Cyprus: Initial Public Offerings 2021

1. Introduction

In 1993 and 1995, the House of Representatives in Cyprus enacted the Cyprus Securities and Stock Exchange Laws and Regulations, respectively, under which the Cyprus Stock Exchange ("CSE") was established. The authority regulating the CSE is the Cyprus Securities and Exchange Commission ("CySEC"), which was established by virtue of the Cyprus Securities and Exchange Commission (Establishment and Responsibilities) Law of 64(I) 2001. The general mission of CySEC is to exercise effective supervision in order to ensure investor protection and healthy development of the securities market.

The first trading session on the CSE was held on 29 March 1996. On 1 October 2009, the emerging companies market of the CSE (the "Emerging Companies Market"), which is a market in the form of a multilateral trading facility, began its operations. The CSE currently operates a non-regulated market (the Emerging Companies Market) and a regulated market (the "Regulated Market"). 

There are seven Regulated Markets on the CSE:

1. the Main Market;
2. the Alternative Market;
3. the Surveillance Market;
4. the Treasury Bills;
5. the Government Bonds;
6. the Corporate Bonds; and
7. the Warrants.

The decision of a local or a foreign company to go public by obtaining a listing on the CSE and conducting an initial public offering ("IPO") is typically based on several factors. Listing on the CSE may lead to business development and growth by raising capital through more conventional ways while, for smaller investors, such listing may offer alternative possibilities and options for more productive and effective investments.

One of the major features of Cyprus' economy is the large number of small to medium-sized enterprises which, although trustworthy and credible, face the peril of being exposed to strong competition as a result of Cyprus' membership in the European Union ("EU"). Listing on the CSE offers growth potential to such enterprises by giving them access to funds which enables them to raise the necessary capital and finance their development and growth activities. The Stock Exchange also offers alternative options and possibilities for investments. It is therefore used as a channel through which savings can be directed to the most productive and effective investments. Following the liberalisation of the interest rates and the elimination of the capital flow restrictions, local companies that are listed on the CSE are able to utilise their funds by investing abroad while foreign companies are given the opportunity to invest in local markets with the ability to liquidate their investments at all times. Listing on the CSE also offers publicity to such companies (i.e. through the annotations associated with this fact) which helps them to enhance their corporate image.

More importantly, being a shareholder in a listed company offers numerous tax incentives. For example, the 17% special defence contribution tax on dividends is not imposed on the 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 which hold immovable properties situated in Cyprus is not applicable for listed companies either. Further, 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.

After the economic crisis and the banking crisis in 2013, the Council of the CSE (in close collaboration with other stakeholders and authorities), reorganised the CSE. This reorganisation aimed, inter alia, to:

(a) minimise any bureaucracy via the use of advanced technology;

(b) create new products within and outside the traditional framework of exchange (i.e. funds); and

(c) modernise the applicable laws (i.e. amend Cyprus laws, transpose EU regulations and directives into national law, strengthen the Corporate Governance Code (the "Code")).

In addition, 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 practices have prepared the ground for a potential increase in the number of listed entities in Cyprus, since the CSE has undertaken significant reforms, aimed at making it even more competitive.

The effect of the above reforms is also reflected in numbers. More specifically, more than 60 companies have been listed on the CSE since 2013. From 2019 to date, 17 companies have been listed on the Emerging Companies Market, offering common stocks to the public, whereas one company has been listed on the Regulated Market. The numbers show that only five companies have been listed on the Regulated Market of the CSE since 2013, which means that the overwhelming majority of companies are now listed on the Emerging Companies Market. Furthermore, it should be noted that, after the outbreak of COVID-19 pandemic, the number of companies that have been listed on the CSE has significantly decreased. In particular, in 2020-2021, only six companies have been listed on the Emerging Companies Market whereas only one company has been listed on the Regulated Market.

This trend of having the companies listed in the Emerging Companies Market may be explained if we consider that the Emerging Companies Market does not come under the Regulated Markets' mandatory provisions that impose strict listing requirements. It therefore offers more flexibility to the companies listed therein which are governed by a more simplified regulatory regime, designed for the needs of:

(a) unlisted companies that are seeking to finance their activities or the liquidity of their shares through secondary markets (i.e. small, medium-sized enterprises);

(b) investors who are seeking new types of investment with higher risk;

(c) companies that are already listed on the Regulated Market but cannot afford the high costs associated with their listing or the excessive reporting obligations; or

(d) companies that are seeking to float their securities to a recognised secondary market of an EU Member State.

More specifically, the Emerging Companies Market:

(a) allows for newly established companies to trade on the CSE, provided that investors are equipped with sufficient information that enables them to access properly the value of the titles;

(b) allows listing with lower costs compared to the Regulated Market;

(c) provides an exit option to the investors;

(d) does not set any market capitalisation requirements or any 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;

(e) does not oblige companies to be governed by the Code (i.e. optional);

(f) does not set any minimum percentage of shares to be held by the public (i.e. free float);

(g) 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

(h) provides for fewer reporting obligations.

Today, the members of the CSE are mainly banks, investment and insurance companies, brokerage offices, hotels and travel agents.

2. The IPO process: Steps, timing and parties and market practice

In order for any company to be listed on the CSE, it must first be a public company. Companies that are not already designated as public must follow a conversion procedure before they proceed to apply for a listing.

The first phase of conversion consists of two steps: (a) the prior application step; and (b) the post-application step.

In terms of the prior application step, the shareholders of the company shall convene a general meeting of members or pass a unanimous written resolution and resolve, among others:

(a) to re-register the company from private to public and to alter its name, as required by the law;

(b) to alter the company's memorandum so that it states that the company is to be converted into a public limited company;

(c) to alter its articles of association so that any restrictions that apply to private companies are deleted (i.e. restrictions on the transfer of shares, limited number of members (up to 50), prohibitions on sending invitations to the public to subscribe for company's shares and debentures, etc.);

(d) to make any alterations to the members/officers of the company as appropriate;

(e) to empower by ordinary resolution the directors of the company to proceed with the conversion; and

(f) to pass a resolution resolving the increase of the company's share capital. According to section 4A of the Companies Law, Cap 113 (the "Companies Law"), the minimum authorised, issued and paid-up share capital of a public company shall be at least CYP 15,000 (€25,629).

The company will then convene a meeting of the board of directors, approving the above resolutions and instructing the secretary to proceed with all necessary filings with the Registrar of Companies in Cyprus (the "RoC").

The secretary, upon the instructions of the directors, files the application for the conversion from private to public company to the RoC along with, inter alia, the following documents:

(a) an extract of the resolution of the shareholders of the company (as described above);

(b) the relevant RoC forms;

(c) the register of shareholders certified by the secretary or the director of the company;

(d) a copy of a bank statement indicating that the company has complied with the minimum capital requirements as set out above;

(e) an affidavit confirming the true and accurate translation of the above documents (where necessary); and

(f) the company's prospectus or the statement in lieu of the prospectus.

The RoC will then review the application and, provided that all of the requirements have been met, a certificate of change of name will be issued. 

The whole procedure for the conversion of a private company to public usually takes around four weeks. Said timeframe varies from case to case, depending on the workload of the RoC and the ability of the parties to act in a prompt and timely manner. Generally speaking, the time frame for convening the meeting of the shareholders is 21 days, unless the shareholders consent to the holding of the meeting in fewer days than the statutory period. The drafting of the necessary corporate documents and the amendments to the articles of association usually takes 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).

The second phase of the conversion is the process of having the company listed. 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 these two methods). In order to list a company on the CSE, both general and specific listing conditions must be met.

Depending on the market on which a company wishes to be listed, different listing requirements apply.

More specifically, the following general listing requirements apply to companies that are about to be listed on the Regulated Market:

• 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 for handing over its Registry to the Central Depository and Registry, where applicable;
• most part of the Company's revenues or assets shall not derive from shipping companies' activities unless the issuer is a Shipping Company; and
• the Company has at least four Directors.

In terms of companies which want to have their shares listed on the Emerging Companies Market, the following listing requirements apply:

• 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 shall be held by a satisfactory number of investors;
• the Company should be ready for handing over its Registry to the Central Depository and Registry, where applicable;
• the Company should have prepared audited accounts, operated regularly and had 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).

Further, it should be noted that, in cases where an issuer has its securities listed on a foreign stock exchange, it shall firstly comply with the terms and conditions of the CSE before proceeding with the listing in Cyprus.

Finally, every company that wishes to list its securities on the CSE is given the opportunity to choose between the Regulated Market and the Emerging Companies Market. Since each market has its own particularities regarding the publishing of the prospectus, someone may distinguish two listing procedures, as follows:

• Regarding the Regulated Market, a company must publish a prospectus which later on must to be submitted to CySEC by the prospective issuer for approval before its publication.
• The Emerging Companies 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. 

3. Regulatory architecture: Overview of the regulators and key regulations

IPOs in Cyprus are governed by numerous and complex laws and regulations enacted in accordance with the European legal and regulatory framework on such matters. The main legislation which governs IPOs is Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017, as amended, on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market (the "Regulation"), and Public Offer and Prospectus Law (L.144(I)/2005), as amended (the "Prospectus Law"). The Prospectus Law was enacted in Cyprus for harmonisation with 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 has been repealed by the Regulation, which is directly applicable in Cyprus and inevitably amends the Prospectus Law. As a result, the provisions of the Regulation (including its supplementing regulations and guidelines) have been applicable in Cyprus since 21 July 2019. In view of the Regulation's full applicability, CySEC has announced that the drafting of a new law regulating matters that need to be determined as per the Regulation will repeal the Prospectus Law. Other principles that govern IPOs are also provided in the Companies Law and the Code, as described herein. In addition, on 4 March 2021, ESMA issued Guidelines on disclosure requirements under the Prospectus Regulation, which should be used by CySEC and each person who is responsible for the information given in a prospectus.

It must be noted that the Prospectus Law provided some specific authorities to CySEC for the governing of an IPO in Cyprus. Following the new Regulation, on 5 July 2019, CySEC was appointed as the competent authority responsible for the duties set forth in the Regulation and for compliance with it, as per Article 31 of said Regulation. CySEC will also be approving the prospectuses, which will be drawn up and distributed as per the Regulation.

As per the applicable laws and regulations, the final form of the prospectus is signed by the offeror or the person asking for the admission of securities to trading on a regulated market. It is also signed by any person whom the prospectus lists as responsible for providing the information stated therein. Where the offeror or the person asking for 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 at all times by the president of the board and the managing director or managing directors, where there is more than one). These people are responsible for the accuracy, completeness and clarity of the prospectus, while ensuring that the information contained therein is up to date. Further, every public offer involves an underwriter who is at least responsible for the collection of the purchase value of the securities offered. Such underwriter shall oversee the safe keeping of the money paid by the participants to the public offer and shall 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. The underwriter, who is responsible for the drawing-up of the prospectus, also signs the prospectus.

In order to help issuers to recover from the economic shock resulting from the COVID-19 pandemic, the European Parliament and the Council have amended the Regulation by creating a new short-form prospectus (the "EU Recovery Prospectus"), which is easier to produce and understand as well as easy to be scrutinised by the competent authorities. The EU Recovery Prospectus will apply until 31 December 2022.

Furthermore, due to the COVID-19 pandemic, the threshold for exemption of obligation to publish a prospectus in the case of an offer or admission to trading on a regulated market of certain non-equity securities issued in a continuous or repeated manner is increased to the amount of €150,000,000 (total aggregated consideration in the European Union for the securities offered) per credit institution calculated over a period of 12 months, provided that those securities:

• are not subordinated, convertible or exchangeable; and
• do not give a right to subscribe for, or acquire other types of, securities and are not linked to a derivative instrument.

This applies from 18 March 2021 to 31 December 2022.

4. Public company responsibilities

In terms of public companies' responsibilities, public companies, and especially publicly listed companies, are under stricter control than private companies. In comparison to private companies, public companies shall fulfil, inter alia, the following obligations:

(a) have at least seven members (there is no maximum);

(b) have at least two directors; and

(c) have a minimum authorised and paid-up share capital of CYP 15,000 (€25,629).

Publicly listed companies are subject to a stricter regulatory regime than non-listed companies. In particular:

(a) when a company is listed on a regulated market, it is obliged to publish on its website a number of documents when convening its general meeting, including the notice of the meeting, stating the total number of shares and voting rights at the date of the notice, copies of the draft resolutions or comments from the directors for each item on the proposed agenda of the general meeting, and copies of the forms to be used by a proxy to vote;

(b) notification obligations on any increases or updates of the shareholdings or voting rights (i.e. dispersion report on a quarterly basis, information on transactions of directors and major shareholders for companies listed on the Regulated Market);

(c) 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;

(d) depending on the market on which companies are listed, further obligations are imposed as to 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), obligation to announce the holding of a board of directors meeting in advance; and

(e) compliance obligations with the provisions of the Market Abuse Regulation 596/2014 of the EU (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.

Regarding corporate governance standards in Cyprus, no particular legislation is currently in place for private or public companies, other than the Companies Law, which provides principles for the operation and management of a company. On the other hand, companies that are listed on the CSE may follow the recommendations of best business practices in Cyprus as well as international practices, as provided by the Code. 

The aims of the Code are, inter alia:

(a) to strengthen the monitoring role of the board of directors in listed companies;

(b) to protect minority shareholders;

(c) to adopt greater transparency; and

(d) to provide timely information, as well as sufficient safeguarding, on the independence of the board of directors in its decision-making.

The Code further provides principles for enhancing the relationship between the managing body and the company's shareholders.

5. Potential risks, liabilities and pitfalls

The process of becoming listed on the CSE, and conducting an IPO, entails important risks, which require a high level of diligence from the lawyers, auditors, financial consultants and the company itself. Taking professional advice is of utmost importance to avoid any such risks.

As explained above, the persons signing the prospectus are accountable to the investors for the information provided therein. Unless the case concerns malicious intention by the persons signing the prospectus, such claim has a statutory bar of two years after the allocation of the securities or their admission to trading on a regulated market.

Further, the underwriter responsible for the drawing-up of the prospectus, as mentioned above, shall be liable to the investors who acquired securities based on erroneous, deficient or insufficient information contained in the prospectus and for any loss suffered by those investors as a result of the drop of the price of the securities after the deficiencies in the prospectus were revealed. Such claim against the underwriter is time-barred a year after the allocation of the securities or their admission to trading on a regulated market.

Any person issuing statements for the drawing-up of the prospectus, with its professional capacity, is liable from the investors' perspective for any loss suffered in the event the prospectus contains inaccuracies or material omissions due to deficiencies in those statements.

Publicly listed companies are at all times obliged to comply with the particular listing requirements of the CSE. In particular, investing in the Emerging Companies Market entails a higher risk, since it is governed by a simpler regulatory framework designed to meet the needs of small and emerging companies; as such, enhanced 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.