On 27 October 2020, Crown Prince of Dubai, His Highness Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum, launched the Nasdaq Dubai Growth Market (the Growth Market). This new initiative is designed to provide access to the capital markets for small and medium enterprises (SMEs) which often have difficulty accessing funding through investors or via loans from banks and therefore face a funding gap which impacts on their ability to grow and expand.
The launch of the Growth Market will enable SMEs to take advantage of the Dubai Financial Services Authority's (DFSA) listing regime for SMEs, which was introduced on 1 April 2020 and was designed to encourage market participants to develop financing solutions to bridge the funding gap referenced above.
What is an SME?
In order to conduct an IPO on the Growth Market an entity must qualify as an SME pursuant to the DFSA's Markets Rules (MKT) at the time of listing. The question of whether or not an entity is an SME is determined by the aggregate market value of the company's shares. MKT1.3.3 provides that a company will be classed as an SME if: (i) at the time of its application for listing, the aggregate market value of its shares on admission is reasonably expected to be less than US$250 million; and (ii) on admission, the actual aggregate market value of its shares is less than US$250 million. As a result, there is no minimum valuation requirement for a company to be able to list on the Growth Market provided that it satisfies the definition of an SME as set out in this paragraph.
It should be noted that the DFSA may modify the application of the SME definition to a particular applicant where it considers it appropriate to do so. For example, the DFSA may permit an applicant with an expected market capitalisation of more than US$250 million on admission to still be classed as an SME if it has a limited operating history and is still at an early stage of its development. Alternatively, a company with an expected market capitalisation of less than US$250 million may request that the SME listing regime not apply to it if it can demonstrate that it should not be treated as an SME (for example, due to its extensive operating history). Any company which asks the DFSA to modify the application of the SME definition while contemplating an IPO on the Growth Market should also contact Nasdaq Dubai to check whether this would impact on its ability to list on the Growth Market.
If, after listing, the average aggregate market value of the company's listed shares exceeds US$500 million for 90 consecutive days, then it will cease to be an SME. In such circumstances, the SME listing regime will cease to apply to the company. It will also be important in these circumstances to liaise with Nasdaq Dubai to determine whether the issuer ceasing to be defined as an SME pursuant to MKT will impact on its ability to maintain its listing on the Growth Market.
Conditions for listing an SME
Certain elements of the DFSA's listing regime have been modified for SMEs to enable them to apply for listing on the Official List. An SME must therefore satisfy the following conditions as part of the SME listing regime in order to conduct an IPO on the Growth Market:
- it must have audited accounts covering a minimum operating period of one year (rather than the three years required in respect of non-SMEs). If an applicant has more than a one-year operating history, then it should include the additional audited accounts for that period, up to a maximum of three years;
- its pre-listing shareholders must be locked in for 12 months following admission;
- it must comply with a prohibition on carrying out share repurchases for a period of 24 months following admission. This is because the DFSA considers the general purpose of an IPO (and, in particular, an IPO of an SME) to be to support the growth of the company by raising funds. The DFSA will allow one exception to this prohibition, which is where the shareholders of the SME have passed a special resolution approving the repurchase. In such circumstances, the share repurchase would still, however, be subject to the prior written approval of the DFSA. Any share repurchases within 24 months following admission to the Official List should therefore be discussed with the DFSA at the earliest opportunity;
- rather than appointing a sponsor for the listing process, an SME is required to appoint a compliance adviser as a condition to admission and for its ongoing listing. Please seebelow for further details;
- key information in respect of the SME must also be made available free of charge on the SME's website.
The requirement to have at least 25% of shares in public hands has not been amended for SMEs because the DFSA considers it an important factor in supporting liquidity and proper price formation in the market. Any company listing on the Growth Market will therefore need to ensure that it complies with this free float requirement.
It should also be noted that the DFSA has not imposed any restrictions on who can invest in shares of a listed SME. As a result, both professional and retail investors can invest in an IPO on the Growth Market, subject to the company complying with the rules in respect of marketing its shares in the jurisdictions in which it decides to do so.
Other than the specific amendments to the listing regime for SMEs as mentioned above, the listing process for SMEs is broadly similar to the listing process for non-SMEs and the normal listing regime as set out in the Markets Law and MKT will apply.
As a result of the above, it is anticipated that the application and document submission process for listing an SME on the Growth Market will not be all that different to the application and submission process for a full listing on Nasdaq Dubai. The existing prospectus content rules will therefore also apply to SMEs and an applicant will still be required to submit a draft prospectus to the DFSA alongside a checklist showing compliance with the various prospectus content requirements. There is, however, a certain amount of flexibility built into the process and it will, for example, be possible for an SME to note that a particular disclosure requirement should not be applicable to it when submitting the checklists. The DFSA will consider such notes as part of its review of the documentation during the application process.
There is no change to the rules in the Markets Law and MKT in respect of who is liable for the content of a prospectus. A prospectus issued by an SME for an IPO on the Growth Market will therefore be expected to contain the usual responsibility statement, which includes a declaration for each person responsible for the prospectus (or a part of it) that the information contained in it is, to the best of their knowledge, correct and complete. The DFSA has, however, confirmed that a compliance adviser will not be deemed to be a person responsible for all or part of the prospectus issued by an SME which it advises. There is also no requirement for a compliance adviser to take on such a responsibility.
In addition to the information which an SME must make available on its website (as referenced above), SMEs are also required to comply with the same secondary disclosure obligations as applicable to non-SMEs. The regular requirements for audited financial statements, disclosure of information to the market (such as the interests of connected persons) and the rules in respect of inside information would therefore also apply to SMEs listing on the Growth Market.
A company listing on the Growth Market will also be required to have a corporate governance framework in place which complies with the corporate governance principles set out in MKT3.2 and should consider adopting the best practice standards set out in Appendix 4 to MKT. It should be noted that the DFSA has adopted a "comply or explain" model in respect of corporate governance standards. This should provide SMEs with some level of flexibility to adopt a corporate governance framework which is appropriate for its business model and development stage but may not comply completely with the best practice standards set out in Appendix 4 to MKT. It is important, however, that the company be able to explain why it has not adopted any particular standard in order to give investors comfort that corporate governance is being taken seriously by the issuer.
In addition to the above, the DFSA has introduced a specific fee structure for SMEs with lower filing and annual fees. In the event that a company ceases to qualify as an SME, its next annual fee will be calculated in accordance with the provisions applicable to non-SME listed entities rather than SMEs.
Requirement for a compliance adviser
As noted above, an SME is not required to appoint a sponsor when conducting an IPO on the Growth Market. It is, however, required to appoint a compliance adviser as a condition of admission of its securities to the Official List and in order to maintain its listing on the Growth Market going forwards. The compliance adviser does not need to be regulated by the DFSA, but should be domiciled or have a presence in the Dubai International Financial Centre. The DFSA does, however, expect the compliance adviser to have sufficient senior competent staff and a proven track record of relevant corporate finance experience. In order to ensure that the DFSA is comfortable with the experience and track record of the compliance adviser, it is anticipated that the SME will discuss the appointment with the DFSA and obtain confirmation that the DFSA does not object to the appointment. It is therefore important that a company wishing to conduct an IPO on the Growth Market liaises with the DFSA at an early stage and before signing any engagement letters with a compliance adviser.
At the pre-listing stage, the compliance adviser will assist the SME with its application for listing and co-ordinate the various workstreams and other advisers involved in the IPO, such as the external auditors and lawyers. The DFSA will also expect the compliance adviser to assist the SME in ensuring that the prospectus contains all of the information that an investor would reasonably expect in order to make an investment decision. This would include advising on the adequacy of the due diligence and verification processes involved in producing the final prospectus.
Once an IPO has been completed on the Growth Market, the compliance adviser will advise the company on its ongoing obligations as a listed entity. This will include matters such as complying with its disclosure obligations, convening shareholder meetings and obtaining shareholder approvals where required, maintaining the mandatory information on its website and adhering to the corporate governance principles set out in MKT. While the compliance adviser's role is to assist the company with these ongoing obligations, it should be noted that the responsibility for compliance with these regulatory obligations remains with the listed SME.
The DFSA must be contacted if an SME wishes to dismiss its compliance adviser or the compliance adviser wishes to resign. It is possible that the DFSA may wish to suspend the company's shares from the Official List if there will be a period in which the SME does not have a compliance adviser. It should be noted that the DFSA can remove the ongoing obligation to appoint a compliance adviser. However, it is unlikely that they will do so while the company is considered to be an SME, unless it can satisfy the DFSA that:
- the SME's shares have been admitted to trading on an authorised market (e.g. the Growth Market) for at least three years;
- the ongoing obligations of the SME for trading of its shares on the market have been complied with during that time; and
- the company has sufficient resources in place to comply with its ongoing obligations without the assistance of a compliance adviser.
In launching the Growth Market, Nasdaq Dubai has taken advantage of the DFSA's SME listing regime to create a product specifically designed to assist in bridging the funding gap faced by many SMEs. It is part of the Dubai Future District project and intends to welcome companies both in the UAE and from around the world. In doing so, it will play a role in helping these companies expand both in the Middle East region and internationally, supporting the global economy in times of unprecedented change.