Proposal for a new stock exchange for small businesses
In Nigeria, it’s very difficult for small businesses to raise small capital: funding of the range N3m to N100m is scarce. The Nigerian Stock Exchange is supposed to be a market that allows the raising of capital from the public, however, because of the large number of rules and processes involved, companies cannot easily get themselves listed.
I am proposing a new, smaller stock exchange called the Small Business Stock Exchange (SBX), to be owned by a state government. This stock exchange will be designed to allow small businesses
- quickly raise capital for expansion
- get business support and assistance
- grow into large companies
Investors will receive returns via
- capital gains (price of stock goes up)
Because the market will be modern and digital, it will be trivially easy for people to both raise capital and invest via an app. The processes will be as easy as signing up for facebook.
With ready cash available for expansion, we will see many businesses grow much bigger. And, because businesses that raise money on this exchange will be more transparent, corporate tax collections will go up.
How will it be set up?
The setting up of Stock Exchanges in Nigeria is regulated by the Securities and Exchange Commission. This body can grant full approval for the setting up of such exchanges. Full details are provided here: https://sec.gov.ng/registration-requirements-of-securities-exchange/
A material hurdle is that the paid up capital of the exchange is required to be N500m.
How will it operate?
The key difference between this exchange and the current exchanges is that it is to be trivially easy to both list and invest in companies listed here. Everything has to be simple and straightforward, and the processes have to be uncomplicated.
It will operate digitally via simple apps and websites.
From an investor perspective
An investor goes on the website (or opens the app of the exchange). There, they see a number of small companies, categorised by risk factor. They can view how much capital each of these companies is seeking to raise, and how many shares they offer. They can then choose to purchase a number of shares.
Owning these shares grants them access to view the company financials, as well as attend quarterly shareholder meetings. The shares are liquid - meaning they can sell them at any time on the same market.
The shareholders, as a group, will appoint to each company via vote:
- A shareholder accountant, who will oversee the finances of the company
- A shareholder director, who will sit in on board meetings and report to all shareholders
- 3 business advisors, who will offer mentorship and advice to the management team
A shareholder is free to sell his shares at any time, and such shares will be taxed with a 25% (10% national capital gains tax and 15% state taxes).
From a company perspective
A company seeking to raise capital will need to be:
- A registered limited liability company with turnover exceeding N1m per year
- Declare the purpose for which the capital is being raised
- Have a board of directors with more than 3 people
- Have at least 10 staff
- Provide information on finances
- Provide evidence of payment of taxes that matches reported revenue and turnover
The company registers on the exchange portal, and pays a registration fee. This fee will fund an exchange-employed auditor who will visit the company to ascertain that it exists and will look through bank statements and financial reports to ensure that what is being said is the truth.
Once validated, the company goes live for the public to invest in.
Once the company has been successfully funded, it will have certain conditions it has to follow:
- The raised capital may not be used to pay management salaries
- The company has to report to shareholders quarterly
- The company has to hold annual shareholder meetings (digitally via video)
- The company has to hold quarterly board meetings (digitally or physically)
- The company is required to open their books to the shareholder accountant, who is required to report anomalies to the shareholders
- The company is required to file tax accurately and honestly
- If a profit is declared, the company is required to pay out dividends to the shareholders
A company can choose to go private again by buying out all shareholders (if they are willing to sell).
Benefits to the Government
There are many benefits to such a system. Economies are built by risk takers - both by those who build companies, and by those who invest in companies. Small companies are inherently risky, which is why they find it so hard to raise capital. But not all small companies are risky - all huge companies started out small.
The introduction of such an exchange would be a huge stimulus to small businesses, and give them the shot in the arm they need to become healthy and start growing. It would also allow the general public to participate in such successes, as they would also have their money grow as the businesses grow.
More directly, the state government will benefit in this way:
- Companies that want to register on this exchange will have to move their registered HQ to the state, increasing VAT revenue
- There will be a 25% charge on capital gains (when stock is sold at a profit, 25% of the profit flows to the Government)
- Local companies will list, draw capital to to the state and create employment
What would be needed to make it happen?
The paid up capital for a stock exchange is N500m, but that does not mean that this money is spent. The money will sit on the cash balance of the company, but will not be spent.
It will probably take about 1.5 years to complete the registration, and will need a staff of perhaps 10 experts. The cost to setup such an exchange and get it up and running will probably cost about N100m, assuming there are no major objections from the SEC.
This is a just a quick overview of the idea. Generally, the time is ripe for this, and the state that moves first will probably capture the value from creating such an exchange.