Following is the last of a series of seven articles in which Dr Lu'ayy Al Rimawi, Jordanian academic/practitioner who has taught law at the London School of Economics and published extensively on regulatory aspects pertaining to capital markets in the UK, analytically looks at the Jordanian Securities Commission's new proposed regulations of public offering:
As can be observed from earlier discussions, an area that has not received adequate attention under the new regime is disclosure instruments. This is because of: (1) Incoherent modality for disseminating nashrat el-esdar or prospectus; (2) Occasional inconsistency between the regime laid by the SA 1997 and the one laid by subsequent regulations; and (3) No provision for supplementary prospectuses or supplementary subscription advertisements.
Incoherent modality for disseminating nashrat al-esdar
The SA 1997 and SA 2002 place disproportionate importance on nashrat al-esdar becoming effective, as opposed to its contents being disseminated properly. Additionally, the condition that buyers must also physically receive nashrat el-esdar "prior to the sale" may, on occasions, be impractical. Unlike the position, for example, under the EU regulatory model where investors in some circumstances may be entitled to request a hard copy of the prospectus, the SA 2002 states quite categorically that the sale would not be binding unless the investor receives a copy of the "effective" prospectus. Art. 34(c) of the SA 2002 states: "The sale of securities that are part of a public offer shall not be binding upon the buyer unless the buyer first has received a copy of the effective prospectus.
Taken literally, the problem with the above Jordanian provision is that it potentially gives rise to transactional delays, as hundreds of thousands of subscribers would wait to receive their copies of the prospectus. Moreover, the legal couching of the above provision could equally provide a loophole inviting transactional instability, as investors can claim that they never received a copy of the prospectus, thus invalidating the sale.
Additionally, the legal regime set by the SA 2002 is incoherent and often confusing. For example, it talks about two segmented legal requirements in terms of the prospectus becoming effective and public, without explaining the full legal consequences for contravening such requirements. Nor does it explain the rationale behind this dual insistence that the prospectus be "effective" and "public". The SA 2002 only partially tackles this by stating that it is considered a "violation of this law" for any person to sell "securities in a public offer without an effective prospectus" (i.e.: Art. 42(4) of the SA 2002).
Indeed, there appears to be no significance whatsoever for the requirement that Jordanian prospectuses be made public. For, after careful scrutiny of all the provisions of the SA 2002, one finds that there are no legal implications for offering shares to the public without publishing a prospectus or making it "public". All the SA 2002 does, is state (in a rather odd out provision) that the "prospectus shall become public upon its submission to the Commission." (i.e.: Art. 38 of the SA 2002). Moreover, earlier sweeping requirements in preceding provisions of the SA 2002 proscribing that: "No person shall make a public offer unless a prospectus is filed with the Commission", further confounds this legal regime. (i.e.: Art. 34(a)(1) of the SA 2002). This is because the corollary from this provision is that once an issuer has "filed" a prospectus with the JSC, they can then offer their shares to the public, without the prospectus being "effective" or "published".
Needless to say, despite their extensive reference to the term "nashrat al-esdar", Jordanian securities regulations still do not provide a clear definition of this modality for disseminating disclosure. Neither the SA 1997 nor the SA 2002 define what nashrat al-esdar is. On occasions, there is not even regulatory cohesion or consistency when deploying the term "nasharat el-esdar", even in the follow-up regulations issued in pursuance to the SA 1997. This confusion is nowhere more visible than in the four Annexes to the 1997 Issuance and Registration Regulations. For example, Annexes II and IV refer to nasharat el-esdar as "prospectus", while Annexes I and III refer to nasharat el-esdar as a " filing statement" made when securities are first registered with the JSC. Clarity here is important, as filing statements or listing particulars and prospectuses are not necessarily always the same.
Occasional inconsistency between the regime laid by the SA 1997 and the one laid by subsequent JSC regulations
One must clearly state at the beginning that although the SA 1997 has now been replaced by the SA 2002, it is still not without legal effect. This is because some of the current regulations (which have not yet been repealed) were issued in pursuance to its provisions. The main argument here is that when one looks closely at the treatment of public offers of securities under the SA 1997 and the 1997 Issuance and Registration Regulations, one finds conflict between the two respective regimes laid by them. Indeed, not only is there an evident fundamental flaw in the Jordanian regulatory understanding of the rationale for regulating public offers, but the whole regulatory regime itself is at times no more than a composite of inconsistent pieces of legislation. Such an argument becomes apparent when one juxtaposes some of the provisions of the SA 1997 next to the 1997 Issuance and Registration Regulations.
To begin with, Art. 54 of the SA 1997 stated that public offers took place either "verbally", "through a prospectus", a "subscription advertisement" or by means of a "text" attached to, or preceding a prospectus - providing such prospectus became effective. For example Art. 54 of the SA 1997 stated: "An issuer, an affiliate thereof, or an underwriter of either one of them shall not offer any securities of the issuer before submitting the prospectus to the [JSC's] Commission and paying the requisite fees. In all circumstance, the offer shall be made in one of the following ways: (1) verbally; (2) by means of a prospectus; (3) by means of a proclamation containing a summary of the prospectus and any other information required or allowed by the Commission in accordance with the Instructions approved by the [JSC's] Board; and (4) by means of a text attached to, or preceding the prospectus, provided the prospectus has come into effect."
However, when one juxtaposes the above to the regime laid by subsequent JSC regulations, one finds evident inconsistency that has not yet been resolved. Nowhere can this be more evident than under the regime laid by the 1997 Issuance and Registration Regulations. Oblivious to the fact that provisions in bylaws cannot repeal or amend provisions in primary legislation, Art. 7 of the 1997 Issuance and Registration Regulations appears to amend Art. 54 of the SA 1997. Art. 7 solely relies on subscription advertisements or "announcements" as the only means to effecting a public offer. Excluding all the methods mentioned in Art. 54 of the SA 1997, Art. 7 of the 1997 Issuance and Registration Regulations states that public offers: "Take place through an effective prospectus via the means of subscription advertisement, the format and contents of which are approved by the JSC."
This inconsistency would have been remedied had the SA 1997 itself been subsequently amended to accommodate such changes in the modalities of disseminating public offers in Jordan. Moreover, even after remedying the above inconsistency between provisions in bylaws and primary legislation, Art. 7 of the 1997 Issuance and Registration Regulations still poses a problem. Its exclusive reliance on the JSC to determine the format and contents of subscription advertisements can itself be criticised on a number of grounds. One of such grounds is that, Jordanian law, as it stands now, contains no guidance on how the JSC should determine the format or contents of subscription advertisement and leaves this question entirely vague. This lacuna is overlooked by the SA 2002 and subsequent regulations issued by the JSC (i.e.: Art. 34 of the SA 2002).
No supplementary prospectus under the Jordanian regulatory regime
Another criticism of the current Jordanian regulatory regime is that there is no obligation on issuers to immediately publish supplementary prospectuses (or supplementary subscription advertisements). It is important to inform investors and their advisers about changes to information in the prospectus during the period of subscription. Mechanisms should be in place to ensure that issuers publish supplementary material immediately to inform investors of such changes. For their part, issuers under Art. 57 of the SA 1997 had only to "promptly" inform the JSC in writing if there was any change in the information supplied in nashrat el-esdar or prospectus. Art. 57 of the SA 1997 stated: "The issuer must promptly inform the Board [of the JSC] in writing of any changes to the information included in nashrat el-esdar."
This position was repeated by the SA 2002. Art. 40 of the SA 2002 states: "The issuer shall inform the Commission in writing or electronically of any changes to the information in the prospectus as soon as they occur, whether or not the prospectus has been declared effective."
However, the above requirement could be criticised on a number of grounds. First, it is confused with Art.(5) of the 1997 Issuance and Registration Regulations, which does NOT require that the JSC is informed in writing or electronically. It merely states: "Issuers must promptly inform the JSC of any changes to the information mentioned in nashrat el-esdar as soon as they occur."
As seen above, although it mandates that the JSC must be promptly notified of changes to the prospectus or nashrat el-esdar, Art.(5) nevertheless does not state that issuers have to notify the JSC in writing (or electronically) of such changes. This is inconsistent with the aforementioned SA 1997 and SA 2002 provisions, which state that the modality of informing the JSC is at least in writing.
Secondly, all the above provisions fail to address how to remedy the problem of disseminating new information that comes into light after submitting the prospectus or publishing the subscription advertisement. Indeed, without paying any consideration to investors' right to be promptly informed of such changes, they imply that issuers' duty in this eventuality is fulfilled once they have informed the JSC. This however, is untenable.
Investors and their investment advisers are entitled to be informed of the changes that take place in the period when subscription advertisements are published until the passing of the subscription date. "Promptly" informing the JSC should not be viewed as a substitution for directly informing investors. It only adds needless bureaucratic complications in the sense of additional compliance procedures, resulting in unnecessary delays. This is because instead of promptly publishing the new additional information that has arisen, issuers have to write to the JSC advising on such changes, which in turn will decide whether or not to pass them to the public.
Thirdly, there is no guidance as to what happens to investors who have already subscribed to the shares before they learnt about the new significant information, which affects the securities or their issuers.
The above situation can be contrasted to the UK, where issuers have to publish a supplementary prospectus if significant new matters rose at any time after the prospectus was submitted to the FSA and before the commencement of dealing in securities (i.e.: Section 81 of the UK's Financial Services and Markets Act 2000). Moreover, as far as the EU regulatory system is concerned, investors who have already agreed to subscribe for the securities before publishing the supplementary prospectus can (within no more than two days after publishing the supplementary prospectus) withdraw their acceptances (i.e.: Art. 16(2) of EU Directive No. 2003/71/EC).
However, a solution to the need to inform investors and their investment advisers of new changes in Jordan would be a "simultaneous approach". Under such an approach, issuers would inform the JSC of the changes that occurred since the submission of the prospectus (or the publication of the subscription advertisement), and at the same time publish a supplementary nashrat el-esdar so that investors receive this information as quickly as possible. Therefore, instead of segmenting the process into two stages, where the JSC first receives the additional information from issuers; and subsequently (and rather bureaucratically) determines whether or not such additional information would be important, investors and their investment advisers can make an assessment of such information more speedily as they directly receive it when it is published by issuers.
Additionally, Jordanian laws need to address the position of aggrieved investors who have already agreed to subscribe for the securities before the publication of the supplementary prospectus. Here, such investors need to be given an opportunity to withdraw their acceptances within a prescribed period after publishing the supplementary prospectus.
In addition to the above, we in Jordan have still do not have an effective promotion regime in the context of public offers. Needless to say, the liability regime for inaccurate or misstatements in the prospectus (both under the Jordanian general law and the new regulatory regime) suffers from acute legal shortcomings.
by Dr Lu'ayy Al Rimawi
© Jordan Times 2005
