In South Africa numerous companies had set up special purpose vehicles to sell stakes to black investors in terms of the country’s economic transformation agenda. Many of these participants were also first-time investors. South Africa’s regulatory framework proved incompatible with the objectives of these restricted schemes for the following reasons:
In 2011 Singular Systems was mandated by the Naspers group to provide a trading infrastructure for its three broad-based black economic empowerment SPVs, which could accommodate the restrictive nature of the schemes and create liquidity for their investors. Singular Systems successfully developed and implemented its Equity Express platform for this purpose.
Over the past five years Equity Express has been the trading platform of choice for eight B-BEE SPVs and four operating companies, two of which have restrictions on shareholding.
On 11 July 2014 the FSB released a directive, coming down hard on what it referred to as “illegal exchanges” operated by companies facilitating trading in their own securities, with investor protection and systemic risk being its main concern.
It was a crushing blow, particularly to those companies that had been responsibly operating thriving OTC facilities using the Equity Express platform.
Companies were advised to apply for a temporary exemption from certain provisions of the Financial Markets Act, to continue trading in their own securities while they regularised their affairs in one of two ways:
Obtaining an exchange licence is onerous, expensive and these companies simply aren’t in the business of running exchanges. Ceasing their illegal activity on the other hand would mean listing on a licensed exchange, also costly and unsuitable for a number of reasons.
There is another option that would allow companies to cease their illegal activity - rearrange operations to fall outside the definition of an exchange in terms of the Financial Markets Act. In its press release dated 4 July 2014, the FSB described an OTC market as “a decentralised market where market participants trade through bilateral negotiations, in shares and other securities that are not listed on an exchange.” Bilateral negotiations occur directly between two parties and is closed to all other market participants.
In a concerted effort to provide optionality to its baffled clients and other companies facing a similar dilemma, Singular Systems developed OTC Express – a solution that allows companies to trade their shares freely among investors over-the-counter.