European Union companies seeking to raise less than 500,000 euros ($529,000) on capital markets wouldn’t need to issue a prospectus for investors under draft streamlined rules intended to ease access to funding for small businesses.
The European Commission proposed raising the bar on prospectuses from 100,000 euros as part of a broader plan to boost the economy and create jobs. The EU’s executive arm also wants to extend simpler rules for less complex prospectuses to companies with a market capitalization of 200 million euros, double the current limit.
“We need a prospectus regime that gives investors the information they need, but that does not pile up unnecessary costs and put companies off raising money on the public market,” Jonathan Hill, the EU’s financial-services chief, said in a statement on Monday. The new rules should be up and running “within a couple of years,” he told reporters in Brussels.
Changes to the prospectus regime are part of Hill’s plan to build an EU capital markets union. Updating the prospectus rules is expected to be one of the politically easiest elements of the plan, which aims to expand financing alternatives to bank lending and which also will tackle tougher goals like tax and insurance regulation.
Frequent issuers would qualify for a five-day fast-track approval process in exchange for a commitment to file a “universal registration document” to supervisors every year, containing all relevant information on the issuer. This would help companies take advantage of financing windows and avoid being shut out of capital markets by red tape.
Listed companies that want to issue new shares or debt also benefit from simplified prospectus rules that allow “more flexibility and less paperwork,” the commission said, adding that 70 percent of the prospectuses approved each year are for listed companies.
In an attempt to boost secondary-market liquidity, Hill proposed removing the incentives in current rules to issue debt securities in large denominations.
“The favorable treatment granted by the Prospectus Directive to non-equity securities with a denomination per unit (i.e. the nominal value of the securities) of 100,000 euros or above has changed issuance denominations which may have led to unintended consequences and making a significant share of bonds issued by investment-grade companies inaccessible to a wider range of potential investors,” the commission said.
While the proposed rule changes “will certainly increase the available financing options for the real economy,” high fixed costs for accessing capital markets will still prevent many small companies from benefiting, according to Markus Ferber, a German member of the European Parliament. As a result, bank financing will remain “paramount.”
“Unfortunately the European Commission as well as the European Central Bank have come up with new burdens for banks time and time again, which makes SME lending increasingly burdensome,” Ferber said. “This comes with a severe risk to thwart possible successes of the capital markets union. A holistic perspective by the European Commission is what is needed more than ever.”