Mello Jones & Martin · Barristers and Attorneys

Private Placement Exemption

Brenda Lehmann · October 6th, 2006

Prospectus Requirements for a Bermudian "Exempted" Company Offering Securities

This article is intended to provide a synopsis of the regulatory issues that need to be considered when an “exempted” company in Bermuda wants to offer securities to the public and, in particular, to sophisticated investors. While there is no specific “private placement exemption” in Bermuda, this article addresses the applicability of the concept of a private placement exemption to the filing of a prospectus in Bermuda. It is intended to provide general information only and does not constitute legal advice in respect of any specific fact, situation or set of circumstances.

The Companies Act

The key piece of legislation which will have an impact on an exempted company (described below) wishing to offer shares to the public is the Companies Act 1981, as amended, (the “Companies Act”). The Companies Act describes the various types of companies which can be incorporated in Bermuda and establishes when a prospectus must be filed (and what such prospectus must contain) when a company offers securities to the public.

What is an Exempted Company?

The Companies Act makes a distinction between “local” companies and “exempted” companies. A local company is a company which is not an exempted company and must comply with certain requirements including:

  1. being controlled by Bermudians
  2. having a minimum of 60% of the shares being owned by Bermudians; and
  3. having a minimum of 60% of the directors of the Company being Bermudian.

A local company usually carries on most of its business “on shore” or “domestically” in Bermuda and would include such operations as hotels, restaurants and shops.

Exempted companies do not have to meet the same requirements with respect to Bermudian ownership and control (hence the term “exempted”). However, as a result, there are certain businesses which exempted companies are not permitted to carry on. They cannot own land or carry on a retail business and they cannot, without a licence, carry on business in Bermuda except pursuant to Section 129 of the Companies Act.

Section 129 stipulates that an exempted company is permitted to carry on various business activities, including the following:

  1. business with persons outside Bermuda and effecting and concluding contracts in Bermuda, with parties in or outside Bermuda, for that purpose;
  2. dealing in securities (with some limitation where the interests are in mutual fund, units, trusts etc.); and
  3. offering goods or services electronically from a place of business in Bermuda or through the internet or other service provider located in Bermuda. The majority of companies set up by “offshore” parties are exempted companies.

Prospectus Requirements

Section 26 of the Companies Act sets out the prospectus requirements that a company must comply with if it wishes to offer securities to the public. Pursuant to s.26, no company can offer shares to the public unless it publishes a prospectus signed by all of the directors of the company and files the prospectus with the Registrar.

However, an invitation to purchase securities will not be treated as made to the public if, in the case of an exempted company, the offer is made in writing by an officer of the company (sanctioned by the Board of Directors) to 35 persons or less or to persons whose ordinary business involves the acquisition, disposition or holding of shares whether as principle or agent.

If the offering is being made to the public it will not be necessary to publish and file a prospectus if:

  1. the shares are listed on an appointed stock exchange and the rules of the stock exchange do not require the company to publish a prospectus; or
  2. the company is subject to the rules and regulations of a competent regulatory and such rules and regulations do not require a company to publish a prospectus (other than by reason of the offering being made to residents who are completely outside the jurisdiction).

The Appendix lists the appointed stock exchanges and competent regulatory authorities currently in effect in Bermuda.[1]

Finally, if a prospectus has been accepted by an appointed stock exchange or competent regulatory authority, the form of such prospectus will be sufficient for filing in Bermuda.

Bermuda Monetary Authority

As indicated above, a company will not be required to publish and file a prospectus if the shares which are being offered to the public are listed on an appointed stock exchange or if the company is subject to the rules and regulations of a competent regulatory authority provided that the rules and regulations of the stock exchange or competent regulatory authority, as applicable, do not require the filing of a prospectus. However, if a Bermuda “exempted” company wishes to list its shares on a appointed stock exchange it will be necessary to obtain the consent of the Bermuda Monetary Authority (the “BMA”) to the listing of the shares. In addition, if there is an offering to the public, the BMA must provides its consent to the issuing of the shares of the company. This will mean that any documentation which is filed with the competent regulatory authority, or produced for purposes of the competent regulatory authority, will likely be required by the BMA. These requirements do not result in a company having to file a prospectus, but a company should be aware that it will have to deal with the BMA to obtain such consents and the BMA can request such information as it desires in making its decision about whether or not to provide its consent. Generally speaking this does not pose a problem but it is one of the steps which must be taken in connection with the listing of shares or making an offering to the public.

Investment Business Act

One other piece of legislation which anyone who is doing business in or from Bermuda should be aware of is the Investment Business Act 1998 (the “IBA”). It was brought into force on January 1st, 2000. The IBA introduces a regime for the registration and licensing of persons who carry on investment business in, or from within, Bermuda. “Investment business” is broadly defined and would include dealing in securities, arranging deals in securities, managing securities and providing investment advice.

Certain activities are excluded from the definition of “investment business”. Issuing one’s own securities (i.e. by way of a public offering) is excluded from the application of the IBA. However, the underwriter of any public offering could be caught by the provisions of the IBA. Accordingly, if the underwriter is located in Bermuda and offers securities to parties outside of Bermuda, they may have to be licensed. In addition, if the underwriter is outside Bermuda but offers securities to parties in Bermuda, they may also have to be licensed.

Whether or not the IBA will apply to a particular entity or transaction is fact specific. A company should address any issues raised by the IBA early in the structuring process.

fn1. Appendix

Stock Exchanges appointed by the Companies Act

  • Alberta Stock Exchange
  • American Stock Exchange
  • Australian Stock Exchange
  • Bermuda Stock Exchange
  • Boston Stock Exchange
  • Canadian Dealing Network
  • Canadian Venture Exchange
  • European Association of Security Dealers
  • Frankfurt Stock Exchange
  • Hong Kong Stock Exchange
  • Irish Stock Exchange
  • Johannesburg Stock Exchange
  • Kuala Lumpur Stock Exchange
  • London Stock Exchange
  • London Stock Exchange – Alternative Investment Market (AIM)
  • Luxembourg Stock Exchange
  • Montreal Stock Exchange
  • National Association of Securities Dealers Automated Quotation System (NASDAQ)
  • New York Stock Exchange
  • New Zealand Stock Exchange
  • Oslo Stock Exchange
  • Paris Bourse
  • Shanghai Stock Exchange
  • Singapore Stock Exchange
  • Stockholm Stock Exchange
  • Swiss Stock Exchange
  • Tokyo Stock Exchange
  • Toronto Stock Exchange
  • Vancouver Stock Exchange
  • Viennese Stock Exchange

Competent Regulatory Authorities

  • Austrian Federal Ministry of Finance
  • Bermuda Monetary Authority
  • Hong Kong Securities and Futures Commission
  • Luxembourg Commissariat aux Bourses
  • Ontario Securities Commission
  • Swedish Financial Supervisory Authority
  • U.S. Securities & Exchange Commission