This article examines the rules that apply when an Iraqi company raises capital, distinguishing private offerings from public offerings. Companies raise capital in many ways: shareholders subscribe for new shares, a strategic investor takes a stake, a listed company conducts a rights issue or a new company invites the public to subscribe for its shares. Each route is subject to different requirements under company law and, where the public is involved, securities regulation.
The distinction between private and public offerings is central. Offerings to the public generally require approval, prescribed disclosure and compliance with procedures designed to protect investors. Private offerings to a limited number of identified investors may involve fewer formalities, but they are still subject to company law requirements and may cross into public offering territory if they are marketed widely.
The Companies Law No. 21 of 1997, as amended, governs the issue of shares, capital increases, public subscription for joint stock companies and pre-emption rights of existing shareholders. The Interim Law on Securities Markets, issued as Coalition Provisional Authority Order No. 74 of 2004, and Iraq Securities Commission rules govern offerings of securities to the public and by listed companies. The Iraq Stock Exchange’s rules govern listing of new shares. Sector legislation, such as the Banking Law No. 94 of 2004, may impose additional requirements on regulated companies. The Anti-Money Laundering and Counter-Terrorism Financing Law No. 39 of 2015 affects investor identification.
Distinguishing private and public offerings
Whether an offering is public depends on factors such as:
- Number and type of offerees. An offering to a small number of identified investors is more likely to be private than one to an open group.
- Method of marketing. Advertising, media campaigns or general solicitation suggest a public offering.
- Nature of the investors. Offerings limited to existing shareholders or institutional investors may be treated differently.
The applicable rules and the regulators’ practice determine where the line is drawn. Companies should obtain advice before marketing an offering, particularly if they intend to approach a wide group of investors. Commercial and regulatory advice in Iraq can help determine whether a proposed offering is public.
Conducting a private offering
A private offering typically involves a capital increase approved by the general assembly, subscription by identified investors and registration. Key steps include:
- Shareholder approval. The general assembly approves the capital increase and amendment of the articles.
- Pre-emption rights. Existing shareholders may have priority rights to subscribe, which must be offered or waived.
- Subscription and payment. Investors subscribe and pay, with evidence provided for registration.
- Registration. The capital increase is registered with the companies registry.
Even in a private offering, the company should provide investors with accurate information and avoid misleading statements, as general principles of liability apply.
Conducting a public subscription
Founding a new joint stock company with public subscription, or offering shares of an existing company to the public, involves additional requirements under the Companies Law and securities regulation. These typically include approval of the offering, preparation of a prospectus or subscription invitation with prescribed content, appointment of a bank to receive subscriptions, a defined subscription period and procedures for allocation and refund of excess subscriptions.
The prospectus must contain accurate and complete information about the company, its business, its financial position, the use of proceeds and the risks. Founders and directors bear responsibility for its contents.
Raising capital as a listed company
Listed companies raising capital through rights issues or new share offerings must comply with Iraq Securities Commission and Iraq Stock Exchange requirements, including approval, disclosure and listing of the new shares. Material information about the offering must be disclosed promptly. Trading in the company’s shares around the offering may be subject to restrictions to prevent insider dealing.
Addressing regulated company requirements
Banks, insurers and other regulated companies may need regulatory approval before raising capital, particularly where the offering could change the shareholding structure or bring in new significant shareholders. The regulator may also impose minimum capital requirements that drive the offering. Corporate advice in Iraq can coordinate company law, securities and sector requirements.
Offering to foreign investors
Offerings to foreign investors may be subject to the laws of their jurisdictions, as well as Iraqi rules. Foreign investors subscribing for Iraqi shares will need to comply with procedures for non-Iraqi investors, including registration with the Iraq Central Depository for listed shares and banking requirements for transferring subscription funds. Restrictions on foreign ownership in certain sectors may limit participation.
Managing liability and documentation
Offering documents, subscription agreements and investor communications should be prepared carefully. Liability for misleading statements can arise in both private and public offerings. Subscription agreements in private offerings should include representations from the company and investors, conditions to completion and investor eligibility confirmations. Litigation and dispute resolution advice in Iraq can assess liability risks in offering documentation.
Using proceeds and reporting to investors
Investors who subscribe for shares rely on the company’s statements about how the proceeds will be used. In a public offering, the prospectus will describe the intended use of proceeds. In a private placement, the subscription agreement may restrict use. Using proceeds for different purposes without disclosure or consent may expose the company and its directors to claims and regulatory action.
The company should establish controls to ensure that proceeds are used as stated, such as a separate account for offering proceeds, board approval of significant expenditures from it and periodic reporting to the board on use of proceeds. Listed companies may be required to report on the use of proceeds in periodic disclosures.
If circumstances change and the company wishes to use proceeds differently, it should consider whether disclosure or shareholder approval is required. Transparent reporting on use of proceeds builds investor confidence and supports future capital raising.
Coordinating with existing financing and shareholder arrangements
A capital raising may be affected by existing agreements. Facility agreements may restrict changes in ownership or require proceeds of share issues to be used to prepay debt. Shareholder agreements may give existing investors pre-emption rights, anti-dilution protection or consent rights over new issues. Regulators may have imposed conditions on the company’s capital structure.
The company should review these arrangements before planning the offering and obtain any required consents or waivers. Failure to do so may expose the company to claims from lenders or shareholders, or may require the offering terms to be revised late in the process. Early coordination also allows the company to explain the offering to existing stakeholders and secure their support.
Illustrative example. An Iraqi real estate company wants to raise capital for a new development. Its management plans to advertise on social media inviting individuals to subscribe for shares. Advisers warn that this approach would likely constitute a public offering requiring approval and a prospectus. The company instead conducts a private offering to its existing shareholders and three identified institutional investors, approved by the general assembly with pre-emption rights offered to existing shareholders, and registers the capital increase.
Conclusion & how Etihad Law Firm can help
Capital raising in Iraq must comply with company law and, where the public is involved, securities regulation. Distinguishing private from public offerings, following the required procedures and preparing accurate documentation protect the company, its directors and its investors.
Etihad Law Firm advises Iraqi companies and investors on private placements, public offerings, rights issues and the related approvals and documentation. We help clients raise capital efficiently and in compliance with applicable rules.