Consultation on the EU Listing Act

On 19 November 2021, the European Commission launched two rounds of consultation on the EU Listing Act, which is to be enacted in the third quarter of this year. The aim of the consultations is to gather information on regulatory obstacles to company listing in the EU. The EU Listing Act is intended to facilitate access to the capital markets, especially for SMEs.

I. Background to the EU Listing Act

The background to the planned EU Listing Act is that the Commission believes European capital markets still have room for improvement, especially compared to other international markets. EU companies make less use of capital markets for debt and equity financing than companies in other leading economies, according to the Commission. This has a negative impact on economic growth and macroeconomic resilience in the EU. One key task of the Capital Markets Union is therefore to ensure that EU companies have access to capital market-based sources of finance at every stage of their development, including stock exchange listing in particular. The benefits of listing include less dependence on bank financing, more diversity of investors, easier access to additional equity and debt capital (through secondary issuing), and a higher public profile and wider reputation. A more balanced financing structure between traditional bank financing and capital market financing can make the real economy more resilient. Access to capital market-based finance is therefore particularly important to support the recovery and help build a sustainable economy following the pandemic.

However, many companies, especially SMEs, currently have no access to the capital markets, which limits their choice of alternative financing options, the Commission said. This makes them dependent on traditional sources of finance, which are limited especially in times of crisis. Prior to the consultations, the Commission identified three main problem areas that will be examined in more detail during the consultations:

1. Post-listing obligations and costs

According to the Commission, many companies, especially SMEs, do not consider an EU listing affordable and are reluctant to go public due to the associated post-listing obligations and costs. This limits the range of financing options for companies, especially SMEs, that wish to expand and grow.

The Commission also pointed out that the increasing emergence of alternative forms of IPO, such as the use of special purpose acquisition companies (“SPACs”), which could represent an interesting financing opportunity for scale-up and start-up companies, could therefore also be interpreted as a response to the challenges typically faced by issuers in the European capital markets. Although IPOs via SPACs are still less common in the EU than in some other jurisdictions, the EU needs to consider whether the existing rules for companies/investors are appropriate to promote the opportunities SPACs could offer and provide adequate safeguards in this context.

2. Regulatory flexibility

Regulatory flexibility is also insufficient, the Commission said. For example, company owners do not have the option of retaining control over their company after an IPO by issuing shares with multiple voting rights. In addition, there is a lack of clarity in the relevant legislation regarding dual listing. Such regulatory restrictions and uncertainties discourage some companies from using European capital markets and thus affect the attractiveness of the EU as a target destination for IPOs, also in a global context.

3. Stock analysis and liquidity

According to the Commission, SME securities are normally characterised by low liquidity, as these companies are perceived as unattractive by investors, especially institutional investors. The limited liquidity can be explained by a number of factors, such as the lack of available stock analysis, especially for SMEs. In addition, institutional investors may fear risk to their reputation if they invest in companies listed on multilateral trading facilities (MTFs), including SME growth markets, as there are no minimum corporate governance requirements for issuers at these trading venues.

II. Aims of the EU Listing Act

The EU Listing Act is intended to address the above problems. According to the Commission, the main aim of the EU Listing Act is to ensure unhindered capital market access for all companies in the EU, in particular for SMEs, i.e. companies that employ fewer than 250 people and have a turnover of no more than €50 million and/or total assets of no more than €43 million. It is therefore worth reviewing whether the rules for a stock exchange listing could be further simplified, how access to the capital markets can be improved for companies in the EU and how the primary and secondary markets work in the EU. In addition, the Technical Expert Stakeholder Group (TESG), already set up by the Commission in October 2020, should monitor the functioning and success of SME growth markets, the Commission added.

Ultimately, the EU Listing Act thus aims to enable issuers within the EU to access and use the capital markets by

• simplifying and easing the requirements for listing and ongoing listing, partly by reducing costs and increasing legal certainty for issuers;
• removing regulatory restrictions; and
• increasing the visibility of SMEs to investors and improving their attractiveness

to give them the opportunity to finance their business, to grow and to create jobs. At the same time, it also aims to ensure a high level of investor protection and market integrity.

The Commission wishes to achieve these aims by

• making targeted amendments to the existing provisions in several EU legal acts (e.g. Prospectus Regulation, Market Abuse Regulation (MAR), MiFID II and Listing Directive), e.g. by simplifying (i) the documentation obligations for an IPO, (ii) the conditions for deferring the disclosure of inside information and (iii) the market testing rules; and
• introducing new provisions, e.g. on shares with multiple voting rights and simplified corporate governance standards for SMEs.

III. Possible content of the EU Listing Act

A glance at the two ongoing rounds of consultation already provides an idea of the sources of law the Commission thinks need to be reformed:

• The open public consultation includes seven general questions on the functioning of the EU regulatory framework, in particular with regard to the achievement of the objectives of the existing regulatory framework and on the factors responsible for the lack of attractiveness of European capital markets.
• The targeted technical consultation includes over 100 additional questions on technical topics and is aimed at capital market practitioners, competent authorities and academics. It addresses, above all, possible changes to the Prospectus Regulation, the Market Abuse Regulation (MAR), MiFID II, company law and the Listing Directive. The aim is to identify the most burdensome requirements and discuss how these could be reduced without compromising market integrity and the general transparency regime.
  
  In the context of the targeted technical consultation, the following legal sources and topics are addressed in particular:
  
  
  • Prospectus Regulation: Possible simplifications of prospectus drafting (especially content requirements, exemptions, format and language), secondary issuing, liability regime, review and approval of the prospectus, uniform registration form;
  • Market Abuse Regulation: Scope of application, definition of inside information and clarification of plans for deferral of disclosure of inside information, facilitations for issuers of debt securities, managers’ own dealings, insider lists, simplifications for market testing, penalties, liquidity agreements, transparency of investment recommendations;
  • MiFID II: Registering MTFs as an SME growth market, dual listing, stock analysis of SMEs;
  • Transparency Directive: Simplification of the rules on regular publication and publication of investments;
  • SPAC: Suitability of the current legal framework for SPACs and creation of special rules;
  • Listing Directive: definitions, conditions for listing, competent authorities;
  • Company law: Multiple voting rights and corporate governance standards for SMEs.

It is notable that the Commission also raises questions about the “gold-plating” of EU legal acts by the Member States, i.e. the over-fulfilment of minimum harmonising EU legal acts by the EU Member States by means of stricter regulations. This could indicate that the Commission might also envisage a stronger full harmonisation of European capital markets law to avoid stricter national regulations as well as divergences in the rules between the various EU Member States.

III. Procedure and status of the legislative process

The Commission’s consultation process will run until 11 February 2022, after which the results of the consultations will be summarised in a report and further details will be decided on. An initial proposal for the EU Listing Act is currently planned for September 2022.

We will keep you informed about the outcome of the consultations and the further legislative process for the EU Listing Act.