TheCityUK has published a report on the European listings regime which sets out various recommendations for the markets' stakeholders (the Report). In the Government's March 2015 Budget, the Chancellor of the Exchequer invited TheCityUK to review the European listings regime in order to inform the debate around the European Commission's commitment to create a single Capital Markets Union (CMU). The fundamental purpose of a CMU is to break down barriers to raising finance on the European capital markets for issuers, particularly SMEs. Click here to read the Commission's Green Paper on the CMU.
SMEs are key to European business
The Report emphasises the importance of SMEs which make up 99% of businesses across the EU. Capital markets play a small role in financing growth for these enterprises, which are thought to be heavily reliant on bank lending and consequently, are vulnerable to the restrictive lending trends following the global financial crisis. The Report's findings support the CMU's objective to making Europe's capital markets more accessible by facilitating quicker, cheaper and easier fundraisings which should benefit all businesses, regardless of their size and maturity, but also supports that regulation should preserve protection for investors.
Click here to access the Report which sets out key recommendations for stakeholders in the European listings regime. Below, we summarise the main recommendations which have been split by the following three categories:
Initial capital raisings
- Increase the awareness of capital markets options to SMEs. SMEs must be educated on the different options available and how to prepare for the fundraising process. There should be clear signposting of more appropriate options for SMEs at their different stages of development.
- Provide more information to potential investors in SMEs. The Report recommends the creation of EU-wide credit registers which make available information on SME's creditworthiness.
- Increase incentives to invest in SMEs. The Report cites the UK's abolition of stamp duty on the purchase of shares trading on AIM as an example of such an incentive. A significant boost in the AIM market's daily trading is attributed to the move - and so the Report encourages other Member States to implement similar initiatives.
- Minimise the complexity of listing on an unregulated market. This could be achieved by limiting the scope of the European listing regime (for example, the application of the Prospectus Directive) to regulated markets only – and should not be extended to multilateral trading facilities, such as AIM, which should be subject to less regulated regimes.
- Adopt further measures to manage costs.Consideration should be given to making equity issuance costs deductible for corporation tax purposes (as is the UK position for debt interest costs).
IPO: Admission to regulated market
- Making information available sooner. The Report suggests that the prospectus should be split into a core registration statement published prior to analyst research and a securities note which would be published later. Additionally, it recommends that the black-out period should be removed between the publication of analyst research and the publication of the prospectus.
- Increase quality of information. Non-connected research should be made more available and prospectuses should be focussed and relevant.
- Broaden investor participation. There should be the ability to move the price range of securities without triggering withdrawal rights of retail investors.
- Increase investor confidence in pan-European offerings. The approach of national competent authorities to prospectus review and approval should be harmonised across Member States. A minimum standard of corporate governance requirements should be co-ordinated and implemented by Member States.
Post IPO: Follow-on capital raisings
- Reduce the prospectus disclosure requirements for follow-on issuances. The Report suggests that the disclosure requirements contained in the annexes of the Prospectus Regulation could be heavily reduced by removing those requirements which an issuer is already required to comply with under the Transparency Directive. Additionally, an issuer should not need to repeat information in a prospectus to the extent it has already disclosed it to the market and where it is available on a dedicated section of the issuer's website.
Report echoes key messages from similar market reviews – can we expect to see change?
Some of the Report's recommendations endorse certain recommendations set out in other well publicised reports on the UK's equity capital markets, such as the ABI's 2013 report on 'Encouraging Equity Investment' and the Lord Myners report on 'IPOs and Bookbuilding in future HM Government Primary Share Disposals'.
The reports emphasise the value in making the prospectus available earlier to investors in an IPO process and also recognise that to do so, the black-out period, which is seen by most UK stakeholders to be unnecessary, should be reduced or eliminated. There is, of course, the obvious 'elephant in the room' in the debate over this point - that is, whether there is any actual risk of litigation from US investors if the blackout period is eliminated? The FCA is yet to publicly comment on this issue but if and when it does, we expect that this will open up the debate and inform how the market will proceed.
The Report also picks up on some key points raised by various respondents to the Commission's recent Prospectus Directive review, which forms part of the CMU workstream. In particular, there appears to be a general call for shorter and more focussed prospectuses and less disclosure required for follow-on capital raisings. It is hoped that the Commission's proposals for a new prospectus regime, expected to be published this autumn 2015, will pick up on some of these recommendations.