7 ways to ease SMEs’ access to capital markets


By Sabine Vollmer

Access to financing can be difficult for any business, but particularly for small and midsize enterprises, according to a 2015 study by the International Organization of Securities Commissions (IOSCO).

SMEs, generally defined as companies with fewer than 500 employees, are the backbone of economies around the world, but their financing options tend to be limited and costlier. SMEs represent a riskier investment than larger companies, a fact amplified by heightened regulatory scrutiny that has made banks more risk averse in the wake of the global financial crisis.

The majority of SMEs (60% worldwide) rely on bank loans as their primary source of financing, the IOSCO study found.

Capital markets are a popular financing source for large companies and an alternative to bank loans for SMEs, but only 25% of SMEs use equity financing as their primary way to raise money, according to the IOSCO study. Fear of losing ownership of the business, relatively high regulatory costs, and inexperience with capital markets tend to discourage SMEs from accessing capital markets.

Many countries have capital markets aimed at smaller companies looking to raise money, but SMEs that have used SME capital markets rarely move up to main markets, which offer better benchmarks for a company’s valuation, ensure a stable investor base, attract institutional and foreign investors, and enhance a company’s reputation.

“Jurisdictions have had uneven success at helping SMEs to tap the capital markets,” according to the IOSCO study. “… New ways and alternative methods of financing should be considered through the involvement of more innovation and use of technology.”

One example the study mentioned is an approach by Chinese e-commerce company Alibaba that solves one big impediment to SME financing. Alibaba analyses trading and payments data it collects, to determine SME creditworthiness for loan distribution and collection.

Other innovative types of SME financing the IOSCO study mentions include asset-backed financing and securitisation and crowdfunding.

IOSCO also issued seven recommendations to make it easier for SMEs to access capital markets:

Review current securities regulatory requirements applicable to SME issuers. Regulators should eliminate disclosure obligations that are of less value to SMEs and lighten listing requirements to lower the minimum free float, revenue, market capitalisation, number of public and minimum shareholders, equity, paid-up capital, and profitability requirements.

To reduce the cost of capital, regulators should lower registration and listing fees for SMEs.

Offer alternatives to a public offering. SMEs that have no plans to go public should be able to access capital markets through private offerings that require no prospectus or offering documents.

Another alternative is a backdoor listing, which involves a private SME acquiring a publicly listed company. Backdoor listings should include a prospectus, filing statement, or information document for shareholders of the public company being acquired.

Ensure investor protection. Regulators need to ensure retail investors have confidence without putting too many burdens on SMEs. To strike the right balance, regulators could require SMEs to disclose less, but the information that is disclosed should highlight the investment risks that are unique to SMEs.

Make a market for SME shares. A low number of outstanding shares and a narrow investor base can make it difficult to sell SME shares. Introducing a market-making system may help. Also, it’s important that investors interested in SMEs have access to analysis and rating information that’s not too costly. Relevant institutions should be encouraged to publish periodic investment research on SME securities.

To protect the integrity of the SME market, policymakers should consider introducing provisions that would allow an SME to grant another company the option to buy its stock as a prelude to an acquisition. Such a lock-up provision would ensure that management remains committed and that securities issued are appropriately valued.

Increase public awareness for the need of SME financing. Regulators and policymakers should organise promotional campaigns, public seminars, and conferences to explain the benefits of capital markets and to increase public awareness of the need for SME financing.

Policymakers could consider setting up a website to inform, educate, and assist SMEs and investors, including publishing periodic analyst reports for SME securities.

Set up a system to ensure that SMEs comply with regulatory requirements. To ensure that SMEs comply with regulations, policymakers should consider establishing a team that answers SME questions and monitors compliance. SME shares should be closely monitored and investigated when necessary for market manipulation.

Nominated advisers who are authorised by or registered with a stock exchange should help SMEs during the application procedure for listing on the stock exchange. The advisers could be held responsible, along with the issuer, for the accuracy of the information and documents released to the public.

Foster investor demand for SME shares. Initiatives to pool highly rated SME securities and lower transaction costs may attract long-term institutional investors in emerging and developed markets. Institutional investors are needed in addition to retail investors to provide adequate financing for SMEs. 

Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.