IPOs in the UAE: All Things You Need to Know

Overview on IPOs in the UAE

An initial public offering (IPO) is the process through which a private company, usually an LLC, becomes public by the sale of its stocks to the general public. IPOs have a crucial role in shaping and empowering the economy because they are an efficient method of raising funds necessary to transform companies’ strategies for growth. The purpose of a public share allows companies to be able to raise capital from public investors, and it is done by drafting and issuing a description of the company and conducting a public subscription of its shares. A company usually approaches attorneys in capital markets to submit required documents to the respective relevant governmental authorities and must obtain their approval.

The laws and regulations of the UAE state that a company must be a legal form of a Public Joint Stock Company (PJSC) in order for the company to offer its shares to the public. This is usually common with limited liability companies (LLC) that convert their legal form and become a public joint-stock company in order to offer their shares to the public, and usually, companies undertake this process in order to raise their capital in the global markets.

Regulating authorities behind IPOs in the UAE

The key regulated authorities in the UAE with regard to the IPO are the Securities and Commodities Authority (SCA) and the Department of Economic Development (DED). The SCA has the authority to confirm the implementation of a public joint-stock company, eventually approving and supervising them. The SCA approaches an open-door policy for any company that chooses to go public, and they can present their business case and raise any inquiries with the full support provided by the SCA. The DED and the SCA work side-by-side to issue resolutions and approve an LLC company’s conversion to a PJSC.

In addition, companies may be required to obtain approval from other regulatory authorities such as the Central Bank of Insurance Authority, for example. Furthermore, significant legislation regarding IPOs is the Companies Law, also officially known as Federal Law Number 2 of 2015, as well as the chairman of SCA’s Resolution No. (11/R.M) of 2016 governs public offerings and the issuance of the shares of public joint-stock companies.

The UAE consists of three financial exchange markets, which are;

1. Abu Dhabi Securities Exchange (ADX),
2. Dubai Financial Market (DFM)
3. NASDAQ Dubai.

ADX and DFM are governed and regulated by the supervising authority of the SCA, and it has the authority to impose and implement laws, regulations, and standards with which the ADX and the DFM must comply. ADX and the DFM work closely with the SCA in order to protect its investors and provide an optimal trading platform for securities trading. Both ADX and DFM operate as a securities exchange market for trading securities, including the shares issued by public joint-stock companies. On the other hand, NASDAQ Dubai is regulated by the Dubai Financial Supervisory Authority as a security supervisory authority, as it is within the jurisdiction of the DIFC.

Why should a company go public?

There are certain advantages for a company going public, and completing an IPO will involve significant changes in the whole company’s structure. Once it is public, the company will be subject to a certain set of rules and responsibilities.

The benefits of going public are listed below:

• Ongoing access to capital: Should a company opt to be publicly listed, the company will have access to significant amounts of capital for its future funding requirements and gain a wide array of diverse investors that would not have been possible if it stayed private.
• Acquisition Currency: Any company wishing to have a major acquisition would be better suited if the company is public. This would make their value on the market exponentially higher than if they were to stay private, thus further increasing the value of a company’s stock and allowing investors to participate in the company’s future potential growth.
• Monetization for shareholders: Current shareholders will experience rapid growth of their stakes in a company once an IPO happens. Current shareholders will be able to engage in the prospective appreciation of share prices and may continue to monetize their stake through the public market.
• Liquid and transparent market for shares: With the existence of a wide array of diverse investors, the company reaps multiple benefits from the liquid market due to the price discovery mechanisms.
• Corporate identity and enhanced public profile: Once a company is listed on a recognized and well-established stock exchange, the company’s image will increase, as well as its credibility and visibility, which will, therefore, attract new investors, customers, and business partners. Establishing an IPO usually brings forth enhanced public image and includes a wide media coverage such as PR, communications, and brand awareness of the company and its product or services. An enhanced public profile also brings forth an improved relationship with customers, vendors, and partners.

Requirements for enlisting IPOs in the UAE

Key consideration requirements when taking a company from a limited liability company (LLC) to a Public Joint Stock Company (PJSC)

• An initial capital that is not less than AED thirty (30) million.
• The company must be operating for at least two financial years.
• The company must have annual operating and distribution profits that are not less than 10% of the company’s issued capital for two financial years prior to conversion.
• There should be an adherence to any minimum capital requirements that are held by the UAE or GCC nationals.
• Founders should not hold less than 30% and not more than 70% of the company’s total issued share capital.

IPO Process in the UAE

Although the process of setting up an IPO is very similar worldwide, the laws and regulations of each country make the mechanism of the process a little different such as required documentation, governmental approvals, and timelines.

In the UAE, the process of an IPO varies depending on the structure of the legal form of the business, such as whether the company is a newly established PJSC or if a company is undergoing the process of converting to a PJSC, and the factor of which Emirate and which financial market the business will be listed should be considered as well.

Newly Established PJSC

Any newly formed PJSC company will require the approval of the SCA when setting up an IPO. The company must undergo a set of requirements, such as acquiring the special approval from the SCA board, providing sufficient capital for 12 months after the incorporation of the company, and at least AED 5 million worth of offered shares to qualified investors.

In accordance with Article 113 of the Companies law 2015, new establishments must seek the DED’s approval to establish the company as PJSC. After the DED’s approval, companies must apply for the SCA approvals while submitting required documents like Memorandum of Association (MOA), Articles of Association (AOA), SCA application form with the request for conversion of PJSC, and evidence of payment for the application.

Should all the required documents be completed, the SCA will conduct a meeting with the DED to review the application for incorporation and the documents along with it. This meeting should be held within ten working days from the date of submitting documents from the SCA and the DED.

If the regulatory authorities approve the application request, DED will then issue a license to incorporate the company and be announced in the official gazette. The owners of the company must then notarize the MOA and AOA before a notary public.

The SCA will then provide the company with a template for the subscription process, which the company must start within 15 days from the date of the issuance of the license. The founders shall not hold less than 30% and no more than 70% of the company’s issued capital. The founders are also required to provide the SCA and the DED a bank certificate containing evidence of payment with the value of its shares.

The companies shall have an undertaking according to SCA’s template to deposit the proceeds generated from the subscription of total shares to the incorporated company and must refund all the surplus funds to subscribers within 15 days from the date of the subscription closure.

After the company obtains the SCA approval, the prospectus is then published in two local Arabic newspapers five days prior to the subscription’s commencement. This step is the invitation to the public offering. This subscription should remain open for at least ten days and should not exceed 30 days; however, a request for extensions is permitted by an additional ten days, although they are subject to the SCA and the DED’s discretion.

Registration of the company before the qualified authority and listing it on the UAE financial markets

The newly incorporated company should complete all registration procedures before DED before it is listed in the financial markets. It should be complete within ten days from the date the incorporation certificate was issued. Afterward, the DED must register the company before the commercial registrar and then issue a new corporation’s trade license within five working days. The company owners should then provide the AOA, MOA, and the company license to the company registrar to register the company in the registrar.

The newly converted incorporation owner should list its shares in the UAE financial markets (ADX or DFM) within 15 days of receiving the trade license and should have a listing request in accordance with the permitted listing regulations that are adopted by the SCA.

Existing companies converting to a public joint-stock company

Suppose an existing company should wish to convert its company to a PJSC. In that case, they should undergo the same process applies as a newly established company except for the following steps:

• The owner of the existing company should write a letter to the SCA if they wish to be established as a PJSC and request a listing window reservation, as well as confirm eligibility.
• The owners would then apply to the SCA to request a PJSC conversion alongside the shareholder’s resolution to approve such conversion.
• The owners would then file the local prospectus, the shareholder’s resolution approving the conversion, a final draft of the IPO MoA and AoA, and the business plan review.
• Once the SCA receives the completed documents, they will examine the conversion request and make a decision within ten working days.
• Should there be approval of conversion granted by the SCA, the company must notify shareholders and creditors of the conversion through a written notice within five working days from the SCA’s approval.
• A meeting will be held between the SCA and the DED in order to examine the conversion application and its documents.
• The SCA will then issue a license to the company should there be a final confirmation of the conversion request, and the decision is published in the official gazette held at the expense of the company.
• The company will then begin with the IPO and listings the same way as a newly established PJSC.