BAHRAIN LEGAL 2015.
* Almoayed Chambers: Beware of 'Private Offerings'
* Charles Russell Speechlys: A Word on Dispute Resolution
* Al Jabal Consultancy: Legal Made Simple
* Zu'bi & Partners: Fine-tuning the Property Law
BETTER SAFE THAN SORRY
Director, General Consultancy Services at Almoayed Chambers
What It Is About
'Private offerings' or 'placements' refer to one of the customary routes to raise capital, either in equity or for a project envisaged by its issuer. The process requires the issuer to prepare necessary legal documentation, known as Private Placement Memorandum (PPM), and obtain necessary approval (if required), prior to contacting the potential investors. PPM is a systematic but complex business plan prepared specifically for a limited number of investors explaining several subjects, such as the investment structure, utilisation of funds, exit policy, potential risks of investment, et cetera.
Trouble in Bahrain
In Bahrain, private placements are governed by the Central Bank of Bahrain (CBB) law and relevant regulations issued by the CBB (specifically, OFS Module of CBB Rulebook Volume 6). No person is allowed to issue any security in Bahrain unless approved by the CBB (Article 81 of the CBB law) and therefore, each private placement requires the CBB approval, unless exempted.
Bahrain market has been flooded with private placements in the last decade and subsequently, the residents had invested in a number of megaprojects. While those private placement documents bear fancy looks to attract potential investors, what is both interesting and alarming is that many of them were issued and circulated without a formal approval from the CBB.
In addition, PPM documentation of such offerings lacked in several respects. For example, one PPM of a megaproject in Bahrain states that "the private placements are not aimed to be distributed to Bahraini residents," but the issuer (an investment bank) actively solicited investments to Bahraini residents, violating the fundamental terms of their PPM and the law. As a result, several investors were forced to pursue legal action against issuers, so that the courts of Bahrain could declare such PPMs as invalid due to non-compliance with the CBB law and/ or regulations.
Points to Keep an Eye On
eo CBB Approval
All private placements require approval of the CBB unless such offerings are expressly exempted under the CBB regulations. It is wrong to think that such placements are just private, and it can be offered privately without complying with the CBB law and regulations of Bahrain.
eo Accredited Investors
Private placement solicitation can only be made to accredited investors, and it must not be offered to public. The CBB Rulebook defines an accredited investor as "an individual who has a net worth of minimum USD 1 million excluding that person's principal place of residence; legal entity which has assets available for investment above USD 1 million; or governmental organisation whose main activity is to invest in financial instruments." The CBB regulations are very strict on it, and they require that placement subscription form must include an accredited investor status confirmation to be signed by the investor. Further, solicitation of approved PPM (for offerings excluding private equity) can only be made to a limited number (less than 100) of accredited investors (OFS- 2.4.2).
eo Confidential Disclosure
Private placements must remain confidential in nature, and solicitation to accredited investors must be made in private. It is prohibited to advertise or distribute PPM openly, either through website or any other communication channel.
eo Duration of Solicitation An approved PPM is valid only for a period of six months from the date of CBB approval, and no solicitation can be made after lapse of the said six month period unless approved by the CBB (OFS-5.1.21).
eo Minimum Subscription Amount and Utilisation of Proceeds
Minimum subscription amount for a private placement may not be less than USD 100,000. Further, it is a fundamental requirement that all funds/investments collected through private offerings must be utilised as prescribed in PPM.
eo PPM Requirements
One has to be very careful in complying with the nitty-gritty requirements (refer to Chapter 5 of OFS Module and Appendix OFS-7 Prospectus Checklist), such as the exact wordings to be used on the front page of PPM, inside cover page, contents of prospectus, et cetera. PPM document must be very specific and should not contain any untrue or misleading statements to attract investors. PPM document must contain a specific statement in respect of suitability of investors and ensure to include statements covering the risk of investment. The private placement fees or any other fees or charges related to the offer must be clearly disclosed in PPM. In all, PPM document must contain all information that should be sufficient to make an informed decision by an accredited investor.
The above requirements are not exhaustive, and it is recommended that the readers should consult a legal expert to understand complexities of private placements in Bahrain before considering their investment options.
Private placement solicitation can only be made to accredited investors, and it must not be offered to public.
About Almoayed Chambers
Headed by Aymen Almoayed since 2010, Almoayed Chambers is a regional legal and strategy firm based in Bahrain with affiliates and offshoots throughout the GCC. They specialise in international law disciplines and complex legal issues, mostly dealing with high net worth clients.
eo Dispute Resolution
eo Corporate Services
Contact: Tel: +973 17100000 Email: firstname.lastname@example.org
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