EU Technical Experts Make Recommendations on Improving Access for SMEs to Capital Markets05/25/2021The EU's Technical Expert Stakeholder Group on SMEs has published a report, including a set of recommendations to improve the capacity of SMEs to access the capital markets. It remains to be seen how much of these the Commission and other legislative bodies will take on board. Some of the recommendations echo those of the report by Lord Hill on the U.K. Listings Review, the focus of which was how to amend the U.K.'s listing regime to ensure the continued attractiveness of the U.K. as a capital markets hub (rather than focusing on SME's).
The main issues and recommendations identified in the EU report are:
1. Need for a single SME definition. The report suggests that work is undertaken to define all publicly listed companies on any type of market whose market capitalization is lower than EUR 1 billion as small and medium capitalization companies (SMCs), and to align the definitions of SMEs by referring to SMCs across different pieces of financial services legislation.
2. Listing requirements are too onerous. The recommendations include: (i) issuing guidance to stock market operators to simplify their listing rules; (ii) adopting, on a permanent basis, a simplified prospectus, similar in its form to the Recovery Prospectus, for secondary issuances; (iii) limiting the number of pages of an IPO prospectus for SMC issuers to 300; (iv) allow SMC issuers to prepare their prospectus in English, as the customary language in the sphere of international finance, independently from the official language accepted by the national competent authority; and (v) abolishing the requirement to print a prospectus and incentivize the use of the electronic forms.
The U.K. Hill Review called for a fundamental review of the prospectus regime very much focused on making a prospectus a much more useful and less onerous document for investors to read and issuers to prepare, taking account of the type of issuance for which it is being used, including (i) differentiating between the need for a full prospectus for public offers and possibly different listing documentation for an admission of shares to trading on a regulated market; and (ii) recognizing that the full disclosure and reporting required by an IPO prospectus is not likely to be necessary or appropriate for a secondary offer by an established listed issuer and that in such cases considerably slimmed down prospectuses or even confirmation of there being no significant change to already disclosed market information might be the norm.
3. Market abuse regime is too onerous. The report recommends that the EU Market Abuse Regulation is amended to: (i) clarify what constitutes inside information and when it should be disclosed; (ii) simplify obligations for insider lists, market soundings and persons discharging managerial responsibilities transactions; (iii) establish a more proportionate punitive regime; and (iv) clarify the EU liquidity contract regime to reflect existing practices.
The Hill Review recommended that within the Government's Future Regulatory Framework Review, priority should be given to a review by HM Treasury and the Financial Conduct Authority of the U.K. Prospectus Regulation and also other listed company regulations (such as MAR and the Transparency Directive) to ensure that the regulatory framework fits better with the U.K.'s capital markets and the issuers making use of them.
4. Lack of flexibility for share structures. The report recommends the introduction of an option for issuers who wish to list or are already listed on an exchange or MTF to adopt multiple voting rights structures, such as dual class shares and/or loyalty shares.
5. Lack of pre-IPO support. It is proposed that the EU should establish a pre-listing sandbox for listed SMCs (for up to two years).
6. Lack of harmonized minimum good corporate governance principles. The report suggests that the EU designs a set of corporate governance disclosures that could be beneficial to SMCs, namely: (i) reporting of related party transactions; (ii) disclosure of acquisition/disposal of voting rights; (iii) appointment of at least one independent director for issuers with a market capitalization above a certain threshold; (iv) appointment of one individual to manage relations with investors; and (v) minimum requirements for delisting, which would aim to protect minority shareholders.
7. Need to broaden retail investor base that invest in SMEs. The report recommends adding a specific category of "qualified retail investor" or "knowledgeable retail investor," subject to certain criteria, and revising the definition of professional client to include a wider pool of investors.
View the report by the EU Technical Expert Group on SMEs.
You may like to view our client note, "UK Listing Regime Reform", March 8, 2021.
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