There are many types of investors such as outside investors, inside investors, sophisticated investors, qualified investors, ultimate investors and others.
These are not the same and the risks and rewards attached to them are not the same.
I believe that every entrepreneur’s aim is to have a very big organization in the long run.
Organizations get bigger when the shareholders and stakeholders increase.
One popular way of getting funds for expansion and growing bigger is to sell the shares of the company to the public on the stock exchange market. This is easy when the company is has a a known brand name and also if it is already listed on the Stock Exchange Market.
The ultimate investor is someone who establishes a company and walks through thick and thin to be able to have the company listed on the Stock Exchange Market. This is where the inventors (entrepreneurs) actually make the money. Those who buy the shares of this company are the outside investors. The original owners are or the inside investors, the founders.
Whether your company is small or big you can raise funds from the public depending on the country in which the company is situated.
I have learnt in my ACCA studies that in the UK, they have the Alternative Investment Market (AIM) for smaller companies that do not meet the requirements to be listed on the main Stock Exchange Market. These smaller companies can then raise funds publicly on this market.
I believe other countries should have or need to have similar markets for their young and upcoming companies.
Ghana needs one for its small and medium companies that are doing well and need funds to expand but do not qualify to raise funds on the main stock market.
As these companies expand and grow then, they can move to the main stock exchange.
Companies incur much more expenses like legal costs, costs on lead brokers, paper work, printing of prospectus and others to raise equity fund when trying to raise funds on the stock market and the demands for returns by equity shareholders are also more expensive than financing projects by internally generated funds and borrowing, but raising funds on stock market also has its own advantages.
At any given time, shares, bonds, debentures could be sold to the public when all stakeholders have been consulted and agreement reached.
I am more concerned with a company being set up and taken through the odds eventually to get listed on the stock exchange. I know that equity is more expensive compared to using internally generated funds and debt funding but ultimately my quest is that there will be wider shareholder base and I believe society at large benefits. New shareholders who have diverse expertise in various fields could come on board during Annual General Meetings, where they may share and or trade their expertise to help spearhead the company to an unexpected growth and expansion if given the chance.
Public offer also gives the original shareholders (founders) the opportunity to sell a percentage of their shareholdings, get money and still remain as shareholders.
Public offer is one of the means that enriches the founders of the company listed.
This might sound unpalatable to some entrepreneurs but the truth is that once you resolve to offload some of your shares to the public; you do not only do so with the sole aim of expanding your company but also to get some money for yourself. The opportunity cost of losing some percentage in your shareholdings does not only put money into the bank account of the company but also ultimately puts money into the bank account of the entrepreneur.
It is not normally simple to have a company listed on the stock exchange
It is tougher in some countries than others.
Around the year 2000, about thirteen big time companies collapsed in the USA; among them were Enron and WorldCom. The financial reports for most of these collapsed companies were ‘cooked’. The end result for the ‘cooked’ financial reports was that the companies that practiced bad accounting collapsed, and some of their ‘big’ men were put before court. Some were even jailed.
Others were sacked and it was not likely they would get new jobs that soon.
Arthur Anderson which was one of the big five audit firms in the world was the main auditor of Enron also collapsed. When all the indemnities protecting an auditor are removed then the auditor has to face legal actions. If the auditor, whom one can say was just an outsider to check the records of Enron collapsed then what about the organization itself that got into those unacceptable practices?
So many issues came up in the financial world after the collapsed of Enron.
The United States of America realized the big loophole was in corporate governance enforcement. The USA therefore got a corporate governance act enacted. It came out with a law on corporate governance. The now famous Sarbanes Oxley ACT or SOX also known as Public Company Accounting Reform and Investor Protection Act (named after the two gentlemen, (Sarbanes and Oxley) who spearheaded the act. Sox is a ruled based corporate governance law unlike in many countries where they are principles based that is really judgmental and not enforceable.
Sox also lays down the procedures and processes that have to be met before a company can be listed on the stock exchange in the USA.
So in the USA apart from the conditions of the Securities and Exchange Commission which is the governing body of the stock exchange market, the requirements of the Oxley Act must also be met fully before listing on the market is accepted.
Countries replicate laws; it has even become easier as we live in a global village.
Who knows, next time it might be your country that wants to adopt corporate governance laws of the USA.
It’s even going to get much tougher in almost every country because of the recent pats CREDIT CRUNCH.
The Graphic Business wrote ‘‘the credit crunch is caused by the impact of sub-prime loans which some financial institutions, that is some banks in some advanced countries put in their statements of financial position (balance sheets) as if they were proper, strong financial assets. These are indeed not good loans but have been packaged as good financial instruments. These instruments do not really have credible book values and could not be turned into cash easily for the banks to use for trading. Eventually these financial instruments were exposed as worthless.’’ Those financial institutions that had these sub-prime loans as assets of their portfolio, then got into financial troubles. This had replicated thereby having multiplier effects on many organizations and affected individuals. Many people lost their jobs because the affected companies could not get the needed funds for smooth operations. Countries like the Iceland, USA were hard hit and that really affected the global market demand and supply in every commodity in almost every country under the sun.
From the underlying, it therefore means that any company seeking to be listed on the stock exchange will be scrutinized more than before. Entrepreneurs should then refrain from addressing their financial reports artificially. Investors depend heavily on the financial reports of organizations to make decisions. If the financial reports are misleading, then that would breach the trust between the preparers of the reports and the users. No proper business transactions can be established again in the future.
When your company (ies) is able to meet these requirements and get listed, the directors and managers need to treat the shareholders and all stakeholders with transparency, honesty, fairness, equitability and objectivity. The company should be directed and managed well so that share price could be appreciated and dividends paid frequently if that is the policy of the company and it’s the choice of shareholders. The interest of managers should match with that of shareholders.
All schemes put in place to reward managers for good performance should be instituted in such a way that management cannot manipulate these schemes to suit their own selfish interest to the detriment of the shareholders.
The Ghanaian Stock Exchange (GSE) is doing well and has been able to attract foreign big companies like Tullow Oil Plc, which is offering an initial public Offer (IPO) in Ghana, right now, the deadline for application for the shares is 4th July 2011. I learn Kosmos Energy will follow suit.
Dear enterprising entrepreneur, have your company (ies) listed on the stock exchange market in future.
©, 2011, Godwin-Xavier Ayeebo
Email: gayeebo@gmail.com
Blog: www.g-xavierayeebo.blogspot.com
