Lakeside View 1 / 2017

The new SME segment raises many questions and is being viewed with scepticism.

Munich, January 25, 2016: Since 2005, the Entry Standard of Deutsche Börse AG has acted as an entry point in the Open Market with special transparency rules (as defined in the terms and conditions of the Frankfurt Stock Exchange). Now it is time to say goodbye to the Entry Standard and welcome the new SME standard.

Against the background that many rules applying to the General Standard had no application in the Open Market, the stock exchange’s establishment of the Entry Standard in 2005 as a quality segment above the Open Market was a sensible move. The need for this increased transparency standard has certainly strongly declined in an environment where the Open Market is increasingly being regulated – many regulations, which so far have only applied to the “EU-regulated markets”, Prime Standard and General Standard, now are also effective for the Open Market anyway following the implementation of the Market Abuse Directive – for instance Directors Dealings disclosure rules and the obligation to keep insider lists.
With the SME standard, Deutsche Börse makes another attempt to create a quality segment. The idea behind this is to protect investors from companies of “inferior quality”. Companies wishing to be included in the new segment must have a positive equity capital, be profitable, generate annual turnover of at least EUR 10 million, and have a market capitalisation of at least EUR 30 million. In general, this is a good approach to create a segment for reputable and mature SME customers, although the individual criteria can certainly be discussed.

Quality segment without quality assurance

It is arguable, however, whether it is appropriate for a stock exchange to delegate responsibility for an assessment of the capital market capability of stock exchange candidates to its capital market partners. They are obliged to carry out an appropriate legal and financial due diligence, confirm to Deutsche Börse AG that the issuer is suitable for the SME segment, and advise and support the issuer in connection with the inclusion procedure. Having in mind that this is a commission business for the capital market partner (this can be a commercial bank or financial service provider, but also a legal adviser or auditing company) a neutral assessment is not provided for. It is not obvious that these regulations will keep us from having a potpourri of the most diverse issuers put together in one SME pot, as has ultimately been the case in the Entry Standard.
The change in costs coming along with the new segment is particularly annoying for the issuers. Companies that have been listed on the Entry Standard so far will have to face a fourfold increase from formerly EUR 5,000 p.a. to EUR 20,000. New candidates will have to pay a one-time fee in dependence of their size, which can easily add up to almost EUR 100,000.
The stock exchange mainly justifies the costs with “neutral research”, which is to be drawn up by the respective partners. In principle, it is important and appropriate to have an independent research report. It can be a good source of information for investors and additional assistance for a decision-making process. However, it must be questioned whether this ensures quality assurance and independence here again.

The issuers interests are only reflected to a limited extent in the new segment

Instead of competing for ideas for the name of the new standard, it would have been more helpful to conduct a survey among the respective issuers to create a truly innovative segment with sustainable success. Not only investors wish for a “quality label”, it would be desirable particularly for issuers to be listed with one’s peers in a pool of companies as the “gems” of the German SMEs. According to the principle “together we are strong”, there is a strong wish to attract the attention of a wider public and to participate in spill-over effects. The stock exchange as a platform which matches supply and demand has unfortunately missed the opportunity to design the trading venue as a market place on which companies and investors can find and meet each other. Sadly, the segment has not been combined with dedicated investor events, a selection index or other elements, which would make the segment more attractive for issuers than other comparable segments abroad.

Conclusion: good idea but insufficient implementation

Without any doubt, the reorganisation of the Entry Standard has suggested itself. In principle, the SME segment is a good idea, especially since the small and medium-sized enterprises are the backbone of the German economy. It would be desirable for them to have a market place on which they meet investors and find capital. However, the segment’s present design features do not quite live up to these expectations.

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