Companies list securities as an efficient means of raising capital: investors choose listed securities because of the additional shareholder protection and liquidity.
Investors looking for liquidity turn naturally to London. In the recent past smaller exchanges in Dublin and Luxembourg have developed niche markets but over the next year legislative and regulatory changes in the EU and the Channel Islands will significantly enhance the advantages of listing outside of the EU on the Channel Islands Stock Exchange (the "CISX").
Promotion to UK Investors
The CISX has recently been approved by the UK’s Financial Services Authority ("FSA") as a Designated Investment Exchange. Many potential investors recognise this as a seal of approval from the FSA as to the effectiveness of the CISX’s rules and its internal regulatory environment as well as the operation of the exchange’s supervision, membership, price information, clearing and compliance arrangements.
Now that the CISX is a Designated Investment Exchange, FSA authorised firms are allowed to treat transactions on the exchange in much the same way as if they were trading on the UK’s Recognised Investment Exchanges. As a consequence investment by an FSA firm in a CISX listed security will now incur a significantly lower position risk requirement, which in turn reduces overall transaction costs.
The UK Inland Revenue has also designated the CISX as a Recognised Stock Exchange under Section 841 of the Income and Corporation Taxes Act 1988 ("ICTA").
Shares listed on the CISX are therefore "qualifying investments" within an ISA, PEP or SIPP and, as a result, an increasing number of closed-ended funds are listing on the CISX.1
The tax treatment of eurobonds is also positively enhanced by the CISX’s status as a Recognised Stock Exchange under ICTA – interest paid on a qualifying quoted eurobond does not have to be withheld for tax purposes if it is listed on the CISX.
Guernsey is also a Designated Territory for the purposes of Section 270 of the UK Financial Services and Markets Act 2000. This allows collective investment schemes to "passport" into the UK. Consequently a CISX listed, Guernsey incorporated open-ended investment company that is regulated under Guernsey’s recently revised Class A Rules can be easily promoted to UK retail investors, as if the fund was regulated in the UK.
Promotion to US Investors
The US Securities and Exchange Commission has designated the CISX as a Designated Offshore Securities Market within the meaning of Rule 902 (b) under Regulation S of the Securities Act of 1933 (which governs the offer and sale of securities outside of the United States without registration under the 1933 Act).
The US Internal Revenue Service has also recognised Guernsey as a "Qualified Intermediary" jurisdiction.
Now that the CISX is also a Designated Investment Exchange, firms may take advantage of the CFTC’s Rule 30.10 exemptions which allow FSA authorised firms to sell investments listed on the CISX to investors in the US.
There are no capital gains, inheritance, gifts, sales or purchase taxes in Guernsey.2 Special purpose companies that are incorporated in Guernsey can apply for tax exempt status and, in return for a small annual fee, will not even incur corporate tax on their income.
If the EU Savings Directive is implemented it will still not affect income paid to companies or capital repaid on redemption of shares.
Secondary Listing on the CISX has always been straightforward, not least because the only continuing obligations are for the Company to comply with the continuing obligations of its primary exchange and to provide the CISX with equivalent information to that supplied to the primary exchange.
EU Prospectus Directive
Many non-EU issuers would rather not be subject to the restrictions imposed on them by the EU Prospectus Directive. In contrast to EU exchanges, the CISX retains flexibility for issuers, whilst still being located in a time zone that is accessible for London, New York and Tokyo.
Certain offerings in the EU fall within the scope of the Prospectus Directive only because they relate to securities listed on an EU Exchange. It is therefore possible to have the benefit of listing on the CISX whilst still offering those securities in the EU.
Flexible Listing Rules
The CISX has developed user friendly listing rules, particularly for investment funds, debt issues and SPV securitisation issues. The Market Authority also considers individual applications for derogations in other circumstances.
The CISX Listing Rules will not be restricted by the "maximum harmonisation" which EU Directives will impose on EU exchanges from 2005. As a result the CISX will still be able to make appropriate changes to its own listing rules, whilst EU stock exchanges will have to rely on changes being made and approved at the European level, if at all The on-going compliance costs and risks are therefore much less than listing in the EU. In particular the CISX will not be obliged to implement the EU Transparency Obligations Directive.
The restrictive Irish listing requirement that "Dividends may only be made out of the company’s accumulated net income plus the net accumulated realised and unrealised capital gains and accumulated realised and unrealised capital losses" is not found in the CISX Listing Rules.
The Combined Code on Corporate Governance annexed to the UK listing rules is not compulsory for Guernsey companies. In respect of the independence of an investment fund’s board, the CISX only requires that there be at least two directors independent from the investment manager/adviser/affiliates. In this context "independence" means that the directors must not hold any executive function within those entities.
Unlike the Irish and London Stock Exchanges, which have an arbitrary 25% minimum risk spreading requirement for investment funds, the CISX has no set minimum.3
Not only are the rules of the CISX flexible and accommodating, but the Guernsey Financial Services Commission ("GFSC") is also approachable and commercial in its outlook. In November 2003 the International Monetary Fund ("IMF") reported that:
"The GFSC is a well-established and well-respected supervisory agency with an experienced staff. The GFSC is to be commended for its continuous proactive attitude taken in order to enhance the Bailiwick's regulatory regime".
Efficient Listing Authority
The CISX Market Authority meets every day to consider listing applications. Initial listing applications are usually turned around within 48 hours. There are fast track listing procedures and simplified listing rules for international debt issuers.
A streamlined application procedure helps to keep fees to a minimum.
Existing registration documents, for example, those prepared for SEC registration or for other regulatory authorities may, in certain circumstances, be used as part of the listing documentation for a CISX listing.
The Channel Islands are within the OECD’s jurisdiction and OECD conventions therefore apply. The Financial Action Task Force ("FATF") regards Guernsey as a co-operative jurisdiction with comprehensive anti-money laundering systems.
The G-7 Financial Stability Forum considers both Guernsey and Jersey to be amongst the Group 1 jurisdictions (the top group of offshore financial centres), determining that they have appropriate legal infra-structures, supervisory practices and levels of resources devoted to supervision and co-operation, relative to the size of their financial activities.
Guernsey has been assessed by the IMF to have "a high level of compliance" for each of the international standards against which it was judged, including: the Basel Core Principles for Effective Banking Supervision; the Insurance Core Principles of the International Association of Insurance Supervisors (IAIS); the Objectives and Principles of Securities Regulation of the International Organization of Securities Commissions (IOSCO); and the FATF 40+8 Recommendations. The IMF also concluded that Guernsey's legal framework for company and trust service providers was fully consistent with the Offshore Group of Banking Supervisors’ (OGBS) Statement of Best Practice for Company and Trust Service Providers.
The CISX is also; registered by the World Federation of Exchanges as a "corresponding market", an Associate Member of the International Securities Market Association ("ISMA"), a member of the European Securitisation Forum and recognised by the Australian Stock Exchange.
Electronic Trading and Settlement
CISX listed shares can be settled through CREST and, because Guernsey companies do not need to have share certificates, the shares can be traded electronically as well. International Debt Issuers can use EuroClear. This, combined with an absence of VAT and stamp duty, led to the trading of 81.5 million CISX listed shares during 2002.4
The geographical position of the CISX in Guernsey provides quick and easy communication with London and the rest of the United Kingdom (both electronically and in person), and the exchange benefits from being in the same time zone as the London markets. Constitutional Position of the Channel Islands
Guernsey and the other Channel Islands are not part of the United Kingdom. They are in fact the remnants of the Duchy of Normandy. When King John of England (and of the Magna Carta) ceded the rest of Normandy to the French crown by treaty in 1204 AD, all the Channel Islands were omitted and have continued to be ruled by English monarchs in their capacity as Dukes of Normandy ever since. Guernsey’s separate constitutional system was retained and has been independent from the Parliament in Westminster for over 800 years. Guernsey’s constitutional relationship with the EU was established in 1972 by Protocol 3 of the UK’s Treaty of Accession to the Treaty of Rome. As a consequence, the Channel Islands are not members of the European Union and do not have to suffer the disadvantages of being subject to EU legislation.
Common Law Legal Jurisdiction
Commercial law in Guernsey is nevertheless heavily influenced by English common law. Consequently the laws of contract, trusts and negligence complement those in England. As is the case in other common law and commonwealth jurisdictions, the ultimate court of appeal is the Privy Council. The duties owed by directors of CISX listed companies are, therefore, both practical and easily understood by UK directors.
Guernsey’s Corporate Law
In addition to limited liability companies, Guernsey law allows the incorporation of Protected Cell Companies ("PCCs"). PCC structures are ideal for Umbrella Funds of all descriptions because they segregate assets and liabilities between different share "cells". This, combined with contractual limitations of rights of recourse, provides an excellent platform from which to launch a portfolio of fund products. Guernsey PCCs are also popular for use as captive insurance and securitisation vehicles.
Shares of no par value can also be issued, enhancing the ability for redemption payments to be funded out of the share premium account, rather than out of the sale of assets. Guernsey statutes also clarify the position of security granted by Guernsey companies under foreign law, as well as contractual set-off and subordination arrangements.5
Critical Mass of Service Providers
Guernsey is globally recognised as the European centre for offshore captive insurance companies, this has allowed the Island to develop a critical mass in the provision of services related to the finance industry. There are around 60 licensed banks (with total deposits in excess of £71 billion) and 40 fund managers, administrators and custodians (looking after assets worth more than £56 billion).6 Collective investment schemes have also been establishing themselves in Guernsey for over 40 years and are promoted/sponsored by institutions in 38 different countries.
The local market for trustees, custodians, administrators, auditors, actuaries and lawyers is therefore sophisticated and competitively priced and there is a readily accessible pool of suitably qualified and regulated individuals who can act as directors of offshore companies.
This artice is a general guide only and before taking any action relating to the contents of this release legal advice should be sought in all relevant areas.
1 In 2002 the UK Inland Revenue carved-out offshore open-ended investment companies from the ICTA definition of "qualifying .investments." The CISX is making representations to the Inland Revenue for this carve-out to be dropped now that the CISX is a Designated Investment Exchange.
2 With the exception of taxes on dwellings.
3 CISX Listing Rules 7.3.2(d)
4 Source: www.cisx.com
5 The Security Interests (Guernsey) Law 1993 and the Companies (Guernsey) Laws 1994 to 1996.
6 Source: www.gfscguernseyci.com
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.