Small and medium sized enterprises (SMEs) are a key aspect of the UAE’s economy helping drive growth and diversification. Several initiatives, including accelerator programmes, incubators and a multitude of free zones geared towards promoting the success of SMEs, have been introduced in the UAE, both privately and with the support of governmental bodies, to create a platform for SMEs to thrive.
For larger businesses, accessing capital markets via an initial public offering (an “IPO”) can be a compelling option. As well as raising capital from investors, a listing increases a business’ ability to raise debt finance (as banks become more comfortable with the increased corporate governance and transparency profile of the group) and boosts a business’ profile with customers and suppliers on an international stage. However, an IPO is expensive (in terms of cash and management attention) and time consuming, meaning it is often only a worthwhile endeavour if the business is seeking to raise a significant amount of equity.
For SMEs, the growth capital they may be seeking (or able to raise) is likely to be more modest than larger businesses, which has resulted in an IPO generally being prohibitively expensive for this important part of the economy.
In the Dubai International Financial Centre Freezone (the “DIFC”), capital markets are regulated by the Dubai Financial Services Authority (the “DFSA”). The DFSA and Nasdaq Dubai – the equity-focussed authorised market institution approved and regulated by the DFSA - have recognised this issue and have launched a new segment on Nasdaq Dubai called the Growth Market aimed specifically towards the SME market.
The new Growth Market
In November 2019, the DFSA launched Consultation Paper 129 to gather feedback on its proposal to facilitate access to capital markets for SMEs. The idea was to reduce costs and the burden of some of the listing criteria which often dissuaded SMEs from pursuing an IPO, taking into account the approach taken in other similar markets (such as AIM in the UK and Nomu in Saudi Arabia).
As a result, on 1 April 2020 the DFSA announced changes to its Markets Rules Module of its Rulebook (introduced by DFSA Rule Making Instrument 273/2020) (the “Markets Rules”) creating the legislative framework for the new SME segment to be launched by Nasdaq Dubai. As part of the Dubai Future District Initiatives, on 27 October 2020 the Crown Prince of Dubai, His Highness Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum, announced the new segment; Nasdaq Dubai Growth Market, which will run in parallel to their existing primary Main Market. Nasdaq Dubai expects the first IPOs in early 2021. The aim is for the new Growth Market to act as a stepping stone for SMEs to grow and eventually passport onto the Main Market.
Who is it for and what are the main changes?
The Growth Market is open to SMEs based anywhere in the world, not just those in the UAE. There is also no particular preference in terms of how the companies should be structured, provided the listing vehicle is incorporated in a reputable jurisdiction and has the ability to ensure some of the Growth Market/DFSA requirements can be met (see below regarding lock-in, for example).
A company will be regarded as an SME for DFSA’s purposes, and would therefore qualify for the relaxation of rules under the Markets Rules, if its market capitalisation is below $250 million on application for listing and thereafter. However, when the SME’s market capitalisation reaches USD 500 million for a period of at least 90 days, it is no longer regarded as an SME and will be required to comply with the full requirements of the Main Market, and can then passport to the Main Market.
Accommodating SMEs in the Growth Market has involved the DFSA finding a balance between providing proportionate regulatory standards suitable for smaller companies whilst also maintaining adequate protective provisions to maintain the integrity of the market and attract new investors. The key changes to the listing regime for SMEs include:
No minimum capitalisation or number of shareholders - there is no minimum market capitalisation or minimum number of shareholders for SMEs on the Growth Market, although there is an expectation of a minimum 25% free float for both markets;
Compliance advisor – an SME does not need to appoint an investment bank as its sponsor for the IPO. Now they must appoint a Compliance Advisor. Compliance advisors are not required to make a sponsor declaration and can be, for example, corporate advisory firms, accountants, lawyers or individuals with sufficient experience of IPOs or financial markets to satisfy the DFSA’s requirements. This gives a greater choice and reduces the issuer’s costs. The Compliance Advisor must remain appointed for a period of three years after listing, and should be engaged to assist the company to comply with its ongoing obligations as a listed entity;
Shorter financial track record is accepted – the Growth Market listing requirements only prescribe a one-year track record instead of a requirement to provide three years financial trading records for entry to the Main Market. This aims to attract younger companies expanding rapidly with an intention to IPO early in their lifespan, and/or research and development companies that need funds quickly to bring their product to market. For companies established for longer than one year, audited accounts will be accepted for a period of up to three years using IFRS or equivalent reporting standards;
Lock-in for existing shareholders – unlike the Main Market where no lock-in provisions are required, the DFSA requires all existing shareholders of the SME at the time of listing to be locked in for at least a one-year period. This aims to instil confidence and protect new investors by keeping key employees and the management team invested in the SME;
Buy-back restriction – a restriction has been introduced to prohibit a SME from repurchasing its own shares within the first two years of listing on the Growth Market. The intention is that this will ensure capital is protected to grow the SME and align the interests of both existing and new investors. If the SME has a legitimate need to repurchase its own shares however, the DFSA will consider providing consent with 75% of shareholders’ approval (rather than the 50% threshold that currently exists on the Main Market); and
Reduced costs – listing fees of $15,000 and ongoing annual fees of $20,000 payable to Nasdaq Dubai and DFSA.
SMEs looking to list on the Growth Market will still be required to comply with the existing reporting requirements, international standard corporate governance checks and prospectus content requirements as members looking to list on the Main Market. Although the strict requirements as to the items that must be included in the prospectus have not been relaxed for SMEs, it is expected that the DFSA will take a pragmatic view to accommodate younger SMEs, which may not have the information required to be presented. Again, this should reduce advisory fees and lower the total cost of listing on the Growth Market.
These recent DFSA changes and the launch of the Growth Market offer SMEs an exciting opportunity to IPO more efficiently and gain access to capital in a cost-effective manner that otherwise would have been restricted in their growth due to the existing rigid listing requirements.
If you have any questions or are interested in discussing the possibility of accessing Middle Eastern investors in a more relaxed regulatory environment as an SME or otherwise, please contact: