Chapter 4 - Markets PDF

Chapter Four Markets ======= 1. **The Central Depository 83** 2. **Issuing and Offering Shares in Public Joint-Stock Companies 86** 3. **Troubled Public Joint-Stock Companies 90** 4. **Conciliation 93** 5. **Debt Securities 94** 6. **Islamic Securities 99** 7. **D...

Chapter Four Markets ======= 1. **The Central Depository 83** 2. **Issuing and Offering Shares in Public Joint-Stock Companies 86** 3. **Troubled Public Joint-Stock Companies 90** 4. **Conciliation 93** 5. **Debt Securities 94** 6. **Islamic Securities 99** 7. **Derivatives 104** 8. **Crypto Assets 105**  1.2 Obligations of the Depository Centre ### **Learning Objective** 4.1.2 Know the obligations of the Depository Centre (Article 10) To ensure that their functions are exercised appropriately, the Depository Centre is faced with a series of obligations that are detailed in Article 10 of the Authority's Decision 19. These include: - Setting the rules and procedures for the members of the depository -- the members are predominantly the brokers on the market. - Enabling the investors to have access to their accounts that detail their ownership of securities. This includes issuing statements of account to the investors upon their request at any time for a fee to be determined by the Depository Centre. The Depository Centre must also enable all entities listed on the market (and their registrars) to access the register of securities holders. - Regularly reviewing and continuously updating the internal auditing system and the risk management operational guide in accordance with the market developments and norms. The reviews should be forwarded to the board of directors or the relevant director, as appropriate, and also be made available to the Authority. - Developing a Professional Code of Conduct for staff, supervising the staff, and organising and monitoring any personal transactions of members of staff in the market. No member of the Depository Centre's board of directors or executive management is permitted to be a partner or a member of the board of directors, management board, executive management, employee, or a representative of another entity licensed by the Authority. - Immediately notifying the Authority if any members of its board of directors serves as a member of the board of any public joint-stock company; or of any other potential conflict of interest. - Not removing the internal auditor without a decision of the board of directors or the relevant director. In the event of a removal, the Authority and internal auditor must be notified at least 30 days in advance, and the notice must state the reasons and justifications of the removal. - Providing the Authority with the following reports: - interim financial reports (quarterly reports) reviewed by the external auditor within 45 days of the end of the quarter - an annual financial report audited by the external auditor within three months of the end of the fiscal year - a periodical and updated report on the equity percentages of the shareholders who hold more than 5% of the capital of the Depository Centre. - Obtaining the prior approval of the Authority before taking any of the following actions: - amending the Memorandum or articles of association of the company, or selling a share to a strategic partner - adding an activity to the trade licence, or removing or amending an activity - increasing or decreasing the capital of the company - effecting any mergers or acquisitions - changing the partners or founders or amending of their equity percentages. - Immediately notifying the Authority of the following: - any cases or procedures that result in considering a Depository Member in default of its obligations - any material changes or developments, or any deficit that affects its financial position - any change in the information or data provided when the application for licence was submitted - any change to the members of the board of directors - any lien or pledge on its assets, and any lawsuits to which the Depository Centre is a party, as well as any judgments issued on such lawsuits which would influence the Depository Centre's financial position - any violations committed by its approved employees of laws, regulations, by-laws or decisions of the Authority and/or the market. - Keeping and maintaining all books and records, documents and financial and technical statements throughout the licence term, keeping backups and ensuring that none of them are exposed to damage. The Authority must be able to receive a copy of such documentation and access to all related materials upon request. - Exercising the licensed business with due diligence as per the provisions of the law and its implementing regulations as well as the principles of honesty, integrity, justice, equality, confidentiality of data and information, preventing conflicts of interest and illegal exploitation of the business, directly or indirectly. 1.3 General Provisions ### **Learning Objective** 4.1.3 Know general provisions relating to the Depository Centre (Articles 11 & 12) Articles 11 and 12 of the Authority's Decision No. 19 detail some general provisions that relate to the Depository Centre. Article 11 requires the market (and any central counterparty it might utilise) to provide the Depository Centre with all the data and information required to exercise its business. It also specifies that the records of the Depository Centre are legal evidence of ownership of securities -- giving the holder the right to vote at annual general assemblies and the right to receive dividends and any bonus shares. For cash dividends, the issuing company must deposit the dividends in the bank account of the Depository Centre. The Depository Centre must then deposit the cash profits in the bank accounts of the shareholders. Article 12 requires the issuer of securities, within one week of the listing on the market being approved, to deliver an up-to-date copy of its register of shareholders to the Depository Centre. Thereafter, the issuer should update the register whenever it is necessary and provide the Depository Centre with such update. The update will be facilitated by the Depository Centre installing a terminal device for the registrar of the listed entity to be able to make the required updates and to undertake any inquiries. The Depository Centre must, within one week from the approval of the listing of any security on the market, install a terminal device for the registrar of the listing entity to enable it to access the register for inquiries and to make the required updates. 2. Issuing and Offering Shares in Public Joint-Stock Companies 2.1 Regulations ### **Learning Objective** 4.2.1 Know regulations for the issuing and offering of shares of public joint-stock companies (SCA resolution 11/R.M dated 6 June 2016): applications (Article 3); preliminary valuation (Article 4); meetings (Article 5); prospectus and offer (Article 6); receiving subscriptions and building the order book (Article 7); pricing and allotment (Article 8); general provisions (Article 9) Public joint-stock companies wishing to issue and offer shares in the UAE must abide by the Authority Resolution 11 of 2016. ### 2.1.1 Newly Incorporated Companies The resolution first deals with newly incorporated companies and the conditions that need to be met. These include the following: - Legal approval to incorporate as a public joint-stock company. - Unless the company is a bank, a finance corporation or an insurance company, the subscribers to the shares must be '**qualified investors**'. A qualified investor is broadly an investor that is suitably experienced in investments and the related risk and meets certain minimum wealth requirements. - A minimum subscription of AED5 million. - The company's senior management must have the adequate qualifications and expertise to manage the business. - The appointment of advisers, including a listing adviser to ensure the company meets the requirements for listing for a period of two years from the listing date. - The publication of a prospectus setting out the details, terms and conditions of the offering. - Sufficient working capital for a period of 12 months. Newly incorporated companies may price the shares being issued using a book building process. ### 2.1.2 Existing Companies Offering Shares After Conversion For companies already in existence that want to offer shares after conversion into public joint-stock companies, the resolution requires the following: - A special resolution to convert the company into a public joint-stock company. - Legal approval to incorporate as a public joint-stock company. - The shares already issued must have been paid in full. - The company must have released its audited financial statements for two fiscal years preceding the request to offer shares and provide up-to-date financial statements no later than three months prior to the publication of the prospectus. - The company must have achieved a net operating profit of no less than 10% of its capital during the previous two financial years preceding the approval of its conversion. - The senior management of the company must have the adequate qualifications and expertise to manage the business. - A subscription receiving body -- a firm tasked with receiving the subscription funds -- must have been appointed. - A prospectus must be prepared. Like a newly incorporated company, the shares may be priced using a book building process. ### 2.1.3 Capital Increases An existing public joint-stock company can issue further shares in a capital increase as long as it meets certain requirements laid down in the Authority's resolution. These include the following: - A special resolution from the company and the Authority's approval of the capital increase. - The company's existing issued capital must have been paid in full. - The appointment of the appropriate parties to the offering, that might include an appraiser of any in-kind contributions. - A prospectus must be prepared. The issuing company wishing to offer shares to increase capital may use any of the following mechanisms: - Increasing the authorised capital (after securing the Authority's approval). - Increasing the issued capital up to the authorised capital previously approved by the shareholders. - Increasing the issued capital through a special resolution in the absence of any authorised capital. However a resolution to increase the authorised share capital must take place within a year. - Increasing the issued share capital through a programme of a series of offerings deemed as a single offering within a period of two years. ### 2.1.4 Share Premium and/or Discount A company increasing its share capital must issue the shares at a nominal value equivalent to the nominal value of the existing shares. However, the company may, under a special resolution and after obtaining the Authority's approval, do the following: - Add share premium to the nominal value of the share. This should be calculated based on the average market value of the share during the six months preceding the date of issue. The company may deduct a percentage of no more than 25% of the calculated share premium. - Exceptionally, a public joint-stock company may issue capital increase shares with a share discount. This is only in cases accepted by the Cabinet in accordance with the provisions of the Commercial Companies Law. This discount shall be calculated according to the mechanism established by the company and approved by the Authority. A blue arrows pointing upwards Description automatically generated ### 2.1.5 Rights Offerings An existing company could issue further shares in the form of a rights issue. This involves new shares being issued to the existing shareholders in proportion to their holdings. The new shares are initially offered to the existing shareholders in the form of a transferable right to subscribe. The company announces the rights issue at least twenty business days before the start date of subscription. The announcement will include the following details: - The amount and percentage of the capital increase. - The exercise price of the rights issue -- the amount to be paid to subscribe to the new shares being offered. - The start and end dates for the trading of the rights. - The start and end dates for the subscription to the shares of the capital increase by the holders of the rights. The shareholders registered at the end of the day which precedes the start date of subscription by ten days will be entitled to subscribe to the rights issue. These holders of rights may sell or use the rights to subscribe and the trading period for the rights will not be less than ten business days. The holders of the rights are those registered at the end of the clearing and settlement period for the trading of such rights and the rights are registered with the clearinghouse in the names of their holders, separate from the original shares. The rights are traded separately from the original shares and the listing of the rights will end on the expiry of the rights trading period. 2.2 Buy Backs #### Learning Objective 4.2.2 Know controls and procedures relating to a company buying back its shares with a view to resell them (Decision No. (40) of 2015) The SCA's Decision No. 40 of 2015 details certain requirements that need to be met in order for a company to buy back its own shares with a view to selling them. At least two financial years must have elapsed since the company has been listed and the company must have issued two audited balance sheets approved by its General Assembly. Furthermore, at least one year must have elapsed since the last selling transaction of shares previously bought back, if any. The buy-back must have been approved by special resolution of the General Assembly of the company, allowing the board of directors to execute the buy-back transaction and to reduce the share capital of the company in the event that the bought back shares are not sold within the period laid down by the Authority. The reduction involves cancelling the bought-back shares and amending the capital of the company in the articles of association. Any buy-back may not exceed 10% of the issued and paid-up share capital, and the company may not execute a buy-back transaction within six months of the last issuance of any securities in a public offer. Any buy-back must be made on the basis of approval from the Authority. The company must apply to the Authority using the approved application and enclosing an undertaking that the company will fulfil its obligations (detailed in the following paragraphs), and any other documents required by the Authority. The Authority will issue its decision to approve or reject the application within 15 working days of the date of submitting the complete application. The obligations of the company referred to above are to announce to the public the buy-back transaction in two widely circulated local daily newspapers, at least one issued in Arabic language, at least 14 days before the date of the actual buy-back. The buy-back transaction must then be executed within a period no longer than one year from the date of obtaining the approval of the Authority. Furthermore, the company must not buy-back its own shares within 15 days before and three days after the disclosure of its financial statements or any other material information that may affect the share price upward or downward. The company must not execute any sale transaction while performing the announced buy-back transactions, and the bought-back shares must not be sold until one year has elapsed after the date of obtaining the Authority's approval of the buy-back transaction. The bought-back shares must be sold within a period of no longer than two years of the date of the last buy-back transaction, otherwise the buy-back transaction will be considered as a capital reduction that requires the bought-back shares to be written off. The company must not issue any new shares arising from a public offer, or any debt instruments convertible to shares before the completion of the sale transaction of the bought-back shares. No member of the company's board of directors or executive management is permitted to be a party to the buy-back or sale transactions and a subsidiary company must not buy the shares of the parent company. 3. Troubled Public Joint-Stock Companies 3.1 The First and Second Categories of Listing #### Learning Objective 4.3.1 Know the conditions for classifying a company within the first category (Article 2) The SCA's Decision No. 13 of 2020 concerns listed companies that are facing certain difficulties and are therefore moved from the so-called first category of listing, to a second category. Listed companies are initially allocated to the first category. Falling from the first category to the second category occurs when either the company concerned has its shares suspended for six months or more, or faces accumulated losses of 50% or more of capital. Put another way, to be classified as a **first category listed company** requires the following: 1. The company shares' listing is not suspended for six months or more. 2. The company did not incur accumulated losses of 50% or more of the capital according to the last audited annual financial statements. 3.2 Transferring Between Categories ------------------------ **Learning Objective** ------------------------ 4.3.2 Know the procedures for transferring a listed company between the two categories (Article 3) It is the market that transfers a company's shares between the first and second category. The market will transfer the listing of a company's shares from the first to the second category or from the second to the first category once a year after the company provides the market with its audited financial statements as at the end of its fiscal year. This is based on the extent of the company's reported losses compared to the company's capital. The market will also transfer the listing of a company's shares from the first to the second category if they are suspended for six months or more. Furthermore, following the Authority approval, the market may choose not to transfer the listing of the company shares from the second to the first category if the company concerned failed to comply with the regulations of the the Authority or the market. Transfers of listed companies between the two categories are announced on the market's website. 3.3 Trading of Second Category Shares #### Learning Objective 4.3.3 Know trading procedure for shares classified in the second category (Article 4) The shares of a company suspended from listed for six months or more can be re-traded on being transferred from the first category to the second category. The trading or re-trading of the shares of a company whose listing has been transferred to the second category involves the market providing a screen dedicated to the trading of the shares of companies classified within the second category and including the data relating to those companies. This will have the name of the listed company written next to its listing category (second category). The trading or re-trading, as the case may be, will be announced and the announcement will include a brief description of trading within the second category, the **watch list** requirements (see below), as well as the company's current status, financial position, the risks associated with investing in the company and any other details the market deems necessary to protect investors.  3.4 The Watch List #### Learning Objective 4.3.4 Know about the watch list: purpose (Article 1); monitoring (Article 5); commitments of companies placed on the watch list (Article 6) The watch list is a list of the companies that have been transferred from the first category to the second category due to failing to meet one of the two conditions detailed in section 3.1 above. A joint committee established by the Authority monitors companies placed on the watch list assessing their compliance with the disclosure and listing requirements. This is initially for a one-year period, extendable to three years. The committee makes recommendations to the Authority and the market as to whether the monitored company should be transferred to the first category. Where a company being monitored does not gain the committee's recommendation to be transferred to the first category, the committee will make one of two recommendations: 1. to keep the company listed within the second category and continuing trading of its shares, or 2. to cancel the listing of the company's shares. Companies placed on the watch list must provide the committee with an action plan for regularising their status and therefore, becoming eligible for the first category listing. The plan must be approved by the board of the company and by an entity with financial and technical expertise approved by the Authority. Details of the implementation and success of the plan must then be disclosed to the committee every three months or on request. 3.5 Delisting of Shares #### Learning Objective 4.3.5 Know procedures relating to the delisting of shares (Articles 7 & 8) In cases where the Authority, after consulting with the market, decides to delist a company's shares, the following procedures will be taken: - The Authority will notify the company of its shares delisting within a period of 30 days of the date of decision being made and issued. - The concerned market will post an announcement on its website of the decision to delist the shares of the company within 30 days of the decision, including the fact that transferring the company's shares after the delisting will be done away from the market's systems ('over-the-counter'). 4. Conciliation 4.1 Conciliation Procedure #### Learning Objective 4.4.1 Know the controls and procedures of conciliation in offences relating to public shareholding companies (Decision No. (42) of 2015) Conciliation is where the Authority can suspend the procedures to initiate a criminal prosecution for certain specified offences and instead decide that the offender should pay the prescribed amount for such offences. The offences are detailed in an annex to SCA Decision No. 42 of 2015 and include a breach of governance rules, a breach of the requirements to invite shareholders to the **annual general assembly**, a refusal to co-operate with auditors and many others. The starting point for conciliation is that the violator submits an application for conciliation to the Authority before a criminal case is referred to the court. This is done using the form designated by the Authority and must include the required data, information and documents. A committee at the Authority will then make a decision, by majority, on the conciliation application. The committee considers and decides on the conciliation application within 15 working days of the date of receipt of the completed application. The committee has the power to approve or reject the conciliation application based on the public interest. The procedures to initiate a criminal case will be suspended when a conciliation application is submitted to the Authority until the committee decides on the application. In cases where the Authority has already submitted a request to the Public Prosecution to initiate a criminal case, the Public Prosecution will be notified of the committee decision approving or rejecting the conciliation application. If the committee's decision is to approve the conciliation application and the violator commits to pay the prescribed amount then no criminal case will be initiated, and the violator will waive any legal rights, claims or warranties. If the committee decides to reject the conciliation application or the violator fails to pay the prescribed amount for the conciliation within the specified period of time detailed in the decision, then the Authority may proceed with the procedures to initiate a criminal case. 5. Debt Securities 5.1 Qualified Investors #### Learning Objective 4.5.1 Know the regulations regarding qualified investors (Article 1) Certain investments and investment products can only be promoted to so-called 'qualified investors'. The definition of a qualified investor is provided in Article 1 of the Authority's Decision No. 17 of 2014 concerning the Regulations of Debt Securities. A qualified investor is a natural or legal person capable of managing its own investments and includes: 1. A corporate person that meets any of the following conditions: - The federal government, local governments and governmental entities, institutions and authorities, or the companies fully owned by any of the aforementioned. - Foreign governments, and its entities, institutions and authorities or companies fully owned by any of them. - International bodies and organisations. - Entities licensed by the Authority or by a similar regulatory authority. - A corporate person who meets, at the date of its last financial statements, at least two of the following requirements: - its total budget of AED 75 million - has net annual return of AED 150 million - has funds or paid up capital of AED 7 million. 2. A natural person accredited by the Authority or by a similar regulatory authority to perform any of the functions related to financial activities or services. 3. A natural person who meets the following conditions: - net equity, with the exception of the person's main house, is valued at AED 4 million - annual income is not less than AED 1 million annually - declaring to have adequate knowledge and experience in the field of investment and its risks, or represented by an entity licensed by the Authority. 5.2 Issuing Debt Securities #### Learning Objective 4.5.2 Know the terms regarding the issuing of debt securities: application (Articles 8 & 9); listing conditions -- issuer (Articles 4 & 6); listing conditions -- debt securities (Article 5); continuing obligations (Articles 19 & 20); suspension and cancellation (Articles 21, 22, 23, 24, 25) An issuer seeking to issue, offer and conduct a primary listing of debt securities in a market must submit an application to the Authority. The application must be submitted on the Authority's required form together with supporting information, data and documents, in particular: - A draft prospectus. - Statements confirming the disclosure in the prospectus, signed by the issuer. - A resolution of the issuer's general assembly/board of directors/relevant body approving the issuance and listing of the debt securities. - The most recent audited financial statements of the issuer. - If the debt securities are guaranteed by any other company, the most recent audited financial statements of the guarantor. - If the debt securities are guaranteed by the government, a copy of the law, regulation, resolution or document allowing the governmental entity to provide such guarantee must be submitted together with the guarantee document for the debt securities to be issued and listed. - Payment of the fees. - Any other documents, requirements, conditions or controls specified by the Authority. A foreign issuer or an issuer incorporated in a financial free zone, wishing to conduct a dual listing for debt securities in a market, must submit a similar application that will also include the preliminary or final approval from the other supervisory authority which carries out similar functions to those of the Authority. ### 5.2.2 Listing Conditions -- Issuer Issuing debt securities must not conflict with the issuer's constitutional documents and those documents must not contain any restrictions which may prevent the issuer from fulfilling the obligations and provisions concerning the issuance and listing of debt securities in accordance with the provisions of the Authority's regulations. Furthermore, when the issuer is a joint-stock company issuing debt securities into the primary market, the issuer must be incorporated in the State and outside a financial free zone. The conditions that need to be satisfied for a primary listing of debt securities are as follows: - If the Issuer is a joint-stock company, to obtain the approval of its general assembly. - To prepare and submit a prospectus to be approved by the Authority. - If the debt securities are convertible, the prospectus must include details of the conversion procedure and terms. - The issuance, listing and offering of the debt securities may be done according to a debt securities issuance programme approved by the Authority. - Appointing a paying agent in the State. - If the issuer is a joint-stock company, an agreement must be signed with an independent representative to represent the debt securities holders and protect their rights and interests. This may be the trustee for secured debt securities, or the paying agent. ### 5.2.3 Listing Conditions -- Debt Securities To be listed, debt securities must satisfy the following conditions: - To comply with the provisions of the Commercial Companies Law and with the issuer's constitutional documents. - Unless the Authority decides otherwise, the aggregate value of all debt securities to be listed must be at least AED 10 million or the equivalent in a foreign currency that is acceptable to both the Authority and the market. - Where the debt securities to be listed are secured, a trustee must be appointed to represent the interests of the holders and that trustee must have the right of access to any information relating to the assets. ### 5.2.4 Continuing Obligations There are further obligations that need to be complied with for debt securities offered through a public subscription. These include: 1. Immediately announcing the following through the means determined by the Authority: - any issuance of any block of shares or new program by the issuer - any change in the terms and conditions of the debt securities - any redemption or cancellation of the debt securities - any appointment or replacement of the trustee or paying agent as applicable - any event of default concerning the conditions of issuing and listing debt securities - any event requiring the immediate notification of the trustee by virtue of the trust agreement. 2. Sending to the Authority and the market a copy of all correspondence sent by the issuer to the holders of the debt securities, as well as any other information or documentation regarding the meetings of holders of debt securities at the time of their issue. 3. Notifying the Authority and the market of any of the following events, information or matters as soon as they come to the issuer's attention. The issuer must also publish the same on its website upon the approval of its board of directors/managers: - any decision not to pay any interest payment on any of the issuer's debt securities - any proposal to issue new securities by the issuer, as well as any guarantee or warranty that relates to this new issuance - any amendments to the issuer's constitutional documents which may materially affect the debt securities holders - any proposed changes to the structure of the issuer's capital which may materially affect the debt securities holders - any decision to change the nature of the issuer's activities or business if such change negatively and materially affects the debt securities holders - any change to the composition of the issuer's board of directors or to its managers - the termination of any period of time which cause the winding-up of the issuer, its holding company or any of its subsidiaries - the entry into possession of or the sale by any mortgagee of a portion of the issuer's assets which in aggregate value represents an amount in excess of 10% of the book value of such assets - the making of any judgment, or order by any court of competent jurisdiction, which may adversely affect the issuer's enjoyment of any portion of its assets which in aggregate value represents an amount in excess of 10% of the book value of such assets - passing of any law, decree or government decision by any competent entity to wind up or dissolve the issuer. 4. Any purchase, redemption or cancellation by the issuer, or any member of its group, of its debt securities or ***Sukuk*** must be disclosed to the Authority and the market, as soon as possible after such purchase, redemption or cancellation and such operation must be published on the issuer's website. The announcement should also state the amount of the relevant debt securities or *Sukuk* outstanding after such operations. 5. If the debt securities are traded outside the market, the issuer must immediately disclose, through the means determined by the Authority, any information that may materially affect the following: - the price and value of the debt securities - the investor's decision to invest in the debt securities or otherwise. A lock in the sky Description automatically generated A foreign issuer and an issuer incorporated in a financial free zone in the State with debt securities listed on the market must comply with the following continuing obligations: - In the event of a conflict between the provisions of the Authority's regulations and those of a foreign market or a financial free zone market, the issuer must immediately notify the Authority of the conflict to enable it to take any appropriate decisions or steps as it deems fit. - Provide the Authority and the market, through electronic means and in a form suitable for publishing by the Authority and the market as well as on the issuer's website, all information and documents notified to or documents filed with the relevant foreign market or financial free zone market. - Immediately notify the Authority and the market of any change in any law, legislation or regulation in the state of the foreign issuer or at the financial free zone or any other state which may affect the transferability or price of the debt securities issued by the foreign issuer or the issuer incorporated in a financial free zone including any change or amendment in any tax legislation. - The foreign issuer or the issuer incorporated in a financial free zone must inform the Authority immediately if its debt securities cease to be listed, or if the issuer is subject to disciplinary action by the foreign market, a financial free zone market or any other securities regulatory body (whether equity securities, debt securities or *Sukuk*). - Sending to the Authority its annual financial statements and interim financial reports filed with the foreign market or the financial free zone market, as necessary, along with any circulars or notices sent to holders of the listed debt securities as soon as any circulars or notices are issued. ### 5.2.5 Suspension and Cancellations The Authority reserves the right, after deliberation with the market, to suspend the listing and trading of debt securities or cancel their listing if exceptional circumstances arise, or if an event occurs that may threaten the maintenance of an orderly market. The Authority may also suspend or cancel, if it considers it necessary for the protection of investors and normal market activities, if it sees a violation of the debt securities holders' right or if the issuer fails to comply with the provisions of the Authority's regulations, undertakings, requests and documents it has signed. The Authority may also suspend the listing and trading of any listed debt securities in any of the following events: - If the issuer ceases to comply with any of the listing conditions or violates any of the conditions stated in the Authority's regulations. - If the specified listing fees or fines have not been paid. Furthermore, a temporary suspension of trading may be requested by an issuer upon the occurrence of a material event that requires immediate disclosure under the Authority's regulations, provided that an announcement of the material information is made as soon as practicable following the suspension. The Authority may also cancel the listing of any listed debt securities in any of the following circumstances: - If a decision is made to dissolve or wind up the issuer. - If the suspension of listing continues for more than six months. - If the relevant debt securities are completely redeemed. Trading in suspended or cancelled debt securities is prohibited and neither the Authority nor the market will be responsible for indemnifying any person or entity for any loss which occurs as a result of the suspension or cancellation of the listing of the debt securities. The issuer may voluntarily cancel the listing of its debt securities by submitting a request to the Authority in accordance with the terms of the prospectus and provided the following conditions are met: - The issuer obtains the approval of its general assembly/board of directors/relevant body in accordance with the requirements of its constitutional documents. - Notifying the relevant debt securities holders, the Authority and the market in writing at least 90 days in advance. The notification must include a comprehensive and sufficient clarification of the issuer's decision to cancel the listing, as well as the Authority's approval. 6. Islamic Securities 6.1 Offering Islamic Securities #### Learning Objective 4.6.1 Know regulation regarding the listing and offer of Islamic securities (Decision No. (20 /R.M) of 2018) Decision No. 20 of 2018 applies to an issuer which issues, or wishes to offer or issue, an Islamic security inside or outside the UAE, and to a foreign issuer that offers or wishes to offer an Islamic security in the UAE. It requires the following data and documents, as a minimum, to be provided in the offering document or prospectus: 1. The names, qualifications and expertise of the members of the Shariah Supervisory Committee. 2. Mechanism for organising the membership and functions of the Shariah Supervisory Committee and remuneration of the members thereof. 3. All details of the Islamic security and the issuer, including the mechanism of structuring and issuing of the Islamic security and the contracts and documents thereof, as well as methods for its evaluation and assets, and the risks of ownership of such assets to the holders of the Islamic security. 4. Mechanism for re-allocating the resources, and the disposal proceeds if the Islamic security or the issuer ceases to be compatible with the principles of Islamic Shariah. 5. The Shariah controls governing the trading of the Islamic security and the necessary action when violated. 6. Mechanism for addressing the cases of conflict of interests among the functions assigned to the members of the Shariah Supervisory Committee and their personal interests, and how they are managed. 7. Methods of resolution of disputes relating to the Islamic security or the issuer. 8. The mechanisms of disclosure and how they are applied. In addition, a foreign issuer wishing to offer **Islamic securities** within the UAE must provide the Authority with the following statements: 1. A statement of any conflict between the laws applicable in the country of issue of the security and the laws applicable in the UAE, and any discrepancies in the Shariah principles in force between the two countries. 2. A statement of any differences in taxation on the Islamic security. 3. A statement of any conflict between the International Financial Reporting Standards (IFRS) and the standards of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) in cases where the foreign issuer pledges to abide by these standards in accordance with the laws of the country of issue. 6.2 Listing Islamic Bonds #### Learning Objective 4.6.2 Understand the terms concerning the listing of Islamic bonds (Decision No. (16) of 2014); application (Articles 2 & 7); listing conditions -- companies (Articles 4 & 6); listing conditions -- Islamic bonds (Article 5); advertisements (Article 12); continuing obligations (Articles 17 & 18); suspension and cancellation (Articles 19--23) ### 6.2.1 Application The Authority's Decision No. 16 of 2014 concerning the regulation of *Sukuk* (or Islamic bonds) applies to *Sukuk* being issued in the UAE or listed on a market in the UAE. It excludes government *Sukuk*. An entity (the obligor) wishing to issue, offer and conduct a primary listing of *Sukuk* in the market must submit an application to the Authority. The application must include: - a draft prospectus - statements confirming the disclosure in the prospectus, signed by the obligor - a resolution of the obligor's general assembly/board of directors/relevant body approving the issuance and listing of the *Sukuk* in accordance with the constitutional documents and detailing whether the *Sukuk* are convertible to shares or otherwise - the most recent audited financial statements of the obligor - if the *Sukuk* are guaranteed by any other company, the most recent audited financial statements of the guarantor - if the *Sukuk* are guaranteed by the government, a copy of the law, regulation, resolution or document allowing that governmental entity to provide such guarantee must be submitted together with a guarantee document for the *Sukuk* to be issued and listed - payment of the fees specified by the Authority, and - any other documents, requirements, conditions or controls specified by the Authority. ### 6.2.2 Listing Conditions -- Companies Corporate obligors' constitutional documents must not contain any restrictions which prevent acting as an obligor in respect of the issuance and listing of *Sukuk.* Furthermore, where the primary listing will be for retail *Sukuk*, the obligor must be incorporated in the UAE and outside of a financial free zone. To obtain approval for the issuance and primary listing of *Sukuk* in the market, the obligor must: - Prepare and submit a prospectus. - If the *Sukuk* are convertible, the prospectus must include details of the convertible *Sukuk* and the conversion procedure. - The issuance, listing and offering of the *Sukuk* may be done according to a *Sukuk* issuance programme to be approved by the Authority and in accordance with the procedures and documents it may request. - Entering into a trust agreement which must include a confirmation of the trustee's right to obtain any information regarding the *Sukuk* as well as the trustee's obligations to protect the rights and interests of the *Sukuk* holders. - Appoint one of the licensed banks in the UAE to act as a paying agent in the UAE. ### 6.2.3 Listing Conditions -- Islamic Bonds Listed *Sukuk* must be approved by the Shariah Committee at the obligor. If the obligor does not have a Shariah Committee, the *Sukuk* must be approved by a Shariah Committee approved by the arranger of the issue. Unless the Authority decides otherwise, the total nominal value of *Sukuk* to be issued and listed must not be less than AED 10 million or its equivalent in any foreign currency accepted by the Authority and the market.  ### 6.2.4 Advertisements With the exception of government entities, any advertisement which is to be issued in the UAE and which is to be issued by or on behalf of an obligor or an issuer of *Sukuk* admitted to listing must be authorised by the Authority before publication. ### 6.2.5 Continuing Obligations An obligor must, with respect to primary listing of *Sukuk*, comply with the following continuing obligations: - Immediately notify the Authority and the market of any new developments or information which are not public knowledge and which may be expected to materially affect market activity in or the price of the listed *Sukuk* or the ability of the obligor or the issuer to meet their commitments. The obligor must, immediately after obtaining the approval of the Authority, publish such new developments on its website in the Arabic and English languages. - Continuously maintain a paying agent in the UAE until the *Sukuk* are finally redeemed. The obligor must also notify the Authority and the market of any change of paying agent. - Inform the Authority and the market of any of the following events as soon as they come to the attention of the obligor and publish the details on its website: - the presentation of any winding-up petition, or the appointment of a provisional liquidator in respect of the issuer, the obligor, the obligor's holding company or any of its subsidiaries - the passing of any resolution by the issuer, the obligor, the obligor's holding company or any of its major subsidiaries that it will be wound up or dissolved - the termination or suspension of activities for any period of time which may cause the winding up of the issuer, the obligor, the obligor's holding company or any of its subsidiaries. - Submit to the Authority and the market the audited annual financial statements within 180 days of the end of the fiscal year. The financial statements must be prepared according to international auditing standards. - Pay the specified annual fees to the Authority and to the market. - Provide the Authority with all of the information which it deems necessary for the protection of investors and any other information that it may request from time to time to ensure compliance with the provisions of its regulations. In addition to the obligations above, there are further continuing obligations in relation to listed retail *Sukuk* that include the following: - Immediately announcing any of the following: - Issuance of any block of shares or new program by the obligor. - Any changes in the terms and conditions of the retail *Sukuk*. - Any redemption or cancellation of the retail *Sukuk*. - Any appointment or replacement of the trustee or paying agent as applicable. - Any event of default concerning the conditions of issuing and listing the retail *Sukuk*. - Any event requiring the immediate notification of the trustee by virtue of the trust agreement. - Sending to the Authority and the market a copy of all correspondence sent by the obligor or the issuer to the retail *Sukuk* holders as well as any other information or documentation regarding the meetings of retail *Sukuk* holders as soon as such information or documentations are issued. - Notifying the Authority and the market of any of the following events, information or matters as soon as they come to the obligor's attention. The obligor must also publish the same on its website upon the approval of its board of directors/managers: - Any decision not to pay any profit payment for any of the obligor's retail *Sukuk*. - Any proposal to issue new securities by the obligor, as well as any guarantee or warranty which relates to this new issuance. - Any amendments to the obligor's constitutional documents which may materially affect the retail *Sukuk* holders. - Any proposed changes to the structure of the obligor's share capital which may materially affect the retail *Sukuk* holders. - Any decision to change the nature of the obligor's activities or business if such change may negatively and materially affect the retail *Sukuk* holders. - Any change to the composition of the obligor's board of directors or to its managers. - The termination of any period of time which causes the winding up of the issuer, obligor, obligor's holding company or any of its subsidiaries. - Taking a possession or the sale by any mortgagee of a portion of the issuer or obligor's assets which in aggregate value represents an amount in excess of 10% of the book value of such assets. - The issuance of any judgment, or order by any court of competent jurisdiction, which may adversely affect the issuer or the obligor's enjoyment of any portion of its assets which in aggregate value represents an amount in excess of 10% of the book value of such assets. - Passing of any law, decree or government decision by any competent party to wind up or dissolve the issuer or the obligor. - Any purchase, redemption or cancellation by the issuer or the obligor, or any member of its group, of its debt securities or *Sukuk* must be disclosed to the Authority and the market, as soon as possible after such purchase, redemption or cancellation and such operation must be published on the obligor's website. The announcement should also state the amount of the relevant debt securities or *Sukuk* outstanding after such operations. - If the retail *Sukuk* are traded outside the market, the obligor must immediately disclose, through the means determined by the Authority, any information that may materially affect the following: - The price and value of the retail *Sukuk*. - The investor's decision to invest in the retail *Sukuk* or otherwise. ### 6.2.6 Suspension and Cancellation The Authority may, after deliberating with the market, suspend the listing and trading of any *Sukuk* or cancel their listing if exceptional circumstances arise or if an event occurs that may threaten the maintenance of an orderly market. The Authority may also do so if it considers it necessary for the protection of investors and normal market activities, if it sees a violation of the *Sukuk* holders' rights or if the obligor fails to comply with the provisions of the Authority's regulations, undertakings, requests and documents it has signed. The Authority may also suspend the listing and trading of any listed *Sukuk* in any of the following events: - If the obligor ceases to comply with any of the listing conditions or violates any of the conditions stated in the Authority's regulations. - If the specified listing fees or fines have not been paid. A temporary suspension of trading may be requested by an obligor upon the occurrence of a material event that requires immediate disclosure under the Authority's regulations, provided that an announcement of the material information is made as soon as practicable following the suspension. The Authority may accept or reject the request for suspension. The Authority may decide to cancel the suspension of trading of any *Sukuk* upon the obligor's request and where the reasons for the suspension cease. The Authority may also cancel the listing of any listed *Sukuk* in any of the following circumstances: - If a decision is made to dissolve or wind up the issuer or the obligor. - If the suspension of listing continues for more than six months. - If the relevant *Sukuk* are completely redeemed. Trading in suspended or cancelled *Sukuk* is prohibited and neither the Authority nor the market are responsible for indemnifying any person or entity for any loss which occurs to such person as a result of the suspension or cancellation of the listing of any *Sukuk*. The obligor may submit a voluntary request to the Authority to cancel the listing of its *Sukuk* in accordance with the terms of the prospectus provided the following conditions are met: - The obligor must obtain the approval of its general assembly/board of directors/relevant body in accordance with the requirements of its constitutional documents. - Notifying the relevant *Sukuk* holders, the Authority and the market in writing at least 90 days in advance. The notification must include a comprehensive and sufficient clarification of the obligor's decision to cancel the listing, as well as the Authority's approval. 7. Derivatives 7.1 Derivative Contracts #### Learning Objective 4.7.1 Know regulations concerning derivatives contracts (Decision No. (22/R.M) of 2018) The Authority's Decision No. 22 of 2018 lays down certain regulations in respect of derivatives contracts. The decision mainly concerns exchange-traded derivatives which could be based on local securities or indexes, or foreign securities. The listing and trading of exchange-traded derivatives must be in accordance with the rules issued by the market and approved by the Authority. The market is obliged to continuously disclose and update details regarding the underlying securities of the exchange-traded derivatives traded on that market. It should also refrain from deregistering any underlying securities, in case there are pending unsettled exchange-traded derivatives in the market based on those underlying securities. In relation to its exchange-traded derivatives the market is also required to: - specify the number of structured financial derivatives in the series of contracts - specify the underlying securities, the month of contract settlement, month of contracting, and the effective date of the contract - specify the initial margin - announce the working days, trading hours, opening and closing times - set the rules and conditions for listing and trading, and - settle all transactions through the central counterparty (CCP). The market may also enforce limits on its exchange-traded derivatives. The Authority or the market, with the approval of the Authority, may temporarily or permanently suspend or delist any exchange-traded derivatives in the event of extraordinary circumstances or an event that undermines the proper working, or if it deems that the trading of such contracts will not serve the public interest or would prejudice or violate the shareholders' rights. 8\. Crypto Assets Introduction -- What are Crypto Assets? Here is a brief explanation from a very credible and reliable source, the Bank of England: *Source: Bank of England Knowledge Bank* In the UAE, the Authority has provided a technical definition of a **crypto asset** as: This definition is drawn from the Authority's Decision No. 23 of 2020 Concerning Crypto Assets Activities Regulation that regulates crypto assets, exchanges, and custodial services within the UAE. The following sections provide more detail from this regulation. It is important to distinguish between the two major types of crypto asset that are defined in the regulations, security tokens and commodity tokens: - A **security token** is a crypto asset that takes a form similar to a financial instrument like a share or a bond. It may make the holder of the token a part owner of a venture and provide an entitlement to share in future profits (like a share), or give the holder the right to be repaid a specific sum of money (like a bond). - A **commodity token** is a crypto asset that is not a security token. As detailed in section 8.2 below, some commodity tokens are regulated by the Authority and referred to as regulated commodity tokens, others are not. 8.1 General Obligations #### Learning Objective 4.8.1 Know general obligations in respect of: offering crypto assets (Article 6); offering security tokens (Article 7); listing crypto assets on a crypto asset exchange (Article 8) Chapter 2 of Decision No. 23 of 2020 provides some general obligations in respect of crypto assets in respect of those offering, promoting or listing crypto assets in the UAE. ### 8.1.1 Offering of Crypto Assets in the State All offer documentation in respect of crypto assets offered or promoted in the UAE must: - be clear, fair, accurate and not misleading - not contain any incorrect statement or omit any statement necessary to prevent the data contained in the offer documentation being misleading. Where a crypto asset has been approved by the Authority for offering in the UAE, or for listing on a crypto asset exchange, the offering person must also ensure that: - all rights and features of the crypto assets described in the offer documentation are properly recorded in the operations of the computer software, protocol or other technology supporting the crypto asset - in situations where funds are collected for the development of a project or to be otherwise used before the relevant crypto assets are issued, the necessary measures are adopted to prevent any misuse of the collected funds until the crypto assets are issued - investors are provided with reasonably regular information about the progress to achieving any project milestones for development of technology or other matters funded by the offering, and disclose in the offer documentation the periods during which such information will be provided - in circumstances where the obligation stipulated in the offer documentation related to the development of technology or other matters funded by the offering is not met, this will be stated in a notification to persons who have accepted the relevant offer, together with an explanation of the relevant matter - those who have accepted the offer are promptly notified in advance of material changes in the nature of the relevant software relevant to their rights in respect of the crypto assets - where the crypto asset does not provide for a right for holders to a claim against an offering person in respect of a default in the performance of benefits provided to holders of the crypto assets (as described in the offer documentation), the offer documentation clearly discloses this fact. Any person promoting or offering crypto assets in the UAE must take reasonable steps to monitor the developments in the nature, transferability and technology underpinning such crypto assets and, promptly upon becoming aware, notify the Authority in the event that a crypto asset changes to, or from, being a regulated commodity token or security token. ### 8.1.2 Offering Security Tokens in the State Crypto assets in the form of security tokens may only be offered for subscription and/or issued in the UAE by an offering person incorporated in the UAE or in a financial free zone within the UAE. The following are also required: - Submitting the offer documentation to the Authority where the offering is limited to qualified investors. - Prior approval of the Authority if the offering includes persons other than qualified investors. In order to obtain the Authority's approval for the offering and issuance of security tokens, the offering person must: - identify the security on the basis of which the security token will be classified - provide the Authority with copies of the required offer documentation - provide the Authority with details of its technology development in respect of the security tokens, external audits and details of its senior employees who are responsible for technology development and supervise it - submit any other application documentation in accordance with the regulation. The Authority will: - request the offering person to maintain the final register of ownership of the securities related to the security tokens by way of an electronic or digital network or database - request the offering person not to issue physical certificates in respect of the securities related to security tokens unless otherwise prescribed in the constitutional documents of the offering person or the terms of issuance - request the offering person not to conduct transfers of the security tokens by way of a written document. The Authority reserves the right to subject the security tokens to restrictions on trading for such period as it feels necessary. ### 8.1.3 Crypto Assets Listing on a Crypto Asset Exchange A crypto asset exchange is essentially a platform or facility for the trading, conversion and/or exchange of crypto assets. The regulations state that no crypto asset can be listed and made available for trading on a crypto asset exchange licensed by the Authority unless either: - the offer documentation for the crypto asset has been submitted to the Authority where the offering is limited to qualified investors - prior approval of the Authority for the offering of the crypto asset has been obtained where the offering includes persons other than qualified investors. If commodity tokens are listed and made available for trading, they are immediately categorised as regulated commodity tokens. In addition to the offer documentation, to obtain the Authority's approval for listing a crypto asset and making it available for trading on a crypto asset exchange, the offering person must also: - appoint a custodian for the crypto assets, a 'crypto asset custodian', unless the Authority decides that custody arrangements in respect of the relevant crypto asset are not required based on a justified request by the offering person - disclose to investors all fees and commissions related to listing of the crypto assets on the crypto asset exchange. A crypto asset may be listed and available for trading on more than a single crypto asset exchange licensed by the Authority in the UAE. 8.2 Disclosure Requirements #### Learning Objective 4.8.2 Know the disclosure requirements for: crypto assets (Article 9); security tokens (Article 10); commodity tokens (Article 11) ### 8.2.1 Disclosure Requirements for Crypto Assets The following disclosure requirements apply to crypto assets when they are offered or issued to investors generally (including investors that are not qualified investors), and when the crypto assets are approved for listing on a crypto asset exchange: - In the event that the funds are kept with the offering person (or the person acting on its behalf, including any crypto fundraising platform) until the crypto assets are issued, a statement clarifying whether the crypto assets will be immediately issued to the subscribers after reaching the required funding amount, or will be issued after a period, plus details of the arrangements for keeping the funds with an incorporated institution and the rights that the subscribers have in relation to the issuance of future crypto assets and the extent at which these rights represent crypto assets. - Details of all material risks relevant to the investment as a result of the technology adopted by the offering person or embedded within the crypto asset or system in which the crypto asset is recorded. - A statement clarifying the computer software and protocols used or relied upon for the operation of the crypto assets, and the extent of engagement of third-party software developers or providers and any rights of the offering person against them. The statement should clarify the extent to which the offering person controls such software, along with the implications for investors in respect of possible future changes to the software, protocols, functionality and operations of the crypto assets and the rights of investors. The statement must include all material features of the computer software related to the exercise by holders of the crypto assets of their rights and performance of any obligations. Any instances where such holders may be deprived of their rights (or have their rights diluted) by way of the operation of the software must be clearly demonstrated. If such software is based on an open-source, a link to the source code repository or equivalent should be provided. - Clarifying the related milestones or dependencies behind the development of the crypto assets or the funded project in respect of the crypto assets and the implications for investors as a result of the failure to reach such milestones, including any refund arrangements. - Details of the time schedule for achievement of stated goals of any relevant project and commitments and incentives for those persons managing the relevant project. - Financial information related to the assets, liabilities, financial position, profits and losses of the offering person or the relevant business or operations to which the crypto assets relate for the last three fiscal years before offering. - Details of the applicable custody arrangements (or to be applied) for the crypto assets and the ability of, and procedures required for, investors to access, hold, transfer and control the crypto assets or their electronic representations (including any requirement to maintain an electronic portfolio, or, if such portfolio is maintained on the investor's behalf by a third party, the terms of such arrangements). Where applicable, this would include details of how cryptographic keys (or equivalent) are generated and stored in respect of the crypto assets or investor responsibility for arranging this, procedures with respect to erroneous or fraudulent transfers, lost keys, and other material items. - Details of technology or software requirements that investors must manage and/or operate in order to exercise their rights in respect of the crypto assets. - Specific notice clarifying whether investors participating in the relevant crypto asset offering have the right to have their contribution refunded if any funding requirement is not met at the end of the offering and a description of the refund mechanism, including the expected schedule of when such refund will be completed. - Details of any disaster recovery, back-up and/or insurance/guarantee arrangements applicable in the event of a failure, or confirmation if no such arrangements are in place. - Details of the intellectual property in respect of the relevant project, including software, any patent, copyright and/or trademark ownership, and identification of whether the intellectual property is issued on an open-source basis. - Details of existing business operations of the team involved in the project to identify a personal record over the last five years and any competing or related projects. - The offering person's identity, headquarters of business (and its jurisdiction area, if different from its headquarters of business), including place where it can be notified with legal process; and, if the offering entity is different from the offering person, (1) the identities of the principal management or key contributors who participate in the governance and management of the crypto asset, and (2) the headquarters of business of the offering entity and address where the offering entity can be notified with legal process. - Details of prior obligations of investors in respect of the relevant project. - Details of the outstanding token provision, any token burning schemes or other measures that could result in a contraction of token supply, and token release and reserve requirements, including a breakdown of tokens held by different classes or groups of investors and the basis for any tokens to be retained by management or otherwise in treasury, along with the rationale, basis and process for release of additional tokens. An explanation of third-party audits in relation to the software developed for the relevant project and related security procedures. - Details of any fees, incentives, or other compensations to be paid to management, officials, or developers of the crypto asset, or contributors to its development or in respect of any exchange, fundraising platform or trading venue of any nature. - An explanation of liability and risk allocation between the offering person and the service provider for issues relating to the software, as well as disclosure of risks related to any possible disruption or termination of the relationship between the offering person and the service provider. The offer documentation must also include a 'key investor information' document or Section, written in a concise manner and in non-technical language, that highlights the essential characteristics of the crypto assets and is submitted to investors so that they are reasonably able to understand the nature and the risks of the crypto asset that is being offered to them. ### 8.2.2 Disclosure Requirements for Security Tokens In addition to the offer documentation required for the offering and issuing of crypto assets detailed above, further disclosure is required for crypto assets offered in the UAE that are security tokens: - Describing how the relevant crypto asset represents a legal right to interests in the relevant security and any rights or interests of any other party in respect of the security, or underlying assets, represented by that crypto asset. - Describing how an investor may exercise its rights in respect of the investment (or underlying security) in the event of a failure or insolvency of any operator of software or technology connected to the security tokens. - Detailing the type of security represented by, or created by, the security token. ### 8.2.3 Disclosure Requirements for Commodity Tokens In addition to the offer documentation required and detailed in section 8.2.1 above, all regulated commodity tokens offered or issued in the UAE must include the following information and disclaimer: - The crypto assets are not considered securities under the laws applicable in the UAE and are not afforded any protections under such laws. - The crypto assets are not legal tender in any state and are not backed by any government. - In the event that the Authority does not approve the listing of the crypto assets on a crypto asset exchange in the UAE, that the crypto assets are not tradable and/or subject to restrictions on their resale in the UAE. - Prospective purchasers of the offered crypto assets should conduct their own due diligence before investing and consult a certified financial adviser if any terms of the offer of promotion documentation are not fully understood. - The nature of crypto assets may lead to an increased risk of fraud or cybercrimes. - Transactions related to crypto assets may be irreversible, and, accordingly, losses resulting from fraudulent or accidental transactions may not be recoverable. - The volatility and unpredictability of the price of the crypto asset may result in significant loss over a short period. - Investors must be willing to lose the entirety of their invested capital and accept that they may have no recourse in the event that purported rights or benefits of the crypto assets are not received, any relevant project does not proceed, or other investors in the market become unwilling to exchange a fiat currency (such as the Dirham or US Dollar) for such crypto asset. The Authority may, paying due regard to the public interest and in consideration of the purposes of the regulations, issue an approval or no objection for the offering or issuing of commodity tokens in the UAE upon application by a prospective offering person or its related party. In granting such approval or no objection, the Authority may, at its discretion, require the application of the certain parts of the disclosures detailed above, such as the disclaimers. 8.3 Crypto Asset Custodians #### Learning Objective 4.8.3 Know the duties and obligations of crypto asset custodians (Article 13) As expected, a crypto asset custodian is expected to keep the crypto assets under its custody safe and secure. In order to do so, a crypto asset custodian must satisfy the following regulatory requirements: - Create a separate account or portfolio for each client so that it contains the details of its ownership of crypto assets and transactions conducted on its account. - Keep crypto assets belonging to the client segregated from the crypto asset custodian's own assets and property. - At all times, to hold amounts of crypto assets equal to the aggregate amounts to which the crypto asset custodian is obligated to all clients, in each case in the form of the same crypto asset. - Not transfer, hypothecate, grant a security interest in or a lien over, loan to a third party, or otherwise allow adverse claims to arise in, crypto assets belonging to client. - Only transfer crypto assets out of a client's account upon the client's express instruction, and not on its own initiative or discretion, unless all circumstances under which the custodian may exercise its own initiative or discretion are disclosed in advance to, and consented to by the client. - Store cryptographic keys, equivalent electronic data comprising user rights in respect of crypto assets or user access log-ins, outside of a network subject to online attack. - Ensure that no single individual person within its custody, who has the rights to operate such cryptographic keys, is able to completely authorise actions in respect of the crypto assets or transactions of associated fiat currencies held for clients. - Create and maintain a log of all movements of crypto assets and related fiat currencies held in custody, changes in respect of related cryptographic keys and individual persons authorising such actions. - Set policies and procedures that provide actions to be taken by the crypto asset custodian, whether individually or across the firm, to mitigate loss caused to clients in the event any crypto assets or associated cryptographic keys become compromised, along with arrangements for stopping transactions until the relevant problem is resolved. - Not aggregate ownerships of crypto assets between clients in a manner that may compromise the ability of the crypto asset custodian to identify and maintain each client's crypto asset. - Adopt procedures that identify and prevent the execution of multiple instructions in respect of the same transaction approved by its client. - Avoid conflicts of interests between its functions as a crypto asset custodian and any other activities it, or its related party, conducts. To the extent such conflicts cannot be avoided, the crypto asset custodian must notify the Authority of the conflict and its relevant systems and controls in place to mitigate the issue, and ensure that disclosure of the conflict is provided to all relevant clients. The crypto asset custodian must enter into a signed written agreement with all holders of crypto assets in its custody that specifies the above duties. 8.4 Fundraising for Crypto Assets 4.8.4 Know the fundraising standards for crypto assets: standards (Article 14); platforms (Article 15) ### 8.4.1 Fundraising Requirements Unless it is restricted to the more knowledgeable and capable qualified investors, raising funds in the UAE to subscribe to an offer of crypto assets has to meet certain requirements. - The fundraising must be conducted by a person holding a licence issued by the Authority to conduct such activity in respect of crypto assets in the UAE. The licence must include approval for operating a crypto fundraising platform detailed in section 8.4.2. - No client can be permitted to invest more than AED 350,000, or its equivalent. The Authority may amend this amount from time to time. - The only funds and crypto assets that may be accepted in fundraising shall be those that can be subject to appropriate controls over combating money laundering and terrorism financing crimes. - The person licensed to fundraise must comply with the disclosure requirements, detailed in section - The fundraising person may not conduct any trading or exchange of the issued crypto assets, unless approved to do so by the Authority. ### 8.4.2 Licensing Crypto Fundraising Platforms The Authority will only grant a licence to operate a crypto fundraising platform in the UAE if the following conditions are met: - - - - - - The Authority may specify additional financial resources or guarantees to be provided by operators of crypto fundraising platforms as it considers necessary to cover any risk exposed to clients and in the event that such requirements cannot adequately be covered due to the lack of available market providers. The operator of the crypto fundraising platform must also apply the appropriate controls against money laundering and terrorism financing crimes to persons wanting to invest through the platform. The crypto fundraising platform may not hold crypto assets or money or conduct any activities in respect of which a licence as a custodian or a crypto asset custodian is required, without obtaining the appropriate licence. If the operator of a crypto fundraising platform seeks to conduct financial services activities other than fundraising, such activities shall be identified in its licensing application, along with details of the systems and controls to ensure independence of its fundraising functions and the compliance with the requirements related to fundraising, as well as the applicable requirements in relation to the other financial services. 8.5 Crypto Asset Exchanges #### Learning Objective 4.8.5 Know requirements for licensing a crypto asset exchange (Article 16) Operating a crypto asset exchange in the UAE requires a licence from the Authority. The grant of a licence requires meeting the following requirements on an ongoing basis: - Provide the necessary technological systems and controls that facilitate the process of recording and reporting trading and transactions taking place on the platform, so that the authority can supervise and control the platform and receive prompt and accurate information regarding the trading and transactions. - Provide effective market surveillance programs, which are subject to regular review and development, to control and monitor trading and transactions in the market, and to detect and prevent conduct amounting to **market abuse**. - Establish appropriate controls to combat money laundering and terrorism financing crimes. - Restrict those permitted to trade on the crypto asset exchange to the following: - persons able to demonstrate a record of regularly investing in securities, commodities and/or crypto assets or having appropriate and adequate knowledge and expertise required to invest in securities, commodities and/or crypto assets - persons who only aim to acquire or sell crypto assets solely in relation to exercising the relevant utility provided by the crypto assets, without having an investment purpose or achieving future revenues. - Provide users with a risk statement prepared in line with the disclosure requirements detailed earlier in relation to the crypto assets. - The exchange's operator must establish the necessary rules, controls and procedures to operate the crypto asset exchange, such as: - fair, transparent and objective rules for accessing the services provided by the crypto asset exchange - permitted order types - prohibited acts and procedures to ensure compliance - available dispute settlement mechanisms - procedures to ensure fair and orderly trading to avoid giving priority to or preferring the execution of trades of some users over others - disclosing the commissions and fees for trading on the crypto asset exchange clearly to users, in advance of their submission - adopting mechanisms to ensure the resilience, integrity and reliability of critical systems in line with industry best internationally accepted practices, including a disaster recovery or back-up arrangements in place, in order to protect the users' crypto assets and mitigate, to the extent practicable, disruption. 8.6 Crypto Assets Listings #### Learning Objective 4.8.6 Know requirements relating to the licensing of crypto assets on a crypto asset exchange (Article 17) To list a crypto asset on a crypto asset exchange, a listing application must be submitted to the Authority, accompanied by the following information and data: - initial and on-going criteria for selection of the crypto asset for listing and trading on its platform - the type and details of the relevant distributed ledger technology and/or protocol used - any fees or other compensation paid by the issuer, promoter, or sponsor of the crypto asset or any third party to the crypto asset exchange operator in exchange for such listing - any hacking vulnerabilities of the technology underlying the crypto assets, and - the traceability of the crypto assets and the ability to apply the controls over combating money laundering and terrorism financing crimes. The Authority may impose restrictions on trading of the crypto asset for a limited period, as the Authority deems appropriate. 8.7 Related Financial Activities #### Learning Objective 4.8.7 Know requirements for financial activities related to crypto assets (Article 18) No financial activities may be conducted in the UAE in respect of security tokens and regulated commodity tokens without obtaining a licence or approval from the Authority, and the Authority reserves the right to prescribe directions from time to time in relation to financial activities that may be licensed in respect of regulated commodity tokens. The person applying for the licence must identify the financial activities related to regulated commodity tokens that it intends to conduct in the UAE in its licensing application. The Authority will then decide on the applicability of its regulations and decision to such financial activities related to the regulated commodity tokens. Brokerage activity in relation to the crypto asset is not limited to the brokerage activities conducted by the members of the exchange. The provision of exchange services into, or from, fiat currency and other crypto assets and receipt for transmission and transmission of crypto assets are also considered as brokerage activities regulated by the Authority, unless the relevant person is registered as a crypto asset exchange operator or a crypto asset fundraising platform operator. If any licensed person is responsible for maintaining the record of ownership or transactions in crypto assets, including by having unilateral rights to control a distributed electronic network or database acting as such record, the licensed person must consult with the Authority on its systems to ensure that it is accurately maintaining records related to all units of such related crypto asset. The Authority may prescribe additional requirements and directions depending on the nature of the crypto assets. A person seeking to obtain a licence or approval from the Authority to practise financial activities in the UAE in relation to security tokens and regulated commodity tokens must meet the following conditions and requirements: - Consider the suitability of the crypto asset for the investor when such person is not a qualified investor. When such investor does not have a record of regular investing in crypto assets for the past two years or is not able to demonstrate knowledge and expertise investing in crypto assets in a reasonable manner, the licensed person must be satisfied that the investor is ready to lose all of the invested funds and has the financial resources to bear this loss. - Provide the necessary technical staff to practise the activities in relation to the crypto assets according to directions prescribed by the Authority. - Comply with the technical requirements detailed in section 8.10. - If the licensed person is required to provide an insurance, a bank guarantee or other such financial guarantees, the Authority may request additional financial resources to be retained. 8.8 Qualified Investors #### Learning Objective 4.8.8 Know the document submission requirements for qualified investors (Article 19) A qualified investor is essentially a natural or legal person who is sufficiently knowledgeable to manage its own investments. For individuals to meet this requirement, three conditions must be satisfied: 1. Net equity, excluding the main residence, amounting to AED 4 million. 2. Annual income not less than AED 1 million. 3. The individual declares that they have adequate knowledge and experience in the field of investment to be practised and its risks, or they are represented by an entity licensed by the Authority, in a manner that does not conflict with the terms of its licence. The Authority provides, on its website, an electronic form for submitting documents related to the qualified investors when required. 8.9 Exchange Crimes #### Learning Objective 4.8.9 Know the scope of provisions relating to exchange crimes in relation to crypto assets (Article 20) As with securities like shares and bonds, exchange crime prohibitions exist for crypto assets made available for trading on a crypto asset exchange licensed in the UAE. Specifically, if the operations of an offering person in respect of crypto assets include arranging for issuance and subscription of crypto assets following a subscription of funds by investors, controls must be adopted to avoid the issuance of crypto assets at prices determined by the offering person at their own discretion. 8.10 Financial Crime and Technological Standards #### Learning Objective 4.8.10 Know the required controls for combating money laundering and terrorism financing in relation to crypto assets (Article 21); the applicable technological standards for crypto assets (Article 22) ### 8.10.1 Financial Crime Controls To combat money laundering and the financing of terrorism, certain additional controls are required of firms involved in crypto assets: - Adopt tracing measures in respect of all crypto assets brokered, exchanged and/or transferred into portfolios or otherwise used to fund purchases of other crypto assets, which demonstrate a legitimate transaction history in respect of each such crypto asset. - Not allow the use of crypto assets that do not permit to adopt such tracing measures in order to fund accounts or make transactions. - Treat clients as high risk, for the purposes of client due diligence, to the extent that such clients transact in crypto assets. - Obtain sufficient contact information regarding their clients and suspend or terminate the account of any client who provides incomplete or suspicious contact information. - Conduct all deposits and withdrawals of funds for a client's account only through a designated bank account opened in the name of the client with an authorised financial institution in the UAE or in other jurisdiction acceptable to the Authority. - Establish and maintain adequate and effective regulations and measures to monitor transactions related to crypto assets and to conduct appropriate enquiries and evaluate potentially suspicious transactions. - Update business risk assessments and compliance frameworks in line with risks of money laundering and terrorism financing crimes related to crypto assets, taking into account directions and recommendations issued by the Financial Action Task Force (FATF). - Regularly review the effectiveness of regulations and measures to combat money laundering and terrorism financing crimes using crypto assets and their development when necessary. - If a licensed person outsources the work of compliance with the controls of combating money laundering and terrorism financing crimes to a third party service provider, the licensed person must conduct adequate due diligence in selecting the service provider and monitoring its ongoing performance and notify the Authority of material outsourcings of functions. ### 8.10.2 Technological Standards Licensed persons must ensure that the technology surrounding crypto assets must be capable of satisfying certain standards, including the following: - In respect of new issues and the recording of ownership of crypto assets, be able to provide the Authority, on request, with the real-time information related to ownership and trading in the crypto assets. This can be outsourced to a third party. - Adopt the best international standards regarding the technology applied in the crypto assets generally, including the cyber security, data protection, software development and oversight and encryption. - Develop systems and software to carry out regular internal and external tests and implement any required updates. - Promptly and upon request, provide the Authority with all audits and reviews conducted by a third party for the licensed person. - Adopt cyber security measures and notify the Authority of any material breaches of cyber security or data loss or other events when the technology of the licensed person is compromised in respect of its holding, storage or management of crypto assets. - Appoint a technology officer with sufficient skills and experience to ensure compliance with these requirements and to provide the Authority with reports where required. Where a licensed person outsources to a third-party service provider tasks and works in respect of technology systems and oversight, it will continue to bear the full responsibility for any matters that may arise from the outsourcing, including the failure of any third party to meet the above obligations. 8.11 The Authority's Powers #### Learning Objective 4.8.11 Know the Authority's powers to control, inspect and penalise (Article 23) The Authority can take all the actions necessary to supervise, control and inspect the offering persons, responsible parties in respect of an offering and licensed persons to ensure compliance with the regulations and legislation on crypto assets. It may also investigate any violations discovered through its inspection or included in any complaints it has received. It is within the Authority's powers to inspect or access computer systems, computer data, computer data traffic or equipment where the data of an offering person, responsible party in respect of an offering and licensed person are stored. 8.12 Data Requests, Complaints and Grievances #### Learning Objective 4.8.12 Know the requirements relating to: data and information requests (Article 24); complaints and grievances (Article 25) ### 8.12.1 Requests for Data and Information Among the Authority's powers is the ability to request data and other information. The Authority can request any additional clarifications, information, documents or data, which it deems necessary for the purposes of control and investigation. This could be required from offering persons, other responsible parties in respect of an offering, licensed persons and their employees, members and clients. ### 8.12.2 Complaints and Grievances The Authority has jurisdiction to consider any complaints or grievances related to the provisions of the regulations on crypto assets. 8.13 Penalties for Violations #### Learning Objective 4.8.13 Know the range of penalties for violations: administrative measures (Article 26); penalties (Article 27); publications (Article 28) Violations of the regulations in respect of crypto assets could result in administrative measures being taken, penalties for the violators and publication of the decisions taken. ### 8.13.1 Administrative Measures A violation of the regulations relating to crypto assets could see the Authority take any of the following administrative measures: - Suspend any offering, issuance or subscription. - Terminate the investors' subscriptions and oblige the concerned authorities to return the amounts paid by the subscribers and their revenues. - Suspend the operation of any technology in respect of crypto assets and require: - adopting alternative means for managing the relevant securities returning the subscription funds to investors in commodity tokens. - Block the operation of any website in the UAE by communicating with the relevant governmental authorities.  ### 8.13.2 Penalties The Authority, in the event of a breach of the crypto asset regulations or related decisions and circulars, may impose any of the following penalties on the firm: - address a notice - impose a financial penalty (not exceeding the maximum stipulated in the law or regulations) suspend the licensed person from practising the activity for a period not exceeding a year cancel the relevant licence or approval. Another entity will be identified to assume the tasks of the licensed person whose licence or approval was cancelled, according to the conditions and requirements that the Authority deems appropriate. Individuals, including members of the board, the CEO or employees approved by the accredited person, can also face penalties from the Authority. It may: - issue a notice - suspend the individual from practising the work for a period not exceeding two months - cancel the approval issued for the appointment or accreditation, as the case may be. ### 8.13.3 Publication of the Names of Violators The Authority can choose to publish the names of violators of the crypto asset regulations, including details of their violations and any penalties imposed. End of Chapter Questions Think of an answer for each question and refer to the appropriate section for confirmation. 1. **What are the functions of the Depository Centre?** 2. **Name the three types of reports which must be provided to the Authority.** 3. **What general provision is described in Article 11 of the Authority's Decision No. 19?** *Answer reference: Section 1.3* 4. **What does the legal evidence of ownership of securities mean?** 5. **What is required of newly incorporated companies wishing to issue and offer shares in the** **UAE?** 6. **What is required of an existing company converting to a public joint stock company and wishing to issue and offer shares in the UAE?** 7. **Capital increases by an existing public joint stock company must meet what requirements?** 8. **What can a company increasing its share capital do under a special resolution?** 9. **Under what circumstances will a buy-back transaction be considered as a capital reduction?** 10. **List the requirements to be classified as a first category listed company.** *Answer reference: Section 3.1* 11. **How are second category shares traded?** 12. **What procedures are implemented when a company is delisted?** 13. **What is conciliation?** 14. **List the conditions a corporate person must meet to be described as a qualified investor.** *Answer reference: Section 5.1* 15. **List the conditions that need to be satisfied for a primary listing of a debt security.** 16. **What statements must a foreign issuer provide to the Authority when wishing to offer Islamic securities within the UAE?** 17. **Explain what an obligor must do when entering into a trust agreement.** 18. **Why should a market refrain from deregistering any underlying securities?** 19. **Describe the two crypto asset tokens.** 20. **What are the requirements of trading on a crypto asset exchange?**