Joe Truelove (pictured), Head of Fund Services at Carey Group explores the uses of offshore stock exchanges, such as the Channel Islands Securities Exchange…
The key reasons for listing a company on an offshore stock exchange are in principle the same as those of listing a company on an onshore exchange – to raise capital or to give existing shareholders an opportunity to sell their shares to unknown third parties in a transparent manner.
Both the Channel Islands Securities Exchange (CISE) and the Cayman Stock Exchange (CSX) are exchanges recognised by HMRC. Under the Individual Savings Account (ISA) rules, investors are permitted to invest in securities listed on a recognised exchange and therefore both CISE and CSX listings of securities make them eligible investments for those investors.
Some jurisdictions have in place restrictions whereby residents are only able to invest in instruments which are listed on a recognised exchange. A number of investment funds in particular have utilised CISE or CSX listings at the request of investors in order to overcome these restrictions, allowing investors from these countries the ability to invest, thereby increasing the pool of potential investors.
The internationally-recognised levels of regulation that each exchange has and the requirements they place on their listed issuers in terms of notifications and other requirements provide investors with some comfort that listed issuers (and their directors) are conducting their affairs to high standards of corporate governance and transparency.
Traditionally debt listings have been attracted to listing on the CISE largely to take advantage of the quoted Eurobond exemption, a scheme introduced by the UK Government to stimulate capital investment into the UK economy. We are also seeing new debt investment structures being listed to enable sophisticated investors to hold these assets in products such as ISAs.
What sorts of securities are listed on the exchanges?
A wide variety of entities seek to list their securities on offshore exchanges. Both debt and equity instruments can be listed and these relate to investment funds and normal trading companies as well as specialist companies which are involved in mining. The CISE has a number of local trading companies listed on it. Mining or extractive industries is a growth area and while many funds are also listed the bulk of listings on the CISE in particular are debt and debt structure. Unlike other exchanges limited partnership interests and units in unit trusts can also be listed on the CISE.
How does that differ with onshore exchanges?
The key difference perhaps between onshore and offshore exchanges is the cost of a listing and the time required to make an application. This is the key driver behind the popularity of offshore exchanges.
One criticism of offshore exchanges is that there is limited liquidity in the market – there is not a ready market to buy and sell shares. This is clearly an area which exchanges are seeking to improve.
How popular is CISE and how many securities listed on CISE are actively traded?
CISE has admitted more than 5,000 securities since inception, of which fewer than 50 are actively traded on the CISE. The CISE website states that there were GBP76 million of trades during 2013. The CISE has only three market makers but is keen to encourage more.
If there is hardly any liquidity available on the offshore exchanges, why are so many securities listed on them?
In some cases there is no need for liquidity and this is not the primary purpose of the listing. These are referred to as technical listings.
Why would anyone bother with a technical listing?
With respect to a debt listing this will be to take advantage of the Eurobond exemption. This allows a company owning the debt of another company to set off the interest paid in respect of that debt as a tax-deductible interest payment. The practice was covered extensively by the Independent newspaper in the autumn of 2013, with a series of articles aimed at exposing companies which appeared to be legally avoiding tax in this way.
In the case of debt listings and debt structures, there has also been a recent drive for them to be listed by investors wishing to hold the security in their ISA, and for this to happen, that security is required to be listed on a recognised exchange such as the CISE.
What does it cost to list a security on either exchange?
Fees for listing a security are extremely competitive, irrespective of the exchange, but vary depending upon the type of security being listed. Our fees as listing sponsor also vary depending upon the complexity of the listing. Expect the upfront fees of a listing to be between GBP10,000 and GBP20,000, including sponsor fees and exchange listing fees. Annual fees are also extremely competitive. Issuers can expect to pay between GBP5,000 and GBP20,000 per annum to cover listing sponsor and the exchange fees in most circumstances.
The CISE has flat rate fees that are not based on market capitalisation, making them very easy to account and budget for as you can easily calculate the fees due over the life of a listing.
From a listing sponsor’s perspective the work levels are driven by the volumes of announcements and changes to the listing which can include issues of further shares, additional classes of shares, share buy backs, trading in shares by directors of the fund or company, dividend announcements and the publication of net asset valuations (which can be up to daily in frequency).
What are the requirements to achieve an offshore listing – preliminary due diligence and continuing obligations?
It is a pretty straightforward process. Due diligence is required for all clients and we as sponsor need to review the documents and provide guidance with respect to whether the security can be listed.
The CISE, in obtaining its international recognitions, have in place prescribed minimum listing requirements which must be met, along with suitable and robust continuing obligations regimes to ensure transparency and make sure that market data and information is available to investors and the public. Its listing rules are similar in composition and requirements to the old LSE Yellow Book.
What do you get for your money?
Listing a security can assist with the marketability of that security. The listing rules need to be followed and announcements made which will give investors additional comfort that they have access to pertinent information.
Potential investors can find information about the security through the fact that this information is published on a public website increasing levels of transparency, which is a greater and greater requirement by investors in today’s markets.
Listing on an offshore exchange can be regarded as a cost-effective forerunner of an onshore listing. The CISE provides cost-effective listings on a recognised exchange
Joe Truelove is Head of Fund Services at Carey Group.
An original version of this article was published in Business Brief, January 2015.
