SEC one year lock-in rule and impact on FLCH & EXPO

SEC one year lock-in rule and impact on FLCH & EXPO

The Sri Lanka SEC's recent one year lock-in rule specifically applies to shares 'allotted' (after 7th Feb 2011) in a public company within a period of one year prior to listing
- having spoken to a couple of corporate lawyers, my understanding of the phrase 'allotted' in this respect is that it only applies to NEW share issues
- the sale of existing shares by promoters does NOT constitute an allotment of shares, and hence does not fall under the lock-in rule

Recent 'sell downs' by Free Lanka and Expo Lanka therefore do not involve any allotment of new shares as they were sales by the promoters and did not involve any new shares being created, and those who bought during these pre-IPO private placements are free to sell upon listing without any SEC restrictions. In any case, both deals were probably done before 7th Feb 2011.

This is a loophole that should be closed by the SEC, but in the meantime, investors should exercise some caution in buying FLCH and EXPO at potentially inflated prices and valuations on day one, as both private placements were done at discounts to IPO price.

FLCH private placement was at Rs 4-70 per share and EXPO was at Rs 6-00 per share.

Some related links below:

Free Lanka Capital Holdings - It's a sellout, not a p'placement: Director
- Daily Mirror, 18th March 2011
http://print.dailymirror.lk/business/127-local/38601.html

Free Lanka Capital Holdings divests 45% in private placement, IPO
- Sunday Times, 13th March 2011
http://sundaytimes.lk/110313/BusinessTimes/bt32.html

Extracts from LBR report of 25th February 2011
'...The share issue will offer 300 million shares of FLCH or 22 percent of the firm’s stake to the public at a price of five rupees per share and will be listed on the Diri Savi board at the Colombo Stock exchange. The group also completed a private placement of 1.1 billion rupees in January this year...'
http://www.lbr.lk/fullstory.php?nid=201102251918584343

say a company has 10 million shares and transfer 1 million shares to 3rd party before the IPO, will it be considered as Private Placement or just transfer of ownership?

The SEC rule re: one year lock in, does not distinguish between private placements and transfers of ownership - the term 'private placement' is not even mentioned in circular.

The key reference is 'allotment of shares' - and 'allotment' implies a NEW issue of shares, not a sale or transfer of old existing shares, irrespective of the exact terminology used. So a transfer of existing shares would not invoke the SEC lock in rule.

http://moneyterms.co.uk/allotment/
- Allotment is the allocation of securities to applicants for a new issue.