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New Exemption to Market Sounding Regime Under the Market Abuse Regulation

In Short

The Situation: An exemption to the market sounding regime under the Market Abuse Regulation ("MAR") that became applicable on 1 January 2021, will increase the attractiveness of private placements of bonds by easing information disclosure burdens.

The Result: Communicating inside information to qualified investors in the context of a private placement of bonds may, in certain circumstances, no longer fall under the MAR market sounding regime. 

Looking Ahead: Negotiation formalities and requirements for private placement of bonds are alleviated by this new exemption, but its scope of application will need to be assessed in practice.

Background

To facilitate access to the markets for small to medium-sized enterprise ("SMEs") by reducing compliance costs and administrative burdens, the SME Growth Markets Regulation (Regulation (EU) 2019/2115 on the promotion of the use of SME growth markets) made various changes to the MAR (Regulation (EU) No 596/2014 on market abuse). Notably, the SME Growth Markets Regulation exempts private placement of bonds to qualified investors from the MAR market sounding regime. 

MAR defines "inside information" as any nonpublic information of a precise nature relating, directly or indirectly, to an issuer or its securities and which, if made publicly available, is likely to significantly affect the price of the securities (shares or bonds).

Under MAR, an unlawful disclosure of inside information arises when a person holding inside information discloses this to any other person, except where the disclosure is made in the normal exercise of an employment, a profession or duties, or in compliance with certain procedures established by MAR. In this respect, MAR provides a specific regime for proper disclosure of inside information in the course of a market sounding (Article 11.4). A market sounding comprises the communication of information to one or more potential investors, prior to the announcement of a transaction, in order to gauge the interest of potential investors in a possible transaction and its related conditions (e.g., potential size or pricing). 

Alleviating Inside Information Disclosure Requirements

If market sounding is conducted in compliance with the requirements of Article 11.4 of MAR, there is no unlawful disclosure of inside information. In recent years, however, such requirements have proven to be burdensome in practice, particularly by raising obstacles to private placements of bonds. In response, the SME Growth Markets Regulation narrows the scope of Article 11.4 of MAR such that the market sounding regime will not apply to securities offered solely to qualified investors for the purposes of negotiating the contractual terms and conditions of their participation in a private placement of bonds. Communication of inside information in this context will not be considered as an unlawful disclosure, provided that an appropriate nondisclosure agreement is in place. 

The exclusion from the market sounding regime only covers communications for the purpose of structuring and negotiating the transaction as a whole. Therefore, communications to merely gauge the interest of potential investors regarding a predefined transaction (including tap issues, where the terms of the transaction are already determined, except for size and pricing) remain subject to MAR's market sounding regime. 

Limited Scope of Exemption

The new exemption from the market sounding regime only applies to securities offered to qualified investors as defined under the Prospectus Regulation (Regulation (EU) 2017/1129). This means that if bonds offered in the context of the private placement are accessible to other types of investors such as private banking clients, the issuer must comply with the full disclosure regime for inside information applicable to market soundings. This is an unfortunate limitation in European jurisdictions where the target market for bonds often includes private banking clients. If the targeted private banking clients have not opted in to be treated as qualified investors, then the exemption from the MAR market sounding regime will not apply. 

Where the exemption does apply, this new and lightened regime will ease the administrative burdens of marketing private placement of bonds. This is a positive development, which will enhance the appeal of such instruments.

Two Key Takeaways

  1. Since 1 January 2021, the SME Growth Markets Regulation enables lifting certain administrative requirements applicable to market soundings made in the context of a private placement of bonds. Certain conditions must be met to benefit from this exemption, including, among others, that the bond placement must be limited to only qualified investors under the Prospectus Regulation.
  2. While this exemption provides much welcomed flexibility in the negotiation phase of a private placement, its actual use may be limited in practice, particularly when the private placements of bonds involve investors from the private banking sector who have not sought treatment as qualified investors.

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