08 Dec 2020

New SCA Regulation on Public Offering: the Time has come for Free Zone Companies to Consider Going Public

Authored by: Yasser Omar

In Brief: 

  1. The Securities and Commodities Authority (SCA) resolution no. 25/RM of 2020 amends the provisions of SCA Resolution no. 11/RM of 2016 on the Regulation of Offering and Issuance of Shares of Joint Stock Companies.

  2. Under the said resolution, free zone companies can offer shares for subscription by the public in an Initial Public Offering (IPO) provided that the requirements are met. 

  3.  When free zone company is approved for IPO by SCA, the offering size can range between 25% and 70% of the free zone company’s shares.

  4. It will be now possible for free zone companies to be listed on Abu Dhabi Securities Exchange or Dubai Financial Market.

The Board of the Securities and Commodities Authority (SCA) passed its resolution no. 25/RM of 2020 (“New Resolution”) to amend the provisions of SCA Resolution no. 11/RM of 2016 on the Regulation of Offering and Issuance of Shares of Joint Stock Companies (“Offering Resolution”). The Offering Resolution regulates the public offering of shares of joint stock companies in UAE stock markets whether such companies are registered inside or outside the UAE. However, under the Offering Resolution it had not been possible for companies registered in UAE free zones to offer shares in the UAE outside the free zones.

The New Resolution marks a significant shift in the offering regulation and allows companies registered in any free zone in the UAE to offer shares to the public provided that the requirements under the New Resolution are satisfied.  In other words, free zone companies are now allowed to go public and offer their shares for subscription by the public in an initial public offering. Such offering will be possible if the offering conditions set forth in the new chapter introduced by the New Resolution are met. It is noteworthy that the New Resolution applies to all free zones in the UAE, including financial free zones. The New Resolution is not yet published and it will take effect 30 days after the date of its publication in the UAE Official Gazette.

We will address the key requirements that must be satisfied in order for the free zone company to be able to offer shares to the public under the New Resolution. These key requirements concern the legal entity itself and the free zone authority having oversight over the legal entity.

A key requirement under the New Resolution in relation to the free zone entity itself is the legal form. The free zone company that wishes to offer shares to the public under the New Resolution must take the legal form of a joint stock company or a legal form that has characteristics similar to that of the joint stock company under the UAE Commercial Companies Law. In this regard, it is worth noting that not all UAE free zones have, in their companies regulations, a legal form that has characteristics similar to that of the joint stock company under the Commercial Companies Law. Jebel Ali Free Zone, Dubai International Financial Centre and Abu Dhabi Global Markets are among the free zones that have legal forms of company that are the equivalent of a joint stock company under the Commercial Companies Law.

The other key requirement in respect of the legal entity relates to the capital and shareholders equity. Under the New Resolution, the free zone company willing to offer shares in public offering must have a minimum paid up capital of AED 20 million. In addition, the net shareholders equity must be at least equal to 100% of the paid up capital. Furthermore, the free zone company must have undertaken, either itself or through one or more of its subsidiaries, an independent core business. The free zone company must show a good performance in the two years immediately prior to the public offering i.e. the free zone company must have realised, either itself or through its subsidiaries, net profits from the core business in the two financial years immediately preceding the public offering.

As for the requirements relating to the free zone authority, under the New Resolution the free zone company must be registered within a free zone that has a Cooperation Agreement with SCA in relation to the supervision and control over companies. Although the New Resolution does not set out a specific definition of such Cooperation Agreement, the form of such Cooperation Agreement will be prepared and made available by SCA.  Moreover, the companies registrar which is in charge of supervision and control over the companies operating within such free zone must be acceptable to SCA. In other words, SCA must satisfy itself of the supervisory role and control that the free zone companies registrar has over free zone companies falling within the registrar’s jurisdiction. Such condition will almost certainly be met where the concerned free zone has a Cooperation Agreement signed with SCA. This is because the main purpose of such Cooperation Agreement is to enable the companies registered within such free zone to go public by offering their shares on stock markets supervised by SCA such as Dubai Financial Market (DFM) and Abu Dhabi Securities Exchange (ADX). SCA would not ordinarily sign such Cooperation Agreement unless it is satisfied  with the supervision and control role of the companies registrar in the concerned free zone and the relevant Cooperation Agreement will ensure that the free zone companies registrar will cooperate to the satisfaction of SCA. Should the free zone company satisfy all the requirements under the New Resolution and SCA approves the application for public offering, the free zone company must offer at least 25% and not more than 70% of its shares in the public offering. By exception to the foregoing rule, SCA can approve an offering of 100% of the free zone company’s shares provided that the offering is limited to qualified investors as defined under SCA rules and regulations.

The New Resolution represents a major step forward in relation to the IPO market and provides a timely boost to the UAE capital markets. This step by SCA also provides recognition to the undoubted success achieved by a number of free zone companies over the years. Such companies, if they elect to benefit from public listings, will be a valuable addition to the diversity of the UAE capital markets.

Conclusion/Recommendation:

For more information on public listings in the UAE, you can contact Mr. Yasser Omar on his email address y.omar@hadefpartners.com