Capital Markets Union: Making it easier for smaller businesses to get financing through capital markets

Part of the EU’s Capital Markets Union (CMU) agenda, today’s initiative should help EU companies to tap market-based funding more easily and cheaply so that they can expand.

Despite the benefits of stock exchange listings, EU public markets for SMEs can struggle to attract new issuers. This is why the Commission, as announced in the Mid-Term Review of the CMU Action Plan in June 2017, wants to adapt existing EU rules on access to public markets. This complements a comprehensive series of measures already adopted by the Commission since the launch of the CMU to improve access to market-based finance for SMEs.

The aim is to cut red-tape for small and medium companies trying to list and issue securities on ‘SME Growth Markets’, a new category of trading venue dedicated to small issuers, and to foster the liquidity of publicly-listed SME shares. The new rules will introduce a more proportionate approach to support SME listing while at the same time safeguarding investor protection and market integrity.

Valdis Dombrovskis, Vice-President responsible for Financial Stability, Financial Services and Capital Markets Union said: “Broadening access to market-based finance for our small and medium sized companies is at the heart of the Capital Markets Union project. Today out of the 20 million SMEs in Europe, only 3,000 are listed on stock-exchanges. We want to change this. We propose rules that will make it easier for SMEs to access to a wide range of funding at all stages of their development and to raise capital on public markets.”

Jyrki Katainen, Vice-President responsible for Jobs, Growth, Investment and Competitiveness said: “Given the crucial role played by scaling-up SMEs in creating growth and jobs, it is essential to ensure that all the right incentives are in place for these companies to grow. After key proposals targeted at SMEs, including on crowdfunding and venture capital finance, we now further ease SMEs’ access to public markets.”

Today’s initiative should boost the number of initial public offerings (IPOs) by SMEs and enable companies listed on those markets to attract a broader range of investors. A more liquid market will facilitate the trading of SME shares thanks to a high number of buyers and sellers, making it easier for SMEs to get funding. At the same time investors in SMEs would be able to turn investments into cash more easily, ultimately contributing to the creation of jobs and growth in the EU.

Main proposed changes to SME listings rules:

• Adapt current obligations to keep registers of persons that have access to price-sensitive information so as to avoid excessive administrative burden for SMEs, while ensuring that competent authorities can still investigate cases of insider dealing.
• Allow issuers with at least three years of listing on SME Growth Markets to produce a lighter prospectus when transferring to a regulated market. A prospectus is a legal document with information an investor needs to have before making a decision whether to invest in the company. Today’s proposal goes even further than the already overhauled and simplified prospectus rules in terms of making it easier for firms to tap Europe’s capital markets.
• Make it easier for trading venues specialised in bond issuance to register as SME Growth Markets. This will be done by setting a new definition of debt-only issuers. Those would be companies that issue less than EUR 50 million of bonds over a 12-months period.
• Create a common set of rules on liquidity contracts for SME Growth Markets in all Member States, in parallel to national rules. This refers to agreements between issuers and financial intermediaries (a bank or an investment firm) for buying and selling shares of and on behalf of the issuer. By so doing, the financial intermediary enhances the liquidity of the shares.

This initiative encompasses a legislative proposal which brings technical amendments to the Market Abuse Regulation and the Prospectus Regulation, and further technical amendments to delegated acts under the Markets in Financial Instruments Directive (MiFID II). The proposed amendments should boost companies’ listing on SME Growth Markets in a way that preserves the core EU rules established to restore confidence in financial markets after the financial crisis.

The proposal for a regulation amending the market abuse and prospectus rules will now be discussed by the European Parliament and the Council. The amendments to the MiFID II delegated act will now be published online for a four-week consultation, after which they will be adopted by the Commission and sent to the European Parliament and the Council for their scrutiny.

Background

Facilitating SMEs’ access to finance at each stage of their development is central to the Commission’s Capital Markets Union project. Much has already been achieved in facilitating SME’s access to finance, notably simplified prospectus rules. Requirements for SME growth markets which enable smaller companies to get equity capital and debt finance (bonds) also entered into force in January 2018. But more still needs to be done: the number of SME initial public offerings today has halved compared to 2006-2007.

Companies listed on an SME Growth Market are required to comply with several EU rules, such as the Market Abuse Regulation, the Prospectus Regulation or MiFID II. However, in many respects, EU laws do not differentiate between larger and smaller companies. For example, the Market Abuse Regulation applies to all share issuers irrespective of size. With today’s proposals, the Commission wants to establish a more proportionate regulatory environment to support SME listing while safeguarding investor protection and market integrity.

Today’s proposal was announced in the Mid-Term Review of the Capital Markets Union Action Plan in June 2017 and follows much ground-work, including a public consultation between December and February 2018. It also builds on the results of the Call for Evidence on the regulatory framework for financial services. The proposals are the first of a set of actions (the ‘SME Listing Package’) designed to help revive IPOs by SMEs in the EU. It notably includes the launch of a study on SME research provision and a reflection on the role that public financial support could play.