New capital market rule to curb misleading claims in share sale

New capital market rule to curb misleading claims in share sale

Ethiopian Capital Market Authority (ECMA) is expediting steps to regulate initial public offerings (IPOs) through a new directive aimed at curbing overpromising by companies seeking to sell shares to the public.

The move comes as the Authority prepares to launch the stock exchange next year and boost investor protection by preventing companies from making misleading claims about returns.

The directive is one of eight in the drafting stage and a top priority for the Authority, which is empowered to regulate larger share companies and is working to standardize the sale of shares by companies through strict procedures.

“We’re expediting the drafting process at a bullet speed just because of the issues we are recently seeing in the market,” said Brook Taye (PhD), the founding director-general of ECMA.

Recent instances of companies selling shares to the public with unclear prospectuses have prompted the Authority to quickly prepare and approve the directive.

Brook added that he has seen advertisements where companies claim to generate high returns.

“We see these every day,” he said, assuring that the Authority’s efforts will put an end to it soon.

“Currently, the law allows us to stop that but as a new institution, we have not yet designed the legal framework,” he explained. “To be clear, this will stop once we have the directive in place.”

Companies seeking to attract investment through share sales must follow procedures that include submitting a prospectus to the Authority in advance.

The prospectus must contain all relevant information about the company, its promoters, associated investment risks and potential for loss, according to Brook. The primary goal is to provide investors with the information needed to make informed decisions before investing in a company.

Failure to fulfill these requirements grants the Authority the power to stop and could constitute a criminal offense, according to Brook. The companies will also be required to submit advertising materials to the Authority for approval before soliciting public investments.

In light of recent incidents in which the public bought shares based on exaggerated claims, the director general hopes the public will not fall for such tactics until the directive is in place to regulate share sales.

Although the specific threshold has not been set yet, gatherings of up to 50 people may not have to comply with procedures to sell shares, which are considered private placements under the capital market proclamation.

Brook stressed that the Authority does not evaluate whether the investment offers a lucrative opportunity, but rather ensures the prospectus contains sufficient information for investors to make their own assessment.


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