LEGAL VIEWPOINT: Regulations for public prospectus By Dr AbdelGadir Warsama Ghalib, Legal Counsel, Bahrain

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Dr AbdelGadir Warsama Ghalib, Legal Counsel

The regulation(s) of any public prospectus intended for the issuance of securities, as a matter of fact and law, are attempting to achieve two main objectives, that is to include “full disclosure” in application to appropriate cases enforced by tougher civil and criminal sanctions. Moreover, the public availability of such “full disclosure” by proper registration within certain competent authorities, such as, exchange commissions, stock markets… etc.

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In practice, the market in securities is largely professional, for example, the Eurobond issues are invariably marketed and held permanently by sophisticated inventors such as central banks, commercial banks, insurance companies, pension funds, investment funds and, sometimes, large different corporations. Members of the public do not buy Eurobonds except, to a certain degree in some privatization cases.

There is a certain regime which requires that a company prospectus needs, at the same time, to seek and ensure that only an “approved” prospectus is used for marketing to the public. This generally means that, there are restrictions on all other methods of marketing without the “approved’ prospectus, such as restrictions on announcements in the media, all types of advertisements, certain presentations and mail shots…

The main objective behind this, is to prevent any marketing of securities to the public except by means of a complying “approved” prospectus. However, there are some few exceptions, the most important of which is for a private offering. The reason behind this exception, is the belief that it would be impracticable and over-burdensome for the law to impose the disclosure and registration requirements on private domestic transactions.

If applicable, the private businesses would be affected and may stop. Therefore, the private offerings are exempted from the prescribed disclosure requirements and, the requirement of public registration.

But how to distinguish between public and private offerings? A genuine question could arise? In other words, when do we require disclosure and registration and, which cases does not need such requirements? The main criteria used to determine whether an offering is private, or public is the number of offers. In the UK, for example, it is regarded as a public offering when from 30 to 40 offers intend to hold securities for their account. This figure varies from one jurisdiction to another, because in some places the figure could reach up to 100 offers. In some jurisdictions there is no reference to the numbers of offers, but they provide that “transactions by an issuer not involving any public offering are exempted”.  The private offerings are basically intended for:

– Sophisticated investors or institutional investors such as banks, insurance companies, pension funds, etc.

– Investors who can bear the potential loss of their investments.

– Investors who purchase as principals for investments with no intention to resell the product to others.

– Investors who have access to information like that which would be included in a prospectus in a registered offering.

In almost all jurisdictions the concept of “private offering” is accepted, even though, we have noticed that the concept has got its own meanings and applications in each jurisdiction. The concept of private offering should fully satisfy the local requirements and practice to be eligible for the necessary exemption from the disclosure requirements and other related registration procedures.

In fact, private offerings are increasing and are quite noticeable in many securities markets, particularly in big placements that are intended for big institutional investors. This indicates the importance of relaxation in such instances, to boost the securities markets and investments therein.