By AbdelGadir Warsama, Legal Counsel
03 August 2023
Any securities to be offered in the market, as a rule, should be appropriately and fully disclosed and at the same time duly registered according to the stipulated process and procedures in the related securities authorities. This rule is intended to protect potential investors and to create healthy environment for investment in the securities markets.
However, there are certain exceptions, as exceptional cases, with reference to the disclosure requirements and registration procedures. The exemptions include, the private offerings that are not intended to the public-at-large, and, the exemptions also include inter alia, the offerings to sophisticated investors and government or public bodies.
The justification behind the exemption granted to offerings of securities to sophisticated investors comes from the fact that sophisticated investors do not really need the protection of a regulated prospectus that is needed in relation to ordinary investors or, in other words, unsophisticated investors. The “sophisticated investors” exemption is essential, for example, for Eurobond issues wherein it appears to be universal there.
The key factors supporting the exemption include the factors that, sophisticated investors normally acquire the necessary financial knowledge and the necessary experience that is required for such activities. The sophisticated investors are financially capable and able to bear all potential risks associated with this type of investment. There is in fact more risk, however, they can face it more appropriately.
There are many ways and methods of defining sophisticated investors. The method followed by most countries is to define sophisticated investors as, persons whose ordinary business or part of whose ordinary business is to buy or sell securities, whether as principal or agent, including professional dealers and brokers, which would normally include institutional buyers and large corporates. Many countries, in fact, list eligible investors to include brokers, dealers, life insurance companies, public / authorities, pension funds, authorized licensed banks, mutual investment funds and investment companies…etc.
In some countries, mostly in Europe, they define a purchaser to be sophisticated investor if he pays more than a certain amount so as to exclude ordinary individuals. Moreover, we could say that sometimes all these criteria are used so that an investor who satisfied any one of them is to be exempted on the grounds that he is a “sophisticated investor”.
Likewise, offerings by governmental and public bodies of the country need also to be exempted. The rationale behind this exemption could be that the intended investors are expected to know all the required information about their own country. Moreover, they are not at risk because they are dealing with their government which guarantees these investments. Issues by foreign governments are often exempted based on the “doctrine of comity”, and the assumption that investments in foreign government securities is essentially based on political decisions.
Normally issues by foreign governments are exempted from the prospectus requirements based on the grounds that all the necessary legal precautions had already been applied and followed in that country and accordingly there is no need to undergo the same procedures again.
The exemption granted to issues by foreign governments is extended to include all securities offerings issued by the main international financial institutions such as the World Bank, because those financial organizations are known to every potential investor and these issues are fully guaranteed and there is, almost, no risk. The World Bank issued many bonds in many parts of the world, and these issues were exempted and they yielded very good returns.
Based on the above, we could say that an offering to “sophisticated investors” or any offering by governmental and public bodies will escape the prospectus and registration requirement from which they are exempted by law. However, apart from such exemptions there is a legal need that requires full transparent disclosure, so as to protect potential investors as a primary obligation.