The JSE Listings Requirements includes an obscure rule, known as Requirement 5.18.

This rule requires that when a company makes an offer of shares to the public and if that offer is oversubscribed, the allocation of shares be done equitably, in that every applicant who applies for a like number of shares, at or above the clearing price, should be allocated a like number of shares. 

At its heart, this rule is about basic fairness. It is applied whenever a general offer is made, like during an initial public offering (IPO). It is for the same reason that trade in the secondary market is anonymous. 

Theoretically, not one of South Africa’s large asset management institutions should have an unfair advantage over smaller institutions or the investor in the street in an IPO, just as they don’t in the secondary market. All market participants should get fair and equal treatment. This is also in line with the financial sector’s own charter which has as one of its objectives to make South Africa’s financial sector more equitable, especially when it comes to promoting the interests of those previously excluded. 

Might Requirement 5.18 not also be in line with prevailing competition law?

Why, then, is the rule so obscure that it is only of interest to regulatory managers swotting for their JSE sponsor executive exam? 

It is because it hasn’t been applied to a new listing for at least the past decade. 

Of the 184 new listings across all exchanges between March 2010 and the end of 2021, at least 90 included the issue or sale of shares, with the rest being technical listings through reverse takeovers, unbundling, introductions, and the like. Of those 90, at least 69 issued shares through private placements, a fundamentally exclusionary process where only invited institutions were allowed to participate and where, even then, eventual share allocations to those invited were at the whim of the company’s advisers. While 17 of the remainder were legally public offers with a registered prospectus, participation was still restricted to a limited class of applicants. Only four were general public offers where the JSE’s Requirement 5.18 was applied, with three being made in 2010 and the last one being made in 2012.

Juxtapose this situation with the overall decline in retail investor participation in the market, the decline of personal stockbroking and the general “institutionalisation” of our public market, with the resulting year-on-year steady reduction in the number of listed companies. Deliberately excluding the public from the public market has broad consequences.

A company board which chooses a private placement ahead of a public offer should be required to answer this question – against which members of the public would you like to discriminate, by excluding them from your offer, and on what basis, precisely? 

The financial sector generally offers three defences of this exclusionary practice: 1) General public offers are administratively intensive and more expensive to implement than a private placing; 2) A private placement saves time; and 3) A company cannot risk including the registration of a prospectus at the Companies and Intellectual Property Commission (CIPC) on the critical path of the transaction timetable.

In the distant past a company would publish an abridged prospectus and application form in the financial press, which applicants could fill out, append a cheque to, and post to the transfer secretary. Thousands of cheques had to be cleared, share certificates issued, and refunds made. That was administratively intensive. Today we have online trading platforms, banking apps, payment gateways, Strate electronic settlement, and e-Fica services: a truly sophisticated electronic financial infrastructure. Administrative intensity should not be an excuse. 

In the past a prospectus had to be typeset, printed, and widely distributed. Today this can all be done digitally. Likewise, ways can be found to reduce settlement costs for smaller transactions. And the marginal cost of one additional shareholder on a share register is miniscule in a digital world.

The process of bringing a company to listing is arduous, takes many months of preparation and, to the extent that a public offer takes longer than a private placement, it appears to be that it is a matter of two weeks or so. Perhaps this is an area that could be investigated by the financial policy makers to help level the playing fields. Notably advisers earn the same fees whichever way the listing is conducted, so they are probably always inclined to take the quickest route to payday.

And then the CIPC red herring: Sure, the predecessor to the CIPC, Cipro (Companies and Intellectual Property Registration Office), was a problem. But this issue of it being too difficult to get a prospectus registered with CIPC needs to be put to bed. Firstly, a prospectus is generally similar to the documents required by the exchanges themselves and secondly, the Section 12J Venture Capital Company industry was able to get hundreds of separate public offer prospectuses approved and registered by the CIPC over the five years up to 2021, raising more than R12-billion from the public in the process. If your corporate lawyer can’t get a prospectus through the CIPC in short order, then you have hired the wrong lawyer. 

And the greatest red herring of all is when claims are made of longer-term material value-add to a company by applying the dark art of “shaping the share register” ahead of the listing. To be clear, the moment a company’s shares are listed it loses control over its share register. The idea that there is anything more than a fleeting advantage to be gained from carefully selecting who is on the share register on the day of listing is smoke and mirrors. Small investors often stubbornly don’t sell for years and large, supposedly committed long-term investors can be among the first to head for the door. There really is no science here.

So, the record shows that South Africa’s financial sector has been turned against smaller direct investors. The question that then arises is: Is this just for convenience or is there something sinister going on here? Have our large institutional investors grown so dominant that they have been able to implicitly or explicitly persuade companies and their advisers to take the private placing route, avoiding the fair competition inherent in Requirement 5.18 and securing themselves the lion’s share of allocations in all offers and placements since 2012? Do financial institutions and the advisers to companies believe that they have no responsibility to at least try to facilitate financial inclusion, despite their stated commitment to the financial sector charter, because a public offer is inconvenient?  

South Africa’s public market is clearly broken. The number of listed companies has more than halved, with a further 20 already expected to delist in 2022. We need to start fixing it, and part of the solution must surely be to reverse the exclusion of the public from the public market. BM