On 1 October 2021, revised regulations of SIX Exchange Regulation (SER) – the self-regulatory supervisory body for issuers listed at SIX Swiss Exchange (SIX) – entered into force. The key part is the enactment of a new regulatory standard Sparks where small and medium-sized enterprises (SMEs) can list and trade their equity securities. This article provides an overview of the revised Sparks specific regulations.

By Christian Schneiter / Peter Kühn (Reference: CapLaw-2021-59)

1) Introduction

The launch of the new equity segment Sparks opens the possibility to companies with a lower market capitalization to make use of the advantages of being public. Such advantages include facilitated access to capital (both equity and debt), a higher degree of diversification of investors, enhanced visibility, i.e. a higher public profile, stronger brand recognition and reputation enhancement.

SIX is generally perceived as the Swiss stock exchange par excellence and has existed since the Helvetic Big Bang twenty-five years ago. In contrast, the other authorized stock exchange in Switzerland, BX Swiss at Berne, is limited to local and smaller issuers and focuses on real estate companies and structured products. A listing at SIX can be attractive for various reasons. As SIX is one of the leading exchanges in Europe some of the largest companies in the world in various sectors are listed there. A listing at SIX provides access to international financial markets and to well-funded domestic and international investors as well as the benefits of Switzerland as a stable financial center. Hence, a listing can potentially give a significant boost to SMEs.

Despite of the advantages of a stock exchange listing at SIX, they currently seem to be struggling to attract new issuers. This applies in particular to the last year as there were only two successful IPOs (V-Zug, Ina Invest). In the first three quarters of 2021, there were three IPOs (PolyPeptide, Montana Aerospace, medmix), whereby currently there appear to be several further IPOs in the pipeline. In addition, many Swiss companies were listed abroad. To counteract the trend towards fewer IPOs, SER, has revised its regulations to support SME listings while safeguarding investor protection and market integrity. The introduction of a SME specific equity segment at SIX is not only closing what might be a gap to the Berne stock exchange but can also be seen as a reaction to international developments: For example, the Alternative Investment Market (AIM) of the London Stock Exchange (LSE) was launched in June 1995 as a sub-exchange growth market for smaller companies. Further, in the European Union (EU), the Markets in Financial Instruments Directive (MiFID II) provides, since January 2018, for so-called SME growth markets (GMs), i.e. multilateral trading facilities (MTFs) designed to allow SMEs to raise capital in public offerings. So far, around 17 MTFs are registered in the EU as SME GMs.

The existing segments at SIX which are designated as regulatory standards – i.e., International Reporting Standard, Swiss Reporting Standard (together Main Market), and the specific standards for investment companies, real estate companies, global depositary receipts and collective investment schemes – have been supplemented on 1 October 2021 with the new equity standard Sparks (Sparks Segment), applicable to issuers with a market capitalization at the time of listing of CHF 500 million and less (see 2) below). Further, the Listing Rules (LR) of SER have been revised as of 6 December 2021 introducing an additional regulatory standard SPACs to allow special purpose acquisition companies (SPACs) to go public in Switzerland. The latter is not the subject of this article.

2) Revised regulations for the Sparks Segment

With the introduction of Sparks on 1 October 2021, the LR have been selectively simplified for issuers at the Sparks Segment (see a) and b) below). Further, the following implementation provisions have been adapted accordingly: (i) Directive Corporate Governance (DCG), (ii) Directive Financial Reporting, (iii) Directive Regular Reporting Obligations, (iv) Directive Distribution Equity Securities, (v) Directive Track Record, (vi) Directive Procedures Equity Securities, and (vii) List of Charges under the LR. 

The SIX trading regulations, i.e. some directives and guidelines, have also been revised and entered into force on 1 October 2021, establishing a separate trading model for the Sparks Segment, tailored specifically for companies with smaller market capitalization (see d) below).

a) Sparks listing requirements for the issuer

For a listing on the Sparks Segment of SIX, an issuer must comply with the following requirements:

– Market capitalization: The market capitalization of the equity securities of the issuer must not exceed CHF 500 million (article 89a LR). The purpose of this threshold (which does not exist for the Main Market) is to enhance visibility and to establish more relevant peer groups for smaller companies.

– Track record: As a rule, the issuer must (i) have existed as a corporate for at least two years (article 89b LR) and (ii) have prepared its annual financial statements for the two full financial years preceding the listing application in compliance with the accounting standard applicable to the issuer (article 89c LR). For the Main Market a three-year rule applies instead. This means that the minimum company and financial track record periods have been shortened for the Sparks Segment by one year in order to facilitate access for smaller companies.

– Recognized accounting standard: Issuers of equity securities listed in the Sparks Segment must have applied one of the following recognized accounting standards for the last two years: IFRS, US GAAP, Swiss GAAP FER, standard under the Swiss Banking Act. Expect for the Sparks Segment, Swiss GAAP FER is only permitted under the Swiss Reporting Standard and the Standard for Real Estate Companies, and the Standard under the Swiss Banking Act is only permitted under the Swiss Reporting Standard.

– Minimum equity: The reported equity capital of the issuer must amount to at least CHF 12 million on the first trading day in accordance with the applicable accounting standard, of which at least CHF 8 million must come from a capital increase (against cash contribution) in connection with the listing. If the reported equity capital of the issuer on the first trading day amounts to at least CHF 25 million, no capital increase is required (article 89d LR). For the Main Market, this minimum equity capital requirement also changed from 1 October 2021, it increased from CHF 2.5 million to CHF 25 million (article 15 (1) LR).

– Auditors, audit reports: Further, a Sparks issuer must also comply with the general listing requirements regarding the licensing of its auditors (article 13 LR) and compliance of its audit reports (article 14 LR) which apply to both the Sparks Segment and the Main Market.

b) Sparks listing requirements for the securities

For a Sparks listing of equity securities, the relevant securities must comply with several listing requirements. In this respect, the minimum percentage of securities which must be in public ownership has been decreased for the Sparks Segment such that a sufficient free float is deemed to be achieved at the time of the listing if at least 15% of the issuer’s securities outstanding in the same category are publicly held, their capitalization amounts to at least CHF 15 million, and these securities are allocated to at least 50 investors at the time of listing (article 89e LR). In comparison, the amount required for a free float on the Main Market is 20% with a capitalization minimum of CHF 25 million (article 19 (2) LR). The Main Market, however, has no requirement as to the minimum number of investors to which the equity securities have to be allocated.

In addition, the following general requirements apply to securities whether they are to be listed on the Main Market or on the Sparks Segment:

– Legal validity and listing by class: At the time of the listing, the securities must have been issued, and their form must be, in accordance with applicable law (article 17 LR). The listing must comprise all of the issued securities in the same category (article 18 LR).

– Tradability: The securities must be tradable on the SIX and the issuer must have established rules on legal ownership (article 21 LR).

– Denominations: The denominations forming the total value of a security must enable an exchange transaction in the amount of one round lot (article 22 LR).

– Clearing and settlement: The issuer must ensure that transactions can be cleared and settled via the settlement systems that are permitted by SIX (article 23 LR).

– Paying agent: The issuer must ensure that services pertaining to interest and capital, as well as all other corporate actions, are provided in Switzerland (article 24 LR).

c) Change of the regulatory standard

The revised LR provide that a unicorn, i.e. an issuer whose average capitalization amounts to more than CHF 1 billion over the previous twelve months (as of 31 December of a calendar year) is obliged to transfer from Sparks to another regulatory standard for equity securities (article 89f (1) LR). Notwithstanding such a mandatory change of standard, an issuer listed on Sparks may apply for a change to another regulatory standard for equity securities if the issuer concerned has been listed at least twelve months at SIX (article 89f (4) LR). Vice versa, an issuer listed under a regulatory standard other than Sparks, may request a change to Sparks if it had an average capitalization of less than CHF 500 million over the previous twelve months as of 31 December of a calendar year (article 89g LR).

d) Sparks specific trading times

Taking into account the lower liquidity of Sparks shares on the secondary market, a separate trading model has been set up for them with the aim of bundling liquidity. This model provides for a shortened trading window with continuous daily trading; opening auction at 3:00 p.m.; continuous trading until 5:20 p.m.; and a closing auction until 5:40 p.m.. This should enable participants, investors and issuers to benefit from improved pricing and the best possible execution of trades in the Sparks shares. It remains to be seen though how the market participants will respond to such a rather short trading window.

3) Prospectus requirement

As a general rule and subject to certain exemptions and relaxations for selected issuers and financial instruments, the Financial Services Act (FinSA) provides that any person in Switzerland who makes a public offer for the acquisition of securities or who seeks the admission of securities to trading on a trading venue (i.e. a stock exchange or a multilateral trading facility) must first publish a prospectus which has been approved by a reviewing body. The reviewing body checks if the prospectus is complete, coherent and understandable. Currently, SER and the Berne stock exchange, BX Swiss, are the only reviewing bodies authorized by FINMA.

Further, the LR provide that an issuer who applies for a listing at SIX (including on the regulatory standard Sparks) must provide evidence that it has a prospectus that has been approved by a reviewing body (e.g. SER) or that is deemed to be approved in accordance with the FinSA (unless an exemption applies). In practice, these two processes – i.e. the prospectus approval prior to publication and the application for the listing at SIX – operate in parallel.

There are currently neither unique SME specific exemptions nor relaxations from the prospectus requirement in place of which SMEs, respectively issuers with a lower market capitalization on a trading venue, could make use of when applying for a listing – as would be possible under article 47 (1) respectively 47 (2) (a) FinSA. In our view, although this is basically comprehensible in itself, because ultimately the aim is to protect investors and not to simply save the (albeit smaller) issuer effort, it is somewhat in contrast to SIX’s efforts to promote more listings of Swiss SMEs through Sparks.

4) Regulatory requirements for maintaining listing at the Sparks Segment

As a consequence of a (Sparks) listing, issuers must comply with the same increased regulatory requirements that apply to any other listed company in Switzerland. This will often result in a paradigm shift in the corporate culture of an SME. Once listed, the SME must in particular:

– Publish an annual report and an interim report (semi-annually), in each case in accordance with a recognized accounting standard of SIX as well as a corporate governance report annually. The revised DCG provides that Sparks issuers may publish the required corporate governance related information – which issuers listed in the other regulatory standards must publish in the annual report – in a separate template provided by SIX that is not part of the annual report but which, however, needs to be published on the same day as the annual report. This should
contribute to standardized reporting and make it more efficient. Whether this is
possible without actually facilitating the content, however, remains to be seen.

– Inform the market of price-sensitive facts, i.e. facts whose disclosure is capable of triggering a significant change in market prices (ad hoc publicity).

– Disclose all transactions of the members of the board of directors and the executive committee and their related persons in shares of the issuer or related financial instruments.

– Further, the issuer must comply with the Ordinance against Excessive Compensation in Listed Companies (OaEC) and any other capital market rules (e.g., the disclosure of significant shareholdings, the prohibitions of insider trading and market manipulation as well as the application of the mandatory tender offer regime (unless the articles of association of the issuer provide for an opting-out)).

5) Outlook

The new equity standard Sparks meets the need for a regulated trading venue tailored for SMEs at SIX and has the potential to open new opportunities for both SMEs and investors. The listing in this equity segment increases the visibility of the SMEs while the tradability of the equity securities will enable SMEs to raise capital more efficiently. In contrast to the SME growth markets in the EU, the revised SER regulations enable SMEs to list their shares (and not only to seek admission to trading at a multilateral trading facility) and thus, to benefit from the advantages of a listing (including being within far more institutional investors’ investment universe). Venture capital investments in particular, which have increased enormously in recent years, could become even more attractive through a possible listing in the Sparks Segment at the horizon, especially since this would create an additional option for an exit by the investors. Further, this new segment could be particularly interesting for Swiss biotech and life sciences companies, which seem to be on the ascendency. 

The success of this new equity segment will depend heavily on how banks, advisers and investors will react to it in real life. The decision of an SME, respectively its key investors, to pursue an IPO (instead of e.g. a trade sale) will also depend on the associated costs. Whether the (largely success-based) fees of the investment banks – who support the issuers in marketing and placing its shares and, usually, also act as underwriters – will decrease in Sparks listings more than as in proportion to the lower transaction volumes, appears questionable. In addition, a (standard) prospectus is still required for a SME listing and the post-listing regulatory requirements remain the same. Accordingly, a decrease in legal fees will primarily depend on whether, to a certain extent, there will be standardized listing documentation in place tailored for SMEs, respectively Sparks listings. After all, we expect Sparks to have a more successful future than the 1999 SWX New Market which was abolished in 2003.

Since 15 October 2021 trading of digital securities in the form of tokens and their integrated settlement and custody is facilitated in Switzerland as FINMA authorized SDX Trading Ltd (SDX) to operate the first digital stock exchange in Switzerland and granted an authorization to SIX Digital Exchange Ltd as central securities depositary. According to the recently published SDX listing rules, Sparks shares are not eligible for an SDX listing. Nevertheless, we share SIX’s view that Sparks and SDX can supplement each other and contribute to a growing and well-functioning ecosystem for the raising of public equity capital in Switzerland.

Christian Schneiter (cschneiter@vischer.com)
Peter Kühn (pkuehn@vischer.com)