Easier access to capital under the new SEC rules

After public consultations for approximately five years, the Securities and Exchange Commission (SEC) has approved certain amendments to the implementing rules and regulations of the Securities Regulation Code (SRC Rules).

There are several amendments, but this column will focus on provisions seen to enhance the ability of companies to raise funds from the domestic market. The amendments are important in light of the Asean integration, which demands that our companies be given easier access to capital for them to stay competitive. These also respond to the need for inclusive growth because providing our companies easier access to capital will  empower  them to create more  jobs, thereby enabling  our people  to enjoy the fruits of economic progress.

Among the salient features  of the new rules relating to capital raising are:

Shelf registration.  This is a type of registration, sometimes called as shelf offering, that allows companies to raise capital from the public without a separate registration for each act of offering. Instead, there is a single registration for multiple, undefined future offerings. The  registration statement may be used to offer securities for up to several years after its publication.

Unlike in the 2003 SRC Rules, the amendments expressly provide that securities may be registered for an offering to be made on a continuous or delayed basis in the future, for a period not exceeding three years from the effective date of the registration statement under which they are being offered and sold.

No new registration  statement is required for the subsequent public offerings.  Instead, the new rules merely  require disclosure of any subsequent sale at least seven business days before the sale of each subsequent tranche.

This is not to say that the 2003 SRC Rules  did not authorize the sale of securities that remained unsold after the termination of the offering period under a registration statement.  The 2003  SRC Rules only mandated the filing of an updated registration statement which, of course, required some time to prepare and get approval for from the SEC.  The practical effect of the old requirement was that our companies could not readily take advantage of favorable market conditions,  or what is called the market window, because of the cumbersome registration process required under the old rules.

Extension of the period to sell securities. The new rules extend the period to sell securities subject of a registration statement  from two to 10 business days from  the effectivity date of the registration statement. The extended period  enables  our companies more time to raise capital from the public.

Ratings for commercial papers.  The new rules removed the distinction between long-term and short-term commercial papers.  A commercial paper is now simply defined as evidence of indebtedness of any person, and with a maturity of 365  days or less. Raising capital through the sale of commercial paper is  made easier with the requirement of an issuer rating instead of a separate rating for each issuance.

Exempt securities. The 2015 SRC Rules introduced a new category of exempt securities. These are securities that are issued or guaranteed by multilateral financial entities (MFEs) established through a treaty or binding agreement with the Philippines.

This means the list of exempt securities is not fixed.  The Securities Regulation Code (SRC) empowers  the SEC to add to the list.  However,  adding to the current list may be done only by rule or regulation, which can be issued only after public hearing. In other words, any addition to the list should be done across the board or on a wholesale basis, not case-by-case.

Exempt transactions.  The 2015 SRC Rules further liberalize the environment for capital raising by expanding the  list of exempt transactions.  Public offerings that have a limited character are now  exempt from registration. Such offerings will be exempt as long as the covered securities are available only to the parties or persons named in the application for exemption for a specified period. An example of this is an employee stock option plan (ESOP) issued by a corporation to its employees.

Likewise, the 2015 SRC Rules have relaxed the requirements for qualified buyers under the provisions on exempt transactions.  The new rules seek to do this by reducing the annual gross income requirement for  individuals from P25 million to P10 million. For juridical persons, the new rules remove the two-year requirement for them to have gross assets of at least P100 million.  Likewise, the new rules no longer mandate the submission of income tax returns for registration as a qualified buyer. Any verifiable document may now be submitted to prove financial capacity.  Lastly, the validity of registration as qualified buyer has been extended to three years.

The effect of the relaxation of the rules is to expand the market in which securities can be sold without need of registration, thereby making access to capital easier for our companies.

Firm Underwriting.  Underwriters are no longer required to underwrite securities solely on a firm commitment basis, which made the cost of  raising capital quite expensive in the past. They can agree on a different plan of distribution, but subject to the approval of the S                                                                                           EC. However, issuers of registered securities, except issuers of proprietary/non-proprietary membership certificates or shares, are still required to enter into an underwriting agreement with an investment bank or investment house.

Financial statements.  One practical problem that companies often encounter in their capital raising activity  is the 135-day rule, which mandated that the offering must take place within 135 days from the end of the fiscal period subject of the financial audit. Sometimes, market developments occurring within the period turn out to be unfavorable, ending in the company failing to raise the needed money.  There are also times when the offering cannot take place within the 135-day period for reasons beyond the control of the company.  Postponing the activity was quite expensive as it  required a new audit.

In line with the new policy to liberalize the environment for capital raising, the  SEC  has adopted a policy to extend the effectivity of financial statements to 180 days from 135 days. This will  align the country’s accounting rules with the Asean standards. The new policy will be formalized as part of the amended SRC Rule 68. In the meantime, companies can avail of this extension by filing a request for relief with the SEC.

Conclusion.  What is admirable about the new rules is that while they liberalize the environment for capital raising, they do not  do so at the expense of  investor protection.  These will be discussed on this column in the future.

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(The author is a senior partner of the ACCRA Law Offices and the president of the Shareholders’ Association of the Philippines (SharePHIL). The views in this column are exclusively his. He may be contacted at [email protected].)