EU: How Eliminating Prospectus Requirement Will Boost Startups

The European Union’s plan for a Capital Market Union (CMU) to unlock frozen capital to channel to European companies in order to – among other things – offer businesses a greater choice of funding at lower costs and provide more investment choices, took a great step forward in an announcement by the European Commission (EC) on November 30th that could considerably alter the playing field for Startup companies and other SME’s.

Eliminating The Prospectus Requirement Is A Boost

The announcement of a new “Prospectus Directive” by the EC made the significant recommendation to eliminate the requirement of a Prospectus, the legal document businesses are compelled to issue to investors, for companies raising under €500,000. A Prospectus is the detailed and costly legal document businesses are compelled by law to issue to investors. As the previous stipulation in Prospectus Directive 2003/71/EC from 12 years ago set the level at which companies were required to issue a prospectus at €100,000, this is an important and positive development for the Startup community.

The announcement emphasized 6 points the proposal seeks to amend:

1. Exempting the smallest capital ratings,
2. Creating a lighter prospectus for smaller companies,
3. Shorter prospectuses and better investor information,
4. Simplifying secondary issuance for listed firms,
5. Fast track and a simplified issuer regime, and
6. A single access point for all EU prospectuses.

New Chances For Startups

What does this mean? Firstly, it is expected that the mark-up from €100,000 to €500,000 will eliminate the initial paperwork, legal fees and bureaucratic encumbrance for Startups and early-stage businesses without large reservoirs of cash or prospective investment on hand. Second, it will also make the prospectuses themselves shorter, and therefore less costly to compile, while introducing a simplified document for listed firms looking to raise money. Third, it is hoped by Lord Jonathan Hill, the EU Commissioner heading the CMU plan, that Startups could thereby be encouraged to go public sooner and float on the stock market, instead of having to rely uniquely on investment from venture capital firms or bank financing.

“It will free up the system, make it quicker and cheaper,” Hill said, who reportedly wants to emulate the American approach to bolstering Startup growth and promote a Silicon Valley-type of ecosystem in Europe. Other measures being considered in the EC’s CMU plan alongside the new Prospectus Directive include “creating a pool of funds to encourage more traditional institutional investors to put their money into early-stage companies.”

The measure is designed to benefit Startups and Investors simultaneously. “It frees up capital to overcome the fragmentation of the European economy,” says StartUs founder David R. Prasser. At present in Europe, Investment remains heavily reliant on banks, countries are still determined by different financial regulations, shareholders invest primarily within national borders, and SME’s have limited access to financing generally.

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