Saudi Arabian Law Overview

Capital Markets

The Saudi Arabian Capital Market Regulation, Royal Decree No M/30 of 2 Jumada Thani 1424 Hejra (corresponding to 31 July 2003), sets out the framework for the capital market including:

1. the establishment of the Saudi Arabian securities and exchange commission, known as the Capital Market Authority (CMA), with objectives of protecting investor interests, ensuring orderly and equitable dealings in securities business, and promotion and development of the capital market;
   
   
2. vesting the CMA with the powers to:
3. license non-bank financial intermediaries; and
4. authorise the offering of securities to the public;
   
   
5. the establishment of the Saudi Stock Exchange (Tadawul), a JSC and the sole entity authorised to trade securities within the Kingdom; and
   
   
6. the incorporation of the National Securities Depository Center, which was converted into a closed JSC named the Securities Depository Center Company (Edaa) in 2016.

Regulatory Framework

The CMA was constituted on 1 July 2004 and is governed by five commissioners who are appointed by Royal Decree, one of whom being nominated as the Chairman and the second as the Vice Chairman. The CMA has issued a wide body of legislation governing securities, including the Market Conduct Regulations (2004); the Authorised Persons Regulation and Securities Business Regulations (both 2005); the Corporate Governance Rules, Investment Fund Regulations, Listing Rules, Offers of Securities Regulations and Real Estate Investment Funds Regulations (all 2006); and the Mergers and Acquisitions Regulations (2007). All have been updated and amended several times since, and new regulations have been passed. At the time of writing, the most important capital markets regulations are the following:

• the Prudential Rules of 2012;
• the Investment Funds Regulations as amended in 2016;
• the Authorised Persons Regulations as amended in 2017;
• the Securities Depository Centre Rules as amended in 2017;
• the Market Conduct Regulations as amended in 2018;
• the Merger and Acquisitions Regulations as amended in 2018;
• the Corporate Governance Regulations as amended in 2019;
• the Offers of Securities Regulations as amended in 2019;
• the Capital Market Institutions Regulations as amended in 2020; and
• the Securities Business Regulations as amended in 2020.

Offers of Securities

Offers of securities in Saudi Arabia must comply with the Listing Rules, the Rules on the Offer of Securities and Continuing Obligations, the Instructions of Book Building Process and Allocation Method in Initial Public Offerings, approved by Capital Market Authority Board Resolution No 2-94-2016 of 15 Shawwal 1437 Hejra (corresponding to 20 July 2016) and the Instructions on the Price Stabilisation Mechanism in Initial Public Offerings, approved by Capital Market Authority Board Resolution No 4-87-2018 of 24 Dhul Qada 1439 Hejra (corresponding to 6 August 2018).

The definition of “offer” is fairly broad, and includes the direct or indirect marketing of or any statement, announcement or communication that has the effect of selling, issuing or offering securities, but does not include preliminary negotiations or contracts entered into with or among underwriters. Offers of securities are categorised as:

1. public offers,
2. private placement offers,
3. exempt offers; or
4. parallel market offers.

Public Offers

An offeror must appoint a financial advisor authorised by the CMA when applying for the admission of securities to the official list, and the issue of securities which have not been previously admitted to the official list must be fully underwritten by an underwriter authorised by the CMA. A legal advisor licensed to practise law in Saudi Arabia must also be appointed.

An applicant for admission and listing must be a Saudi JSC, and must have been carrying on as its main activity, either by itself or through one or more of its subsidiaries, the same activity for at least three financial years. The senior executives of the issuer must be adequately experienced in the management of the issuer’s business. Where the issuer has undergone a material restructuring, one financial year must pass from the date of the restructuring’s completion before an IPO application may be submitted. Either on its own or with its subsidiaries, the issuer must possess sufficient working capital that it can continue operations for at least twelve months following the date of the prospectus’ publication. The issuer must also submit to the CMA audited financial statements.

To be admitted to the official list, there must be a sufficiently liquid and open market for the shares that are the subject of the application, as follows:

1. there must be at least 200 public shareholders; and
2. at least 30% of the class of shares should be owned by the public.

Upon obtaining the CMA’s approval, Tadawul may permit a lower number of public shareholders or a lower percentage of the class of shares if it considers that it is appropriate in view of the number of shares in the same class and the distribution to the public.

Article 30 of the Rules on the Offer of Securities and Continuing Obligations sets out extensive requirements as to the prospectus. The prospectus must contain all the information necessary to enable an investor to make an assessment of the activities, assets, liabilities, financial position, management and prospects of the issuer and of its profits and losses.

The application for admission of securities to the official list must be submitted to both the CMA and Tadawul, alongside the draft prospectus and all supporting documentation that the Rules on the Offer of Securities and Continuing Obligations and the Listing Rules require. After receiving all the required information and documentation, the CMA and Tadawul will review applications within 45 days and 10 days respectively. The CMA has the discretion to accept an application, even if it does not meet all the stated requirements, if the CMA is satisfied that such admission will be in the interests of the applicant and of the investors, and that the investors have received the necessary information to arrive at an informed judgment concerning the applicant and the securities that are the subject of the application. Tadawul’s approval of the application is conditional upon the CMA’s approval.

The issuer must publish the prospectus and make it available to the public at least fourteen days prior to the start of the offering period, however the issuer must not publish the prospectus without receiving the CMA’s approval for the IPO. The prospectus is published on the websites of the issuer, Tadawul, CMA, and the financial advisor.

Issuers also have notification obligations vis-à-vis the CMA and must notify it of certain events which include any amendment to its by-laws or changes to the location of its principal office, any change in its external auditors or the presentation of a winding-up petition, the passing of any winding-up order or the appointment of a liquidator in respect of the issuer, its holding company or any of its subsidiaries, or the commencement of bankruptcy proceedings.

Private Placement Offers

A private placement is an offer of securities that does not fall into any of the other three categories of securities and is either a subscription limited to sophisticated investors or is a limited offer. A limited offer is directed at no more than 100 offerees (excluding sophisticated investors) and the minimum amount to be paid by each offeree is not less than SAR 1 million. This threshold amount may be reduced where the total value for the offered securities does not exceed SAR 5 million.

An offer to sophisticated investors is directed at a number of potential investors including professional investors who are natural persons who fulfil any of the following criteria: he has carried out at least ten transactions per quarter over the previous four quarters of a minimum total amount of SAR 40 million on securities markets; his net assets are not less than SAR 5 million; he has worked for at least three years in the financial sector in a professional position which required expertise in securities investment; he holds a professional certificate that is related to securities business and accredited by an internationally recognised entity; or he holds the General Securities Qualification Certificate that is recognised by the CMA and has an annual income of not less than SAR 600,000 in the last two years.

The offeror must notify the CMA and submit to it copies of the offering documents at least ten days prior to the proposed date of the offer.

Exempt Offers

Exempt offers do not need to comply with the Rules on the Offer of Securities and Continuing Obligations. The sole requirements are that the offeror or capital market institution (depending on who is carrying out the offer) notify the CMA with certain information regarding the details of the offer, as detailed in Articles 6(b) and 6(c) of the Rules on the Offer of Securities Regulations and Continuing Obligations. The various types of exempt offers are detailed in Article 6(a) of the Rules on the Offer of Securities and Continuing Obligations, and include, but are not limited to: offers where the securities are issued by the Saudi government, offers of contractually based securities, offers in insolvency situations where shares are offered to creditors, and offers where issuers whose shares are not listed on Tadawul increase their capital through debt conversion.

Parallel Market Offers

The Parallel Market (Nomu) serves as an alternate platform for companies who wish to make public offers of shares. It has a minimum market cap of SAR 10 million (in contrast to the main market cap of SAR 300 million) and has less restrictive listing conditions, such as lighter disclosure requirements. However, only qualified investors may invest in securities listed on the Parallel Market. Qualified investors in this context refer to a range of different kinds of potential investors, including but not limited to:

1. capital market institutions acting for their own account;
2. clients of capital market institutions licensed to conduct managing activities where such capital market institutions have been appointed as investment managers who are permitted to make decisions on offers and investments in the Parallel Market on the client’s behalf without obtaining their approval;
3. Saudi governmental bodies, any supranational authorities recognised by the CMA or Tadawul, and any other stock exchange recognised by the CMA or Edaa;
4. government-owned companies, either directly or through a portfolio managed by a capital market institution authorised to carry out managing activities;
5. companies and funds established in GCC member states; and
6. investment Funds.

Suspension of Listings

The CMA has the power to, at any time, suspend or cancel the listing in certain situations, including in the following circumstances:

1. the CMA considers it necessary for the protection of investors or the maintenance of an orderly market;
2. an issuer fails, in a manner which the CMA considers material, to comply with the Capital Market Regulation, its Implementing Rules or any laws and instructions governing Tadawul that have been approved by the Board of the CMA (including a failure to pay on time any fees due to the CMA or Tadawul, or any fines due to the CMA);
3. the CMA considers that the issuer, or the issuer’s business, operations or assets are not at a sufficient level to warrant the continued listing of its securities on Tadawul;
4. information has leaked on the proposed transaction of a reverse takeover, and the issuer is unable to assess accurately its financial position and inform Tadawul accordingly; or
5. an issuer has accumulated loses reaching 50% or more and has registered for a financial restructuring with the court in accordance with the Bankruptcy Regulation issued by Royal Decree No M/50 of 28 Jumada Awal 1439 Hejra (corresponding to 14 February 2018).

Rules concerning the prohibition of market manipulation, such as effecting a trade in a security that involves no change in its beneficial ownership, insider trading and untrue statements are stipulated in the Market Conduct Regulations.

Penalties

There are general sanctions stipulated in the Capital Market Regulation that may be placed on any person that engages in or is about to engage in acts or practices that constitute a violation of the Capital Market Regulation or its Implementing Rules. The range of such sanctions includes:

1. damages and right to indemnity;
2. issuing a warning to the concerned person;
3. issuing a cease or desist order;
4. requiring the person to take necessary steps to avert the violation, or, where appropriate, to make restitution to those who have suffered damages;
5. requiring the violator to pay for the CMA’s account the gains realized as a consequence of the violation;
6. suspending the trading in the security;
7. barring the violator from acting as a broker, portfolio manager or investment adviser;
8. the seizing and executing of property;
9. issuing a travel ban;
10. barring the violator from working with companies whose securities are traded on Tadawul; and
11. disciplinary action, revocation or suspension of licences.