E cikk a Bird & Bird és az Arsboni által meghirdetett 2019. évi Cikkíró Pályázat keretében született.
Szerző: Karsa Roland
Now is the time for Hungary’s SMEs and startups to go big and go public!
Ringing the BSE opening bell could be within reach through Xtend market, Budapest stock exchange’s new trading platform launched in 2017 that aims to help promising companies go public.
On January 10thof this year CyBERG Corp’s Chairman of the Board Balazs Rozsa and Deputy Chief Executive Officer Erik Szabo rang the bell to open the day’s trading session on Budapest Stock Exchange (BSE). At BSE the opening bell marks an event worth celebrating, like an initial public offering (IPO) when a company goes public and offers its shares to the general public for the first time. Usually the company’s chief executives are given the honor to ring in their company’s first day of public trading. Although it is not quite like hitting a Chinese gong as was the case in the late 1800’s and early 1900’s at the New York Stock Exchange (NYSE), it is still a very ceremonious and honorable moment, as well as a major milestone for any company.
CyBERG Corp – a Hungarian startup founded in 2015 – is the second company to have benefited from the new trading platform Xtend. Xtend market is commonly referred to as a multilateral trading facility (MTF) and is indeed an alternative trading platform to Hungary’s traditional stock exchange BSE. It differs from other MTFs in Europe in that its declared purpose is to help small to medium-sized enterprises(SMEs) smoothly and gradually transition into public trading. By default, it is also an appealing option for Startups, such as CyBERG, that are hungry for increased capital, wish to get better financially established and are determined to bring their ideas to life.
Xtend is part of Hungary’s recent strategy to increase activity on capital markets by making it possible for new companies to go public. And BSE is doing everything in its power to make it a success story including reshaping its listing category system to further strengthen Xtend’s position on BSE and to better emulate international stock exchange standards and practices. These changes have been underway since January 2019 and one of the most significant changes is that the infamous category T, known for unreliable and penny stocks, is being phased out leaving only the Prime and Standard categories. Therefore, companies that would have gone public through category T are now invited to enter through Xtend and the phasing out of category T should be fully completed by January 2020.
Companies entering the Standard category must have a minimum market capitalization of HUF 250 mln, and at least 10% public float (stocks that are in the hands of public investors), and at least one closed business year.
By boosting its capital markets which have traditionally been neglected, Hungary hopes to encourage increased investment in bonds and shares and enjoy a healthier balance between corporate and banking finance. This would ideally lead to a more diversified, and therefore, more competitive and stable economy: more diverse because of the entry of new and different kinds of companies into public trading through internal funding mechanisms, and more stable because of internally available funding even when banks slow down lending.
What does Xtend have to offer?
The advantages that Xtend offers are significant and mitigate the risk involved when a company attempts to go public. Xtend therefore acts as an “anteroom” of the bourse by offering lower costs, financial incentives, as well as exemptions and other forms of reliefs from otherwise onerous reporting and financial obligations.
Xtend offers reliefs from onerous reporting requirements. First of all, Xtend-listed companies are not obliged to comply with the burdensome International Financial Reporting Standards (IFRS). Second of all, companies with stock issuance under the amount of EUR 5 mln are not required to prepare a prospectus for approval by the National Bank of Hungary (the general authorization and regulation authority of financial and capital markets institutions and market operators). They are only required to draft an informational document which is much less complex and resource-intensive and only needs BSE’s approval.
Because Xtend market wants to attract and help promising companies with ambitious goals to eventually enter the BSE market, there is no minimum stock issuance requirement. This is significant given the HUF 5 bln and HUF 250 mln respective market capitalization (the total HUF market value of a company’s outstanding shares) requirements of the Prime and Standard markets.
Xtend also makes its stocks more attractive to investors by providing an opportunity to place them in long term investment accounts. If investors choose a minimum five-year investment account, they can collect interest, dividends and capital gains tax free.
A number of financial incentives are offered to companies wishing to enter the Xtend market. A company may apply for partial funding from BSE. This funding is available thanks to an agreement concluded between BSE and the Ministry of Finance and has been made possible through the EU Economic Development and Innovation Operational Program.
The National Stock Exchange Development Fund is another funding source which was recently launched in the first quarter of 2018. It provides capital and private investors to companies wishing to list on Xtend and prepare for future public offerings. Investors typically invest HUF 1 Bln and in exchange they acquire a minority stake in the given company.
Listing on Xtend can be a great alternative to taking out traditional bank loans when a company needs external financial aid for expanding and growing business and in some cases it may be the only option for increasing capital.
iii) Public image
One of the main reasons that companies wish to go public is to gain more exposure, power and build up their reputation. Xtend provides companies the opportunity for an easier conversion into a public limited company (PLC). The PLC legal designation is instantly indicative of the company’s size and reputation. As such, it is good for marketing, it improves public and corporate image and constitutes a quantifiable asset which is calculated as part of the company value.
What does entering and trading on Xtend market entail?
The first thing a company needs before jumping on the Xtend bandwagon is a good lawyer, preferably a capital markets expert with interest and knowledge of Xtend and its twists and turns. In addition to this, an advisor is required for companies getting listed on the Xtend platform and will be assigned by BSE. The advisor’s task is to support the company during the listing and ultimately the trading process. The advisor also protects the investors’ interests by regularly monitoring the issuing company’s financial status
In order to enter Xtend, a company must undergo a formal change from private limited company to a PLC. The conversion occurs in two partially overlapping parts: first deciding to become a PLC and preparing the necessary internal changes by the effective date, and second, registering the stocks on Xtend.
i) Conversion into a PLC
In order to be eligible for conversion into a PLC, a company must be a private limited company and it must meet the requirements for PLCs prescribed by laws. Most significantly there is a minimum registered capital requirement of HUF 20mln. In addition, the company must make a series of internal changes including appointing a Board of Directors and a Supervisory Board, or the company can opt to appoint a Board of Management which is a mix of the two and drafting new bylaws for the PLC.
All corporate documents related to the conversion (e.g. shareholders’ resolutions, bylaws, etc.) have to be submitted to the Court of Registry for registration. Once this steps has been fulfilled to the satisfaction of the Court of Registry, it will issue a conversion order. In order to initiate the process of stock registration, the conversion order must be submitted to BSE who will make a final decision on whether to grant an effective date, the date as of which the PLC officially comes into existence and trading can begin. During the transitional period, up until the effective date, the company continues to exist and operate as a Private Limited Company.
ii) Stock registration
BSE’s decision to grant an effective date for the registration of a company’s stocks on Xtend, thereby concluding the its conversion into a PLC, is conditional upon receipt of either an information document or a prospectus according to the company’s stock issuance.
In the case of companies with a stock issuance under EUR 5 mln, the submission of an information document for BSE’s approval is sufficient. The information document should include the company’s basic information and should be drafted with the assistance of the designated advisor.
In the case of companies with a stock issuance above EUR 5 mln, a prospectus must be prepared which is much more complex than the information document and requires knowledge and experience in corporate and capital markets, as well as knowledge and understanding of accounting and finance. It should include a brief history of the company, a due diligence report outlining the company’s major contracts in effect, the company’s future plans and prospects as well as a description of the offering, description of the underwriting, financial information, risk to buyers, etc.
The transition from being a private company to a public one is a challenging one. Despite the reliefs and exemptions Xtend provides to facilitate a smoother transition, there still remain numerous obligations that are not imposed on non-listed companies. These can include annual and biannual reporting and submitting corporate governance reports. A company might also be required to prepare extraordinary publications or disclosures under circumstances such as when price-sensitive information arises which could directly or indirectly affect the value of or the yield on the issuer’s securities or could be relevant to for the market participants’ investment decisions.
Public companies are also obliged to comply with European Union laws on market abuse, which do not apply to private companies. Market abuse encompasses issues such as insider trading, unlawful disclosure of inside information, and market manipulation. On the plus side, complying with these laws provides and ensures greater transparency.
Xtend-listed companies have the opportunity to gradually warm up to the changes and newly imposed obligations by not taking them all on at once. As they get comfortable enough or sufficiently increase their capital, they can decide to “go the whole hog” and upgrade to BSE’s Standard bourse category – which ultimately is the intented purpose of Xtend and would contribute to boosting the capital markets. Nevertheless, there is no obligation to upgrade, nor is there a limit to the amount of time a that a company can remain listed on Xtend. In addition, companies that decided to test the waters of public trading through Xtend but end up drowning can leave the platform voluntarily through the delisting process.
As of today, there are two companies listed on Xtend with a third oneon the way. GOPD Zrt. has already registered its stocks on Xtend, but the bell has yet to be run to launch its public trading. And hopefully others will have the opportunity to ring the BSE opening bell too. It is an opportune moment for eager and hopeful companies to take advantage of the unique opportunity that Xtend is offering. Without Xtend, CyBERG might not have been able to go public at all let alone so quickly. By ringing the BSE bell, you might just be part of the ringing in of a new and hopefully a buoyant chapter in Hungary’s economy. BSE is Xtending a helping hand, so grab a hold and enjoy the ride!