Size of market
What is the size of the market for initial public offerings (IPOs) in your jurisdiction?
South Africa’s main exchange, the Johannesburg Stock Exchange (JSE), typically dominates South African and African capital markets’ activity, and although no IPOs took place on the JSE in 2021, the overwhelming majority of IPOs that have taken place on the African continent in the last decade were in South Africa. Furthermore, according to a PwC report (March 2022), in 2021 the JSE accounted for 82 per cent of other equity capital market activity in terms of volume raised, the largest of which was Steinhoff International’s US$850 million sell-down of its shareholding in Pepkor Holdings Limited. Generally, however, African markets, and South Africa in particular, had a challenging year in 2021, with a 73 per cent reduction in equity capital raised, compared to the previous year (according to the PwC report). The JSE also had 24 delistings in the last year, and as discussed further below, the JSE has recently published a consultation paper proposing various changes and improvements to attract new issuers.Issuers
Who are the issuers in the IPO market? Do domestic companies tend to list at home or overseas? Do overseas companies list in your market?
The issuers in the South African IPO market are primarily domestic, although there are a number of foreign entities that have an inward secondary listing on the JSE. In terms of activity we have seen on the JSE recently, overseas companies have an increased interest in inward listings (JP Morgan, 2018). Inward listings are driven to a large extent by South Africa’s exchange control regulations, which place certain limitations on South African residents’ ability to hold shares in foreign companies. Foreign shares that are listed on a South African exchange are treated as domestic assets for exchange control purposes, which means that the shares can be held freely by South African residents without restriction. This is particularly relevant for South African institutional investors, who have restrictions on the percentage of investments held by them that can be foreign assets. Domestic companies tend to list on the JSE, although certain large South African corporates do have dual listings on other exchanges, or have moved their primary listing to a European exchange such as the London Stock Exchange, EuroNext or the Frankfurt Stock Exchange. A number of South African corporates, including several mining companies, have also utilised American Depository Receipt or Global Depository Receipt programmes to access foreign markets.
Most of the larger South African IPOs will include an international offering to UK, US and European investors.Primary exchanges
What are the primary exchanges for IPOs? How do they differ?
The primary licensed exchange for IPOs in South Africa is the JSE. The JSE has two primary boards: a main board (Main Board) and an alternative exchange (AltX) for small and medium-sized companies. The eligibility criteria for listing on the AltX are generally significantly less onerous than the JSE Main Board, and it tends to attract more junior and development companies. South Africa has five new stock exchanges that have started trading in the past couple of years; namely, the ZAR X, the 4AX, the Equity Express Securities Exchange, the A2X and the Cape Town Stock Exchange (the latter of which is the latest to have debuted, in September 2021). These largely aim to attract smaller companies in the market with lower barriers to entry (ie, lower costs and less stringent qualification requirements, such as less public free float), although upon launch date, the A2X primarily aimed to commence with secondary listings of JSE-listed companies. These exchanges are mostly initially focused on equities listings, although the 4AX has recently commenced a debt listings platform as well. They are all quite focused on the introduction of modern technological advancements.
The new exchanges are, however, still in the fledgling stage, and it is too early at this point to say whether these new exchanges will provide any significant competition to the JSE. It is interesting to note that the new exchanges are drawing the attention of larger companies. A number of significant blue-chip South African corporates now have a secondary listing on A2X, for example, such as Standard Bank, Naspers, Sasol, Exxaro, Sun International and Nedbank Group.
The JSE remains South Africa’s primary exchange. Accordingly, for the purpose of this chapter, we have focused primarily on equity IPOs on the JSE, and in particular on the JSE’s Main Board.
Which bodies are responsible for rulemaking and enforcing the rules on IPOs?
The key regulations that are applicable to IPOs are the Johannesburg Stock Exchange (JSE) Listings Requirements that regulate all companies listed or intending to list on the JSE, the key regulator in this regard being the Issuer Division of the JSE. The JSE Listings Requirements are secondary legislation, published by the JSE in terms of the Financial Markets Act 2012 (FMA).
Of equal importance in an IPO context is the South African Companies Act 2008 (the Companies Act). The Companies Act is particularly important in that it regulates on what basis offers can be made to the public in South Africa, and provides certain safe harbours in this regard. An offer of securities (including equity and debt securities) to the public can be made only by a South African public company or a foreign company (incorporated outside South Africa) that has filed its incorporation documents with the Companies and Intellectual Property Commission (CIPC). A public offer will also require the preparation and registration of a prospectus with the CIPC. The Companies Act is also relevant if the offeror is a South African company, as it regulates, inter alia, the manner in which the offering can be made and prescribes certain corporate governance requirements that must be met by the issuer. The key regulators in relation to the Companies Act are the CIPC and the Companies Tribunal.
Other key regulation includes the FMA, which consolidates the law relating to the regulation and control of, inter alia, exchanges and securities, trading, central securities depositories (relevant for dematerialised shares), the custody and administration of securities, market abuse matters, restrictions on who may market securities, and ancillary matters. The primary regulator under the FMA is the Financial Sector Conduct Authority (FSCA) (previously the Financial Services Board).
South Africa also has a system of exchange controls that seeks to regulate capital outflows from South Africa. In an IPO context, this regulates, inter alia, the listing of shares of non-South African companies on the JSE (inward listings). The primary regulator in this regard is the Financial Surveillance Department of the South African Reserve Bank (FSD).Authorisation for listing
Must issuers seek authorisation for a listing? What information must issuers provide to the listing authority and how is it assessed?
Yes. The listing of equity securities will require the approval of the relevant exchange, which in the South African context is primarily the JSE. The JSE Listings Requirements impose certain eligibility criteria that any company listing on the JSE must meet. From a Main Board perspective, the criteria that must be complied with include, inter alia, three years of audited financials, a recent profit history and a free float of 20 per cent held by public shareholders. The AltX eligibility requirements are less onerous. The issuer will also have to appoint a sponsor who will act as a liaison between the issuer and the JSE. All applications for listing are to be submitted to the JSE through a sponsor.
In accordance with the JSE Listings Requirements, applicants seeking to list any securities are required to submit a number of documents to the JSE for review and approval. The key document that has to be prepared (and approved by the JSE) and then distributed is a pre-listing statement, which must include the information prescribed under the JSE Listings Requirements. The JSE will also need to approve the company’s constitutional documents and the rules of any share incentive scheme. The directors of the company must typically also provide the JSE with a resolution undertaking to comply with the JSE Listings Requirements and accept responsibility for the pre-listing statement.
If an IPO also constitutes a public offering of securities in terms of the Companies Act, then a prospectus will be required to be prepared and registered with the CIPC. The content requirements for a prospectus are generally similar to those of a pre-listing statement, and the pre-listing statement and prospectus will typically be the same document.
The JSE also has an accelerated fast-track listing process for companies that are listed on one of the major international exchanges and wish to have a secondary inward listing on the JSE. In such cases, a full-blown pre-listing statement is not required, and the issuer will be required to publish a much simpler pre-listing announcement.
The smaller exchanges also need to authorise listings on their platforms in accordance with their listings requirements, where, in some cases, application may be made by filling out a form.
If the IPO is done in conjunction with an underwritten offer, the underwriting agreement must be filed with the CIPC and the JSE.Prospectus
What information must be made available to prospective investors and how must it be presented?
A company that wishes to list on the JSE is required to prepare and publish a pre-listing statement. The disclosure requirements for a pre-listing statement are extensive and require a great deal of diligence and specialist input. A pre-listing statement must include certain information regarding the company and its business (including its directors and officers, its borrowings, material acquisitions and disposals, related party arrangements and material litigation), salient details in relation to the offering, risk factors and certain historical and pro forma financial information (including three years of audited historical financials). The inclusion of additional non-prescribed information, such as management analysis of the issuer’s financial conditions and results of operations, has become market practice for South African pre-listing statements, particularly those that relate to an international offering. For specific types of company, additional information is required. For example, a mining company must include a competent person’s report setting out its reserves and resources, and a property company must provide valuation reports on its property portfolio. An announcement containing an abridged pre-listing statement must also be published.
If a prospectus is required in terms of the Companies Act, the Companies Act specifies that a prospectus must contain all the information that an investor may reasonably require to assess the assets and liabilities, financial position, profits and losses, cash flow and prospects of the company in which the shares are to be acquired, and to assess the securities being offered and rights attached to them. However, as noted above, the content requirements are generally similar to those of a pre-listing statement, and the pre-listing statement and prospectus will typically be the same document.
Both the JSE Listings Requirements and the Companies Act permit an issuer to apply for a dispensation from including certain information (whether for reasons of confidentiality or otherwise).Publicity and marketing
What restrictions on publicity and marketing apply during the IPO process?
In providing offering-related documentation to local investors, the marketing of securities restrictions under the Companies Act, the Collective Investment Schemes Control Act (CISCA) 2002 and the Financial Advisory and Intermediary Services Act (FAIS) 2002 must be considered. For instance, under the Companies Act, an advertisement relating to a public offer must meet certain prescribed requirements. Failure to do so is an offence. This applies only in the context of a public offer, however. CISCA regulates offerings by collective investment schemes, while FAIS regulates the provision of any investment advice or recommendation that must typically be done only by a registered financial service provider. A disclaimer is typically included in a pre-listing statement or prospectus, stating that it includes only factual information and does not constitute an investment recommendation or advice.
As a general comment, any communication (oral, website or otherwise) or written documentation that could reasonably be construed as inviting, inducing or influencing investors to participate in an offer of securities or relate to the future profits or losses or valuation of a company or its securities, prior to, during and immediately following an offering of securities, should:
- be fair and accurate and not misleading or untrue;
- if written, contain appropriate disclaimer language;
- be consistent with (and not contradict) the information that will be contained in any offering document; and
- in a listed context, if it contains any price-sensitive information, be released in a way that is appropriate and complies with relevant insider-dealing legislation and stock-exchange rules.
Typically, in the context of security offerings, publicity guidelines are pre-agreed to effectively manage the release of communication from a regulatory and market-practice compliance perspective.
There are no specific restrictions dealing with the publishing of research reports by underwriters, but the considerations set out above apply equally.Enforcement
What sanctions can public enforcers impose for breach of IPO rules? On whom?
The nature of the sanction sought will ultimately depend on the regulation that is breached.
A breach of the JSE Listings Requirements would typically be referred to the JSE Investigation Division. The JSE has various remedies available to it in relation to those persons who fall under its ambit, including issuers and their directors, sponsors and certain advisers (such as JSE-accredited auditors). Remedies include private or public censure, suspension or termination of listing, a fine or withdrawal of accreditation (in the case of sponsors or JSE-accredited advisers).
Breach of the FMA (of insider-trading or market-abuse rules) can be referred to the FSCA. The FSCA was established in terms of the Financial Services Board Act, 1990 as an enforcement committee to discipline certain professionals operating in the securities industry, and recently renamed from the Financial Services Board. After consideration of a matter referred to the enforcement committee, an administrative penalty can be imposed on a person who provides securities services, or the committee may require such person to pay a compensatory amount to the FSCA. The Directorate of Market Abuse (DMA) is empowered in terms of the FMA to investigate cases of insider trading, prohibited trading practices and the making of false, misleading or deceptive statements, promises or forecasts in respect of listed securities. The DMA can refer cases of insider trading to the enforcement committee of the FSCA, which has the power to impose administrative penalties on an offender. The DMA may also hand the matter over to the prosecuting authorities for consideration or take civil action against an alleged offender.
A breach of the Companies Act may expose the issuer to certain administrative sanctions or financial penalties or, in some cases, constitute an offence.