A NEW ERA OF CAPITAL FORMATION IN ETHIOPIA: THE PUBLIC OFFER AND TRADING OF SECURITIES DIRECTIVE
Ethiopia’s capital market takes a giant leap forward. The Public Offer and Trading of Securities Directive 1030/2024 (“Directive”), considered as central in the creation of a vibrant capital market and protection of investors, has officially been enacted as a law on November 14, 2024. The Directive operationalizes Part Eight of the Capital Market Proclamation No. 1248/2021 (“Proclamation”) dealing with the registration of securities.
Security is defined under the proclamation as a transferable instrument evidencing ownership in a financial transaction including equity securities (shares), debt securities (bonds), unit in a collective investment scheme and derivative i.e. contracts relating to securities (option and future contracts).
The Proclamation states that:
- Prior to offering securities to the public or its securities being placed for trading on a regulated market, a securities issuer is required to apply for the registration of the securities by filing a registration statement before the Ethiopian Capital Market Authority (the “Authority”);
- Prior to issuing securities to the public or advertising the issuance of a security, an issuer is required to issue a Prospectus approved by the Authority; and
- Issuers of a publicly offered securities or publicly held companies (i.e. share companies formed by public subscription and whose shares are already held by more than 50 shareholders) inform the Authority and its shareholders of any information helpful in determining the financial position of the issuer and affecting the price of its securities.
The Directive fleshes out these registration requirements and covers a number of issues related to capital raising through the offer of securities to the public.
Disclosure in the form of a Registration Statement
The Directive states that the issuer needs to make detailed information disclosures in accordance with the requirements of the Directive in order to register the securities. The disclosure is made in the form of a set of documents called “Registration Statement” which is composed of the prospectus and other accompanying documents.
The Registration Statement includes, among other things, the relevant corporate documents of the company, historical financial information for the preceding three years, an equity valuation report, independent legal opinion, a summary and copy of material contracts, schedule of pending claims and litigations, and evidence of a closed bank account for the monies to be collected from subscribers.
The Directive also sets out the issuance of a prospectus as a requirement before the offer of securities to the public. It states that an issuer is not allowed to issue or offer securities to the public without first publishing a prospectus. The prospectus is the primary tool of information disclosure in the Registration Statement. It is a marketing document highlighting the investment opportunities for potential investors, as well as a legal document that entails liability on the part of the issuer for the statements contained within it. It is used to disclose all relevant information about the company issuing the securities and the securities it is offering, including the material risks of investing in its securities. This enables investors to make an informed investment decision.
The Prospectus is required to be prepared, approved and published in accordance with the requirements of the directive and with the help of a licensed Transaction Advisor.
Ethio telecom’s 10% offer of its ordinary shares to the public is an example of an offer conducted based on the requirements of the Directive.
Eligible issuers
The Directive lists the following entities as potential issuers of securities to the public: Share companies, whether already established or under formation, multilateral agencies and other statutory bodies that are empowered to issue securities by law.
Private Limited Companies (PLCs) are exempt from capital market regulations as they are private companies with their shareholder number capped at 50.
Regarding share companies under formation, while their formation process is governed in accordance with the Commercial Code, some aspects related to capital raising like the offer documents used, the requirement to have a core investor and other investor protection mechanisms are implemented in accordance with the Directive.
Publicly Held Companies
Companies already formed by public subscription and having more than 50 shareholders and a capital of more than 100,000,000 (One Hundred Million) are Considered as publicly held companies. These may include banks, insurance companies, and real estate companies. Publicly held companies are required by the Directive to file their application for the registration of their already issued share within 1 year starting from the effective date of the Directive.
In addition, companies currently under formation through public subscription of shares, raising a capital of more than 100,000,000 (One Hundred Million) and expecting more than 50 subscribers are given the same 1-year period to register in accordance with the Directive.
Exemptions
The Directive introduces offering exemptions to companies that meet the specific criteria. This allows businesses to secure funding without the complexities of full registration. The exemptions are tailored to different fundraising scenarios, considering factors such as the type of investor the offer is made to, the capital amount to be raised, and the number of investors involved. The exemptions provided include:
- Private Placements: offers made to a limited number of investors to raise a limited amount of capital.
- Offers to Qualified Investors: targeting specific investor groups with a certain level of financial sophistication as stipulated under the Directive.
- Small Offers: Fundraising initiatives that involve a small amount of capital.
Different types of Requirements for different types of offers
The Directive has set different requirements based on the type of offer (a preferred issue, a bonus issue), issuer (companies already established or under formation), and type of security to be issued (equity, debt or hybrid securities). The requirements mainly differ on grounds such as the offer documents required, timing of registration, length of offer period, the required type of advisor and advisor retention period.
Ongoing information disclosure
Following the completion of the offer and registration process, the company is required to provide ongoing information disclosures to the public. There are two types of ongoing information disclosure obligations. Timely disclosure of any kind of price-sensitive information and a periodic and regular disclosure of financial statements prepared in accordance with the standards set by the Accounting and Auditing Board of Ethiopia.
Moving forward
Starting from the effective date of the Directive, any company engaging in the activity of capital raising from the public is required to register the securities to be issued before the Authority unless they are making an exempt offer. The registration process requires the filing of a Registration Statement including a prospectus prepared, approved and published in accordance with the Directive. Not only new issues of securities but companies like banks, insurance companies and real estate companies who have already raised capital by public subscription are required to file for registration of their securities within 1 year. In addition to registration of the securities, public companies will have the obligation to disclose information to the public on an ongoing basis.
