/ Chilean securities regulator proposes radical changes to rules on exempted public offerings and private placements. Or does it?16 October, 2020
This is an opportunity to address the shortcomings of the current regulations. The comment period ends on October 30, 2020.
On October 5, the Chilean securities regulator (Comisión para el Mercado Financiero, “CMF”) published for comment a draft regulation amending the private placement regulation (NCG N° 336) and the regulation on offers that are exempt from registration (NCG N° 345).
NCG 336, which dates back to 2012 was a welcome development in terms of providing written guidance for both domestic and foreign issuers and distributors in relation to what would not qualify as public offers and would therefore not require that the relevant securities (be it investment fund shares, shares of companies listed abroad, bonds, etc) to be registered with the CMF.
However, NCG 336 has its shortcomings many of which are apparently being radically addressed. Not directly, but indirectly.
These past eight years of experience in the application of NCG 336 has helped the CMF understand that there should be a greater degree of flexibility in relation to placements being made with so called Qualified Investors.
One of the shortcomings of the current NCG 336 is that the required disclosure legend to be introduced in the relevant marketing materials is too rigid and prescriptive. Indeed, the legend, apart from having to be in Spanish (which is awkward in an English language prospectus) requires that the commencement date of the offering be stated. This creates difficulties particularly in the case of products such as mutual funds whose prospectuses have dates that change from time to time and contain multiple share classes that are not all created at the same time and, therefore, do not have the same offering commencement date.
Another criticism to NCG 336 has related to the use of minimum unit values of the relevant security as a parameter to consider an offering as a private placement, instead of exempting offerings that have minimum subscription requirements.
The use of websites is also a matter that needs to be clarified. Indeed, an offering is not considered public under the current rules if the website in which the marketing materials are contained is a “restricted access” website. It is clear that restricted access would include password protected websites. However, the CMF has not clarified whether this would also include websites that have click through questions relating to, for example the nature of the investor (i.e. whether the investor is a qualified investor, etc). This would be more in line with international standards.
While the current proposal does not address any of these issues directly and leaves the specific regulations on these matters untouched in NCG 336, it might be doing so practice because of the proposed amendment to a separate rule (NCG 345) which refers to offerings which are exempt from registration.
Indeed, the CMF proposes to introduce several new cases of exempt offerings, one of which is offerings of securities that may only be acquired by Qualified Investors, as defined in the rules.
In relation to these exempt offerings the only requirements are to provide a non-prescriptive disclosure legend in the sense that the securities are not registered, are not subject to the supervision of the CMF and may not be publicly offered; and to obtain an investor representation in the sense that the investor is a Qualified Investor.
However, the proposed rule does not clarify in what circumstances the offer to Qualified Investors may be made and whether or not counting rules will continue to apply to certain types of Qualified Investors. In fact the proposed rule blurs the exemption by requiring specifically that the disclosure legend state that the securities may not be publicly offered. Does this mean that the offer still has to be made under NCG 336 with all its shortcomings?
Another pending matter to be resolved, is that there is no clarity as to how these rules relate to permitted activities of local broker/dealers and whether these rules would allow to distribute foreign securities without having to fully comply with the regulation on mandates to purchase foreign securities (Circular 1046), among which is the requirement that the foreign issuer be registered. This is fine for shares of foreign listed companies, but not adequate for the subscription of shares or interests in foreign private equity funds.
A second case of exempt offering being introduced refers to offers that are limited to UF 10,000 (approx. US$ 350 thousand) in a twelve-month period.
The purpose of this second type of exempted offering is to provide alternative sources of funding for small and medium sized businesses and is in line with efforts made by the CMF to create an adequate regulatory environment for crowdfunding.
The deadline to submit comments to the CMF expires on October 30, 2020.
If you need further information, please do hesitate to reach out to a member of our capital markets team.