Luxembourg: Financing And Investing In Luxembourg: Latest Trends

Despite the various geopolitical events in 2022, deal count remained stable in Luxembourg, which remains one of the prime jurisdiction for foreign investors, notably attracted by the Grand Duchy's stable economy, its AAA rating and practical regulation.

The extensive Luxembourg legal toolbox provides businesses in needs of funding with the most appropriate instrument to raise money. Such legal solutions have benefi ted from a revamp in the recent past to address the need for alternatives to traditional bank fi nancing and debt instruments.

1. Lending in Luxembourg

The conditions for a company to provide loans were clarifi ed in June 2021 by the Luxembourg fi nancial sector supervision authority, the Commission du Secteur Financier (the "CSSF").

The granting of loans to the public and on a professional basis is usually an activity regulated under the Luxembourg law dated 5 April 1993 relating to the fi nancial sector, as amended (the "1993 Law"), and is subject to the issuance by the CSSF of a license for credit institutions or for professionals in the fi nancial sector carrying out lending activities under article 28-4 of the 1993 Law. The licensing requirement applies regardless as to whether the granting of loans is made on a primary basis (i.e. originations of loans) or on a secondary basis (i.e. acquisition of loans).

More generally, any Luxembourg based person carrying out fi nancial services having a regular occupation or business activity of the fi nancial sector falls within the scope of the 1993 Law and is subject to the CSSF's authority and authorisation as a result of its residual competence under article 14 of the 1993 Law.

This being said, a person may still act as loan provider without holding a license in case it does not act on a "professional basis", meaning that it will not make a living out of the activity or the scale of the activity in question compared to the other activities exercised and does not carry out such activity on a regular basis, thereby excluding one-off lending operations.

In addition, the CSSF clarifi ed that a loan should not be considered as being made to the public and therefore out of the scope of article 28-4 of the 1993 Law in circumstances where :

• it is granted to a restricted circle of persons determined in advance (as opposed to a multitude of non-identifi able persons), without specifying any maximum; or
• whose nominal value amounts to at least EUR 3,000,000 (or the equivalent amount in another currency) and which is exclusively granted to professionals, as defi ned in the Luxembourg Consumer Code.

Finally, the CSSF highlighted the non-application of the article 28-4 of the LFS to professionals carrying out activities whereby the taking up and pursuit thereof are governed by special laws, including notably undertakings for collective investments (UCIs), specialised investment funds (SIFs), pension funds, investment companies in risk capital (SICARs) and securitisation undertakings.

2. New opportunities for the Luxembourg securitisation market

As an alternative to the traditional bank fi nancing, market players may turn to securitisation vehicles which may grant loans and acquire loans without being licensed under the 1993 Law, as long as the operation qualifi es as a securitisation transaction within the meaning of the Luxembourg securitisation law of 22 March 2004, as recently amended (the Securitisation Law) (and the securitisation vehicle does not issue securities to the public on a continuous basis) and which propelled the Grand Duchy among one of the leading jurisdiction for securitisation transactions.

Among the features of the Securitisation Law, market players are in particular taking full advantage of the compartment asset ring fencing, whereby the assets allocated to a certain compartment of a securitisation vehicle are segregated from the assets of others compartments and only available to satisfy the investors and creditors of such compartment, and the express legal recognition of limited recourse and non-petition principles ensuring the bankruptcy remoteness of the securitisation vehicle and statutory recognition of contractual arrangements in that context.

However, securitisation transactions structuration have evolved over time. Following the adoption of the bill of law 7825 which came into force on 8 March 2022, the Securitisation Law features have been modernised, enhancing thereby Luxembourg's attractiveness for collateralised debt obligations' (CDOs) and collateralised loan obligations transactions (CLOs) and meet investors' needs.

The new regime provides securitisation vehicle with broader choices with respect to the corporate form that a vehicle may adopt and with respect to the means of funding its securitisation activities. A securitisation vehicle may now raise monies by issuing all sort of fi nancial instruments, while issuance was before limited to the sole fi nancial instruments qualifying as securities. Furthermore, a securitisation vehicle may now contract any type of borrowing, which is no longer limited to specifi c situations and on a transitional basis.

In order to attract a greater share in the CDOs and CLOs market, the management of the securitised debt exposures is no longer limited to passive management. The securitisation vehicle or a designated third party may take an active role in the management of the securitised debt exposures, as long as those have not be fi nanced by way of fi nancial instruments offered to the public.

To further address any legal certainty issue, the criterions of offer to the public have been expressly laid out in the Securitisation Law, which states that fi nancial instruments are deemed to be offered to the public when their issuance is not directed at professional clients, their denomination is less than EUR 100,000, and they are not distributed by means of a private placement.

Another welcomed feature of this modernisation consists in the faculty for the securitisation vehicle to grant security interests over its assets to any party in relation to the securitisation transactions, thereby offering greater fl exibility in terms of deal structuring. An investor in a securitisation transaction may hence obtain funding from a third party which in turn would benefi t from a pledge over the securitisation vehicle's corresponding assets.

As a result, we are observing a renewed interest in the possibilities offered by the Luxembourg securitisation regulatory framework and consequently a shift of CDOs transactions which may previously have been set up in jurisdictions other than Luxembourg, reaffi rming the Grand Duchy status as a prime securitisation destination.

3. Crowdfunding

Since the regulation 2020/1503 on European crowdfunding service providers for businesses (the Crowdfunding Regulation) came into force on 10 November 2021, businesses in need of fi nancing may now also turn to the general public, by using the services of European crowdfunding service providers (ECSPs) either located in Luxembourg or in other EU member states.

ECSPs are legal persons licensed by the national authority of their member state to offer crowdfunding services¹ in their home member state, and which, following certain administrative steps, may passport their services to project owners or investors located in other EU members states, without the necessity to establish a physical presence thereto. The CSSF is in charge of licensing and supervising the ECSPs having Luxembourg as home member state.

Although the Crowdfunding Regulation only applies to crowdfunding services provided to non-consumer project owners (i.e. the relating to offers for an amount of up to EUR 5,000,000 calculated over a period of twelve months per project owner, such conditions are likely to be met by businesses in needs of funding, triggering therefore some obligations for them to comply with).

For example, project owners shall draft and maintain up to date a standardised information sheet (consisting of 6 pages maximum) known as a Key Investment Information Sheet, addressed to investors or prospective investors.

The harmonization of the crowdfunding regulatory framework offers new opportunities to companies which may reach a larger number of investors throughout the European Union, while minimizing the marketing and legal costs.

4. Latest developments for virtual assets

Is the crypto winter over? Financing taking the form of virtual assets, including crypto assets, i.e. virtual assets which may be transferred and stored electronically using distributed ledger technology (DLT), have become the object of a renewed interest from both investors and funding seekers.

Although the concept of DLT has been given legal certainty through the amendment to the Luxembourg law of 1 August 2001 on the circulation of securities, as amended by the Luxembourg law dated 1 March 2019, the Grand Duchy has not yet adopted a comprehensive set of rules regulating all aspects of virtual assets related activities.

Depending on the characteristics of the virtual assets to which relate their activities and on the nature of their activities, Luxembourg-based actors may, before starting their activities, need to obtain a license from the CSSF, (i) as a payment institution or electronic money institution under the Law of 10 November 2009 on payment services, as amended (the "2009 Law"), should the virtual assets qualify as electronic money (within the meaning of the 2009 Law), or (ii) the 1993 Law, should the virtual assets meet the criterion of fi nancial instruments (within the meaning of the 1993 Law).

In addition, and regardless of whether or not a license is necessary under the 2009 Law or the 1993 Law, any person or non-person providing one or more of the following services, whether on its client's behalf or on its own accounts:

• exchange between one or more forms of virtual assets or between virtual assets and fi at currencies, including the exchange between virtual currencies and fi at currencies;
• transfer of virtual assets;
• safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets, including custodian wallet services; and/or
• participation in and provision of fi nancial services related to an issuer's offer and/or sale of virtual assets;

shall register as a virtual asset services provider ("VASP") subject to the Luxembourg law of 12 November 2004 on the fi ght against money laundering and terrorist fi nancing, as amended (the "AML Law").

A professional being licensed under the 1993 and/or the 2009 Law and willing to extend its offer of services to virtual assets related services is not exempted from having to register as a VASP, if applicable, and shall update beforehand the information provided to the CSSF as part of its licensing.

Conscious that this meander of legal provisions and the upcoming regulation on Markets in Crypto-Assets (MiCA) may constitute a challenge for market players, the CSSF has set up a dedicated contact point for anyone contemplating to launch a project involving fi nancial innovation (including distributed ledger technology or virtual/crypto assets) and will provide guidance with respect to any license or registration requirements which may be necessary.

5. Listing on the Luxembourg Stock Exchange ("LuxSE")

Keeping pace with new trends and market participants' expectations, the LuxSE has updated some of its listing processes and confi rmed its ambitions to remain the global number one in terms of debt securities listings.

5.1. Virtual asset listing

In January 2022 the conditions under which virtual assets may be listed on the Securities Offi cial List ("SOL"), without admission to trading on one of the markets operated by the LuxSE, have been clarifi ed. Are admitted to the SOL the virtual assets operated under the DLT or similar technology, either DLT native securities or tokenised securities (i.e. initially dematerialised or book record securities which have been later tokenised) to the extent the following cumulative conditions are met:

1. They qualify as fi nancial instruments within the meaning of the Directive 2014/65/EU of 15 May 2014 on markets in fi nancial instruments, as amended (also known as MiFID II);
2. They are debt fi nancial instruments;
3. They are offered exclusively to Qualifi ed investors in the meaning of the Regulation (EU) 2017/1129 of 14 June 2017 on the prospectus, as amended or issued in a denomination per unit that amounts to at least EUR 100,000; and
4. Their pricing is expressed in fi at currency.

The possibility to list crypto assets on the SOL is however limited to issuers having previously issued securities in capital markets or applicants having a proven track record in capital market transactions. In addition, the LuxSE may request the applicant to provide an opinion confi rming that an issuance under the DLT or similar technology has legal certainty under the governing law of the securities.

5.2. Fastlane admission process

In addition, since October 2022, the LuxSE has implemented a new alleviated "fastlane" admission process for the listing on its exchange-regulated Euro MTF market of, inter alia, non-equity securities and equity convertible bonds issued by issuers whose shares are already admitted to trading on an EU regulated market or equivalent.

The eligible issuer is required to fi le an application form as well as a simplifi ed admission documentation containing the terms and conditions of the securities for which an admission on the Euro MTF is sought, instead of having to produce an otherwise prospectus in accordance with the requirements of the LuxSE rules and regulations thereby considerably accelerating the listing admission process.

Footnote

1. i.e. the matching of business funding interests of investors and project owners through the use of a crowdfunding platform and which consists of the facilitation of granting loans or the placing of transferable securities and admitted instruments for crowdfunding purposes issued by a project owner or a special purpose vehicle.

Originally published by Beaumont Capital Markets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.