SMEs and access to the capital markets: TheCityUK on “creating an equity culture”
Published on 29th Jul 2015
TheCityUK – the body set up in 2010 to promote the UK financial and professional services industry – has published its report on access to the capital markets for the small and medium enterprise (SME) sector.
Capital markets currently play a relatively small role in SME financing, with 70% of finance coming from bank loans. The report looks at ways to reduce SMEs’ dependence on bank loans at a time when the ability (and willingness) of banks to lend is still constrained, and at how to help SMEs raise capital in other ways more quickly and cheaply. The report was commissioned by the UK Government as part of its Spring 2015 budget. We look at some of its key recommendations and findings below.
Principal recommendations
TheCityUK’s main recommendations are to:
- increase SMEs’ awareness of the capital markets options available;
- provide more information and greater incentives to equity investors in SMEs;
- make it easier to raise capital and list on unregulated markets, and at a lower cost;
- during an IPO, make information available to investors earlier in the process by publishing a core registration statement, followed by research;
- get rid of the blackout period between the publication of analysts’ research and the publication of the prospectus;
- encourage retail investor participation in IPOs;
- harmonise the approach taken to listings by national listing authorities across Europe, encouraging pan-European offerings; and
- reduce the prospectus disclosure requirements for secondary issues.
TheCityUK recognises that some of its conclusions are not new. For example, the proportionate regime for rights issues has tried to reduce disclosure requirements in rights issue prospectuses, but TheCityUK has not identified any occasions where an issuer took advantage of that regime.
Taking more transactions out of the prospectus regime
The report suggests increasing the threshold at which the prospectus regime comes into play. Currently, offers of securities with a total value of less than €5 million (subject to a 12 month look-back) or those that are offered to fewer than 150 investors (excluding certain exempt sophisticated investors) per EEA state are exempt from the requirement to publish a prospectus. Comparing these thresholds with the new Reg A+ regime in the United States – where transactions under US$50m are potentially exempt from the equivalent to the EU prospectus regime (see box below)) – TheCityUK calls for these thresholds to be raised to “a more meaningful level“.
The new US Reg A+ regimeAs part of the effort to make capital more accessible for small businesses, the US JOBS Act authorized the US Securities and Exchange Commission (SEC) to exempt annually up to US$50 million of a company’s securities issuances from the registration requirements of the Securities Act of 1933 (broadly speaking, the equivalent of the EU prospectus regime). The new regime was introduced last month, and is known as Reg A+. Reg A+ provides for two tiers of offerings. Companies in Tier 1 can offer up to $20m of securities and those in Tier 2 can offer up to US$50m of securities. To qualify, the issuer must primarily direct, control and coordinate the company’s activities from the US or Canada. Those who offer US$20m or less have a choice as to whether they opt for Tier 1 or Tier 2. A company may choose to comply with the more rigorous reporting requirements applicable to Tier 2 to access additional benefits such as exemption from state registration requirements. Under both Tiers a company is required to file an offering statement, which is subject to review and comment by the SEC. Once the SEC is satisfied, it will issue a “qualification statement” which must be obtained prior to completion of the securities offer. There is no time limit for the SEC to finish its review. However, it is possible to engage in “test the waters” communications before and after the filing of the offering statement by discussing a potential Reg A+ offering with potential investors. |
Splitting the prospectus and abandoning the blackout period
Both the ABI (now the Investment Association) in 2013 and Lord Myners’ independent review for the Department of Business, Innovation and Skills in 2014 made recommendations on improving the IPO process, including earlier publication of prospectuses, changing the approach to the blackout period and enabling a broader range of independent research to be made available to investors. TheCityUK’s proposals on making information available earlier and getting rid of the blackout period go further than the ABI and Lord Myners’ recommendations, however, and would represent a significant change to current practice.
Current market practice is for the announcement of a company’s intention to float to be followed by a period of around two weeks where analysts connected with the underwriters on the IPO brief potential investors on the company. At the end of those two weeks, the pathfinder prospectus is published and the price range for the offer based on initial feedback from key potential investors. There is then a further period of approximately two weeks of management presentations to investors and bookbuilding by the underwriters before final pricing is announced and allocation takes place. The gap between the publication of connected analyst research and the publication of the prospectus is called the “blackout period”.
TheCityUK proposes that the prospectus is split into a core registration statement – containing all information about the company and to be published much earlier in the process (potentially some months before) and before any connected research – and a much shorter securities note setting out the details of the securities being offered and the price or price range. The registration statement would be pre-approved by the listing authority so that it could be used as a basis for independent research and give investors an opportunity to provide pricing feedback which took account of the information disclosed in the document. Once an issuer had published the registration statement, they could then launch the IPO relatively quickly without needing to wait for a blackout period.
Whether or not banks will be happy to abandon a blackout period without legislative intervention remains to be seen – the report acknowledges that, whilst the current blackout period is unpopular, no-one has felt able to break ranks given the perceived risks of liability for analyst research which is conflated with the prospectus.
Osborne Clarke comment
It is not clear what the next steps following the report’s publication will be. It is set within the context of the continuing debate on how to create a single market for capital (a Capital Markets Union, or CMU – a development which we look at here) across the EU which involves a significant number of stakeholders, and which would require greater harmonisation not just of legal systems but of differences in local capital markets practices, which are often significant. In our view, of all the recommendations set out in the report, substantial raising of the thresholds for triggering the existing prospectus regime would be the single most straightforward and cost-effective means of improving access to equity finance for SMEs.
The report itself acknowledges frustration at the lack of change arising from the recommendations for improving IPOs made by the ABI and Lord Myners: “It is hoped to do more than just add to the already considerable weight of support for these recommendations and that real action will follow. The recommendations in the two previous reports are achievable, require only limited regulatory change and are very strongly supported“.
Source: TheCityUK: Capital Markets for Growing Companies – a review of the European listings regime
