In a previous thought leadership piece, Singular Systems carefully unpacked the predicament that companies faced when the Financial Services Board (FSB) released a directive clamping down on what it referred to as "illegal exchanges".
The private companies that were enabling trading in their own securities using platforms with matching mechanisms to execute trades found themselves in a difficult position whereby they were effectively operating 'illegally'.
The popularity and ease of use of trading platforms such as Equity Express came under scrutiny as the FSB cited systemic risk and investor protection as their main concerns. Mid to larger B-BBEE share schemes were some of the most negatively impacted, but this also affected other private companies trading shares in this manner.
Companies were advised to apply for a provisional exemption from certain provisions of the Financial Markets Act (FMA), to continue trading in their own securities while they regularised their affairs in one of four ways:
1) Obtain an exchange licence;
2) Cease your illegal trading activity;
3) List on an exchange, ie, the JSE; or
4) Rearrange operations to fall outside the definition of an exchange in terms of the FMA.
For most companies, the only feasible option is for the company secretary to once again take over the function of manually negotiating acceptable deals between buyers and sellers, and deal with the settlement process. Going backwards and forwards between buyer and seller to ensure each trade takes place correctly is understandably an onerous task.
Some of the companies in question have upwards of 90 000 shareholders who require a facility to be able to:
1. Value their investment through a transparent price discovery mechanism; and
2. Liquidate their investment in an efficient manner that eliminates settlement risks.
In the case of restricted shares, there are also multiple sets of checks, controls and rules to implement, which makes trading even more arduous to execute. Manually doing any of the above takes an enormous amount of time and effort for the company secretary, let alone dealing with tens of thousands of shareholders trying to execute up to hundreds of thousands of trades a year.
Clearly, a solution was needed in order to overcome the above cross-roads that many private companies found themselves in.
Singular Systems, the company that built Equity Express, has invested its time and resources into understanding the predicament the FSB's directive put so many companies in. The result, OTC Express, an over-the-counter trading platform that meets the FSB's approval. OTC Express effectively allows over-the-counter share trading to take place while falling outside of the definition of an 'exchange', according to the FMA. The key is that the technology allows the transacting parties to negotiate bilaterally, thereby ensuring no 'illegal' matching takes place. By removing the matching mechanism, OTC Express safely falls outside of the FSB's definition of an exchange.
OTC Express's software is a simple and efficient solution not only for trading company shares, but also for price discovery. The publishing of historic trade data means companies and their shareholders are able to comprehend the true market value of their shares.
OTC Express enables shareholders to transact independently of the company secretary with a guarantee that settlement will take place. This means the onus is removed once again from the company secretary to supervise each trade. Furthermore, any queries or questions that a shareholder may have can be dealt with by contacting OTC Express's call centre share dealers or by paying a visit to the walk-in centre.
Finally, OTC Express is a proven platform that allows any restrictions that a company wishes to enforce (ie, race-based for B-BBEE shares, limits on percentage ownership, etc) to be implemented at a platform level. This means fewer checks have to be performed by company secretaries and support staff, which allows them to shift their focus from administering share registers to ensuring compliance and day-to-day strategic administration of the company.