The European Commission wants to promote one of its flagship initiatives as far as financial markets are concerned: the creation of a unified European capital market. The aim of the Capital Markets Union is to facilitate access to funding for small and medium enterprises and to remove barriers blocking cross-border investments in the EU. One of the measures that is already being worked on is the modernization of the directive regulating the contents of the prospectuses that European companies have to publish if they want to be financed in the capital market. After consulting with the public last February, the European Commission launched a proposal on the reform of this directive in November.
With this change, the EU executive is looking to facilitate access to funding for SMEs by simplifying the information to be provided to perform an issue, while always ensuring proper investor protection.
A single capital market: current situation
On September 30, the European Commission presented its Action Plan to establish a single capital market for the 28 EU Member States. In this way, it seeks to reduce barriers to access capital markets and improve the flow of capital among states by diversifying investment options and expanding funding opportunities from within and outside the EU.
This Action Plan includes the reform of the 2003 European Prospectus Directive (revised in 2009) which led to a harmonization of rules on the publication of prospectuses in Europe. This regulation guaranteed that all prospectuses published by companies who come to the markets in the EU provide clear, complete and standardized information so that investors could make their decisions. By standardizing the norm at European level, confidence increased in all EU countries and cross-border investments were thus encouraged.
On September 30, the European Commission presented its Action Plan to establish a single capital market for the 28 EU Member States
Currently, virtually all companies that want to issue debt should publish a prospectus with the information necessary for investors to make their investment decisions. Among other matters, the prospectus describes the company and its activities as well as reporting on its financial statements and the shareholding structure. All these documents can add up to hundreds of pages and pose high costs for businesses, particularly SMEs. In addition, it can represent a significant overload of information for investors, which sometimes complicates finding the determining data.
For these reasons, the Commission has proposed a review of the Prospectus Directive and thus simplifying access to capital markets for companies.
A new proposal that favors SMEs
The Commission now wants to amend the regulations on prospectuses that businesses prepare before searching for funding in the markets. This “will mainly benefit small and medium enterprises and make the requirements simpler, less extensive and expensive, and more aligned within the EU, explained Jonathan Hill, the European Commissioner for Financial Stability, Financial Services and the Capital Markets Union.
The amendments in the Commission’s proposal include increasing the threshold at which companies must publish their prospectuses. The prospectus will not be necessary for issues lower than €500,000 (the threshold is currently €100,000). In addition, states can set higher thresholds for their internal market, up to 10 million euros (currently 5 million euros).
The European Commission also advocates smaller information documents that do not involve excessive costs in relation to the amount of the issue or the expected compensation for investors. In short, less expensive and less complex prospectuses for SMEs. The market capitalization threshold will be set at 200 million euros from 100 million euros today.
The EC also advocates prospectuses that are more summarized and have clearer information for investors, which do not have any legal jargon that is difficult for retail investors to understand.
The market capitalization threshold will be set at 200 million euros from 100 million euros today
Those companies that are already listed and want to make an additional issue of shares or debentures will have to publish a simplified prospectus, which will increase flexibility and reduce administrative costs. In addition, it will be backed up by a fast system for frequent issuers, which may use a universal registration document and receive fast approval within five days when they want to borrow on capital markets.
A single point of access to all Europeans prospectuses will also be encouraged. The European Markets Authority (ESMA) will provide free online access to all documents approved in the European Economic Area. In this way, investors will have a single portal where they can find the necessary information on listed companies. In addition, these documents will be available on the companies’ websites to ensure easy access in all the requested languages.
The change in the directive has now to be passed through Parliament and the European Council for adoption.
Securitization and other measures for the single market
But the Prospectus Directive is not the only measure proposed to boost the single capital market. Relaunching the securitization market is also a priority, as these instruments are an important source of funding and allow banks to grant more credit and sustain growth and investment,
The Commission has some other proposals in the pipeline, as advanced in November 2014 in a document entitled «An Investment Plan for Europe». This is the case of the regulation on long-term European mutual funds (FILPE) and the normalization of credit information on SMEs. All of these are areas in which any small degree of progress could quickly produce positive effects