Views on improving the integrity of global capital markets
28 May 2015

EU Prospectus Directive Reform to Ease Investor Access to SME Information

It is not easy being an expanding, but still small and medium-sized enterprise (SME) in Europe. In addition to the usual growing pains of a company anywhere, expanding across the European Union (EU) Member State borders is more challenging than the concept of ‘EU Single Market’ suggests.

CFA Institute has been covering SMEs’ funding challenges in a policy brief, a member survey, and ongoing blog coverage. Back in June 2013 we also covered SMEs’ access to bank and nonbank financing in our response to the European Commission’s Green Paper on the long-term financing of the European economy.

This spring the Commission has renewed its focus on SMEs under the Capital Markets Union (CMU) umbrella framework (please see my previous blog post for further information). The CMU initiative aims at harmonising European capital markets; facilitating cross-border investments; and easing SMEs’ access to capital. Traditionally, European SMEs receive approximately 70% of their funding from banks and only 30% from other sources — these numbers are roughly the other way around in the US. CFA Institute believes that the Commission’s re-focus on SMEs is important in the context of increasing jobs and growth in the EU. After all, SMEs are the backbone of the European economy and deserve support from adequate, harmonised legislation.

In conjunction with the Green Paper on the CMU, the Commission issued a public consultation on the revision of the Prospectus Directive. The Commission sought feedback on how the European prospectus regime could be simplified, without compromising investors’ need for trustworthy and transparent information. Indeed, if the prospectuses are of equally high quality and conform to the same standards in all Member States, the prospectus acts as a ‘quality check’ on the securities that are admitted to trading. Within the Prospectus Directive revision, the Commission is also trying to understand how the prospectus regime could be applied specifically to SMEs.

CFA Institute Member Survey: SME Credit Information Not Available

Interestingly, the lack of investment in European SMEs could be partly explained by the perception that credit information on unlisted SMEs is not easily accessible. In our recent member survey, 83% of the respondents maintained that the information is not accessible, while only 6% believe it is.

SME Credit Information

One of the goals of the Prospectus Directive revision is just that: to make the information on European SMEs more accessible to cross-border investors. This is a valuable cause that CFA Institute supports. Nonetheless, while we recognise the hardship such supplementary information may have upon SMEs, we also believe that investors need this information in the form of a prospectus in order to adequately understand the risks associated with such enterprises. Indeed, the information may be more important in the case of SMEs because of the limitations they have regarding access to capital, revenue sources, sales markets, and management expertise. Consequently, we believe that all issuers should adhere to the same disclosure requirements.

If the EU legislators decide that a proportionate disclosure regime should be applied to SMEs, we believe that such companies should be required to list on SME Growth Markets. A specific SME Growth Market ‘tag’ would clarify that SMEs operate on a specialised platform that do not have to adhere to the same transparency and governance requirements as required of traditionally listed companies.

Approval Procedure Differences

Several respondents to our member survey noted that despite the current legislation, prospectuses are in practice assessed differently by different national competent authorities. The ‘surprise element’ applies to both the approval regime within the Member States and the format of the approved prospectus. Without security on the outcome of the approval process in other Member States, issuers find it challenging to enter the markets outside of their home country. On the other hand, investors may also shy away from prospectuses that do not meet the same quality and format requirements in all the Member States. To ensure a level playing field and to simplify the administrative processes associated with preparing, filing, and reviewing prospectuses, there should not be a difference in prospectus requirements according to where a security is issued or listed. Such a requirement would also reduce the scope for regulatory arbitrage and uphold high common standards of disclosure for prospective investors across the EU.

Our members similarly noted that there are several question marks on the practical application of insolvency laws in Europe. Without a full understanding and certainty of how the insolvency procedures unfold in the different Member States, it may be unnecessarily risky for investors to enter markets where there is little or no protection for investors in case of insolvency.

A Move away from ‘Phonebook Prospectuses’

Despite aiming for the opposite, the current legislation may have caused European prospectuses to expand in length. This is because of the enhanced focus on liability regimes and the issuers’ fear of being sued for not providing adequate amount of information in the prospectuses. To the opposite effect, many investors now find it more challenging to discern relevant information in the documents. Some of the prospectuses are several hundred pages long, causing the average investor to keep clear of the ‘phonebooks’ and potentially make risky investments without sufficient knowledge of the products. While CFA Institute does not support determining an exact maximum number of pages, we believe that the prospectuses should minimise the volume of extraneous information, or to include information by incorporation of reference.

The Commission has also introduced the idea of having a single European repository for prospectuses. The centralised database would provide a number of benefits to investors across the world, though the effective functioning of it would have to require issuers to file prospectuses both in the language of their headquarters and in English. Such a requirement would create an efficient mechanism for harmonised, simultaneous, and broad dissemination of all information across all national boundaries within the EU and beyond, and in the languages investors understand. While it may cost issuers more to translate filings into different languages, they would benefit from lower costs of capital resulting from a wider pool of investors.

The Commission has now started to go through the responses it has received to the consultation. With the upcoming summer recess ahead, it is unlikely that further details of the revision will be shared until September. Nonetheless, we at CFA Institute eagerly wait for the Commission’s feedback and look forward to further informing the EU policy makers with the ideas of our members on how the revision of the Prospectus Directive could help the European economy to get back on its feet through heightened cross-border investments in SMEs.

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About the Author(s)
Maiju Hamunen

Maiju Hamunen was an analyst for the Europe, Middle East, and Africa (EMEA) region in the Capital Markets Policy Group at CFA Institute. She was responsible for developing research projects, policy papers, articles, and regulatory consultations that advanced the policy positions of CFA Institute.

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