Public Offer Vs Private Placement Starcomms Offer as Case Study

Public Offer Vs Private Placement Starcomms Offer as Case Study

May 16, 2012 / Research

Financial Markets are governed by a set rules, regulations and choices. The choices open to investors to participate in the primary market is encouraged by the belief that the investor will be guided and protected by the regulators who are expected to ensure that activities of companies and operators are guided by a set of rules known to all stakeholders. Fundamental to this is the need to understand the differences, advantages, disadvantages, implications and remedy available under the different options open to companies and where/how investors decide to engage in either private placements or public offerings. To contextualise this within the prism of the 2008 Starcomms offer and the attendant issues arising therefrom, we have produce below a table highlighting the characteristics of each offering, the peculiarities and the specifics of the offer. The immediate conclusions drawn was that the 2008 Starcomms offer was in all material facts an Initial Public offering for which the regulators ought to have identified and taken necessary and corrective steps to recalibrate or rescind. The Placement which is supposed to be undertaken by a few individuals was made prepared and packaged like a public offer and made a public affair to the extent that prospective investors started depositing for the placement, with majority of them eventually not allotted shares by the SEC but placed under investment vehicles by firms and operators who ought to have known better. Yet to this day, there has been no official declaration from the Securities & Exchange Commission (SEC) on this transaction that typifies the excesses that took place during the capital market boom years; and sadly signposts the reason why confidence may not return to the market anytime soon. Comparative Analysis Table

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Public Offer Vs Private Placement Starcomms Offer as Case Study

Definition

Interpretations

The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded. In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue, the best offering price and the time to bring it to market. Generally, any sale of securities to more than 50 people is deemed to be a public offering, and thus requires the filing of registration statements with the appropriate regulatory authorities. The offering price is predetermined and established by the issuing company and the investment bankers handling the transaction.

The sale of securities to a relatively small number of select investors as a way of raising capital. Investors involved in private placements are usually large banks, mutual funds, insurance companies and pension funds. Private placement is the opposite of a public issue, in which securities are made available for sale on the open market.

The placement was packaged asan Initial Public Offering in everything but name. This contravenes existing rules guiding the private placements designed to be for few individuals that are supposed to be invited via a letter and not through blasted emails, newspaper coverage, advertisements and public road shows.

Securities not issued to the public - without advertisement, public solicitation or public issuance in any form or shape.

The documents available at http://www.proshareng.com/news/Public%20Offers%20Private%20Placements would indicate that several public and open road shows/investors meetings were held to both local and foreign investors and other general public awareness measures were deployed to sell the offer.

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Public Offer Vs Private Placement Starcomms Offer as Case Study

Description

When an issue / offer of securities is made to new investors to become a part of the firms' shareholder family, it is deemed a public issue.

Allotment

An issue becomes public if its results of allotment is to over 50 persons or more.

Types

Public issue can be further classified into Initial public offer (IPO) and Further public offer (FPO)

When an issuer makes an issue of securities to a select group of persons not exceeding 50, and which is neither a rights issue nor a public issue, it is called a private placement An issue becomes privately placed where an allotment is made to less than 50 persons who can be directly attributable to have 'paid' for the shares on offer. Private placement of shares or convertible securities by listed issuer can be of two types: Preferential allotment or Qualified institutions placement (QIP):

The number of people that took part in the placement exceeded the minimum requirements number of 50 and perhaps indertiminable given the use of special purpose vehicles and unapproved funds by the SEC for the same purpose.

This issue was subscibed to by over 50 persons (approx about or more than 1000 from the records of lodgement into bank accounts) BUT SEC approved a list of 43 investors without questions as to the nature and place of special investment vehicles used.

It was not stated or clearly classified but the private placement was treated like aPUBLIC OFFERRING in contravention of existing SEC rules.

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Public Offer Vs Private Placement Starcomms Offer as Case Study

Approval

It is an unlawful act for any person to offer for sale or to buy or sell securities which are subject to the provisions of the Act or these Rules and Regulations a. before the Issuing house has filed a registration statement with the Commission; or b. after the registration statement has been filed but before it is cleared by the Commission; or c. after the Completion Board meeting but before the issue is authorized to open except in the following circumstances: i. preliminary negotiations or actual agreement between the issuer and the underwriter; ii. Oral offers not made to the public; iii. Notices of proposed offering.

No public company shall offer securities by way of private placement without the prior approval of the Commission.

Public Presentations at the various fora in the country were held while the receiving banks collected monies from subscribers before the SEC approval was obtained as disclosed in the timeline analysis provided in the investigation. Further, at no point was the specific nature of the NCC approval made public in the PPM or in any of the presentations made at its public road shows.

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Public Offer Vs Private Placement Starcomms Offer as Case Study

Collective Fund Trust

This is a method that differs from Public Offerings - in some jurisdictions such investment vehicles are allowed to partake in public offerings.

Methods of Promotion

Firm is allowed to make public promotional activities as approved by the SEC.

This is in line with basic characteristics of Private Placement investors in a trust plan shall be qualified investors if recognised under the jurisdiction and if properly disclosed in its PPM Cold Calling is not permitted, Advertisements, articles, notices or any other communication cannot be published in any newspaper, magazine, newsletter or similar media or broadcast on TV, radio or cable., No seminars or meetings may be held with regard to any current offering unless each invitee is known and qualified in advance, No mention of any specific offering or past performance may be made at generic seminars (i.e. seminars to discuss the general concept of such investments).

Investment vehicles were created purposely to aggregate those who were not on the allotment list e.g. AFRINVEST Starcomms TELEOPS fund, Frontier Market Funds, Frontier Market Funds, Chapel Hill Denham Management Ltd, Chapel Hill Advisory Partners Ltd and IBTC Asset Management Limited amongst others.

Public Presentations at investment forums and promotions on electronic and online media were among marketing strategies as against regulatory rule. See schedule of representations and presentations made in public in the references provided below.

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Public Offer Vs Private Placement Starcomms Offer as Case Study

Ownership

Public offerings are used by companies with more dispersed ownership before the offerings

Private placements are used by family firms and venture capitalists with controlling owners before the offerings

Owners of monies were not 'directly' among the 43 persons approved by the SEC

10

Time Required

Lot of formalities involved due to stringent rules

11

Pricing

Sold at Market value

12

Share Certificates

Share certificates expected to be issued within regulatory specified period

13

Liquidity

More liquid

14

Due Diligence

Necessary due dilligence and all important information would be presented for investors with attendant professional and corporate liability well noted.

Quicker form of raising money Investment relatively priced (at a high discount) to compensate for absence of immediate liquidity as compared to market value. Share certificates are unduly delayed and there is much uncertainty about when such shares may be listed due to the absence of stringent regulatory control Illiquid as investors cannot easily sell unless when the securities are listed on the Exchange Company's financial health, accounting records, or tax declarations are not fully known. On a general note, there is often less information to help investors do an extensive analysis of the company to aid informed

The offer ended within the specified period but never started when it should as SEC approval had not been received at the time of commencement.

Booking building method was employed

Share certificates were meant to be issued to the 43 allottees on the allotment list approved by SEC only. Yet, over 300 subscribers received certificates through questionable procedures that involved share certificate transfers outside the rules.

The private placement was listed few months after closure date of the offer.

The offer was promoted beyond regulatory requirement and the majority of those who subscribed relied on the regulator to ensure that the transaction was indeed within the rules of a placement.

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Public Offer Vs Private Placement Starcomms Offer as Case Study

decisions.

15

Investors Profile

Experts, sophisticated, institutional and retail investors can invest in IPO under a caveat emptor

16

Investment Intent

It encourages both long and short term investment patterns

Private placement should be made only to investors capable of evaluating the merits and risks associated with the investment Purchasers of private placement securities must purchase for investment purposes and not for the purpose of resale. The typical subscription documents used in private placements contains what is called "investment letter language." This representation should be personally verified. Consideration should be given as to whether the investment representation makes sense in view of the surrounding circumstances of the proposed purchaser.

This was not put in consideration as the offer was technically - an offer to the world - outside the regulatory requirements and rules operating at the time.

The offer was created to accommodate speculators, venture capitalist, and retail investors as against such strict regulatory stipulations as would be expected for a private placement for which the SEC was earning a fee.

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Public Offer Vs Private Placement Starcomms Offer as Case Study

Proshare Research

Related News/References: 1. Private Placement Investopedia (http://www.investopedia.com/terms/p/privateplacement.asp#axzz1wfqQkMUH) 2. The STARCOMMS PLC Private Placement Exposed - The Petition 3. Starcomms Plc: The SEC Approved list of 43 Allottees 4. Starcomms: What happened to Circle TEL for which the NCC gave the PP approval? 5. Starcomms Confirms role of ACTIS, ECP and Chapel Hill Denham 6. Chapel Hills 2009 Response to Initial Allegations on Starcomms Offer 7. Starcomms Pilot Fishing Presentation March 08 8. Starcomms PPM [1] 9. Investor Presentation 2008 - Starcomms Plc 10.Starcomms Investor Letter 11.BusinessDay of 29th April 2008 12.Afrinvest - Tele Fund Starcomms PPM[2] 13.Private Placements in Nigeria - An analytical Framework. 14.Shares: Private Placements as Public Offers - Legality -

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