Our Legal, Primary Markets and Secondary Markets Expert Groups contributed to our response to the European Commission's public consultation on building a proportionate regulatory environment to support SME listing.
You can read our response in full here (pdf).
Challenges faced by public markets for SMEs
We emphasised the crucial role that small and mid-size quoted companies play in the UK economy; they contribute £14.7 billion to GDP and directly support 430,000 jobs.
Nonetheless, we noted a number of factors had led to a weakness in SME-dedicated public markets in the EU:
- Low number of companies coming to the public markets - An increasing number of delistings, along with the average size of IPO companies rising significantly has resulted in a steady decline in the number of quoted companies over the past decade. There are now 31% fewer companies listed on the Main List of the London Stock Exchange and 41% fewer listed on the Alternative Investment Market (AIM) in 2018 than in 2007.
- Decline of local ecosystems - The number of Nominated Advisers available to small and mid-size quoted companies has halved since 2008.
- Lack of retail and institutional investors - Declining institutional interest in small and mid-size quoted companies has led the total number of investors in these companies falling. Furthermore, the reduced role of pension funds in SME securities is also holding these companies back.
Regarding why low numbers of SMEs sought admission to EU public markets, we cited the high compliance costs - both on admission and ongoing - due to regulatory constraints as a major factor (our response contains a table outlining the estimated costs of floating and maintaining a quotation on AIM). We also noted that the Market Abuse Regulation had increased the regulatory burden on MTF quoted SMEs disproportionally, since it came into force in July 2016.
We commented that the lack of visibility of SMEs (including lack of financial research and credit information) towards investors for equity played a large part in inhibiting institutional and retail investments in SME shares. Noting that independent investment research was an invaluable source for investors to learn more about a small and mid-size company’s financial performance and status, we pointed out that such research had significantly fallen since 2007, which hindered the ability of SMEs to attract a broad range of investors and thus secure capital to fit their growth ambitions. We noted that 20% of companies had had no research written on them by their own broker or Nominated Adviser in the previous two years.
Specific regulatory barriers
Overall, we argued that, in order to fully maximise the potential of SME Growth Markets in the European Union, there must be a clear, material advantage for companies considering a listing on such a market and for companies already listed on such a market. Therefore any regulatory alleviations must be available to all issuers listed on SME Growth Markets.
We supported revising the criteria used to define an SME Growth Market. We recommended raising the market capitalisation threshold to €500 million and threshold regarding the proportion of SMEs on an SME Growth Market to between 51% and 74%.We added that, in order to reflect the diversity of EU markets, EU Member States could be given the flexibility to adjust this threshold for their own individual markets. We remarked that this would help recognise the fact that companies at different stages of growth have different needs and constraints.
Market Abuse Regulation
Regarding management's transactions, we did not support the proposals to extend the time limit for PDMRs and persons closely associated to notify their transactions to the issuers; raise the threshold above which managers of SME Growth Markets Issuers should declare their transactions; or make national competent authorities or the trading venue responsible for making the managers' transactions public.
Regarding insider lists, we argued that as the requirement to keep an insider list is so onerous and burdensome for small and mid-sized quoted companies given the level of resources available to such companies and the purpose for which insider lists are kept, that all companies on SME Growth Markets should be entirely exempted from complying.
Regarding MiFID II, we commented that any tick size regime should be flexible to adapt and reflect the difference liquidity among SMEs and that a ‘one-size-fits-all’ regime should not be adopted, where the heterogeneous nature of SMEs is compromised for the sake of cross-market harmonisation.
Minimum free float requirements
We commented that we did not consider that there should be any minimum free float requirements determined at the EU level for any SME Growth Market in the European Union. We stated that imposing free float requirements would make listing on a public market unattractive to many companies, which would contradict the European Union’s objective of making SME Growth Markets an appealing platform for companies to seek new capital.
Central Securities Depositories Regulation
We commented that the new settlement regime would increase the nominal minimum liquidity required to access equity capital markets, which will constrain the ability of small and mid-size quoted companies to raise the necessary capital to fund their growth. In particular, the daily fines system will market volatility by creating an environment rife for abuse. We urged the European Commission to remove all fines for failing to settle trades on time from securities of small and mid-size quoted companies irrespective of trading venue.