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General introduction to regulatory framework
The CMA and the Saudi Central Bank (SAMA) are the government bodies that regulate asset management and financing transactions in Saudi Arabia.
The CMA regulates Saudi Arabia's capital markets, including securities, sales of assets, equity securities and debt securities (such as sukuk). Its power is granted under the Capital Market Law, which was originally implemented in 2003.
The CMA has recently issued resolutions and implementing regulations governing the management and offerings of securities, including, but not limited to, the following:
- the Rules on the Offer of Securities and Continuing Obligations, which govern the offering of securities in Saudi Arabia on both a private and a public basis;
- the Capital Market Institutions Regulations (previously named the Authorised Persons Regulations), which govern the establishment of asset managers, their conduct of business, systems and controls, and handling of client money and assets;
- the Rules for Special Purpose Entities, which are intended to promote sukuk and the offering of other debt instruments in addition to the establishment of investment funds as separate entities;
- the Rules for Foreign Investment in Securities, which govern investment by foreign investors in listed securities, debt instruments and investment funds;
- the Investment Funds Regulations, which govern public funds, listed non-real estate funds, private equity funds, hedge funds, money market funds and private real estate funds;
- the Real Estate Investment Funds Regulations, which govern publicly placed real estate funds including REITs; and
- the Instructions on the Direct Financing Investment Funds, which govern the establishment and operation of credit funds.
In late 2017, the CMA issued the Financial Technology Experimental Permit Instructions, which introduce a sandbox accelerator under which certain financial services companies can apply for licences for products and services in new sectors. In addition, SAMA announced the launch of the Fintech Saudi initiative in May 2018, which is also aimed at supporting the fintech ecosystem alongside the efforts of the CMA. On 10 September 2020, the CMA announced the issuance of an experimental permit for Maysan Financial Technology Company to investigate social trading technology; a number of permits followed, with 40 fintech licences having been issued to date, which range from robo-advisory to crowdfunding to distribution platforms to offer and invest in debt instruments.
SAMA acts as the central bank of Saudi Arabia and is responsible for issuing currency and regulating the insurance industry (although the Saudi Arabian government approved the establishment of the Insurance Authority in August 2023, which will become responsible for regulating this sector). It is also responsible for encouraging the development of the Saudi Arabian banking system in both public and commercial sectors. Additionally, SAMA is Saudi Arabia's investment authority and is responsible for managing the country's assets, both inside and outside the country, although this role is being largely transferred to and handled by the PIF.
With few exceptions, individuals who are not citizens of a GCC country and non-GCC corporate entities (including Saudi entities with direct or indirect non-GCC ownership) must register with MISA and obtain a foreign investment licence prior to owning non-listed shares or real property in Saudi Arabia. The MISA registration process adds expense and time to any transaction. The primary exemptions to MISA registration are ownership in a CMA fund and investment in listed shares (or units in exchange-traded funds or REITs) pursuant to the CMA's regulatory framework or under the CMA-regulated swap regime. The CMA published Rules for Foreign Investment in Securities in March 2023, which further relaxed the restrictions on foreign investment in listed securities.
To date, the MISA rules have not governed foreign ownership in a CMA fund. Accordingly, there is no requirement that non-GCC investors in a CMA fund obtain MISA approval. Moreover, GCC nationals and companies that are majority-owned by GCC nationals (and partly owned by non-GCC nationals) are permitted to invest directly in listed securities in Saudi Arabia. Additionally, financial institutions that register with the CMA as a qualified foreign investor (QFI) are permitted to buy and sell shares of publicly listed companies in Saudi Arabia on their own behalf and on behalf of their clients without MISA approval. In November 2021, the CMA announced that CMA-regulated real estate funds and companies listed on Tadawul that had foreign ownership would be permitted to own real property in the holy cities of Mecca and Medina – an activity that had historically been limited to Saudi nationals. In March 2023, the Real Estate General Authority announced that it would relax its rules governing foreign investment into real estate and allow foreigners to invest in properties of any kind, including commercial, residential and agricultural – including in the holy cities of Mecca of Medina.
As part of the CMA's efforts in revamping the existing financial services regulations, the CMA has introduced a number of amendments to the above-mentioned rules and regulations during the past couple of years, with the most notable amendments relating to the Investment Funds Regulations, the Capital Market Institutions Regulations (previously called the Authorised Persons Regulations) and the Rules on the Offer of Securities and Continuing Obligations.
Among other things, the amendments to the Investment Funds Regulations introduced a number of developments with respect to the establishment and operation of private funds. Investors in private funds must be institutional clients or qualified clients as defined by the CMA, or retail clients investing a maximum amount of 200,000 riyals. In addition, a fund manager that is not licensed to operate or administer funds by the CMA must appoint a separate administrator for the fund. The CMA has also taken active steps to reduce the number of distressed funds in the market by placing a number of affirmative obligations on fund managers with respect to liquidating funds and distributing proceeds to investors. The amendments aim to codify a number of CMA practices and also introduce a number of significant changes. In terms of private funds, the amendments introduce a number of amendments concerning investor eligibility and corporate governance and also aim to resolve certain ambiguities in the market regarding the permissibility of capital commitment structures by clearly permitting them under the amendments. With regard to public funds, the amendments touch on a number of areas including investment restrictions and governance. Pursuant to the amendments, REITs and certain non-real estate funds that are currently able to list on the Tadawul are also given the right to list on the Parallel Market.
The amendments to the Capital Market Institutions Regulations introduce certain amendments to the defined scope of securities activities, the types of licences and the minimum capital required to carry out these activities. They also introduce new classifications for the types of clients for CMA-regulated entities whereby clients are retail clients, qualified clients or institutional clients, and reduce requirements for applicants to obtain a management licence whereby the required share capital has been reduced in some cases to as little as one year of expenses.
The amendments to the Rules on the Offer of Securities and Continuing Obligations introduce a number of changes that have an impact on the offering of securities in Saudi Arabia. Most notably, the amendments provide additional protection to unsophisticated investors that were previously required to invest a minimum amount of 1 million riyals in a private placement on a limited offer basis (i.e., limited to a maximum of 100 offerees) but are now restricted from investing more than 200,000 riyals.
Similar to the CMA, the Ministry of Commerce (MOC) announced draft amendments to the Companies Regulations in July 2020, which were announced in their final form in June 2022 and formally adopted in January 2023. Under the amendments, a number of new concepts (which are typical in offshore and other common law jurisdictions) have been introduced. Such features and concepts include the introduction of drag-along and tag-along rights in addition to the introduction of multiple classes of shares with different rights.
