EU Listing Act - Increasing the attractiveness of the capital market (Part 1: General presentation and changes in prospectus law)

published on 17 July 2024 | reading time approx. 4 minutes

In recent years, there has been an increasing migration of growth companies to the USA and other non-EU member states. The number of initial public offerings (IPOs) is also declining – despite a slight recovery in the first half of 2024. The EU has also recognized this and decided to review the regulations on companies' access to the public capital markets and adapt them as part of the EU Listing Act. This represents a package of measures to increase the attractiveness of the capital markets for companies of all sizes. This goal is to be achieved by reducing the effort and costs of admission and listing.

In the first part of a series of articles, we present the general regulatory content of the EU Listing Act and the significant changes to prospectus law that it provides for.

What is the EU Listing Act and what does it cover?

Based on the observations described above, the EU Commission had already initiated the EU Listing Act in December 2022. On February 1, 2024, the European Parliament and the EU Council reached a provisional agreement, which was approved by the European Parliament on April 29, 2024. Formal adoption by the European Council and publication in the Official Journal of the EU is now pending. The election of the EU Parliament in June 2024 does not stand in the way of the successful conclusion of the legislative process.

The EU Listing Act consists of a package of measures to revise several legal acts. It provides for the adoption of two directives and one regulation. The following existing EU legal acts are particularly affected by this:

the Prospectus Regulation (EU Prospectus Regulation),
the Market Abuse Regulation (MAR),
the MiFIR Directive and
the MiFID II Directive.

Among other things, these amendments provide for adjustments to the insider law of the MAR and further simplifications in prospectus law in the EU Prospectus Regulation.

It also paves the way for a more flexible corporate governance structure through the introduction of multi-voting shares by way of a directive. This directive is primarily aimed at start-up founders and owners of companies aiming to enter the capital market. It is intended to enable them to retain control of their company even in the event of an IPO. The German legislator has already introduced multivoting shares through the Future Financing Act (Zukunftsfinanzierungsgesetz; ZuFinG) at the end of 2023.

Objectives and effects:

In particular small and medium-sized enterprises (SMEs) are especially reliant on other sources of financing in addition to bank financing. A key objective of the European Capital Markets Union is therefore to facilitate access to capital market-based sources of financing for both SMEs and large companies. On the one hand, the requirements for admission to a stock exchange are to be lowered. On the other hand, transparency and market integrity as well as investor protection should be maintained. This objective is to be achieved, among other things, by reducing the regulatory requirements for capital market-oriented companies and the fragmentation of national legislation. The EU Listing Act thus contributes to the higher goal of creating a genuine EU single market.

According to estimations, listed companies in the EU will be able to save around EUR 100 million per year as a result of the EU Listing Act. The simplified prospectus regulations alone are expected to save companies around EUR 67 million per year. Due to the greatest savings potential in the prospectus regulations, the first part of the article series deals with the changes to the Prospectus Regulation.

Entry into force:

The legislative process is expected to be successfully completed by the end of 2024. Entry into force is generally scheduled for the twentieth day after publication in the Official Journal of the EU. However, there are numerous exceptions, for example for the changes to the ad hoc publicity obligation and to the prospectus format and content, which will not take effect until 15 or 18 months after entry into force.

Significant changes in securities prospectus law:

The requirements for securities prospectus are to be standardized for IPOs or other initial issues of securities. This is to be achieved through technical standards still to be drawn up by ESMA. In addition to some technical changes, further exemptions from the prospectus requirement are planned.

Volume-related exceptions for small issues:

The exemption in terms of volume relates to the offering of securities for companies listed on the stock exchange or listed on the over-the-counter (OTC) market. Currently, Member States may exempt public offers of securities from the obligation to publish a prospectus for small issues of up to EUR 8 million over a period of 12 months. For offers below EUR 1 million or the threshold set at national level, Member States may require national disclosure documents provided that they do not constitute a disproportionate or unnecessary burden. According to the EU Listing Act, the requirements for volume-related exemptions in the member states are to be harmonized and raised to EUR 12 million. By way of derogation, the member states should only be able to limit the maximum amount for prospectus-free issues to EUR 5 million. The German legislator has previously adopted the existing maximum limit of EUR 8 million. It is therefore to be expected that it will also adopt the new limit of EUR 12 million. Due to the low threshold, this change will benefit smaller companies in particular.

Percentage exception for the admission of additional shares of listed companies:

Listed companies must also observe percentage volume limits for the admission of further shares to the regulated market. Also in this respect, there is currently the possibility of a capital increase and admission to the stock exchange without a prospectus. A securities prospectus currently only has to be prepared if the new securities to be admitted account for 20% of the number of securities of the same type already admitted within a period of 12 months. This threshold is now to be raised to 30%. This increase is probably the most far-reaching change and will save a lot of costs, especially for listed SMEs. The original proposal even provided for a relief to 40% of the securities already admitted. However, for so-called large-cap transactions (e.g. larger international subscription rights issues), it is to be expected that a prospectus will continue to be prepared on a voluntary basis. This is the only way for companies to meet the expectations of the targeted investor groups.

Uniform formats and prospectus standards:

If a company that is already listed on the stock exchange or listed on the OTC market requires additional funds after its admission to the capital market, it is possible to generate these funds through a secondary emission on the capital market. A public offer is also generally required for this secondary emission through a capital increase in the company's share capital. If the company exceeds the thresholds described above, a securities prospectus is also required. With regard to these requirements for secondary issues, the current disclosure regulations are to be replaced by a new EU-follow-on prospectus. As with initial issues, these changes are also intended to simplify secondary emissions for all companies.

The new requirements relate, for example, to the length of the securities prospectus, which is to be limited to a maximum of 300 A4 pages.

Conclusion on the changes to prospectus law:

For SMEs in particular, the increase in the thresholds for issuing without a prospectus will make it easier to raise capital on the capital market. A conclusion on the uniform requirements for the format and standards of securities prospectuses, which have yet to be drawn up, will have to await ESMA's drafts.