Fayval Williams, Guest Writer
Fayval Williams
Sunday, June 15, was probably a quiet and normal day for most people in Jamaica. For the financial sector, it marked significant changes in how issuers of securities can now go to market.
In the past, issuers making a public offering had to produce a detailed prospectus for submission to the Financial Services Commission (FSC), a process that took quite some time, effort and cost. Now, FSC's Guidelines for Exempt Distributions (Guidelines SR-GUID-08/05-0016) provide a straight forward way for potential issuers of securities to seek exemption from registration of a prospectus or offering documents.
In summary, a prospectus does not have to be registered with the FSC if any of the following holds true:
1) The securities are sold to accredited investors purchasing as principals.
2) The buyer purchases a minimum amount of J$10 million.
3) The securities are highly rated.
4) The securities are private issue.
Prior to the exempt distribution guidelines, the FSC restricted a private placement to no more than 50 purchasers. Now, there is no limit on the number of purchasers. The private placement becomes subject to the same 'accredited investor', 'minimum amount' or highly rated security criteria.
Accredited Investor
This is a term defined by various securities laws in many other jurisdictions that defines the investors permitted to invest in certain types of higher risk investments.
For the Jamaican market, the FSC's definition of 'accredited investor' is any one of the following:
(a) Any government authority or public statutory corporation constituted under any written law in Jamaica, or company a majority of the voting shares of which are owned by the Government of Jamaica.
(b) A bank as defined in the Banking Act, an insurance company registered under The Insurance Act, 2001, a company licensed under the Financial Institutions Act or a building society registered under the Building Societies Act.
(c) An approved retirement scheme, approved superannuation fund or specified pension fund, as defined in The Pensions (Superannuation Funds and Retirement Schemes) Act, 2004.
(d) Any officer or general partner of the issuer, or any officer of a general partner of the issuer.
(e) Any unit trust, mutual fund, non-redeemable investment fund or other collective investment scheme that is registered with the FSC.
(f) A trust company or licensed dealer purchasing as principal or on behalf of a fully-managed account where the account holder is an accredited investor
(g) Any individual whose net worth exceeds J$50 million, or a corporation over 90 per cent of the voting shares of which are owned by such an individual or a trust of which such an individual is the sole primary beneficiary.
(h) Any individual who had an income before taxes in excess of J$10 million in each of the two most recent calendar years, or a corporation over 90 per cent of the voting shares of which are owned by such an individual or a trust of which such an individual is the sole primary beneficiary.
(i) Any entity that had net assets in excess of J$250 million dollars as reflected in its audited financial statements for its most recently completed fiscal year or alternatively, if its most recently completed fiscal year ended less than 90 days prior to the relevant date, as reflected in its audited financial statements for its second most recently completed fiscal year.
(j) An entity in respect of which all of the owners of interests, direct or indirect or beneficial, are accredited investors.
(k) Any entity incorporated or constituted outside of Jamaica that is analogous to the entities listed in (a) to (f) or that qualifies as an accredited investor or has a similar status however defined, under the securities legislation of its governing jurisdiction.
(l) any individual residing outside of Jamaica who qualifies as an accredited investor (however defined) or has a similar status, under the securities legislation of the individual's country of residence, or who meets the criteria specified in (g) or (h) and is otherwise lawfully entitled to purchase the securities under the securities laws applicable to such purchase.
(m) Any individual or entity recognised as an accredited investor by the FSC.
This list offers a large number of criteria under which one can qualify, offering an important pillar for the corporate bond developmental process to begin.
Highly Rated Securities
Credit ratings are widely accepted in many developed financial markets as a way of helping investors understand the risks associated with different securities. With the FSC's exempting from prospectus registration those securities that are rated 'BBB+' or higher by a recognised rating agency, this sets the stage for wider acceptance of corporate bond ratings. Having said that however, the FSC recognises that there is a need to expand this definition of highly rated securities to reflect equivalent ratings under several different scales.
Of great importance as well, the FSC acknowledges that currently its risk weighting of corporate bonds is 100 per cent, meaning an institution has to hold the same amount of capital as the outstanding amount of the
corporate bonds. This acts as a disincentive to financial institutions for which capital is very precious.
However, if the corporate bonds are rated by a recognised rating agency, this could set the stage for the FSC to revisit its capital adequacy guidelines and allow for lower levels of capital to be held against those corporate bonds depending on the rating category. I believe such a move would propel the corporate bond market several steps forward.
Private Issuer
With no limit on the number of purchasers, the FSC's guidelines now allow for exemption from prospectus registration a person who purchases the security as principal and is also an officer of the issuer. Exempt securities can also be distributed to an individual who is personally involved in the business of the issuer and is an officer or partner of a major supplier, service provider, consultant, customer or client of the issuer.
Requirements
Not having to file a prospectus with the FSC does not mean that there is no documentation required. What we have instead of a prospectus is 'Form XD F-1 Notice of Exempt Distribution'. This greatly simplifies the process, takes less time, is less costly and has a very reasonable requirement that the issuer or selling security holder completes this form XD F-1 not less than 15 days before the trade or distribution of the securities takes place.
In addition, an issuer, selling security holder or licensed dealer must also ensure that the prospective purchasers of the securities meet the relevant criteria of the definition of accredited investor.
Finally, the issuer or selling security holder must report the trades to the FSC, no later than the last day of the calendar month following the month during which the trade took place. The report must be completed on 'Form XD F-2 Exempt Distribution Report' and it must identify the exemption criteria used.
Resale of Securities
Being able to trade, resell, or repo securities are necessary activities for a vibrant corporate bond market. The FSC does allow for the exempt securities to be traded, resold or repo'ed to accredited investors. Recall that there is no limitation on the number of accredited investors. There is only a requirement that an accredited investor be established before the trade and that there is adherence to the reporting requirements after the trade.
Net, these changes are positive. They recognise that not all investors need the full regulatory protections of the FSC. Accredited investors who are in a position to obtain the benefit of independent professional advice, can appreciate the risks associated with different types of investments and most important, they have the financial wherewithal to withstand negative changes in the value of those investments. A corporate bond market now appears closer in its realisation in the Jamaican financial market.
Note: These guidelines do not apply to securities issued by the Government of Jamaica, Unit Trust or Mutual Funds. Investors are encouraged to read the actual guidelines issued by the FSC and available at its website.
fayvalw@gmail.com
