Shearman & Sterling LLP | FinReg | European Commission Proposes Legislation to Promote SME Growth Markets
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  • European Commission Proposes Legislation to Promote SME Growth Markets
    05/24/2018
    The European Commission has published a proposal for a Regulation to amend the Market Abuse Regulation and the new Prospectus Regulation. The aim of the proposed Regulation is to promote the use of SME Growth Markets by making technical adjustments to the MAR and the new PR to make the regulatory framework applying to listed Small and Medium-sized Enterprises more proportionate and to foster the liquidity of equity instruments listed on SME Growth Markets, while maintaining a high level of investor protection and market integrity. The proposed Regulation is in line with the objectives of the EU Capital Markets Union of reducing the overreliance on bank funding and diversifying market-based sources of financing for European companies.

    SME Growth Markets are a new sub-category of multilateral trading facility introduced by the revised Markets in Financial Instruments Directive in January 2018. Companies listed on an SME Growth Market are required to comply with MAR and the PR and are impacted by some aspects of MiFID II. The adjustments in the proposal for a Regulation are designed to lower the administrative burden and costs for issuers on SME Growth Markets stemming from compliance with MAR and the PR and to address regulatory shortcomings in MAR that can affect the liquidity of SME financial instruments. The European Commission has also published a separate proposal for a regulation amending delegated legislation under MiFID II to address regulatory barriers to the take-up of the SME Growth Markets.

    MAR currently only contains two limited adaptations to issuers listed on SME Growth Markets. The proposed Regulation will make a number of changes to MAR, including:

    (i) introducing an exemption from the market sounding regime for private placements of bonds with qualified investors (that is, investors who are involved in negotiation of the bond issue) when an alternative wall-crossing procedure is in place. This is a significant alleviation, since the majority of SME bonds are privately placed, and is designed to foster development of private placement markets of bonds. The exemption will be available when: (a) the issuer seeking a private placement of bonds already has its equity or non-equity financial instruments admitted to trading on an SME Growth Market; and (b) if an alternative wall-crossing procedure (for example a non-disclosure agreement) is in place, by which any potential qualified investor acknowledges the regulatory duties stemming from access to inside information;

    (ii) introducing the possibility for SME Growth Market issuers to enter into a "liquidity provision contract" with a financial intermediary that will be entrusted with the task of enhancing the liquidity of the issuer's shares. This relaxes the MAR requirement for an Accepted Market Practice to have been established by an issuer's national regulator before liquidity provision contracts can be entered into;

    (iii) modifications to reduce the obligations imposed on SME Growth Market issuers when they decide to delay the publication of inside information;

    (iv) provision for SME Growth Market issuers to maintain a "list of permanent insiders" rather than meet the more onerous ongoing obligations to maintain insider lists. This is intended to address the perception that the current MAR exemption for SME Growth Market issuers from keeping and updating an insider list is not meaningful since SME Growth Market issuers must still provide their national regulator with an insider list on request; and

    (v) allowing two additional days for an SME Growth Market issuer to publicly disclose any information on personal transactions declared to it by persons discharging managerial responsibilities (and persons closely associated). This is intended to address criticism that compliance with the strict deadlines of the PDMR regime under MAR is disproportionately burdensome for SME issuers.

    Under the Capital Markets Union Action Plan, the EU has introduced the "EU Growth Prospectus" in the new PR, to make it easier and cheaper for smaller companies to access public markets. However, if an SME Growth Market issuer wishes to transfer its shares from an SME Growth Market to a regulated market, it needs to produce a full prospectus as it cannot use either the EU Growth Prospectus or the simplified prospectus for secondary issuances in this circumstance. The proposed amendment to the PR will introduce a "transfer prospectus" for companies listed for at least three years on an SME Growth Market and wishing to move to a regulated market.

    The European Commission is seeking feedback on the proposal for a Regulation by July 25, 2018.

    The finalized proposal for a Regulation will then be considered by the Council of the European Union and the European Parliament. Once adopted, it will enter into force 20 days following its publication in the Official Journal of the European Union and will apply directly across the EU from six months after that date.

    View the proposed Regulation and Impact assessment.

    View the proposal to amend secondary legislation under MiFID II.