Thursday, February 22, 2018

Are you ready to go public?

Many businesses over time have grown into strong vibrant companies using bank borrowings and internally generated funds. In many cases these companies have sprouted from small family-owned enterprises or partnerships. The use of external equity capital has been largely eschewed by some of these vibrant businesses.

An opportunity now exists to raise Equity capital on the Trinidad and Tobago Stock Exchange on very attractive terms. You may recall that in the 2011/2012 Budget the Minister of Finance proposed the establishment of a Junior Stock Exchange to facilitate and foster growth of Small and Medium Enterprises (SMEs). The main component of the Minister's initiative was that any qualifying company listing on the TTSE would benefit from a reduced tax rate of 10 per cent.

1. What are the benefits of going public?

The advantages are as follows:

(i) Tax Incentive

• The incentive being promulgated is that SMEs listing will be charged a reduced corporate tax rate of 10 per cent for the first 5 years of listing, after which it would revert to the standard 25 per cent corporate tax rate. The effects of this can be substantial.

(ii) Equity vs Debt

• The ability to raise, in specific circumstances, equity financing that will take you to a maximum of TT$50m at a relatively cheaper cost compared to debt financing. We note that for SMEs, the lending rate is usually above the Prime Lending Rate usually starting at around 7.5 per cent to reaching into double digits (that is the annual interest due) depending on the risk characteristics of your business and quality of collateral, if any. Investors will be well aware that with bank financing there are also negotiation fees and guarantee fees depending on the business venture.

(iii) Risk Reduction and

increased flexibility

• Companies are already exposed to the specific business risks of your industry and the economy at large. Why should debt be another risk factor, or more so the inability to service debt? As you would know with equity financing, you are not obligated to repurchase the shares (unless you choose to) as opposed to debt financing where you are obligated to repay the principal and interest and which may come with restrictions on how the money can be spent or on certain aspects of business operations.

(iv) Divesting Option

• Many family businesses would have had to face the issue of succession as it sometimes is the case that the second generation does not necessarily want to "run" the business but would of course still wish to benefit from the wealth creation. Listing provides the flexibility to more effectively transfer partially or in full the business to other owner or shareholders while achieving best price discovery.

(v) Other Advantages

• The criteria of shareholding required to be eligible for listing i.e. 25 shareholders holding over 30 per cent of the company can still allow you to maintain control of the company.

• Going public can raise awareness of your company and its products.

• Going public can form a basis for valuing your company if at some point you wish to sell your company

• Listing offers shareholders a relatively easier exit from the company if you decided to diversify your investments or reduce your holdings than if the company remained private.

2. What are the costs

of going public?

With the equity financing that is being allowed through the Act, companies will have to engage the services of a broker for the listing of their shares. As such stockbroking fees will be incurred as well as fees for the issuing of the prospectus. It is our understanding that TTSE charges will be minimal, with respect to listing, the initial fee is set at $10,000 annually. There may also be legal and other administrative fees incurred in the listing process.

3. What criteria must I meet in order to list my shares?

According to the Finance Bill 2012 which amends the Corporation Tax Act, an "SME listed company" means a Small and Medium Enterprise company listed on the Trinidad and Tobago Stock Exchange, namely a company whose:

(a) minimum share capital is TT$5m;

(b) maximum share capital is TT$50m; and

(c) minimum number of shareholders is 25 members.

In order to benefit from the reduced tax rate of 10 per cent for the first 5 years, the company must ensure

i. a minimum of 25 shareholders own a total of at least 30 per cent of the issued share capital of the company; and

ii. Capital shall be raised with the issuance of an initial public offering to be followed by a listing on the Trinidad and Tobago Stock Exchange not less than 60 days after allotment of the issue.

Companies should note the definition of Capital as defined in the amended legislation. Additionally if you desire to list your shares on the Trinidad and Tobago Stock Exchange (TTSE), certain guidelines which are available from the TTSE must be followed.

4. Who are the key players

in this process?

The transition from private to listing of your shares encompasses the development of relationships with the following entities:

• The Securities and Exchange Commission—For approval of the Prospectus and to List and Trade Shares.

• The Trinidad and Tobago Stock Exchange—For the approval to List Shares upon meeting guidelines for Listing

• An Underwriter/Broker—To facilitate the listing of the shares, this cannot be done directly by the Company wishing to List.

• Ministry of Finance—In providing the tax incentive.

5. What is the first step?

We have mentioned previously that in order to list shares you would need to engage the services of a licensed Broker. Bourse continues to be the leading independent stock-broking firm in this regard and would be capable to take you through all of the stages involved.