Jason Allison examines the Cayman Islands Stock Exchange, which has thrived as a specialist exchange listing bespoke investment funds and structured credit products since its launch in 1997.
The Cayman Islands Stock Exchange (CSX) has thrived as a specialist exchange listing bespoke investment funds and structured credit products since its launch in 1997. In a bid to attract more investors and issuers from around the world the CSX is evolving to position itself as the exchange of choice for ‘specialist companies’.
Leveraging its expertise in listing alternative investment products traded by sophisticated participants in the American and European markets, the CSX has implemented changes to attract more equity issuers with a particular focus on small to medium enterprises.
In March this year the CSX went live on the Deutsche Börse's XETRA trading platform providing access to a network of approximately 400 banks and brokers worldwide who are authorised to trade on one or more XETRA markets. XETRA is the Deutsche Börse’s international cash market platform for trading equities, bonds, warrants, exchange traded funds and other instruments. More securities are currently traded using XETRA technology than on any other trading platform. The XETRA-based 'XCAY' market for CSX-listed securities is open between 12.00pm and 5.30pm GMT on Monday to Friday (with additional pre and post trading sessions), providing easy access to markets on both sides of the Atlantic.
To complement the trading of CSX-listed securities on XETRA, the CSX amended its listing rules (Listing Rules) with effect from 30 April 2013 to facilitate the equity listings of specialist companies with limited track records including mineral companies.
A specialist company may only offer securities to ‘qualified investors’ who subscribe for at least US$100,000 of securities in the issuer and represent that they are particularly knowledgeable in investment matters. This minimum investment threshold for qualified investors in specialist companies mirrors the minimum investment threshold for sophisticated investors in registered hedge funds which, unlike retail funds, are not required to obtain a full licence from the regulator.
The concept of a specialist company was introduced into the Listing Rules by the CSX in 2012 to allow certain companies to list that do not have a three-year operating history or audited financial statements.
The 2013 amendments to the Listing Rules provide further concessions, exempting specialist companies from needing to comply with requirements for a minimum percentage of securities being in public hands, a board comprising at least three directors (the majority of whom must be independent) and minimum working capital.
Specialist companies still need to prepare a listing document which complies with the Listing Rules and must include wording about investment suitability and the possibility of an illiquid secondary share market. However, the concessions in relation to public ownership, board composition and working capital recognise that such requirements may not be appropriate for specialist companies. For example, a development stage company will tend to be closely held by risk-tolerant investors and it is unlikely that the directors will be independent.
Unless otherwise agreed with the CSX, equity issuers are required to appoint an approved listing agent to advise on compliance with the Listing Rules and liaise with the CSX when submitting shareholder circulars. A listing agent appointed by any equity issuer (other than a specialist company) must be a suitably qualified corporate advisor in a recognised jurisdiction with the appropriate regulatory authorisation. Unlike other equity issuers, specialist companies may appoint any approved listing agent, such as a firm of accountants or attorneys which is practising in the Cayman Islands or another recognised jurisdiction.
The CSX’s amendments seek to ensure that listing requirements are responsive to the needs of early-stage growth companies while maintaining high regulatory standards. Indeed, the CSX is the only offshore exchange to be a member of the Intermarket Surveillance Group (a surveillance focused group of over 30 major exchanges worldwide) and is an affiliate member of IOSCO (International Organization of Securities Commissions) indicating that the exchange meets rigorous and internationally accepted standards of securities regulation.
The CSX has established a reputation for applying the Listing Rules pragmatically and flexibly recognising that the more onerous requirements of retail offerings are unnecessary for qualified investors in specialist companies. For qualified investors transparency and regulatory oversight may be more important than market liquidity. This may be especially relevant to investors who are prohibited or restricted from investing in unlisted securities or securities which are not listed on a recognised exchange. The CSX is accredited as a "recognised stock exchange" by HM Revenue & Customs in the UK; CSX-listed securities may be eligible investments for certain savings and pension products and payments on listed securities may be made without deduction of withholding tax.
The CSX is pragmatic in its approach to disclosure requirements. Unlike many European exchanges, the CSX is not bound by the European Prospectus Directive and so is able to be flexible in its approach to listing documentation and the needs of issuers. For instance, listing documents can be based on existing offering documents and it is possible to passport or incorporate by reference documents filed with another exchange recognised by the CSX. In circumstances approved by the CSX, certain disclosure requirements may also be waived for specialist companies.
The CSX provides opportunities for specialist companies to achieve a full listing on a 'main' market in circumstances where those companies would otherwise only be eligible for listing on 'alternative' or 'growth' markets. Companies with less than three years' operating history and audited financial statements are usually restricted to listing on sub-markets of larger exchanges.
Listing fees on the CSX are generally lower (annual fees are capped at US$10,000) compared with other exchanges and the less onerous regulatory burden for specialist companies naturally leads to lower compliance costs. The CSX can also offer a fast-track primary listing to specialist companies and a fast-track secondary listing to companies which already have a primary listing on another exchange recognised by the CSX.
The launch of trading on XETRA and the amendments to the Listing Rules demonstrate the CSX's commitment to attracting a broader range of investors and issuers. Migrating to the XETRA trading platform has exposed CSX-listed securities to the global trading community, adding visibility and market liquidity for CSX-listed issuers. For specialist companies which are less concerned with liquidity than the benefits of listing on a recognised stock exchange, the amendments to the Listing Rules remove some requirements which are intended to benefit retail investors but are less important to sophisticated investors. Importantly the lower barriers to listing on the CSX may provide specialist companies with access to a wider institutional investor base.
Carey Olsen has commenced work on an equity listing for a specialist mineral company on the CSX under the amended Listing Rules. As the news of the amendments spreads it is anticipated more issuers will see the CSX as a viable alternative exchange for listing and trading equity securities.
Jason Allison Partner
Carey Olsen Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Jersey, Cape Town, Hong Kong, London and Singapore.
Anthony McKenzie Partner