Intricacies of Placement Business in Financial Markets in Europe

Josef Bergt
2023

Introduction

The concept of "Placement Business," as delineated in MiFID 2 is a financial service requiring licensing as an investment firm. This article aims to provide an analysis of the legal framework surrounding Placement Business, focusing on its defining characteristics, regulatory requirements, and exceptions to licensure obligations. The objective is to elucidate the complexities inherent in this financial service, thereby offering a nuanced understanding for legal practitioners, financial service providers, and scholars alike.

Defining Placement Business

The Core Elements

Placement Business is characterized by the placement of financial instruments without a firm commitment to underwrite. The activity must meet the following criteria:

• Sale of financial instruments
• In a third-party name
• For a third-party account
• Within the context of an issuance
• With a placement agreement
• Without a firm underwriting commitment

The Nature of Financial Instruments

The financial instruments in question must fall under the purview of MiFID II, encompassing a wide range of assets such as equities, debt securities, and derivatives. The activity is confined to the sale of these instruments, thereby excluding any acquisition-related transactions.

Agency and Representation

The placement must occur in "open representation," meaning that the placing party acts in a third-party name for a third-party account, typically for the issuer. Activities conducted in "concealed representation" do not qualify as Placement Business but may fall under the definition of financial commission business.

Context of Issuance and Placement Agreement

The activity must be conducted within the context of an issuance, which refers to the first issue of a specific number of securities by an issuer. A placement agreement must exist between the issuer and the entity conducting the placement, specifying the terms and conditions of the placement.

Regulatory Requirements

Licensing Obligations

Any entity intending to engage in the Placement Business must obtain licensing from the competent national supervisory authority for this investment service. The licensing requirement is irrespective of the legal form of the entity and is triggered if the activity is conducted on a commercial scale or requires a commercially organized business operation.

A placement business only exists if no firm underwriting commitment is made. A "firm commitment underwriting" occurs when a company commits to acquiring an issuance of financial instruments at a predetermined price, thereby also assuming the sales risk.

In the following cases, a placement business is not present:

• If a company makes a firm underwriting commitment during the placement process of financial instruments, thereby assuming the sales risk (known as "firm commitment underwriting"), this constitutes an issuance business.
• If a company, due to uncertain placement expectations, makes a firm underwriting commitment only for a portion of the issuance and reserves an option for the rest of the instruments to be placed (known as "options consortium"), this activity also falls under the category of issuance business.
• If a company takes on guarantees that are economically equivalent to a firm underwriting commitment, it performs the issuance business.

Geographical Scope

The licensure requirement applies if the business is conducted domestically, even if the target clients are non-residents. The domestic operation criterion is met if the company has its headquarters in the respective member state or maintains a legally dependent branch or other physical presence from which it conducts business.

Exceptions to Licensure Obligations

Certain exceptions exist, such as the "group privilege", which exempts companies conducting Placement Business exclusively within their corporate group. 

Source: BaFin Factsheet Placement Business

Executive Summary:

• Placement Business is a complex financial service with specific defining characteristics, including the sale of financial instruments within the context of an issuance based on a placement agreement for a third party without a firm underwriting commitment.
• Regulatory requirements mandate licensing from the competent national supervisory authority as an investment firm.
• Exceptions to licensure requirements exist, providing avenues for specific types of business models to operate without obtaining formal permission.