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. For instance, Jumia, considered the Amazon of Africa, was founded in Nigeria over a decade ago and operates in several markets, but is yet to achieve profitability. Notwithstanding, it became the first African tech company to be listed on the New York Stock Exchange (NYSE) in 2019.
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’)’. This approval followed deliberation on the draft Rules by the Regulation and New Business Committee of the NGX RegCo (the regulatory arm of the Nigerian Exchange Group), consideration of stakeholder comments on the exposure draft, and approval by the Board of NGX RegCo. The Rules thus went through an internally rigorous process before submission to the SEC for approval.
Relevance of the Tech Board
As of December 2022, the most profitable company listed on the Nigerian bourse was Zenith Bank PLC (Zenith Bank) with a market capitalisation of $1.64 billion. While an impressive feat, the most valuable startup in Nigeria, Flutterwave, was in fact not listed on the exchange. While it took Zenith Bank 32 years to achieve a valuation of $1.64 billion, Flutterwave achieved a valuation of $3 billion, in six years on the back of its Series D fundraising round in early 2022.
Flutterwave, a cross-border fintech payment platform, is not the only company in Nigeria with a high valuation outside the Nigerian bourse, thus denying Nigerians and the investing public the opportunity to list, invest and tap into local fundraising. OPay, another fintech company, crossed the $2 billion valuation mark in 2022, slightly higher than the combined valuation of GTCO and Access Bank PLC, two local financial institutions listed on the Nigerian Exchange.
Usually, startups like Flutterwave and OPay have sought and obtained listing in foreign markets, while majorly operating in Nigeria and other African markets. Flutterwave for instance, took steps to go public and list on the US-based NASDAQ, an exchange popular with tech companies, seeking to use the monies raised to expand its African market, and introduce new products in lending. While the gains of these intentions might be targeted at the Nigerian marketplace, the continued listing of Nigerian startups abroad represents a form of capital flight that denies Nigerians the opportunity to stake a claim in the companies revolutionizing service delivery and supporting their growth.
Why tech companies in Nigeria prefer foreign listings: NASDAQ and NYSE in Focus
Thus far, a background into the Rules and their relevance has been provided. It is necessary to consider the appeal of foreign listings, over and above local listings, as a prelude to considering how the Rules enhance Nigeria’s position as a potential destination for the listing of tech companies.
Comparing NASDAQ and the NGX Growth Board
Generally, NASDAQ is preferred by tech companies for its lower listing fees and minimum requirements. A company seeking to list on the NASDAQ must pay an entry fee based on the number of shares listed, and the specific market to be listed on.
Where the company intends to list on the NASDAQ Capital Market, the market valuation should be at least $35 million. The entry fee ranges from $50,000 to $75,000, with $5,000 being a non-refundable application fee. Where the company desires to list on the NASDAQ Global Select and Global Markets, the applicable entry fee ranges from $150,000 to $295,000 with $25,000 being a non-refundable fee. The market valuation here should be at least $100 – $110 million.
NASDAQ was the first to offer a completely electronic trading experience, where no specialists or brokers are physically present on the trading floor. NASDAQ also has partnerships with the London Stock Exchange (LSE) and the OMX, which comprises the Stockholm Stock Exchange (Sweden), Helsinki Stock Exchange (Finland), Tallinn Stock Exchange (Estonia), Riga Stock Exchange (Latvia), and Vilnius Stock Exchange (Lithuania), thus covering the entire Nordic region. Via partnerships like the one with OMX, companies listed on the NASDAQ gain increased visibility in the global investment marketplace, gain access to a broad base of investors, and deeper pools of liquidity.
Conversely, the NGX offers three boards, namely:
a. Premium Board – targeted at elite issuers that meet the most stringent corporate governance standards;
b. Main Board – targeted at established companies with a track record of accomplishment; and
c. Growth Board – targeted at small-cap and growth-oriented companies seeking to raise capital and boost share liquidity.
Startups, especially those in their early stages, tend to be flexible in their approach to corporate governance and may not have a track record of accomplishments for eligibility to the Premium and Main Boards. They are however growth-oriented and seek to raise capital. Thus, the Growth Board would be appropriate for startups and early-stage tech companies in Nigeria.
Read also: Tech startups defy downturn, set funding record
The Growth Board offers listing in two segments, the Entry Segment and the Standard Segment. The application fee for the Entry Segment is N250,000 while the listing fee is N200,000. On the Standard Segment, the application fee is 0.1% of the offer size, while the applicable listing fee here is computed like the Premium and Main Board. For the Premium Board, Main Board, and Growth Board (Standard Segment), the ‘Market Capitalisation/Nominal Value Fees Graduation Metrics’ (the Metrics), issued by the former Nigerian Stock Exchange, remains applicable. The Metrics list a range of market capitalisations, from below N50 million, to above N200 billion, and the relevant listing fees for each range of market capitalisation. For a company with a market capitalisation between N40 billion to N60 billion (similar to the range for the NASDAQ Global Market), the listing fee is N3.08 million. Where market capitalisation is between N16 billion to N17 billion (similar to the range for the NASDAQ Capital Market), the relevant listing fee is N2.38 million.
What this shows is that the preference for the NASDAQ over the NGX Growth Board is not a result of cost-effectiveness, as NASDAQ listing costs significantly more. It thus suggests that NASDAQ is preferred for benefits that go beyond and compensate for the higher cost of listing.
Top of the advantages that the NASDAQ presents is the fact that by listing on it, Nigerian tech companies are able to access investors, not just in the American market, but in six other investor ecosystems. As such, the higher cost of listing may be easily recouped, compared to the NGX Growth Board, which costs less, but has fewer cross-border advantages, and is far less automated.
Comparing the NYSE and the NGX Growth Board
Compared to the NASDAQ, listing on the NYSE costs higher, but it is considered more prestigious than the former. Indeed, some companies that were listed on the NASDAQ have transited to the NYSE as their valuation grew. As such, the NASDAQ is sometimes considered a stepping stone to NYSE listing. This is not to say that firms have not transited from the NYSE to NASDAQ, but it is less common. Also, the NYSE has larger volatility, more visibility and greater certainty of execution, compared to NASDAQ. The NYSE is able to deliver this because it engages human traders, each dedicated to a listed stock, overseeing its activity from opening bell to closing auction. This person can intervene when needed, for instance, in managing initial trades for an IPO.
NYSE offers separate markets, similar to what NASDAQ offers. The NYSE’s markets are:
a. NYSE – for mid and large cap companies across all verticals
b. NYSE American – for small cap companies
c. NYSE Arca – an electronic marketplace for ETPs
d. NYSE Bonds – a marketplace for bonds
The initial listing fee for the NYSE is a flat rate of $295,000 for common stock. Any additional class of common stock will attract a flat fee of $5,000. There is also an annual fee of at least $74,000, which increases depending on the number of shares listed. Notwithstanding, there is a cap on how much an issuer will be made to pay in a calendar year – $500,000.
To list on the NYSE, a company must have a minimum of 1.1 million publicly held shares, and have at least one of the following:
a. At least 400 holders of 100 shares or more, and an average monthly trading volume of at least 100,000 shares for the most recent six months; or
b. At least 2,200 holders and an average monthly trading volume of at least 100,000 shares for the most recent six months; or
c. At least 500 holders and an average monthly trading volume of at least 1 million shares for the most recent 12 months.
However, where the listing is in connection with an IPO, Option A above is compulsory. The market value of the shares must be at least $40 million for IPO companies or $100 million for companies seeking to transfer their listing to the NYSE or list existing securities. The shares must also have a minimum closing price (or offering price where connected with an IPO) of at least $4 per share at the time of listing.
The cost of listing on the NYSE is significantly higher than the NASDAQ and far greater than the NGX Board. It is also far more stringent in its requirements. Yet it remains the preferred place for listing companies as it offers real benefits that far outweigh the costs.
It has been earlier said that NYSE listing is more prestigious, compared to the NASDAQ listing. Common reasons for listing on the NYSE are increased liquidity, accessing institutional funds otherwise subject to foreign investment restrictions, establishing a commitment to local markets, facilitating share ownership by local employees, and using securities as acquisition currency. However, the trading volume of shares listed on the NYSE tends to be lower than expected levels after listing. The real value of NYSE listing thus tends to be the attention it brings and its positioning for global investors.
The NYSE itself is located in New York’s financial district and offers significant networking opportunities. Each week, events hold, bringing investors together. It is regularly visited by political and cultural leaders, and these visits are well reported in the press, thus providing quality coverage for any relevant listed company. The NYSE is already home to 80% of the Fortune 100 and 75% of the S&P 500.
Summarily, the choice of listing on the NYSE, NASDAQ, or any of the NGX boards, is not a price-sensitive choice. If it were, local tech companies would prefer NGX listing over the other two. The NASDAQ and NYSE are preferred for the associated benefits they come with.
NASDAQ offers an automated trading experience and simultaneous access to seven exchanges, by one listing. The NYSE offers prestige, accessing funding opportunities targeted at American companies, wider media attention, and a global pool of potential investors.
With the benefits of foreign listing established, in the second half of this article, the benefits (or not) of local listing will be explored.
