This article considers how issuers, sellers, directors and advisers can manage disclosure risk in securities transactions involving Iraqi businesses. Whenever shares or other securities are offered to investors, whether through a public offering on the Iraq Stock Exchange, a private placement or an international offering referencing Iraqi assets, the information provided to investors becomes a source of potential liability. Statements that are inaccurate, incomplete or misleading may give rise to regulatory action and investor claims.
Iraqi businesses present particular disclosure challenges. Information may be harder to verify, records may be incomplete, regulatory and political risks may be significant and changing, and the operating environment may be unfamiliar to international investors. Disclosure documents must describe these matters accurately without either understating risks or making statements that cannot be supported.
The Interim Law on Securities Markets, issued as Coalition Provisional Authority Order No. 74 of 2004, and the rules of the Iraq Securities Commission govern disclosure in Iraqi securities offerings and by listed companies, including prohibitions on misleading statements. The Companies Law No. 21 of 1997, as amended, governs public subscription and the responsibilities of founders and directors. The Iraqi Civil Code No. 40 of 1951 provides general principles of civil liability. International offerings may also be subject to the securities laws of the jurisdictions where investors are located.
Identifying who is responsible
Responsibility for disclosure may fall on several parties:
- The issuer. The company whose securities are offered is primarily responsible for the accuracy of its disclosures.
- Directors and founders. Directors and, in a public subscription, founders may bear responsibility for statements in offering documents.
- Selling shareholders. Shareholders selling in an offering may be responsible for information about themselves and, depending on circumstances, the company.
- Advisers and intermediaries. Brokers, underwriters, auditors and legal advisers may bear responsibility within their roles.
Each party should understand its responsibility and the steps it should take to discharge it.
Verifying information
Statements in disclosure documents should be supported by evidence. A verification process involves identifying each material statement, the source supporting it and the person responsible for confirming it. Financial information should be derived from audited accounts or reviewed by auditors. Legal statements, such as those about licences, property and litigation, should be supported by due diligence. Market and industry data should be sourced and attributed.
Where information cannot be verified, the document should say so or qualify the statement appropriately. Corporate advice in Iraq can conduct legal due diligence supporting disclosure.
Describing risks accurately
Risk factors should be specific to the business and its environment, not generic. For Iraqi businesses, relevant risks may include political and security conditions, regulatory change, dependence on government customers, payment delays, currency and transfer restrictions, title and licensing issues, and limitations on enforcement of rights. Each risk should be described in a way that allows investors to understand its potential effect.
Risk factors do not cure misleading statements elsewhere in the document. A document that describes a licence as secure in one section and lists licence revocation as a risk in another may still mislead if the licence is in fact subject to a pending challenge.
Managing forward-looking statements
Projections and statements about future plans are inherently uncertain. They should be based on reasonable assumptions, clearly identified as forward-looking and accompanied by explanation of the factors that may cause actual results to differ. Projections that are not reasonably supported create significant liability risk.
Handling related-party and ownership information
Investors want to know who controls the company and whether it has significant transactions with related parties. Disclosure should identify major shareholders, beneficial owners where required and material related-party transactions. In family-owned businesses, related-party relationships may be extensive and informal, requiring careful identification.
Updating disclosure during the offering
If material developments occur between publication of the offering document and completion of the offering, the document may need to be supplemented. The parties should monitor developments and have a process for deciding whether a supplement is needed. Commercial and regulatory advice in Iraq can help assess whether developments require updated disclosure.
Allocating risk among the parties
Underwriting and placement agreements typically include representations and indemnities from the issuer and selling shareholders to intermediaries regarding disclosure. Directors may seek indemnities from the company. These arrangements allocate risk between the parties but do not remove liability to investors or regulators. Litigation and dispute resolution advice in Iraq can help assess liability exposure in the event of claims.
Training directors and management on disclosure responsibilities
Directors and senior managers sign or approve disclosure documents and may bear personal responsibility for them. Many are experienced in running businesses but less familiar with the standards applied to public disclosure. Training before an offering helps them understand what is expected and why verification matters.
Training should cover:
- The legal framework. The responsibilities of directors for offering documents and continuing disclosure.
- Materiality. How to identify information that investors would consider important.
- Verification. The process by which statements are checked and the directors’ role in it.
- Consistency. The importance of ensuring that marketing materials, presentations and media statements match the offering document.
- Continuing obligations. Disclosure duties after the offering, including insider trading restrictions.
Directors who understand these points are better able to challenge drafts, ask the right questions and identify issues that advisers may miss because they lack inside knowledge of the business. Their engagement also strengthens the defence available to them if the document is later questioned.
Treating international and local disclosure consistently
Transactions involving Iraqi businesses may involve disclosure in more than one market. An Iraqi company may list locally while its parent is listed abroad, or an international offering may describe Iraqi assets to investors in several countries. Differences between disclosures in different markets can create liability, because investors and regulators may compare them.
The parties should ensure that disclosures in all markets are consistent in substance, even where format and level of detail differ. A statement about an Iraqi licence, dispute or contract should not be described as secure in one document and uncertain in another. Coordinating the drafting teams for each market and conducting a consistency review before publication reduces this risk.
Illustrative example. An Iraqi telecommunications services company prepares to offer shares to the public. Its draft prospectus states that its main contract with a state operator runs for ten years. Due diligence reveals that the contract allows the operator to terminate on six months’ notice and that the operator has recently issued a notice of underperformance. The prospectus is revised to describe the termination right and the notice, and a specific risk factor is added. The issuer’s directors confirm, through a verification process, that the revised statements are accurate.
Conclusion & how Etihad Law Firm can help
Disclosure risk in securities transactions involving Iraqi businesses can be managed through clear allocation of responsibility, rigorous verification, accurate description of risks, careful treatment of forward-looking statements and updating disclosure as needed. These steps protect issuers, directors and advisers and give investors the information they need.
Etihad Law Firm advises issuers, selling shareholders and intermediaries on disclosure in Iraqi securities transactions, including due diligence, verification and offering documents. We help clients prepare disclosure that is accurate and defensible.