Underwriting protection

I have received some kind inquiries related to what I mentioned in my last article about underwriting to buy founders’ shares of companies, and this necessitates simplifying the issue of underwriting and its protection in this article as much as possible, whether founding or selling underwriting.

The start of the capital subscription stage is considered one of the basic stages in the establishment of the company, which requires extensive protection from any manipulation or fraud.
This is because underwriting is the important tool for accumulating the capital of this company by addressing the audience of investors who offer it out of confidence in the project and its founders.
The IPO may also arise in the post-establishment stage to complete the authorized capital or when there is a need to increase the capital or sell part of the capital according to the fair market value (I call the latter a special name of my own, which is the sales IPO).
This, of course, after obtaining the approval of the official authorities

Given the practical importance of the IPO.
contemporary legislations have given it special criminal protection by criminalizing certain acts related to public offerings, such as making false statements or violating the law.
such as making false statements or violating the law in the prospectus.

The share subscription document is called a “prospectus” or “share prospectus” and the two terms are synonymous.
These prospectuses are the ones on which the criminal acts take place.
Therefore, the Saudi regulator has protected them with texts that prohibit compromising or tampering with them and stipulate the conditions and controls that must be met.
The most important of which is to be truthful and honest in all the data contained therein.
This, in turn, leads to minimizing the risks that may shake the confidence of subscribers in such companies, while establishing the principle of reliance on honesty and integrity in the commercial field and the stability of transactions in it.
If the prospectus contains false data or is contrary to the truth or the law.
This entails the criminal responsibility of the founders or owners of the company in the case of a sales subscription for these transgressions and accordingly they are punished for what they committed in accordance with the penalties stipulated by the Saudi regulator in Article (212) of the Saudi Companies Law, which is imprisonment for up to one year and a fine that may reach one million riyals, or one of these two penalties, in addition to the refund of the amounts paid to the subscribers.
This is in addition, of course, to refunding the amounts obtained by false and deceptive statements in the case of sales underwriting.
Since the example illustrates the article, I will mention an example of false statements in the prospectuses that affect attracting people and exploiting their preoccupation with its validity.
This is what I call selling underwriting (the founders and owners selling part of their shares at a price higher than their face value), where we find the founders and owners of the company practicing this influence on the subscribers through two main things, namely:
Inflating assets and minimizing liabilities.
The financial advisor must collude with the owners and board members in general in this fraud, and one of the biggest lies and fraud in inflating assets is the inclusion of fictitious past projects with high profits in agreement with the parties to their contracts.
These profits are included through loans and deposits from stakeholders that are ostensibly part of the capital, but in fact they are inactive capital, and this is not explained in the prospectus.
In addition, future projects are listed with very high financial figures, but they are in fact promises of projects, and the examples are too numerous to list.
As for the complicity of the financial advisor, it is through requesting these fictitious data and feasibility studies from the founders and owners of the company.
which determines the value of the shares offered for public subscription.
This is why many companies go public at very high prices.
They were valued according to false data included in their financial statements for the last three years, which the Saudi system requires before offering an IPO for a portion of the company’s outstanding shares, along with other data related to contracts, future projects, fame, market need for the company’s products, and so on.
Then, after a year or more, the facts about these data and data are revealed and their prices return to their real price, which is many times the subscribed price.
And some of them, two or three years after the subscription, realize that they have lost a large part of their capital.
For example, an individual organization turned into a limited liability company in 2007.
Then, in the same year, it turned into a joint stock company with a capital of one billion riyals, and then in 2008, the company’s shares were offered for public subscription to citizens at seven times their nominal value (i.e. it was converted from an individual institution owned by one person to a joint stock company listed on the capital market with a very high issuance premium in a short period of less than two years and as a result, the founders and owners obtained an astronomical amount for the issuance premium in part of the capital, which reached 18 billion riyals.
Then the matter did not end there. Shortly after its shares were offered for subscription, accumulated losses were discovered in the company that amounted to more than 10 percent of the capital and the total liabilities of the company exceeded the total assets by 200 million riyals, and thus the company reached the edge of the abyss and became almost bankrupt and on the verge of liquidation.