Section 1.1 Private companies raising publicly: a new regime for African SMEs
Common practice in securities markets regulations is to prohibit offerings of securities to the general public (hereafter, “POS”) except in the case where the securities are offered by a public company. The POS is typically authorised by a securities regulator who approves the issuer’s prospectus. The offering may then be advertised to the general public. Due to the high overall transaction costs of a POS, mandatory disclosure of sensitive information as well as the post-transaction costs such as reporting, compliance and shareholder relations, most companies stay private. Private companies must raise external growth capital through private placements; however, due to a number of supply and demand-side barriers which are well documented elsewhere, the vast majority of African SMEs do not have access to formal private investment capital.
The supply of early-stage and indeed later-stage capital for most African SMEs usually lies within their network of friends, family and the wider community. Fundraising from one’s community can be a cost-effective solution for entrepreneurs at the outset; however, the lack of formal fundraising practices at an early stage becomes a barrier to accessing formal finance later in the entrepreneurial journey. This results in a very small pool of SMEs that are able to participate in formal capital markets.
The ACfA Label Framework seeks to bridge this gap by creating a new regime for African SMEs: small private companies seeking to raise capital from people in their trusted networks who can be considered as a section of the general public – family, friends, community, customers, employees – in a formalised, safe and cost-effective manner.
The ACfA Label Framework creates an exemption to classic securities law whereby a POS is prohibited except when the issuer is a public company, or a private company that raises capital publicly in fulfilment of the conditions in DOC 6-2019: Project Sponsor Prospectus and when the securities are offered through a registered Crowdfunding Intermediary that holds the ACfA Label and is supervised by ACfA.
