Since 1 October 2021, small and medium-sized enterprises (SMEs) with a capitalization of less than CHF 500 million can list their shares on a new stock exchange segment of the SIX Swiss Exchange (SIX). The so-called Sparks segment of SIX offers more relaxed listing requirements compared to those of the main segment. It aims to open up the capital market in Switzerland for SMEs by developing a functioning public equity market specifically designed for them. The present article addresses mainly the capital requirements and provides some thoughts concerning Sparks and its chances of success.

By Matthias Kuert / Olivia Zingg (Reference: CapLaw-2022-03)

Since 1 October 2021, small and medium-sized enterprises (SMEs) with a capitalization of less than CHF 500 million can list their shares on a new stock exchange segment of the SIX Swiss Exchange (SIX). The so-called Sparks segment of SIX offers more relaxed listing requirements compared to those of the main segment. It aims to open up the capital market in Switzerland for SMEs by developing a functioning public equity market specifically designed for them. A listing on Sparks can be attractive for both, fast-developing SMEs, allowing them to raise the capital required to support their growth story, and established SMEs with stable revenues. The first Sparks listing took place just before we finalized the present contribution (Xlife Sciences AG on 11 February 2022). 

After a short overview concerning Sparks (see in that regard also Christian Schneiter/Peter Kühn, CapLaw-2021-59), we provide below a few calculation examples to illustrate the applicable capital requirements. A listing on Sparks is, from a legal perspective, more accessible than a listing on the main segment. However, the minimal market cap required in practice remains to be seen. We conclude that – while obviously a strenuous exercise – a going public on a regulated stock exchange such as Sparks may (still) be worthwhile, inter alia because of disciplining effects ultimately also beneficial to the business.

1) Overview of the listing requirements…

The Sparks segment is supposed to facilitate access to the capital market by way of lower listing requirements compared to the main segment. Under the SIX Listing Rules dated 21 October 2021 (LR) namely the following requirements must be fulfilled on the day of the listing:

• A market capitalization of less than CHF 500 million (article 89a LR).

• A company track record of more than two years (article 89b LR) and audited financial statements in line with a recognized accounting standard for the last two financial years preceding the listing application (article 89c LR). Recognized accounting standards are, mainly, US-GAAP, IFRS and Swiss GAAP FER (article 6 (4bis) Directive on Financial Reporting dated 19 August 2021). 

• A reported equity capital of more than CHF 12 million, of which at least CHF 8 million must come from a capital increase (contribution in cash) carried out in connection with the IPO. No capital increase is required in case of a reported equity of CHF 25 million or more (article 89d LR). The reported equity consists of all items that qualify as “equity” under the applicable accounting standard (article 89d LR). Absent an (in cash) capital increase, the necessary equity to be reported in the Sparks segment is the same as in the main segment (article 15 (1) LR, requiring – in any case – CHF 25 million).

• Freely tradable shares (free float) of at least 15% of the outstanding shares (article 89e LR). The calculation of the free float is explained in article 4 of the Directive on the Distribution of Equity Securities dated 18 June 2021 (DDES), basically containing a negative definition (i.e. which shares are not to be counted towards the free float).

• A market capitalization of freely tradable shares of more than CHF 15 million (article 89e LR). The relevant market capitalization is determined by way of the theoretical opening price (TOP) stated by the issuer for the opening of trading on the first trading day (article 5 DDES). 

• A shareholder base of at least 50 investors (article 89e LR). 

In addition, issuers on Sparks must publish a prospectus according to the rules provided for in the Financial Services Act (FinSA; article 35 et seqq. FinSA; article 27 (1) LR). The relevant content of such prospectus is provided for in Annex 1 to the Financial Services Ordinance (“Minimum content of the prospectus scheme for equity securities”).

2) …and the ongoing requirements for being public 

Sparks companies are subject to almost the same ongoing listing requirements as companies listed on the main segment: 

The duties concerning financial reporting (article 49 (1) LR), ad hoc publicity (article 53 LR) and disclosure of management transactions (article 56 LR) fully apply. 

Issuers on Sparks are also obliged to inform on corporate governance aspects on a yearly basis (Directive on Information relating to Corporate Governance dated 18 June 2021 (DCG)). They can, however, fulfill this information duty with a template provided by SIX, which is not part of the annual report, but can be published separately, on the same day as the annual report (article 4 (2) DCG). 

On an ongoing basis, the company must have an average market capitalization of less than CHF 1 billion (twelve months average). Exceeding this threshold involves a mandatory switch to the main segment (article 89f (1) LR). 

Furthermore, the rules on disclosure of major shareholdings (article 120 et seqq. Financial Market Infrastructure Act, FinMIA), public takeovers (article 125 et seqq. FinMIA), insider trading (article 142 and 154 FinMIA) and market manipulation (article 143 and 155 FinMIA) are also relevant for issuers on Sparks. Eventually, issuers on Sparks have to comply with the stock corporation law provisions specifically applicable to listed companies. These concern, in particular, board and executive compensation (currently still contained in the Swiss Ordinance against Excessive Compensation in Listed Companies (OAEC)) and the possibility to introduce transfer restrictions (article 685d et seqq. of the Swiss Code of Obligations (CO)), as well as – in case of larger companies – gender equality (article 734f CO) and non-financial reporting (article 964a et seqq. CO).

3) Calculation examples (capital requirements)

The following calculation examples illustrate the implications of the above-mentioned thresholds on the minimal capital requirements for a listing on Sparks from a legal perspective. These requirements are compared with the requirements for a listing on the main segment.

The required market capitalization of the freely tradable shares is determined on the basis of the TOP on the first trading day (see above). Below, we assume that this (theoretical) price will correspond to the actual opening price and that shares will also be traded at this price on the day of the listing. The respective market value of the company involves often a discount (IPO discount) to the value determined by the valuation methods relied on earlier in the IPO process (namely multiple or discounted cash flow (DCF) method; see Wüest in Going Public on SIX, 2^nd edition, 2015, available under https://www.six-group.com/dam/download/the-swiss-stock-exchange/listing/equity/ipo/publication.pdf (SIX Going Public Guide), 49).

Established SME example: A family entrepreneur plans to list the shares of his/her long-established SME. The entrepreneur wants to keep a controlling stake of 51%. The other 49% of the shares shall be publicly offered.

Scenario 1 “Direct Listing” (entrepreneur sells 49% to the public; no capital increase):

Sparks:

– Reported equity: At least CHF 25 million, because there is no capital increase. 

– Free float:

– The minimum percentage threshold is met given that the entrepreneur offers 49% of the shares to the public. 

– However, these 49% of the shares must have a minimum market capitalization of CHF 15 million. This corresponds to an overall market cap at the opening price on the day of the listing of at least CHF 30.61 million. 

Main Segment:

– Reported equity: At least CHF 25 million.

– Free float: 

– The minimum percentage threshold of 20% (article 19 (2) LR) is met, as 49% of the shares are freely tradable. 

– The 49% of the freely tradable shares must have a market capitalization of at least CHF 25 million (article 19 (2) LR), corresponding to an overall market cap at the opening price on the day of the listing of at least CHF 51.02 million.

Scenario 2 “Capital Increase” (creation of 96% additional capital to be issued to the public (49% overall); no (direct) sale by the entrepreneur):

Sparks:

– Reported equity: The (in cash) capital increase must generate reported equity in the amount of CHF 8 million in order that the lower Sparks thresholds apply (see above). Accordingly, the overall reported equity must amount to at least CHF 16.33 million.

– Free float:

– The minimum percentage threshold is met given that 49% of the shares are issued to the public. 

– However, these 49% of the shares must have a minimum market capitalization of CHF 15 million on the day of the listing, which corresponds (again) to an overall market cap at the opening price on the day of the listing of CHF 30.61 million.

Main Segment:

– Same calculation as above, considering that the capital requirements do not depend on whether there is a capital increase or not, i.e. minimal reported equity of CHF 25 million and overall market cap of at least CHF 51.02 million.

Growth SME Example: A growth company seeks to raise capital through a 100% capital increase. Pre-IPO, the founders own 30% and a financial investor owns 70% of the shares. Post-IPO, the founders shall have a remaining 15% share. The financial investor plans to sell his/her shares in the IPO. 

Sparks:

– Reported equity: The (in cash) capital increase must (again) generate reported equity in the amount of CHF 8 million, with the consequence that the overall reported equity must amount to at least CHF 16 million.

– Free float: 

– The minimum percentage threshold is met. 85% of all shares will be freely tradable as the founders only keep 15% post-IPO and the pre-IPO financial investor will sell his/her shares in the IPO. 

– The 85% freely tradable shares must have a market capitalization of at least CHF 15 million. This corresponds to an overall market cap at the opening price on the day of the listing of at least CHF 17.65 million.

Main Segment:

– Reported equity: The overall reported equity must (again) amount to at least CHF 25 million.

– Free float: 

– The minimum percentage threshold is met since 85% of all shares will be freely tradable. 

– The 85% freely tradable shares must have a market capitalization of at least CHF 25 million, corresponding to an overall market cap at the opening price on the day of the listing of at least CHF 29.41 million.

Considering the calculation examples, the market capitalization necessary to meet the minimum free float will often be the higher hurdle for IPO candidates than the required reported equity (the required overall market cap always exceeding the required reported equity). Nevertheless, both requirements need to be assessed separately by every candidate. Moreover, the examples presume that there are, besides the legacy shareholders, no investors with a stake of more than 5% post-IPO. The shares of such investors would not count towards the free float (article 4 (1) (ii) DDES). If there were respective investors, the percentage amount of the freely tradeable shares would decrease, with the consequence that an (even) higher overall market cap would be required. 

The calculation examples show that a listing on Sparks presupposes a lower overall market cap compared to the main segment indeed (the provisions concerning Sparks requiring in both examples approximately 60% of what is needed for the main segment). Furthermore, the calculation examples show that candidates with a free float worth CHF 15 million and an overall market cap of CHF 30 million should often meet the capital requirements for Sparks, provided that also the necessary reported equity is present. At least if a substantial (in cash) capital increase is planned in the realm of the IPO (triggering the lower Sparks thresholds, see above), the equity requirement is also achievable for companies fit for a market value on the first trading day in the CHF 30 million range or even below. Taking into account that such value may involve a certain discount (IPO discount; see above), companies valued by way of a multiple or DCF method at around CHF 30-40 million will – in sum – often meet the applicable capital requirements for a listing on Sparks from a legal perspective.

Having said that, an IPO must (obviously) also be marketable commercially. Generally (i.e. without specifically addressing Sparks), investment banks deem a free float of at least CHF 40-50 million necessary (see also Nikitine/Bähler, in Europainstitut, Kapitalmarkt: Recht und Transaktionen XV, IPO Readiness: Stolpersteine auf dem Weg zum Börsengang, 13). This implies a (potentially considerably) higher market cap and company value, exceeding the above-mentioned CHF 30-40 million (potentially by far). Companies with a corresponding value might well also fulfill the capital requirements of the main segment. Hence, there is persuasion required in the corporate finance field and with investors in order that Sparks will indeed attract smaller issuers. Otherwise, the legally lower capital requirements compared to the main segment might remain a theoretical advantage.

4) A listing on Sparks may (still) be worthwhile

In light of the above, it remains to be seen whether the lower entry thresholds of Sparks will do the trick and facilitate listings compared to the main segment in practice. Furthermore, Sparks offers a special trading model (in particular a condensed trading window) with the intention to optimize the price determination and the execution of trades, taking into account that companies with a smaller market capitalization generally trade at lower volumes. However, this trading model will also have to pass the practical test yet (see also Christian Schneiter/Peter Kühn, CapLaw-2021-59).

On the other hand, a listing on Sparks is a going public on a fully regulated stock exchange and thus a strenuous exercise in terms of both, (internal) resources and (external) costs (see Ammann, in Going Public Guide, 18 et seq.; Nikitine/Bähler (above), 26 et seq.).

Against that background, SMEs may raise the question why they should envisage a listing on a regulated stock exchange such as Sparks (or also the main segment), in particular given that private equity seems to be available almost abundantly and there are foreign over-the-counter markets and other foreign markets with considerably less strict admission rules, which sometimes also Swiss companies use.

An important aspect of a going public on a regulated stock exchange are disciplining effects. From an economic perspective, the share price has such effects, catering for a market-based benchmark to measure the actions of board and management, including through potential unfriendly take-over offers if the share price reaches (too) low levels (see Ammann (above), 18). 

Disciplining effects are also present from a legal perspective. Companies often deem additional regulations a burden. However, preparing the financial statements in line with a recognized accounting standard, compiling a prospectus, complying with the corporate governance provisions provided for in the OAEC and the DCG, etc., also implies an intense confrontation of the responsible persons with their company, which will ultimately also be beneficial to the business. Furthermore, the requirements concerning listed companies pick-up megatrends such as ESG or gender equality timely, and addressing such trends is, again, generally beneficial to the business. 

A listing on Sparks may thus still be attractive for SMEs – all the more if there will be room for listings of smaller companies in practice and the trading model will prove to be suitable.

Matthias Kuert (matthias.kuert@cms-vep.com)
Olivia Zingg (olivia.zingg@cms-vep.com)