AFTER years of initial public offerings (IPO) closing within the same week or a minute after opening, the practice might come to an end based on the Financial Services Commission’s (FSC’s) proposed amendments to the ‘Guidelines for Issuers of Securities’ which will require every public offer (PO) to be open for at least three business days after the opening date.

The FSC put out the second iteration of its amendments last week after canvassing comments from members in the financial services industry and public from March 2021. The original proposal (item 20) wanted to ensure that there were 14 days for the public to consume and ruminate on the offering before its opening date. The proposed format would result in more time being given to investors to evaluate an offering and for equity analysts at the various brokerage firms to effectively analyse and publish a recommendation.

The last IPO on the market, EduFocal Limited, closed after one minute on March 3 with investors pouring in $428.42 million in subscriptions relative to the $129.69 million that was being sought. Only Mayberry Investments Limited (MIL) and JMMB Securities Limited clients were able to participate.

However, various investors are questioning the FSC proposal due to the current structure of the Jamaica Stock Exchange (JSE) Junior Market offerings having a ceiling of $500 million and most offers in recent times being oversubscribed by more than 200 per cent. This comes as the FSC guidelines don’t have significant distinctions between IPOs and additional public offerings (APOs) which all have different scenarios due to the size of the offers. As a result of these oversubscriptions, relative to the size of the public pools, most allocations to investors who subscribed to Junior Market offers received a pro-rata allocation between 11.76 to 16.57 per cent on what they invested.

One person who spoke on condition of anonymity with the Jamaica Obserever stated that if he received 10,000 shares and a pro-rata allotment of 16.57 per cent in the public pool in the EduFocal (Ticker: Learn) IPO between two brokers, he might have possibly received only 1,000 units and less than five per cent pro-rate allotment based on secondary market trading of the stock since listing. Learn is currently trading at $3.28 relative to the $1 IPO price.

While respondents in a poll by the Business Observer were split between the need for public offers to be open for longer after the opening date, those who agreed with the measure stated that this was because of issues encountered via the digital public offer platforms used by brokers since the novel coronavirus pandemic. They believed that guidance on digital platforms should be added to the FSC’s proposed amendments. As a result, there is no longer a form contained in most prospectuses unless the issuer decides to include it.

The most recent case where investors had issues was with the Spur Tree Spices Jamaica Limited IPO which was lead by GK Capital Management Limited and processed through Sagicor Investments Jamaica Limited’s (SIJL’s) eInvest platform. Apart from many persons having issues attaching their signature or seeing the uploaded form in the system, some applicants ended up with nothing despite applying for the IPO.

The prospectus instructions stated that individuals should have transferred the money to be invested to an SIJL chequing account. However, the eInvest platform instead stated that people using Sagicor Bank accounts should input their account numbers and have the requisite funds for deduction. When the IPO was closed, many people received an email that no funds were sent to the account and the application was thus incomplete. After going through the JSE’s Regulatory Market and Oversight Division to seek a resolution, the applicants received their shares despite the company already listing. Spur Tree closed at $3.77 on Tuesday compared to an IPO price of $1.

Another investor complained that she had to wait two months to get her refund from the Tropical Battery Company Limited IPO.

Eighty-two per cent of respondents also believed that there shouldn’t be a restriction by the FSC for the lead broker to have a reserved pool in an IPO. One respondent commented, “Brokers have to be incentivised to scale a company to the point of IPO. I don’t agree with restricting them from having shares in companies they are bringing public.”

Respondents who agreed to the need for a broker-reserved pool believed that a 10 to 50 per cent cap on the amount brokers could reserve on the offer would be fair. Seventy-three per cent of respondents also agreed that the minimum size of an offer reserved for the public should be greater than 40 per cent.

The Learn IPO had 62 per cent of the offer reserved for the public, 53 per cent reserved in the Spur Tree offer and 60 per cent for the public in JFP Limited’s IPO.

Managing director of JN Fund Managers Limited Allan Lewis said, “JN Fund Managers and the other securities dealers are reviewing the Proposed Guidelines for Issuers of Securities recently circulated by the Financial Services Commission (FSC). JN Fund Managers is always willing to work with the FSC to ensure that investors are protected and that the securities markets are more efficient. We expect that the guidelines that will be promulgated by the FSC after the consultative period has ended will inure for the benefits of investors and securities dealers.”

Other broker heads that the Business Observer tried to seek a response from on the proposed updates didn’t respond up to press time.

Executive Chairman of Mayberry Investments Limited Christopher Berry stated last week that if the FSC’s block on brokers having a reserve pool went through, it would become uneconomical for many brokers to engage with small companies planning to list on the JSE. He added that it would make more sense for the broker to arrange a private placement with accredited investors and list via introduction than go the traditional IPO route. He explained that a broker buying in at a public offer through a reserved pool signals a lot to the market since not all POs will have a reserved pool for the broker. The average return on the Junior Market since listing has been 493 per cent.

Another executive at a broker who spoke on the condition of anonymity mentioned that a possible solution to the squeeze public investors feel through IPOs would be for the JSE to increase the minimum listing size from 20 to 30 per cent like in Trinidad and Tobago and reducing the mandatory buy-out threshold to promote wider holding of shares. He added that lock-up agreements need to be used to ensure brokers themselves don’t just exit investments in less than one month after listing.

The FSC is currently proposing through item 21 that individuals who benefit from a reduced price in a PO through a reserve pool should be subject to a lock-up period of three months. Lock-up periods are not imposed by the Securities and Exchange Commission in the USA but instead the underwriter who is bringing the company to the public.

Editors Note: The FSC will be taking comments on the paper on or before April 8 through the submission of a letter at its Barbados Avenue office or through its securities@fscjamaica.org email.