For securities issuers, the Capital Markets Board of Turkey (CMB) entered the New Year like Santa Claus, home from his travels with a holiday bag full of leftover gifts. The chief regulation governing public offerings and private placements Communiqué Serial No: I/26 on Principles of Registration with the CMB and the Sale of the Shares is expected to be replaced by a Draft Communiqué soon. The key areas of proposed change concentrate on the public offering process, the private placement alternative strengthened by sale to qualified investors, the shelf registration system, and the sale of shares of companies listed in the emerging companies market (ECM).
Beginning with the last item, we believe the Draft Communiqué will pass as soon as the ECM's technical and regulatory infrastructure is complete. The ECM is designed to serve as an intermediate market for companies that have growth potential but cannot satisfy the conditions of the Istanbul Stock Exchange (ISE). As they begin to trade on the ECM, they will enjoy low-cost funding alternatives, and once they fulfill the ISE criteria they will be able to make a smooth transition to the ISE. The Draft Communiqué widens the scope of the current Communiqué which only applies to companies that are listed or will be listed on the ISE and sets forth the procedures for registering sales of the emerging companies' shares. In this respect, the Draft Communiqué is surely a big step in adding to the ranks of beneficiaries of available capital markets funds.
The second change that we believe will facilitate and thereby boost the issuance of shares in capital markets is the Draft Communiqué's new articles on the shelf registration system. Despite the system having been in the Communiqué for almost seven years, none of the listed companies have ever applied to the CMB to benefit from the system due to its inefficiency. The Draft Communiqué makes the system functional and allows issuers to register their shares to be offered within a year with the CMB up front. Once registered, the only formalities an issuer must undertake are updating the shelf-registration prospectus and preparing the shelf information memorandum as opposed to the circular that would have to be published in the conventional system comprised of specifics of the issuance in question. Following the CMB's approval of the content of the shelf-registration prospectus and memorandum, the issuer would need to publish them both on the internet and Public Disclosure Platform and register them with the relevant Trade Registry. This way, issuers will be able to deal with the extensive portion of registration formalities beforehand and gain a shortcut to capital markets funds.
"What about the exemptions for QIBs?" was amongst the hard questions we dealt with in the past, since the Communiqué was silent on who could qualify as a qualified institutional buyer (QIB) and the issue arose of whether the prospectus requirement applied to the sale of shares to QIBs. Having to deal with the problem by way of analogy from the provisions in a different regulation on registration and sale of foreign mutual funds was giving lawyers a hard time in rendering exemption advice. Now, the Draft Communiqué makes our jobs easier by defining QIBs and explicitly addressing the prospectus exemption.
The definition of QIBs includes, among others, banks, domestic and foreign mutual funds, pension funds, investment trusts, brokerage, portfolio management and insurance companies, mortgage finance institutions and qualified investors either real or legal persons possessing liquid funds of at least TL1 million ($659,000). With respect to the exemption, the Draft Communiqué puts an end to the prospectus and circular drafting. There is also no indicator in the Draft Communiqué as to the number of QIBs, in contrast to the 100-person threshold in other jurisdictions. That said, if the sale is not directed to QIBs but rather qualifies as a private placement, then the 100-person threshold would apply. Similar to the provisions in other jurisdictions, however, in the event of a resale transaction, a prospectus and circular would have to be prepared both in the sale to QIBs and private placement.
Last but not least, the Draft Communiqué proposes a relaxed public offering process. As opposed to the minimum offering threshold such as a company with equity of TL16.2 million being required to offer at least 25% of its shares the Draft Communiqué abolishes such threshold, allowing the issuers to avail themselves of the capital markets funds markets without restriction. The Draft Communiqué also eliminates the underwriting commitment.
The reader will have the final say on this subject, as the CMB calls for the public to submit proposals, comments and criticism with respect to the Draft Communiqué's provisions. So if you have any suggestions and would like to take part in reforming the offering process in Turkey, we would be happy to convey your suggestions to the CMB.
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