This article provides the reader with an overview of the latest amendments of the Rules on The Offer of Securities and Continuing Obligations (ROSCOs) (i.e the new provisions pertaining to securities crowdfunding platform and introduction of the direct listing of Debt instruments/Sukuk on Saudi Stock Exchange (Tadawul)). Certain legislative definitions and references have been paraphrased for brevity. Therefore, it is not a substitute for comprehensive legal advice.

The registration of Debt instruments/Sukuk offered by way of private placement for the purpose of a Direct Listing (“DL”) (also known as the “Technical Listing”) on the Saudi Stock Exchange (“Tadawul” or the “Exchange”) and the offering of securities through a Crowdfunding platform have now been regulated by the Saudi Arabian Capital Market Authority (“CMA” or the “Authority”) pursuant to the Rules on the Offer of Securities and Continuing Obligations (“ROSCOs”) as amended by the CMA Board Resolution number (1-94-2022) dated 22 AUG 2022G and its latest amendment by resolution of the CMA Board number (8-5-2023) dated 18JAN 2023.

Overview

The ROSCOs stipulate a number of rules and cases in which the offering is exempt from the requirements of these rules. These include, but are not limited to, whether the securities are issued by the Government of the Kingdom, whether the offer is for contractually-based securities of Institutional and Qualified clients (as defined below), or whether the offeree is affiliated with the issuer (unless the offering is of a category listed on the Exchange).

According to the latest amendments, the CMA added the “Crowdfunding” as a new case in which an offeror is exempt from the requirements of the ROSCOs. Additionally, it is now possible to submit an application to CMA for the Registration of Debt instruments/Sukuk that are offered by way of private placement for the purpose of DL on the Exchange.

For the purposes of these rules, securities do not include units in investment funds, which are covered by separate CMA rules being The Investment Funds Regulations and The Real Estate Investment Funds Regulations.

Crowdfunding:

• Article 6 of the ROSCOs provides certain cases in which an offeror of securities is considered exempt from the requirements of the ROSCOs as follows:

1. 1. where the securities are issued by the government of the Kingdom;
   2. offers of contractually-based securities provided that the offer of unlisted contractually based securities shall be limited to any of the following cases:
      1. Where all offerees are investors under the categories of Institutional and Qualified Clients[i]
      2. Where all offerees are employees of the issuer or of any of its affiliates.
   3. where an issuer whose shares are not listed on Tadawul increases its capital by offering new shares to existing shareholders;
   4. where the offeree is an affiliate of the issuer, unless it is an offer of a class of shares that is listed on Tadawul;
   5. where all of the offerees are employees of the issuer or of any of its affiliates, unless it is an offer of a class of shares that is listed on Tadawul;
   6. offers in an insolvency situation where shares are offered to creditors;
   7. where an issuer whose shares are not listed on Tadawul increases its capital by way of debt conversion
   8. where the subscription in total value for the securities being offered is less than SAR 10 million (or an equivalent amount) in accordance to the following conditions:
      1. the offer must not be made more than once during the 12 months after the completion of the offeror;
      2. subscription in the offered securities must not exceed 50 offerees (excluding investors under the categories of Institutional and Qualified Clients) provided that the amount payable per offeree (excluding investors under the categories of Institutional and Qualified Clients) must not exceed SAR (200) thousand (or an equivalent amount); and
      3. declaration to the offeror or the Capital Market Institution (“CMI”) (if the offer is carried out through a CMI) acknowledging (i) the risks associated with the investment, including that may result in loss of the full amount of the investment, (ii) that the CMA will not give any assurance as to the accuracy and completeness of the documents related to the offering or its completeness, and expressly disclaim any liability whatsoever for any loss arising from, or incurred in reliance upon, any part of the offer documents, and (iii) that the offeror or the authorised person does not have to notify the CMA of the suitability of such an investment
   9. If the offering is made through a CMI authorised to carry out arranging activities in the course of carrying out securities crowdfunding, in accordance with the requirements and conditions of the ROSCOs.

• The restriction and requirements on secondary market activity in respect of securities acquired pursuant to a crowdfunding are as follows:

1. 1. A person (referred to as a “transferor”) who has acquired shares may not offer or sell such shares to any person (referred to as a “transferee”) unless the offer or sale is made through a CMI and where one of the following requirements is met:

1. 1. 1. the price to be paid for the shares does not exceed SAR (25) thousand or an equivalent amount;
      2. the shares are offered or sold to an investor under the categories of Institutional and Qualified Clients;
      3. the shares are being offered or sold in such other circumstances as the CMA may prescribe for these purposes.
   2. If the requirement in subparagraph (1) of paragraph (a) cannot be fulfilled because the price of the shares being offered or sold to the transferee has increased since the date of the original offering, the transferor may offer or sell shares to the transferee if their purchase price during the period of the original offering did not exceed SAR (25) thousand or an equivalent amount.
   3. If the requirement in paragraph (b) cannot be fulfilled, a transferor may offer or sell the shares if he sells his entire holding of such shares to one transferee.
   4. The provisions of paragraphs (a), (b) and (c) shall apply to all subsequent transferees of such shares.

• The restrictions in paragraphs (a), (b), (c), and (d) shall cease to apply upon approval of listing on the Exchange of shares of the same class as the shares that are subject to such restrictions.

Direct Listing of Debt instruments/Sukuk offered by way of private placement:

• On August 22^nd, 2022, the CMA amended the ROSCOs introducing the registration of Debt instruments/Sukuk offered by way of private placement for the purpose of DL on the Exchange developing the regulatory framework for convertible debt instruments, including the provisions relating to private placements of such instruments by companies listed on the Exchange, and regulating the issuance of exchangeable debt instruments, including the conditions relating to the shares for which such instruments may be exchanged.

• Debt instruments/Sukuk offered through a private placement: in case where the offer is a debt instruments/Sukuk issuance programme, the offeror or the CMI must provide the CMA within 10 days from the completion of the offering of each issuance of a programme the details of the total proceeds and the issuance terms and conditions. The Issuer, in case where the Issuer is a Saudi joint-stock company or a Special Purposes Entity (“SPE”) whose beneficiary is a Saudi joint-stock company, must deposit Saudi Riyal-denominated debt instruments/ Sukuk with the Depository Center (referred as “Edaa” or the “Center”) within a period not exceeding ten days from the completion of the offering or the completion of the offering of each issuance if the offering was part of a debt instruments/Sukuk issuance program, provided that the request to deposit such debt instruments/Sukuk with Edaa shall be made by the CMI through whom the private placement is made.

• the issuer whose shares are listed in the Exchange, when offering convertible debt instruments by way of a private placement, shall be subject to the following conditions:

1. 1. The number of shares into which convertible debt instruments may be converted shall not exceed 15% of the issuer’s total number of shares.
   2. 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.
   3.  The issuer shall submit an application to the CMA for the registration of the shares resulting from conversion of convertible debt instruments in accordance with the requirements of these Rules and as prescribed by the CMA.

• Further the CMI (through whom the private placement is made) which disclose the issuance profile for the debt instruments/ Sukuk referred to in paragraph (h) of Article 10 of the ROSCOs on the Exchange’s website in accordance with the form prescribed by the CMA within a period not exceeding ten days from the completion of the offering or the completion of the offering of each issuance if the offering was part of a debt instruments/Sukuk issuance program.

Approvals of Regulatory and Supervisory Bodies

Crowdfunding:

• The only legal requirement is for the offeror or the CMI (if the offer is carried out through an CMI), when making such offer, to notify the CMA on a quarterly basis of the total number and value of the offers the CMI has made in addition to providing the following information: 1) type of exempt offer; 2) categories of the offerees; 3) amount paid by each offeree category in Saudi riyals; 4) date of the commencement of the offering; 5) date of the completion of the offering; 6) name and nationality of the issuer; 7) name and nationality of the offeror; 8) price paid for each security; 9) type of security; and 10) total size of the offering.

• If the offer is not complete at the time of the notification, the following information must be submitted: 1) Number of existing offers. 2)The expected date of completion. 3) The issuer and offeror information.4) Related securities.

Direct Listing of Debt instruments/Sukuk offered by way of private placement:

• CMA & Tadawul: An offeror may not register Debt instruments/Sukuk offered by way of private placement for the purpose of direct listing on the Exchange without obtaining the CMA approval. He should also make prior arrangements with Tadawul for listing the Debt instruments/Sukuk on the Exchange in accordance with the Listing Rules (“LR”) of the Saudi Stock Exchange (the “Exchange” or “Tadawul”) as amended pursuant to CMA Board Resolution number (1-108-2022) dated 19 OCT 2022G.

• Corporate approvals: The ROSCOs and LR require the issuer who apply for the registration of Debt instruments/Sukuk and listing to obtain all approvals required pursuant to its bylaws and the Companies Law[1] and its implementing regulations. In accordance with Article 117 of the Companies law the approval of the extraordinary general assembly must be issued prior to issue Debt instruments/Sukuk and apply for listing. Typically, such approval by the general assembly is granted upon the recommendation of the board of directors (“BoD”). The general assembly would approve the overall value of the issuance and grant the board of directors the necessary authority to determine and negotiate the specific terms and conditions of the issuance along with the relevant issuance and finance documents. Particularly in relation to a convertible bond or Sukuk issuance, the board of directors may approve the issuance of the new shares of the joint stock company at conversion without seeking any further approval from the general assembly for such increase, on the basis that the general assembly would have initially approved the issuance of the convertible bonds or Sukuk. Where the offeror is an SPE, the approvals of the SPE’s BoD and the Sponsor’s BoD are required.

• Moreover, the offeror’s BoD must appoint two representatives before the CMA and Tadawul for all purposes relating to the Capital Market Law, the Companies Law, their Implementing Regulations [i.e the ROSCOs], the Tadawul regulations [i.e. the LR] and other relevant laws, one of whom must be a director and the other must be a senior executive. Where the offeror is an SPE, it must appoint two representatives from its directors before the CMA and Exchange. The Sponsor must also appoint two representatives before the CMA and Exchange, one of whom must be a director and the other must be a senior executive.

• Further, any restriction on transferability of the Debt instruments/Sukuk must be approved by the CMA at the time of listing and all investors must be provided with appropriate information to enable dealings in such debt instruments/Sukuk to take place on an open and fair basis.

• Approvals required by the relevant governmental agencies, where applicable: depending on the nature of its business, an issuer may be required to obtain the approval of other relevant governmental authorities or regulators such as the Saudi Central Bank [in case of financial institutions such as banks or financing companies etc.] prior to proceed with the offering process.

Conditions & Requirements

Crowdfunding:

• As mentioned above the “crowdfunding” has been categorized under the exempt offers in accordance with the following requirements and conditions:

1. 1. The offering shall be for new shares in the issuer, and the issuer shall not use the proceeds of the offering to provide loans or invest in other entities or companies or in investment funds.
   2. The issuer is not a company whose shares are listed on the Exchange, or a company wholly owned by a company whose shares are listed on the Exchange, or any other issuer or other category of issuers as determined by the CMA.
   3. The total value for the offered shares of the same class through all securities crowdfunding platforms or a limited offering of the same issuer –during the (12) months following the end of the offering– shall not exceed SAR (10) million or its equivalent, and that the offering through a securities crowdfunding platform shall not coincide with any other offering for the same issuer through another securities crowdfunding platform or a private placement.
   4. The offering shall be limited to clients registered with the securities crowdfunding platform, and the amount incurred by each retail client’s subscription shall not exceed SR (25) thousand or its equivalent for each offering.
   5. Retail clients shall not be allowed to participate in subscribing in the shares of an issuer that was not established in the Kingdom.
   6. The issuer shall prepare an offering document in accordance with the requirements of Annex (1) of the ROSCOs, and that the offering document is available to clients registered with the securities crowdfunding platform through the website of the CMI at least five days prior to the date specified to start the offering.
   7. The offering period shall not exceed (45) days, and the total proceeds of the offering during that period shall not be less than (80%) of the total value of the offering that was disclosed in the offering document. In the event that the offering is not completed, the CMI must return the subscription amounts to the subscribers –without imposing any fees– within a period not exceeding (5) days from the end of the offering period.
   8. The CMI shall allow its retail client who has subscribed to cancel his subscription within (48) hours from the time of submitting the subscription application or until the end of the offering period (whichever comes first), and the CMI shall inform its client who has subscribed in the offered shares –immediately and without delay– of the completion of the offering or its cancellation and when its shares are registered in the issuer’s shareholders register.
   9. If a material change occurred to the offering document prior to the start of the offering or after the start of the offering and before its end, the issuer must notify the CMI as soon as it becomes aware of such change. In this case, the CMI may, at its discretion, request the issuer to resubmit the offering document, and it may also re-impose the five-day period stipulated in paragraph (6) above. The CMI must notify its client who has subscribed in the offered shares immediately and without delay of that change, and the client who subscribed before being notified of that change has the right to cancel or amend his subscription before the end of the offering period.
   10. If a material change occurred on the information disclosed in the offering document after the end of the offering period and before the client who subscribed in the offered shares is registered in the issuer’s shareholders register, the issuer must notify the CMI as soon as it becomes aware of such change.
   11. The CMI must notify its client who has subscribed in the offered shares immediately and without delay of that change, and the client who subscribed in the offered shares has the right to cancel or amend his subscription.

Direct Listing of Debt instruments/Sukuk offered by way of private placement:

• The conditions of registration of Debt instruments/Sukuk that are offered by way of private placement for the purpose of direct listing on Tadawul and key requirements are set out below. Further, it should be noted that issuer, or the Sponsor if the issuer is an SPE, must submit to the CMA with its application for direct listing the electronic copies of the documents (it shall maintain original copies of such documents and submit it to the CMA at its request).

#	Conditions &Requirements	Applicant without securities listed on Tadawul	Applicant with securities listed on Tadawul
1	Advisors	Applicant must appoint a financial advisor and a legal advisor.	Applicant must appoint a financial advisor
2	Legal Form	Closed Joint Stock Company or an SPE	Public Joint Stock Company or an SPE
3	Liquidity Requirement	Aggregate value of all debt instruments/Sukuk to be listed (or in the case of a debt instrument issuance programme, each separate tranche) must be at least SR 100 million.	Aggregate value of all debt instruments/Sukuk to be listed (or in the case of a debt instruments/Sukuk issuance programme, each separate tranche) must be at least SR 50 million.
4	Type Offering Document[ii]	RD as per Annex 7 of the ROSCOs which provides a model draft (containing the information and documentation that are required by CMA to be disclosed)	Idem – however Annex 8 of ROSCOs do not require legal information section to be included
5	Continuous Activity	The applicant must have been carrying on, either by itself or through one or more of its subsidiaries, a main activity for at least 3 years prior submitting the DL application.	Not applicable
6	Previous Three Fiscal Year	The applicant must have prepared its audited financial statements for the previous 3 years preceding the application in accordance with the accounting standards adopted by SOCPA	Not applicable
7	Interim FS	If reviewed interim financial statements are issued during the application period, the issuer must provide a copy of such statements to the CMA as soon as reasonably practicable.	Not applicable
8	Previous Structuring[iii]	Where an applicant has undergone material restructuring, he may not submit his application to list Debt instruments/Sukuk until one financial year has elapsed from the date of completion of that material restructuring.	Not applicable
9	Debt instruments/Sukuk Maturity	the maturity date of Debt instruments//Sukuk that are the subject of the registration application must be at least one calendar year after the date of the CMA’s approval of the application.	Idem
10	Convertible debt instruments	Not permissible	For a company to issue debt instruments or financing debt instruments that are convertible into shares may not be registered for the purpose of DL on the Exchange unless the class of shares into which they may be converted is listed.
11	Senior Executives Experience	The senior executives of the issuer must have an appropriate expertise and experience for the management of the applicant’s business.	Not applicable
12	Validity of submitted financials	If the period covered by the most recent audited financial statements has ended more than (6) months prior to the expected date of approval of the application for registration of Debt instruments offered by way of private placement for the purpose of direct listing on the Exchange, it shall submit to the CMA a reviewed interim financial statements covering any period from the date of the end of the period covered by the latest audited financial statements until the expected date of approval of the direct listing application, or submit audited annual financial statements (as applicable). In all cases, the period covered by the latest audited interim financial statements submitted to the CMA shall not have ended more than (6) months before the date of approval of the application.	Not applicable

Key notes:

Where the offeror is an SPE, the following documentation and information must be submitted:

• items#5,6,7,8 and 12 set out in the above comparison table, applies on the Sponsor;
• the prospectus must include all information necessary to enable the investor to evaluate the activity, assets and liabilities of the SPE, in addition to the Sponsor’s assets, liabilities, financial position, management, expected opportunities, profits and losses. It also includes information on the number and price of securities and any obligations rights, powers and privileges associated with them;
• the CMA approval may include multiple issues of debt instruments/Sukuk under a single issuance program. If the CMA approves the financing transaction, all debt instruments/Sukuk to be issued under the program will be offered within (24) months following the approval of the CMA provided that the sponsor complies with the below:

1. 1. When seeking approval from the CMA for a new financing transaction, the Sponsor must provide a signed pricing annex for each segment of the issuance programme, and a confirmation letter from the Sponsor to the CMA confirming the debt instruments/Sukuk have been offered;
   2. The documents must include details of the issuance, including terms and conditions of the issue, final allocation, amounts paid, the maturity and redemption rates (if any) and their price details;
   3. A copy of the debenture agreement or any other document constituting or securing such instruments must be included;
   4. agreement governing the finance with the Sponsor;
   5. agreement with the custodian (where applicable);
   6. any agreement governing the special purposes entity’s investment or management.

• An applicant shall commence the offer of debt instruments/Sukuk within one year of receipt of the CMA’s approval, failing which the approval shall lapse.
• the CMA shall make its decision in respect of a financing transaction within (10) days, if the financing transaction is in relation to privately offered debt instruments/Sukuk.

Conclusion

The Crowdfunding and the new DL mechanism of Debt instruments/Sukuk offered by way of private placement are good examples of how the Capital Markets industry in Saudi Arabia is evolving in line with Financial Sector Development Program (which is one of the pillars to achieve the objectives of the Saudi Vision 2030).

We have seen in Q4 2022 the CMA approval on two public offerings of Debt instruments/Sukuk under a programme out of which one Sukuk issuance was through an SPE where the Sponsor is a Saudi listed company. It should be noted however that the CMA and Tadawul did not yet approve any Direct Listing of Debt instruments/Sukuk offered by way of private placement, as of the date of this article. We envisage that, in Q3 or Q4 2023, they will announce the first wave of direct listings of Sukuk on the Exchange.  

Author: Fadi Daher (PhD), Partner.

For further information, please contact Fadi Daher (fadi.daher@glaco.com).

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[1] The new law was issued pursuant to Council of Ministers Resolution No. 678 dated 28/06/2022 and ratified by Royal Decree No.(M/132) dated 30/06/2022.

[i] Institutional clients fall into one of the following sub-categories:

(a.) The Government of the Kingdom or any supranational authority recognised by the CMA.

(b.) Companies fully owned by the Government or any Government entity, either directly or through a portfolio managed by a Capital Market Institution authorised to carry on managing business.

(c.) Any Legal Person acting for their own account and including any of the following:

1. 1. 1. A company which owns, or is a member of a group which owns, net assets of more than SAR 50 million.
      2. An unincorporated body, partnership company or other organisation which has net assets of more than SAR 50 million.
      3. A person acting in the capacity of director, officer or employee of a Legal Person and responsible for its securities activity, where that Legal Person falls within the definition of paragraph (c/1) or (c/2).

(d.) A company fully owned by a Legal Person who meets the criteria of paragraph (b) or (c).

(e.) An investment fund.

(f.) A counterparty.

Qualified clients include any of the following:

(A.) A Natural Person who meets at least one of the following criteria:

1. Has carried out at least ten transactions per quarter over the last 12 months of a minimum total amount of SAR 40 million on securities markets.
2. Has net assets not less than SAR 5 million.
3. Works, or has worked, for at least three years in the financial sector in a professional position related to investment in securities.
4. Holds a professional certificate in securities business and accredited by an internationally recognized entity.
5. Holds the General Securities Qualification Certificate that is recognized by the CMA, and has an annual income that is not less than SAR 600,000 in the last two years.
6. Being a client of a Capital Market Institution authorised by the CMA to conduct managing activities, provided that the following is fulfilled: a. The offer shall be made to the Capital Market Institution, and that all related communications be made by it. b. The Capital Market Institution has been appointed on terms which enable it to make investment decisions on the client’s behalf without obtaining prior approval from the client.
7. Registered persons of a Capital Market Institution if the offer is carried out by the Capital Market Institution itself.

(B.) A Legal Person which meets at least one of the following criteria:

1. Any Legal Person acting for its own account and be any of the following:
2. A company which owns, or which is a member of a group which owns, net assets of not less than SAR 10 million and not more than SAR 50 million.
3. Any unincorporated body, partnership company or other organisation which has net assets of not less than SAR 10 million and not more than SAR 50 million.
4. A person acting in the capacity of director, officer or employee of a Legal Person and responsible for its securities activity, where that Legal Person falls within the definition of paragraph (1/a) or (1/b).
5. Clients of a Capital Market Institution authorised by the CMA to conduct managing activities, provided that the following is fulfilled:
6. The offer shall be made to the Capital Market Institution, and that all related communications be made by it.
7. The Capital Market Institution has been appointed on terms which enable it to make investment decisions on the client’s behalf without obtaining prior approval from the client.

(C.) A company fully owned by a Natural Person who meets one of the criteria mentioned in paragraph (A) or a Legal Person who meets one of the criteria mentioned in paragraph (B).

[ii] If application is made for Debt instruments/Sukuk that have been or will be offered within a debt instruments/Sukuk issuance program, the applicant shall prepare a single registration document that covers the maximum amount of Debt instruments/Sukuk that have been or will be offered by way of private placement within the program.

[iii] For the purposes of this paragraph, “material restructuring” shall mean: a. disposing any of the issuer’s asset that has contributed in generating (30%) or more of the issuer’s revenue or net income as per the most recent annual financial statements; b. acquiring assets with a value exceeding (30%) or more of the net asset value of the issuer as per the most recent annual financial statements; c. acquiring a company with a shareholder equity constituting (30%) or more of the issuer’s shareholder equity as per the most recent annual financial statements.