LUXEMBOURG: An Introduction to Capital Markets

Capital Markets in the Grand Duchy of Luxembourg 

The challenges faced by the markets today, notably higher-for-longer interest rates, call for greater consideration of financing through market-based solutions. More diversified financing in the form of debt and equity is particularly important for young, innovative companies without established revenue streams to scale up and realise their growth potential. Improving firms’ access to market-based sources of financing is a key objective of the capital markets union (CMU) – the European Union’s (EU) plan to create a single market for capital. The Grand Duchy of Luxembourg is the EU’s third leading financial centre and ranks as the most globally integrated EU market . The country has therefore a role to play in enabling companies to access international markets to finance their activities. Its comprehensive capital markets infrastructure, international expertise and robust yet flexible company laws are key draws for firms to structure their capital markets transactions in Luxembourg. Effective capital markets are also a prerequisite for the success of the Grand Duchy’s sustainable finance agenda. In this respect, Luxembourg has been ranked 5th among the world’s financial centres by the Global Green Finance Index and has confirmed its role as a hub for sustainable finance, attracting investors with a wide range of sustainable financial products. Luxembourg is also home to the leading sustainable finance platform, the Luxembourg Green Exchange (LGX), listing half of the world’s green bonds .

Equity markets outlook and spotlight on SPACs 

Equity markets around the world rebounded in 2024 as investors became more confident that central banks would be able to control inflation and reduce interest rates shortly. The equity primary markets in the EU have seen an increase of initial public offerings (IPOs) in the first quarter of 2024, with investors appearing to regain interest in IPOs after years of reduced activity. As capital raising is expected to continue as a longer-term trend, it is worth noting the special purpose acquisition companies (SPACs) which present a compelling alternative to traditional IPOs for companies to access the markets. SPACs are typically shell companies listed on public markets with the sole purpose of merging with a privately held business (target) selected on the basis of an investment strategy defined by the SPAC’s sponsors. The main advantage of a SPAC deal is its speed. The entire SPAC process can take up to six months, whereas the traditional IPO often takes around 12 months thereby reducing the time during which market conditions could negatively impact the process. Investors looking for innovative investment opportunities are likely to welcome high-quality SPAC offerings as they open capital markets to a broader range of companies such as start-ups, tech or biotech. It is to be noted that several SPAC and de-SPAC deals have already been implemented in Luxembourg.

Structure of voting rights 

Flexibility for issuers to choose how to distribute voting rights in their company may influence their decision on whether or not to access public markets. Luxembourg company law allows the creation of different classes of shares with or without voting rights. In order to provide issuers with even more flexibility, the EU legislators have recently agreed on a new directive on multiple-vote share structures . The implementation of this new directive could increase the number of IPOs in the EU. Multiple-vote share structures are a form of control-enhancing mechanism enabling controlling shareholders to raise capital from the public while retaining decision-making power in the company by holding shares of a class carrying more votes per share than another class. Currently, most of the EU Member States, including Luxembourg, do not allow for multiple-vote share structures. The scope of application of the directive is limited to initial admission to trading of shares on multilateral trading facilities (MTFs) as defined in Directive (EU) 2014/65 (MiFID II), such as the Euro MTF market of the Luxembourg Stock Exchange (LuxSE). The directive is expected to be approved by the EU legislators before summer 2024 and transposed into national laws by summer 2026 at the latest.

Access to the EU regulated markets 

Within the same package of measures as the directive on multiple-vote share structures, the EU legislators reached an agreement on the Listing Act . The new regulation aims at easing access to the EU regulated markets by alleviating the costs of drawing up prospectuses, notably by amending Regulation (EU) 2017/1129 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market and Regulation (EU) No 596/2014 on market abuse. The key changes of the Listing Act are notably the widening of the scope of exemptions from the obligation to publish a prospectus with respect to secondary issuances, the introduction of a new standardised EU Follow-On Prospectus for secondary issuances and the removal of the obligation for issuers to disclose inside information relating to intermediate steps of a transaction. The new provisions are expected to be approved by the EU legislators before summer 2024 and to become directly applicable in the EU Member States within 15 to 18 months of their entry into force.

Sustainable investments and ESG reporting 

Investors are increasingly incorporating environmental, social and governance (ESG) factors into their decision-making processes and are expected to continue to seek sustainable offerings in 2024. Luxembourg is fully committed to sustainable finance and is structurally prepared to welcome investors seeking sustainable products. For instance, the LuxSE’s Luxembourg Green Exchange (LGX) is the world’s largest platform dedicated exclusively to ESG bonds, with over EUR1 trillion issued through more than 3,600 listed securities. Its recent initiative to flag gender-focused bonds demonstrates its commitment to link finance with social development. As sustainable investments become more popular, the risk of greenwashing (misleading sustainability claims) increases. One of the acts aiming to improve transparency on ESG issues is Directive (EU) 2022/2464 as regards corporate sustainability reporting (CSRD), amending Directive (EU) 2013/34, which is currently being transposed in Luxembourg by bill of law 8370. CSRD focuses on enhancing the rules on sustainability reporting and extending them to a greater number of undertakings. In-scope entities will be required to disclose a range of data on their ESG impacts according to the European Sustainability Reporting Standards (ESRS) developed by the European Financial Reporting Advisory Group (EFRAG). Moreover, statutory auditors will be required to opine in particular on compliance with the applicable standards and the process implemented by an issuer to determine the information to be disclosed. The CSRD regime will progressively apply as from the financial year 2024 to all entities whose securities are admitted to trading on a regulated market in the EU (except micro undertakings). Luxembourg is currently the home Member State for over 380 issuers and the Luxembourg financial sector regulator (the CSSF) will gradually be in charge of controlling the application of the CSRD requirements.