capital, or the value of its free float should be at least $50,000 at the NAFEX conversion rate at the time the NGX receives the issuer’s application; The NGX has the discretion from time to time to review the free float requirements – If raising capital at the point of listing, should have a minimum float of 10% of its issued share capital, or the value of its free float should be at least $5 million at the NAFEX conversion rate at the time the NGX receives the issuer’s application; The NGX has the discretion from time to time to review the free float requirements
Methods of listing
The Rules permit listing in nine different ways, namely: direct listing; initial public offer (IPO); memorandum listing; accelerated book building; dual listing; reverse acquisition/takeover/merger; depositary receipts; Special Purpose Acquisition Companies (SPACs); or any other method that the NGX Board prescribes from time to time.
Listing is permitted in Naira and foreign currencies based on valuation, the rationale being to enable issuers raise capital in any currency depending on their strategy and capital requirement.
Obligations upon listing on Tech Board
The NGX will annually review an issuer’s eligibility to remain on the Tech Board for both segments. To remain on the Tech Board, irrespective of the segment, an issuer is required to fulfil the following obligations:
a. Filing with the NGX its quarterly accounts approved by its Board of Directors, unaudited or audited;
b. Submission of audited annual financial reports and statements;
c. Maintaining the minimum free float requirement (5% and 10% for Startup Tech and Big Tech Segments);
d. Minimum corporate governance requirements as prescribed by the NGX. Issuers are also required to comply with the SEC’s Corporate Governance Guidelines and disclose compliance in their annual report;
e. All other listing obligations stipulated under the Listings Rules of the NGX.
Migration between the listing segments
An issuer listed on the Startup Tech Segment can be transferred to the Big Tech Segment upon successful application. Although not expressly stated, an issuer that wishes to transfer to the Big Tech Segment must be able to meet the specific listing requirements for that segment.
On the other hand, an issuer already listed on the Big Tech Segment can be transferred to the Startup Tech Segment where it is unable to maintain the eligibility criteria. This might happen where it market cap drops below $100 million, free float drops below 10% or $5 million, or shareholders drops below five. Before the transfer, the NGX may in consultation with the issuer, give notice and time to correct the deficiency. Failure to do so within time, the issuer may be transferred to the Startup Tech Segment or any listing board (Premium Board, Main Board, or Growth Board), subject to their agreement and meeting the relevant listing requirements.
Fees
The Rules do not state any express fees for application or listing. It however gives the NGX power to publish, review, and fix fees for listing, subject to the SEC’s approval.
Commentary on the Rules and potential impact
The Rules are innovative in the introduction of distinct segments that cater to large and small cap tech companies, permitting companies to list without a long operating track record or breaking even, and even while capital is being raised. The permission to list in any currency may help the importation of foreign exchange and aid tech companies that seek to hedge against a weak Naira.
Once the Tech Board is operational and issuers are listed, the success of the Board may be impacted by the market share and demand for the services of the tech company in question, and the prevailing macro-economic conditions at the time.
Notwithstanding, the impact and appeal of the Tech Board can be greatly enhanced if the NGX adopts some of the strategies of the NASDAQ and NYSE discussed in this article. These include the following:
i) seeking out partnerships with tech boards in other African countries or even the NASDAQ that enable cross-listing or wider access to a pool of investors;
ii) facilitating fora for issuers and investors to network;
iii) offering a completely automated trading experience, in line with its tech focus; and
iv) liaising with the National Council for Digital Innovation and Entrepreneurship, to be established by virtue of the Nigeria Startup Act 2022, and the National Information Technology Development Agency (NITDA) so that the listing application process is available on the proposed Startup Portal for labelled startups.
Conclusion
We have considered the approved Tech Board and the factors that make the NASDAQ and NYSE preferred exchanges for listing. In comparison with existing boards in Nigeria, we have shown that the choice for preferred listing is not subject to cost, but rather, the associated benefits that an exchange can deliver. Compared to the existing Growth, Main, and Premium Boards, the approved Tech Board comes with listing requirements tailored to the tech ecosystem. Its real value, however, is likely to lie in the associated benefits it can offer.
Notwithstanding, we can expect implementation of the Rules for Listing on the NGX Technology Board to commence sometime in 2023. By tapping the local market, it promises to expand funding sources for startups in Nigeria, which took a hit in 2022 and has historically depended more on foreign investment.
With the right set of collaborations and awareness, the NGX Tech Board is a potential game changer and a window into the African market, not just for Nigerian startups, but for big tech companies.
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