A new section 309B of the Securities and Futures Act affects all offers made in or into Singapore, whether the issuer is incorporated in or outside Singapore. It requires issuers to classify their capital markets product before it can be offered in Singapore. The classification must be notified to the SGX (if listed) or to financial institutions operating in Singapore (if not listed). Breach of the section is a criminal offence. This update also considers the issues involved and market practices.
Since 9 July 2018, issuers of capital markets products that are being offered in or into Singapore have been required to flag them as being either “prescribed capital markets products” or “capital markets products other than prescribed capital markets products”. This involves determining whether they are one of the types of capital markets products listed as “prescribed capital markets products” and notifying the required persons of this classification. The obligation is set out in a new section 309B of the Securities and Futures Act (SFA), read together with the Securities and Futures (Capital Markets Products) Regulations 2018 (Regulations) which came into operation on 9 July 2018.
Scope of the obligation
The list of the types of capital markets products to be classified as “prescribed capital markets products” is in the Schedule of the Regulations. The types of products in the list include the following:
• Shares issued or proposed to be issued by a corporation;
• Rights, options or derivatives issued or proposed to be issued by a corporation in respect of its own stocks or shares;
• Debentures, other than asset-backed securities or structured notes;
• Units in a business trust; and
• Units in a collective investment scheme that is a Real Estate Investment Trust.
If the product is listed on the Singapore Exchange (SGX), the issuer must notify the SGX of the product’s classification. If the product is to be offered to investors in Singapore through a financial institution operating in Singapore (Singapore FI), the issuer must notify that financial institution of the product’s classification. The obligation applies so long as the investor is in Singapore, and even if the issuer and the product are outside Singapore.
A Singapore FI itself is separately obliged to ensure that it has been informed about the product’s classification before offering it in Singapore to an investor. This applies whether the offer is to subscribe in the product or it is a resale of the product.
Exemptions to the obligations under section 309B
An issuer/Singapore FI is exempted from these requirements if the offer is to any of the following persons in Singapore (Exempted Investors):
• An accredited investor;
• An expert investor;
• An institutional investor; or
• Any other person that is not an individual.
The categories are similar to the prospectus exemptions set out in sections 274 (offers to institutional investors) and 275 (offers to accredited investors and certain other persons) of the SFA. Section 275, however, exempts offers made to persons other than accredited investors and is also commonly relied on for offers made to an individual for a consideration of at least SGD200,000 for each transaction. As such individuals need not be accredited or expert investors, offers to them would not be exempted from the section 309B obligations.
Consequence of breach of section 309B
Section 309B(9) makes it a criminal offence to fail to classify a product. It is also a criminal offence to misclassify or to fail to notify the classification of a capital markets product. The penalty is a fine of up to SGD50,000. If the offence continues after conviction, a fine per day of up to SGD5,000 can additionally be imposed.
Why impose an obligation to classify and notify?
What a Singapore FI does with the classification notification
Once a Singapore FI is informed of the product’s classification, it will then know whether it is required to take any further steps when offering the product in Singapore to investors. These steps (Additional Steps) have been set out in the Notice on the Sale of Investment Products (SFA 04-N12) as well as the Notice on Recommendations on Investment Products (FAA-N16) (collectively, the Notices), both of which were first issued in 2011.
The Additional Steps only apply if:
• If the product is not classified as a “prescribed capital markets product”; and
• It is being offered in Singapore to an individual who is not an expert investor or an accredited investor.
If both limbs are satisfied, the Additional Steps to be taken by the Singapore FI are:
• It must carry out an assessment of the investor’s knowledge and experience in relation to the type of product that is being offered.
• The assessment is to ensure that the investor understands the risks involved in transacting in the type of financial product being offered.
• If the investor fails the assessment, he must be given various cautions as to the risks of buying the product.
• In addition, the product may only be sold to that investor together with the provision of advisory services to the investor as part of selling the product to him. Accordingly, the financial institution must also be an exempt financial advisor before it can proceed with the sale.
The background to the Notice
As noted, the Notices were first issued in 2011 and Singapore FIs have in fact been required to carry out these Additional Steps as from that year. They were also required, as from 2011, to ascertain the classification of the capital markets product that they are offering. The only difference is one of nomenclature: the Notices use the term “Excluded Investment Product” instead of “prescribed capital markets product”. A capital markets product that is not a “prescribed capital markets product” is referred to in the Notices as a “Specified Investment Product”.
The rationale behind the Notices was to ensure that investors are not sold complex financial products whose risks they do not understand. They were part of the regulatory actions taken in response to the Global Financial Crisis in 2008. Accordingly, financial instruments that are simple and whose risks are well-known to less sophisticated investors (e.g., vanilla bonds, shares, units in a Real Estate Investment Trust) are those that have been listed as “prescribed capital markets products” / Excluded Investment Products. They may therefore be offered to investors without the Additional Steps taken to warn them of the risks involved.
Issues to consider for dealing with section 309B
The issues to be considered by issuers as regards the section 309B obligation are as follows:
• An issuer that intends to make offers into Singapore in reliance on the sections 274 and 275 SFA exemptions and also avoid the obligation under section 309B by offering only to Exempted Investors needs to bear in mind the disjunction between the section 275 SFA exemption and the list of Exempted Investors. As a result of this disjunction, it will need to ensure that it has processes in place that ensure that the Singapore FIs through whom it is making the offer will not inadvertently offer the product to a person who is not an Exempted Investor and in reliance on the prospectus exemption for offers made to an individual for a consideration of at least SGD200,000 for each transaction unless the appropriate classification and notification has been made and given.
• The obligation under section 309B applies as well to resales of capital markets products. Accordingly, even if the initial offer was confined to only Exempted Investors and the classification not determined, a Singapore FI may subsequently seek to sell to investors that are not in that list. The Singapore FI would then be required to ascertain from the issuer the product’s classification before doing so.
• What is required to properly comply with the requirement for notification is currently unclear. In particular, it is not clear whether the concept of “notice to the world” can be applied to the obligation to notify under section 309B or whether the issuer needs to demonstrate that it provided specific notice to the Singapore FIs it is offering the product through at the minimum for the primary offering.
• Vanilla bonds and shares in companies, for example, are clearly “prescribed capital markets products”, while at the other end of the spectrum contracts-for-differences and accumulator notes clearly “not prescribed capital markets products”. Other capital markets products, such as covered bonds, are less clearly one or the other.
Industry players are currently grappling with how to deal with the new requirement and market practice is evolving. Different industry players are taking different approaches depending on their own internal risk assessments and preferences. The major trends that we are aware of are as follows:
• Some FIs are relying on the exemptions to section 309B by putting in place internal processes to ensure that the capital markets products are not offered or sold to persons who are not Exempted Investors.
• Some FIs intend to have the issuer issue notifications and to insert appropriate legends into the documentation.
• A bifurcated approach as to the evidentiary steps FIs will be satisfied with for compliance with the notification requirement may emerge, with differences for transactions with a stronger Singapore nexus compared to a global securities offering where the Singapore offering forms a small subset.
• The general market approach has been to err on the side of over-classifying products as “not prescribed capital markets products”. Such an approach would reduce the risk that a product wrongly classified as a “prescribed capital markets product” would be sold to an investor without the relevant customer assessments required under the Notice.