20 second summary
On 7 August 2015, the London Stock Exchange (the “Exchange”) published AIM Notice 41 and issued new guidance in Inside AIM on Regulation S, Category 3 securities. Historically such securities have not been eligible for electronic settlement in the CREST system (“CREST”), operated by Euroclear UK and Ireland (“EUI”), which is the principal central securities depository (“CSD”) for transactions on the Exchange. However, an electronic settlement solution has now been established to enable this and as a result, derogations from AIM Rule 36 will no longer be available from 1 September 2015.
Regulation S, Category 3 issuers
Non-US offerings of equity securities of US issuers and other issuers that do not qualify as “foreign private issuers” under US securities laws (“Category 3 Issuers”) are subject to significantly more onerous restrictions and procedures than non-US offerings of other issuers. Among other things, in such offerings:
- No offers or sales can be made to, or for the account or benefit of, US persons during a one-year “distribution compliance period” (which is reduced to six months if the issuer is a reporting issuer);
- Underwriters and/or other distributors must obtain certifications from purchasers that they are not US persons and are not acquiring securities for the account or benefit of US persons;
- Securities of such issuers that are still subject to transfer restrictions must contain a legend to the effect that transfers are prohibited except in accordance with Regulation S or another applicable exemption from the US Securities Act of 1933 (the “Securities Act”);
- The issuer must, either by contract or provision in its constitutional documents, refuse to register any transfer of the securities not made in compliance with Regulation S, pursuant to registration under the Securities Act or an available exemption from registration.
Under AIM rules and practice, securities of such Category 3 Issuers were historically ineligible for electronic settlement in CREST and were flagged as Regulation S, Category 3 securities settled in certificated form. Consequently, Category 3 Issuers engaged in primary issuances would initially issue their securities in certificated form to facilitate the after-market policing requirements of Regulation S and request a derogation from AIM Rule 36 to allow such securities to settle outside of a CSD. While this approach addressed US securities law risks, a consequence has been longer settlement periods (typically, T+10), which can adversely affect liquidity and trading prices of the securities.
Since 5 January 2015, however, all transactions in transferable securities that take place on a trading venue (including AIM) are required to be settled electronically (Article 3(2) of the Central Securities Depositories Regulation). While the Exchange previously granted an extension for these securities, EUI has now established a new settlement service which will allow these securities to be settled electronically through CREST. Accordingly all Regulation S, Category 3 securities are expected to be eligible for electronic settlement by 1 September 2015.
Although the Regulation S requirements for Category 3 Issuers are difficult to apply to dematerialised securities, the Exchange agreed a set of procedures with EUI (published in a document called the Whitebook) that has now been finalised in AIM Notice 41 that are intended to facilitate compliance with Article 3(2) as well as Regulation S requirements.
Among other things, the procedures (i) require members of CREST not to engage in any trade in a Regulation S security unless such member has a reasonable basis to believe, after inquiry and confirmation, that the trade complies with applicable US securities laws; and (ii) enable securities in CREST subject to restriction during the Regulation S mandated distribution compliance period to be encoded with a special identifier. Allowing electronic settlement at the outset will result in shorter settlement, narrower pricing and greater liquidity for Category 3 Issuers. However, as there is no current, definitive guidance from the US Securities and Exchange Commission on the appropriate level of procedures for offerings of Category 3 Issuers, careful thought will still need to be given at the start of any equity capital markets transactions on how best to manage US securities law risks.
AIM Rule 36 derogations
As a result of this new service, from 1 September 2015, the Exchange will no longer grant derogations from Rule 36 (settlement) for these securities as they will be eligible for electronic settlement within a Central Securities Depository. Consequential changes have been made to the AIM Application Form but the AIM Rules will not be updated until the next set of changes due to the minor nature of the changes at this time.
Inside AIM also reminds new AIM applicants that propose to issue Regulation S, Category 3 securities to request derogations from Rule 32 of the AIM Rules (transferability of shares) prior to admission and to clearly disclose on the application form that they are Regulation S, Category 3 securities.