SWITZERLAND: An Introduction to Capital Markets
Framework Conditions for Capital Markets in Switzerland
Companies from across the globe and stemming from a wide range of industries which are looking to raise capital are continuously attracted by Switzerland’s economic conditions and the success of the Swiss capital markets. Switzerland boasts a legal and regulatory framework ensuring competitiveness as well as compliance with internationally recognised standards while maintaining a “Swiss finish” and further offers a healthy, long-established and yet dynamic financial ecosystem.
Issuers placing shares or fixed income instruments with investors are regularly supported by both Swiss and international investment banks. Their high placing power is one of the aspects making the Swiss capital market an attractive and effective choice for issuers. In fact, a significant number of transactions taking place in Switzerland are structured as 144A offerings targeted at qualified investors, which shows the Swiss capital markets’ ability to reach an international investor base. State-of-the-art financial market infrastructures further contribute to the Swiss market’s appeal – as do internationally renowned industry clusters, such as for pharmaceutical and biotech companies. An additional boost comes from Switzerland’s continuous leading ranking in the WIPO (World Intellectual Property Organization) Global Innovation Index for the past 13 years.
The Swiss regulatory environment is deservedly known for being stable and well developed, leaving market participants with a certain degree of flexibility at the same time and contributing to attractive framework conditions for the capital market. This flexibility is partially due to Switzerland’s long tradition of self-regulation by the industry, which allows for a much faster legislative action and the adoption of tailored, practical rules.
Overview of the financial market infrastructure
Two stock exchanges operate in Switzerland: SIX Swiss Exchange (part of the SIX Group) and BX Swiss. Both are stock exchanges within the meaning of the Financial Market Infrastructure Act of 19 June 2015 and licensed and supervised by the Swiss Financial Market Supervisory Authority (FINMA).
On both exchanges, shares, bonds, exchange traded funds and structured products are listed and traded. BX Swiss is traditionally the listing venue favoured by smaller (typically Swiss) companies, whereas the issuers on Swiss Exchange also include multinational corporations. SIX Swiss Exchange accommodates for smaller companies who wish to tap into the capital markets for financing their activities with a dedicated listing segment tailored to their needs (so-called SPARKS segment). In addition to the more traditional trading segments, in late 2021 SIX Swiss Exchange created its listing standard for SPACs and in 2022 it introduced a listing standard for global depository receipts (GDRs), targeting mainly Chinese issuers. GDRs represent underlying shares which have been deposited with a depository bank and are tradable securities similar to American depositary receipts (ADRs).
The listing process and the listing requirements are subject to the exchanges’ self-regulatory powers. Prospectus requirements, however, are governed by the Federal Act on Financial Services (FinSA) of 15 June 2018 and are to a great extent aligned with those applicable in the EU. Prospectuses vetted and approved by the competent authority in an EU member state and a number of other jurisdictions are considered approved in Switzerland too, facilitating the extension of public offers to different countries.
Spotlight on selected legal reforms
A few legal reforms are worth mentioning, which may (directly or indirectly) impact the capital market and its players. While some of these new norms have already entered into force, some of them are still in the making and may still change or be further shaped/impacted by international developments.
ESG reporting becomes effective
The Swiss corporate law reform addresses a wide array of matters focusing on the liberalisation of capital provisions, the strengthening of shareholder rights and new ESG disclosure duties (so-called “non-financial reporting”) and related obligations, whereas the latter can be considered as the most significant development. Under the relevant provisions, Swiss public companies (ie, companies subject to an ordinary audit) and financial institutions, who employed more than 500 FTE and had a balance sheet of more than CHF20 million or a turnover of more than CHF40 million (in each case calculated on a consolidated basis in two consecutive years), have to report on non-financial matters for the first time in 2024 on the financial year 2023. Moreover, the Federal Council has recently anticipated that the threshold of 500 FTE will be lowered to 250 FTE to align with EU requirements.
In addition, enterprises as well as business partnerships, whose registered office, central administration (Hauptverwaltung) or principal place of business (Hauptniederlassung) is in Switzerland, are subject to due diligence and reporting requirements regarding their supply chain if they import or treat conflict minerals or offer goods and services that face founded suspicion of child labour. The scope of application for these obligations is therefore broader than that for non-financial reporting duties. Swiss law offers certain exemptions from these reporting obligations.
Steps to prevent greenwashing
In line with the new ESG reporting requirements and related obligations and the growing attention of investors for “green” instruments, the Swiss government is taking further steps to address greenwashing and thus misleading clients about the sustainable characteristics of investment products.
In December 2022, the Swiss government tasked a working group with presenting a proposal on how to address greenwashing in the financial sector. After evaluating the input from the working group, the Federal Department of Finance has proposed to adopt principles-based state regulation at the ordinance level, which could be supplemented by industry self-regulation. The consultation draft is expected by the end of August 2024. However, if the financial industry presents a self-regulation solution that implements the government’s position effectively, the Federal Department of Finance may abstain from presenting a proposal.
The expected proposal should focus on the following goals.
- Financial products or services should only be advertised as being sustainable if they are compatible with at least one specific sustainability goal or contribute to achieving a sustainability goal. This should ensure that financial products and services that are aimed at reducing ESG risks are labelled as sustainable only if they pursue a sustainable investment goal in addition to a purely financial one.
- Providers of sustainable products or services should be able to disclose how they intend to achieve the sustainable investment goal they pursue. Moreover, providers should report regularly on the selected sustainable investment goals, and compliance with the transparency requirements should be verifiable by an independent third party.
- Clients should have recourse to legal remedies.
Further initiatives aimed at promoting sustainable investments are being taken on the self-regulatory level, such as the guidelines of the Swiss Banking Association for the financial providers on the integration of ESG-preferences and ESG-risks into investment advice and portfolio management, which entered into force earlier in 2023.
Foreign Investment Screening Act
Until recently, Switzerland’s legislation pertaining to foreign investments has been limited to very specific sectors, eg, the financial sector, residential real estate, aviation, telecommunications, etc. However, following an initiative of the Swiss parliament, a general foreign investment screening regime is now in the making with the goal to prevent takeovers that would endanger public order or security. After the receipt of a significant criticism in connection with a consultation process for the initial draft, the proposal published in December 2023 narrows the scope of application in principle to acquirers that are foreign state-controlled and which intend to invest into a Swiss company operating in a critical sector (eg, energy and water supply or suppliers in the defence industry).
Tightening of / new criminal provision in the regime for public takeovers
On 29 September 2023, the Swiss Parliament adopted an amendment of the Swiss Financial Market Infrastructure Act and introduced a new criminal law provision. In the event of untrue or incomplete information in the prospectus or announcement of a public takeover offer, the responsible persons may in future be punished with a fine of up to CHF500 million. Provided no referendum is called by 18 January 2024, the new provision will enter into force on 1 February 2024.
Is the Swiss capital market out of the crisis?
Notwithstanding the challenges brought by the COVID-19 pandemic, the ongoing conflict between Russia and Ukraine, the energy crisis that ensued from it and the significant aggravation of the conflict between Israel and Palestine, the capital market activity in Switzerland and the Swiss economy in general fared relatively well in the past few years. However, like the global markets, the Swiss markets are also still confronted with great uncertainty. Moreover, in response to rising inflation, which is, however, much lower in Switzerland compared to other jurisdictions, and negative interest rates, since September 2022 the Swiss National Bank has been gradually raising the interest rate paid on sight deposits, which have now reached 1.75%.
These factors keep affecting the equity capital markets in Switzerland and potential IPO candidates postponed their plans to 2024. It is still unclear whether further IPO candidates will take a chance in 2024. Nevertheless, 2023 showed some momentum, especially towards its end. The first Swiss De-SPAC transaction closed in December 2023 and the listing of GDRs, a trend started in 2022 and met with a keen interest in particular from Chinese issuers, remained strong in 2023 with eight issuers listing their GDRs on SIX Swiss Exchange, and a few other successful equity offerings having taken place, strengthening the hopes for 2024. The debt capital market issuances showed a strong momentum as many issuers (Swiss and foreign) took advantage of the favourable interest rate environment.