SIMON BROWN: Let the buyer beware

Recent media reports about investors in an unlisted venture in Umhlanga in KwaZulu-Natal have again reminded me why I never invest in unlisted shares. The reasons are simple: regulation and liquidity.

At the heart of every business is the Companies Act 71 of 2008 which came into effect in 2011, replacing the old 1973 Act. It’s a great document and easy reading. The act sets out the regulations and requirements of all formal companies in South Africa such as AGMs, board responsibilities, how soon results need to be published, shareholder voting processes and more.

The problem with owning an unlisted business is that if the company is flouting the rules, it becomes pretty much impossible to do anything about it without bringing in expensive lawyers. I have received many e-mails from distressed shareholders where results haven’t been published and AGMs not held. Letters to the board go unanswered and ultimately the investment is worthless.

What the JSE (or any exchange) does is add an extra layer of regulation on top of the Companies Act, and the JSE enforces this as best it can.

Now, sure, we still have failures such as African Bank, Steinhoff and more. We also have a number of suspended listings which have failed to publish results within the required three months (the JSE does give an extra month’s grace). But for the majority of listed stocks the results come out on time, AGMs are held and shareholders get to vote their shares.

Another huge problem with unlisted companies is the ease of selling your shares. An exchange offers great liquidity in that, at its heart, it is a place for buyers and sellers to meet centrally (electronically). Now, you may not find a buyer at a price you like and volume may be tiny in some small-cap stocks, but at least you know where you’ll find other buyers and sellers.

Selling (or buying) unlisted shares is hard as there is no central exchange. Some unlisted companies may try to assist with the process, but it’s never going to be nearly as efficient as a central exchange.

As a last point, there is of course a huge exception to owning unlisted shares, and that’s when the business is yours. I have owned a few companies over the years where I have been the majority shareholder and the comfort here is that if things are not being managed well for shareholders, well then it is my fault.

You may even have invested in a friend’s business and hold a minority stake, but at a very minimum I’d want a board seat on any company I hold shares in, which means I would need to have a significant-enough stake to warrant such a position.

So, yes, you may have an opportunity to invest in a great unlisted company and, sure, it may one day grow into something huge and even list. But most never list and in my experience most are a horror experience that ultimately loses you money.