How to Raise Capital SME Hand Book What is the Alternative Investment Market Segment? The Alternative Investment Market Segment (AIMS) of the Uganda Securities Exchange is a platform through which Small & Medium Enterprise (SME) companies can access capital through the capital markets. The AIMS is built on a simplified listing framework with less stringent requirements than the Main Investment Market Segment (MIMS). In order for a company to raise capital by issuing securities to the general public and provide the investors with a mechanism to sell the securities that they have purchased, the company or the securities must be listed on the Uganda Securities Exchange (USE). Listing on the USE is governed by the Listing Rules of the Exchange, the provisions of the Capital Markets Authority Act, Cap 84 Laws of Uganda 2000, the Capital Markets (Prospectus Requirements) Regulations, 1999 and the Companies Act, Cap 110 Laws of Uganda 2000. This brochure seeks to help MSME/ SME understand the Listing Process, Benefits and Rules of raising capital on the USE. The simplified Rules provide a quick reference point but in no way do they substitute the full text of the USE Listing Rules. Any person seeking a listing of a security must refer to and comply with the provisions of the Listing Rules. SME Hand Book 1 Some banks have expressed difficulty in serving the SME market. The difficulty lies in the high risk levels and transaction costs associated with lending SME companies. 2 How to Raise Capital Why Go Public Deciding to go public provides a wide range of benefits for your company, therefore the choices a company makes are very important. Going public is an opportunity for a company to have access to capital for future growth. A company may choose to list on the AIMS/SME segment in order to: • Access capital for growth, both at the time of initial public offering (IPO) and later through additional issues. • Cultivate employee motivation through employee incentives like share options and employee share schemes • Improve governance and management practices • Attain objective and transparent market valuation of the company. • Better credit ratings with financiers • Raise the profile and level of awareness of the company and its products with customers, suppliers and competitors. Ways through which a company can raise capital in the Capital markets • Equity: A company may raise capital through issuing shares to the public. • Bonds: A company may raise capital through debt instruments e.g. corporate bonds. Two Segments exist under equity section, namely the Main Investment Market Segment (MIMS) and the Alternative Investment Market Segment (AIMS) also known as the SME Segment. The AIMS/SME segment is a market segment designed for small and medium enterprises to access affordable long-term capital and secure equity participation of both institutional and individual investors. The segment is geared for companies wishing to take advantage of the opportunities and advantages associated with raising capital through the capital markets. SME Hand Book 3 Benefits of Joining the AIMS/SME Segment The reasons for listing on the AIMS/SME segment vary among the companies based on the company’s stage of development, age, size and type of business. Being listed provides both the company and investors with a number of benefits which include among others: Enterprise Benefit • Attract new investors and open up new investment avenues • Enhance company prestige and status • Improved Corporate Governance standards and maximizing shareholders’ value • Visibility of company brand through regular publication of market data via stock market reports and press media • Help restructure a company’s balance sheet Investor and Shareholder Benefits • Objective market valuation of shares through the price discovery mechanism • Opportunity to invest in profitable companies 4 How to Raise Capital • Improved liquidity of underlying shares • Exist mechanism to divest and when the investor may wish Financial Benefits • Cheaper alternative to raise capital • Improved credit rating for company Employee Benefits • Boost employee motivation & loyalty • Enhance a sense of ownership • Streamlined management structures Supporting the SMEs to Raise Capital on the USE The USE ensures that your company accesses all the information and support it needs to make the right decision for your business. The USE will provide support and guidance both before and after you join the AIMS market. Prior to Joining The USE will provide your company with the necessary training to help in deciding whether raising capital on the USE is right for your enterprise. This training will help you understand the benefits that your enterprise can derive from raising finance through the capital markets. We will help you understand the prelisting and post-listing obligations of an enterprise seeking to raise capital on the SME Segment of the USE. After Joining The USE will be available to address any questions and concerns that you may have with regard to any post listing concerns that may arise. Publications & Mailings The USE Daily Market Report and periodic publications will keep you abreast of the key developments on the AIMS/SME Segment. SME Hand Book 5 Many SMEs still rely on internally generated funds, loans from family or friends and other informal lenders. These funds may often be very expensive or may not be available in a sustained manner thereby limiting the SMEs’ capacity to grow. What are the Requirements for Listing on the AIMS/SME Segment The listing requirements for the AIMS/SME segment are simplified compared to the Main Investment Market Segment. Enterprises looking to raise capital on the AIMS/SME segment are required to have attained a certain size, in terms of net assets, a sound business plan, and meet the requirements for listing. Some of these requirements are similar for all market segments while others are specific to the AIMS/ SME Segment. to the public. In addition, the laws of the country of incorporation must allow the issuer to engage in the proposed issue. The purpose of this provision is to ensure that the securities issued to the public are governed under the Laws of Uganda. General Requirements Transferability: The securities for which listing is sought should be paid up and freely transferable. Status of the Securities: The Company’s laws of incorporation must authorize the Issuer to issue the securities proposed to be issued Undertakings: The Company should undertake to the Exchange in writing by resolution that it shall comply with the listing Rules of the Exchange. 6 How to Raise Capital Financial Information: The financial statements should be drawn up in accordance with the national laws of the Issuer and shall be prepared and independently audited in accordance with International Accounting Standards. Directors: The directors and senior management of the Issuer should collectively have appropriate expertise and experience for the management of the Issuer’s business. CMA Approval: The securities for which listing is sought should have been approved in writing by the Capital Markets Authority (CMA). The approval of CMA is based on the CMA Act and regulations ensuring that the prospectus or the information memorandum complies with the requirements of the CMA. SME Hand Book 7 Listing Requirements Specific to AIMS/SME The AIMS segment provides an avenue to Small & Medium Enterprises to raise capital. For a company to be considered for listing under this segment, it must comply with the following requirements: • The Company must be a public company limited by shares under the Companies Act, Cap 110. • The minimum authorized, issued and fully paid-up capital of the Company must be at least Ug. Shs 200,000,000/= (Two hundred million Uganda Shillings Only). • The net assets of the Company must be valued at a minimum of at least Ug. Shs 400,000,000/= (Four hundred million Uganda Shillings Only) prior to raising capital. • The Company must submit a business plan with a clear indication of its prospects. • Where a company opts to raise capital through equity, the minimum number of shareholders immediately following the closure of the initial public offering shall be one hundred. • The Company should have published audited accounts for at least two years. Other requirements include: • The Company must have suitably qualified senior management for at least one year prior to the application to raise capital, none of whom has committed an offence considered inappropriate for the management of a Company. • No director of the Issuer should have in the preceding two years been adjudged bankrupt, had any winding up proceedings pending or threatened against it (in the case of a company), been convicted of a felony within ten years prior to the application, or been temporarily or permanently prohibited by a lawful order from acting as director of a public company. • The controlling shareholders should make an undertaking to the Exchange to hold onto their shares for a period of at least 24 months following approval of the application for listing. • At least one third of the Board of Directors should consist of independent non-executive directors. • The Company must comply with detailed disclosure requirements for the AIMS/SME segment as specified in Appendix 2 of the Listing Rules. 8 How to Raise Capital Advisors Involved in Raising Capital & the Listing Process To bring a private company to the stage where it qualifies to raise capital & list on the USE requires the coordinated efforts of a number of skilled professionals, each of whom brings to the “Flotation Team” his unique skills and expertise. The team works together to prepare the Prospectus and Information Memorandum. A Sponsoring Broker The sponsoring broker plays a crucial role in co-ordinating the flotation team and advising the company on various aspects of the issue. i Initial Appraisal: An important initial view will be required from the sponsoring stockbroker on the suitability of a particular company for flotation and on the optimum timing of the flotation. ii The prospectus: It is essential that the prospectus contains the details concerning the company in a format which is suitable for appreciation by the potential investor and which meets the requirements of the Ugandan law and the USE. iii Exposure to potential investors: The sponsoring broker will assess the best method of marketing a particular company’s securities and to liaise with the issuer and other professionals on presentations to potential investors. The sponsoring broker distributes to all its clients and likely investors a comprehensive report on the issue, together with a copy of the prospectus. The investing public normally direct their inquiries on the issue to the sponsoring broker. iv Pricing: The sponsoring broker has the unique insight into the price which the market finds acceptable and therefore has a prime role to play in the decision on the appropriate price at which the securities may be sold. SME Hand Book 9 B Transaction Advisors Transaction Advisors play a crucial role in the period prior to the flotation and after. As experts in the field of finance and investments, Transaction Advisors will in consultation with company senior management and other experts do the following: i Identify capital requirements and composition ii Draw the corporate financial and investment strategy iii Steer the drafting of the issue prospectus iv Advise the pricing and timing of the issue v Assist in the distribution of the prospectus and marketing of the Company vi Perhaps the most important role of the Transaction Advisors is the underwriting or arranging for the underwriting of an issue. By underwriting, the Transaction Advisors demonstrates its support and confidence in the company which the investing public takes note of. viiPlays an important role in the allotment process including refunds. C. The Auditors The auditors of the company are normally appointed to the Flotation Team as the reporting accountants to the issue. They play a key role at all stages of the pre-listing period including the following: i The Accountant’s Report: This 10 How to Raise Capital is an essential part of the prospectus and covers such areas as the basic structure of the Company, the accounting policies, the earnings of the Company over the previous three/five years, where applicable, the Company’s assets and liabilities and other financial details. ii The Prospectus: The accountants must ensure that all the financial information in the prospectus is recorded accurately and in strict accordance with the facts and the law. iii Tax: The accountants will be consulted frequently on the tax implications of the Company, particularly if a restructuring of the Company is necessary prior to listing. The importance and value of this contribution by the accountants to the flotation cannot be overestimated. iv General: The auditors will often have significant input into the more general areas of the prospectus as well as on such matters as employee share option schemes and accounting policies. D. The Advocates The firm of advocates acting for the company advises on the re-organisations that arise when a company transfers to public status, including such matters as changes to the memorandum and articles, share capital, registration A substantial portion of the SME sector may not have the security required for conventional collateral based bank lending, nor high enough returns to attract formal venture capitalists and other risk investors. as a public company and so on. They will normally input into the prospectus and confirm on title to properties and any litigation and material contracts outstanding. E. The Public Relations and Advertising Agents Depending on the public profile of the company planning entry to the market, a campaign to increase public awareness about the company and its upcoming Issue, needs to be conducted throughout the period up to flotation. Advertisements in the different media may form a part of this campaign. One of the most important contributions to be made by the advertising and marketing agents is the successful marketing of the Issue. F. Valuation Reports Reports by professional valuers on the company’s properties and other fixed assets such as plant and machinery and also reports by other specialists must be included in the prospectus. SME Hand Book 11 Glossary AIMS Bond Broker Capital Capital Market CMA Debt Equity Issue MIMS SME Acronym for Alternative Investment Market Segment. A certificate evidencing a debt on which the Company or Issuer promises to pay the holder a specified amount of interest based on the coupon rate, for a specified length of time, and to repay the loan on its maturity. General term for an investment broker-dealer or a duly registered individual who is an employee of a licensed securities broker-dealer that is registered to trade in securities in the capacity of an agent or principal. The term has two distinct but related meanings. To an economist, it means machinery, factories and inventory required to produce other products. To an investor, it may mean the total of financial assets invested in securities, a home and other fixed assets, plus cash. Financial markets where debt and equity securities trade. Capital markets include organized exchanges as well as private placement sources of debt and equity. Acronym for Capital Market Authority. Money borrowed from lenders for a variety of purposes. The borrower typically pays interest for the use of the money and is obligated to repay it at a set date. Ownership interest in a corporation’s stock that represents a claim on its earnings and assets. Any of a company’s securities; the act of distributing such securities. Acronym for Main Investment Market Segment. Acronym for Small & Medium Enterprise. List of the Licensed Member Firms African Alliance (Uganda) Ltd Workers’ House, 6th Floor Plot 1 Pilkington Road Tel: +256 414 235 577 Fax: +256 414 235 575 E-mail:securities@africanalliance. co.ug Baroda Capital Markets (U) Ltd. P.O. Box 7197 Kampala Tel: +256 414 233 680/3 Fax: +256 414 258 263 Email: [email protected] Crane Financial Services (U) Ltd. Plot 20/38 Kampala Road P.O. Box 22572 Kampala Tel: +256 414 341 414/ 345345 Fax: +256 414 231 578 Crested Stocks and Securities Limited 6th Floor Impala House Plot 13-15, Kimathi Avenue P.O. Box 31736, Kampala, Uganda Tel: +256 414 230 900 Fax: +256 414 230 612 Email: [email protected] Web: www.crestedsecurities.com Dyer & Blair (Uganda) Ltd Rwenzori House Ground Floor P.O. Box 36620 Tel: +256 414 233 050 Fax: +256 414 231 813 Email: [email protected] Equity Stock Brokers (U) Ltd. Orient Plaza Plot 6/6A Kampala Road, P.O. Box 3072 Kampala Tel: +256 414 236 012/3/4/5 Fax: +256 414 348 039 Email: [email protected] 12 How to Raise Capital Renaissance Capital Ltd Plot 15, Kitante Close, Lower Kololo P.O. Box 893, Kampala, Uganda Tel: +256 41 4340018/9 +256 31 2264775/6 Fax: +256 41 4340016 Email: enquiries@renaissance. co.ug UAP Financials Limited Plot 1 Kimathi Avenue P.O. Box 7185, Kampala, Uganda Tel: +256 414 332700 Uganda Securities Exchange Ltd. Plot 1, Pilkington Road Worker's House, 2nd Floor, Northern Wing P.O. Box 23552, Kampala, Uganda Tel +256 414 259 585, 342 818 +256 312 370 815, 370 817, 370 818 Fax +256 414 342 841 Email [email protected] Website www.use.or.ug
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