Janet E. Morrison, Legal Writer

Janet E. Morrison

Stock exchanges in the great financial centres of the world are the lifeline of capital that contribute to the vitality and stability of world's economy.

'Going public' has come to signify the coming of age of a company. The report in the Financial Gleaner issue of October 31, 2008, that the Jamaica Stock Exchange proposes to launch a 'junior stock market' which will offer the advantages of listing to medium- and small-sized companies (SMEs) is good news for companies and investors. The junior market is intended to encourage domestic investment in SMEs, increase employment and stimulate econo-mic development.

The United Kingdom, the United States and Canada each has a junior stock exchange which function as a secondary source of capital for young, small and emerging companies.

One of the major hindrances that in-vestors have to investing in an SME is their inability to sell the shares in them, there being no ready market or 'platform' on which to trade the shares.

This leads to a general inability of an SME to attract new capital.

This inability, together with the inaccessibility of loan capital caused by insufficient collateral or by high interest rates, contribute to severe under-capitalised SMEs - that is, SMEs with potential for growth in the Jamaican market, where venture capital is hard to access, are often stillborn for want of equity or affordable capital for expansion.

A junior stock exchange might therefore create opportunities for small, young and growing companies to raise capital in the open market to fuel needed investment for the benefit of companies and their investors.

The launch of a junior stock market regulated by the JSE signals a maturing of the Jamaican capital market.

There are some basic requirements proposed for listing on the JSE Junior Market.

The SME must prepare and publish a prospectus in the usual way, that is, make an Initial Public Offering or IPO.

The IPO must comply with the requirements of the Companies Act and be approved by both the registrar of companies and the Financial Services Commission.

No practical benefits

Legislators should review the law in this regard since there is in practice a fair amount of duplication of efforts in satisfying both regulatory requirements with no practical benefits as regards disclosure for investors, but which dual requirements delay the process and adds to the expense of an IPO.

The capital of the SME should not be less than $50 million at the completion of the IPO. This threshold has been recommended as an incentive for SMEs to list.

Appointing a mentor

The number of shareholders of the SME should not be less than 25 holding, no less than 20 per cent of the company's share capital.

The SME must demonstrate that it has the ability to comply with the JSE Rules by having an adequate internal structure and personnel.

It is also required to appoint 'a mentor', who is an FSC authorised corporate broker, to its board for advising and oversight purposes. In this way, it is hoped the SME will be guided by the mentor to comply with the JSE Rules.

The SME will be required to be audited annually and to comply with the JSE Rules for transparency and accountability to investors.

It is proposed that appropriate changes will be made by Parliament to the tax laws to encourage SMEs to list on the JSE. The present proposal is a full income tax holiday for the first five years after listing and for the second five years, a one-half income-tax holiday.

SMEs will also enjoy no taxes on dividends and transferors of their shares will not be liable to pay transfer tax and stamp duties on their transfer. These are tax exemptions currently enjoyed by the holders of shares listed on the JSE by virtue of current legislation.

Significant incentives

However, as regards the above tax holidays, two conditions apply - should the SME fail to list on the main board or delist within the first 10 years of listing on the junior market, the SME will be required to refund the tax incentives to the Government; and, if the SME is acquired by a private entity following receipt of the tax incentive, 20 per cent of the share capital is required to remain listed.

The announced proposal presents significant incentives to encourage investments in equity in SMEs and for SMEs to list on the junior market of the JSE. No doubt the market eagerly awaits its implementation.

Janet Morrison is an attorney with the law firm, DunnCox, in Kingston.

Taken from the Financial Gleaner, Friday November 14, 2008.