Saudi IPO rules put underwriters on risk from the start of book-building

Saudi Arabia's Capital Market Authority has approved its new provisions on initial public offerings, which bind underwriters from the first day of book-building, tie orders to cash and require prospectuses to carry forecasts, the authority said on 2 November. The rules took effect on publication.

For a company planning a listing on the Saudi Exchange, the change reaches the underwriting agreement, the order book and the prospectus. The final text kept the three pillars of the consultation draft of 22 September, whose proposals set a 2 November start, and changed one of them in a way that lengthens the forecast an issuer must publish. The consultation ran for 30 calendar days to 22 October, 11 days before the provisions took effect and 41 days after the draft appeared.

Underwriters carry the risk earlier

Under the approved provisions, the underwriter must execute the underwriting agreement and have it become effective before book-building begins, and its obligation to buy all the offered shares takes effect when book-building starts. The draft noted that the existing instructions require the agreement to be signed only before the subscription process begins. The approved text keeps a clause from the draft: if the underwriter's holding would breach the listing requirements, the shares are not listed and the underwriter buys all of them, and the underwriting agreement may include a mechanism for disposing of those shares.

For an underwriter, that means pricing market risk over the whole book-building period, not just the few days of retail subscription. Lawyers at Gibson Dunn, in a client note of 3 November, called the obligation to buy the shares even when the company does not list unusual by international standards, and said the rules do not specify the commitment price, conditions or termination rights, which are left to the parties. On this reading, an issuer's finance chief should expect those points to move to the front of the talks with its banks, because a bank that is on risk from the first day of book-building has more reason to settle them before it starts.

Order books backed by cash

The second change works on the investor side. Orders in the book must reflect the liquidity actually available to the investor, financial capacity may be verified only in cash or cash equivalents, and orders become binding for payment no later than the deadline for paying the subscription amount, the authority said. When the draft was published, it said the aim was to strengthen the link between orders and the ability to pay, so that book-building becomes a more reliable basis for setting the price.

The draft notice put the extra checks on the financial adviser and other institutions receiving orders. Gibson Dunn's note said headline oversubscription figures are likely to be lower as a result, and more representative of executable demand. For boards and investors who read those figures as a measure of demand, a smaller multiple under the new rules is not the same signal as a smaller multiple under the old ones, and comparisons across the two regimes need care.

For issuers, the gain is a book that is closer to the money that will arrive on the payment date, which gives the price set from it a firmer base.

A longer forecast than the draft proposed

The third change is where the final text moved. The draft asked for forward-looking indicators of financial performance covering no less than one financial year. The approved provisions require forecasts covering the remainder of the latest financial period and at least the financial year that follows it, and the financial adviser must exercise professional due diligence on them. Gibson Dunn's note said the adviser must also reach a reasonable opinion on the forecasts. Gibson Dunn gave the example of a prospectus whose latest period ends in June and whose financial year ends in December: the forecast would then cover July to December 2026 and the whole of 2027.

In practice, every subscriber will hold a published forecast from the issuer, and its first results as a listed company are likely to be read against it. For a finance team, that points to work well before the filing: a budget that can stand as a public statement, a documented basis for each assumption and an adviser ready to stand behind it. The draft said the statements must be clear, not misleading and based on reasonable and measurable grounds.

The authority said it will publish questions and answers on the provisions within its frequently asked questions on implementing regulations. Gibson Dunn said deals already in progress should be reviewed against the rules now, since they applied from publication. The IPO provisions came into force on the date the draft had set; the authority's other autumn drafts and their start dates are compared here.