Reimagining the European Markets of Tomorrow

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1 Reimagining the European Markets of Tomorrow November 2017

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3 Reimagining The European Markets Of Tomorrow The Importance Of Active SME IPO Markets Economic growth is supported by efficient capital markets. The availability and effectiveness of financing mechanisms as well as effective allocation of capital lays the foundation for investments, research and development, groundbreaking innovations and job growth. It is the core in the development of society. A key element of efficient capital markets is active IPO markets, allocating capital where it makes the most use. Active IPO markets enable companies to move from private to public, and allow venture capital to be recycled and fund new investments, innovation and economic growth as well as job creation. In today s search for growth, public markets are especially important to finance growth companies, as an active IPO market enables these to take the leap needed to accelerate innovative ideas and grow at the very time they need it the most. Startup companies and other small and medium enterprises (SMEs) are themselves critical in driving economic growth. During 2015, SMEs employed two in every three people across the EU and produced more than 57 cents in every euro of value added or net contribution of the company to the economy. 1 Needless to say, these companies are important to the European economy. Imagine the potential for economic growth if Europe successfully combines its capital markets with the broad-based, finely knit network of European SMEs. In the Nordics, research performed by Nasdaq Market Research documents that SMEs with direct access to long term risk capital on Nasdaq s European growth market for smaller companies, Nasdaq First North, show employee growth three times that of non-listed companies. This is why the integration between SMEs and capital markets is crucial, and in this interaction active IPO markets play a central role. This is also why the EU project on advancing a Capital Markets Union is paramount as it aims at revitalizing capital markets by taking a number of legislative and nonlegislative measures reforming the European framework applicable to financial markets. The mid-term review of the Capital Markets Union published in June 2017 highlighted a number of measures that Nasdaq welcomes and which include: Develop local and regional capital markets nonlegislative strategy Corporate bond markets roadmap for possible followup to ongoing work An SME listing package, including equity research, best practices of using EU funds for financing SME listing costs and to explore if targeted changes to EU legislation can deliver more proportionality for listed SMEs Retail engagement Long-term equity investment incentives for pension funds and insurance companies Personal European Pension Product legislative proposal end of June European SMEs according to the Annual Report on European SMEs 2015/2016. BUSINESS.NASDAQ.COM 3

4 The Nordic Story Background and landscape While the global IPO activity has been far from robust since the 2008 financial crisis, the situation in the Nordic countries has been a completely different story, in particular for SMEs. Since 2008, the Nordic markets have seen a 28.8% increase in IPO activity, and the activity during the last years has been on record levels. On Nasdaq s Nordic main markets, the number of new listed companies increased from 9 in 2012 to 32 in 2016, with capital raised per year from MEUR to MEUR. The situation is even more remarkable on Nasdaq First North. Here, the number of new listed companies have increased from 9 in 2012 to 63 in 2016, thereby outperforming other major European growth markets despite the relatively modest size of the Nordic region. The Nordic IPO climate has maintained resilient in As an example, on 18 October 2017, Nasdaq s main market in Stockholm reached an all-time high in number of listed companies in reaching number 319. The previous record of 318 companies had been in place for over 16 years since 28 June On the same day, Nasdaq First North listed number 300, also an all-time high. This is a unique situation and clearly documents a willingness and ability to fund small and growing companies as the majority of the new listings are SMEs No. of listed companies 2000 October 2017 STOCKHOLM MAIN MARKET FIRST NORTH NORDIC EXCL.BALTIC Oct 2017 Interest in the highly active Nordic IPO market is also increasing from abroad with a growing number of smaller international companies and international investors now turning towards the Nordics and in particular Nasdaq First North. This development will most likely intensify further as a consequence of the decision by the UK to withdraw from the EU, which is placing the general attention for cross-border listings higher on the agenda as companies and investors are shifting their focus for alternatives in other European countries that have full access to the EU single market. Fundamentals behind the Nordic story What makes the Nordic capital market stand out in the global IPO landscape? The explanation may be in a very well-functioning capital ecosystem. Together with market participants, the Nordic countries, and in particular Sweden have managed to create a unique local framework where investors and companies are able to interact regardless of size. In other words, having stakeholder support based on investor interest. This includes a strong retail equity culture, and strong pipeline of new companies able to manage the capital supplier from the investors. What typically sets the Nordics apart is that retail investors typically trade directly in the local markets. In this, online brokers are crucial as they offer low-priced, direct access. Another crucial element is commercial broker interest in Small Cap segments. Key to any equity market is liquidity and a commercially sustainable business case for banks, brokers and professional investors to operate in the market. This commercial interest facilities and supports both retail engagement as well as SMEs opportunities for sourcing this investor segment via a listing on either Nasdaq First North or Nasdaq s Nordic main markets. In order to nurture and develop the ecosystem, as a central player in this ecosystem Nasdaq has launched local IPO Task Forces across the Nordics, which have proposed and implemented measures aimed at enhancing the IPO climate, engage different investor segments and raise public awareness. For example, Nasdaq has introduced more flexible rules for quarterly reporting to reduce administrative burden on listed companies, more flexible rules on the number of shareholders required for fulfilling the listing requirements by facilitating the use of liquidity providers, and the possibility to receive advance rulings in IPO processes on questions of material importance to the assessment of applicable listing requirements, thereby making the process more efficient. Nasdaq has also published checklists for listed companies contacts with media and analysts, an area usually seen as challenging for growth companies, and has made its premises and networks available for SMEs to meet investors on a regular basis. On the trading side, all Nasdaq s Nordic markets run midday auctions for lesser traded shares and has introduced CCP clearing for at least Mid Cap shares, which motivates remote liquidity in Nordic listed shares. Furthermore, all Nasdaq s Nordic markets have raised political awareness of the benefits of fair taxations of equity returns. 4 BUSINESS.NASDAQ.COM

5 We see five key areas that have been supported the development of the Nordic IPO ecosystem: 1. Low entry barriers for retail investors: Well-informed public with high interest in the capital markets and growth companies Easy access to the capital markets through online brokers such as Avanza and Nordnet 2. Small and medium sized investment firm presence: Relatively high presence of small and medium sized investment firms that are commercially able to advise smaller companies in connection with IPO processes and have access to retail investor base. Entrepreneurial culture and innovation focused society 3. Tax measures incentivizing investment in listed companies: Investment savings account (ISK) introduced in Sweden during 2012 which provides retail investors with an alternative to ordinary tax on income from capital a similar model is under introduction in Denmark for Increased SME interest from institutional investors and pension funds: For the last years, institutional investors and pension funds have shown an increasing interest in Nasdaq First North as the quality of the listed companies has continued to increase Strong public confidence in the capital markets SME interest from institutional investors and pension funds Low entry barriers for retail investors 5. Strong public confidence in the capital markets: Small and medium sized investment firm presence Tax measures incentivizing investments in listed companies Nasdaq and market participants are continously working together to safeguard and increase the quality of the listed companies, including Nasdaq First North Strength and statute of Nasdaq s local exchanges and intimate collaboration with local shareholder associations Long tradition of extensive self-regulation as an alternative or a complement to legislation provides flexibility and legitimacy within the sector and thereby ensures a high level of compliance BUSINESS.NASDAQ.COM 5

6 Reimagining The European Markets The development of the Capital Markets Union is an important step to unlock investments and create a single market for capital within the EU. However, the Nordic success story clearly demonstrates the significance of well-functioning local financial ecosystems. The Nordic example shows the importance of public awareness of investments and the significance of turning traditional savers into investors. It shows the role of new technologies, where online brokers have disrupted traditional banking and paved the way for easy access to the markets. It shows the significance of lowering the barriers for cross-border transactions as the markets are shifting following the political development in the EU. Both the EU and the individual member states should look further than the Capital Markets Union in order to reimagine the European markets and ignite the growth of SMEs. The following are Nasdaq s top-5 asks: 1. TAX POLICIES Tax incentives for investments in SMEs are in place in many jurisdictions and could be further explored by sharing best practices. The Swedish model of the investment savings account (ISK) is an excellent example of this and has proven very successful since its launch in 2012 more than 2 million individual accounts has been opened. The ISK allows the account holder to buy and sell shares actively without being taxed by every transaction. Instead, a holding tax is calculated and collected on an annual basis, corresponding to the central bank s rate. This provides a less complex regime for the account holder and encourages investor activity as well as reinvestment. This model is now explored in, for instance, Denmark. A similar example is the Estonian investment account model, when investments are tax eligible only when the profit is withdrawn from the investment account. Financial transaction taxes can be described as tax on liquidity, and will therefore have significant negative effects on the efficiency of capital markets. The currently discussed proposal for a Financial Transaction Tax among certain EU Member States should be withdrawn. Similar taxes already in place across the EU should also be reconsidered. 2. EDUCATION AND AWARENESS The importance of proper financial education in schools must be highlighted as this for many often is the first encounter with the framework of the capital market. Another example is the Swedish pension system, which allows individuals to allocate a certain portion of the pension money at his or her own choice, thereby increasing the awareness of investments and of equity. 3. LOWERING THE BARRIERS FOR RETAIL AND INSTITUTIONAL INVESTORS Many seem to agree that an important factor for the Nordic success is a strong equity culture. The portion of retail participation is high, not least on Nasdaq First North, where Avanza and Nordnet are popular among retail investors and represented 68% of all trading in first half of Similar, the portion of institutional investors in listed SMEs is also increasing. Much of the recent years new legislation for financial markets have improved the efficiency of trading of financial instruments. However, the efficiency has mainly benefited the blue chip markets and trading of large shares have become even more attractive, thus even further widening the gap to growth companies. The business case for various participants has weakened, and in some markets the local ecosystem has virtually disappeared. As a general approach, policymakers should keep in mind that also smaller intermediaries, such as analysts, banks and accountancy firms, need to be able to maintain their business in a reasonable environment. If the regulatory costs become too high, the smaller actors will close down. SMEs will keep struggling to find advisors and partners to support them through the funding escalator. One example is the rules of MiFID II aimed at unbundling investment research and trading fees. If brokers are not allowed to use trading fees to finance their equity research, there is no longer a business case for doing proper equity research, which leads to a deterioration of the ecosystem. To somehow counter the poor analyst coverage of especially SMEs, Nasdaq has created Company Information Sheets for all its listed companies, of all sizes, with the same basic key data for all. This does not include an analysis, but provides easily accessible and comparable key information and data for investors. We see this a potential basis for analysts to do further work. For the Capital Markets Union to assist in providing better access to finance for companies thereby creating growth and jobs savers need to be turned into investors. Opportunities need to be embraced and barriers need to be overcome. Efforts should be focused on both cross-border investors and those active within a more local ecosystem. In some countries, such as Sweden, Finland and Denmark, the equity culture has kept developing in a positive direction over a number of years and the retail investor involvement is significant. While there are local differences due to different tax regimes, the retail engagement can vary across capitalization segments, there is no doubt that typically affluent and welleducated, the Nordic retail investor both has the means and ability to invest on their own. In other regions however, such as the Baltic countries, the current starting 6 BUSINESS.NASDAQ.COM

7 point is very different and the development of an investment culture locally is essential. Investor protection is important and should ensure that the investor can easily access and understand the risks associated with a certain investment. What needs to be avoided is however to totally discourage risk-taking, as any investment and opportunity is always associated with some level of risk. 4. PROMOTING LONG-TERMISM The capital markets, as a creator and incubator for long-term investments, needs to be protected so it can successfully grow. While we are in support of practical and necessary regulation, we also have witnessed market fragmentation caused by MiFID I and MiFID II. In turn, this has made high-frequency trading more attractive, often creating a sense of short-termism in the markets. Capital markets need to be the place where companies can access long-term capital and both companies and investors need to have trust in this. Financial regulation needs to consistently support this and refrain from a regime of step-by-step favoritism of short-term market participants. Further, Nasdaq once again wishes to underline the role tax policy can play in this regard. We encourage the Commission s work to help sharing best practices on various examples of tax incentives supporting long-term investments. It is also our mission to provide fair, transparent, and efficient markets for our stakeholders. We strive to further engage, encourage and support our listed companies in reaching more broadbased ESG reporting and hence even better markets. We recommend self-regulation if the markets are proactive, new legislation will not necessarily be needed. 5. EVOLVING MARKET STRUCTURE The implementation of MiFID II and MiFIR needs to defend an efficient and transparent price formation process in listed shares and by so facilitate fair and orderly markets. However, there is currently a lack of clarity around what type of activity is allowed on a Systematic Internaliser (SI) an investment firm which organizes frequent, systematic and substantial dealings on own account outside a trading venue risking blurring the line between bilateral and multilateral trading. If an SI would operate on a riskless principal basis, this would essentially replicate the functioning of a multilateral venue, with a fraction of the transparency requirements. This will not support the further development of capital markets as an alternative source of finance for European companies. Another important part of transparent, fair and orderly markets is market data being produced by trading venues and further resold by data vendors. It is important that market venues continue to have incentives to produce high-quality market data. It is not sustainable in the long run to force trading venues to provide market data free of charge. The technology investment needed to provide high-quality market data needs to be financed. The ongoing development and innovation of emerging technology also opens up new opportunities for investors to access investment prospects. These technologies include mobile apps that can connect investors to the markets much more easily and cheaper than before, e-voting to facilitate shareholder engagement, automated translation to break down language barriers for crossborder investments, standardization of information, data and formats to facilitate automation, translation and comparability and thereby improve accessibility to data and information for investors, and machine learning in surveillance system, an area where Nasdaq is spearheading the development to ensure resilient markets. Policymakers should embrace these opportunities and (i) ensure that regulatory intervention does not stall innovation, and (ii) closely analyze if there are any current regulatory barriers standing in the way for innovation. A complete list of Nasdaq s proposals for reimagining the European markets is attached to this document. Education and Awareness Tax Policies Lowering the Barriers for Retail and Institutional Investors Reimagining the European markets of tomorrow Promoting Long-Termism Evolving Market Structure BUSINESS.NASDAQ.COM 7

8 Appendix Summary Of Areas Where Further Actions Are Needed To Drive Growth TAX POLICIES Taxes on financial services are harmful to economic growth and should be eliminated. Lower tax rates for long period equity holdings would incentivize long term investments. Lower corporate taxes would incentivize entrepreneurship and the growth of SMEs. Stock option programs for startups and micro companies should be given preferential tax treatment in order to attract competence and long-term commitments. Tax barriers for cross-border investments should be eliminated removal of discriminatory tax treatment on investment funds as well as varying national requirements on the marketing of funds and fees for cross-border notifications. EDUCATION AND AWARENESS Financial literacy education should be high on the agenda. The Commission should share best practices from individual EU Member States, also regarding alternatives regarding how education and awareness can be raised, with the Swedish pension system as a great example. Strengthen the innovation within the financial area and the Nordics. Closer cooperation between the state governments, local municipalities and the financial industry in order to boost the innovation and entrepreneurships and job growth. LOWERING THE BARRIERS FOR RETAIL AND INSTITUTIONAL INVESTORS Pension funds and UCITS funds should be incentivized to increase ownership stakes in listed SMEs. Prospectuses should be light and useful and SME markets should not require prospectuses while still ensuring a high quality of the listed companies. Requirements on quarterly reporting should be on a voluntary basis. Chain of intermediaries should be simplified to ensure that the investors, and not intermediaries, are rewarded by companies growth. Harmonization not always the answer. Keep local accounting standards and corporate governance rules Recognize the importance of self-regulation. Legislative tick size regime is harmful to liquidity and local market operators should be allowed to determine applicable tick sizes by themselves. Securities holdings legislation should be harmonized. EU public funding guidelines needed to foster the investment of ELTIFs in SMEs. EIB to consider directing funds to the IPO phase for SMEs and thereby combine public and private money. LONG-TERMISM Financial regulation needs to consistently support sustainability and refrain from step-by-step favoring short-term market participants. Lower tax rates for long period equity holdings would incentivize long term investments. EVOLVING MARKET STRUCTURE Cost transparency should be further enhanced. More transparency in price formation. Increase pre- and post-trade transparency also for other financial instruments, including corporate bonds Maintain incentives for market operators to produce high quality data. Mobile apps can connect investors to the markets much more easily and cheaper than before. Investing in a company can be done from one s smartphone or tablet, rather than by an in-person visit to one s bank. E-brokerage is relatively well developed in the Nordic financial ecosystem and have led to individual investors being able to be active on capital markets in a simpler way. Distributed Ledger Technology (DLT) opens up opportunities for easier shareholder engagement. As an example, Nasdaq is working towards enabling DLT based e-voting in Estonia, which would allow shareholders to vote in shareholder meetings without being present in-person and without providing a proxy. Further innovation in post-trade structures may be expected, driving down costs. Automated translation breaks down language barriers for cross-border investments. Standardization of information, data and formats will facilitate automation, translation and comparability. This should improve accessibility to data and information for investors. Copyright All rights reserved. Nasdaq and First North are registered trademarks of Nasdaq, Inc Q16 BUSINESS.NASDAQ.COM 8