The DFSA brings into force new regulations to simplify and streamline access for SMEs to equity capital markets in, or from, the DIFC
On 1 April 2020, the Dubai Financial Services Authority (the “DFSA”) amended its Markets Rulebook (“MKT”) and other relevant sections of its Rulebook Modules to provide for a simplified and streamlined regime for Small or Medium-sized Enterprises (“SME”) to access equity capital markets in, or from, the Dubai International Financial Centre (“DIFC”).
The purpose of the amendments is to particularly address the route by which SMEs can apply to have their shares admitted to the DFSA’s Official List of Securities and therefore, encouraging SMEs to list on Nasdaq Dubai. The amendments provide appropriate and proportionate regulatory standards to match the smaller size of SMEs, whilst at the same time providing adequate levels of investor protection.
The amended regulations recognise the importance of SMEs to the UAE economy and should allow SMEs easier and less costly access to equity financing.
1. What constitutes an SME?
An entity applying to admit its shares to the DFSA’s Official List of Securities will be classified as an SME if the aggregate market value of the shares it is applying to list is reasonably expected to be less than US$250 million in value.
An entity that has already had its shares admitted to the DFSA’s Official List of Securities will be classified as an SME if the aggregate market value of its shares when admitted was less than US$250 million and the average market value of its listed shares has not exceeded US$500 million for 90 consecutive days. In the event that the aggregate market value of an SME’s listed shares exceeds US$500 million for 90 consecutive days an entity will lose its SME status.
2. What has changed for an SME when applying to list its shares?
The eligibility requirements for listing set out in MKT have been amended for SMEs so as to be proportionate to the nature, scale and resources of SMEs. Examples of the changes that have been made to MKT and the different eligibility rules that apply to SMEs are as follows:
- Sponsor/Compliance Adviser – the DFSA is unlikely to require an SME to appoint a sponsor in order for it to be able to list. Instead, a compliance advisor who meets the DFSA’s eligibility requirements (see below) will be appointed to advise the SME on the listing process. The compliance advisor is likely to be required to remain appointed by the SME for a minimum of three years after the listing to assist the SME with its ongoing obligations as a listed entity, including compliance with its ongoing disclosure obligations.
- Financial Track Record – an SME is only required to provide one year of audited financial statements to the DFSA (or such longer period that the SME has been in operation) at the time of the listing application. This allows greater flexibility for start-ups or companies with a short trading history to list. The audited statements must be prepared in accordance with IFRS or such other standards acceptable to the DFSA. Once the SME’s shares are listed, accounts must be prepared in accordance with IFRS, or such other standard the DFSA are satisfied with, and must also comply with IAASB.
- Market Capitalisation – the previous requirement of a minimum aggregate market value of US$10 million for any applicant to list shares has been changed to US$250 million (with no maximum market capitalisation). However, for SMEs, there is no minimum market capitalisation and a maximum market capitalisation of US$250 million.
- Lock-in – in order to protect investors, the DFSA has introduced a lock-in period of 12 months from the date of listing for all persons who are shareholders of the SME immediately prior to the listing. This protects investors by ensuring that any shareholders who are also key employees, or part of the SME management team, are required to continue to remain invested in the SME for a period after the listing.
- Fees – the fees charged by the DFSA for the application to list and review of the listing application documents are lower for an SME compared to other applicants.
3. What has changed for an SME after it has successfully listed its shares?
The DFSA has amended the ongoing post-listing requirements for SMEs in MKT. Most of these amendments particularly relate to the expectation that the corporate governance of an SME may be less sophisticated than that of larger listed entities and therefore certain additional requirements are in place to protect investors. These include:
- The potential for the DFSA to require an SME to have an appointed compliance advisor to assist the SME with its ongoing legal and regulatory requirements pertaining to its listing. MKT states that it is at the discretion of the DFSA as to whether a compliance adviser will be required but that it will be ‘usual’ for one to be required. This is very similar to the nominated adviser regime currently used on the AIM market operated by the London Stock Exchange.In a guidance note in MKT, the DFSA has said that the compliance advisor must be in place for a minimum of three years after the shares have been listed and a number of conditions will need to be met for the DFSA to consent to waive the requirement for an SME to have an appointed compliance advisor. The relationship between the SME and a compliance advisor is a contractual one similar to one with any other professional adviser.In order for a person to be approved by the DFSA to be a compliance advisor to an SME it must meet the following criteria:
- be a person familiar with the requirements of the laws of the DFSA and should have the necessary knowledge, experience, qualifications and resources to assist the SME to comply with its regulatory obligations;
- have sufficient senior, competent staff and a proven track record of relevant corporate finance transaction experience to enable it to advise the SME;
- be independent from the SME; and
- have appropriate conflict of interest policies in place.
- Additional website disclosure requirements to ensure certain information (as specified in MKT) is easily accessible to investors.
- Higher thresholds of shareholder approval for the SME to be able to take certain actions. For example, a reduction of share capital in the first 24 months after listing requires the consent of 75% of the shareholders of the SME, rather than a simple majority as would apply to a listed entity that is not an SME.
- The annual fee to be paid to the DFSA in respect of the listing is set at US$10,000 per annum, rather than being based on the number of shares admitted to the official list as is the case with listed entities that are not SMEs.
- These developments are encouraging signs for SMEs that have been waiting for the legal and regulatory architecture to change in order to make it easier to seek equity financing in a timely and cost-efficient manner.