The Initial Public Offerings Law Review: Luxembourg
Key international players consider Luxembourg to be one of the most attractive business centres in the world. With approximately 126 registered banking institutions, a successful investment fund industry with about 3,693 funds managing net assets of approximately €5,000 billion and a dynamic insurance sector, Luxembourg offers a full range of diversified and innovative financial services.2
The main advantages of Luxembourg include its:
- continued affirmation of an AAA rating for long-term and short-term sovereign credit;
- sound public finances;
- rapid regulatory process;
- business-friendly attitude of the authorities;
- large network of double taxation treaties;
- efficient immigration procedures;
- recognition as an innovative hub for fintech; and
- state-of-the-art company laws.
To maintain the attractiveness of Luxembourg in a context where the regulatory framework becomes increasingly harmonised, there are clear signals that the Luxembourg authorities want to differentiate themselves from their foreign counterparts with regard to quality of service, responsiveness and approachability.
The above are all factors to consider when selecting the optimal location in which an initial public offering (IPO) vehicle should be established. Given the benefits offered, Luxembourg is increasingly the jurisdiction of choice for initiating IPO transactions.
i Main stock exchanges
The Luxembourg Stock Exchange (LuxSE) operates two markets: an EU-regulated market named Bourse de Luxembourg (BDL) and an exchange-regulated market named Euro MTF, which does not qualify as a regulated market within the meaning of Directive 2014/65/EU, but rather as a multilateral trading facility (MTF).
In addition, since 12 January 2018, the LuxSE offers the possibility for issuers to have securities admitted on its official list without being admitted to trading on any market through the creation of a dedicated section of the LuxSE's official list, namely the LuxSE Securities Official List (the LuxSE SOL).
Issuers whose shares have been admitted to trading on the BDL are subject to European regulations applicable to financial instruments, including Regulation (EU) 2017/1129 of the European Parliament and the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market (the Prospectus Regulation), which officially became effective on 20 July 2017 and fully entered into force in July 2019.
The Prospectus Regulation also provides for an exemption from the obligation to publish a prospectus for the admission to trading on a regulated market of 'securities already admitted to trading on the same regulated market, provided that they represent, over a period of 12 months, less than 20 per cent of the number of securities already admitted to trading on the same regulated market' (Article 1, 5.(a)).
Because of the European passport provided under the Prospectus Regulation, a prospectus may be used for admission to trading on a regulated market in another country in the European Economic Area (EEA), without further review or the imposition of further disclosure requirements (except for summary translations, where applicable) by the relevant authority of that EEA country. This, therefore, minimises regulatory arbitrage and provides a single market framework.
Prospectuses for the public offering of equity securities within the EEA or admission to trading on a regulated market within the EEA (including the BDL) issued by issuers incorporated in Luxembourg must be approved by the Luxembourg competent authority, the Commission for the Supervision of the Financial Sector (CSSF), and, where applicable, subsequently passported into the relevant host Member States in which an admission to trading on a regulated market or a public offering takes place.
The Euro MTF has been a fast-growing market since its creation in 2005. It was created by the LuxSE to provide issuers with an alternative to the EU-regulated market. The LuxSE is responsible for the review and approval of prospectuses for admission to trading on the Euro MTF.
The Euro MTF is not an EU-regulated market and is, therefore, outside the scope of the EU Prospectus Regulation and Directive 2004/109/EC (the Transparency Directive); thus, the reporting and transparency requirements are less stringent. It is suitable for those not interested in the European passport but who want a European admission to trading.
As of June 2021,3 some 36,985 securities were admitted to trading on both markets, 57 per cent of which were admitted to trading on the BDL and 43 per cent of which were admitted to trading on the Euro MTF, which makes the Euro MTF the second-largest MTF in Europe. These numbers include 14,486 bonds and 18,671 structured investments.
Investment funds form another important segment with 3,519 share classes listed as of 30 June 2021.4
With 111 listed global depositary receipts (GDRs), the LuxSE is the second exchange in Europe in terms of GDRs.5 Worldwide, 9 per cent of IPO capital raised via depositary receipts in 2011 was from depositary receipts listed on the LuxSE.6 In terms of origin of the underlying equity issuers for those depositary receipts, as of 30 June 2021, Taiwan ranks first with 43 GDRs (39 per cent of GDRs listed on the LuxSE),7 followed by India (37 per cent).
GDRs have been present on the LuxSE for some time: the first listing of a GDR took place in 19908. GDRs provide the relevant underlying company with access to international capital markets. Emerging countries looking for international investors see the GDR as a unique solution in terms of flexibility and market exposure.9
As far as the equity market is concerned, the LuxSE has more than 27 domestic issuers with equity listed on one of the LuxSE's markets. The trading activity overall is, however, rather limited.
Among those domestic issuers, an increasing number of Luxembourg IPO vehicles serve as holding companies for operational groups operating in other countries (especially Germany). The reasons for using a Luxembourg IPO vehicle (rather than a German vehicle) are diverse: often private equity houses that intend to float one of their investments have already used Luxembourg vehicles to structure their investment and one of the existing top companies is then converted into an IPO vehicle.
In other circumstances, Luxembourg vehicles are preferred to other vehicles for corporate governance reasons (increased flexibility of Luxembourg company law compared with other jurisdictions), and issuers are also keen on dealing with the CSSF to have their prospectuses approved rather than another authority (bearing in mind that the CSSF is one of the most popular competent authorities under the Prospectus Regulation with more than 1,300 documents approved yearly).10
A number of foreign issuers also have their equity listed on the LuxSE. These companies are usually dual-listed, with their equity also being listed on another regulated market within the EEA. For instance, there are a number of German corporates with listings on one or more regulated markets in Germany that also have their shares admitted to trading on the LuxSE's BDL. The dual listing permits issuers to have more flexibility in terms of language for the underlying listing prospectus and to draw up the prospectus in English, rather than in German, which is often considered an important marketing tool in connection with such equity capital market transactions.
ii Overview of listing requirements
Admission to trading and admission to official list
There is a distinction between the requirements for an admission to trading of shares in an issuer to the regulated market of the LuxSE (BDL) and the Euro MTF. Although a prospectus is required in both cases, the underlying regulatory regime differs significantly.
For admission to trading on the Euro MTF, the competent entity for prospectus approval will be the LuxSE. In contrast, for admission to the regulated market of the LuxSE, a prospectus drawn up in accordance with the requirements of the Prospectus Regulation is required (the disclosure requirements regarding equity issuers are generally perceived to be more demanding than those for the Euro MTF, which are set by the rules and regulations of the LuxSE).11
The Prospectus Regulation-compliant prospectus is approved by the CSSF if the issuer is a Luxembourg company (and for third-country issuers if certain conditions are met), whereas an issuer incorporated in an EEA country other than Luxembourg would have the prospectus approved in its jurisdiction of incorporation (the home Member State) and then passported into Luxembourg via the EU passport for an admission to trading on the BDL.
In principle, admission to listing on the LuxSE's official list goes hand in hand with the admission to trading on one of the LuxSE's markets.12 On request of the issuer or the person seeking the admission to trading, the securities specified in an application form may not, however, be admitted to the official list.13 As an exception to the above, it is now possible, subject to the conditions set out in the LuxSE's Rulebook – Securities Official List (the SOL Rulebook), to have securities admitted to listing on the LuxSE SOL without the securities being admitted to trading on the LuxSE-regulated market or Euro MTF.
Applicable listing requirements
The requirements for listing securities, which apply equally to securities on the BDL and the Euro MTF, where they are also listed on the official list, are set out in the Grand-ducal Regulation of 13 July 2007, as amended, relating to the holding of an official list for financial instruments, as amended (the Listing Regulation). The requirements are outlined below.
The requirements for listing securities on the LuxSE SOL (next to the application for listings itself, which includes the need to provide an 'information notice') are set out in the SOL Rulebook and are substantially identical to those highlighted below.
Compliance with applicable law14
The issuer must conform to the corporate laws and regulations, and their articles, to which it is subject.
Minimum number of investors15
A sufficient distribution of shares (or units) to the public of one or more Member States must be achieved at the latest at the time of the admission to the official list. A sufficient distribution is deemed to have been achieved when either the relevant shares and units have been distributed to the public up to at least 25 per cent of the subscribed capital represented by this category of shares and units, or when, owing to the high number of shares and units of a same category and the extent of their distribution to the public, proper operation of the market is assured with a lower percentage.
This condition does not apply where the securities are to be distributed through the BDL or the Euro MTF, although in that case, the admission to the official list may only be granted if the LuxSE believes that sufficient distribution through the regulated market will take place within a short time frame. The Listing Regulation also specifies that where the shares and units are admitted to the official list of one or more third countries, the LuxSE may, by derogation, provide for their admission to the official list of the LuxSE when sufficient distribution to the public has been achieved in the third country or countries where they are listed.
A certain level of discretion is left with the LuxSE to assess whether sufficient distribution is deemed to be achieved. To enable the LuxSE to form an opinion, the relevant issuer or person seeking admission will need to respond to a questionnaire issued by the LuxSE in which the issuer will specify its expectations regarding distribution. There is no minimum number of investors per se, and the LuxSE will analyse the overall context.
The holding by a single investor, even if accompanied by a limited number of 'strawmen investors' each holding an insignificant portion of the overall equity, is considered insufficient. However, a distribution of the shares among a limited number of investors each holding a reasonable stake in the company would usually be satisfactory to the LuxSE, though, as mentioned, there is some discretion on the part of the LuxSE in this respect.
Article 18.104.22.168 of the SOL Rulebook provides that there are no free float conditions for shares and units admitted to the LuxSE SOL.
Minimum market value of share issuer
The minimum share capital, at the time of listing, must be at least €1 million or the equivalent value in any other currency, unless the LuxSE is otherwise satisfied that there will be an adequate market for the shares concerned.16,17
Negotiability of securities
Shares and units must be freely transferable. Selling restrictions or lock-ups (e.g., post-IPO management lock-ups) are, however, accepted.18
Number of securities concerned
The admission application must, in principle, concern all shares and units of the same category issued.19 The only exception to this rule (which does not apply to the LuxSE SOL) relates to large blocks of shares that are designed to maintain control of the company, or that are not tradable during a determined period in accordance with agreements, provided that the public is informed of these situations and that there is no risk of these situations causing any prejudice to the holders of the shares for which admission to the official list is being applied.
Minimum prior existence
The issuer must have published or filed, in accordance with national law, its annual accounts for the three financial years preceding the application for listing.20 A derogation is possible21 and, if obtained, the LuxSE imposes additional post-listing obligations on the issuer via the requirement for publication of quarterly reports over a certain period post-listing.22
iii Overview of law and regulations
As set out in the Prospectus Regulation and the Act of 16 July 2019 on prospectuses for securities (the Prospectus Act), no offer of transferable securities may be made to the public in Luxembourg without the prior publication of a prospectus approved by the CSSF or a competent foreign authority.23
Depending on the type of offer and the securities offered, different regimes apply. Part II of the Prospectus Act implements the provisions of the Prospectus Regulation into Luxembourg law and refers to the Prospectus Regulation for the general legal framework of the prospectuses, whereas Part III, Chapter 1 of the Prospectus Act applies to alleviated prospectuses, which must be published for public offers of securities not covered by the Prospectus Regulation. The main difference between the two regimes is that only public offers made under the Prospectus Regulation can benefit from the European passport for securities. Part III, Chapter 1 of the Prospectus Act is used for public offers in Luxembourg only.
Generally, a prospectus or an alleviated prospectus must contain all the information that enables prospective investors to make an informed assessment of the contemplated investment. The contents and format of a Prospectus Regulation prospectus are determined by Commission Delegated Regulation (EU) 2019/980 (Regulation 2019/980).24 Prospectus Act, Part III prospectuses are either drafted on the basis of Regulation 2019/980 or on the basis of the rules and regulations of the LuxSE.
Chapter 1, Article 1 of the Prospectus Regulation provides for exemptions from the obligation to publish a prospectus for certain offers.25 The obligation to publish a prospectus does not apply to offers to the public of certain types of securities (such as, under certain conditions, securities offered or allotted (or to be allotted) to existing or former directors or employees by their employer whose securities are already admitted to trading on a regulated market or by an affiliated undertaking).
Admission to trading
The admission to trading of securities requires the prior publication of a prospectus in accordance with the Prospectus Regulation or the Prospectus Act. The regime applicable for admission to trading varies, to a great extent, according to the market on which the admission to trading is sought. Issuers can either request an admission to trading on the regulated market of the LuxSE or the Euro MTF market.
Depending on the type of securities for which an admission to trading on the regulated market is sought, the Prospectus Regulation, or Part III, Chapter 2 of the Prospectus Act is applicable. Only prospectuses approved under the Prospectus Regulation can benefit from the European passport. The competent authority for the approval of a Prospectus Regulation listing prospectus is the CSSF, whereas the LuxSE governs the approval of alleviated prospectuses under Part III of the Prospectus Act.
As previously mentioned, the Prospectus Regulation provides for an exemption from the obligation to publish a prospectus for the admission to trading on a regulated market (see Section II.i).
Since 3 July 2016, Regulation (EU) No. 596/2014 on market abuse, as amended (the Market Abuse Regulation) applies across the European Union, thereby introducing a new market abuse regime. Compared with its predecessor, Directive 2003/6/EC on market abuse, the Market Abuse Regulation has an expanded scope as it directly applies to financial instruments on a wider range of trading venues, including MTFs, such as the Euro MTF. This means that issuers with shares on the Euro MTF will also need to comply with the ongoing obligations stemming from the Market Abuse Regulation (which was not the case under the previous Luxembourg regime).
The Market Abuse Regulation prohibits insider dealing and market manipulation (although a number of safe harbours, which are relevant for IPOs, such as the safe harbour for stabilisation transactions, are also provided) and imposes a number of continuing obligations on issuers with equity admitted to trading on a regulated market or an MTF.
The Market Abuse Regulation does not apply in respect of securities only listed on the LuxSE SOL.
Corporate and governance aspects
Where the IPO is made through a Luxembourg-incorporated issuer, the flexible corporate framework is often a driver for selecting the home jurisdiction of the IPO vehicle.
Potential IPO vehicles – corporate form
The most common form for structuring an IPO via a Luxembourg issuer is the Luxembourg public limited liability company (SA). An alternative is the Luxembourg partnership limited by shares with a double shareholder (general partner and limited partner) structure (SCA).
In contrast with an SA, control of the SCA may be structured such that it does not necessarily depend on shareholdings.26 This is the case if a holder of unlimited shares is appointed manager and cannot be removed without such holder's consent. There must be at least one shareholder with unlimited liability, who will carry out the management of the SCA.27 Typically, only the limited partner shares would be offered to investors or admitted to trading.
Bearer shares versus dematerialised shares and shares in registered form
Historically, IPOs through Luxembourg companies have been structured via the issuance of shares in global bearer form: one or more global share certificates are issued by the company that represent the entire issuance of new shares, which are subsequently lodged with a depositary for entry into the relevant clearing systems.
The Luxembourg Act of 28 July 2014 on the immobilisation of bearer shares and units (the Immobilisation Act 2014), has been a game changer in this regard. The law imposes the appointment of a Luxembourg depositary that meets the requirements of the Immobilisation Act 2014, with whom all bearer shares must be deposited.28
For a large number of IPOs, the appointment of such a Luxembourg depositary has become problematic – the deposit of the global bearer share for the relevant IPO is usually made with a depositary that is linked to the relevant clearing system of the relevant market on which the shares are to be traded, which (as mentioned previously) is often outside Luxembourg (e.g., where listing of the shares takes place in Germany, there is usually a deposit in Germany for a clearing there).
Therefore, most issuers are now structuring their Luxembourg IPOs through the issuance of dematerialised shares governed by the Luxembourg Act, dated 6 April 2013, on dematerialised securities (the Dematerialisation Act 2013). According to the Dematerialisation Act 2013, the shares must be registered in the issuance account for the Luxembourg issuer's shares of the same class held with a 'liquidation body',29 which must be a securities settlement system. Typically, LuxCSD SA, a securities settlement system created in 2010 and jointly owned by the Luxembourg Central Bank and Clearstream International, is appointed as the liquidation body for Luxembourg issuer IPOs. A Luxembourg principal agent is typically appointed as the 'LuxCSD principal agent', who liaises with LuxCSD.
The single issuance account held with the liquidation body in which the dematerialised shares are recorded indicates the identification elements of those dematerialised shares, the quantity issued and any subsequent changes. In accordance with the Dematerialisation Act 2013, dematerialised shares are only represented by a record in a securities account. Ownership of the shares is established by such registration in a securities account.
Shares in registered form can also be issued by a Luxembourg company. According to Luxembourg company law, the issuer must hold at its registered office a register in which the holders of shares are registered. In the case of shares cleared through clearing systems, the relevant clearing system (or person acting for the account of the clearing system) is entered into the register.
In addition to these existing requirements, on 15 January 2019, the Luxembourg Act of 13 January 2019, pertaining to the register of beneficial owners – which implements the provisions of the Fourth EU Anti-Money Laundering Directive30 into Luxembourg law – was published and provides for the creation of a register of beneficial owners of Luxembourg legal entities. The Act entered into force on 1 March 2019 and applies to Luxembourg companies whose shares are admitted to trading (although there will be exceptions, for instance, for companies whose shares are admitted to trading on a regulated market).
Flexible corporate law – non-voting shares, nominal value and authorised capital
Both SAs and SCAs may issue non-voting shares. According to the Luxembourg Act dated 10 August 1915 on commercial companies, as amended (the Companies Act 1915), which has been amended to provide further flexibility for the issuance of non-voting shares by SAs,31 the maximum number of non-voting shares is to be determined by the general shareholders' meeting, and the financial rights attached to the non-voting shares on a distribution (dividend, repayment or liquidation) are determined in the articles of association of the Luxembourg issuer.
Non-voting shares retain voting rights in relation to any resolutions:
- that may result in an amendment to the rights attached to the non-voting shares;
- on the reduction of the share capital; or
- on the early dissolution of the company.
Holders of non-voting shares are entitled to receive all convening notices and reports sent to the other shareholders.
Luxembourg law allows the issuance of shares with or without nominal value. There is no maximum or minimum nominal value, and it is possible to issue various share classes with a different nominal value and proportionate voting rights.
The articles of incorporation of the IPO vehicle can provide 'authorised capital', which is limited to five years but can be renewed. There is no restriction on the size of this authorised capital (versus the actual share capital, etc.).
The Companies Act 1915 provides for the possibility to issue beneficiary shares, which are of a sui generis nature and are, strictly legally, neither outright equity nor outright debt. According to Article 430-1 of the Companies Act 1915: 'Shares representing or not the corporate capital and designated by the present law as beneficiary shares or securities can be created. The articles of association shall specify the rights attached thereto.'
Although the rules applicable to shares are determined in detail in the Companies Act 1915, beneficiary shares are not otherwise regulated by it. This leaves room for flexibility in terms of structuring. The articles of the relevant Luxembourg issuer can, thus, provide any allocation of, for instance, the economic rights in respect of these instruments and also permit flexibility for the organisation of voting power.
Luxembourg company law permits both one-tier (board of directors) or two-tier (management board and supervisory board) systems for SAs. This flexibility allows adaptation to local market needs. For example, IPOs through Luxembourg holding companies that are to be admitted to trading on a German regulated market would tend to make use of the two-tier system, which is more common in the German market.
In a single-tier structure, the board of directors is vested with the broadest powers to conduct the SA's business and to represent it, with the exception of those powers expressly reserved by the Companies Act 1915 or the articles to the general shareholders meeting.
The same principle applies to the management board in a dual structure, except that the management board's powers are also subject to the powers expressly reserved for the supervisory board. The supervisory board supervises the management board and, where applicable, grants authorisations to it. It cannot, however, interfere in the management of the SA. Members of the management board cannot simultaneously be members of the supervisory board.
In an SCA, the managers are vested with the broadest powers to conduct the SCA's business and to represent it, with the exception of those powers expressly reserved by the Companies Act 1915 or the articles of association for the general shareholders' meeting.
The Ten Principles of Corporate Governance issued by the LuxSE
The Ten Principles of Corporate Governance issued by the LuxSE (fourth edition-revised version of December 2017) (the Ten Principles) generally apply to all companies incorporated in Luxembourg where their shares are listed on a regulated market operated by the LuxSE, namely the BDL. The Ten Principles comprise three types of rules: the compulsory principles themselves (comply), the recommendations (comply or explain) and the lines of conduct, which are indicative only and not compulsory.
The Ten Principles may also be used as a reference framework for other companies; for example, in respect of any company incorporated in Luxembourg, or outside Luxembourg, or any company incorporated in Luxembourg that has asked for its shares to be admitted to a foreign regulated market. The Ten Principles are not mandatory under those circumstances.
The offering process
i General overview of the IPO process
An IPO is typically organised as a public offering of shares to retail investors in one or more public offer jurisdictions and institutional investors located in such public offer jurisdictions or elsewhere.
The offer process is launched after approval and publication of the public offer prospectus. Typically, the maximum number of shares to be offered and the price range (or a maximum price) are set forth in this prospectus, with the actual number of shares allotted to investors and the final offer price being published at the end of the offering process,32 once pricing and allotment has been completed at the end of the book-building process (the aim of which is to evaluate the size and price sensitivity of demand from investors).
Typically, an IPO will provide for the issuance of new shares to investors (primary) and the offer for sale of existing shares (held by one or more selling shareholders agreeing to participate in the IPO) to investors (secondary). IPOs with solely a primary issuance are possible as well and would be favoured if the intention was for the company to obtain a maximum of fresh monies to invest. A large secondary would be foreseen where one or more selling shareholders (typically a private equity fund) would like to start taking profits from their investment and start divesting.
For marketing purposes, the issuer and the relevant financial institution or institutions appointed by the issuer will advertise the offering through investor road shows, newspaper advertisements, ad hoc meetings and discussions with investors, etc. Advertisements in relation to the IPO must meet certain standards according to the Prospectus Regulation: they must be clearly recognisable as such, must state that a prospectus has been or will be published, and where investors are or will be able to obtain it. The information in the advertisement shall not be inaccurate or misleading, and must be consistent with the information contained in the prospectus.
Prior to the publication of the public offer prospectus, no communication may be made by any party that would trigger public offering requirements (as the prospectus would need to be approved and published prior to this action).33 Where certain potential investors are approached (on a confidential basis) prior to any announcement of the transaction to gauge their interest, the provisions regarding 'market soundings' set out in the Market Abuse Regulation must be taken into consideration (the requirement for the market participant to obtain the consent of the person receiving the market sounding to receive inside information, etc.).
The application for admission to trading in Luxembourg is officially submitted to the relevant exchange during the offering process (although the exchange will, in practice, have been approached informally beforehand). According to the rules and regulations of the LuxSE, the decision for admission takes place within a time frame of a maximum of 10 working days of the receipt of the request. In practice, approvals are obtained within shorter time frames.
The LuxSE's role is very limited in the case of an admission to trading on the regulated market of the LuxSE, since the prospectus is vetted by the CSSF or another relevant competent authority, and the LuxSE does not interfere in this regard.
The overall time frame required for an IPO is dependent on a large number of factors. This makes it difficult to predict the exact time required for a specific transaction. Initial due diligence within the issuer's group (to enable appropriate prospectus disclosure) is often started long in advance of the entire process. The prospectus drafting process (including the setting up of physical drafting sessions involving all relevant parties) is generally a time-consuming exercise as all parties must be comfortable with its content.
For the review of the prospectus by the CSSF (if competent), the Prospectus Regulation gives the CSSF up to 20 working days to provide comments.34 In practice, the CSSF reverts with preliminary comments within only a few working days, and the detailed set of comments is usually available in less than 20 working days. Subsequent reviews are quicker, and the CSSF can be approached beforehand to discuss a bespoke timetable for a specific transaction. Where the prospectus is approved by the LuxSE (for an admission to trading on the Euro MTF), the review time is generally quicker: the LuxSE has indicated that it will make sure it can revert with comments within three working days.
The length of the public offer process itself can be fixed as deemed appropriate by the relevant financial institutions. In the case of an IPO of a class of shares that is to be admitted to trading for the first time, the prospectus must be available for at least six working days before the end of the offer.35
Typically, an issuer contemplating an IPO is advised by a financial institution, who would in most situations assume the role of lead manager, book runner or arranger in connection with the IPO.
Legal advisers are in charge of the drafting of the prospectus, and the underwriting or placement agreement to be entered into with the relevant financial institution appointed, and they advise on the corporate steps to be taken throughout the entire process. They also coordinate between all participants and usually liaise with the competent authority for handling the prospectus approval process and the listing application. Typically, each party (issuer and accompanying bank) would appoint separate counsel.
Listing agents can be appointed to handle coordination with the competent authority and the LuxSE. Any person (lawyer, etc.) can act as a listing agent.
A paying agent is appointed in view of lodging the shares with the relevant clearing system. The agent would act as LuxCSD principal agent if clearing is made via LuxCSD. A clearing is not compulsory in the case of an admission to the LuxSE SOL only.
Auditors must review the financials referred to in the prospectus and give assurance that they are comfortable with these inclusions (typically, a comfort letter is issued).
As outlined above, a prospectus is required for a public offering and admission to trading of shares. Responsibility for the prospectus lies with the issuer, the offeror or the person asking for admission to trading on a regulated market. The responsible persons must be clearly identified in the prospectus. In Luxembourg, there is no rule or case law according to which prospectus liability would, in the case of a pure secondary offering, have to be shifted entirely to the selling shareholders.
An underwriting or placement agreement is generally entered into with the financial institutions assisting the issuer in the IPOs and relevant selling shareholders (if applicable). These agreements are normally drafted according to international market standards and comprise a detailed set of representations and warranties to be given by the issuer and the selling shareholders.
In view of guiding the transaction parties regarding the type of information on the project that can be discussed outside the working group, which remains confidential, a thorough set of 'publicity guidelines' is usually set up at the beginning of the process. These guidelines also contain the appropriate disclaimers for any communication prior to and during the launch of the IPO. Research report guidelines are often established in view of specifying the interaction with persons establishing reports on the company.
ii Pitfalls and considerations
Compared with those targeting the Euro MTF, issuers willing to access the regulated market of the LuxSE (assuming the admission to trading and listing is not associated with any public offer) will face higher regulatory hurdles. IPOs involving an admission to trading on the regulated market are, therefore, more time-intensive and complex.
Among the initial challenges, the prospectus approval process is certainly one of the biggest. Equity prospectuses will, except in certain specific circumstances36, need to follow the most demanding annexes in Regulation 2019/980 (in particular Annex 1), and for a number of issuers – specifically those that have undergone a restructuring or made significant acquisitions – additional hurdles often lie with the complex financial history of the underlying group and requirements to draw up pro forma financial statements to satisfy the requirements of Annex 20 of Regulation 2019/980.37
Further, certain 'specialist issuers' (active in the real estate market or in the minerals sector or start-ups) may face additional hurdles owing to additional information required at European level (such as the need to have specialist reports).38
The guidelines of the European Securities and Markets Authority (ESMA) on alternative performance measures,39 which aim at creating further transparency and usefulness of alternative performance measures referred to in prospectuses, and improving the comparability, reliability and comprehensibility of alternative performance measures, are often seen by issuers as additional challenges for prospectus approval.
The introduction of the LuxSE SOL now allows registration of securities solely on the official list without admission of those securities to trading on any of the markets operated by the LuxSE. This is intended to allow issuers to have their securities appear on a widely recognised official list, without the application of a number of capital markets-related EU and national laws that solely focus on securities being admitted to trading.
The ongoing disclosure obligations imposed by the SOL Rulebook are limited to certain events affecting the securities and the issuer. Those rules are not new as they have been taken from Chapter 9 of the rules and regulations of the LuxSE. However, none of the information covered in those rules must be made public; it must only be communicated to the LuxSE.
The only publication obligation regarding securities admitted to the LuxSE SOL relates to the right of the LuxSE to request an issuer to issue a press release that contains the announcement of a suspension or withdrawal of securities from the LuxSE SOL. This suspension or withdrawal must be formally requested by the issuer, but can also be requested by the LuxSE at its own initiative. As mentioned previously, a clearing is not compulsory in the case of an admission to the LuxSE SOL only.
iii Considerations for foreign issuers
Foreign issuers are, prima facie, subject to substantially the same requirements as Luxembourg issuers. Among the challenges to be faced are the requirements regarding financial statements for foreign issuers, especially those stemming from a country outside the EEA.
While at the level of the regulated market, European legislation will dictate International Financial Reporting Standards (IFRS) (as adopted by the European Union) or deemed equivalent standards. The Euro MTF is more flexible in this regard.
Generally accepted accounting principles (GAAP) of third countries are generally accepted, subject, where applicable, to the drawing up of statements of main differences between the relevant third-country GAAP and IFRS.
Upon admission of the shares to either the regulated market or the Euro MTF market of the LuxSE, a number of ongoing disclosure and notification requirements apply.40 Since the Euro MTF is not a regulated market subject to relevant EU directives, the ongoing obligations will be driven by Luxembourg rules and will be less rigorous than those applicable to the regulated market.
However, the Market Abuse Regulation has an extended scope of application comprising, since June 2016, MTFs, including the Euro MTF. Given that there is no admission to trading on any market or trading venue, the Market Abuse Regulation does not extend to securities listed solely on the LuxSE SOL.
i LuxSE-regulated market
An issuer whose shares are admitted to trading on the regulated market of the LuxSE will, where Luxembourg is the elected home Member State,41 be subject to the requirements under the Act of 11 January 2008 on transparency requirements for issuers of securities, as amended (the Transparency Act 2008), implementing the Transparency Directive on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market, as amended.
Those requirements comprise the need to publish annual and half-yearly financials meeting the requirements of the Transparency Act 2008 (which includes the drafting up of consolidated financials in accordance with EU IFRS); the publication by an issuer of large holding disclosures received from shareholders if relevant thresholds have been crossed (5, 10, 15, 20, 25, 33, 50 and 67 per cent of the total voting rights); and the publishing of the total number of voting rights and capital to allow shareholders to make relevant notifications to the issuer (and the CSSF).
These issuers will also be subject to the ongoing requirements set forth in the Market Abuse Regulation, including the requirement to publish 'inside information' that directly relates to the issuer and to its financial instruments, the need to hold and update insider lists and to make disclosures in connection with the managers' transactions in the securities of the issuer, etc.
The rules and regulations of the LuxSE also impose certain duties on an issuer with shares admitted on the LuxSE's regulated market, although those are duties to communicate certain information (particular securities events, such as the change of the paying agent or the payment of dividends, etc.), as opposed to requirements to publish information. The LuxSE enjoys quite broad powers in that it may ask issuers to communicate to the LuxSE all information that the LuxSE deems useful for the protection of investors or for the due and proper operation of the market. The LuxSE may even request the publication of relevant information and, if the issuer does not comply with the request, proceed itself with the publication at the issuer's cost.42
ii Euro MTF
For issuers whose shares are admitted to trading on the Euro MTF market, the provisions of the Transparency Act 2008 and the Transparency Directive will not apply. Instead, those issuers are subject to the continuing disclosure obligations set forth in the rules and regulations of the LuxSE (in addition to the communication requirements towards the LuxSE already mentioned for the regulated market, which also apply here).
According to those supplemental rules, an issuer with shares on the Euro MTF must make available to the public the latest audited annual accounts (drawn up in accordance with national legislation – IFRS are not compulsory). Half-yearly financials are required only if relevant national legislation requires their publication. Amendments of rights attached to the shares, and any communications to holders regarding allotment and payment of dividends, new share issuers, etc., must be published. Large holding disclosure also applies (10, 20, 33, 50 and 67 per cent of the voting rights), although a publication by the issuer is only required where the latter has been made aware of any crossing.43
Since June 2016, the ongoing obligations for issuers under the Market Abuse Regulation are also applicable to issuers on the Euro MTF. Accordingly, the obligations described above for the regulated market also apply to the Euro MTF.
iii The LuxSE SOL
For issuers whose shares are admitted to listing on the LuxSE SOL, the SOL Rulebook provides for limited ongoing disclosure requirements. The SOL Rulebook only provides for disclosure obligations in relation to either events that are likely to affect the securities or to information when the issuer deems it necessary to 'facilitate the due and proper operation of LuxSE SOL' and contains a list of examples of such events.
As the Market Abuse Regulation will not be applicable to those issuers, there will not be any specific ongoing disclosure obligations in this respect. However, none of the information covered in those rules must be made public; it must only be communicated to the LuxSE.
The only publication obligation relating to securities admitted to the LuxSE SOL relates to the right of the LuxSE to request an issuer to issue a press release that contains the announcement of a suspension or withdrawal of securities from the LuxSE SOL. This suspension or withdrawal must be formally requested by the issuer, but can also be requested by the LuxSE on its own initiative.
Outlook and conclusion
We live in challenging times, especially in light of the ongoing global economic recession as a result of the covid-19 pandemic. International bodies, such as the International Monetary Fund, the Financial Action Task Force, the Organisation for Economic Co-operation and Development and European authorities, want to set aside the competitive distortions that result from a regulatory playing field that is not level, and try to eradicate weaknesses in regulation and supervision that might adversely affect the stability of the international financial systems, by moving towards a single rule book.
The financial sector plays a key role in Luxembourg's economy, and the Luxembourg authorities strive to find the right balance between increased supervision and the need for sufficient room to manoeuvre to allow the financial sector to breathe and develop.
Recent changes in Luxembourg company law reinforce the current legal framework and will further increase Luxembourg's attractiveness as the IPO jurisdiction of choice for an increasing number of companies. Established market practice has been embedded in law (thus strengthening legal certainty), and a series of new mechanisms and instruments have been introduced to respond to the demands of a more complex economic environment with a view to increasing the flexibility of Luxembourg company law.
All these changes should contribute to attracting even more interest in Luxembourg as an IPO jurisdiction.
Impact of SPAC boom
The rapid emergence of special purpose acquisition companies (SPACs) may change the dynamics of the IPO market. These blank check companies launch an IPO to raise finance with a view to identifying and acquiring a target or targets, usually within a 24-month period. As such they offer targets an alternative way to achieve a listing compared with the traditional IPO. In some senses, the process is easier too.
Since there is no target at the point of the SPAC IPO, the prospectus is substantially lighter than would normally be the case, serving mainly to set out the credentials and investment strategy of the sponsor and outlining the risks for investors if no target is found within the lifetime of the scheme, as against detailed business descriptions and management discussion and analysis sections.
SPACs have exploded in the United States. Some US$88 billion is estimated to have been raised in US SPAC IPOs in the first quarter of 2021, which is more than in the whole of 2020, itself a record year. Multi-strategy asset management funds – as opposed to pure buy-out private equity houses – have readily joined the frenzy, and we are beginning to see money raised in the United States being invested in targets in Europe and elsewhere.
Although the creation of SPACs is a trend that came later to Europe, starting mostly with vehicles incorporated and listed in the Netherlands, it is now gaining increasing traction in other jurisdictions, including Luxembourg. It seems likely to continue growing.44
This begs the question of whether SPACs will coexist with traditional IPOs as an alternative way to admit shares for trading on public markets? Or will they, increasingly, become the preferred route for taking businesses to the market? Another open question is whether the regulatory framework will, at some point, be adjusted to specifically deal with SPACs or whether regulators will adopt restrictive approaches in respect of SPACs.
The upcoming months will provide additional insight on the impact of SPACs.
1 Frank Mausen and Paul Péporté are partners at Allen & Overy.
3 Figures provided by the LuxSE.
6 The LuxSE and Deloitte, 'The Luxembourg Stock Exchange: Your premium listing destination', p. 5.
7 Figures provided by the LuxSE.
9 The LuxSE and Deloitte, 'The Luxembourg Stock Exchange: Your premium listing destination', p. 11.
11 Annexes 1 and 3 of Commission Delegated Regulation (EU) 2019/980 of 14 March 2019 as amended, supplementing Regulation (EU) 2017/1129 of the European Parliament and of the Council in respect of the format, content, scrutiny and approval of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Commission Regulation (EC) No. 809/2004 (Regulation 2019/980), comprises the disclosure requirements regarding the issuer and the relevant shares that must be provided for such a prospectus. Additional annexes of the Regulation apply (Annex 20 for pro forma financials, where applicable).
12 According to the rules and regulations of the LuxSE, an application for admission to trading on one of the securities markets operated by the LuxSE is also deemed to be an application for admission to the official list (Chapter 7, Article 701.1 of the rules and regulations of the LuxSE).
13 The opposite scenario (admission to the official list without admission to trading) is now also possible. Article 701.2 of the rules and regulations of the LuxSE specify that an application for admission to the official list without an application for admission to trading on one of the securities markets opened by the LuxSE is possible subject to conditions set out in the SOL Rulebook.
14 Article 6 of the Listing Regulation and Article 22.214.171.124 of the SOL Rulebook.
15 Article 13 of the Listing Regulation.
16 Article 7 of the Listing Regulation and Article 126.96.36.199 of the SOL Rulebook.
17 The condition does not apply for admission to the official list of a further block of shares and units of the same category as those already admitted.
18 Article 11 of the Listing Regulation and Article 188.8.131.52 of the SOL Rulebook.
19 Article 14 of the Listing Regulation and Article 184.108.40.206 of the SOL Rulebook.
20 Article 8 of the Listing Regulation and Article 220.127.116.11 of the SOL Rulebook.
21 The derogation must be desirable in the interest of the company or the investors and subject to the LuxSE being satisfied that the investors have the necessary information available to be able to make a well-founded opinion on the company and the shares.
22 Article 702.6 of the rules and regulations of the LuxSE.
23 The prospectus is then passported into Luxembourg in accordance with the Prospectus Regulation.
24 As amended, in particular by Commission Delegated Regulation (EU) 2020/1273.
25 For instance, insofar as offers of shares and units are concerned, offers addressed solely to qualified investors, offers of securities addressed to fewer than 150 natural or legal persons other than qualified investors per Member State and offers of securities addressed to investors who acquire securities for a total consideration of at least €100,000 per investor.
26 However, it is possible for an SA to issue non-voting shares. See below.
27 Holders of unlimited shares in an SCA are often limited liability companies. This is in order to grant protection.
28 There is, however, Luxembourg legal literature providing that the Immobilisation Act 2014 does not apply to shares in global bearer form (as those are considered not to have the actual characteristics of definitive bearer shares).
29 The Dematerialisation Act 2013 provides that, as an alternative to a 'liquidation body', a 'central account keeper' can be appointed; however, a central account keeper can only be appointed in respect of unlisted securities.
30 Directive (EU) 2015/489 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing.
31 Prior to these amendments, the total number of non-voting shares in an SA was limited to 50 per cent.
32 According to Article 17 of the Prospectus Regulation, this information can be published by way of a final price notice where (1) the valuation methods and the criteria or the conditions in accordance with which the final offer is to be determined, or both, or (2) the maximum price or the maximum number of shares, or both, are disclosed in the prospectus. Otherwise, a supplement to the prospectus is required, which triggers withdrawal rights for investors who have already provided their acceptance for a purchase.
33 According to the Prospectus Regulation, an 'offer of securities to the public' means a communication to persons in any form and by any means presenting sufficient information on the terms of the offer and the securities to be offered, to enable an investor to decide to purchase or subscribe to these securities.
34 Article 20 of the Prospectus Regulation provides that this 20-working-day period becomes 10 working days if the relevant issuer has already made a public offering or admission to trading on a regulated market in the past.
35 Article 21 of the Prospectus Regulation.
36 There are lighter requirements, for instance, for an EU growth prospectus, for secondary issuances of shares and in the event an issuer can avail itself of the regime for an EU recovery prospectus, as introduced by Regulation (EU) 2021/337 in the context of the covid-19 pandemic.
37 Article 18 of Regulation 2019/980 sets out the additional requirements that apply where the issuer has a complex financial history or has made a significant financial commitment. Annex 20 of Regulation 2019/980 sets out the requirements regarding pro forma financials.
38 European Securities and Markets Authority update of the CESR recommendations of 23 March 2011, as amended (ESMA/2011/81).
39 ESMA Guidelines on Alternative Performance Measures (Ref. ESMA/2015/1415).
40 Certain obligations start applying even earlier, such as the obligations stemming from the Market Abuse Regulation.
41 For EEA issuers, the home Member State will be the country of the registered seat of the issuer. In other words, only Luxembourg issuers would have Luxembourg as their home Member State. For non-EEA issuers, different rules apply.
42 Article 908 in Chapter 9, Part I of the rules and regulations of the LuxSE.
43 There is no requirement for the Euro MTF (that is similar to the Transparency Act 2008, for shares on a regulated market) to disclose to the issuer (or the CSSF) any crossing of large holding thresholds.
44 Although a cooling of the US SPAC boom is already perceptible.