In recent years, Bermuda has become known as ‘the world’s risk capital’. It is now the third-largest insurance market in the world behind New York and London, and the largest offshore insurance market. The past 12 months have seen particularly strong listing activity for the Bermuda initial public offerings (IPO) market, primarily due to the number of insurance linked securities (ILS) listings and international debt listings, which remain strong following the success of 2016 and continue to ensure that Bermuda remains a market-leading capital markets jurisdiction. Figures recently published by the Bermuda Stock Exchange (BSX) confirm 103 new ILS listings in 2017 with a combined nominal value of US$11.54 billion (up from US$6.157 billion in 2016), and 55 per cent growth from 2016 in international debt listings, which were up from 116 to 180 listed securities.2
Both the BSX and the Bermuda Monetary Authority (BMA), the insurance regulator of Bermuda, have played an instrumental role in Bermuda’s acceleration to the forefront of the world’s insurance arena. The BSX was one of the first stock exchanges in the world to introduce specific listing regulations for insurance securitisation, which have been enhanced by the BMA’s introduction of a new designation of insurer, the ‘special purpose insurer’, with its own set of streamlined regulations to speed up the process of setting up an ILS issuer in Bermuda.
This chapter aims to act as a guide to the IPO process on the BSX. It is, however, worth mentioning the significant role that Bermuda companies play in the structuring of IPOs on stock exchanges around the globe. By the third quarter of 2017, the market capitalisation of Bermuda companies listed on the New York Stock Exchange (NYSE) and Nasdaq was US$247 billion, up from US$224 billion in the third quarter of 2016. The total number of Bermuda companies listed on the NYSE and Nasdaq exchanges was 63 at the end of 2017, with significant deal activity being conducted throughout the year, raising US$2.8 billion of capital.3
Bermuda, as a jurisdiction for the incorporation of a listing vehicle, offers many benefits for international companies: tax neutrality, sensible and proportionate regulation, a legal system based on the English legal system (which is widely understood and trusted by the business community) and flexibility in its ability to adapt and dovetail to the requirements of onshore jurisdictions.
II GOVERNING RULES
i Main stock exchanges
The BSX was established in 1971. It was initially set up to handle domestic equity trading. As a consequence of Bermuda’s rapid expansion as a leading offshore financial jurisdiction, the BSX was eventually restructured to allow for both domestic and international trading. It is now the world’s leading fully electronic offshore securities exchange, hosting over 750 listed issuers4 with an aggregate market capitalisation of US$432.1 billion,5 trading most types of debt and equity securities, collective investment vehicles, depositary receipts, insurance-related products and derivative warrants. The BSX’s rapid growth since inception can be attributed to its ability to provide innovative and commercial solutions, tailored to the needs of those wanting to list and do business in the jurisdiction. A key example of this is speed to market, where the BSX is able to complete many types of listings in as little as two weeks once due diligence and key documentation has been finalised.
The BSX, recognised as a designated offshore securities market by the US Securities and Exchange Commission, is a full member of the World Federation of Exchanges and an affiliate member of the International Organization of Securities Commissions. It is located in a member nation of the Organisation of Economic Co-operation and Development and also enjoys international recognition by a number of regulatory bodies, including as:
- a registered organisation by the London Stock Exchange (LSE);
- a designated investment exchange by the UK Financial Conduct Authority;
- a recognised stock exchange by UK HM Revenue and Customs resulting in withholding tax benefits for certain types of investors;
- a recognised investment exchange and approved stock exchange by the BMA;
- an approved stock exchange by the Australian Foreign Investment Funds Taxation Rules;
- a designated stock exchange for the purposes of the Canadian Income Tax Act; and
- a member of Americas Central Securities Depositary Association in Peru.
Trading on the BSX is executed through the BSX’s electronic trading, settlement and depositary X-stream trading platform licensed by Nasdaq OMX. The fully automated system is based on a central limit order book model that allows for the trading of both equity and fixed-income securities, and is designed to support the secondary market trading and settlement of sophisticated listed securities. Trade information on all listed securities is disseminated worldwide via Bloomberg and is available on the BSX website (www.bsx.com) with the aim of encouraging investor confidence through transparency and disclosure.
The BSX is now a leading market for the listing of investment funds and ILS, including catastrophe bonds, enhanced by the BMA’s creation of the ‘special purpose insurer’ (SPI), which can be quickly set up and licensed to issue ILS. Known for its innovative approach to insurance solutions, Bermuda has become home to over 165 SPIs since 2010.6 By the end of 2017, BSX listings of ILS reached 227 (up from 175 in the previous year), with a market capitalisation of US$25.99 billion,7 accounting for over 75 per cent of the global market capitalisation of ILS.
In addition to its appeal for funds and ILS structures, the BSX attracts early-stage growth companies who are able to take advantage of the BSX’s Mezzanine Market (discussed further in Section II.ii), small to medium capitalisation companies and companies looking for an alternative to the Alternative Investment Market (AIM), Nasdaq or the LSE because they are smaller and cannot justify the higher costs of listing on those exchanges.
The BSX also has a streamlined process for facilitating secondary listings of securities that are already listed on one or more of the other recognised stock exchanges,8 such that a secondary listing can generally be completed within a very compressed time frame. The NYSE, Nasdaq, LSE and Hong Kong Stock Exchange are popular exchanges for companies considering a dual listing with the BSX. The NYSE and BSX are both home to the holding companies of various insurance groups including Aspen, Blue Capital and XL Group, while both the LSE and BSX provide listings for the securities of Jardine Matheson, Lancashire and Mandarin Oriental (among others). Most recently, in September 2016, the Bank of NT Butterfield & Son Limited, Bermuda’s largest independent bank, completed its US$287.5 million IPO on the NYSE, while retaining its listing on the BSX.
The number of international issuers listed on the BSX far outweighs the number of domestic issuers. This is not surprising given the size of the island, and the fact that Bermuda-exempted companies are considered international issuers rather than domestic issuers for the purposes of the BSX’s Listing Regulations.9
ii Overview of listing requirements
The principal function of the BSX is to provide a fair, orderly and efficient market for the trading of securities issued by both domestic and international issuers. In furtherance of this objective, the requirements for listing on the BSX and the continuing obligations of issuers are set out in the BSX Listing Regulations (2002) and Practice Notes issued by the BSX (the Listing Regulations). The BSX highlights that compliance with the Listing Regulations will not in itself guarantee that an application for listing will be successful as the BSX retains a discretion over whether to accept or reject an application. Prospective issuers and their sponsors are therefore encouraged to contact the BSX as early as possible during the listing process to seek informal and confidential guidance about an applicant’s suitability for listing.10
The conditions for listing on the BSX vary depending on the type of issuer and the type of security being listed. Section I of the Listing Regulations applies to all issuers, both domestic and international. The other Sections apply to specific types of issuers, products or securities. For example, Sections IIA, IIB and IIC apply to domestic issuers (Section IIA to main board equity securities, Section IIB to small cap stocks and Section IIC to debt securities); Sections IIIA, IIIB and IIIC apply to international issuers (Section IIIA to a main board listing of equity securities, Section IIIB to a listing of debt securities and Section IIIC to depositary receipts); and Sections IV, V and VI apply to all issuers (Section IV to investment funds (collective investment schemes), Section V to ILS and Section VI to derivative warrants). Each section has its own appendices, which explain the various product-specific standard forms, disclosure requirements and BSX listing fees.
A company can achieve a listing of its securities on the BSX through any of the following methods:11
- offer for subscription: an offer for subscription is an offer to the public by an issuer of securities for subscription;
- offer for sale: an offer for sale is an offer to the public by or on behalf of the holders or allottees of securities already in issue or agreed to be subscribed;
- placing: a placing is the obtaining of subscriptions for or the sale of securities by an issuer or its intermediary from or to persons selected or approved by the issuer or its intermediary, other than by way of an offer to the public;
- rights issue: a rights issue is an offer by way of rights to existing holders of listed securities that enables those holders to subscribe for further securities in proportion to their existing holdings;
- capitalisation issue: a capitalisation issue (or bonus issue) is an allotment of further securities to existing holders, credited as fully paid up out of the issuer’s profits or reserves, in proportion to their existing holdings without any monetary payment;
- introduction: an introduction is the grant of a listing for existing securities that are already issued; and
- g other methods: securities may also be brought to listing on the BSX by the issue of securities through:
• the exercise of options, warrants or similar rights to subscribe for or purchase securities where the grant of the rights was supported by a prospectus and was approved by the BSX;
• the exercise of options granted to or for the benefit of executives or employees of a listed issuer where the grant of options was approved by the BSX;
• a dividend reinvestment plan approved by the BSX to the issuers’ securities holders; and
• such other methods as the BSX may approve from time to time.
Restricted marketing and mezzanine listings
Typically, requirements for a primary listing on the BSX are minimal compared to other exchanges. Instead, the BSX’s approach is to rely on full disclosure rather than prescriptive regulations through its use of restricted marketing conditions, meaning that access to the market is limited to sophisticated investors only.
The Listing Regulations provide12 that an international issuer seeking a primary listing on the BSX will be subject to restricted marketing conditions; in other words, its securities may only be marketed to qualified investors and may only be traded on the BSX between qualified investors, unless the proposed issuer meets certain exemption criteria. This is known as the ‘Mezzanine Market’ or a ‘mezzanine listing’ and is primarily used by growing e-commerce, high-technology and development-stage companies to enable them to list at a much earlier stage than on markets in other jurisdictions.
To qualify for a mezzanine listing it is not necessary for a company to meet the conventional IPO requirements of track record, free float or profitability. Although the Mezzanine Market is not intended to function as a highly liquid market, it does have the added advantage of the credibility that comes with listing on a globally recognised exchange (which is often more attractive to institutional investors than investing in non-listed securities, particularly in jurisdictions where investment in non-listed securities is restricted), and offers issuers full exposure to the international markets.
To be considered a qualified investor for the purpose of the BSX Listing Regulations, the investor must complete an investor suitability declaration in the form prescribed by the BSX and meet the BSX’s minimum investment or suitability criteria as given below.
- a minimum investment of US$100,000;
- a minimum individual net worth (including spouse) of US$1 million; or
- a minimum annual income of US$200,000 (US$300,000 joint income with spouse).
For private corporations and partnerships:
- a minimum investment of US$100,000;
- minimum net assets of US$5 million; or
- all its equity owners or partners are qualified investors.
Certain institutions, including banks, stockbrokers, insurance companies and investment advisers, are automatically considered to be qualified investors.
As mentioned above, it is possible for an issuer to apply for an exemption from the restricted marketing conditions.13 In order for the BSX to grant such an exemption, the issuer would need to:
- demonstrate that it is incorporated in Bermuda as an exempted company pursuant to the Companies Act 1981;
- demonstrate that at least two of its directors are resident in Bermuda;
- agree to comply with the issuer’s continuing obligations set out in the Listing Regulations; and
- agree to forward to the BSX, its members and other holders of its listed securities all financial information required to be prepared and disseminated by the company as if it were a full reporting foreign issuer, pursuant to the Securities and Exchange Commission’s rules in the US or an equivalent standard acceptable to the BSX.
In addition, while not stated in the Listing Regulations, the BSX Listing Committee would typically expect a company applying for an exemption from restricted marketing to have a BSX market capitalisation of not less than US$25 million.
Listings of other products and vehicles are also subject to restricted marketing between qualified investors, including ILS and investment funds.
iii Overview of law and regulations
The listing criteria and IPO process in Bermuda are governed by the Listing Regulations. In addition, any issuer incorporated in Bermuda will be subject to the Companies Act 1981 (as amended) (the Companies Act). The Companies Act provides for the incorporation of companies either as local companies or as exempted companies.
A local company is a company that carries on its principal business activities in the local economy and is subject to what is known as the ‘60/40’ ownership rule, which requires that at least 60 per cent of the voting control of the company is held by Bermudians and that a majority of the board of directors are Bermudian.14 An exempted company, on the other hand, is a company that carries on its principal business activities outside of Bermuda (such companies are restricted from carrying on business in Bermuda)15 and can be 100 per cent owned by non-Bermudians. For the purposes of the Listing Regulations, a domestic issuer is a local company and an international issuer includes Bermuda-exempted companies and overseas issuers. The applicable Listing Regulations vary depending on the type of issuer. It is worth noting that in order to encourage foreign direct investment into Bermuda, local companies that are listed on the BSX in certain ‘prescribed industries’, including telecommunications, energy, insurance, hotel operations, banking and international transport, can apply for a waiver of the 60/40 rule.
The Companies Act does not distinguish between a public company and a private company; however, certain provisions of the Companies Act apply only to companies that have their shares listed on appointed stock exchanges.16 Further, the Companies Act does not regulate takeovers of listed companies in Bermuda and there is no takeover regulator or specific takeover code to govern such transactions. If the issuer in question is listed on a stock exchange in another jurisdiction in addition to the BSX and is subject to such regulation in that jurisdiction, then those regulations will govern, but failing that, neither the BSX nor any other government body in Bermuda would be involved in regulating takeover activity of listed Bermuda companies.
Depending on the sector in which the issuer operates, there may be specific industry regulations that apply in addition to the general requirements of the Companies Act and the Listing Regulations. Such sectoral specific regulation is outside of the scope of this chapter; however, given the prominence of ILS and investment fund listings in Bermuda, it should be noted that Bermuda insurance companies and Bermuda investment funds are regulated by the BMA and are subject to sector-specific legislation under the Insurance Act 1978 (and related regulations) and the Investment Funds Act 2006 (as amended), respectively.
Something that may not be familiar to all jurisdictions is the regulation of exchange control in Bermuda. Issues to and transfers of securities in Bermuda companies (both local and exempted) involving non-residents of Bermuda must, pursuant to the Exchange Control Act 1972 and Exchange Control Regulations 1973, receive prior approval of the BMA, except where a general permission has been granted by the BMA. In its Notice to the Public of June 2005 (as amended), the BMA granted various permissions that enable a Bermuda company to issue and transfer shares to and between non-residents without the prior approval of the BMA. One such general permission is for the issue and transfer of equity securities (i.e., voting shares) for as long as such equity securities are listed on an Appointed Stock Exchange. The BSX is an Appointed Stock Exchange for this purpose and a full list of Appointed Stock Exchanges in other jurisdictions can be found on the Registrar of Companies website.17
III THE OFFERING PROCESS
i General overview of the IPO process
The first stage of the IPO process is for the issuer to appoint a sponsor. If the issuer is seeking a primary listing of its shares on the BSX, only a ‘trading member’ of the BSX may act as a sponsor. The BSX maintains an approved list of listing sponsors and trading members on its website. The sponsor is responsible for ensuring that the applicant for listing has been provided with fair and impartial advice and guidance as to the applicability of the Listing Regulations, that all of the necessary documents required to support the application for listing are lodged with the BSX and for communicating with the BSX during the listing process.18 The sponsor must submit a declaration to the BSX before the trading of the issuer’s securities commences.
Once appointed, the sponsor will vet the issuer and ensure that it meets the relevant conditions for listing set out in the Listing Regulations.
The issuer will need to prepare and issue a prospectus,19 the contents of which will vary depending on the type of issue involved (instead of a prospectus the issuer may instead prepare an offering memorandum, offering circular, scheme particulars or equivalent). Once prepared, the prospectus is submitted for review by the BSX to ensure compliance with the Listing Regulations prior to listing. The prospectus must contain information that enables an investor to make an informed assessment of the activities, assets and liabilities, financial position, management and prospects of the company. The Listing Regulations provide guidance on the following prospectus-related matters:
- the standard form of disclaimer;
- general required information about the company, its advisers and the prospectus;
- information required about the relevant securities as well as the terms and conditions of their issue and distribution;
- information about the company’s share capital;
- information about the company’s investments;
- information required about any investment managers or advisers;
- financial information required about the group and its prospects;
- details required about the company’s management;
- particulars about the use of proceeds of the issue and its distribution;
- information required about any material contracts; and
- details about the provision of relevant documents for inspection.
In addition to a prospectus, the company will need to submit an application for listing to the BSX. Although the precise requirements for a listing application will vary depending on the type of security being listed, the general requirements include:20
- a formal letter of application, signed by an officer of the company and the sponsor complying with the requirements of the Listing Regulations; and
- supporting documents, including:
• its certificate of incorporation;
• constitutional documents;
• an audit report and accounts for the past three financial years;
• a certified copy of the board (and, if required, shareholder) resolution authorising the issue and allotment of securities, the making of the application, the signing of the issuer’s undertaking (see below), and approving and authorising the issue of the prospectus;
• an issuer’s undertaking in the form prescribed by the Listing Regulations;
• a declaration signed by each director and proposed director in the form prescribed by the Listing Regulations;
• a copy of any temporary document of title and any definitive document of title to be used in respect of the securities to be listed;
• a certified copy of every material letter, report, statement of adjustments, valuation, contract, resolution and other documents referred to in the prospectus (including a letter from any auditor whose audit report is set out in the prospectus confirming that the auditor has given its consent to the issue of the prospectus with the audit report included); and
• such other documentation as the BSX may require.
The sponsor will prepare the cover letter and assist the issuer in gathering the necessary information for the application for listing. The Listing Regulations advise an issuer to consult with the BSX early in the process as to the suitability of an issuer for listing (and this is even more important if the issuer or the proposed offering is out of the ordinary) to ensure any issues that need to be addressed can be dealt with in advance.
In addition, the issuer must enter into an issuer’s undertaking with the BSX to comply with the continuing obligations imposed by the BSX and it will need to appoint a share registrar or transfer agent in Bermuda.
The issuer will be required to pay a listing fee (and in certain circumstances a new issue levy or subsequent issue fee) calculated on the expected initial market capitalisation of securities to be listed. There is also an annual fee payable, which is calculated on the market value of the securities to be listed.
For secondary listings, the BSX relies mainly on filings already made for the primary exchange, therefore the filing requirements are much less than for a primary listing. The following documents will generally be required:
- the latest annual report and audited financials;
- corporate resolutions authorising the secondary listing;
- a formal letter of application; and
- payment of listing and sponsorship fees.
The BSX undertakes to provide a response to a listing application from its Listing Committee within seven business days of the date of submission of the complete listing application. The BSX seeks to respond within two business days with comments on each draft of the prospectus. In most cases, the entire approval process can be completed within two to three weeks of the date of submission of the complete listing application. Overall, the process is likely to take a minimum of three months to complete (less for ILS and funds listings).
ii Pitfalls and considerations
Industry-specific considerations aside, one of the main considerations for an issuer has to be the restricted marketing conditions that generally apply to listings by international issuers on the BSX. The Mezzanine Market is not intended to operate as a highly liquid market, and, while it does create a mechanism for trading, such trading is restricted to qualified investors, meaning that an issuer’s securities are not free trading in the usual sense. Securities listed on the BSX have therefore been described as more akin to a form of listed private equity rather than a listed security in the traditional sense that is freely tradable between both institutional and retail investors on a wide scale.
IV POST-IPO REQUIREMENTS
Once listed, an issuer must comply with the continuing obligations requirements set out in the Listing Regulations, which vary depending on the issuer and the type of security being listed. The issuer will provide an undertaking to the BSX in this regard as part of its listing application.
Generally, the continuing obligations require that the issuer keep the BSX and holders of its listed securities informed of anything related to the issuer (or the group):
- that is necessary to enable the appraisement of the financial position of the issuer;
- that is necessary to avoid the establishment of a false market in the issuer’s securities; and
- that might reasonably be expected to materially affect market activity in and the value of the issuer’s securities.21
In addition, an issuer must:22
- notify the BSX of its net asset value calculations and of issue and redemption prices whenever they are calculated, and of any percentage change in the next asset value of a fund;
- provide notice of annual general meetings to the BSX (concurrent with notice being sent to all members);
- send audited annual accounts to all members including a report by the directors on its operations and provide 10 copies of the accounts and the directors’ report to the BSX within six months of its financial year end;
- deliver to the BSX any interim financial accounts and preliminary announcements or results;
- e advise the BSX if its securities cease to be listed on another stock exchange or it is the subject of disciplinary action by another stock exchange or regulatory body;
- send to the BSX for review any drafts of proposed amendments to the relevant prospectus and any relevant announcements or advertisements;
- report any decision to declare, recommend or pay any dividend or make any other distribution to investors to the BSX for dissemination at least five business days prior to the record date for the payment of such distribution;
- make arrangements acceptable to the BSX to facilitate the efficient settlement of all trades and registration of transfers of securities;
- keep and maintain a complete file of all relevant advertising and other marketing materials, which must be produced to the BSX at any time on demand;
- adopt by board resolution and enforce an internal code of dealing for directors and executive officers that prescribes their ability to trade on the basis of unpublished price sensitive information; and
- notify the BSX of the happening of any of the specified events listed in the Listing Regulations pertaining to the relevant type of issuer.
While listed, every issuer must appoint authorised representatives or a sponsor to act at all times as the issuer’s principal channel of communication with the BSX. If the issuer elects to appoint authorised representatives, rather than a sponsor, two authorised representatives must be appointed who are both members of the issuer’s senior management and both must be ordinarily resident in Bermuda.23
V OUTLOOK AND CONCLUSION
At the time of writing the Bermuda chapter for the inaugural edition of The Initial Public Offerings Law Review in early 2017, it was anticipated that 2017 would be a promising year for the BSX. This proved to be the case as a result of the continued success of the ILS and catastrophe bond market, which saw an 87 per cent growth in 2016 in the nominal value of BSX-listed ILS securities.24
Looking forward, the BSX is working hard not only to expand the international market, but also to focus on growing domestic capital markets. In 2017, the BSX initiated the ‘Own your share of Bermuda’ investor programme with the aim of increasing investor awareness of what the BSX can offer and ultimately to increase trading activity on the Exchange. The BSX has indicated that it will continue to expand this programme in 2018. Insurtech, fintech and cryptocurrency are gaining increasing traction in Bermuda so we may see a new generation of entrepreneurs in this sector choosing to raise capital domestically through a BSX listing.
1 Becky Vernon is a counsel and Neil Horner is head of the corporate department at ASW Law Limited.
2 BSX 2017 Year End Review, 8 January 2018.
3 Figures published in Conyers Dill & Pearman’s Bermuda Public Companies Update, November 2017.
4 BSX website: www.bsx.com/comp_securities.php.
5 BSX 2017 Year End Review, 8 January 2018.
6 Bermuda ILS Market Report Q3 2016 (Vol. 4, No. 3) January 2017, published by the BMA.
7 BSX 2016 Year End Review: www.bsx.com.
8 A list of recognised stock exchanges can be found in Appendix 5 to Section IIIA of the Listing Regulations.
9 The difference between Bermuda-exempted companies and Bermuda-local companies is explained in Section II.iii.
10 Listing Regulations, Section I (All Issuers), paragraph 2.5.
11 Listing Regulations, Section I (All Issuers), paragraphs 2.16–2.23.
12 See Regulations 4.7–4.9 of Section IIIA of, and Practice Note 13 to, the Listing Regulations.
13 See Regulation 4.10 of Section IIIA of the Listing Regulations.
14 The 60/40 rule applies unless the company has been granted a licence by the Minister of Economic Development, pursuant to Section 114B of the Companies Act, to exempt it from the requirements. In a budget statement issued by the Premier and Minister of Finance on 16 February 2018, it was announced that the 60/40 rule would be relaxed in favour of a 40/60 rule, allowing non-Bermudians to own up to 60 per cent of a domestic business.
15 An exempted company can apply for a licence pursuant to Section 129A of the Companies Act to enable it to carry on business activities in Bermuda.
16 Section 48 (listed shares to transferred in accordance with rules of the relevant exchange); Section 65(3) (listed company may maintain branch register outside of Bermuda); Section 83 (accounting records of companies listed on an appointed stock exchange); Section 87A (listed companies may send summarised financial statements); and Section 87C (listed companies to provide full financial statement).
17 www.roc.gov.bm, under ‘Approved Stock Exchanges’.
18 Listing Regulations, Section I (All Issuers), paragraph 2.9.
19 Section 26 of the Companies Act requires the publication of a prospectus in connection with an offer of shares to the public, separate to the prospectus requirement of the Listing Rules.
20 Listing Regulations, Section IIIA (International Issuers), Chapter 5.
21 Listing Regulations, Section IIIA (International Issuers), Chapter 6.
22 This list is not exhaustive – see Listing Regulations, Section IIIA (International Issuers), Chapter 6 for full post-IPO continuing obligations plus sector-specific continuing obligations, for example, for ILS, debt and fund listings.
23 Listing Regulations, Section I (All Issuers), paragraph 2.10.
24 BSX 2017 Year End Review, 8 January 2018.