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Nixing Legal Jargon From Small Business Investment

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The European Commission has been making moves to simplify and ease access to funding for its small and medium-sized enterprises. Part of this venture, naturally, means lessening the restrictions of cross-border investment throughout the EU.

Earlier this year, EU policymakers passed a resolution as part of a broader effort to launch the Capital Markets Union (CMU), a single, pan-EU market to facilitate SME finance.

The resolution included language that acts as the foundation for that CMU, a non-binding plan to make information more accessible to both small business owners and investors across Europe.

Only weeks ago, another step in this legislative journey was taken. The European Commission announced the proposal of a complete overhaul of the rules that govern how businesses can raise funds via public offering.

According to the commission, the proposal would increase transparency for investors about the businesses looking to publicly raise money. To do so, businesses must provide a prospectus to potential backers about the company and its finances. According to reports, EU officials not only want to change what information is required to be included in these prospectuses but also make it less burdensome for companies — especially SMEs — to create these documents.

[bctt tweet=”‘We need a prospectus regime that … does not pile up unnecessary costs.'”]

“We need a prospectus regime that gives investors the information they need but that does not pile up unnecessary costs and put companies off raising money on the public markets,” stated Commissioner for Financial Stability, Financial Services and Capital Markets Union Jonathan Hill in a statement. “Today’s proposal strikes a better balance. It will make the system simpler, cheaper and quicker. It will safeguard investors, while making it easier for small and medium-sized enterprises and other businesses to raise money.”

The Changes

The commission has proposed several changes to achieve these goals. First, lawmakers suggest a higher threshold at which businesses must generate a prospectus, meaning the smallest of the SMEs won’t need to create one at all if they’re looking to raise anything below €500,000 (about $545,000), up from the previous threshold of €100,000 (about $110,000).

Additional proposed changes include less complex prospectuses required for less complex funding efforts — in other words, allowing small companies to provide a shorter, less complicated prospectus.

EU policymakers also want to take the political jargon out of these documents, making it clearer for investors as to which companies are looking to raise public funds. The proposals also include streamlining the process for companies already publicly listed looking to raise additional funds, as well as for firms that frequently raise funds via capital markets.

The European Securities and Markets Authority will also provide a single portal through which companies and investors can access these documents online.

According to the European Commission, the changes are all in the name of simplifying the process for SMEs to gain financial support.

“For companies,” the EC said in its statement, “the current rules constitute a lot of legal paperwork, often running into hundreds of pages.” The commission added that the legal language often used in these prospectuses weakens investors’ ability to understand these businesses. “This creates uncertainty and runs counter to the CMU objective of making capital markets more accessible for investors.”

The European Parliament and the Council of the EU will deliberate on the proposals, though it is unclear when they would vote on the measures.

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