FRA Issues Regulations and Procedur

The board of directors of the Financial Regulatory Authority (“FRA”) issued Decision No. 48 of 2019, dated 8 April 2019, with the regulations and procedures of public offerings and private placements (the “Decision”),[1] thus effectively representing the first written decision of its kind to be issued for the regulation of one of the most important pillars of capital markets, which are offerings (both public and private). The Decision is divided into 10 sections that establish the different frameworks related to offerings, which were previously managed in accordance to what has been practiced in the Egyptian securities market and its related laws.

The First Section: Types of Offerings

Offerings are specified as either: (1) a public offering (whether listed securities or those which have not yet been listed), (2) a private placement, or (3) a public offering accompanied by a private placement. As for the former (public offering), the definition provided in the Decision kept the methodology that has been followed thus far, which is offering securities to unspecified individuals or legal persons/corporations through a prospectus. On the other hand, a private placement is defined as offering a tranche of the offered securities to individuals or legal persons/corporations from qualified investors through a prospectus, with a definition of qualified investors clarified in a different section of the Decision.

The Second Section: The Offering Price

This section of the Decision provides for the requirement to set the price of the offering, allowing the company wishing to offer, through a bookrunner, to use either a fixed price – which is adopted based on a study of the fair value – or a book building process, wherein the offering price is discovered and determined through investors’ orders at different prices. In addition to this, the prospectus must specify a price range of the floor and ceiling of the offering price. Finally, this is to be followed by the announcement of the final offering price after closing the order period, according to the method followed to determine the price.

The Third Section: Qualified Investors for Private Placements

The private placement tranche is among the most important in offerings, for it forms the basis for covering the offering and the success of its subscription. Thus, it was natural that ‘qualified investors’ were defined in the Decision, in both their individual and legal persons/corporation forms. As for individual qualified investors, they must have liquid assets amounting to EGP 5 million, and it is preferred that they have at least 5 years of experience in securities. As for qualified investors who take the form of public legal persons/corporations, these include insurance funds, public pension funds, and companies with a minimum paid-in capital of EGP 1 million. Financial institutions can also partake in private placements provided they fulfil any of the following conditions:

• The institution’s book value is not less than EGP 20 million;
• The institution has investments in securities that amount to at least EGP 10 million at the date of the start of subscription, excluding investments in the targeted company; or
• The licensed activities of such institutions allow subscription in securities.

The Fourth Section: Parties to an Offering

The Decision specifies the parties to an offering. Among these are the issuing company, the bookrunner, the broker, the legal counsellor, the bank receiving the offering money, the depository company, and the stock exchange.

The Fifth Section: The Obligations of the Parties to an Offering

This section clarifies the obligations of the parties to an offering that have been specified in the previous section. The common denominators in all of these obligations are that they must respect the rules and procedures of doing business, maintain confidentiality, and avoid disseminating information except through the prospectus. Both the broker and the bookrunner must adhere to certain technical regulations related to documenting the allotment process, determining the targeted investors, completely separating clients’ accounts, and refraining from financing purchase orders that are not fully paid.

The Sixth Section: Regulations and Procedures of Public Offerings

With regards to the regulations of public offerings, a public that has not been specified in advance must be invited to the offering through a prospectus, in accordance with FRA’s rules, and a study of the fair value must be presented in cases of initial public offerings (IPOs) or offering a listed but inactive financial company. Structural or material changes occurring before the offering must be disclosed to investors. In all cases, the offering period must not be less than five business days and the prospectus must contain all information about the offered security and the procedures to be followed if the process of offering is not covered. As for the procedures of public offerings, the allotment process must be undertaken proportionately based on the shares offered for sale and the purchase orders, while maintaining the buyer’s right to cancel purchase orders up to the last day of receiving orders. The Decision allows the board chairman of the issuing company, with FRA’s approval, to extend the period of receiving orders to fall between three to ten days. The Decision also allows the postponement of the entire offering for a period of no more than three months while updating the prospectus accordingly.

The Seventh Section: Restrictions on the Selling of Securities

Taking into account the minimum shareholding requirements for majority shareholders, as provided for in the rules and regulations of listing securities, the remaining shareholders who purchased a security prior to a public offering must decide whether to offer it for sale in the offering or to hold it for at least six months, or to combine both options.

The Eighth Section: Price Stabilization Mechanism

As per the Decision, the usage of a price stabilization mechanism in a public offering remains optional. This mechanism aims to support the stabilization of the price of a share for a tranche of the subscribers in a public offering to allow them to sell, during the period in which the share stabilization account is valid, shares they had bought during the offering. Certain regulations must be met in such cases. For example, the period of the share stabilization account must be a month, starting from the first day of trade, with the shares being transferred (upon account liquidation) to the selling shareholders who have financed the account.

The Ninth Section: Regulations and Procedures for Private Placements

In contrast to the regulations for public offerings, the Decision sets a minimum threshold for the subscription orders in private placements, at a rate of 0.5% of the value of the offering and at least EGP 1 million for individual investors, or a rate of 1% and no less than EGP 10 million for financial institutions. In addition, subscribers to private placements cannot subscribe to a public offering, and there must be no conflict of interest for brokerage companies that receive subscription orders or for the bookrunner with the parties to the offering. Finally, the Decision limits the right to access purchase orders to FRA and bookrunners.

The Tenth Section: Procedures to Implement Public Offerings and Private Placements

The Decision does not delve into the procedures to implement public offerings and private placements but rather assigns this task to the Egyptian Stock Exchange, following which they must be ratified by FRA. No timeframe was specified by the Decision for the publication of these procedures.   [1] FRA Board of Directors Decision No. 48/2019 with the regulations and procedures of public offerings and private placements, available through this link (in Arabic).