Convertible Notes

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Bahrain has implemented a policy that permits businesses, including startups and small to medium-sized enterprises (SMEs), to raise capital through convertible notes.
What are the main aims and objectives?

The main aims and objectives of Bahrain's convertible notes policy revolve around a comprehensive strategy to enhance the kingdom's position as a leading business and entrepreneurial hub in the region. By introducing convertible notes as a legal and financial instrument for startups and small to medium-sized enterprises (SMEs), Bahrain seeks to create a more attractive, competitive, and flexible business environment. This initiative is part of a broader effort to align the country's business regulations with global best practices and innovative funding mechanisms.

One of the central goals of this policy is to facilitate easier access to capital for early-stage businesses, which often face challenges in securing traditional forms of financing. Convertible notes offer a solution by allowing investors to inject funds into a business with the option to convert their investment into equity at a later date. This mechanism not only simplifies the fundraising process for startups and SMEs but also attracts a wider range of investors.

How does the program work?

The policy is part of an amendment to the Bahrain Commercial Companies Law (BCCL) aimed at improving the business environment and aligning with global best practices. This amendment enables the introduction of employee share schemes and the use of convertible notes as a means to raise capital. By offering convertible notes, startups can raise funds more simply, cheaply, and quickly without having to establish a valuation at an early stage.

Convertible notes operate as a financial instrument that businesses can use to raise capital, where the investment made by the bondholder can later be converted into equity at pre-determined conditions. This conversion is typically at the option of the bondholder, not the issuer, providing a level of flexibility and protection for the investor. A significant feature of the convertible notes in Bahrain includes a strike price mechanism. This mechanism offers protection to the bondholder by allowing conversion at the book price if it falls below a certain threshold. For example, if the book price goes below BD0.365 per share, the bondholder has the option to convert at that price, even if the current trading range for the shares is around BD0.300 and the book value is close to the strike price. This ensures that the investor has a safeguard against significant market fluctuations, making it an attractive option for raising funds and investing in businesses in Bahrain.

What is the overall cost?

There are no direct costs attached to this policy.

How was it implemented?

Bahrain became the first mainland jurisdiction in the Gulf Cooperation Council (GCC) to allow the use of convertible loans. This was achieved by amending the country’s Commercial Companies Law to legalise the use of convertible notes for SMEs and startups.

What impact has been measured?

There is no available information about the impact of Convertible Notes in Bahrain.

What lessons can be learned?

According to a report by KPMG, Convertible Notes have gained popularity and are frequently chosen as the go-to fundraising tools by startups and early-stage companies that are yet to engage in equity funding based on pricing. This form of initial funding and financing typically involves and is aimed at the families and friends of the startup founders, alongside some affluent individuals, family offices, as well as angel investors and venture capitalists. Occasionally, more established companies on the verge of going public also turn to this fundraising mechanism to cover the expenses leading up to their listing.

CURATED BY

Pakiza Abdulrahman

Head of Investor Aftercare
bahrain economic development board
Bahrain