SME Growth Markets in 2018: Will MiFID II/MiFIR Drive Greater Choice of Capital Markets Based Financing Options for SMEs?

Transcription

1 SME Growth Markets in SME Growth Markets in 2018: Will MiFID II/MiFIR Drive Greater Choice of Capital Markets Based Financing Options for SMEs? Michael Huertas * Katharina Ariane Beyersdorfer ** EU law; Financial markets; Small and medium-sized enterprises Introduction From 3 January 2018, one of the legislative cornerstones of EU financial markets regulation will be amended and superseded by the entry into force of the MiFID II/MiFIR Package. 1 This package delivers quite a breadth and punch in the change to how EU financial markets are regulated, with a view to making markets, according to EU policymakers own statements, more efficient, resilient and transparent, and at strengthening the protection of investors. Yet all this change also offers a number of opportunities. For small-to-medium-sized enterprises (SMEs), one of the major changes is the establishment of growth markets. This aims not only to improve financing conditions for SMEs by providing capital market financing as alternatives, but also to continue to drive the EU s goal of completing the Single Market for financial services. These themes of balancing the right drivers of growth, integration and smarter regulation have continued to be prominent in the European Commission s (EC s) most recent Single Market integration efforts, in particular, the flagship project, the Capital Markets Union (CMU) and the various actions to be advanced thereunder. This ambitious project launched in September 2015 with a breadth of work streams that are to be completed by To call this a tall order is beyond an understatement, especially as regulatory requirements remain increasingly multifaceted, complex and challenging. On top of that, the CMU s progress in 2016 and for much of 2017 has still continued to favour consultation as opposed to action, 3 and has not provided much in the way of any blue sky thinking. On 6 June 2017, the pace of CMU driven reform finally picked up for SMEs, with the EC publishing its Commission Staff Working Document, Addressing Information Barriers in the SME Funding Market in the Context of the Capital Markets Union. 4 This policy document marks the first step in how the EC plans to present a comprehensive solution that leverages off the best efforts of EU Member States to improve the information architecture that SMEs and investors need to improve capital allocation. The pace of change has also continued unabated, with a raft of non-cmu regulatory requirements and reforms entering into force, or those, such as the MiFID II/MiFIR, set to enter into force. This means that market participants continue to be faced with a vast breadth of fast-paced changes, many of which mean changes, each with varying degrees of impacts on financial services firms and their business as usual as well as change the business work streams. These changes also impact on the way regulated financial services firms are likely to engage with their counterparties and their clients, including SMEs. While growth markets have existed in various forms as secondary boards, alternative capital markets, small cap specialist markets and under various other names since the 1980s, new rules and new economic realities are improving the potential role of these trading and execution venues. Despite past attempts, EU financial markets and operators have not yet built a pan-continental * Michael Huertas is a solicitor (qualified in England & Wales and Ireland) and a Counsel currently with Baker McKenzie in Frankfurt am Main, Germany, specialising in financial regulatory advisory and structured finance matters. His professional practice is focused on emerging regulatory issues in Banking Union and Capital Markets Union. His academic research interests cover cross-border issues in conduct of business regulatory reforms with a focus on collateral, custody and client asset/client money arrangements, offering proposals on how to identify, mitigate and manage what his research terms conceptual translation risk and the resulting costs. This article builds on some of that research. The usual disclaimer applies. The views expressed here are purely personal and need not reflect those of Baker McKenzie. The author would welcome dialogue on any of the issues raised herein or in relation to his research interests. Michael can be reached via: [Accessed 29 September 2017]. ** Katharina Ariane Beyersdorfer is a senior manager with Baader Bank AG, heading Investor Relations and Communications. Baader Bank is one of the leading family-run investment banks in the German-speaking world focusing on market making, capital market and broking services. Baader Bank has a depth of experience in advising Mittelstand and other non-german SMEs in their capital markets financing options. Katharina is based between Munich and Frankfurt and has joined Baader Bank from the German Investor Relations Association (DIRK), where she spent five years as senior manager leading the Stakeholder Engagement team across various projects. 1 MiFID II refers to the Markets in Financial Instruments Directive 2014/65 (Directive 2014/65 on markets in financial instruments and amending Directive 2002/92 and Directive 2011/61 [2015] OJ L173/349) and the following link provides access to the principal legislative text and a non-exhaustive collection to the relevant texts of subsidiary legislation available at: MiFIR refers to the Markets in Financial Instruments Regulation 600/2014 (Regulation 600/2014 on markets in financial instruments and amending Regulation 648/2012 [2014] OJ L173/84) and the following provides access to the principal legislative text and a non-exhaustive collection to the relevant texts of subsidiary legislation available at: /markets-financial-instruments-mifir-regulation-eu-no _en [Both accessed 29 September 2017]. 2 This marks the end of the current EC cabinet and their appointed term. 3 See also M. Huertas, The EU s Capital Markets Union Project in 2016: Where Are We Now? (2016) 31 J.I.B.L.R. 274 available at: /app/document?&srguid=i0ad69f8e ecce79792c99cea11&docguid=i8f7eb e6af1a87ab3e8992b5&hitguid=i8f7eb e6af1a87ab3e8992b5 &rank=1&spos=1&epos=1&td=1&crumb-action=append&context=6&resolvein=true [Accessed 29 September 2017]. 4 Commission Staff Working Document, Addressing Information Barriers in the SME Funding Market in the Context of the Capital Markets Union SWD(2017) 229 final/2 available at: [Accessed 29 September 2017].

2 408 International Company and Commercial Law Review growth market. This is now set to change, with about 40 execution venues 5 being potentially eligible to qualify as growth markets and an estimated 2,500+ SMEs that are potential issuers 6 of equity securities. This article, structured in three parts, provides an analysis of MiFID II/MiFIR s provisions on growth markets for SMEs (SME-GMs), includes an assessment of how SME-GMs deliver CMU s goals, and concludes with an outlook and possible options for SMEs seeking financing as well as next steps for their financial advisers. What do MiFID II and MiFIR change for SMEs and SME-GMs? Like its predecessor, MiFID II distinguishes between operators of regulated markets, multilateral-trading facilities (MTFs) and a new type of execution venue, organised trading facilities (OTFs). MiFID II s art.33 specifically introduces provisions that EU Member States must allow operators of MTFs to apply to the relevant competent authority of a home EU Member State to have the MTF registered as a SME growth market, as that term is used within MiFID II. The home competent authority will change according to the Member State but is usually the financial markets regulator responsible for conduct of business regulation, e.g. the Financial Conduct Authority (FCA) in the UK, the BaFin in Germany, the CSSF (Commission de Surveillance du Secteur Financier) in Luxembourg; but in Ireland it is the Central Bank of Ireland that is given the jurisdiction of a unitary financial services authority. The provisions of MiFID II, like any EU directive, are required to be transposed into the national law of each of the EU s Member States. In several jurisdictions, this may take the form of verbatim introduction or the amendment of the legislation that transposed the requirements of MiFID I when that EU directive was originally passed in 2004, according to the relevant deadlines for implementation. In contrast, the provisions of MiFIR, as with any EU regulation, take direct effect. The MiFID II/MiFIR Package is complemented by subordinate legislation, i.e. Level 2 in the form of Implementing Technical Standards and/or Regulatory Technical Standards and Level 3 guidance instruments. MTFs are multilateral systems operated by a MiFID investment firm or a market operator that brings together multiple third parties in the buying and selling of interests in financial instruments in that system, and in accordance with non-discretionary rules contained in MiFID II/MiFIR. An analytical comparative discussion of the characteristics and merits of regulated markets v MTFs v OTFs is beyond the scope of this article. However, what is important is that art.33 of MiFID II is compact and self-contained in its legislative provisions in clearly stating how MTFs can become SME-GMs, as well as describing the relevant attributes that a MTF would have if designated as a SME-GM. This designation process occurs in three stages. First, the home competent authority, say the BaFin in Germany, must receive an application from the MTF operator (pursuant to art.33(1) of MiFID II). The home competent authority may, upon consideration of specific criteria (art.33(3) of MiFID II) register, i.e. designate, the MTF as a SME-GM. The criteria in art.33(3) of MiFID II require that each Member State has set rules (possibly as part of the MiFID II transposition process) that the applicant MTFs should not only comply with the detailed rules in the MiFID II/MiFIR Package, as to the operation of a MTF, but equally, so as to be designated as a SME-GM. These criteria include (clarifications in square brackets) that Member States ensure MTFs: are subject to effective rules, systems and procedures which ensure that the following is complied with : at least 50% of the issuers whose financial instruments are admitted to trading on the MTF are SMEs at the time when the MTF is registered as an SME growth market and in any calendar year thereafter. The definition of SME is set out in art.4(13) of MIFID II as small and medium-sized enterprises ; for the purposes of this Directive, this means companies that had an average market capitalisation of less than on the basis of the end-year quotes for the previous calendar year. It is important to note that this definition of SME, in some parts, may differ across other EU legislation so that an entity such as a partnership or micro-enterprise might qualify as a SME for the purpose of that legislation, but for the purposes of MiFID II may not qualify, whether owing to grounds of size and/or entity type. This definition should 5 This figure is based on 2013 data and is based on a total of about 150 multilateral-trading facilities (MTFs) operators or 75 excluding the UK post-brexit. Data is based on the Europe Economics Report. 6 See, inter alia, the analysis, based on compiled data (parts of which cut off in 2013) provided to the European Securities and Markets Authority (ESMA), in the context of the Market Abuse Regulation reforms, by Europe Economics, Data Gathering and Cost Analysis on Draft Technical Standards Relating to the Market Abuse Regulation (6 February 2015) available at: [Accessed 29 September 2017].

3 SME Growth Markets in also be read in conjunction with the terms introduced by art.77 of the CDR April 2016, 7 the details of which are discussed in further detail below; have appropriate criteria are set for initial and ongoing admission to trading of financial instruments of issuers on the market ; have and maintain 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, either an appropriate admission document or a prospectus if the requirements laid down in Directive 2003/71/EC [i.e. the Prospectus Directive, as amended] are applicable in respect of a public offer being made in conjunction with the initial admission to trading of the financial instrument on the MTF ; provide evidence that there is appropriate ongoing periodic financial reporting by or on behalf of an issuer on the market, for example audited annual reports ; ensure compliance so that issuers on the market as defined in point (21) of Article 3(1) of Regulation (EU) No. 596/2014 [Market Abuse Regulation or MAR], persons discharging managerial responsibilities as defined in point (25) of Article 3(1) of MAR and persons closely associated with them as defined in point (26) of Article 3(1) of MAR comply with relevant requirements applicable to them under MAR ; provide that regulatory information concerning the issuers on the market is stored and disseminated to the public ; and maintain compliance so that there are effective systems and controls aiming to prevent and detect market abuse on that market as required under the MAR. These criteria above have, prior to entry into force of the MiFID II/MiFIR Package, already been supplemented by further criteria in the form of the CDR April The power to supplement the criteria is set out in art.33(8) MiFID II and the contents of the further criteria are contained in the provisions of art.78 of the CDR April 2016, as discussed in further detail below. Notwithstanding the regulators powers to introduce further rules, the MTF requirements, and those that are a prerequisite to be designated a SME-GM, do not restrict 8 the relevant MiFID investment firm or the MTF market operator, as an applicant seeking SME-GM designation, to self-impose or comply with additional requirements that it sets itself in relation to its own operations. That being said, it should be noted that SME-GMs are subject to the regulatory principle of non-discrimination among execution venues. This is detailed specifically in Recital 112 of the CDR April 2016, which means that SME-GMs should not place more burdensome obligations upon issuers than execution venues that are categorised as regulated markets. The deregistration of a SME-GM is equally, if not more, straightforward than the designation and registration process as a SME-GM. The deregistration of a SME-GM may occur if any of the following arises (as contemplated by art.33(5) of MiFID II as supplemented by art.79 of the CDR April 2016): self-requested deregistration: i.e. the MiFID investment firm or market operator operating the SME-GM applies for its deregistration; or breach of criteria: i.e. the requirements in art.33(3) of MiFID II are no longer complied with in relation to the SME-GM. As with most EU legislation, especially that which has, or purports to have, goals of integrating European markets, the recording of execution venues, and financial instruments or products that are executed thereupon, are part and parcel of capturing the capital markets ecosystem in Europe. Consequently, obligations on the registration and deregistration of MTFs as SME-GMs are set out under art.33(6) of MiFID II. Any change in status requires the home national competent authority to notify the European Securities and Markets Authority (ESMA), which, among its many pan-eu regulatory tasks and co-ordination of national competent authorities, acts as a centralised gatekeeper of which venues qualify as SME-GMs. ESMA is thus tasked with maintaining a publicly accessible and up-to-date list of SME-GMs. This centralised list is likely to be of benefit for investors, financial advisers as well as those SMEs seeking finance, including those looking to list in other Member States. It is at present not yet clear how frequently this list is set to be updated. 7 See Regulation supplementing Directive 2014/65 as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive C(2016) 2398 final available at: [Accessed 29 September 2017], or any subsequent version as published in the Official Journal of the EU. 8 See MiFID II art.33(4).

4 410 International Company and Commercial Law Review SME-GMs as tools to integrate EU markets and deliver on CMU s goals While the development of SME-GMs, as dedicated execution venues, is a welcome reform in its own right, the real opportunity for financial integration of European markets and real cross-border liquidity is provided for in art.33(7) of MiFID II. This is achieved by MiFID II s provisions facilitating easier dual-listings. The opportunities that this legislative provision offers cannot be underestimated. This is based on the assumption that the provisions will be implemented in all Member States equally and with sufficient harmonisation of post-trade infrastructure, which is in itself a standalone EU reform priority. The deepening of integration and cross-border liquidity offers real potential benefits for investors, SMEs and MTFs operating SME-GMs in all sorts of ways. Article 33(7) of MiFID II thus reads as follows (emphasis added): 7. Member States shall require that where a financial instrument of an issuer is admitted to trading on one SME growth market, the financial instrument may also be traded on another SME growth market only where the issuer has been informed and has not objected. In such a case however, the issuer shall not be subject to any obligation relating to corporate governance or initial, ongoing or ad hoc disclosure with regard to the latter SME growth market. What this could mean is that SMEs that have been admitted to trading in, say, the Zagreb Stock Exchange, Croatia, could achieve a dual listing in, say, Scale, the Frankfurt-based MTF that is likely to become a SME-GM. Not only is this an exciting opportunity, but achieving such dual-listing abilities delivers on the political and economic goals of the CMU project. If such dual listings take off, then it will also be likely assist in improving the financialisation of EU markets as well as the integration between the EU s periphery and the core. Focus on making this art.33(7) of MiFID II provision a success in practice will mean that both industry and the supervisory and regulatory policy and decision-makers will need to further advance existing and pending reform efforts to holistically deliver pan-eu standardisation in the post-trade environment. Key to ensuring that this deepening of integration is a success, specifically in the context of art.33(7) of MiFID II, is also likely to include the role of relevant financial advisers. This is the case whether or not they themselves act as members of a MTF/SME GM. This is also the case where they fulfil the role, as foreseen in the MiFID II/MiFIR Package, to act as gatekeepers with respect to the SMEs, by ensuring that appropriate standards of due diligence are maintained in respect of SMEs that have been listed and those seeking a dual listing. However, financial advisers and SME-GM operators are not the only gatekeepers. Historically, this role has been and will continue to be exercised by listing authorities.there remains much to be done beyond what the MiFID II/MiFIR Package and other EU legislation explicitly prescribe, or what the CMU work streams implicitly call for in building a more common set of standards, regulatory and supervisory culture among listing authorities, let alone using common application forms. Monitoring, mitigating and managing delivery against those common goals are likely to fall among the many tasks assigned to ESMA and its own strategic priority of ensuring greater supervisory convergence. It remains to be seen whether the EC will improve ESMA s financial resources in order for it to deliver the multitude of its tasks. These are, however, very necessary considerations that not only ensure greater standards are complied with but are required in order to provide further reassurance to investors and thus generate liquidity. Article 33(8) of MiFID II locks in the EC s ability to supplement the criteria set out in art.33(3) with further provisions contained in delegated legislation which includes Level 2 and possibly Level 3 measures. That delegated legislation is to be crafted in a manner that shall take into account the need for the requirements to maintain high levels of investor protection to promote investor confidence in those markets while minimising the administrative burdens for issuers on the market and that de-registrations do not occur nor shall registrations be refused as a result of a merely temporary failure to meet the conditions set out in point (a) of paragraph 3 of this Article. The CDR April 2016 is the first of those measures. Level 2 measures further details on SME-GMs Some of these subsequent measures have already been introduced as Level 2 measures, notably by the Regulation supplementing MiFID II as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive [e.g. MiFID II] (for purposes herein, the CDR April 2016). 9 At the time of writing of this article, this CDR April 2016 was not yet in force, just as MiFID II/MiFIR were not yet fully in force. Article 77 of the CDR April 2016 provides further clarity on the qualification as an SME pursuant to art.4(1)(13) of MiFID II. Specifically, the terms of art.77 of the CDR April 2016 clarify that, with respect to the 200 million market capitalisation threshold, this is based with reference to closing prices and length of trading. In summary, this means an issuer whose shares have been admitted to trading for less than three years will be an SME if its market capitalisation is below 200 million based on any of the following: 9 See Regulation supplementing Directive 2014/65 C(2016) 2398 final, or any subsequent version as published in the Official Journal of the EU.

5 SME Growth Markets in the closing share price of the first day of trading if shares have been admitted to trading for less than one year; the last closing price of the first year of trading, if its financial instruments have been admitted to trading for more than one year but less than two; or the average of the last closing share prices of each of the first two years of trading, if its financial instruments have been admitted to trading for more than two years but less than three years. For those issuers that have no equity instruments trading on a trading venue or are strictly trade non-equity financial instruments (as contemplated in Recital 111 to the CDR April 2016), the threshold calculation for the purposes of qualifying as a SME pursuant to art.4(1)(13) of MiFID II resorts to assessing the last annual or consolidated accounts. The issuer will be an SME if it meets at least two of the following three criteria: (1) its average number of employees during the financial year was less than 250; (2) it has a total balance sheet not exceeding 43 million; and (3) it has an annual net turnover not exceeding 50 million. Rules on how to treat non-euro to euro conversions apply but this should be considered in light of specific circumstances that apply at the relevant time. Article 78 of the CDR April 2016 provides further qualitative and quantitative criteria supplementing the SME-GM designation criteria that was set out in the Level 1 provision of art.33(3) of MiFID II. This includes the following clarifications: the home state competent authority of the Member State of the operator of an MTF seeking a SME-GM designation will be responsible for calculating the average ratio of SMEs over the total number of issuers with financial instruments admitted to trading for the purpose of assessing whether the 50% threshold requirement in art.33(3)(a) of MiFID II is satisfied. The average ratio is calculated on 31 December of the previous calendar year as an average of the 12 end-of-month ratios in that calendar year. If no previous data is available, then the verification process takes place at the end of the first three calendar years; and the home competent authority of the MTF shall not award the SME-GM designation unless it is satisfied that the MTF has: established and applies rules providing for objective and transparent criteria for the initial and ongoing admission to trading of issuers on the SME-GM including compliance with the EU s Prospectus Directive 10 regime by publishing an admission document or a prospectus for approval 11 and the relevant public disclosure and recordkeeping obligations; an operating model which is appropriate for the performance of its functions and ensures the maintenance of fair and orderly trading in the financial instruments admitted to trading on the SME-GM; rules that require an issuer to state in its admission document whether it has sufficient working capital for its present requirements or, if not, how it proposes to provide the additional working capital needed; ongoing reporting requirements for SME issuers requiring publication of annual financial reports within six months of financial year end, half-yearly financial reports within four months after the end of the first financial half-year end. Issuers may use International Financial Reporting Standards (IFRS) or those relevant financial reporting standards 12 governed by national law. These provisions should of course be contrasted with the relevant rules of the MTF/SME-GM as some may have more stringent requirements or additional rules that are not covered at the EU level. Article 79 of the CDR April 2016 clarifies that the SME-GM deregistration process should apply in cases where the volume of SMEs falls below 50% over a period of three consecutive calendar years, or where the art.33(3) of MiFID II criteria are no longer fulfilled. An outlook and possible next steps for SMEs seeking financing as well as their financial advisers Aside from the gatekeeper role that financial advisers are likely to play in respect of SMEs, in terms of both sourcing and securing financing, as well as ensuring that resilient compliance standards are met by the SME issuer 10 Directive 2003/71 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34 [2003] OJ L345/ See also Recital 113 of the CDR April See Recital 114 of the CDR April 2016.

6 412 International Company and Commercial Law Review prior to a listing and following a listing, financial advisers are likely to be liquidity generators in their own right. That being said, it should be noted that, regardless of MiFID II/MiFIR and the EU s Prospectus Directive regime, there are (currently) no common rules that apply across those MTFs that may become SME-GMs as to whether there is mandatory requirement for a financial adviser, or where one exists, a common definition of what such a role entails. The same is true in relation to minimum admission standards, ongoing reporting and the use of IFRS or local accounting standards. While further work may be necessary to harmonise standards across this area, this divergence does not necessary stop the benefits of SME-GMs nor the ability to dual list. Separate from these technical regulatory concerns, it is likely that financial advisers will increasingly look to specialise themselves both by sector and by geographic area in terms of the SME-GMs they engage with. It remains to be seen which SME-GMs will specialise in what, and which financial advisers will focus on more specialised SME-GMs whereas others may have a broader focus. As an example, it is conceivable that specialised financial institutions that assist, for example, biotech companies in securing their financing needs, may only look to service that area and do so solely across their core geographical markets and those of their existing clients. In contrast, other financial institutions and their business models might instead aim to apply to a broader set of SMEs and those MTF operators, such as NASDAQ, which might look to build broader SME-GMs. Some of these decisions may be directed by how MTF operators choose to set up SME-GMs, but also ultimately by where SMEs and investors find an efficient balance in which to trade. So, what next? Even before this new MiFID II provision takes effect, financial advisers should be planning and facilitating conversations both internally, as well as with existing and possible SMEs and SME-GMs as to how to ensure that this new opportunity and greater liquidity are made accessible. This might include setting up internal working groups to facilitate knowledge-sharing within the firm, setting up liaisons with key SME associations and market operators, as well as raising the awareness of SMEs of their options. In short, the multiple tomes of the MiFID II/MiFIR regime are likely to keep financial institutions quite busy post the January 2018 deadline. While that workstream comes on top of a long list of to-dos on the horizon for financial institutions, each with different priorities in relation to the breadth of other Eurozone-specific and wider EU regulatory and supervisory reform projects, the opportunities that exist in relation to SME-GMs are important in tying European capital markets further together, building the CMU and, more importantly, driving economic growth via SMEs, which are the backbone of most of the EU s real economy. The years ahead may be busy but the opportunities are certainly bound to be exciting.