Smaller companies may find raising cash on the stock market easier if EU plans to cut its own red tape come into force – providing a lifeline for cash-strapped startups unable to access bank finance.
Companies hoping to list and raise less than €500,000 (£362,000) through issuing shares or bonds will no longer have to publish a prospectus – a lengthy document detailing the business, its finances and shareholding structure.
“We’re proposing a simpler, faster and cheaper regime that will make prospectuses more useful and help more companies unlock the investment they need to grow on capital markets,” said Jonathan Hill, the EU’s financial services commissioner who outlined the plans.
Since 2003, writing a prospectus has been mandatory for companies in the EU planning to raise over €100,000, a relatively small amount of money in markets.
The prospectus is the “springboard” to markets, Hill said, but can be disproportionately expensive, running to hundreds of pages and costing anywhere from tens of thousands of euros up to €1m. It is a rare admittance from the EU that its own rules are a hindrance to business.
The prospectus rules were supposed to make investment safer, through giving potential investors as much information as possible. But critics say only some of the detail is genuinely useful, and wading through hundreds of pages is onerous. For smaller firms, the costs of drawing up such a document are prohibitive.
“One of the main problems with a prospectus is that the regime effectively compels issuers to include any information that an investor might conceivably want. Given the legal implications, the result is a huge amount of boilerplate of little value and huge complexity,” says Ian Sayers of the Association of Investment Companies (AIC).
The changes, put forward by the European Commission and part of a wider spread of regulation known as the Capital Markets Union, could help to stimulate small business across the region as the market plugs the finance gap left by banks reluctant to lend to younger, riskier companies.
It could foster a Silicon Valley- style approach to raising money for early stage companies, where start-ups head to the market for finance rather than seeking bank loans or relying on the small world of business angels for venture capital.
Hill said across the EU companies raised €370bn through issuing shares or corporate bonds in 2014 – but in the US the figure was three times higher.
Freeing up capital is essential for the Eurozone economy, which is still struggling six years after the financial crisis. “Smaller companies are where most of the job creation is, where the growth comes from and most of the tax take, too,” says Gervais Williams, a fund manager from Miton Capital. “One of the ways of getting the economy booming is through embracing smallness.”
Other plans on the table include slimming down prospectus requirements for all businesses, while companies which have already issued one would be exempt from publishing another for secondary fund raisings.
There could also be the option for individual countries to tweak the rules so that no prospectus would be needed for share or bond issuance under €10m – up from the existing €5m.