The London Stock Exchange ("LSE") on 7 August 2015, published AIM Notice 411 and issued new guidance in Inside AIM2 on certain U.S. securities known as "Regulation S, Category 3 securities," which is intended to improve the access of U.S. issuers seeking a London listing.

Background

Regulation S under the U.S. Securities Act of 1933, as amended ("Securities Act") provides a safe harbour from the requirement to register securities with the U.S. Securities and Exchange Commission ("SEC") prior to any offer and sale of such securities for securities sold in offshore transactions outside of the United States, provided that certain conditions are met. Among the conditions applicable to securities that are classified as “Regulation S, Category 3 securities” is the requirement that such securities bear a legend “to the effect that transfer is prohibited except in accordance with the provisions of this Regulation S, pursuant to registration under the Act, or pursuant to an available exemption from registration; and that hedging transactions involving those securities may not be conducted unless in compliance with the Act.”

Under the AIM Rules for Companies, unless the LSE agrees otherwise, securities that are admitted to trading on AIM must be eligible for electronic settlement in the CREST system ("CREST") operated by Euroclear UK and Ireland (Euroclear), the principal central securities depository for transactions on the LSE (see AIM Rule 36). However, until now Regulation S, Category 3 securities have not been eligible for electronic settlement due to the aforementioned legending requirement and have relied on a derogation from AIM Rule 36, allowing such securities to be held in certificated form.

Conversely, Article 3(2) of the EU Central Securities Depositary Directive ("CSD Directive") requires that, beginning in January 2015, all transactions in transferable securities that take place on a trading venue (including AIM) are required to be settled electronically. This requirement applies irrespective of whether the security is eligible for electronic settlement or not and regardless of the issuer's jurisdiction of incorporation. The CSD Directive effectively made the application of AIM Rule 36 mandatory, creating a conflict with the requirements of Regulation S for Category 3 securities and uncertainty for U.S. issuers seeking a listing in London. This uncertainty led to a number of U.S. issuers whose securities would be fall under Category 3 abandoning plans to seek a London listing.

Accordingly, following several months of discussions, the LSE and Euroclear devised a solution to allow Regulation S, Category 3 securities to be settled electronically. 

This new electronic settlement service, established as a set of procedures published in Euroclear's 'whitebook' and finalised in AIM Notice 41, is intended to facilitate compliance with both the CSD Directive, as well as the requirements for Regulation S, Category 3 securities. As a result, Regulation S, Category 3 securities will not be eligible for settlement in Crest and the LSE will no longer grant derogations from AIM Rule 36 for such securities.

In order to comply with the legending requirement for Regulation S, Category 3 securities, (i) CREST will use security codes that will identify restricted securities as such; (ii) the restrictive legend required for Regulation S, Category 3 securities will be provided electronically, and participants in transactions involving Regulation S, Category 3 securities would be required to be read the legend before a trade can be effected through CREST; and (iii) the proposed purchaser will be required to provide a certification relating to applicable US securities laws.

Practical Impact

The principal results of making Regulation S, Category 3 securities eligible for electronic settlement are as follows:

  • issuers of Regulation S, Category 3 securities will have improved access to London listings and the European capital markets, generally;
  • as a result of the move to electronic settlement, the settlement times for Regulation S, Category 3 securities will generally be shortened from T+10 to T+2;
  • from 1 September 2015, issuers of Regulation S, Category 3 securities will be eligible for electronic settlement in CREST, and consequential changes have been made to the AIM admission application form to reflect this; and
  • applicants for an AIM listing must clearly disclose on the application form that they are Regulation S, Category 3 securities, as they will be identified as such on the trading system with the letters "REG S".

The AIM guidance also reminds AIM applicants that propose to issue Regulation S, Category 3 securities that they still must request derogations from Rule 32 of the AIM Rules (transferability of shares) prior to admission.