On 27 September 2022 the Capital Market Authority (“CMA“) of Saudi Arabia announced a series of amendments to its implementing regulations designed to (i) facilitate the direct listing of debt instruments (including convertibles) offered by way of private placement; and (ii) introduce a framework for equity fundraising through crowdfunding platforms. The amended Rules on the Offer of Securities and Continuing Obligations (“OSCOs“) now also provide for the public offer of exchangeable debt instruments.

These initiatives expand, and further diversify, the available channels for issuers to raise funds to achieve their business objectives. These developments build on amendments to the OSCOs in March which permit a listed company to place up to 15% of its capital through the suspension of preemptive rights.

The amendments signal the CMA’s continuing commitment to drive the development of the Saudi capital markets through the further development of its debt market and its support for innovative practices, in the form of securities crowdfunding.

The introduction of these developments are primarily reflected in the amended OSCOs and Tadawul’s Listing Rules, with certain additional amendments to Capital Market Institutions Regulations (“CMIRs“) and Investment Account Instructions (“IAIs“).

The purpose of this client briefing note is to provide an overview of these key developments.

Introducing the direct listing of debt instruments offered by way of private placement and exchangeable debt instruments

Generally the Listing Rules only permit the listing of securities which have been offered by way of public offer, although there are a number of exceptions. One of these exceptions is the listing of privately placed debt instruments issued by the government of the Kingdom. 

Now, as a result of the recent amendments to the Listing Rules and OSCOs, other issuers may seek a direct listing of debt instruments offered by way of private placement subject to compliance with the relevant conditions.

The conditions for offering debt instruments by way of private placement for the purpose of a direct listing on Tadawul are set out in a new Chapter 2 of the OSCOs.

The provisions of Chapter 2 essentially mirror the requirements for a public offer in Part 4 of the OSCOs, as these apply to a public offer of debt instruments under Article 42. As with a public offer of debt instruments, legal and financial due diligence reports are not required and the offer is not required to be underwritten. One key condition for the direct listing of debt instruments offered by way of private placement is that the debt instruments must have a maturity date which is at least 1 calendar year after the CMA’s approval of the application.

Rather than a prospectus (as is required for a public offer of debt instruments), the application for registration must be accompanied by a “registration document”. However, the minimum information required is equivalent to a prospectus for a public offer of debt instruments and, as with a public offer of debt instruments, varies depending on whether the issuer already has securities listed on the Exchange.

As with a public offer of debt instruments, an application for registration, issuer’s and director’s declarations and due care letters from the financial and legal advisors are required. Following the direct listing of the debt instruments, the issuer will become subject to the continuing disclosure obligations in Part 7 of the OSCOs. 

Chapter 2 of the OSCOs clarifies that issuers may also seek a direct listing of convertible debt instruments offered by way of private placement, subject to the class of shares into which they may convert already being listed.

Where the issuer already has shares listed on the Exchange, an offer of convertible debt instruments by way of private placement is subject the following additional conditions:

  • the number of shares into which the convertible debt instruments may be converted must not exceed 15% of the issuer’s total number of shares;
  • convertible debt instruments shall not be offered by way of a private placement more than once during the twelve months following the end of the offer; and
  • the issuer must seek registration of the shares resulting from conversion of the convertible debt instruments.

The amended OSCOs now also permit the public offer of exchangeable debt instruments on the same basis as the public offer of other debt instruments under Article 42. Exchangeable debt instruments may be registered and offered only if the shares for which they are exchangeable are already listed and on condition that the issuer does not dispose of the shares for which they may be exchanged before the expiration of the maturity date.  

Introduction of the regulatory framework for securities crowdfunding

As a result of the recent amendments across various CMA regulations, the concept of crowdfunding is now recognised and separately regulated. 

Offering shares via a securities crowdfunding platform

Article 6(a)(9) of the amended OSCOs treats the offering of securities through a crowdfunding platform as an ‘Exempt Offer’ provided that the offer is conducted by a CMI (authorised to carry out ‘arranging’) on behalf of the issuer via an electronic crowdfunding platform hosted by the CMI.

The implication is that any other form of crowdfunding which does not meet the conditions in Article 6(a)(9) would constitute a public offering.

To qualify as an Exempt Offer under Article 6(a)(9), the offer must:

  • be made by a company which is not listed on Tadawul (and is not a subsidiary of a listed company). If the issuer is a foreign entity, then retail clients are not permitted to participate;
  • not exceed SAR 10 million in value when aggregated with all subsequent offerings made over the next 12 months through securities crowdfunding platforms or via limited offerings;
  • limit subscriptions to clients registered with the securities crowdfunding platform subject to subscriptions by any retail client not exceeding SAR 25,000 (or its equivalent);
  • be subject to an offer period not exceeding 45 days, during which proceeds received must reach at least 80% of the total value of the offering stated in offering document, failing which the offer will be deemed not to have been completed and the CMI must return all proceeds to subscribers (without deduction of any fees).

Offerings through securities crowdfunding platforms require the issue of an offering document which complies with the content requirements stipulated in a new Annex 1 of the OSCOs. Annex 1 requires the disclosure of, amongst other things, the terms of the offering, procedures to be taken in the case of an incomplete offering and the issuer’s business plan and key financial information, including financial forecasts and related assumptions, financial position and cash flows.

In addition, Annex 1 requires the provision of a consent letter from the relevant CMI which confirms, amongst other things, that the offer through the crowdfunding platform complies with the requirements of the OSCOs.

Subscribers who receive shares through securities crowdfunding platforms are subject to secondary market selling restrictions, and may not sell the shares unless the sale price does not exceed SAR 25,000 (or an equivalent amount) or the shares are sold to an investor meeting the criteria of an institutional or qualified client.

Dealing with clients participating in crowdfunding and custody of funds

A number of amendments to the CMIRs and IAIs have been made to clarify the responsibility of CMIs who are dealing with clients participating in securities crowdfunding.

Most significantly, the CMIRs have been amended to specifically exempt CMIs from complying with the client money and client asset rules in relation to clients funds received from securities crowdfunding subscriptions, subject to the funds held not exceeding SAR 40 million in aggregate and funds received from retail clients not exceeding SAR 100,000 in aggregate.

In addition, CMIRs offering securities through crowdfunding platforms are exempt from assessing the ‘suitability’ of a client’s participation in crowdfunding.

Finally, the IAIs have been amended to clarify that CMIs must open investment accounts on behalf of clients who participate in securities crowdfunding and must sign an investment account agreement with the client before offering to engage in securities crowdfunding with the client.

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