The European Commission aiming to simplify the market sounding process for the offering of bonds – practical implications going to be limited

The Commission notified the Parliament on August 8, 2019 that it accepts all amendments made to the text by the Parliament in the first reading held on April 18, 2019 and the initiative is now getting closer to its final adoption. The amendments will be directly applicable in all member states upon becoming effective.[2]

The Growth Markets Regulation contains, among other things, amendments to the EU Market Abuse Regulation[3]. These amendments aim to lower the administrative burden and compliance costs faced by SME Growth Market issuers in connection with the offering of securities. This reflects the objectives of the EU capital markets union.

Proposed amendment to the scope of the obligation to conduct market sounding

One of the key amendments proposed to be made to the Market Abuse Regulation relates to the scope of application of the market sounding process. Under the proposal, the scope of the obligation to conduct market sounding will be amended so that the market sounding process would not need to be followed in connection with an offering of bonds addressed solely to qualified investors. However, such an exemption would only apply if the bond issuer:

i. has financial instruments admitted to trading on a regulated market, an MTF, or an OTF; and

ii. ensures that the qualified investors receiving the offer information are aware of, and acknowledge in writing (e.g. by signing a non-disclosure agreement), their legal obligations relating to the receipt of such information. In addition, the investors need to be aware of the applicable sanctions concerning insider dealing and the unlawful disclosure of inside information.

It is important to note that the above-mentioned reduced scope of the market sounding process would impact all companies having financial instruments admitted to trading on a trading venue as defined in the Market Abuse Regulation (and the Directive on Markets in Financial Instruments[4]). As a result, and in contrast to what could be fairly assumed based on the Commission's proposed objectives, the impact of the amendments would not be limited to SME growth markets. This is good news for the market players.

The Parliament's legislative resolution[5] suggests that the argument behind the exemption is that the communication of information in the negotiation phase of a private placement of bonds generally aims not to just gauge the interest of potential investors in a pre-defined transaction, but to structure and complete the transaction (i.e. to negotiate all of the contractual terms and conditions of the transaction). When the conditions of the exemption are met, the information disclosure is deemed to be made in the normal exercise of employment, profession, or duties and as a result it is not deemed to constitute an unlawful disclosure of inside information.

Implications in practice

Market sounding practices relating to the offering of bonds vary from one member state to another. There are also differences between the customs followed by each of the market's individual players within a single member state. Typically, ambiguity has been caused by questions on the nature of the information to be disclosed (i.e. whether such information is inside information or not) and the applicability of the market sounding process to a disclosure of confidential (non-inside) information. Ambiguous circumstances have often been resolved by security offerors publishing a release concerning the intended offering before the investors are contacted. This practice may perhaps especially be considered to be market practice where regular/established issuers are concerned (it is appropriate to note that the reasons behind such a practice are not solely related to questions concerning market sounding).

Where the above-mentioned practice is followed, the practical implications of the proposed amendment are likely to be quite limited once effective. On the other hand, in offerings where no release is published concerning the intended offering before the investors are contacted, the amendment may facilitate a more straightforward selling process. However, the most important benefit of the amendment is the resulting general decrease of ambiguity in relation to questions on the scope of the application of the market sounding process. This decrease in ambiguity will strengthen the risk management functions of both issuers and any third parties acting on their behalf (often being authorized credit institutions or investment firms) concerning the unlawful disclosure of inside information. Accordingly, all market players conducting market sounding in connection with the offering of bonds are encouraged to closely follow the adoption of the Growth Markets Regulation and, if needed, update their internal directives and guidelines.

The amendments proposed to be made to the Market Abuse Regulation in the Growth Markets Regulation are intended to apply from 12 months after its entry into force. Assuming the Growth Markets Regulation is published in the EU Official Journal in November 2019, the amended market sounding regime would be in place by the end of 2020.

[1] European Commission's proposal for a regulation of the European Parliament and of the Council amending regulations (EU) No 596/2014 and (EU) 2017/1129 as regards the promotion of the use of SME growth markets (COM(2018)331 final).

[2] The only amendment requiring national implementation measures in Finland relates to the utilization of a member state option pursuant to Article 18, Section 6(2) of the market abuse regulation. Please see page no. 6 and 18 of the comment request by the Finnish Ministry of Finance (VM098:00/2019) (available only in Finnish).

[3] Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (Market Abuse Regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC.

[4] Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU.

[5] European Parliament legislative resolution of 18 April 2019 on the proposal for a regulation of the European Parliament and of the Council amending Regulations (EU) No 596/2014 and (EU) 2017/1129 as regards the promotion of the use of SME growth markets (COM(2018)0331 – C8-0212/2018 – 2018/0165(COD)).