Notwithstanding the stated intention of the UK government to take back control, it remains important to keep abreast of legislative and other initiatives emanating from Brussels. This is because, in a rather strange twist of fate, the current state of sclerosis within the UK legislature and the likelihood of some form of transitional arrangement with the European Union renders it likely that most new UK legislative measures over the next few years will be as a result of EU legislative initiatives, even after Brexit finally takes effect.
The function of the single market, in particular in relation to capital and financial services, was always of great interest to the UK, not least because London has long been, and remains, the EU’s dominant market place for such services. The UK was formerly in a position of major influence, with its former Commissioner, Lord Hill, being the European Commissioner responsible for financial stability, financial services and the capital markets union. The UK government gave that up when Lord Hill stepped down in the summer of 2016. However, the capital markets union project continues, even without British leadership.
MIFID II (which was implemented on 3 January 2018) has created the new label of an “SME Growth Market” to encourage the adoption of flexible rules which encourage SME listings and the use of capital markets to fund the development of growth businesses. AIM, the subsidiary market operated by the London Stock Exchange (LSE), is by a long way Europe’s most successful market for growth companies and the LSE has been successful in getting AIM recognised as the first SME Growth Market, which is great news.
But European markets such as AIM could do better. There remains a dearth of growing European companies seeking to raise equity on the capital markets. Europe is producing only half of the SME IPOs that it generated before the financial crisis (300 on average from 2005-2007, compared with 172 in 2016). In the three years between 2005 and 2007 over EUR 30 billion was raised annually on markets such as AIM at the point of IPO. However, in the much longer eight-year period from 2008 to 2015 less than EUR 23 billion has been raised. The situation is especially acute in certain EU Member States, where mature capital markets do not exist.
The EU wants to see more SMEs using the capital markets across the Union and has launched a consultation on Building a Proportionate Regulatory Environment to Support SME Listing. A three-pronged strategy is required:
- making the markets more effective for SMEs;
- supporting SME growth more generally, encouraging these companies to come to the market; and
- using new, nimble and growing companies to create new market demand in those smaller member states which currently struggle to create and maintain public companies.
Capital markets were originally developed to connect capital with businesses which needed it. SMEs are at a stage of operation where equity funding is vital – they often will not be able to satisfy the conditions of banks to receive secured finance. Growing SMEs create new products and jobs and equip us all to face the challenges of the future. Accordingly, any initiative to support the development of risk capital and encourage the supply of companies to the capital markets is to be encouraged.
Key areas of focus are:
- supporting the pipeline of SMEs seeking to come to the capital markets;
- supporting the professional ecosystems to support companies at IPO stage in many (generally smaller) Member States (note that this is not a major issue in the developed London market);
- increasing institutional and retail investors to hold SME financial instruments, and making the cost of investing and maintaining these proportionate;
- alleviating the administrative and reporting obligations on SMEs whilst maintaining a vibrant market with sufficient and accurate information and ensuring investors remain protected;
- market abuse, transactions with persons discharging management responsibility and insider lists (all under the Market Abuse Regime); and
- supporting liquidity for companies on SME Growth Markets.
There is now a broad acceptance that the strict requirements of the EU prospectus regime and other local securities laws have prevented many companies from looking to the capital markets and raising funds outside of a home jurisdiction. After many years of work, in 2017 the EU agreed a new regime which loosened the Prospectus Directive requirements for SMEs. The current initiative seeks to build an ecosystem to support growth SMEs and to further alleviate administrative burdens on them. The alternative is that such companies would otherwise be turned away from European capital markets, into the embrace of private equity or foreign wealth or, alternatively, simply not grow. It is very significant that the EU is acknowledging that it is necessary for the regulatory environment to support SME listings to be “proportionate”, striking a balance between investor protection and quality assurance, but without strangling businesses before they can grow.
At the very minimum, the EU is working to highlight the issue and develop an initiative for us all to “get behind growth”. We should all work together to deliver more great, innovative European businesses.
The consultation runs until 26 February 2018