After filing for an IPO at the New York Stock Exchange last week, eCommerce company, Jumia is gearing up to become the first Africa-focused tech startup to list on a major global exchange. If everything goes according to plan, the IPO may be concluded as early as March 27th 2019.
The US capital market has long been a favoured destination for foreign companies looking to raise capital or establish a trading presence for their securities. In the case of Jumia, it filed in a registration statement under the name Jumia Technologies AG.
The new name became effective upon registration with the commercial register of the local court in Berlin, Germany on January 31st, 2019, although there are still debates around the actual origin of Jumia. Nigerian company or German, what this goes to show is that a foreign company apparently can IPO in the US.
It's a complex and rigorous process, but here are a few key things to know on planning an IPO in the US.
Confirming your foreign private issuer status
A key consideration for a foreign company is whether it qualifies as a foreign private issuer. In the US, two tests that determine the foreign private issuer status of prospective IPO companies are percentage of US share ownership and US business contacts.
Basically, a foreign company will qualify as a foreign private issuer if it meets the following criteria;
- At least 50% of its outstanding voting securities are held by US residents.
- The majority of its executive officers or directors are US citizens or residents.
- If more than 50% of the issuer’s assets are located in the United States
- If the issuer’s business is administered principally in the United States.
Registering your securities with SEC
Foreign companies that want to go public in the US must register their securities with the US Securities and Exchange Commission (SEC) as required under the “Securities Act” of 1933 or “Security Exchange” Act of 1934.
Three ways to go about registering securities with SEC are through a Direct Public Offering (DPO), an Initial Public Offering (IPO) or a reverse merger. Both the DPO and reverse merger are typically faster and less expensive than the IPO, which requires you to hire an investment bank to underwrite and issue shares on your company’s behalf.
In the case of Jumia, the eCommerce company went with the IPO option, having hired the services of 7 investment companies (Morgan Stanley & Co. LLC, Citigroup Global Markets Inc, Berenberg Capital Markets, LLC, RBC Capital Markets, LLC, Raymond James & Associates, Inc, Stifel, Nicolaus & Company, Incorporated and William Blair & Company, L.L.C) to underwrite shares on its behalf.
Establishing an American Depository Receipt programme
The stocks of most foreign companies that trade in the US markets are traded as American Depository Receipts (ADRs). Having an ADR setup (issued by depository banks in the US under agreement with the issuing foreign company) allows for easy comparison to securities of similar companies as well as access to price and trading information.
On its own, an American Depository Receipt (also referred to as American Depository Share) is a US dollar-denominated equity share of a foreign-based company available for purchase on an American stock exchange.
ADRs simplify investing in foreign securities by having the depository bank manage all custody, currency and local taxes issues.
Process of registration and filing of registration statements
When filing for an IPO in the US, the principal document one must fill is the SEC Form F-1, as required by the Securities Act and Exchange Act. All required registration statements and other material filed with the commission must be submitted in electronic format on the commission’s Electronic Data Gathering and Retrieval (EDGAR) system and are subject to staff review and comment.
Issuers are encouraged to contact the staff of the Office of International Corporate Finance to discuss these questions. Questions about the required financial statements or unusual accounting and financial reporting issues may be directed to the Chief Accountant’s Office in the Division of Corporation Finance.
Summarily, once a foreign private issuer is public in the US, it must comply with the SEC’s reporting (annual and other reports) and disclosure requirements, including an ongoing requirement to file periodic reports. In some instances, these reporting obligations of foreign companies that become public companies are relaxed in order to encourage more foreign companies to enter the US capital markets.