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Yesterday I wrote here about the suspension of Cloudtag shares and commented on what I considered to be breach of Cloudtag through delaying the release of the Conversion Notice from L1 by 48 hours. There has been subsequent debate on social media whether Cloudtag is in breach or not.
In my view there is a clear moral breach, but let’s look into the regulations which cover CloudTag. The first question is whether the RNS was inside information, i.e. information which is price sensitive to the trading of CloudTag securities. The issue of 19m new shares represents around 5% of the current shares in issue so this is clearly material and price sensitive. There are also 19m warrants issued, these are currently in the money and represent a further 5% of the share capital. Let’s just follow this through to the end though for complete avoidance of doubt. Only information which is price sensitive should be RNSed and the company goes a step further in the RNS (as is required by law) to put the issue of ‘inside information’ beyond avoidance of doubt:
This announcement contains inside information for the purposes of Article 7 of EU Regulation 596/2014.
What is article 7 then? This relates to the Market Abuse Regulation (MAR) relating to EU regulated markets. As Cloudtag has shares traded on AIM it must comply with these rules. The MAR sits on top of the FCA DTR rules and the FCA handbook has been amended to include these rules. Let’s start with the golden rule on inside information as follows:
[There should be] prompt and fair disclosure of relevant information to the market [DTR 2.1.3]
There are though valid reasons when inside information can be delayed, the FCA handbook refers us back to EU regulation , which states:
[there are] cases where immediate disclosure of the inside information is likely to prejudice the issuers’ legitimate interests [Article 17(4) of MAR]
The ‘issuer’ in this context is Cloudtag and ‘legitimate interest’ is taken to mean something that is commercially sensitive or requires regulatory approval. There is no commercially sensitivity here as far as I am concerned, the conversion is based on an agreed contact which is in the public realm. The EU (useful for something then) have made a list of examples. I won’t copy them all down here but you can read them yourself, I can’t see how Cloudtag can meet any of them and thus has no excuse for delaying this RNS. Indeed is this why the shares were suspended by AIM?
Examples of when the FCA may require the suspension of trading of a financial instrument include:
- if an issuer fails to make an announcement as required by the Market Abuse Regulation within the applicable time-limits which the FCA considers could affect the interests of investors or affect the smooth operation of the market [DTR 1.4]
I also note an interesting article on ShareProphets which questions whether Cloudtag actually has authority before the EGM on Monday to issue the full 19m shares. This could be the reason for the delay, i.e. trying to sort out the mess. However, a holding statement should have been put out immediately after hours on 7th December or at 7am on 8th December with perhaps suspending the shares until the situation was clarified. I’ll get to my summary soon but just to kill a red herring which is doing the round on social media:
A lot of people have quoted DTR 5.8.3 on social media to claim that Cloudtag has acted appropriately.
The notification to the issuer shall be effected as soon as possible, but not later than four trading days in the case of a non-UKissuer and two trading days in all other cases, after the date on which the relevant person:
- learns of the acquisition or disposal or of the possibility of exercising voting rights, or on which, having regard to the circumstances, should have learned of it, regardless of the date on which the acquisition, disposal or possibility of exercising voting rights takes effect; or
- is informed about the event mentioned in DTR 5.1.2 R (2).
I am fairly sure this is a red herring and governs the ‘person’, i.e. L1 Global Fund in this case notifying ‘issuer’ of securities CloudTag. Once this notification was made to CloudTag it became inside information, which should have been released without delay in accordance with the above rules.
What about AIM rules? How do they interact with MAR/FCA DTR?
Cloudtag is listed on AIM and thus must also comply with these rules. Compliance with MAR does not mean that an AIM company will have satisfied its obligations under the AIM Rules, just as compliance with the AIM Rules does not mean that an AIM company will have satisfied its obligations under MAR. However, AIM is pretty clear though:
An AIM company must issue notification without delay of any new developments which are not public knowledge which, if made public, would be likely to lead to a significant movement in the price of its AIM securities [AIM rule 11]
Cloudtag allowed its securities to open on December 8th at 15.25p, 2.5x greater than the L1 exercise price. Shareholders were unaware at this point that dilution by upto 10% was already in motion. This is a false market and potential evidence for market abuse. In my reading of the MAR and AIM rules I can see limited grounds for delaying the Conversion RNS. The market should have been notified and if Cloudtag were not in a position to do so the shares should have been suspended pending clarification on December 8th 7am.
I believe it could well be that the NOMAD is spending the weekend with Cloudtag getting to the bottom of this. I hope all works out for those locked in, even if my assessment is wrong those invested should ask themselves whether they are comfortable with the way this RNS has been dealt with?
Disclaimer – I have no positions in this stock and to my knowledge nor do any close family, friends nor associates. This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.