MEP Neena Gill lays out her plan for more drastic prospectus reforms than those proposed under the Capital Markets Union
The commitment of the European Commission to build a single market for capital is as old as the EU itself. However, only since last year has the Capital Markets Union (CMU) taken centre stage and become an integral part of the jobs and growth agenda.
The need to expand and develop capital markets in the EU is clear. The bank lending-capital market funding split in the EU is 70%-30%, while in the US these figures are reversed. Despite having relatively similar GDPs, America's equity markets are twice the size of those in the EU. US small and medium-sized enterprises (SME) receive five times as much funding from capital markets as they do here in Europe. While we in the EU are not going to become like the US overnight, the fact is there is considerable scope for our financial markets to expand.
More integrated financial markets should enable companies, especially SMEs, to gain better access to capital markets across borders. At present, they face too many obstacles. Reforming the rules surrounding prospectuses could contribute to a more flexible capital raising process.
A prospectus is a vital document for, among other things, investors to make an informed assessment of the assets, liabilities and financial position of a company. The review of the Prospectus Directive is singled out in the CMU Action Plan as a high-priority action. The rationale behind this review is to reduce one of the main regulatory hurdles that issuers face when offering their equity and debt securities to the investing public. At the same time, the proposal aims to make the prospectus a more relevant tool to inform potential investors.
The Commission's proposal puts forward five main changes.
First, the amount of capital you can raise on the EU markets without a prospectus increases five-fold from €100,000 ($111,000) to €500,000. Member states have the ability to raise the limit to €10 million, which is twice the current amount.
Second, a special regime for smaller companies will be created. This will allow SMEs to produce simpler and cheaper prospectuses. Helping SMEs gain better and swifter access to capital markets is a central tenet of CMU.
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"At some 250 pages, the average length of a prospectus in the UK is more akin to a telephone book" |
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Third, the process by which companies that have already issued a prospectus but wish to make another foray into capital markets will be streamlined. Given repeat issuers account for 70% of all prospectuses today, this is an important development. These changes will speed up the process and could save listed companies up to €100 million per year.
Fourth, the Commission wants to create a 'frequent issuer regime,' meaning that approval times for companies that regularly seek market funding will be halved from 10 days to five.
Finally, the proposal seeks to shorten the prospectus document itself, making it far more useful for investors by clearly including the information they need – as well as reducing the burden on issuers.
I am the spokesperson for the Socialists & Democrats Group on this issue, and I welcome the Commission's proposals as a step in the right direction. However, the process for issuing a prospectus is too slow and too expensive. At some 250 pages, the average length of a prospectus in the UK is more akin to a telephone book. To say the least, it's quite a cumbersome exercise.
In 2014, 3,838 prospectuses were approved by national competent authorities of the EU/European Economic Area. Of those, just one in four were passported, meaning that three-quarters of the issuers raised capital in their own home country. To create the truly cross-border, pan-European CMU that Commissioner Hill envisages it must be easier, cheaper and quicker to issue a prospectus. The proposals must help SMEs raise capital, and avoid the unnecessary duplication of already-available information.
The Commission proposal lacks ambition in terms of achieving the real objectives of the CMU. Essentially, it means that member states could keep the status quo with a few minor tweaks. My preferred approach would be to strike a balance between sufficient investor protection on the one hand, and flexibility for issuers on the other. That would focus on creating greater synergies between member states in relation to thresholds and the time national competent authorities (NCA) take for approval; greater clarity on prospectuses issued by a company established in a third country; and better taking into account the needs of SMEs in different member states.
Finally, the development of what could be dubbed a Further Issue Prospectus would greatly ease the burden on issuers seeking more capital. Given that 70% of prospectuses are for secondary issuances, significant reform in this area could have a lasting impact. There is a distinct difference between the needs of investors in a company undergoing an initial public offering, and one seeking further capital and whose information is already in the public domain.
The key is therefore to work on the length of the document, to streamline the approval period of a prospectus by the respective NCAs, and to bring about transparency of legal costs as recommended by the European Securities and Markets Authority. After all, this should not be an exercise in lining the pockets of law firms.
The European Commission's proposals are the first steps on a long road, but greater ambition is needed to bring about real change. I will propose and seek support for these reforms in the European Parliament. I hope the Council will have the same level of ambition; after all, it is clear that we cannot go on with small tweaks to the status quo. Ambitious reform of EU prospectus rules would help channel the billions of euros of savings in EU citizens' bank into the real economy, rather than lying dormant with low or negative interest rates. Prospectuses are, after all, the gateway to the capital market.
By Neena Gill, member of the European Parliament