EUROPEAN COMMISSION Brussels, 24.5.2018 SWD(2018) 243 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT

Accompanying the document Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

amending Regulations (EU) No 596/2014 and (EU) 2017/1129 as regards the promotion of the use of SME growth markets {COM(2018) 331 final}

{SEC(2018) 247 final}

{SWD(2018) 244 final}



Table of Contents Table of Figures Glossary 1 Introduction: Political, legal and market context 1.1 Legal background 1.2 Policy context 1.3 Market context 1.3.1 A persistently low and concentrated SME IPO activity 1.3.2 Underdeveloped SME bond markets 2 Problem definition 2.1 What are the problems 2.1.1 Supply side: high compliance costs for listed SMEs 2.1.2 Demand side: Insufficient liquidity on SME-dedicated markets 2.2 What are the problem drivers? 2.2.1 Administrative and regulatory burden on SME issuers stemming from the application of MAR and the Prospectus Regulation 2.2.2 Inadequate definition of SME Growth Markets 2.2.3 Lack of schemes (mechanisms) to promote trading and liquidity on SME Growth Markets 2.2.4 Out-of-scope drivers

2.3 Consequences: less capital raised by SMEs on public markets 2.4 Wider consequences 2.5 How will the problem evolve? 3 Why should the EU act? 3.1 Legal basis 3.2 Subsidiarity: Necessity of action of the European Union 3.3 Subsidiarity: Added value of EU action 4 Objectives: What is to be achieved? 5 What are the available policy options? 5.1 What is the baseline from which options are assessed? 5.2 Policy options addressing administrative compliance costs 5.2.1 Options under the Market Abuse Regulation 5.2.2 Options under the Prospectus Regulation 5.3 Policy options concerning the SME Growth Market definition 5.3.1 Defining criteria and thresholds for equity and debt-only issuers 5.3.2 Half-yearly reports 5.4 Policy options to address liquidity on SME Growth Markets 5.5 Options discarded at an early stage 6 What are the impacts of the policy options? 6.1 Policy options addressing administrative compliance costs

6.1.1 Market Abuse Regulation 6.1.2 Prospectus/ transfer of listing from an SME Growth market to a regulated market 6.2 Policy options concerning the SME Growth Market concept 6.2.1 SME Growth Market defining criteria and thresholds 6.2.2 Half-yearly report 6.3 Policy options to address liquidity in SME Growth Markets 7 Preferred option 7.1 Overall impact of the preferred option 7.2 Macro-economic impacts 7.3 Small and medium-sized enterprises 7.4 UK leaving the EU 7.5 EU and Member State budgets 7.6 Social impacts 7.7 Impact on third countries 7.8 Environmental impacts 7.9 Impact on competitiveness 7.10 Coherence 7.11 REFIT (simplification and improved efficiency) 8 How will actual impacts be monitored and evaluated? Annex 1: Procedural information

Annex 2: Stakeholder consultation Annex 3: Who is affected and how? Annex 4: Definitions Annex 5: Out-of-scope drivers Annex 6: Discarded options Annex 7: Additional Market Background Annex 8: The impact of developed SME Growth Markets on the whole funding escalator of companies Annex 9: business models of SME brokers and liquidity issue Annex 10: Implications of the European Tick Size Regime for liquidity on SME Growth Markets Annex 11: Market Abuse data received from National Competent Authorities Annex 12: Determining the appropriate debt issuance size to define an SME issuer on debt-only SME Growth Markets Annex 13: Market Data collected from European MTFs Annex 14: The current regulatory environment of 'SME Growth Markets' Annex 15: EU Acts and alleviations granted to SME Growth markets issuers Annex 16: Assessment of Policy Options - Synthesis Table Annex 17: Explanatory graph on the extension of the time-period to disclose managers’ transactions Table of Figures Figure 1 - Legislative scope of regulated markets vs. SME Growth Markets

Figure 2 – SME Listing Package actions and objectives Figure 3 – IPO values, number of IPOs, average capitalisation and average number of listed companies on European junior markets Figure 4 – Comparison of selected alternative markets: turnover ratio Figure 5 – Comparison of selected regulated markets: turnover ratio Figure 6 – Companies moving from SME-dedicated markets to regulated markets Figure 7 – Average annual value of shares traded by market cap band, AIM Figure 8 – Initial Public Offerings and Secondary Public Offerings by Growth Companies in Advanced economies (Billions, USD, 2014) Figure 9 – Problem tree Figure 10 – Average market capitalisation of companies listed on a selection of SME-dedicated MTFs Figure 11 – Average value of outstanding issuances per issuer per year Figure 12 – Summary of the preferred options Figure 13 – Distribution of retail and institutional investors in selected EU MTFs vs. regulated markets Figure 14 – Distribution of domestic and foreign investors in selected EU MTFs vs. regulated markets Figure 15 – Free float requirement and minimum capitalisation on EU SME-dedicated MTFs Figure 16 – Evolution of market capitalisation segments Figure 17 – Average brokerage fees by market capitalisation Figure 18 – Tick sizes mandated by Commission Delegated Regulation 2017/588 for liquidity bands and price ranges respectively



Glossary Acronym Meaning or definition AMP Accepted Market Practice CEE Central and Eastern Europe CMU Capital Markets Union CRA Credit Rating Agency CSDR Central Securities Depositories Regulation EGESC Expert Group of the European Securities Committee ELTIFs European long-term investment funds Regulation: ESMA European Securities and Markets Authority EU European Union GAAP Generally accepted accounting principles HFT High-Frequency Trading IAS International Accounting Standards IASB International Accounting Standards Board IBO Initial Bond Offering IFRS International Financial Reporting Standards IPO Initial Public Offering MAR/MAD Market Abuse Regulation/Directive MiFID II Markets in Financial Instruments Directive II MTF Multilateral Trading Facility NCA National Competent Authority OECD The Organisation for Economic Co-operation and Development PCA Person Closely Associated PDMR Person Discharging Managerial Responsibilities PE Private Equity PP Private Placement PR Prospectus Regulation RM Regulated markets (also called 'main markets') SME Small and medium-sized enterprise STOR Suspicious Transaction and Order Reports TFEU Treaty on the Functioning of the European Union VC Venture Capital

1Introduction: Political, legal and market context The Capital Markets Union (CMU) initiative aims at diversifying sources of financing for European companies, in order to stimulate investment, economic growth, job creation and sustainable development. Through both the CMU Action Plan and CMU Mid-Term Review, the Commission adopted many proposals to foster corporates' access to capital in their early development stages, including the review of EU regulations on venture capital and the proposals on crowdfunding. In order to further ease companies' growth and scaling up, more needs to be done at the following stage, i.e. to raise capital on public markets. Although listing on a regulated market is more suitable for large firms, small and medium-sized enterprises (SMEs) can list their shares and bonds on so-called junior markets. These markets are important precisely as they make the link between private equity financing and the main public markets. Over the past decade, however, most of these junior markets in Europe have been struggling. Among other factors, the lack of SME visibility towards investors, low levels of liquidity, SMEs’ insufficient knowledge of the listing process and high compliance costs can explain why few SMEs seek financing on public capital markets. This Impact Assessment accompanies a proposal for a regulation and a Commission Delegated Regulation that would tackle certain regulatory impediments for issuers on junior capital markets. In particular, it examines a number of technical amendments aiming to reduce the regulatory burden on SMEs listed on public markets and to enhance the liquidity of these markets. These targeted changes will not fully revive junior markets in Europe on their own. Nevertheless, they address regulatory barriers flagged by stakeholders as inhibiting SME access to public markets. They do so whilst preserving the highest standards of investor protection and market integrity. Moreover, the adjustments should be considered to be only one part of a broader package of measures, the 'SME listing package', which also targets the remaining issues preventing SMEs from raising capital on public markets. Any changes proposed as a result of this analysis should therefore be understood as a first step in the right direction, and not as a single remedy in itself. While this impact assessment considers the problems that can be tackled through regulatory amendments, the other measures making up the SME listing package are non-regulatory. 1.1Legal background When companies choose to raise capital through the issuance of shares or bonds in the EU, they can do so either on regulated markets (‘RMs’, also called 'main markets') or on a Multilateral Trading Facility (MTF), both categories being defined by the Markets in Financial Instruments Directive II (MiFID II). While either type of market is accessible to companies of all sizes, regulated markets are generally more appropriate for large and mature businesses. Listing on these markets will provide access to deeper pools of capital and liquidity, and companies will benefit from a higher public profile (media coverage, investment research, etc.). However, regulated markets require companies to comply with a wider range of EU regulations concerning initial and ongoing disclosure, market abuses, and accounting among others (such as the Transparency Directive, the Shareholders' Rights Directive and the Takeover Bid Directive). This implies a significantly higher cost of listing. While the benefits will offset these costs for larger companies, smaller companies will usually reap fewer benefits from a regulated market listing and often lack the resources to meet the higher regulatory requirements. MTFs are generally more appropriate for smaller, fast-growing companies, as issuers on these markets do not have to comply with all the European legislation applicable to companies listed on a regulated market. MTFs are usually regulated through the listing rules of the exchange. Across the European Union, a large number of regulated market operators also have alternative MTFs, targeting specifically smaller issuers. These 'junior markets' (also called alternative markets or trading platforms) "offer more flexible listing criteria, eased disclosure requirements and comparatively low admission costs, so as to cater to SMEs' inherent characteristics". According to Europe Economics, there were 40 MTFs dedicated to small and medium-sized enterprises across the European Union in February 2015. Since January 2018, the Markets in Financial Instruments Directive II has also introduced a new category of MTFs, the SME Growth Markets, to "make it attractive for investors, and provide a lessening of administrative burdens and further incentives for SMEs to access capital markets". For an MTF to qualify as an SME Growth Market, at least 50% of the issuers whose financial instruments are traded on the trading venue MTF need to be SMEs, defined by the Markets in Financial Instruments Directive II as companies with an average market capitalisation of less than EUR 200 million. In order to guarantee investor confidence, the listing rules of SME Growth Markets must also satisfy certain quality standards, including an appropriate admission document (when a prospectus is not required) and periodic financial reporting. The SME Growth Market framework was developed to further acknowledge the special needs of SMEs entering the equity and bond markets for the first time. Several acts of the European Union already refer to this new form of trading venues, such as the recent Prospectus Regulation, the European Venture Capital Fund Regulation and the Central Securities Depositaries Regulation (see annex 14 for more details). As the cost of drawing up a prospectus can be disproportionately high for SMEs, the Prospectus Regulation has also introduced a reduced disclosure regime for SMEs which have no securities admitted to trading on a regulated market. Since its entry into application on 1 July 2016, the Market Abuse Regulation (MAR) has been extended to MTFs, including SME Growth Markets. It provides for two specific alleviations for SME Growth Market issuers (see below in the Section Problem Drivers). The Market Abuse Regulation is a comprehensive legislative framework that aims to increase investor confidence and market integrity, by prohibiting to (i) engage or attempt to engage in insider dealing; (ii) recommend that another person engage in insider dealing or induce another person to engage in insider dealing; (iii) unlawfully disclose inside information or (iv) engage in or attempt to engage in market manipulation. Issuers are also subject to several disclosure and record-keeping obligations under the Market Abuse Regulation. Relevant issuers are notably under a general obligation to disclose inside information to the public as soon as possible. Regulated Market SME Growth Market MIFID II MAR Prospectus Regulation Only if there is offer of securities to the public Transparency Directive Takeover bid Directive Shareholders' Rights Directive Mandatory use of IFRS Non-financial reporting Directive Source: Commission services 1.2Policy context Newly listed SMEs are a key motor of new investment and job creation. Companies recently listed often outstrip their privately-owned counterparts in terms of annual growth and workforce increase. The benefits of listing include a reduced dependency on bank financing, a higher degree of diversification of investors, easier access to additional equity capital and debt finance (through secondary offers) and higher public profile and brand recognition. From the investors' angle, companies with a small market capitalisation (small caps) have, on average, a higher risk-return profile than large companies. In order to support jobs and growth in the EU, facilitating access to finance for SMEs has been a key goal of the Capital Markets Union (CMU) from the outset. Since the publication of the Capital Markets Union Action Plan in 2015, some targeted actions were taken to develop adequate sources of funding for SMEs through all their stages of development. Among others, the Commission has taken forward a comprehensive package of legislative and non-legislative measures to scale up Venture Capital (VC) financing in Europe, including the creation of a Venture Capital fund-of-funds supported by the EU budget and the review of regulation on European Venture Capital and European Social Entrepreneurship funds. In its Mid-term Review of the Capital Markets Union Action Plan published in June 2017, the Commission chose to raise its level of ambition and strengthened its focus on SME access to public markets. Importantly, the Commission also recognised that there was no 'silver bullet' to restore the markets of SME initial public offerings (IPO) across the EU. The Commission has therefore decided to set in motion several non-legislative actions aimed at reviving the public markets for SMEs. First, building on the conclusions of the Call for Evidence, the Commission committed to assessing the impact of Markets in Financial Instruments Directive II (MiFID II) level 2 rules, requiring the unbundling of research from trading commissions, on SME equity and bond research coverage. Second, the Commission will identify and share best practices of financial schemes set up by national promotional banks that help SMEs bear initial public offering costs. Third, the Commission will explore how an EU financial support can help SMEs at the stage of an initial public offering. Fourth, the Commission will continue working with the International Accounting Standard Board (IASB) and all interested stakeholders to improve International Financial Reporting Standards (IFRS) acceptance by developing an application toolbox and by clarifying disclosures for SMEs through the IASB's Disclosure Initiative. Although still in discussion, these various measures will mostly aim at improving the visibility and attractiveness of SME securities towards investors, and at reviving the ecosystem of SME-specialised intermediaries that intervene in the listing process (cf. figure 2). Last but not least, the Commission has committed to publishing 'an impact assessment that will explore whether targeted amendments to relevant EU legislation could deliver a more proportionate regulatory environment to support SME listing on public markets'. This measure constitutes the regulatory part of the SME listing package announced in the Mid-Term Review of the CMU Action Plan. Progress has already been made in the context of CMU to make it easier and cheaper for smaller companies to access public markets, notably with the creation of the alleviated 'EU Growth Prospectus' through the revised Prospectus Regulation. Nevertheless, stakeholders expressed through various dialogues and previous public consultations (such as the CMU public consultation, the Call for evidence on the EU regulatory framework for financial services and the CMU Mid-Term Review public consultation), that more needed to be done on the regulatory side to ensure that SMEs could reap the full benefits of public markets.



Source: European Commission services On 29 June 2017, the Council underlined that it 'welcome[d] the Commission's commitment to deliver a more proportionate regulatory environment to support SME listing on public markets, which – coupled with related non legislative actions – would further promote the development of equity capital markets across all Member States'. While conducting this proportionate review of regulatory barriers to SME listing, the Commission has decided to follow two guiding principles. First, this review should make sure that no proposed change undermines investor protection and market integrity or weakens core principles of acts of the European Union that were crucial in restoring confidence in financial markets (such as the Market Abuse Regulation). Second, the Commission considers that SMEs listed on regulated markets should remain outside the scope of this exercise. Requirements imposed on regulated market issuers should apply in a similar way regardless of the size of the company, so that investors on regulated markets feel confident that issuers are subject to one single set of rules. Different requirements for SMEs compared to large capitalisations on those trading venues are likely to confuse stakeholders, and in particular investors. Therefore, this review will not interfere with the rulebook of the European Union applicable to regulated market issuers. It will be strictly confined to SME Growth Markets and companies listed on those trading venues, a position also in line with a resolution adopted on 19 January 2016, by the European Parliament, which called on the Commission and the Member States "to make active use of the SME Growth Market category in future financial services regulation". As a result, only legal texts applicable to SME Growth Markets are considered in the context of this initiative (i.e. Market Abuse Regulation, Prospectus Regulation and the MiFID II – see figure 1 for more details). 1.3Market context 1.3.1A persistently low and concentrated SME IPO activity Despite the benefits of stock exchange listings, European public markets for SMEs are struggling to attract issuers. The number of initial public offerings on SME-dedicated markets steeply declined in the European Union in the wake of the crisis, and did not significantly pick up since. As a result, Europe is producing only half of the SME initial public offerings that it generated before the financial crisis (478 initial public offerings on average per year in 2006-2007 vs. 218 between 2009 and 2017 on EU SME MTFs). Between 2006 and 2007, an average of EUR 13.8 billion was raised annually on European SME-dedicated MTFs through initial public offerings. This amount fell to EUR 2.55 billion on average from 2009 to 2017. While IPO markets continue to function well for larger companies, they may have become less accessible to smaller companies. Source: Commission data on European SME-dedicated MTFs collected directly from securities exchanges Importantly, one MTF – AIM in the UK – has been responsible for the bulk of the activity between 2006 and 2017 (74% of the total proceeds). Although this proportion has decreased over time, it still represented more than half of all IPO values conducted on EU SME markets in 2016. This fact highlights a second important issue in the European SME IPO landscape: the activity remains highly concentrated in the UK , leaving other markets virtually inactive in comparison. Source: Commission data on European SME-dedicated MTFs collected directly from securities exchanges In addition, the fact that 18 European SMEs carried out their initial public offerings in the US between October 2012 and March 2014, raising a total of EUR 1,156 million of capital, further illustrates the fact that EU IPO markets may not always suit the needs of European SMEs. 1.3.2Underdeveloped SME bond markets The situation on debt markets is also particularly worrying. As highlighted by a dedicated Commission Expert Group, bond markets remain largely untapped by European SMEs, despite the creation of specialised platforms in Europe with simpler, less costly processes and requirements,. This situation is clearly reflected in the low number of companies issuing bonds on SME-dedicated markets: out of the approximately 35,000 companies eligible to issue mini-bonds in Italy, only 222 companies did so from 2012 to 2016. Similarly, 800 Spanish SMEs are believed to be eligible to issue bonds on the Spanish SME-dedicated debt market (MARF), while there have been only 41 five issuers of debt on the market since 2013. 2Problem definition To create viable public markets for small and mid-capitalisation companies, SMEs must be willing to issue securities (supply) and investors must be willing to invest in this asset class (demand). Furthermore, public markets for SMEs need to be supported by healthy local ecosystems (i.e. a network of brokers, equity analysts, credit rating agencies, investors specialised in SMEs, etc.) that help smaller firms both pre- and post-IPO, connect listed SMEs with investors, and that (indirectly) ensure a sufficient level of liquidity. All these elements are also influenced by the way regulations have been designed. In this regulatory perspective, the challenges that SME-dedicated markets are currently facing can be categorised into two groups: (i) on the supply side, issuers have to face high compliance costs to be able to list; (ii) on the demand side, insufficient liquidity can affect issuers, investors as well as market intermediaries.

2.1What are the problems 2.1.1Supply side: high compliance costs for listed SMEs Two categories of costs are incurred by SMEs when tapping public markets: (i) the direct costs of becoming (at the Initial Public Offering or IBO stage) and remaining publicly listed, through fees paid to several services providers (such as the underwriting banks, auditors, legal advisors, communication specialists…); and (ii) the indirect ongoing compliance costs to meet regulatory requirements. While making a decision on whether or not to list, companies weigh expected benefits against the costs. If costs are higher than benefits or if alternative sources of financing propose a better ratio, companies will not seek a listing of their shares or an issuance of bonds on a public market. The focus of this impact assessment will be on the indirect costs associated with requirements laid down in European legislation. Heavy reporting requirements are considered an indirect cost of remaining public, as additional staff is needed to assist the issuer in complying with regulatory requirements. The problem is magnified by the fact that EU legislation is very technical, that SMEs may therefore not have the expertise or experience needed to understand and meet their obligations (giving rise to compliance issues), and may not be prepared to obtain external legal advice due to associated costs. In general, SMEs hold the view that fund-raising through capital markets imposes a large administrative burden, which is considered one of the main hurdles to going public. A study from the World Federation of Exchanges has asked listed SMEs to compare their experience of listing with their prior expectations. The areas where listed SMEs' experience was most out of line with expectations were 'time and costs of meeting listing requirements', 'time and costs of reforming the corporate governance structure' and 'time and cost of aligning financial statements'. Among other things, the majority of unlisted SMEs mentioned that 'the ongoing cost of compliance was too high', 'the listing requirement entailed changing too many requirements within the firm' and that they were 'concerned about heavy and cumbersome requirements'. These responses confirm that SMEs not only perceive capital-raising on public markets as burdensome, costly and time consuming – a perception that may discourage them from listing – but actually experience it as such. High compliance costs and management time spent to comply with the regulatory burden can also lead companies listed on junior markets to cancel their admission to trading. The inherent small size of SMEs often makes compliance costs disproportionate. As the costs associated with some requirements are largely fixed, economies of scale imply that a disproportionately large burden is placed on smaller firms, either in terms of staff to mobilise or actual monetary costs. In 2010, the total ongoing costs of remaining listed (direct and indirect) in France were estimated to lie between EUR 150,000 to EUR 500,000 per year for equity issuers with less than EUR 150 million of capitalizationOne UK stakeholder mentioned that the direct and indirect costs of having shares admitted to trading on AIM (the London Stock Exchange SME Growth Market in the UK) are considered to be around EUR 325,000 per year. In the UK, complying with the Market Abuse Regulation would result in additional costs estimated at EUR 58,000 per year and per company listed on AIM. In Italy, the costs due to application of the Market Abuse Regulation to bond issuers on EXTRA-MOT-PRO (an SME-dedicated MTF specialised in bonds) are estimated at EUR 25,000 for the first year and between EUR 5,000 and EUR 10,000 per year for ongoing compliance. Some companies across the EU were also reported to have delisted because of the cost and compliance burden stemming from the Market Abuse Regulation . 2.1.2Demand side: Insufficient liquidity on SME-dedicated markets SME markets and small cap companies traded on them tend to suffer from lower levels of liquidity than their larger counterparts. As shown in the table below, the turnover ratio of all the SME-dedicated MTFs is typically lower than the turnover of corresponding regulated markets in the same Member State. Some SME-dedicated MTFs have very low liquidity, with a turnover ratio between 0 and 5%. 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 First North (Nordics) 113% 85% 60% 58% 56% 56% 126% 84% 82% 58% 53% 60% EN.A (EL) N/A N/A 1% 2% 2% 1% 1% 1% 0% 0% 2% 2% ESM (IE) 124% 126% 195% 133% 64% 4,6% 4,2% 2,9% 5,6% 7,9% 5,7% 13% AIM (IT) N/A N/A N/A 2,4% 13% 7,6% 9,3% 17% 20% 30% 11% 47% NewConnect (PL) N/A 44% 36% 42% 62% 40% 20% 14% 20% 31% 23% 24% AeRO (RO) N/A N/A N/A N/A N/A N/A N/A N/A N/A 2% 5% 3% MAB (ES) N/A N/A N/A 18% 10% 10% 10% 15% 123% 17% 5% 4% AIM (UK) 77% 77% 62% 59% 60% 67% 78% 58% 77% 58% 57% 72% Source: Commission data on European SME-dedicated MTFs collected directly from exchanges 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Nasdaq OMX (Nordics) 132% 134% 135% 109% 88% 89% 69% 64% 64% 68% 64% 61% ATHEX (EL) 0 0 0% 0% 0% 0% 0% 0% 25% 45% 51% 48% Irish SE (IE) 13% 20% 63% 36% 23% 42% 40% 66% 59% 44% 50% 27% Borsa Italiana (IT) 154% 204% 185% 158% 163% 179% 138% 128% 153% 153% 114% 108% Warsaw SE (PL) 24% 22% 44% 58% 45% 42% 41% 42% 36% 36.% 38% 38% Bucharest SE (RO) 15% 17% 12% 15% 13% 22% 15% 17% 17% 11% 11% 14% BME (ES) 114% 135% 183% 90% 119% 117% 93% 87% 108% 134% 98% 88% LSEG (UK) N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Source: Commission data on European SME-dedicated MTFs collected directly from exchanges Low levels of liquidity act as one of the most important deterrents to investments in SME financial instruments, and especially in shares. Investors (institutional and retail) overall prefer liquid stocks (and markets) for their investments. A study has shown that both retail and institutional investors consider that more liquidity in SME stocks is the main factor that would increase their confidence in listed SMEs. Without liquidity, professional investors face increased risks ('liquidity risk') and tend to shift their assets away from SMEs into larger capitalisation companies. Liquidity remains the precondition for an exit from an investment. With insufficient liquidity, it might take several months for an investor to sell off their holdings in a company. When liquidity is constrained, professional investors cannot get the shares required to fulfil their portfolio requirements, deterring their participations in such markets. Low liquidity on SME-dedicated markets is an important variable for issuers. Low liquidity increases the equity cost of capital and increases the likelihood that an initial public offering could be under-priced compared to the actual fundamentals of the company, as investors price in the liquidity risk. In addition, lack of liquidity may be an important driver of delistings. If a stock is not liquid, it may be priced at a discount, which implies lower advantages of being listed. This could imply that companies with more concentrated ownership (less free float), less traded stocks and operating in less liquid national stock markets will be more inclined to go private. The lack of liquidity is also a source of concern for market intermediaries. A study has shown that market intermediaries consider a mechanism enhancing liquidity of SME stocks' to be the most important factor for the health of the SME ecosystem. Interestingly, this result holds across all types of intermediaries, as financial institutions supplying financial services to SMEs usually provide more than one service, several of which requiring market liquidity (such as underwriting, brokerage or market-making services). Liquidity is key in the business model of brokers, especially on segments where trading volumes are thin, like on SME segments. Evidence suggests that revenues from the fees generated by smaller trading segments are insufficient to remunerate brokers, who bear high fixed costs and are often locally-based. Due to this lack of liquidity, services providers are not incentivised to support smaller listed companies because it is economically less attractive for them to do so. This lack of profitability potentially creates problems in ensuring the existence of a sufficiently vibrant and motivated ecosystem to support small and mid-caps. Such ecosystems consist of investment banks specialised in SMEs, brokers, market-makers and other third party advisors specialised in SMEs. The erosion or disappearance of the local and regional ecosystems in Europe is cited as a major contributor to the low levels of initial public offerings on SME markets. 2.2What are the problem drivers? While there are many factors driving SMEs' decision to go public and investors' decisions to invest in SME financial instruments, this impact assessment focuses on selected drivers related to specific barriers in the regulatory framework. The other 'out-of-scope' drivers are described in Annex 5. 2.2.1Administrative and regulatory burden on SME issuers stemming from the application of MAR and the Prospectus Regulation The Market Abuse Regulation has extended the scope of its obligations to issuers whose financial instruments have been admitted to trading on an MTF (including SME Growth Markets). In doing so, the Market Abuse Regulation has created a 'one-size-fits-all' regulatory environment by making all its requirements applicable (except two minor alleviations discussed below) in the same manner to all issuers, irrespective of their size or the trading venue where their shares or bonds are admitted to trading. In the context of the Call for Evidence on the EU regulatory framework for financial services, 'several respondents argued that the market abuse regime places a high burden on issuers listed on SME markets, which may ultimately result in less activity and thus reduced financing for SMEs'.

Some MTF issuers notably consider their obligation resulting from the Market Abuse Regulation to notify managers' transactions as burdensome. Notifications by managers of transactions carried out in relation to securities of companies they manage are informative for price formation (market signalling): by providing the market with this notification, managers indicate to investors their perception of the issuers’ future prospects. The obligation to disclose a manager’s transaction applies once these transactions have reached a cumulative amount of EUR 5,000 within a calendar year (with no netting). To reduce the number of declared transactions and associated costs, a national competent authority may decide to increase the threshold to EUR 20,000, but only four of them have decided to use this option. Some stakeholders consider that this threshold is too low, making this requirement not only burdensome for managers and issuers but also poorly informative for the market. The persons caught by the managers' transactions regime (either the Persons Discharging Managerial Responsibilities – PDMRs - or the Persons Closely Associated to PDMRs - PCAs) shall notify the issuers within three working days as of the transaction date, while SME issuers are obliged to disclose those managers' dealings within the same three-day period. As the settlement of a transaction takes at least two working days and can lead to a late notification, the current three working-day rule may not allow issuers to have sufficient time to disclose the transactions to the market, while they face potential sanctions in case of non-compliance with this requirement. This timeframe will still be particularly challenging when the issuer is seeking legal advice about whether a specific transaction should be disclosed or not. Another administrative burden stems from the obligation to justify the reasons why the disclosure of inside information has been delayed. The issuer can delay such disclosure in certain cases to avoid harming its legitimate interests and provided that it would not prove misleading for the public. However, once it has decided to delay the disclosure, the issuer must inform its national competent authority and justify the delay. The written explanation should be provided in all circumstances or only when the national competent authority requests it (but only seven Member States have chosen this second option). An implementing regulation provides that companies must record and document in writing a long list of information ('disclosure record'). This requirement can be burdensome for SMEs that already struggle with defining what constitutes inside information. In some cases, SMEs can also be tempted to disclose inside information earlier than they wanted (and thus harming its legitimate interests) to avoid time-consuming justifications to the national competent authority. The private placement of SME bonds with institutional investors is also constrained by the Market Abuse Regulation market sounding regime. The Market Abuse Regulation provides for a prescriptive regime, which introduces obligations on issuers (or investment firms acting on their behalf) carrying out soundings as well as on investors who are sounded out. The heavy obligations imposed have a deterring effect on both potential issuers and investors that might otherwise have been interested in entering into a negotiation process with the issuer to concluding such a transaction. Furthermore, the Market Abuse Regulation does not go far enough in differentiating requirements for SME Growth Market issuers compared to companies listed on regulated markets. The Market Abuse Regulation has made only two limited concessions to SME Growth Market issuers. First, those issuers can disclose inside information on the trading venue's website (rather on their own website). In practice, this concession has been considered to be of limited value, as SMEs can also be required to maintain a website for regulatory or other commercial purposes. Second, SME Growth Market issuers are also exempted from maintaining 'insider lists' (i.e. a list of all persons who have access to inside information) on an ongoing basis, as long as the issuer takes all reasonable steps to ensure that any person with access to inside information acknowledges the regulatory duties which follow and the issuer is able to provide the national competent authority, on request, with the insider list. This exemption does not amount to a real alleviation. In practice, it can be difficult to draw up an insider list ex-post several months after the events that gave rise to inside information. There is also still a need for such issuers to have adequate systems and procedures in place to produce an insider list if requested by the national competent authority. This may lead such issuers to establish costly internal systems or processes, which increase the administrative burden they are under. Finally, it appears that very few companies listed on SME-dedicated markets actually graduate to the European main (regulated) markets, while those trading venues allow successful companies to benefit from greater liquidity and a larger investor pool. Stakeholders indicated that one regulatory impediment to such a graduation on main markets is the obligation to draft a full prospectus when the shares are admitted to trading on a regulated market. Dritter

Markt (AT) Euronext G (FR,BE, NL,PT) START (CZ) First

North (Nordics) ESM (IE) AIM

(IT) New Connect (PL) MAB (ES) Aktie

Torget (SE) NGM (SE) AIM

(UK) Total of listings from the SME-dedicated MTF to the regulated market 0 8 0 61 3 3 62 1 6 1 74 Total number of listed companies since 2006 or the creation of the SME MTF 4 276 1 426 32 120 646 93 258 83 2251 % over total number of companies listed on market 0% 3% 0% 14% 9% 3% 10% 1% 2% 1% 3% Source: European Commission calculations based on data collected directly from European securities exchanges 2.2.2Inadequate definition of SME Growth Markets Europe Economics has identified around 40 potential candidates for the SME Growth Market label among the EU MTFs. Among those 40 SME-dedicated MTFs, only three have been registered as SME Growth Markets so far. As mentioned above, an SME Growth Market is currently defined as an MTF on which at least '50% of issuers are SMEs'. SMEs are defined by Markets in Financial Instruments Directive II as companies with a market capitalisation below EUR 200 million. This definition does not prevent SME-dedicated MTFs specialised in shares to register as SME Growth Markets, as the vast majority of their issuers do not reach this EUR 200 million market capitalisation threshold. However, as the market capitalisation threshold is set at a rather low level, this can 'adversely impact investor perception of the SME markets as they would be regarded as only accommodating micro-cap, illiquid companies". Indeed the definition of SMEs included in Markets in Financial Instruments Directive II does not correspond to those used in indices or by asset managers specialised in small caps. Some European regulations already grant regulatory incentives to companies that have a larger market capitalisation than the MiFID II SME definition. Finally, it appears that companies with a higher market capitalisation than EUR 200 million can also suffer from liquidity issues, thus attracting lower investor interest and making the listing less attractive. The figure below shows that liquidity really kicks in for companies listed on AIM, when their market capitalisation exceeds GBP 1 billion. Another regulatory issue arises from the fact that the level 1 of MiFID II only refers to equity issuers. To determine whether an SME Growth Market has at least 50% of SME issuers, the level 2 of MiFID II provides for a complementary approach to capture SME debt issuers on SME Growth Markets. The level 2 states that issuers with no equity instrument traded on any trading venue shall be deemed an SME provided that, according to its last annual or consolidated accounts, it meets at least two of the following three criteria: (i) an average number of employees during the financial year of less than 250; (ii) a total balance sheet not exceeding EUR 43 million and (iii) an annual net turnover not exceeding EUR 50 million. This definition refers to the EU 2003 Recommendation defining an SME, which is not fully adapted to companies willing to issue bonds on SME-dedicated MTFs. As the OECD puts it, the SME bond market is 'suited mostly to the upper segment of the SME size spectrum'. The typical issuance size ranges between EUR 20 and 80 million on the Mercado Alternativo de Renta Fija in Spain and EUR 30 million on Extra-MOT Pro in Italy. Therefore, after the issuance, some SME bond issuers may not meet the balance sheet threshold (especially when they return to the market for follow-up bond issuances). Second, in order to repay a debt of such scale, SME bond issuers need to have stable cash-flows with a turnover prospectively higher than EUR 50 million. If the definition of SME bond-only issuers is not well-calibrated, the SME-dedicated MTFs specialised in bond issuances and those that allow both equity and bond issuances by SMEs may face challenges in registering as SME Growth Markets. In turn, if the SME Growth Market framework is not used by market operators, their issuers will not be able to benefit from regulatory alleviations, thus increasing their compliance burden. Beyond the SME non-equity issuer definition, another requirement may hinder the take-up of the SME Growth Market concept. The level 2 of MiFID II also imposes periodic disclosure requirements on SME Growth Market issuers, by requiring half-yearly and annual reports. Financial reporting provided on a half-yearly basis is usually welcomed by investors and contributes to attracting interest in the company. However, some market participants have indicated that the publication of such half-yearly information can also represent a time-consuming and costly obligation for SMEsThe absence of flexibility left to the market operators as regards the possibility to require or not a half-yearly report can discourage some MTFs from seeking a registration as an SME Growth Market, because they cannot tailor their listing rules to local conditions. Finally, the take-up of the SME Growth Market 'brand' is also constrained by the fact that only few alleviations or benefits are currently foreseen in the EU legislation for the issuers listed on this new type of trading venues (See Annex 14). Some market operators and stakeholders consider that the legal framework applying to SME Growth Markets does not differentiate them much from MTFs (in terms of regulatory benefits) or regulated markets (in terms of alleviations), making the concept insufficiently attractive. 2.2.3Lack of schemes (mechanisms) to promote trading and liquidity on SME Growth Markets

The limited liquidity on SME equity markets can be explained by a number of factors. While SMEs tend to overlook the importance of liquidity, investors favour mechanisms that promote trading of SME stocks. There are different mechanisms through which liquidity can usually be enhanced. Market-making (under a contract with a trading venue) is probably the most traditional system. Some market operators have encouraged the development of market-making (by putting in place some attractive fee trading schemes in return for minimum requirements to build deeper markets). The remuneration of the market-maker typically comes from the spread (the difference between buy and sell prices). However, these types of arrangements also rely on the existence of market-makers that are willing to commit capital and run a market risk. Market-making activities would currently be challenged by both regulatory reforms and new technology developments. Another mechanism is the liquidity provision contract, which 'consists in an issuer entering into an agreement with a financial intermediary that is entrusted with the task of enhancing the liquidity of the issuer’s financial instruments'. Liquidity providers play the same role as market-makers but they do not act with their own account. Several studies show that liquidity contracts can improve liquidity, that this improvement is particularly significant for less liquid shares and that they help reduce liquidity risk. When SME issuers are allowed to enter into a liquidity contract, be it market making or liquidity provision, they seem to largely use this possibility. However, in order to be allowed by a competent authority, the liquidity provision practice must be recognised as an accepted market practice (AMP) under the Market Abuse Regulation. For an accepted market practice to be established a national competent authority must notify the European Securities and Markets Authority and other national regulators of its intention, and the European Securities and Markets Authority must issue an opinion that (i) assesses the compatibility of the accepted market practice with the Market Abuse Regulation and the related regulatory technical standard on accepted market practices, and (ii) considers whether the accepted market practice would threaten market confidence in the European financial markets. For the time being, only four Member States authorise liquidity provision contracts. This means that in 24 Member States, SME issuers do not have the possibility to enter into a liquidity contract, but have to rely on market makers (provided they exist). Finally, another technique consists in requiring a minimum free float (i.e. a minimum amount of capital in the public's hands and that can be freely traded) when an SME seeks to list its shares on an SME-dedicated market. The relative low volume of shares traded on SME-dedicated markets is often attributed to the small sizes and limited free float that small caps regularly offer. It is likely that there will be a much smaller percentage of the shares of an SME in public hands, as the founders of the company will probably want to hold on to a significant stake in the ownership of the company. The Markets in Financial Instruments Directive II does not prescribe any free float or minimum capitalisation requirement when a company seeks the admission of its shares to trading on an SME Growth Market. Some SME-dedicated MTFs have no requirement in terms of free float or initial minimum number of shareholders. Other trading venues require a minimum number of shareholders (from 50 to 300) or a threshold varying from 10 to 20% of the shares (see Annex 7). Finally, most of the SME MTFs do not set a minimum capitalisation threshold. Given this absence of free float at the initial public offering stage, liquidity in the secondary market is insufficiently stimulated, carrying the risk of reduced capitalisation (to reflect liquidity risk) and higher capital costs on these markets. 2.2.4Out-of-scope drivers Beyond the drivers listed above, the demand for SME financial instruments is also constrained by additional factors, such as the lack of visibility of SMEs towards institutional and foreign investors, or the tax treatment of investments in the various Member States. The supply of SME financial instruments is also hindered by SMEs' lack of business education. These and other out-of-scope drivers are not addressed in the current initiative focusing on targeted technical amendments, but are being considered in the wider plan to facilitate SME access to public markets (see section on policy context, i.e. CMU). For more details on out-of-scope drivers, please refer to annex 5. 2.3Consequences: less capital raised by SMEs on public markets SMEs will opt in favour of (or against) a public listing of their shares/bonds by weighing the costs and benefits of such a decision. Although it would be exaggerated to claim that low SME listing levels are the direct consequence of the regulatory issues described above, the latter do contribute to reducing the relative attractiveness of public markets for SMEs: they increase the regulatory burden imposed on SMEs when listing on public markets, and they limit the liquidity of listed SMEs. The regulatory barriers considered in this impact assessment are part of a wider problem preventing SMEs from accessing the advantages of public issuances of shares and bonds. Concerning public equity markets, one of the main advantages lies in the ability for SMEs to raise permanent risk capital, i.e. capital that does not have to be paid back to investors within a given time limit. In addition to serving as a direct source for financing new investments, listed shares also provide the corporation with its own currency, which may be used to finance acquisitions. Concerning bond markets, the main advantages for companies stem from the flexibility of the instrument (the terms of the issuance can be fully customised to fit a company’s needs) and its agility (bond markets can offer quicker access and implementation than bank or equity funding). In addition, limited access to public markets further reduces SMEs' ability to raise funding by preventing them from resorting to secondary raisings. Going public for a company is not only a one-off opportunity to raise capital, but offers the possibility, for both equity and bonds, to make subsequent issuances over time and raise money again from its share- and bondholders. The amount of equity raised through secondary or follow-on offerings is by no means marginal or negligible. Such offerings can be made several years after the initial public offering, in order to finance, for example, a new phase of expansion. The figure below illustrates the total public equity financing of growth companies with an initial public offering of less than USD 100 million in advanced economies. In every year shown in the figure, equity proceeds through secondary public offerings of companies exceed initial public offerings proceeds. Source: OECD Moreover, public equity and debt markets enable SMEs to raise large amounts more easily than they could through other means. Eventually, going public could also bring SMEs other more intangible benefits, such as increased visibility and brand recognition for potential suppliers and customers. Reduced SME access to public equity and bond markets also results in limited opportunities for European companies to diversify their sources of funding and reduce their overreliance on bank loans. This is all the more relevant as studies have shown that the development of public equity markets may also foster SME access to the bond market, by increasing the availability of, and improve conditions for, subsequent debt financing. A study from the OECD has notably found a strong positive relationship between a company's public listing and its issuing of corporate bonds. A number of explanations have been offered to explain why being listed could help companies access the corporate bond market,. There is also evidence to suggest that the same positive relationship holds for listing, bank credits and syndicated loans. In addition to the complementarity between equity and bond financing, more dynamic public equity markets can also foster the development of private equity and venture capital financing. Healthy public equity markets can stimulate private equity and venture capital activity by providing smooth exit opportunities. However, the European SME-dedicated markets do not currently provide a stable exit mechanism for venture capitalists and private equity funds. Similarly, public equity markets for SMEs could also stimulate equity crowdfunding investments. However, at present, there is no real secondary market for crowdfunding exits. As a consequence, a limited SME access to public markets has repercussions not only on capital-raising through IPOs, but throughout the funding escalator of companies (see annex 8 for more details). 2.4Wider consequences Lower capital raising activity by SMEs on public markets can translate into significant missed opportunities for the European economy, in terms of economic growth, job creation and innovation. A significant amount of research has documented the links between vibrant public markets and economic growth. Ensuring the development of SME-dedicated public markets is key in fostering growth, as they appear most suited to the needs of high-growth, innovative SMEs, which would otherwise struggle to find adequate sources of funding,. Data showed that junior trading venues can significantly boost the activity of fast-growing SMEs, as companies choosing to list on an SME-dedicated MTF have shown very significant growth rates in their post-IPO phase. Similarly, as underdeveloped public markets do not enable high-growth companies to grow and reach their full potential, they also prevent them from recruiting and creating jobs. Studies have highlighted that job creations by SMEs tend to accelerate after the initial public offerings. Eventually, underdeveloped SME-dedicated public markets prevent fast-growing firms from exploiting their innovation potential. As explained in a study on the economic impact of the London Stock Exchange's junior market AIM, equity capital is most suitable for technology firms and fast-growing companies needing to make upfront investments with no immediate or steady revenues. If such companies do not have access to funding under appropriate conditions such as those offered by public equity markets, they are less likely to invest in research and innovate.





2.5How will the problem evolve? If no action is taken, existing market and regulatory failures would remain, SME access to public capital markets would be impeded, and small companies would continue to be largely dependent on bank financing. Market developments, such as the emergence of Fintech in the financial services industry, is not expected to substantially improve the situation regarding the particular problems at hand. What is more, in certain areas further deterioration is likely. Considering that the majority of the European SME initial public offering activity has been carried out in the UK for the past twelve years (see section on Market context), the departure of the UK from the European Unionis expected to reduce the opportunities for growth companies in continental Europe to list and raise capital on European public markets. It should also be kept in mind that low activity on SME MTFs has repercussions on the whole funding escalator: in the longer run, less developed junior markets also means less exit opportunities for investors at the Venture Capital and Private Equity stage, and less companies able to move on to the regulated market (see Annex 8 for more details). In this context, action needs to be taken swiftly. The work conducted in this impact assessment is all the more urgent as it aims to address issues that have been repeatedly highlighted by stakeholders over the past four years as holding back SME access to public markets (see annex 2 on stakeholder consultation for more details). In the public consultation on “Building a proportionate regulatory environment to support SME listing”, high compliance costs were rated the highest by respondents to explain the low number of SME initial public offerings. Although the regulatory impediments presented in the previous sections do not explain on their own the low levels of SME IPO activity in the European Union, they further dis-incentivise smaller companies to raise capital on public markets and exacerbate unfavourable market conditions. These detrimental impacts are unlikely to decrease in magnitude without further regulatory changes. So far, they have instead increased with the entry into application of the Market Abuse Regulation in 2016, which imposed stricter requirements to all issuers regardless of their size. Being a regulation, it also left little flexibility to Member States to adapt the rules. It is also important to note that waiting longer before taking action would be highly unlikely to bring further insight. As currently framed in MiFID II, the SME Growth Market concept remains an “empty shell” with only little difference compared to the general MTF framework. As a consequence, a significant number of market operators have highlighted that they saw limited benefits to registering their MTFs as SME Growth Markets. In some instances, they even described the current framework as unfit for purpose (especially for debt-only issuers). In this context, the resolution of the European Parliament, which called on making “active use of the SME Growth Market category in future financial services regulation”, should be taken up. 3Why should the EU act? 3.1Legal basis The legal basis of the Market Abuse Regulation and the Prospectus Regulation (PR) is Article 114 of the Treaty on the Functioning of the European Union (TFEU) which confers to the European institutions the competence to lay down appropriate provisions that have as their objective the establishment and functioning of the single market. The legal basis of the Markets in Financial Instruments Directive II is Article 53(1). Under Article 4 of TFEU, EU action for completing the internal market has to be appraised in light of the subsidiarity principle set out in Article 5(3) of the Treaty on European Union. According to the principle of subsidiarity, action on European level should be taken only when the objectives of the proposed action cannot be achieved sufficiently by Member States alone and thus mandate action at European level. 3.2Subsidiarity: Necessity of action of the European Union It has to be assessed whether the issues at stake have transnational aspects and whether the objectives of the proposed actions cannot be sufficiently achieved by Member States in the framework of their national constitutional system (the so-called 'necessity test'). In this regard, it should be noted that even if they are more local in nature compared to regulated markets, SME-dedicated MTFs (and potential SME Growth markets) have a clear cross-border dimension, in terms of investors who invest outside their Member States of origin (see Annex 7) as well as in terms of issuers that often list their shares or bonds on a trading venue located in another Member State. The first objective of this initiative is to remove undue administrative burden and ease SME access to public markets for shares and bonds, in order to diversify their sources of capital from anywhere within the European Union. The second objective consists in increasing the liquidity in financial instruments issued by SME Growth Market issuers, especially shares. Administrative burden placed on SMEs results from the application of MiFID II, the Market Abuse Regulation and Prospectus Regulation. The latter two items of legislation have direct binding legal force on all Member States. Those rulebooks leave almost no flexibility for Member States to adapt the rules to local conditions or to the size of issuers or investments firms. Likewise, MiFID II does not provide Member States with sufficient flexibility to address the problems identified. As such, the problems arising from those provisions can only be effectively addressed via legislative amendments tabled at the European level. The possible alternatives, i.e. non-legislative action at Union level (e.g. guidelines by ESMA, and action at Member State level) could not sufficiently and effectively achieve the objective as they could not amend the provisions of the Regulations. Therefore, any improvement of these rules to make the EU framework for SME Growth Markets issuers more proportionate requires a legislative action at EU level. The liquidity of SME shares on the MTFs that could register as SME Growth Markets is also hindered by regulatory shortcomings stemming from the Market Abuse Regulation and MiFID II. Member States may adopt accepted market practice on liquidity contracts but only four have done so. This means that in 24 Member States, the potential SME Growth Market issuers are deprived from the right to enter into liquidity contracts. This situation creates a fragmentation of the Single Market and creates a distortion of competition between issuers that have the right to enter into a liquidity contract (and therefore ensure liquidity, lower their cost of capital…) and those which do not have this possibility. Limited trading due to the absence of free float on admission may cause investors to have a negative perception of the liquidity of securities listed on SME Growth Markets. As the EU label will be shared by different MTFs across the EU, this lack of liquidity on the secondary market could impair the credibility and attractiveness of those newly-created trading venues. Action is needed at European level to ensure that the identified regulatory shortcomings resulting from European rules are adequately tackled and that minimum liquidity can be ensured on those markets. 3.3Subsidiarity: Added value of EU action It has to be considered whether the objectives would be better achieved by action at EU level (the so-called 'test of European added-value'). As there is almost no flexibility to adapt the Markets in Financial Instruments Directive II, the Market Abuse Regulation and Prospectus Regulation to local conditions, a legislative action at EU level is absolutely needed in order to reduce the administrative burden placed on SME Growth Market issuers. By its scale, EU action could reduce the administrative burden for SME issuers while at the same time safeguarding a high level of market integrity and investor protection (thus ensuring a level-playing field among issuers and avoiding any distortions of competition among 'SME Growth Markets').

Furthermore, as regards the regulatory obstacles impairing liquidity provision, action at national level can even increase legal fragmentation and may lead to distortions in competition of SME Growth Markets across EU Member States. Action at the European level is better suited to ensure uniformity, and legal certainty. This will help to efficiently achieve the objectives of the Markets in Financial Instruments Directive II (and notably the creation of SME Growth Markets) and will better facilitate cross-border investments and competition between exchanges while safeguarding the orderly functioning of markets. The options proposed respect the principle of proportionality, are adequate for reaching the objectives and do not go beyond what is necessary, striking a balance between establishing pan-European standards while at the same time leaving sufficient flexibility to both Member States and market operators/investment firms to adapt their SME Growth Markets to local conditions. 4Objectives: What is to be achieved? The general objective of the proposal would be to make technical amendments to the current regulatory requirements in order to facilitate capital-raising by SMEs on public markets through shares or bonds issuances. This should help to increase investment, economic growth, job creation and innovation in the EU. Specific objectives would therefore be: 1) to reduce the regulatory compliance costs faced by SME issuers when their shares or bonds are admitted to trading on SME Growth Markets; 2) to increase the liquidity of equity instruments on SME Growth Markets; and 3) to ensure a high level of investor protection and market integrity. 5What are the available policy options? The policy options described and analysed in this impact assessment have been regrouped into three topics: administrative compliance costs, SME Growth Market concept, and liquidity. For each topic, several provisions have been analysed in parallel following a given logic of intervention (essentially by degree of alleviation or harmonisation). This grouping was done notably to better highlight the collective impact of all the proposed change on one given regulation or one set of issues. Presenting all changes separately could have made it more difficult to perceive the actual cumulative impact of the adjustments. Each change, however, was also assessed individually, as presented in section 6. The set of provisions analysed are those for which there was sufficient evidence of a need for action. Commission services initially considered a much broader set of potential changes, which emerged from the various consultation exercises, seminars organised with stakeholders and meetings with Member State representatives. Many were however discarded after a preliminary analysis, either due to market integrity risks, political feasibility, or lack of evidence. For more details, please refer to annex 6 on discarded options and annex 16 on the synthesis table of the initial options. 5.1What is the baseline from which options are assessed? Under the baseline scenario no action would be taken beyond the non-legislative measures that the Commission services have already committed to (see section 1.2). While recent legislative actions such as the creation of an alleviated 'EU Growth Prospectus' will reduce the costs of listing for SMEs, other administrative compliance costs would remain in place. This includes in particular the costs arising from the obligations in the Market Abuse Regulation and the financial reporting obligations in the Markets in Financial Instruments Directive II. These obligations would continue to place a disproportionately high burden on SME issuers, thereby dis-incentivising smaller companies to raise capital on public markets. The SME Growth Market definition, and in particular the definition of a debt-only issuer, would remain overly restrictive, thereby preventing most European MTFs (either specialised in SME bonds or in SME bonds and shares) to register as SME Growth Markets. This, in turn, would make it impossible for issuers on these markets to benefit from the regulatory alleviations and potential other benefits that legislators envisioned for SME Growth Markets. Investors would also remain reluctant to invest in SME shares given excessively high liquidity risks in many small and micro-cap shares. While SME issuers have always attracted lower levels of investor interests and thus trading activity and liquidity, certain regulatory restrictions would continue to exacerbate this unfavourable market condition. These barriers include in particular, the unavailability of liquidity contracts in most Member States. Given the self-reinforcing nature of liquidity it is expected that liquidity levels will remain low without such initial stimuli. Moreover, minimal free float percentages would continue to restrict the total amount of shares available for trading. As a result, SMEs would continue to face significant hurdles and disincentives to tap public markets for capital. While recent trends indicate that the dependence of European companies on bank loans has decreased overall, SMEs have remained largely dependent on bank financing. If no further regulatory efforts are made to alleviate this dependence, SMEs will continue to exhibit a large exposure to banking sector shocks, thereby increasing potential contagion effects on the real economy. SMEs would also remain less flexible in their financing decisions overall, which would impede growth especially for rapidly expanding companies. It would also prevent SMEs from optimising their capital structure, thereby giving rise to competitive disadvantages vis-à-vis larger companies. These detrimental impacts are unlikely to decrease in magnitude without further regulatory changes that are part of a wider plan to enhance SME access to public capital markets. On the contrary, market developments such as the overwhelming dominance of alternative liquidity provision via high frequency trading (HFT) strategies are likely to intensify liquidity issues in SME values. It is generally not possible to apply HFT market making strategies in illiquid financial assets, especially in the absence of efficient hedging markets. HFTs have pushed most traditional market makers out of liquid large and mid-caps. Traditional market makers that may also provide quotes in illiquid SME values are thus facing reduced revenues. This has already forced some of them to exit the market. Meanwhile, the administrative costs of listing for SMEs will remain the same. Ultimately, the disincentives of listing are expected to increase while there is no foreseeable increase in incentives. 5.2Policy options addressing administrative compliance costs 5.2.1Options under the Market Abuse Regulation Management Transactions Insider Lists Delay in disclosing inside information Market soundings Option 1. Light-touch alleviations strictly confined to the procedures Extend to 5 days the deadline for PDMRs to report transactions to issuers and NCA and for issuers to publicly disclose these transactions Replace the fixed threshold for transactions requiring disclosure by a relative threshold based on the issuer's market capitalisation (e.g. 0.02%) SME GM issuers only need to provide a list of insiders upon NCA request Justifications for delaying the disclosure of inside information only need to be issued upon NCA request Exempt private placement of bonds from the market sounding regime when the investors enter directly in the negotiations phase (with an alternative wall-crossing procedure is in place) Option 2. Relief limited to the scope, disclosure and record-keeping obligations. Adopt a new deadline for issuers to publicly disclose transactions relative to the notification by PDMRs and extend the overall deadline to 5 days Raise the threshold for transactions required to be disclosed to EUR 20,000 SME GM issuers only need to maintain a list of 'permanent insiders' Justification only upon NCA request + no need to keep a disclosure record. Option 3. Partial exemption from certain regulatory requirements Issuers are exempt from the responsibility to disclose managers' transaction to the public. The responsibility is placed on NCAs instead [supplementary to changing thresholds] Exempt SME issuers from maintaining an insider list Exempt SME issuers from notifying a delay to disclose inside information to the NCA. Exempt all private placements of bonds from the market sounding regime The policy options regarding the Market Abuse Regulation aim to reduce the administrative compliance costs for SME issuers and to make obligations placed on them more proportionate. There are three potential approaches under the Market Abuse Regulation that could be adopted. These approaches differ in the degree of alleviation that they apply to MAR provisions: from light-touch to more far-reaching alleviations, and finally exemptions from the various obligations analysed. It should be understood that the Market Abuse Regulation provisions analysed here are those for which adjustments can be made without decreasing investor confidence or market integrity. Other changes or provisions could have been considered in addition to the ones outlined in the table here-above, but were discarded up front because of their risks towards market integrity (see annexes 6 on discarded options and 16 on the synthesis table of the initial options). The purpose of the present initiative is in no way to deconstruct the market abuse regime. Adjustments shall only focus on simplifying procedures for issuers and redistributing the burden between issuers and National Competent Authorities. Option 1 would foresee to extend the deadline for Persons Discharging Managerial Responsibilities (PDMRs) and Persons Closely Associated (PCAs) to them to report transactions to issuers and the national competent authority to 5 days. The same deadline would apply for SME GM issuers to publicly disclose these transactions. PDMR transactions would furthermore only be captured by the disclosure requirement once they breach an annual threshold set in relative terms to the respective issuer's market capitalisation (e.g. 0.02% as computed at the end of the previous calendar year). As concerns the delayed disclosure of insider information, issuers would only need to notify the national competent authority. A full justification for such delays would only be required upon explicit request from the national competent authority. Option 1 would also exempt the private placements of bonds from the market sounding rules, provided that institutional investors are involved in the negotiations and when an adequate wall-crossing procedure is in place (such as the signature of a non-disclosure agreement recalling the obligations in case of disclosure of inside information). In terms of the requirement for maintaining insider lists, no changes would apply compared to the baseline, as the current regime for insider lists applying to SME Growth Market issuers is already alleviated.

Option 2 would provide more far-reaching alleviations from the current requirements under the Market Abuse Regulation than option 1. It would not extend the deadline for PDMRs to report transactions. Issuers however would receive additional time to publicly disclose these transactions after the PDMR reports them (e.g. to disclose within 2 days following the notification from the PDMR – see annex 17 for more details). Furthermore, the threshold for the disclosure requirement of PDMR transactions would be increased to EUR 20,000 on a fixed basis. Option 2 would also lower the requirements for SME Growth Market issuers to maintain an insider list. Instead of an obligation to provide a full list of insiders to the national competent authority on-demand, as required under the baseline, issuers would only have to maintain a list of 'permanent insiders'. This list would only capture managers and employees that have regular access to inside information and would be updated on a continuous basis. Persons that are infrequently exposed to single sets of inside information would not be included. As under option 1, a full justification for the delayed disclosure of inside information would only be required on request of the NCA. In addition, SME Growth Market issuers would be exempt from the requirement to keep a record of delayed disclosures. As regards private placements of bonds by SME issuers, option 2 would foresee no changes compared to option 1. Option 3 would envision exempting SME Growth Market issuers from the current the Market Abuse Regulation requirements in the areas specified. Issuers would no longer be required to publicly disclose manager transactions. National competent authorities would be responsible for the publication instead. This could be coupled with an increase in the threshold for transactions requiring disclosure as per option 1 or 2. SME Growth Market issuers would furthermore be exempted from both the obligation to maintain an insider list and notifying the delay in disclosing inside information to their national competent authorities. The option would also exempt all private placements of bonds from the market sounding regime, without requiring an alternative wall-crossing procedure. Scope of the Options under the Market Abuse Regulation Type of issuers Option 1. Restricted scope for alleviations under MAR SME listed on SME Growth Companies Option 2. Extended scope for alleviations under MAR All SME Growth Market issuers Under Option 1, only SMEs (defined as equity issuers with a market capitalisation below EUR 200 million or debt-only issuers meeting two of the three criteria set by the 2003 Recommendation on the definition of SMEs) listed on an SME Growth Market would be able to benefit from the above-mentioned targeted alleviations under the Market Abuse Regulation. Under Option 2, all the SME Growth Market issuers (irrespective of their size) would benefit from the potential alleviations under the Market Abuse Regulation. 5.2.2Options under the Prospectus Regulation Requirements to transfer from an SME Growth Market to a regulated market Option 1. Partial alleviation Create a lighter "transfer prospectus" for issuers having been listed for a certain amount of time on an SME Growth Market (e.g. 3 years) Option 2. Admission document Require an admission document (no approval by an NCA) instead of a full prospectus for companies that have been listed on an SME Growth Market for a certain amount of time (e.g. 3 years) The two options aim at reducing the administrative burden imposed by the publication of a full prospectus in case of a transfer to a regulated market for issuers already listed on an SME Growth Market for a certain amount of time. Under Option 1, this alleviation would take the form of a new lightened prospectus ('a transfer prospectus'). Option 2 would exempt the issuers from the prospectus publication obligation, provided that an admission document is produced in accordance with the regulated market's listing rules. 5.3Policy options concerning the SME Growth Market definition 5.3.1Defining criteria and thresholds for equity and debt-only issuers Definition of SME Growth Market Definition of SME debt-only issuers Definition of SME equity issuers Proportion of SMEs Option 1. Unique definition of SMEs Increase the thresholds of the 2003 recommendation definition to match the profile of SMEs today Left unchanged (at least 50%) Option 2. Market definition for debt issuers, raised threshold for equity issuer and raised SME proportion Define an SME debt issuer based on the value of the issuance (50 million over one year) Raising the market capitalisation threshold for equity issuers from EUR 200 to EUR 500 million Raised to 75% (at least) Option 3. Alternative market definition for debt issuer and raised threshold for equity issuer Define an SME debt issuer based on the value of its outstanding bonds (EUR 150 million) Left unchanged (at least 50%) Option 1 would consist in creating a single definition for SMEs (either equity issuer or debt-only issuer) listed on an SME Growth Market. This definition would be based on the criteria from the 2003 Recommendation on SME definition while raising the thresholds it sets. Under this Option, an issuer would be deemed an SME if it meets two of the three following criteria: (i) an annual turnover below EUR 200 million, (ii) a total balance sheet below EUR 200 million and (iii) a number of employees up to 499. Under this option, the proportion of SMEs would be left unchanged compared to the baseline (at least 50%). Option 2 would amend the definition of an SME debt-only issuer based on the value of the issuance. The threshold for qualifying as an SME debt-only issuer would be set at EUR 50 million over a period of 12 months. As regards the equity issuer definition, the market capitalisation threshold would be raised from EUR 200 to EUR 500 million. Finally, at least 75% of SMEs would be required on an SME Growth Market. Option 3 would define an SME debt issuer on the basis of an issuer’s total nominal value of outstanding bonds. The threshold would be set at EUR 150 million. Like option 2, the market capitalisation threshold defining an SME would be raised to EUR 500 million. However, the proportion of SMEs would be left unchanged compared to the baseline (at least 50%). 5.3.2Half-yearly reports Half yearly reports Option 1. Exemption for non-equity issuers Allow SME Growth Market operators to decide whether or not to apply an obligation for half-yearly reports to non-equity issuers Option 2. Exemption for equity and non-equity issuers Allow SME Growth Market operators to decide whether or not to apply an obligation for half-yearly reports to equity and non-equity issuers Option 1 would remove the obligation for non-equity issuers to publish half-yearly reports when their bonds are listed on an SME Growth Market. Market operators could however decide to impose half-yearly reports as part of their internal listing rules. Like option 1, option 2 would remove the obligation for non-equity issuers to publish half-yearly reports but it would also exempt equity issuers from this requirement. Discretion would be left to market operators to impose half-yearly reports on equity and/or non-equity issuers through their listing rules. 5.4Policy options to address liquidity on SME Growth Markets

Liquidity contracts Free float requirements Option 1. 29th regime + free float Create a European regime for liquidity contracts, while authorising NCAs to submit an AMP and develop a parallel regime tailored to local conditions. Oblige SME GMs to impose a free float requirement but provide flexibility on exact criteria Option 2. Full harmonisation Create a fully harmonised EU liquidity provision scheme with all conditions set out at EU level, without the possibility for NCAs to submit an AMP tailored to local conditions. Impose precise free float criteria for SME GMs Option 1 would consist in imposing a minimum free float requirement on issuers’ capital at the time of admission to trading, and in authorising liquidity contracts in all Member States through the creation of a dedicated EU legal framework (a 29th regime) on liquidity contracts. This option would allow for some flexibility. National regulators would still be allowed to establish in parallel an accepted market practice (AMP) on liquidity contracts in order to better adapt such contracts to their local markets. Concerning free float, the value and nature of the required minimum would be set by each market operator to fit their local contexts. Option 2 would also require all SME Growth Market operators to impose a minimum free float at admission, and authorise liquidity contracts in all Member States. However, as opposed to option 1, no deviation from the European standard would be possible: the free float requirement (including its criteria) would be set at EU level, and national authorities would not be allowed to establish accepted market practices to deviate from the EU liquidity contract regime. 5.5Options discarded at an early stage Several potential adjustments, initially included in the public consultation "Building a proportionate regulatory environment to support SME listing", have been discarded after preliminary analyses, due to either lack of evidence, lack of overall support, market integrity risks or potential additional costs to issuers. These options include requiring key advisers, harmonising delisting rules on SME Growth Markets, simplifying transfers of listing from a regulated to an SME Growth Market, reducing disclosure requirements of inside information by SME Growth Market bond issuers, and amending the tick-size regime applicable to equity instruments listed on SME Growth Markets. For more details, please refer to annex 6. 6What are the impacts of the policy options? 6.1Policy options addressing administrative compliance costs 6.1.1Market Abuse Regulation Management Transactions Insider Lists Delay in disclosing inside information Market soundings Option 1. Light-touch alleviations strictly confined to the procedures Extend to 5 days the deadline for PDMRs to report transactions to issuers and NCA and for issuers to publicly disclose these transactions Replace the fixed threshold for transactions requiring disclosure by a relative threshold based on the issuer's market capitalisation (e.g. 0.02%) SME GM issuers only need to provide a list of insiders upon NCA request Justifications for delaying the disclosure of inside information only need to be issued upon NCA request Exempt private placement of bonds from the market sounding regime when the investors enter directly in the negotiation phase (with an alternative wall-crossing procedure is in place) Option 2. Relief limited to the scope, disclosure and record-keeping obligations. Adopt a new deadline for issuers to publicly disclose transactions relative to the notification by PDMRs and extend the overall deadline to 5 days Raise the threshold for transactions required to be disclosed to EUR 20,000 SME GM issuers only need to maintain a list of 'permanent insiders' Justification only upon NCA request + no need to keep a disclosure record. Option 3. Partial exemption from certain regulatory requirements Issuers are exempt from the responsibility to disclose managers' transaction to the public. The responsibility is placed on NCAs instead [supplementary to changing thresholds] Exempt SME issuers from maintaining an insider list Exempt SME issuers from notifying a delay to disclose inside information to the NCA. Exempt all private placements of bonds from the market sounding regime Option 1: Light-touch alleviations strictly confined to the procedures Option 1 would provide additional time for the disclosure of management transaction and would re-calibrate the threshold above which transactions need to be notified on a relative basis compared to the respective issuer's market capitalisation (e.g. 0.02%). For investors, this solution would mean that the managers' transactions that are the most informative for the market (as they exceed a certain percentage of the market capitalisation) would be disclosed. For managers and issuers, the use of a market capitalisation criterion would not necessarily translate into fewer transactions to be notified and disclosed. As shown in the Table below, with a relative threshold set at 0.02% of market capitalisation, the alleviation compared to the current threshold of EUR 5,000 would only kick in for companies with a market capitalisation above EUR 25 million. Furthermore, some stakeholders have underlined that it can be challenging for managers and closely associated persons to keep track of the current EUR 5,000 threshold. Their task would be made even more complex by a threshold expressed in a market capitalisation percentage. Issuer's capitalisation EUR 10 million EUR 25 million EUR 50 million EUR 100 million EUR 200 million EUR 500 Million EUR 1 billion Threshold of notification EUR 2,000 EUR 5,000 EUR 10,000 EUR 20,000 EUR 40,000 EUR 100,000 EUR 200,000 Under this Option, the additional time for the notification would provide both managers and issuers with greater flexibility, thus further reducing their administrative burden. However, this extension of delay would not solve one difficulty frequently mentioned by respondents to the public consultation: the transactions are sometimes notified to the issuer lately, which often leaves little to no time at all to disclose those transactions to the market. Both amendments on managers' transactions would have little to no impact on market integrity. This extension of delay would mean that investors would still be informed of managers' transactions (five days after the transaction instead of three days). While increasing the threshold may have a marginal impact on the ability of national competent authorities to detect insider trading, other supervisory tools (e.g. suspicious transactions reports) would similarly trigger alerts which could then be further investigated. The envisioned change to provide a justification for the delay of disclosing insider information only upon request of the responsible national competent authority would similarly reduce administrative burden for issuers while incurring a minimal impact on the ability of national competent authorities to monitor the lawful disclosure of such information. Since issuers would still notify the national competent authority when there is a delay in the disclosure of information, any suspicion of irregularities could be directly examined by issuing a respective request for justification. However, the burden alleviation for issuers would have a limited impact, as the issuer would still be obliged to keep 'a disclosure record' to provide the national competent authorities with the necessary justifications when requested. Option 1 would bring legal clarification by exempting private placements of bonds issued by SME Growth Market issuers from the market sounding regime under the the Market Abuse Regulation. This would reduce the administrative burden on issuers and those acting on their behalf (such as the arranger banks). By lightening the administrative constraints on prospective investors that could participate in the structuring of private placement transactions, this would also facilitate debt issuances by SMEs. Such a modification would also better reflect the nature of private placements of bonds, where 'investor contacts form part of an inherent process of negotiations with the entire set of potential investors with whom a transaction might occur, rather than a (helpful, though not inherently necessary) mean to test an offering's viability before presentation to a wider group of investors'. Under this Option, both issuers and those acting on their behalf would have to apply an adequate wall-crossing procedure, as negotiated private placements may give rise to disclosure of inside information (e.g. on the issuer's creditworthiness). This wall-crossing procedure could take the form of the mandatory signature of a non-disclosure agreement between institutional investors involved in the subsequent negotiations with the issuer and/or its arranger, which would make sure that all parties are aware of their obligations regarding inside information disclosure. The signature of a non-disclosure agreement (that corresponds to current market practice) would help preserve market integrity, while placing a less significant burden on issuers that would not deter them from negotiating a private placement. Option 2. Relief limited to the scope, disclosure and record-keeping obligations Similar to option 1, option 2 foresees targeted amendments to the current requirements that would lower the administrative compliance costs for SME Growth Market issuers. The amendments under option 2 would however imply more far-reaching alleviations. In terms of the requirements to disclose managers’ transactions, option 2 provides the benefit of setting the deadline for the public disclosure in relation to the timing of the PDMR notification. This would ensure that the issuer always has sufficient time for the disclosure process and provides issuers with additional temporal flexibility (see annex 17 for more details). Meanwhile, the increase of the disclosure threshold on fixed terms (from EUR 5,000 to EUR 20,000) would equally reduce the cost burden for issuers. In relative terms, smaller issuers would be alleviated slightly more strongly, as the EUR 20,000 threshold would reflect a larger percentage of their overall market capitalisation. A higher fixed threshold also implies that fewer transactions would be disclosed. Ultimately though, as is also the case for option 1, other supervisory tools would still trigger alerts regardless of whether a transaction is captured by mandatory disclosure. Changing the maximum delay or threshold should thus bear little to no impact on market integrity. From an investor perspective, this option would entail no change, as investors would still be informed of managers' transactions (five days maximum after the transactions). The situation would be further improved as small managers' transactions that carry less market signalling information (below EUR 20,000) would not be disclosed to the market. Option 2 would also include a change in terms of the obligation to maintain an insider list. Producing an insider list upon request from an national competent authority (as under the baseline and option 1) entails no real cost savings as inside information and persons having access to such information still need to be monitored on an on-going basis for the issuer to be able to draw up an insider list if requested by the national competent authority. Issuers have to produce ad hoc lists of insiders several times a year for each piece of inside information. Option 2 therefore foresees to require only one list of 'permanent insiders' (i.e. only capturing managers and staff that have regular access to inside information) in order to avoid the costs of on-going monitoring and tracking. The impact that this would have on the capacity of national competent authorities to detect insider trading would be minimal, as (i) national competent authorities rarely rely on insider lists for the identification of insider trading, and (ii) not everyone having access to a particular set of inside information would necessarily be captured by an on-going insider list in any case. However, a list of permanent insiders can raise another issue, namely that it does not provide real guidance as to whether a particular person has in fact received a particular piece of information. As concerns the delayed disclosure of inside information, option 2 would also exempt issuers from maintaining a disclosure record, beyond placing the justification delay on an 'on-request' basis. This would lower the administrative costs significantly more. In addition, this would enable to preserve the issuers' legitimate interests, as anecdotal evidence suggests that issuers are currently incentivised to disclose inside information earlier than necessary to avoid recoding cumbersome justifications for the delay in disclosure. At the same time, national competent authorities could keep an internal record of delayed disclosures, if deemed necessary, as notification of delays would still apply. As national competent authorities would still be able to request a justification for the delay (prepared ex-post by the issuer), the impact on market integrity would be minimal. As regards private placements of bonds by SME issuers, option 2 would foresee no changes compared to option 1.

Option 3: Partial exemption from certain regulatory requirements Option 3 would grant SME issuers a range of exemptions from current requirements. This would have a greater positive impact on the administrative compliance costs faced by SME Growth Market issuers. Under this option, national competent authorities would be responsible for disclosing managers' transactions to the public, thus discharging issuers from this obligation. This would merely shift costs from issuers to national competent authorities without any detrimental impacts on market integrity. National competent authorities would have to bear the administrative burden (and potential liability risks) associated with disseminating the information related to managers' transactions to the market. For investors, the situation would not be changed or would be slightly improved, as all managers' transactions on SME financial instruments would be accessible through one single national data-entry point. Some European national competent authorities have already decided to use this method and taken the initiative to discharge issuers from the obligation to disclose managers’ transactions to the public. Stakeholders generally admit that such system proves extremely efficient, although not all European national competent authorities would have the resources both in terms of IT and budget. Under this option, SME Growth Market issuers would also be exempted from maintaining insider lists and justifying delays in disclosing inside information. This solution would be justified as the usefulness of insider lists for insider dealing investigations has been questioned several times. As the flow of insider information generated by SMEs is significantly lower and concentrated on few managers, national competent authorities could easily identify insiders (and potential insider dealings) through other investigation techniques. While reducing administrative costs more significantly than options 1 or 2, there are potential market integrity risks that could arise from this amendment. In addition to facilitating insider dealing investigations, the insider list requirement has also an educational impact by ensuring that people featured on the list understand the meaning and consequences of having access to inside information. Under Option 3, SME issuers would not be required to inform the national competent authority in the event of delayed disclosure (but would still be required to provide a justification ex-post when requested by the national competent authority). This solution would further reduce the administrative burden on SME issuers. While the absence of insider lists could be compensated for, as under options 1 and 2, by other supervisory tools, not notifying national competent authorities about delays of disclosure of inside information would undermine the ability of national competent authorities to monitor the timely and accurate disclosure. Delayed disclosure of inside information increases the risk of information leaks and, as a consequence, the risk of insider trading. Knowing that disclosure has been delayed enables targeted monitoring of relevant issuers and allows national competent authorities to intensify their surveillance of anomalous price movements before important announcements. As there would be no direct means to verify whether disclosure has been delayed, there would be risks that some issuers exploit this exemption, to withhold negative news. Similar to Option 2, option 3 would exempt SME Growth Market issuers, those acting on their behalf, and investors from the market sounding rules foreseen by the Market Abuse Regulation. In addition, the parties to the negotiated private placement transaction would not have to put in place a wall-crossing procedure to avoid any disclosure of inside information. This option would alleviate the burden and would make the private placements of bonds more attractive for both issuers and investors. The absence of a wall-crossing procedure would also be justified by the fact that negotiated private placements takes place with institutional investors who are more familiar with duties as regards inside information. In the past, one Member State already adopted a market practice on market soundings by excluding private placement transactions without requiring an alternative wall-crossing procedure (such as the signature of a non-disclosure agreement). This option would finally put the European private placement markets using a bond format (such as the Euro-PP in France and the mini-bonds market in Italy and in Spain) on an equal footing with other private placement markets using loans that are not considered financial instruments under the Markets in Financial Instruments Directive II and fall outside the scope of the Market Abuse Regulation and the market sounding regime. EFFECTIVENESS EFFICIENCY (cost-effectiveness) Coherence Score Objectives Policy option Objective 1 Reduce compliance costs for SMEs Objective 2 Enhance liquidity Objective 3 Maintain market integrity Baseline scenario 0 0