On 24 May 2018, the European Commission proposed new, targeted rules that aim to make it easier for small and medium-sized enterprises (SMEs) to get funding through dedicated stock exchanges. The proposals form part of the EU's efforts to broaden access to market-based sources of financing for innovative and fast-growing companies under its capital markets union (CMU) project.

Investment and job creation

Newly listed SMEs are a key motor of investment and job creation in the EU. Between 2006 and 2012, for example, companies that listed their shares on First North Stockholm increased their workforce by 17% annually after the initial public offering (IPO). This compared to an annual growth of 5% for all private companies in Sweden. Listed companies are less dependent on bank financing and benefit from a more diversified investment-base, easier access to additional equity capital and debt finance (through secondary offers). They also have a higher public profile and brand recognition.

However, despite the benefits, EU public markets for SMEs are struggling to attract new issuers. The number of IPOs on SME-dedicated markets declined steeply in the wake of the financial crisis, and have not picked up significantly since. As a result, Europe is producing only half of the SME IPOs that it generated before the financial crisis: 478 IPOs on average per year in 2006-2007 compared with only 218 between 2009 and 2017 on junior markets specialised in SMEs. Between 2006 and 2007, an average of €13.8 billion was raised annually on European SME-dedicated multilateral trading facilities through IPOs. This amount fell to €2.55 billion on average from 2009 to 2017.

The responses to a recent public consultation launched by the Commission highlighted two major issues among the many factors behind this decline. On the supply side, issuers face high compliance costs and administrative burdens to list on public markets. On the demand side, insufficient liquidity can weigh on issuers (due to higher costs of capital), on investors (who can be reluctant to invest in SMEs in the first place due to low liquidity levels and related volatility risks) and on market intermediaries (whose business models rely on customers order flow in liquid markets).

SME growth markets

The proposal for a regulation the Commission put forward in May (together with amendments to a delegated act under the markets in financial instruments directive, or MiFID II) focuses on SME growth markets. These are a new category of trading venues, introduced in January 2018 by MiFID II to facilitate access to capital for smaller and medium-sized companies.

There are four main objectives underpinning the proposed new rules. First, they aim to reduce the administrative burden and high compliance costs faced by SME growth market issuers. For instance, the Commission is proposing amendments that would represent for each issuer a 15-17.5% reduction of costs resulting from the market abuse regulation application. Second, the proposals will ensure a minimum level of liquidity of SME shares to make EU public markets for SMEs more attractive for investors, issuers and market intermediaries.  Third, they will increase the attractiveness of the SME growth markets 'label' by making it easier to register trading venues as SME growth markets. Currently, among the 40 markets with a focus on SMEs across the EU, only three have so far been registered as SME growth markets. This in turn will allow more listed companies to benefit from regulatory relief targeting SME growth market issuers. Finally, the proposed changes should also help growing SME growth market issuers move easily to the main (regulated) markets, thereby allowing them to benefit from greater liquidity and a larger investor pool.

The proposal for a regulation will now be discussed by the European Parliament and the Council.

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