Regulators and the financial industry should be developing venture bond markets alongside venture equity markets to help small companies find market financing, suggests a new report published by International Organization of Securities Commissions (IOSCO) on Thursday.
IOSCO jurisdictions have had “uneven success” at helping small and medium sized enterprises (SMEs) tap the capital markets, according to the report SME Financing through Capital Markets.
To improve that performance, the report recommends: establishing separate equity and fixed income markets for small caps, with regulatory requirements that are tailored to smaller firms; establishing market advisor and market-making systems to help firms raise capital; and introducing alternative methods of financing, such as private equity, venture capital and securitization.
The report is based on a survey of 45 IOSCO jurisdictions, including 31 emerging market members.
Although several jurisdictions have successfully established separate small cap equity markets, the report notes, “policy makers have yet to achieve similar success at improving SME access to the fixed income markets.”
In response, the report recommends establishing separate markets specifically for venture firms; and it says these markets should have listing requirements that are targeted to these firms in order to reduce their issuance costs. However, custody, clearing and settlement procedures should be the same in dedicated venture markets as it is in the main markets, the report says.
Small firms’ access to the corporate bond market and other debt securities markets is almost non-existent, the report finds. “The main reason for this situation is the inadequate institutional investor demand for SME securities, caused primarily by the lack of liquidity,” the report concludes. “One way to overcome this hurdle is to pool SME securities, either equity or debt, into one product. These products should offer enough equity and other securities to attract institutional investor demand.”
“To increase institutional investor demand, securities regulators, exchanges, brokerage houses, institutional investors and related government parties could collaborate to develop practices or models that offer higher liquidity for equity and other SME securities,” the report suggests.
In addition, it recommends that, “wherever possible, policymakers should introduce a market making system for securities issued by SMEs.” And, it suggests that policymakers explore the suitability of alternative sources of financing for venture firms.
Lastly, the report notes that IOSCO’s board will have a roundtable on the issue of small companies access to market based finance at its next meeting in Toronto in October.