Capital Markets & Financial Regulation News – November 2015-Capital Markets Union
- Capital Markets Union:
Towards new vital sources of funding for SMEs? - SMEs financing vehicles:
The role of the European Union Venture Capital Funds Regulation
(EuVECA)
Capital Markets Union
The European Commission has recently launched its
ambitious plan towards a true single market for capital in
Europe, a Capital Markets Union (CMU) (COM(2015)468
“Action Plan on Building a Capital Markets Union”). Its
creation is a key element of the Investment Plan announced
by the Juncker Commission in November 2014.
One of the main objectives of the CMU is the development
of a diversified financial system complementing bank
financing, while at the same time, small and medium-sized
businesses (SMEs) are placed at the forefront of the CMU
initiatives. Providing more funding options for Europe’s small
businesses has been recognised as essential for investment
and business. SMEs are the backbone of the European
economy, yet they are struggling to raise capital, particularly
during the important development phase.
Cross-border access to finance
Cross-border access to finance, as well as diversified
sources of funding (e.g. venture capital, crowdfunding
platforms, MTF platforms) presupposes a solid legal
framework promoting transparency and investor
protection, especially in cases not sufficiently regulated
such as non-listed companies and SMEs. European
regulators seem to place SMEs regulation and funding high
up on their agenda. On the other hand, national regulation
differs from country to country depending on the degree of
standardization for SMEs that the regulation intends to
provide.
The starting point of the new policy and regulation is the
opportunity for SMEs to promote themselves as promising
investment cases and, consequently, attract the interest of
financiers, especially funds, looking to spot -on a cross-
border basis- the best SME-opportunities to invest in. In
other words, policy makers and regulators are aiming at
implementing common standards for SMEs across Europe,
in order to boost competition between them in terms of
alternative sources of funding, while enable financiers, other
than banks, to compare investment opportunities across
Europe.
Pioneering and extrovert SMEs looking for financial partners
outside the banking sector, should abide by standards set
by law or best practices related to, inter alia:
(a) Transparency
(b) Disclosure
(c) Publication of best practices (payment methods
etc.)
(d) Corporate governance.
Even in cases where the national regulatory approach for
SMEs is still fragmented, it should be appropriate for SMEs
to adopt and promote best practices, mainly under a “Code
of Conduct” concept in line with the European standards.
For example, SME could adopt provisions for disclosing its
payment practices, the persons exercising an important
influence on its business operation or its credibility rating
and assessment by banks or other institutions (CRAs etc.).
Further and apart from the SME-targeted framework, SMEs
could also extract useful examples from listed companies
and their standards of increased transparency and
disclosure obligations. For example, listed companies have
to make public their annual financial statements, as well as
inside information concerning their operation or the financial
instruments issued. Moreover, shareholders in listed
companies enjoy a high level of protection through
European and national provisions concerning information for
shareholders, participation in general shareholder meetings,
voting rights etc. The underlying policy of all those
provisions for listed companies is ultimately investors’
protection. The same level of protection SMEs should aim to
achieve if they wish to satisfy investors’ requirements for
transparency, impartiality of the management body and
sound corporate governance before securing funding.
All in all, SMEs wishing to diversify their funding sources, in
times when banking finance has become scarce, have to
seriously consider reaching high business standards such
as those employed by other European SMEs or even those
implemented by listed companies wishing to consolidate
investor confidence. Legal expertise is needed to assist
SMEs in the new challenge as well as financiers wishing to
capture this business opportunity.
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