The supervision on the issuance of equity and debt securities aims at investor protection by means of reviewing on the issuing company’s qualifications, securities features and imposition of disclosure requirements for investment decision. The architecture of the SEC regulations on the matter is tailored to fit the securities features and offering manners.
1. Regulatory Principles
The issuing company must obtain an approval from the SEC and the registration statement and draft prospectus must become effective before securities can be offered for sale to the public, subject to the following regulatory principles:
1. Review on the issuing company’s qualifications and securities features
In case of public offering of securities, the merit-based regulations under the Securities and Exchange Act of 1992 require the SEC approval which depends upon the types of securities:
1.1 Approval criteria for public offering of shares emphasize the issue of corporate governance of the issuing company since investors in shares will become the company’s equity owners who are entitled to distribution of profit. The criteria include clear and transparent shareholding structure, trustworthy directors and executives, credible and transparent disclosure of information. Rights offering to existing shareholders is exempted from the SEC approval and disclosure requirements.
1.2 Approval criteria for offer for sale of debentures, on the other hand, aim to protect investors as the issuer’s creditors. The criteria requires the issuer have the debentures rated by a credit rating agency to assess financial condition and ability to repay debt, providing that either issue or issuer rating is acceptable. Credit rating so issued as well as information on financial condition and operational results disclosed in the prospectus will be useful for making investment decision.
The SEC’s consideration on the issuing company’s qualifications, securities features and granting of approval shall not, in any event, be deemed as a guarantee that investment in the securities approved by the SEC is risk-free. Investors should study related information and make their own investment decisions based on individual preference and risk appetite.
2. Disclosure of information on offered securities
On the side of disclosure-based regulations, the SEC prescribes minimum requirements on pre-offering information disclosure covering that relating to the company business, financial condition and operational results as well as risk factor. The requirements are customized to fit the offering manners where public offering of securities is subject to the most stringent requirements to ensure that investors have accurate and complete information for making investment decisions.
Disclosure requirements are, however, relaxed in case of private placement which is offer for sale to a small number of investors, investors with their own access to information or institutional investors; for instance, private placement of debentures requires a light version of disclosure documents whereas that of shares is exempted from disclosure requirements.
As registration statement and prospectus contained a lot of information, the SEC requested that issuing company provide executive summary in accordance with specified format to highlight material information concerning the company and offering for sale of securities and distribute it to investors with subscription form. However, investors should review a full version of information in the registration statement and prospectus, which can be requested from the company, underwriter, or download from SEC website.
While emphasizing sufficiency of information for making investment decisions, the regulatory principles on disclosure of information also takes into consideration the right balance between compliance costs borne by the issuing company and the company competitiveness.
2. Duties subsequent to offer for sale of equity or debt securities
After closing of the offer for sale of securities, the issuing company has the duty to submit reports to the SEC as follows:
1. Reporting result of sale of securities or exercise of convertibles (in case of offer for sale of convertibles (warrants or convertible debentures)
2. Financial statements (annual and quarterly) and reports under Section 56 which include annual registration statement (Form 56-1) and annual report (Form 56-2)
3. Report on securities holding of executives and auditors (Forms 59-1 and 59-2)
The due dates for submission of the foregoing reports are specified in the relevant notifications.
The company approved to offer for sale of shares and that whose shares are listed on the Stock Exchange of Thailand are required to maintain its qualifications as approved by the SEC while the company’s directors and executives must perform their duty with due care and loyalty as specified in Chapter 3/1 of the Securities and Exchange Act of 1992.
3. Securities holder protection
Protection mechanisms are available in case of corporate action having adverse effects on securities holders but the mechanisms depend on the type of securities. For instance, shareholders own the equity of the issuing company while debenture holders, as the creditors, have claim against the issuing company's assets.
3.1 In case of equity securities holders
● Corporate actions with adverse effect on shareholders
○ Issuance of new shares to investors other than existing shareholders: the company's rights offering where all existing shareholders are entitles to subscribe newly issued shares based on their proportion of shareholdings will not trigger dilution effect. The offer for sale of shares to others, on the other hand, causes control and price dilutions, particularly in case of discounted offer where the offering price is discounted from the market price of shares where the higher discount rate causes the higher price dilution.
○ Acquisition or disposition of material assets of the company that affects its business operation such as expansion of plant in considerably large scale, change of business or entering into high valued related party transaction (i.e. purchase of land from the company's major shareholder which may lead to undue benefit to such major shareholder).
Shareholder indirect participation in the company business operation is done through appointment of the board of directors as their representatives. The board of directors comprises directors nominated by major shareholder, independent directors and audit committee members. Nonetheless, prior to entering into significant matters, the board of directors is required to propose the matters to the shareholders’ meeting for approval.
The SEC regulations set certain mechanisms to ensure that the shareholders have sufficient information and period of time to study such information prior to the date of shareholders’ meeting as follows:
1. Notice of shareholders’ meeting is required to be submitted to the shareholders at least 14 days prior to the meeting date which is extended from 7 days prescribed under the Public Limited Company Act of 1992.
2. Details of significant information must be stated in the notice of shareholders’ meeting, for example the reason why the company should offer for sale of shares with discount to a particular investor.
3. Opinion of independent third party, independent directors, audit committee members and financial advisor, must be provided for shareholder decision.
4. Veto right is put in place for minority protection as a result only 5% or 10% 0f total voting right, as the case may be, can overthrow the proposal approved by 75%; for example, in case of offer for sale of shares with significant discount from market price or offer for sale of shares in significant amount to any particular director or executive.
● Corporate action that may affect right of share warrant holders
Share warrant holders are entitled to purchase newly issued shares of the issuing company at the predetermined exercise price and ratio on the specified date. The terms and conditions of share warrant and prospectus must clearly state that the issuing company is obliged to proceed with adjustment to exercise price or ratio in the event of corporate action causing change in amount of shares, share price or predetermined exercise price or ratio.
Share warrant holder protection to protect share warrant holders, the issuing company must make adjustment to exercise price or ratio when any of the conditions specified in the offering circular is satisfied. For example, if the issuing company changes the par value of share from 10 to 1 baht resulting in 10 times increase in amount of shares, the holders of share warrants with predetermined exercise ratio of 1:1 at 10 baht per share must be protected in that the issuing company must either adjust the exercise price from 10 to 1 baht per share or adjust the exercise ratio from 1:1 to 1:10
3.2 debenture holder protection
As creditors, debenture holders are entitled to repayment of principle and interest promised by the issuing company. It is, therefore, important that the terms and conditions of debentures, the framework governing right, duty and liability between the issuing company and the debenture holders must clearly state the protection mechanisms, especially where the issuing company gets into financial hardship. The terms and conditions must also specify the role of debenture holder representative to monitor the issuing company's compliance for the best interest of debenture holders.