Securities Regulations in Saudi Arabia

Saudi Arabia’s Capital Market Authority (CMA) is responsible for regulating and developing the Kingdom’s capital markets, protecting investors from unfair practices such as insider trading and market manipulation, and overseeing all aspects of securities issuance and trading.  Its authority derives from the Capital Market Law which was enacted in July 2003 in order to modernize the country’s investment activities and attract foreign investment.

The Capital Market Law not only established the five-member Board of the CMA, but it established and defined the Saudi stock exchange known as Tadawul; set forth regulations for securities brokers; defined investment funds; provided for stock prospectuses and other disclosures; prohibited market manipulation and insider trading to boost investor confidence in the system; and set forth penalties for the violation of its rules and regulations.

Securities cannot be offered to investors in Saudi Arabia unless they are in strict compliance with CMA regulations.  An offer of securities may be a public offer, a private placement, or an exempt offer.  These terms are mutually exclusive.  Any offer which is not a private placement or an exempt offer is considered to be a public offer.

 An exempt offer is an offer of securities meeting any one of the following requirements:

            1.         The securities are offered by the Saudi government.

            2.         The securities are offered by a supranational authority recognized by the CMA.

3.         The securities are offered to no more than 60 offerees who must each pay a minimum of One Million Saudi Riyals.

4.         The total offering does not exceed Five Million Saudi Riyals.

5.         The issuer is a member of a group to whom the securities are exclusively offered.

A private placement is defined as an offer of securities that is not an exempt offer and where the amount payable by each offeree is not less than One Million Saudi Riyals and the offer is made to either the Saudi government,  the Saudi Arabian Monetary Agency (SAMA),  any supranational authority recognized by the CMA, the Saudi stock exchange or any other exchange recognized by the CMA, the CMA Depository Center, those persons acting for their own account, clients of an authorized person who makes the offer, financial institutions acting for their own account, or any other persons considered exempt by the CMA.

The CMA regulates all securities businesses operating in the Kingdom.   One is engaged in such business if he is engaged in any of the following activities:  dealing in securities as a principal or agent, arranging for others to deal in a security, managing someone else’s security in circumstances involving the exercise of discretion, advising others in dealing with a security, or taking custody and safeguarding another person’s securities. 

A very important role for the CMA is to regulate the advertising of securities to the public.  No one may make or communicate a securities advertisement to any Saudi citizen unless he has been authorized to do so by CMA and he has approved the contents or proposed communication.  However, a securities advertisement designed to be communicated only to persons outside Saudi Arabia is not subject to these regulations.

As a direct consequence of the Capital Market Law and the establishment of the Saudi stock exchange (Tadawul), the Kingdom is experiencing a surge in foreign direct investment and substantial growth in market capitalization.  In addition to being the largest economy in the Gulf region, Saudi Arabia’s stock market capitalization now exceeds 36% of the Gulf countries’ total market capitalization.

After last year’s market correction and the resulting decline in trading volume, current market valuations are reasonable and appear sustainable over the long term.  Much of the CMA’s initiatives have stimulated new investment products, improved transparency, increased disclosure, and fostered corporate governance standards.   However, the Saudi stock market remains in its infancy, with the current number of listed companies still low.  As of mid-2007, there were 98 stocks listed on the Saudi stock exchange.  Out of over 14,800 companies operating in the Kingdom (not including proprietorships), only 158 were joint stock companies.

The relative stability of the Kingdom and its progressive attitude toward economic reforms combine to make the country very attractive to foreign investors.  Many private equity firms are entering the region to take part in the growing economic opportunities fueled by high oil prices and domestic commercial development.  So far, the bulk of private equity funds have been invested in Islamic funds and closed-end real estate funds.  Two years ago, however,  the CMA approved the Islamic bond market (sukuk) to provide financing for development projects in the Kingdom.  This bond market continues to grow, providing investors with another way to invest in the future of the country.

Based on strong economic fundamentals and sound governmental policies existing in the Kingdom, the outlook for securities in Saudi Arabia is very positive.  The rules are many, but generally accommodative to those who wish to engage in the securities industry.  Competent legal assistance should be sought by those who wish to offer securities or those investors who wish to purchase bonds and equities.  A very helpful place to learn more about securities regulation in Saudi Arabia is at the Capital Market Authority’s website:  www.cma.org.sa.