BY: ComplyLog|September 1, 2023|Insider list management
In December 2022, the European Commission (EC) presented three proposals for facilitating an easier and less burdensome route onto the EU’s public markets for businesses, particularly small and medium enterprises (SMEs). These linked suggestions for adjustments to existing laws in the union were packaged together under the title of the EU Listing Act.
The act is primarily concerned with helping companies through the IPO and post-IPO landscape, but the proposed changes could affect a great deal of EU legislation, including some of the provisions in the Market Abuse Regulation (MAR).
This article explores the proposed law changes that might form part of a finalised EU Listing Act. In particular, it explores what these mean for compliance surrounding inside information and insider lists.
Table of Contents
II) The changes the EU Listing Act might bring to MAR
II.II) Clarification of the conditions under which issuers may delay disclosure of inside information
III) Other changes the EU Listing Act proposes
The Listing Act is a series of proposals the European Commission (EC) has submitted to the European Council and Parliament. It wants these parties to deliberate on the suggestions to adjust the current legislation in order to make it easier for companies to seek private funding on the financial markets.
There are three proposals within the EU Listing Act package:
|Proposal||What it includes|
|Document 52022PC0762||Proposal to amend:The Prospectus Regulation to further harmonise requirements concerning the preparation, approval and distribution of prospectuses when issuers offer securities to the public or on a regulated market and to raise the prospectus exemption threshold for secondary issuances.The Market Abuse Regulation to reduce the legislative burden on issuers as they take steps to detect and prevent market abuse, market manipulation and insider dealing.The Markets in Financial Instruments Regulation (MiFIR) to set up cross-market order book surveillance (CMOBS) to help national competent authorities (NCAs) better identify occurrences of market manipulation and abuse.|
|Document 52022PC0760||Proposal to amend the Markets in Financial Instruments Directive II (MiFID II) to increase the threshold for companies obliged to unbundle payments for research and execution from €1 billion to €10 billion market capitalisation. This should increase access to research for SMEs.
Also, this seeks to repeal the Listing Directive, which the European Commission suggests will increase market harmonisation within the EU.
|Document 52022PC0761||Proposal to create a new directive on multiple-vote share structures for companies gaining admission to SME growth markets. This would harmonise laws across the EU and allow company owners to raise additional funds whilst maintaining powers to make decisions.|
Currently, issuers must immediately disclose any inside information, described as being of a precise nature, which, “if it were made public, would be likely to have a significant effect on the prices of financial instruments.”. The EC has decided that the obligations for SMEs with regard to inside information can be too labour-intensive for compliance functions. Analysing what constitutes inside information, when it needs to be disclosed and when it can be delayed can be a time-consuming process.
If the Listing Act is implemented, issuers would only need to disclose inside information that leads directly to the completion of a “protracted process”. This means that only when the board of an issuer has made a final decision to, for example, acquire another firm, does that information become inside information. The intermediate steps will not require disclosure, as the information “is not sufficiently mature” and, therefore, could mislead investors, rather than informing them.
Whereas the criteria for allowing the delay of insider information disclosure currently revolve around the notion that the delay will not mislead the public, the EC is looking to clarify conditions that it believes are easier to assess.
Under the Listing Act, this would mean issuers must meet the following requirements to delay disclosure:
Currently, issuers who meet the requirements to delay inside information are obliged to notify the national competent authority (NCA) about their decision to delay once the information becomes public. Under the new proposals, issuers will have to disclose their intention to delay disclosure immediately after the decision is taken.
Rather than creating event-based insider lists for each piece of inside information, the Listing Act could reduce the obligation to simply drawing up a permanent list of persons who have access to all inside information by virtue of their position within the business. This could mean the CEO, other executives, administration staff and others.
However, the European Securities and Markets Authority (ESMA) has long been concerned that relying on a permanent list makes it more difficult to know who was actually in possession of the knowledge and could hinder an investigation. In response to the Listing Act, it also expressed concern about the fact that those with only irregular access to inside information would not be featured in the list and might therefore not know the status of the information and the risks involved. This could lead to inadvertent insider trading.
As the law stands, issuers have to report transactions in that company’s financial instruments made by persons discharging managerial responsibilities (PDMR) and persons closely associated with them (PCA) if they exceed €5,000 annually. This could increase to a minimum of €20,000 due to the Listing Act and possibly up to €50,000 if an NCA decides to raise the bar at a national level.
PDMRs are prohibited from trading in the issuer’s financial instruments in the 30-day closed period before an interim financial report of the year-end report. However, there are some exemptions currently and there may be more as a result of the Listing Act.
The new law could exclude transactions where the PDMR did not make an investment decision, such as converting financial instruments.
Issuers who use market soundings to gauge interest in an IPO, merger or other potential event would gain full protection against any allegation of unlawfully disclosing inside information. This safe harbour protection also presumes innocence if non-compliant activity occurs.
Article 5 of MAR includes provisions exempting buy-back programmes and stabilisations from the prohibitions relating to insider dealing, unlawful disclosure of inside information and market manipulation.
The proposed amendment could streamline the reporting process for issuers looking to benefit from these exceptions. Under the proposed changes, issuers will be required to report relevant information solely to the NCA of the market where their shares have the highest liquidity. Additionally, issuers will only need to disclose aggregated information to the public, making the reporting mechanism more straightforward and efficient.
The proposals within the EU Listing Act are aimed at developing the capital markets union (CMU), which the EU views as integral to the single market. However, reports showed that the number of companies going public, particularly SMEs, was levelling out, rather than rising as hoped.
The conclusion was that there were significant barriers to smaller companies listing and enjoying the benefits of going public. The solution is to lower the costs involved with an IPO and to make the process of listing more attractive and efficient.
The Listing Act aims to remove the challenges involved and provide the following advantages to businesses considering an IPO or secondary listing.
The ability to create multiple-vote share structures ensures SMEs can maintain decision-making powers as they raise funds on the markets. Providing different classes of shares with varying voting rights allows owners to hold controlling stakes without having to make a proportionate investment as they would when all shares hold the same voting rights.
Making this available across the union, rather than fragmented between member states as is the case currently, ensures the IPO process is a level playing field and, therefore, fairer.
The separation of brokers’ payments for research and execution has led, according to the EC, to SMEs receiving lower amounts of research by analysts, worse quality of research, a greater chance of losing coverage and reduced secondary market liquidity.
An important element of the IPO process is to ensure that the company is as visible as possible to investors. For this reason, the EU Listing Act proposes to raise the MiFID II threshold for unbundling from €1 billion to €10 billion market capitalisation in order to increase the amount of investment research on these businesses.
The current requirements for a prospectus that a company has to issue before it goes public are deemed by many to lead to longer prospectuses and an extended approval process. For additional issuances after the IPO, companies are still obliged to create an in-depth prospectus despite much of the information being widely available already.
The new legislation intends to create a standard prospectus format, with a 300-page limit. The proposal is to replace the current EU Growth Prospectus with a new EU Growth Issuance document that demands fewer requirements. There will be exemptions that mean companies do not require a prospectus for secondary issuances and, for those that do not fall within the exemptions, there will be a new, simplified follow-on prospectus framework.
The European Commission identified the laws surrounding inside information, including what constitutes inside information, the creation of insider lists and the rules around disclosing that information, as being burdensome, particularly to smaller businesses.
As such, it proposes reducing the scope of obligations related to the disclosure of inside information, moving towards creating a permanent insider list rather than event-based lists and raising thresholds for reporting managers’ transactions.
EU Listing Act implementation timeline
At the time of writing, the EU Listing Act is about to enter the ‘Draft report’ stage. There are a number of steps before it is implemented and, perhaps eventually, transposed into national legislation.
The reasoning behind much of the Listing Act is to streamline the requirements on issuers and to make it easier to access the public markets. This means loosening regulatory obligations and standardised processes to reduce the cost and time it takes to go public.
The Listing Act means that issuers could be less likely to rely on bank financing, as they will instead have access to investment.
ESMA warns that advisors will find it more difficult to draw up an insider list based around the information gained from client issuers. They will not be part of the issuer’s list anymore, so will not receive notification of having accessed inside information.
The higher threshold for unbundling research and execution costs will mean that there should be a lot more information on smaller issuers available for access by advisors.
The Listing Act aims to create a standardised format for prospectuses with a limit on the number of pages and, in certain circumstances, remove the requirement for a prospectus for a secondary issuance.
Although the European Commission is moving forward with the EU Listing Act, it is still at a relatively early stage. At the time of writing, the European Council has agreed its negotiating mandate on the act. This means it can negotiate the final version of the texts of the proposals with the European Parliament. If the EU Listing Act is eventually implemented into law, it would mean significant changes to the work of compliance professionals, particularly around the topic of inside information and insider lists.
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