Stock exchange for SMEs to kick off soon in Hungary

  • by VLPlus

Last autumn, the Budapest Stock Exchange (BÉT) launched Xtend, an alternative trading platform to help financing mid-size enterprises. The project is in progress, BÉT is now monitoring companies whose shares will be traded with expectedly from Q4. We summarized what are the legal and financial conditions for companies to enter this alternative stock exchange.

Equity crowdfunding may be a buzzword in the UK and US but the Hungarian legal framework does not support such platforms for two reasons: the requirements for offerings are designed for bigger companies that are fit for the stock exchange as well and the intermediary platforms are subject to a license from the Hungarian National Bank (MNB) for investment services.

However, the Capital Market Act of Hungary introduced two years ago a new provision allowing BÉT to “operate platforms supporting capital investments to companies” and now we can see the reason behind. Apparently, there will be no equity crowdfunding platforms in the near future in Hungary and the need for alternative financing of SMEs will be satisfied by Xtend, the new multilateral trading facility (MTF) operated by BÉT.

Let’s see how an MTF could be an alternative for a traditional stock exchange. The key difference is that trading on an MTF is subject to a lighter regulatory framework where companies shall only publish an information document instead of a detailed prospectus and their reporting obligations are way easier to comply with than the onerous reporting system of listed companies. On the other hand, it has to be noted that both the types of investors and the types of companies are different: a traditional stock exchange is dominated by institutional investors who trade with shares of companies in a developed phase from different industries whereas the MTF is a place for a limited number of investors with a high risk investment strategy who prefer trading with shares of startups from the IT, biotech or renewable businesses.

So what is the status now in Hungary? BÉT presented Xtend last autumn as the future alternative stock exchange for SMEs. Currently there are ten registered investment service providers who will trade with the new shares. It will soon turn out which companies will be the first players on this new market as BÉT is currently reviewing the eligibility of applicants for the trading to start expectedly in Q4.

Why would Xtend be an alternative for SMEs compared to the traditional stock exchange? First of all, it is not necessary to transform the company into a public limited company. (Nevertheless, only companies limited by shares are eligible because shares are the only securities that represent membership in a company according to Hungarian Law.) Secondly, as opposed to a public offering on a stock exchange, the company is not obliged to prepare a prospectus and have it approved by the MNB provided the total value of the offering is below 5 million EUR. Moreover, the company is not obliged to comply with IFRS accounting standards.

These are significant facilitations as the costs of preparing a prospectus along with other costs of a public offering on a stock exchange (audits, advisors) may well amount to tens of millions of Forints whereas on Xtend there is only a one-off registration fee of HUF 300,000 and a procedural fee of HUF 1.1 Million. The only additional administrative cost is that the company shall appoint a qualified advisor who acts as a mentor for the company in entering Xtend and trading with the shares (the annual fee is HUF 500,000). We are excited to see which companies will be the first players on the new market.