On 7 August 2015, the London Stock Exchange published AIM Notice 41 and issued corresponding new guidance in Inside AIM on certain US equity securities known as "Regulation S, Category 3 securities". As a general rule, securities that are admitted to AIM must be eligible for electronic settlement in the CREST system (CREST) operated by Euroclear UK and Ireland (Euroclear), the principal central securities depository for transactions on the London Stock Exchange. However, until now Regulation S, Category 3 securities have not been eligible for electronic settlement and have relied upon a derogation from AIM Rule 36, allowing such securities to be held in certificated form.
Following the introduction of new EU regulations which require all transactions in transferable securities to be settled electronically, the London Stock Exchange has been working with Euroclear and a solution has now been provided allowing Regulation S, Category 3 securities to be settled electronically. As a result, from 1 September 2015, derogations under AIM Rule 36 will no longer be available.
The current situation
By way of background - due to certain restrictions under US securities laws - non-US offerings of equity securities of US-based issuers and other issuers that do not qualify as 'foreign private issuers' under US securities laws (together, referred to as Relevant US-restricted Issuers) are subject to significantly more onerous restrictions and procedures under US securities laws than other issuers undertaking non-US offerings.
In order to meet the post-issue policing requirements of Regulation S or other applicable exemptions under the US Securities Act of 1933 (as amended), Relevant US-restricted Issuers have historically issued their securities in certificated form and requested a derogation from AIM Rule 36 to allow such securities to settle outside of CREST. While this derogation helped to address the US securities post-issue restrictions element, the effect has been longer settlement periods, which can adversely affect the liquidity and trading prices of the Relevant US-restricted Issuers' securities and make a UK listing less attractive to Relevant US-restricted Issuers.
So what's changed?
The introduction of the EU regulation on Central Securities Depositories (CSD Regulation) has required the current practice to change. Since January 2015, all transactions in transferable securities that take place on a trading venue (including AIM) are required to be settled electronically (Article 3(2) of the CSD Regulation). This requirement applies irrespective of whether the security is eligible for electronic settlement or not and regardless of the issuer's jurisdiction of incorporation. Accordingly, the London Stock Exchange and Euroclear have been working together to provide Relevant US-restricted Issuers with access to full electronic settlement in CREST.
This new electronic settlement service, established as a set of procedures published in Euroclear's 'whitebook' and finalised in AIM Notice 41, is intended to facilitate compliance with both the CSD Regulation as well as Regulation S requirements. As a result, the London Stock Exchange will no longer grant derogations from AIM Rule 36 (settlement) for securities of Relevant US-restricted Issuers, as such securities will now be eligible for electronic settlement within CREST.
A positive outcome?
From 1 September 2015 securities in Relevant US-restricted Issuers should be eligible for electronic settlement and consequential changes have been made to the AIM admission application form to reflect this. The AIM guidance also reminds new AIM applicants that propose to issue Regulation S, Category 3 securities to request derogations from Rule 32 of the AIM Rules (transferability of shares) prior to admission. It also asks the applicants to clearly disclose on the application form that they are Regulation S, Category 3 securities, as they will be identified as such on the trading system with the letters "REG S".
There is currently no definitive guidance on this from the US Securities and Exchange Commission and so careful thought will still need to be given on how best to manage US securities law risks. However, the changes made to electronic settlement will clearly benefit Relevant US-restricted Issuers, allowing for potentially greater liquidity on the Regulation S, Category 3 securities from the outset. Undoubtedly, they will also make a UK listing a more attractive option.