December 7, 2021

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CMA speaks on approval of prospectuses

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Kampala. October 30, 2021. The role of the Capital Markets Authority (CMA) in approving prospectuses for the offer of securities to the public is enshrined in S. 5. 1 (a) of the Capital Markets Authority (CMA) Act. It is an offence under section 90G of the CMA Act to offer securities to the public or any section of the public in Uganda without approval from the CMA.

The purpose of the approval by the CMA is to ensure prospectuses disclose all the key information that investors need before making an investment decision. 

The approval does not assess the merits of the offer, and should therefore not be interpreted as an endorsement of the merits of investing in the securities that are the subject of the prospectus. Investors must therefore make their own informed decision before undertaking any investment.

A prospectus is prepared by an adviser authorized by CMA because of the experience and skill they have in this task. The law specifically makes this obligatory for someone ‘carrying on the business of organizing the promotion and floatation of securities to the public on behalf of the issuer’ to have been authorized by the Authority.

Considering that their professional obligation and reputation is at stake, and for the practical reason that an issuer may not have the ability and time to undertake this task properly, such adviser must take this responsibility seriously. 

The information to be contained in a prospectus and the fees to be paid upon lodgment of a prospectus, are detailed in the Capital Markets Authority (Prospectus Requirements) Regulations, which are also to ensure clarity and consistency in the review of prospectuses.

The payment of fees to the regulator and the exchange on which the securities will be listed, is a normal practice the world over, and is enshrined in law. The CMA is currently reviewing the legal framework to ensure that the regulations are up to date with developments in the capital markets industry.

 There is a growing interest to offer other securities that are derivatives of debt or equity which are offered by unlisted Issuers, as well as debt and equity securities issued by private companies to less than one hundred (100) investors.

These developments have been taken into consideration in the development of new regulations for offers of securities.

Part of the key information that must be included in a prospectus for issue of debt or equity securities of a company is: the key terms of the offer (price per security and number of securities in the case of equity securities, and interest offered in the case of debt securities); size of the offer (amount to be raised); use of proceeds from the offer; profiles of directors and management; the general business overview; historical financial performance of the business including the history of dividend payment; a detailed description of the risks facing the business; the status of the company as a duly registered public company and existence of the shares; any material litigation that could affect the value of the business; the allocation policy for the securities offered; and the offer period.

A prospectus approved by the Authority also contains an independent accountant’s report and an independent legal opinion attesting to the financial and legal aspects of the information contained therein.

Detailed discussions invariably take place between the Authority and the Issuer represented by the transaction advisor, to ensure completeness of the information disclosed, after a thorough review of the entire prospectus.

Companies issue prospectuses to raise money to refinance debt, payout majority shareholders, or to finance growth. The prospectus regulations do not in any way prescribe the manner in which the proceeds are applied, other than as stated in the prospectus issued to the public. The key point is that there should be a full disclosure of use of proceeds, against which an issuer can be held to account if the need arises. 

An interesting but highly subjective exercise when raising capital through a public offering or private placement, is the valuation of the shares being issued. Usually, the Transaction adviser, using various valuation models and in consultation with the directors of the company, comes up with a share price that they believe reflects fair value for the shares on offer. In this regard, the Authority may offer guidance but the final decision on the valuation of the securities rests with the Issuer as guided by their advisers, both of whom need to have carefully considered the medium to long term reputational implications of an over valuation of their securities.

When making investment decisions, investors  (individual or institutional) should invariably consider the following factors: the long term growth prospects of the company., its ability to service debt as well as pay dividends, the return on investment – and interest in the case of debt offers.

These variables should be compared with other competing investment opportunities like the return on investment from residential or commercial real estate, strategically located undeveloped land, government securities, trade, agriculture, and other available securities listed on a securities exchange.

It is therefore important that a medium to long term financial analysis is carried out, with the guidance of a finance professional (preferably one licensed or approved by CMA) knowledgeable on the different investment analysis models.

“We would once again encourage the public to take a medium to long term view when investing their savings in financial assets, to desist from investing with or through anyone who is not licensed or approved by the CMA or any securities market regulator, and to inform the CMA in case one becomes aware of an unlicensed person offering securities to the public without the approval of the Authority,” said Samuel Sanya, Communications and Public Relations Manager, Capital Markets Authority. 

“Please endeavor to get investment advice from only approved persons whose list is available on the CMA website, here: https://cmauganda.co.ug/supervision/licensing-approvals/licensed-firms/.”

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