CopiedUnderstanding Market Soundings: A Guide to Compliant Capital Raising

Market soundings can be an effective and integral part of raising capital, as they can help businesses identify investor interest and potential terms for deals. However, it is critically important that the market soundings are conducted in compliance with the EU Market Abuse Regulation (MAR) to avoid inside information being improperly disclosed or misused.

This leads to challenges and questions for businesses interested in performing market soundings prior to a transaction. Knowing when certain MAR obligations are triggered, how to obtain consent from investors correctly, or which parts of the process should be documented are all part of the overall process. This article aims to shed light on these issues and challenges, guiding the reader through the key steps of a compliant market-sounding process.

What Are Market Soundings? Copied

Market soundings deal with any communication that takes place between the issuer of the investment or transaction opportunity, the potential investors, and any advisors on either side of this relationship before the actual announcement has been made.

Typically, this is done to gauge interest, explore whether a deal is feasible, help make decisions regarding the timing, size, structure, or pricing of the transaction, or to better understand the attitudes and interests of possible investors.

This is mainly done to help the issuing business gain important insight into the sentiment revolving around the transaction or market, allowing them to adjust their offer and further communication accordingly to obtain the best chances for success.

A well-executed market sounding can lead to an overall better outcome due to less uncertainty and a better understanding of how investors think, how the market might react, and how pricing, timing, and structure should be adjusted to match investors’ expectations.

During the process of market sounding, sensitive details that might be classified as inside information can play a big part in the communication between the issuer and potential investors. This might include non-public information such as the structure, price range, or timing of the transaction.

While these details are often necessary to include in market soundings, they are also heavily regulated by MAR. Therefore, the process will need to be handled extremely carefully to disclose information correctly without exposing the issuer to compliance risks that could lead to severe consequences.

Market Abuse Regulation (MAR) Copied

Market soundings fall under the scope of Market Abuse Regulation (MAR), which was introduced to prevent insider trading, unlawful disclosure of inside information, and market manipulation. MAR provides a structured framework to ensure transparency and regulatory compliance during market soundings, requiring both Distributing Market Participants (DMPs) and Market Sounding Recipients (MSRs) to adhere to strict guidelines.

While multiple MAR articles apply to market soundings, Article 11 is particularly significant, as it defines how market soundings should be conducted, the obligations of the DMP, and the requirements for handling inside information. In addition to Article 11, Articles 17, 18, and 19 are also crucial, as they govern disclosure of inside information, insider list management, and personal account dealing, respectively. Each of these articles plays a role in ensuring that market soundings are conducted in a structured and compliant manner, reducing the risk of market abuse.

The Market Sounding Process Copied

The market sounding process must be carefully structured to comply with the EU Market Abuse Regulation (MAR) while maintaining trust among investors and safeguarding market integrity. The specifics may vary depending on the issuer, but a few core stages apply to most market soundings.

One of the key elements of a compliant market sounding is the clear distinction between the roles of Distributing Market Participants (DMPs) and Market Sounding Recipients (MSRs):

• Distributing Market Participants (DMPs): The parties conducting the market sounding, such as investment banks, corporate issuers, or financial intermediaries. DMPs are responsible for ensuring compliance by assessing whether inside information is involved, obtaining explicit consent from MSRs, and documenting all communications for regulatory purposes.
• Market Sounding Recipients (MSRs): Investors or other stakeholders receiving the market sounding information. MSRs must acknowledge receipt of the information, determine whether they are in possession of inside information, and ensure they do not trade on undisclosed material information.

A structured market sounding process helps both DMPs and MSRs meet their compliance obligations under MAR. Below are the key stages:

1. Internal Assessment of Information Copied

Before initiating a market sounding, DMPs must assess whether the information they plan to disclose is classified as inside information. This assessment is crucial, as it determines whether additional compliance measures—such as obtaining MSR consent or maintaining insider lists—are required.

The DMP should consider:

• Precision: Is the information specific enough to impact investment decisions?
• Non-Public Status: Has this information been shared publicly?
• Potential Impact: Would this information influence the price of the securities if made public?

If the information is deemed inside information, the insider list must be updated, MSRs must provide explicit consent before receiving details, and DMPs must control the flow of information accordingly.

2. Approaching Investors (MSRs) and Securing Consent Copied

Once a market sounding begins, DMPs must obtain explicit consent from MSRs before sharing potentially sensitive information. This step ensures that MSRs understand their regulatory obligations and agree to handle the information appropriately.

Key steps include:

• Explaining the purpose of the market sounding and identifying the transaction scope.
• Informing MSRs that they may receive inside information and explaining their obligations under MAR.
• Requiring MSRs to confirm receipt of information and their understanding of compliance responsibilities.
• Documenting the consent process and maintaining clear records for regulatory audits.

DMPs must also add MSRs to insider lists where applicable, ensuring transparency in information flow.

3. Conducting the Market Sounding Copied

Once the internal assessment and MSR consent process are complete, the market sounding can proceed. DMPs will communicate transaction details to MSRs, often through structured discussions, while ensuring full compliance with MAR regulations.

To maintain compliance, DMPs should:

• Use pre-approved scripts and predefined talking points to prevent unintentional disclosure of inside information.
• Limit discussions to authorized individuals who understand MAR requirements.
• Document all market-sounding communications to ensure a complete audit trail.

Regulators require detailed records of these interactions, making proper documentation a critical compliance requirement.

4. Post-Sounding Documentation and Compliance Checks Copied

After conducting a market sounding, DMPs must ensure that all documentation is complete and that regulatory requirements have been met. This includes:

• Updating insider lists (if inside information was shared).
• Keeping records of all communications with MSRs.
• Conducting internal audits to verify compliance with MAR obligations.

Best Practices for Market Soundings Copied

Market soundings require a structured and well-documented approach to remain compliant with Market Abuse Regulation (MAR). Issuers must take proactive steps to ensure regulatory compliance while maintaining efficiency and transparency throughout the process. By following established best practices, both Distributing Market Participants (DMPs) and Market Sounding Recipients (MSRs) can mitigate legal risks and avoid unintentional breaches of compliance.

1. Establish Clear Internal Policies Copied

DMPs should develop internal procedures that define how market soundings should be conducted, including who is responsible for compliance oversight, how investor consent is obtained, and how communications are documented. Clear policies help ensure all soundings are conducted within regulatory boundaries.

2. Use Pre-Approved Scripts and Templates Copied

To prevent the risk of unlawful disclosures, DMPs should use pre-approved communication templates and structured scripts when conducting market soundings. This ensures that only necessary and compliant information is shared with MSRs, reducing the risk of insider trading concerns.

3. Ensure Proper Investor Consent & Compliance Awareness Copied

Before disclosing any details, DMPs must obtain explicit consent from MSRs to participate in a market sounding. MSRs should also be informed of their obligations regarding inside information to prevent compliance violations. Maintaining a record of all consents ensures audit readiness.

4. Assign Compliance Oversight to a Designated Individual Copied

A compliance officer or designated representative should oversee the market sounding process, ensuring that all regulatory steps are followed, NDAs are secured, investor consent is recorded, and communications are properly documented. DMPs should ensure that compliance personnel have full visibility into the process.

5. Leverage Third-Party Compliance Solutions Copied

Many issuers work with compliance service providers to ensure full adherence to MAR requirements. These providers offer:

• Regulatory expertise to navigate MAR obligations.
• Automated compliance solutions for tracking investor consent, maintaining insider lists, and recording market-sounding communications.
• Monitoring tools that flag potential compliance risks before they become regulatory issues.

Using Technology as a Tool Copied

Due to the complex regulations that require issuers to keep track of investor consent, maintain insider lists, assess inside information, and more, many companies are using software solutions to help speed up the process, eliminate risks, and manage the market sounding process more effectively.

These tools can help streamline the overall process, providing a structure that key employees can follow and reference while automating tasks such as documentation, recordkeeping, and workflow tracking. They can also be valuable resources that provide useful overviews of who received what information, when consent was obtained, and the current status of each market-sounding activity.

Many tools also include time-saving features that can help remind staff members to follow up on certain actions, generate reports automatically, or improve the ability to collaborate and share information safely. Thus, these features reduce risk and make complying with the regulations easier and more efficient.

Conclusion Copied

Market sounding can be extremely valuable for issuers looking to explore investor interest and raise capital efficiently and successfully. However, issuers must comply with the EU’s Market Abuse Regulations to avoid unlawful disclosure of inside information and potential market abuse violations.

In particular, articles 11, 17, 18, and 19 are critical regarding market soundings, which can be demanding regarding manpower, resources, and knowledge. They require extensive documentation, obtaining consent from investors, creating and maintaining accurate insider lists, and more.

Given this complexity and the potential consequences of not complying with MAR, many issuers and advisors seek outside help by partnering with an experienced service provider specialising in compliance solutions

Logwise simplifies market-sounding compliance with automated wall-crossing, documentation, and regulatory oversight tools, helping your business stay compliant without added complexity.

Get started today and ensure a seamless, compliant market-sounding process.