1 Introduction
The continuous growth, modernisation and full compliance of the Cyprus Stock Exchange (the "CSE") with European legislation, and the strong performance of the Cyprus economy despite the overall adverse global economic climate, continues to attract the interest of local and international companies that are seeking to accelerate their growth and gain access to European capital markets.
Other than gaining access to capital, acquiring visibility and credibility, and providing liquidity for existing shareholders, Cyprus is a competitive market for initial public offerings ("IPOs") as it offers tax incentives since its tax regime is very favourable for companies, including a low corporate tax rate, exemptions on dividends, capital gains and interest. More specifically, the 17% special defence contribution tax on dividends is not imposed on non-resident shareholders of listed companies (i.e. legal or physical persons). In addition, the 20% capital gains tax that is imposed on gains resulting from the disposal of shares in companies that hold immovable properties situated in Cyprus is not applicable for listed companies on the regulated market of the CSE either. On a further note, foreign investors may particularly benefit in cases of a double taxation treaty between Cyprus and the foreign investor's country of origin. Moreover, any profits arising from the sale of securities by Cyprus tax residents are exempted from income tax and are therefore not subject to the special defence contribution.
In addition, the strategic geopolitical position of Cyprus, located at the crossroads of Europe, Asia, and Africa, is a key factor in attracting companies that operate in these regions. For these reasons, inter alia, domestic and international companies looking to go public decide to list their securities (including shares, bonds, debentures, equities and other instruments) on the CSE.
IPOs have been part of Cyprus' financial landscape since the early 1990s with the introduction of the CSE, established in 1993, through the Cyprus Securities and Stock Exchange Laws (Law 14(I)/1993). Additionally, in 1995, the Cyprus Securities and Stock Exchange Regulations were issued (RAA 214/1995). The Cyprus Securities and Exchange Commission ("CySEC") is the regulating authority of the CSE, which was established by virtue of the Cyprus Securities and Exchange Commission (Establishment and Responsibilities) Law 64(I) 2001. In general, CySEC's mission is to exercise effective supervision to ensure investor protection and healthy development of the securities market.
During the early 2000s, there was an important increase in IPO activity as a result of the growth of the island's economy, the dot-com boom as well as the liberalisation of the capital markets. However, 2022 and the start of 2023 have been challenging times on the global capital markets and this has also been reflected on the CSE.
Recently, as a result of the COVID-19 pandemic and the Russia-Ukraine conflict, there has been a noticeable impact on global economies, and Cyprus is no exception; however, the Cyprus economy has shown overall resilience and adaptiveness. The COVID-19 pandemic caused disruptions in supply chains, reduced consumer spending, and led to job losses and business closures.
Moreover, partly because of the ongoing Russian-Ukraine conflict, inflation is affecting many countries, including Cyprus, which could lead to the erosion of the value of investments and to higher interest rates, which would make it more expensive for companies to raise capital through IPOs. On top of that, the sanctions imposed on Russia by the EU and the international community have had a negative impact on IPO activity in Cyprus.
The CSE currently operates a non-regulated market (the "Non-Regulated Market") and a regulated market (the "Regulated Market"). The Regulated Market consists of the Main Market and the Alternative Market, each with its own characteristics and requirements according to CSE laws and regulations.
The Emerging Companies Market (the "ECM") constitutes the Non-Regulated Market. The ECM is a multilateral trading facility.
Cyprus (which is also part of the commonwealth and has strong ties with the UK) has adapted and continues to adapt to ongoing global economic and political challenges and is trying to overcome these issues and remain an attractive and competitive market for companies choosing to go public. This is evidenced through the current trends that show an increase in IPOs in Cyprus. Particularly, from 2022 to date, 13 companies have been listed on the ECM and three companies on the Regulated Market, whereas, in 2020–2021, only six companies were listed on the ECM and one company on the Regulated Market.
Cyprus' economy has a large number of small to medium-sized enterprises ("SMEs") that face strong competition from other companies, especially those operating in the EU that can penetrate the local market. The CSE offers funding options and possibilities for capital investments, which in turn enable the listed entities to proceed with acquisitions, expansions, and research and development and to become more cost efficient. It is also a channel through which savings can be directed to the most productive and effective investments.
Fairly recently, the Council of the CSE, in collaboration with other stakeholders and authorities, reorganised the CSE. The aim of the reorganisation was to, inter alia:
- minimise any bureaucracy via the use of advanced technology;
- create new products within and outside the traditional framework of exchange (i.e. funds); and
- modernise the applicable laws (i.e. amend Cyprus laws, transpose EU regulations and directives into national law, and strengthen the Corporate Governance Code (the "Code")).
Additionally, the CSE has entered into various memoranda of understanding with other stock exchanges over the last few years for the purpose of facilitating cooperation with strategic partners. To that end, one could argue that the latest formulations of the regulatory scheme and market practice have prepared the ground for a potential increase in the number of listed entities in Cyprus, since the CSE has undertaken significant reforms, by making it even more competitive.
Most entities in Cyprus seek a listing on the ECM. This trend may be due to the fact that the ECM:
- allows for newly established companies to trade on the CSE, provided that investors are equipped with sufficient information that enables them to properly access the value of the titles;
- allows listing with lower costs compared to the Regulated Market;
- provides an exit option to the investors;
- does not set any market capitalisation requirements or thresholds as to the minimum shareholders' equity capital. The only set requirement is for the issuer to be a public company with a sufficient number of investors;
- does not oblige companies to be governed by the Code (i.e. optional);
- does not set any minimum percentage of shares to be held by the public (i.e. free float);
- does not follow an excessive listing process (i.e. issuers are required to prepare and submit to the CSE the company's history of business and its business plan – no financial forecast is required, information as to the company's directors, shareholders, risk factors, audited financial statements prepared at least two years prior to the listing, etc.); and
- provides for fewer reporting obligations.
In our view, the upwards trend of IPOs that we have witnessed in Cyprus in recent years will continue due to the following:
- The tech sector in Cyprus has been growing rapidly in recent years, and this has contributed to IPO activity in the country. Several technology companies have gone public on the CSE, and this trend is expected to continue as the sector continues to grow.
- While larger companies have historically dominated IPO activity in Cyprus, there has been a recent trend of smaller companies, particularly SMEs, going public. This could be due to a growing interest in alternative financing options among smaller companies.
- There is a growing focus on sustainable investing globally, and Cyprus is no exception. Investors are increasingly looking for companies that are committed to environmental, social, and governance ("ESG") factors, and this could impact IPO activity in the country.
Looking ahead to 2023, it is difficult to predict the specific trends and factors that will impact IPO activity in Cyprus. However, if global economic conditions continue to improve, and geopolitical tensions ease, it is possible that there may be a further increase in IPO activity in Cyprus. Additionally, regulatory changes or new tax incentives could also impact IPO activity in the country.
2 The IPO process: Steps, timing and parties and market practice
Conversion procedure from a private company into a public one
First of all, in order to be listed on the CSE, a company must be a public one. A public company can be registered in Cyprus either from the outset or by converting an already registered private company into a public company before it proceeds to applying for a listing.
The IPO process consists of two phases. The first phase of conversion consists of two steps:
- the prior application step; and
- the post-application step.
For the prior application step, the process starts with a general meeting of members, convened by the shareholders of the company or with a unanimous written resolution, and the following should be carried out:
- re-register the company from private to public;
- change the name of the company;
- amend the articles of association in order to include the fact that the company will be converted to a public one;
- amend the articles of association so as to strike out any restrictions that would apply to private companies, such as a limited number of members, curtailments on the transfer of shares, interdictions to send invitations to the public to subscribe for the company's debentures or shares, etc.;
- modify the members of the company if applicable;
- give power to the directors of the company, by means of ordinary resolution, to take action regarding the conversion; and
- increase the company's share capital by means of resolution in order to meet the legal criteria of the €25,629 minimum prescribed in Article 4A of the Companies Law, Cap 113 (the "Companies Law").
Afterwards, the company will have to arrange a meeting of the board of directors in order to approve the above and instruct the secretary to proceed with the necessary filings at the Registrar of Companies in Cyprus (the "RoC"). Thus, the documents that need to be filed are the following:
- an extract of the resolution of the shareholders of the company (as described above);
- the relevant RoC forms;
- the register of shareholders certified by the secretary or the director of the company;
- a copy of a bank statement indicating that the company has complied with the minimum capital requirements as set out above;
- an affidavit confirming the true and accurate translation of the above documents, if applicable; and
- the company's prospectus or the statement in lieu of the prospectus.
After the submission of the application by the secretary, the RoC reviews the application and issues a certificate of change of name if it is satisfied with the documents provided. The timeframe for the procedure of conversion is usually around four weeks but this is subject to variations depending on the workload and the intricacy of each case. In general, the timeframe for convening the shareholders' meeting is 21 days, unless the shareholders consent to the holding of the meeting in shorter notice than the statutory period. The drafting of the necessary corporate documents and amendments to the articles of association usually take one week, while the holding of the meeting of the board of directors is convened immediately after the articles of association are amended. The issuance of certificates by the RoC takes one to three weeks, depending on whether the officers or the shareholders of the company are to be changed (which usually delays the issuance of certificates).
Listing of the company
The second phase of conversion is the listing of the company. The listing of a company on the CSE may take either the form of a public offer or a private placement, or a combination of both. General and specific listing conditions must be met in order to list a company on the CSE, although this depends on the market on which a company wishes to be listed as different listing requirements apply.
The usual timeframe for a listing is one or two months from the date of submission of the relevant documents and information. But again, this is subject to variations depending on the complexity and other factors.
Listing requirements of the Regulated Market are the following:
- the company needs to be legally incorporated, having the power to issue securities to the public;
- the company has the power to issue specific securities for which the application is submitted;
- the listing concerns securities of the same category, and such securities are fully paid up and their transfer is free;
- the company has sufficient working capital;
- the company ensures equal treatment of the beneficiaries of same category securities and provides the necessary guarantees for the protection of the investors;
- the company ensures that any future issues are offered proportionally, initially to the existing shareholders;
- the company is ready to hand over its Registry to the Central Depository and Registry, where applicable;
- the majority of the company's revenues or assets shall not derive from shipping company activities unless the issuer is a shipping company; and
- the company has at least four directors.
The listing of a company on the CSE can take different forms. It can either be carried out via:
- a public offer (in this case, if the offer is more than €2.5 million and addressed to more than 100 investors, there should be an approval from CySEC in addition to the admission document to be approved by the CSE, otherwise, there is no need for such approval);
- a private placement;
- listing of existing shares (an admission document is required with the CSE's approval only); or
- a combination of a public offer and a private placement.
Listing requirements of the ECM are the following:
- the company needs to be legally incorporated, having the power to issue securities to the public;
- the company has the power to issue specific securities for which the application is submitted;
- the listing concerns securities of the same category, and such securities are fully paid up and their transfer is free;
- the company ensures equal treatment of the beneficiaries of same category securities;
- the company also ensures that any future issues are offered proportionally, initially to the existing shareholders;
- the company's securities are held by a satisfactory number of investors;
- the company should be ready to hand over its Registry to the Central Depository and Registry, where applicable;
- the company should have prepared audited accounts, operated regularly;
- relevant activities for at least two financial years prior to its listing;
- in the case of a newly established company whose issue price with which it will begin to trade is different from its nominated value, a valuation of the value of its securities must be prepared by an investment firm or by an Auditing House; and
- it is a necessary prerequisite to appoint a nominated advisor. The nominated advisor presents the issuer to the CSE and represents it through the listing process, ensuring that the listing requirements are fulfilled at all times, and advises it on compliance issues (i.e. compliance with the continuous listing obligations).
It is worth noting that if an issuer has its securities listed on a foreign stock exchange, it should first of all comply with the requirements of the CSE prior to proceeding with the listing in Cyprus.
Submissions to CySEC
Finally, every company that wishes to list its securities on the CSE is given the opportunity to choose between the Regulated Market and the Non-Regulated Market. Since each market has its own particularities regarding the publishing of the prospectus, two listing procedures can be distinguished, as follows:
- Regarding the Regulated Market, a company must publish a prospectus that must later be submitted to CySEC by the prospective issuer for approval before its publication.
- The Non-Regulated Market, since it is operated based on the regulative decisions adopted by the CSE, does not come under the mandatory provisions set for regulated markets. As such, if the issue of a prospectus is regarded as necessary for those issuers who wish to obtain a listing in this Market, then the approval of CySEC should be provided.
In addition to the traditional IPO process, there are several alternatives that companies may rely on to become publicly traded in Cyprus, such as:
- Direct listing: A direct listing is a process in which a company goes public by listing its shares on a stock exchange without raising any capital. This approach allows existing shareholders to sell their shares directly to the public, bypassing the traditional underwriting process. In Cyprus, there have been a few examples of companies listing through a direct listing process.
- Reverse merger: A reverse merger is a process in which a private company acquires a public company with the goal of taking over its public listing. This approach allows the private company to become publicly traded without going through the traditional IPO process. Reverse mergers have been used by a few companies in Cyprus to become publicly traded.
3 Regulatory architecture: Overview of the regulators and key regulations
Main laws and regulations
In Cyprus, IPOs are governed by several complex laws and regulations enacted in accordance with the European legal and regulatory framework on such matters. The main legislation governing IPOs is Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017, as amended and consolidated, on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market (the "Prospectus Regulation") and the Public Offer and Prospectus Law (L.144(I)/2005), as amended (the "Prospectus Law"), which was enacted in Cyprus to implement Directive 2003/71/EC of the European Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading (the "Directive"). The Directive was repealed by the Prospectus Regulation, which has been directly applicable in Cyprus since 21 July 2019 and inevitably amends the Prospectus Law.
In view of the Prospectus Regulation's full applicability, CySEC has announced that the drafting of a new law regulating matters that need to be determined as per the Prospectus Regulation will repeal the Prospectus Law. The Code and the Companies Law also provide principles that govern IPOs in Cyprus, as described herein. Further, there are European Securities and Markets Authority ("ESMA") Guidelines, issued on 4 March 2021, on the amendment of Market Abuse Regulation 596/2014 of the EU (the "MAR") Guidelines in relation to delayed disclosure requirements under the Prospectus Regulation. The Prospectus Regulation should also be applied by CySEC and by each person who is responsible for the information given in a prospectus.
Regarding the applicable laws and regulations, the final form of the prospectus is signed by the offeror or the person requesting the admission of securities to trading on a regulated market. Furthermore, it is signed by any person whom the prospectus lists as responsible for providing the information stated therein. In case the offeror or the person requesting the admission of securities to trading is a legal person, the prospectus shall be signed by at least three executive members of the board of directors (and ongoing by the president of the board and the managing director or managing directors, in case there is more than one). It is the responsibility of the persons mentioned above to ensure the accuracy, completeness and clarity of the prospectus and to ensure that the information contained therein is up to date. Moreover, every public offer involves an underwriter who is at least responsible for the collection of the purchase value of the securities offered. The underwriter oversees the safekeeping of the money paid by the participants to the public offer and has to ensure that the money is made available to the offeror, while arranging for the allocation of the offered securities to investors who have participated in the public offer. Thus, the underwriter, who is responsible for the drawing-up of the prospectus, also signs the prospectus.
Competent authority
It should be noted that the Prospectus Law provided some specific authorities to CySEC for the governing of an IPO in Cyprus. In accordance with Article 31 of the Prospectus Regulation, on 5 July 2019, CySEC was appointed as the competent authority responsible for the duties set forth in the Prospectus Regulation and for compliance with it. CySEC will also be the authority responsible for approving prospectuses, which will be drawn up and distributed as per the Prospectus Regulation.
4 Public company responsibilities
Public companies, and particularly publicly listed companies, have stricter requirements and obligations to fulfil in comparison to private companies.
Public companies shall satisfy, at least, the following obligations:
- have at least seven members with no maximum in this regard;
- must bear a minimum of two directors; and
- have a minimum authorised and paid-up share capital of €25,629.
Publicly listed companies have even stricter requirements to meet than non-listed companies. Specifically, these consist of the below:
- when listed on a regulated market, a publicly listed company is required to maintain a number of reports on its website, such as when it convenes its general meeting, the notice of the general meeting, the number of shares and voting rights at the time of the notice as well as copies of the draft resolutions and any comments of the directors in relation to the items on the agenda of the general meeting, along with copies of any forms that have been used by a proxy to vote;
- a publicly listed company must notify obligations on any increases in or updates to the voting rights and shareholdings (for example, a dispersion report on a quarterly basis and information on transactions of directors and major shareholders for companies listed on the Regulated Market);
- such companies also have notification obligations to CySEC and the market on which such securities are traded, on any amendments of the memorandum and articles of association of the company or any change to the rights attaching to any class of shares;
- depending on the market on which such companies are listed, additional obligations can apply regarding the market capitalisation threshold, minimum equity capital, preparation of the qualified auditors' report, reporting obligations on the company's financial results (obligation to publish annual and biannual financial statements), and the obligation to announce the holding of a board of directors' meeting in advance; and
- a publicly listed company must be in compliance with the provisions of the MAR and the Market Abuse Law (L.102(I)/2016) regarding inside information and insider dealings for securities and disclosure obligations to persons discharging corporate management responsibilities.
In regard to corporate governance standards in Cyprus, there is no particular legislation currently in force for private or public companies, other than the Companies Law, which provides principles for the operation and management of a company. Nevertheless, companies that are listed on the CSE may follow the recommendations of best business practice in Cyprus as well as international practice, as provided by the Code.
The Code mainly aims to:
- strengthen the monitoring role of the board of directors in listed companies;
- protect minority shareholders;
- adopt greater transparency;
- enhance the relationship between the shareholders and board of directors of the company; and
- provide timely information, as well as sufficient safeguarding, on the independence of the board of directors in its decision-making.
5 Potential risks, liabilities and pitfalls
Conducting an IPO and becoming listed on the CSE implies important risks. Thus, the most important players in ensuring that the listing procedure goes steadily are underwriters, lawyers, financial consultants and auditors. Hence, it is always advisable to seek professional advice before taking any action in order to avoid and/or mitigate such risks.
In accordance with the Prospectus Law, those who sign the prospectus are responsible to investors for the information contained therein. Unless there is a malicious intention of the signatories of the prospectus, this action is prescribed within two years from the allocation of the securities or their admission to trading on a regulated market.
In addition, the underwriter behind the drawing-up of the prospectus is liable to the investors who acquired securities on the basis of erroneous, deficient or insufficient information found in the prospectus and for any loss consequently suffered to the drop in price of the securities after the discovery of the deficiencies. This type of claim against the underwriter is prescribed within a year from the date of allocation of the securities or their admission to trading on a regulated market.
Furthermore, anyone issuing statements for the drawing-up of the prospectus is liable from the investors' perspective for any loss suffered in the event that the prospectus contains inaccuracies or material omissions due to deficiencies in those statements.
Overall, publicly listed companies are always obliged to comply with the listing requirements of the CSE. Specifically, investing in the ECM bears a higher risk, since it is governed by a simpler regulatory framework designed to meet the needs of small and emerging companies; thus, meticulous examination of all the circumstances surrounding such companies is recommended before an investment is made
Originally published by Global Legal Insights.
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.