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Capital Markets Union - Funding Business Growth in the European Union
Dec 09, 2016

By Ken Snoeks, Audit & Advisory Partner, Crowe Horwath Callens Pirenne & Co, Antwerp, Belgium and David Chitty, International Accounting & Audit Director, Crowe Horwath International, London, United Kingdom 

A post financial crisis challenge in the European Union (EU) has been achieving business growth, supporting innovation, and creating new jobs and opportunities. In many Member States the banks have retreated from the space that they traditionally occupied to finance businesses of all sizes. Unfortunately, the equity markets in many Member States did not have a record in financing smaller and riskier businesses, meaning that equity has often not been an alternative to debt. 

The European Commission (EC), the administrative body that directs policy in the EU has embraced the challenge of funding business growth with the Capital Markets Union (CMU) initiative. CMU is not necessarily about new Regulations or Directives, but rather stimulating discussion that leads to change. One of the main focusses of CMU is facilitating access to capital markets for SME's.

A meeting on CMU progress was held in Brussels on 8 December 2016. Crowe Horwath International representatives attended the meeting as we have participated in a project lead by Accountancy Europe to prepare a briefing paper on applying the Simplified Prospectus Directive that the EC is working on.

Simplified prospectuses are part of a wider solution to the challenge of financing growth. If the prospectus can be simplified, it will reduce the cost of listing, but at the same time the prospectus also has to be made more relevant and attractive to potential investors.

Our group concluded that a lighter prospectus regime will encourage and incentivise smaller companies to seek market financing. The prospectus should focus on a proper understanding of the prospects of the business and the risks associated with the business. A prospectus that is useful to investors does not have to be full of "standard" disclosures; it should focus on what is relevant to investing in this business. A focused prospectus will cost less to prepare in both fees and time.

To simplify the prospectus, three categories of information are to be presented:

  • In the prospectus, company-specific information describing the business model, identifying the key risk factors specific to the company, giving an overview of performance through financial and non-financial KPIs and presenting summary historical financial information.
  • On the issuer's website, standard information stemming from existing material such as audited historical financial statements, an overview of the most significant transactions and relationships with related parties, and the CVs of the directors and senior managers.
  • Information to be presented on a website of a third party such as the broker or the market could include generic non-company specific information, generic risk factors, the taxation position of investors, and known differences between a country's accounting framework and the IFRS.

The prospectus should incorporate elements from management presentations and independent research. Materiality is vital, as information should be relevant and useful. The presentation of the prospectus should take advantage of technology, as this will both reduce cost and potentially enhance distribution. There should be clear transparency about the due diligence and reporting processes.

There are many other challenges for CMU to address such as reducing the cost and burden of market continuing membership obligations (whilst protecting investors) and making the market for corporate debt work better. Improving the prospectus is a start, and each extra listing creates opportunities and boosts growth.

Find out more about CMU at http://ec.europa.eu/finance/capital-markets-union/index_en.htm.

The briefing paper in relation to the simplified prospectus can be found at https://www.accountancyeurope.eu/wp-content/uploads/Prospectus_paper.pdf