Hamilton & Associates Securities Lawyers

Posted by Brenda Hamilton, SEC Attorney

The popularity of the Frankfurt Stock Exchange (FSE) is demonstrated by the increasing  number of U.S. companies seeking to go public by listing on the FSE. Many U.S. issuers are seeking to go public direct on the Frankfurt instead of the OTC Markets and U.S. Stock Exchanges. Like U.S. listed companies, issuers are able to list on the FSE using a direct public offering or by completing a reverse merger with a public shell. Currently there are more than 3,200 U.S. companies on the FSE.

The FSE is owned and operated by Deutsche Börse, which also owns the clearing company Clearstream. The FSE is the largest stock exchange in Germany and boasts a share turnover of over 90% , making it the world’s 3rd largest trade-place for stocks, as well as the world’s 6th largest by market capitalization.

The FSE’s fully electronic trading system Xetra® functions similar to the Depository Trust Company (“DTC”) in the U.S. and  is one of the leading electronic trading platforms in the world.  Many U.S. issuers with Global Locks and DTC Chills of their securities perceive the FSE as a viable alternative to U.S. electronic trading. With its launch in 1997, the FSE succeeded not only in strengthening its own competitive position, but also created attractive framework conditions for foreign investors and market participants. Many U.S. issuers also believe that the FSE offers lower legal and compliance costs.

The FSE encourages investor relations activity and stock promotion, road shows and other promotional activities. The securities of companies listed on the FSE are free trading, even those held by controlling shareholders and management of the listed company.

Access to Capital Not only will issuers find it easier to get listed, they may find it is easier to get funded with an FSE listing. The FSE has access to greater than 1/3 of the world’s investment capital. With more than 250 international trading institutions and more than 4,500 traders worldwide, the FSE receives massive exposure to investor capital. Investors directly connected to the FSE represent a full 35% of the world’s investment capital. This means that a listing on the FSE gives companies access to more than 1/3 of all the investment capital in the entire world. And Germany happens to be home to the largest capital market conference in all of Europe, with over 5,500 participants and more than 100 exhibitors every year.

Enhanced Liquidity The FSE does not impose restrictions on the sale of securities including securities held by officers, directors and beneficial owners. There are no restrictions on tradability or registration requirements.

Prohibition Against Naked Short Selling In June of 2010, Germany passed a regulation banning naked short selling. Critics blame short sales as being a major cause of the U.S. market downturns. Naked short sales occur when short sellers manipulate stock prices by taking naked short positions, where they sell the stock without actually owning it. Then, they use negative news announcements to drive down the stock price so that they can cover their short position at a much lower price.

Timely Approval Process From the time it is submitted, a listing on the FSE takes only 5 to 6 weeks to complete.

Limited Regulation It is extremely costly to adhere to the requirements of Sarbanes-Oxley. It is so costly that since the Sarbanes-Oxley Act was passed, many U.S. companies have found the ongoing expense to be reason enough not to be public and have since gone private.

FSE is a Stock Exchange The FSE is an internationally recognized stock exchange, just like the NASDAQ or the New York Stock Exchange (NYSE). The liquidity of stocks listed on the FSE is the highest in all of Europe, including the London and Paris Stock Exchanges. Market liquidity and trading volume on the FSE is ranked number three in the world, behind only the NASDAQ and NYSE but without their listing requirements.

Frankfurt Listing Categories In Europe, there are two ways of accessing the capital market: (1) the European regulated markets and (2) markets that are regulated by the stock exchanges themselves. On the FSE, companies that are listed in the Regulated Market are admitted to the General Standard or to the Prime Standard. Companies that trade on the Open Market, which is regulated by the stock exchange, may be admitted to the First Quotation Board. The Entry Standard segment issuers in the General and Prime Standard fulfill the highest European transparency requirements and gain all the advantages of a full listing. The Entry Standard is particularly suited for small and medium-sized companies.

First Quotation Board All companies with an initial listing in the Open Market are included in the First Quotation Board, which is directed at domestic and international companies for a cost-efficient and fast admission of their shares to trading. The First Quotation Board application for inclusion must contain a clear description of the security to be included as well as provide detailed information on the issuer’s business in either the form of a prospectus or issuer data form, both of which are subject to approval by the national regulatory authority. Companies listed in the First Quotation Board must comply with the rules of European law including insider trading rules, market abuse directive and the provisions governing public offerings.

The basic requirements for the First Quotation Board are as follows: 1. The company must have had €500,000 in paid in capital or assets at some time prior to listing. The €500,000 in paid in capital or assets must be confirmed by a letter from a certified auditor or admitted attorney. 2. The company must provide a list of 30 shareholders, their address and the number of shares they own. 3. The application must be submitted by a market participant. 4. Proof of minimal nominal value of shares to be included or certificates amounting to €.1.

Entry Standard This is a segment of the Open Market. Its legal framework is defined by the “General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market on the Frankfurt Wertpapierbörse”. This segment is open to companies that want to include their securities in quick, easy and cost-effective trading with reduced formal requirements. Entry Standard companies have to publish audited annual financial statements, including a management report, in German or English within six months of the end of the reporting period. The financial statements must be prepared in accordance with national accounting standards (nat. GAAP, e. g. HGB in Germany) or International Financial Reporting Standards (IFRS*). Interim reports must be published no later than three months after the end of the first six months of every financial year. In addition, company news items that could be of significance for the valuation of the company’s shares must also be published. A brief company profile which is to be updated annually must be made accessible on its website, as well as a continuously updated corporate action timetable.

General Standard This segment is subject to the statutory requirements for the Regulated Market. The General Standard regulations are binding for all companies seeking a cost-effective listing in an EU-regulated market. The General Standard is suitable for companies that primarily target national investors. Issuers in the General Standard who are domestic issuers must publish an annual financial statement within four months of the end of the financial year. This includes the annual financial statement, which is approved in accordance with the national legislation of the country in which the company is domiciled, a management report and a so-called “Balance Sheet Oath”.

If the company is an allied company, the annual financial statements must also be compiled at the consolidated company level where the international reporting standards in accordance with IFRS / IAS or under specific preconditions, U.S. GAAP, Canadian GAAP or Japanese GAAP must be applied. In addition, a domestic issuer must publish a half-yearly financial statement within two months of the end of the reporting period. Interim reports must be published for the first and third quarters and include all essential events of the reporting period. The issuer must also publish company news items that could influence the stock market price in ad hoc disclosures. Reaching, exceeding or falling short of reporting thresholds must also be disclosed.

Prime Standard Above and beyond the requirements for the General Standard, the Prime Standard requires issuers to meet international transparency requirements. This is because the Prime Standard is tailored to the needs of companies wishing to position themselves to attract international investors. It offers investors the highest transparency standards in Europe. Issuers in the Prime Standard have to fulfill additional transparency obligations compared to companies in the General Standard. For example, they are obligated to prepare quarterly financial statements and to maintain a corporate action timetable in the Internet. Prime Standard companies have to report in English and in German, and must hold at least one analyst conference per year.