The Level 2 process for MiFID 2 and MiFIR (together MiFID II), which are expected to come into force by the beginning of 2017, is underway. Please see our previous briefing, MiFID II and Structured Deposits: New Duties for Banks for background on MiFID II.
The European Securities and Markets Authority (ESMA) has issued a consultation paper that includes their proposed advice to the European Commission (Commission) on designing the requirements that will be set out in Level 2 measures and will govern the new SME growth markets which MiFID 2 proposes. Responses to the consultation paper must reach ESMA by 1 August 2014.
Why does MiFID 2 include proposals for SME growth markets?
MiFID 2 provides for a new category of market to facilitate:
- access to capital for smaller and medium-sized enterprises (SMEs); and
- the further development of specialist markets that aim to cater for the needs of smaller and medium-sized issuers.
Currently, SME growth markets, growth markets or junior markets are usually operated under MiFID as multilateral trading facilities (MTFs). For example, in the UK, AIM is an MTF and not a regulated market under MiFID. MiFID 2 envisages that the creation within the MTF category of a new sub-category of SME growth market and the registration of those markets should:
- raise their visibility and profile; and
- aid the development of common regulatory standards in the EU for those markets.
MiFID 2 recites that attention should be focused on how future regulation should further foster and promote the use of that market so as to make it attractive for investors, and provide a lessening of administrative burdens and further incentives for SMEs to access capital markets through SME growth markets.
How will the creation of SME growth markets affect existing growth markets such as AIM?
Registration as an SME growth market under MiFID 2 will be voluntary. Given the importance of not adversely affecting existing successful markets, the option will remain for operators of markets aimed at smaller and medium-sized issuers to choose to continue to operate such a market in accordance with the requirements of MiFID 2 without seeking registration as an SME growth market. An issuer that is an SME should not be obliged to apply to have its financial instruments admitted to trading on an SME growth market.
How will the requirements for an SME growth market be defined?
In order for the SME growth market initiative to be successful, the requirements applying to that new category of markets will need to provide sufficient flexibility to strike the correct balance between maintaining appropriate levels of investor protection while reducing unnecessary administrative burdens for issuers on those markets.
The requirements will also need to be able to take into account the current range of successful market models that exist across the EU. A recent report published by the CNMV (Comisión Nacional del Mercado de Valores) in Spain entitled “Access of SMEs with growth potential to the capital markets” identified that the success of the AIM has served as a model for the creation of markets of a similar nature in other countries including Alternext for French, Dutch and Belgian securities, the Entry market of the Frankfurt Stock Exchange, in the form of the NYSE-Euronext and the Deutsche Börse Group, respectively, and First North, with Swedish, Finnish and Icelandic securities and in Spain, the Alternative Stock Market (MAB) of the Bolsas y Mercados Españoles.
In order for that new category of markets to benefit SMEs, at least 50% of the issuers whose financial instruments are traded on an SME growth market should be SMEs. The 50% criterion needs be implemented in a flexible way. A temporary failure to meet that criterion should not mean that the trading venue will have to be immediately deregistered or refused registration as an SME growth market if it has a reasonable prospect of meeting the 50% threshold from the subsequent year. The assessment to determine whether an issuer is an SME enterprise should be based on the market capitalisation of the previous three calendar years. This should ensure a smoother transition for issuers from those specialist markets to the main markets.
What is the definition of an SME for the purposes of the SME growth markets regime?
SMEs are defined for the purposes of MiFID 2 as companies that had an average market capitalisation of less than €200m on the basis of end-year quotes for the previous three calendar years. As ESMA points out, this could be interpreted as excluding all SMEs with a lifespan of less than three years from counting towards the 50% threshold.
However, the SME growth markets regime is especially directed towards promoting the access to the capital markets of young issuers which are likely to have a low market capitalisation so that such issuers should be taken into consideration when assessing whether the 50% threshold is met.
ESMA therefore considers that as an expression of the flexible way of implementing the 50% threshold, SMEs with a history of less than three years should also be counted as SMEs if their market capitalisation on commencement of trading or based on the end-year quote after the first year of trading or the average of the end-year quotes after the first two years of trading is below €200m.
ESMA also notes that MiFID 2 refers to market capitalisation of issuers only. This is a concept normally associated with equity issuers. There is a question therefore as to how non-equity issuers which would not have market capitalisation as such would feature when determining whether a market meets the requirement that “at least 50% must be SME issuers”.
ESMA is looking for views on the following options:
- All non-equity issuers should be considered as SMEs for the purpose of determining whether an SME growth market meets the requirement of having at least 50% SME issuers.
- All non-equity issuers should not be considered as SMEs for the purpose of determining whether an SME growth market meets the requirement of having at least 50% SME issuers.
- Non-equity issuers should be considered as SMEs for the purpose of determining whether an SME growth market meets the requirement of having at least 50% SME issuers if:
- the overall outstanding nominal value of the debt securities issued by the issuer does not exceed €200m; or
- the annual net turnover of the issuer based on the last published annual accounts does not exceed €300m; or
- the issuer is classified as an SME pursuant to the Prospectus Directive which defines SMEs as companies that meet at least two of the following three criteria: (i) an average number of employees during the financial year of less than 250, (ii) a total balance sheet not exceeding €43m and (iii) an annual net turnover not exceeding €50m.
How will the new regime for SME growth markets interact with the MiFID rules for MTFs?
The investment firm or market operator operating an SME growth market must comply with the other obligations under MiFID 2 relevant to the operation of MTFs as well as the specific requirements relating to SME growth markets.
Will MiFID 2 limit the powers of operators of SME growth markets?
MiFID 2 will not prevent the investment firm or market operator operating the SME growth market from imposing additional requirements.
What SME growth market requirements are to be prescribed in Level 2 measures or technical standards?
ESMA is to provide technical advice on:
- how to apply the 50% criterion to various predictable situations including where no track record is available for newly created markets or issuers or in case of issuers of non-equity securities only;
- rules governing the registration and the deregistration of SME growth markets;
- criteria for initial and ongoing admission to trading of financial instruments of issuers on the market;
- ensuring that on initial admission to trading of financial instruments on the market there is sufficient information published to enable investors to make an informed judgment about whether or not to invest in the financial instruments, in the form of either an appropriate admission document or a prospectus where the requirements of the Prospectus Directive are applicable in respect of a public offer being made in conjunction with the initial admission to trading of the financial instrument on the SME growth market;
- appropriate ongoing periodic financial reporting by or on behalf of an issuer on the market, for example audited annual reports;
- requirements for issuers on the market, persons discharging managerial responsibilities (PDMR) and persons closely associated with them to comply with relevant requirements applicable to them under the new Market Abuse Regulation (MAR);
- the storage and dissemination to the public of regulatory information concerning the issuers on the market;
- effective systems and controls aiming to prevent and detect market abuse on that market as required under MAR.
What will happen if a market ceases to satisfy the requirement of having at least 50% SME issuers?
MiFID 2 requires that EU states must provide that the relevant regulator may deregister a MTF as an SME growth market if the requirements for registration as an SME growth market are no longer complied with in relation to the MTF. ESMA suggests that:
- A temporary failure to meet the 50% criterion mentioned above should not lead to an immediate deregistration as an SME growth market.
- An SME growth market should only be deregistered as such if it were to fall below the qualifying 50% threshold for three consecutive years.
An SME growth market, deemed not to meet the qualifying 50% threshold in one year or in two consecutive years, should not be required to disclose that fact to the market.
What will the criteria be for admission to trading on an SME growth market?
ESMA suggests that:
- A market operator or investment firm operating an SME growth market should apply a regime which is effective in ensuring that issuers are appropriate for admission to the market.
- An SME growth market should have an operating model which is appropriate for the performance of its functions.
- An SME growth market should not be required to have rules prescribing the use of International Financial Reporting Standards (IFRS).
- An SME growth market should have rules which are consistent with the maintenance of fair and orderly trading in compliance with the obligations owed by the operator of an MTF under MiFID 2.
An SME growth market should consider whether it would be appropriate to apply tailored rules to issuers carrying on specialist activities, such as mineral exploration.
How will the criteria be set for initial and ongoing admission to trading of financial instruments of issuers on the market?
ESMA considers that the investor protection objectives of the SME growth market regime could be met through the application of a number of different operating models. For example, the investment firm or market operator operating an SME growth market could make its own assessment of whether an issuer is able to demonstrate that it meets the relevant admission criteria.
Alternatively, in line with existing practices on a number of growth company markets, the rules of an SME growth market could require this assessment to be made by a third party corporate finance adviser to be appointed by the issuer where the SME growth market operates an appropriate oversight regime for such advisers.
ESMA considers that MiFID 2 should remain neutral as to the operating model of an SME growth market, provided the relevant national regulator assesses it to be an effective way of applying the admission to trading requirements.
What will the requirements be for a prospectus or admission documents where an SME is admitted to trading on an SME growth market?
An issuer seeking admission to an MTF is not required to produce a prospectus under the Prospectus Directive unless it is undertaking a public offer of securities in connection with its application. However, in line with the responsibility of an MTF operator to “provide, or [be] satisfied that there is access to, sufficient publicly available information to enable its users to form an investment judgement”, a majority of primary market MTFs place minimum initial disclosure obligations on issuers, typically in the form of an ‘admission document’ or ‘information memorandum’, in circumstances where a prospectus is not required.
ESMA realises that care should be taken in setting, at MiFID 2 level, requirements for SME growth markets which go beyond the general obligations of an MTF under MiFID 2. Consequently, ESMA does not consider it appropriate to require that an admission document is formally approved by the relevant national regulator or the market operator with respect to the accuracy of the information it contains.
However, given that the initial admission document is likely to have a significant influence on investment decisions, ESMA considers it may be appropriate for an SME growth market to make arrangements for a draft admission document to be subject to an appropriate review, such as to ensure that it adequately addresses each of the minimum disclosure requirements (in other words, that it is complete).
ESMA does not believe that it should be necessary for the relevant regulator to be involved in that review. It expects that the operating model of the market would help determine the appropriate process (e.g. potentially forming part of the role of an issuer’s professional adviser, where an adviser-based model is present).
ESMA’s recommendations in this area are:
- An issuer which seeks admission of its financial instruments to an SME growth market should publish an appropriate admission document, or a prospectus that complies with the requirements of the Prospectus Directive.
- The admission document should, as a minimum, contain sufficient information for investors to make an informed assessment of the financial position and prospects of the issuer and the rights attaching to its SME growth market securities.
- Provided that a prospectus is not at any time required by the Prospectus Directive, the rules set by the operator of an SME growth market governing the content of an admission document should be permitted to take a ‘top down’ or ‘bottom up’ approach.
- The admission document should contain a statement disclosing whether or not, in its opinion, the issuer possesses sufficient working capital for its present requirements, and if not, how additional capital would be provided.
- The responsibility for the admission document should lie with the issuer.
- A market operator or investment firm operating an SME growth market should make arrangements for a draft admission document to be subject to an appropriate review consistent with its operating model, such as to ensure that it adequately addresses each of the minimum disclosure requirements.
What will the requirements for ongoing periodic financial reporting by issuer on SME growth markets be?
ESMA considers that on the one hand requirements applying to SME growth markets potentially should not be as onerous as the ones applying to regulated markets.On the other hand, as the requirements applicable need to be of a standard “to maintain high levels of investor protection to promote investor confidence in those markets”, ESMA is inclined to(as a minimum requirement) ask for the publication of annual and half-yearly reports. When it comes to establishing deadlines for publishing such reports, the Transparency Directive requires issuers on regulated markets to make public their annual reports at the latest four months after the end of each financial year and the half-yearly reports to be made public at the latest three months after the relevant period. ESMA is considering whether more generous deadlines could be suitable for issuers admitted on SME growth markets. Itsuggests that issuers on SME growth markets should publish annual reports within six months after the end of each financial year and half-yearly financial statements within four months after the end of the first six months of each financial year.
Will MAR apply to SME growth market issuers, their PDMRs and their associates?
MIFID 2 states that issuers on an SME growth market and PDMRs in the issuer and persons closely associated with those issuers shall comply with relevant requirements applicable to them under MAR. This is consistent with MAR, which extends the scope of the market abuse framework to any financial instrument admitted to trading on an MTF or on an OTF.
Applying the new market abuse framework in an undifferentiated manner to all MTFs, including SME growth markets, however, may impose a significant burden on issuers on those markets. The scope and size of the business of SME growth markets issuers is more restricted and the events giving rise to the need to disclose inside information typically reflects this.
MAR does take the situation of SME issuers into account to an extent. For example, SME growth market issuers are also exempt, under certain conditions, from the obligation to keep and constantly update insiders’ lists.
ESMA thinks that the exemptions that MAR intends to introduce specifically for issuers on SME growth markets are sufficient and therefore does not propose to establish any additional or different provisions or any additional relief for SME growth market issuers. In fact, ESMA thinks that as far as potential market abuse is concerned it is necessary to have a consistent and ambitious regime across all trading venues envisaged by MiFID 2 in order to have an adequate level of market integrity and investor protection.
How should regulatory information concerning the issuers on SME growth market be disseminated to the public?
ESMA considers that the rules on dissemination and storage under the Transparency Directive which apply to issuers on a regulated market would be burdensome for issuers on SME growth markets and therefore a different approach needs to be adopted. Having conducted a fact finding regarding existing markets and having had discussions with market operators and SME issuers, ESMA considers that the internet should be the primary means for publishing and also disseminating information. The options ESMA is considering are:
- regulatory information, where permitted under MAR, can be published on the website of either the issuer or the market operator; or
- all regulatory information should always be published on the website of the market operator in order to use the market website as a natural point of convergence of information for investors on SME growth markets.
As far as the storage of information is concerned ESMA’s fact finding revealed that the requirements applicable in the existing markets mostly refer to a certain period of availability of the information on the website of the issuer. ESMA is considering:
- establishing as a minimum requirement that the information published and disseminated shall be available on the website of the issuer or the market operator – whichever has been used for publication – for a period of at least five years in order to provide investors with a sufficiently long history of published regulatory information; or
- alternatively, shortening this period to three years.
Will SME growth markets be subject to additional market abuse requirements?
ESMA considers that the provisions of MAR will be adequate. In the interests of consistency and an adequate level of market integrity and investor protection, ESMA suggests that no additional specifications at the MiFID 2 level are required for SME growth markets.