A new regulation (the Regulation) to promote the use of SME growth markets has been published in the Official Journal and enters into force on 31 December 2019. The Regulation is designed to make it easier for small and medium-sized enterprises (SMEs) to access financing through public markets by reducing some of the administrative burdens and compliance costs faced by issuers on an SME growth market.
What are SME Growth Markets?
The Markets in Financial Instruments Directive 2014/65/EU (MiFID II) established the SME growth market to facilitate access to capital for SMEs and to further the development of specialist markets aimed at the needs of SME issuers. SME growth markets are a sub-category of multilateral trading facilities (MTFs) and defined by MiFID II as including companies with an average market capitalisation of less than €200 million based on year-end quotes for the previous three calendar years and with shares which have been admitted to trading for less than three years.
Take-up of the SME growth market designation has been low to-date despite high-profile designations by London's AIM and NEX Exchange. The European Commission identified the "low level of differentiation" between SME growth markets and issuers of other trading facilities as contributing to this.
The Regulation applies to all companies listed on SME growth markets. In other words, a company listing on an SME growth market triggers application of the Regulation whether that company is an SME or not. The Regulation amends both the Market Abuse Regulation (the MAR) and the Prospectus Regulation. It applies across all Member States from 31 December 2019, apart from Article 1 amending the MAR, which applies from 1 January 2021.
Key changes to the Prospectus Regulation
Exemption from publishing a prospectus: limited to offers of equity securities relating to takeovers, mergers and divisions where certain conditions are met. This resolves an unintended consequence of the current exemption, which meant that unlisted companies, in some circumstances, were able to carry out an initial admission of shares without producing a prospectus.
Simplified disclosure: available to issuers of secondary issuances whose equity securities have been admitted to trading on a regulated or SME growth market continuously for at least the last 18 months and which issue non-equity securities or securities fungible with equity securities previously issued.
Simplified disclosure for growing companies: available to companies transitioning from an SME growth market to a regulated market where they have at least two years of trading on an SME growth market and have fully complied with reporting and disclosure obligations.
EU growth prospectus: available to issuers other than SMEs seeking an initial public offer with a tentative market capitalisation below €200 million.
Key changes to the Market Abuse Regulation
Insider dealing to "qualified investors": disclosure to investors such as credit institutions and investment firms in the course of a private placement of bonds will be excluded from the scope of the market sounding regime, provided that an adequate non-disclosure agreement is in place.
Liquidity contracts: issuers whose financial instruments are admitted to trading on an SME growth market will be authorised to enter into a liquidity contract for their shares. Standards for this contract will be devised by ESMA and introduced by way of delegated act.
Delaying disclosure of inside information: issuers who have their financial instruments admitted to trading on an SME growth market (and no other market) will not have to report reasons for delaying public disclosure of inside information unless requested to do so by the competent authority. As long as the issuer is able to justify its decision to delay, it will not be required to keep a record of that explanation.
List of 'permanent insiders': issuers will no longer be exempted from the requirement to produce an insider list (in practice, most issuers produced a list). The exemption has been replaced by a reduced requirement for issuers to include in their lists "only those persons who, due to the nature of their function or position within the issuer, have regular access to inside information".
Application of the Guidelines
The Guidelines are addressed to competent authorities, who must incorporate them into their supervisory practices (through changes to their legal framework and supervisory processes). They apply from 10 January 2020. Authorities have a transitional period of two years from this date in which to establish AML/CFT colleges for all firms, cross-border and EU establishments that meet the conditions set out in the Guidelines. They should first establish colleges for firms assessed as high-risk for ML/TF purposes in line with the Risk-Based Supervision Guidelines.
Time extension for making public manager's transactions: SME growth market Issuers will have two business days following receipt of a notification to make public the details of a manager's transaction after receiving notification from a person discharging managerial responsibility (PDMR) or a person closely associated (PCA). This will replace the current timeline of three business days after the transaction has been carried out, which proved very difficult, and in some cases impossible, for a company to meet.
The delegated regulation
The Regulation is supplemented by a new delegated regulation, which has applied since 11 October 2019. This delegated regulation amends the SME growth market framework, as set out in MiFID II. In particular, it addresses barriers to listing experienced by non-equity SME issuers, which include the following:
- New definition of a non-equity issuer based on an issuance size criterion: a non-equity issuer will be deemed to be an SME if the nominal value of its debt issuances over the previous calendar year do not exceed €50 million (excluding loans provided by a credit institution).
- Discretion regarding half-yearly financial reports: SME growth market operators have discretion to decide whether to impose a requirement for a half-yearly financial report on non-equity issuers (equity issuers will still be obliged to comply with this). This will allow non-equity issuers on SME growth markets to avail of the same exemption as those on regulated markets, which are exempted under the Transparency Directive.
- Free float requirement for equity issuers: SME growth markets are required to impose a free float requirement for equity issuers when shares are admitted to trading for the first time. This can be expressed either as a percentage of the total amount of issued share capital or as an absolute value. This is designed to prevent illiquid companies from being listed on SME growth markets.
Euronext Growth now an SME growth market
Euronext Growth, Euronext's pan-European MTF, has been registered as an SME growth market as of 29 October 2019. This designation means that there will be fewer regulatory obligations for small and mid-caps listed on this market, including those amendments brought about by the new Regulation.
The true benefits of this new regime will only emerge in practice. Changes to the prospectus regime for companies listing on SME growth markets will be felt from the beginning of 2020, but the arguably more significant amendments to the MAR will not take effect until 2021.