Chapter 3: Introduction to SME’s regime

3.1 What is the SME’s regime?

Small and Medium-sized Enterprises (SMEs) are described as companies with less than 250 employees, a turnover of about €5 million, or a market value of €43 million[1]. One of the major aims of SMEs is to secure a place in the global market and to attract investors so as to develop their innovation activities. Innovation is important for most SMEs because it ensures that small firms can survive the hurdles of the aggressively competitive business environment. Therefore, SMEs rely on the appropriability regime in order to secure profits from their research and technological development projects. The appropriability regime is that which allows   a business to prevent their competitors from copying their original products[2]. This protection not only covers intellectual property rights (IPRs) but other legal documents, human resource management activities, and other intangibles that have the capacity to affect a business’ finances[3]. Hence, SMEs’ appropriability regime allows the enterprises to protect the revenue generated from their innovative developments[4]. It is necessary to protect the inventions because of the increasingly rampant rival firms which have the capacity to duplicate or create similar products as those of the SMEs[5].

Although this regime has assisted SMEs in a number of ways, there still exists the problem of being familiar with and drawing upon intricate rules and regulations. For instance, the firms may be required to possess a certain amount of money in order to safeguard themselves from damage by rival companies[6]. Hence, SMEs under this regime have experienced burden and difficulties penetrating through the overly competitive global market. Consequently, when the EU started looking into how they can empower SMEs both in finances and easing access to European markets, the appropriability regime started fading. The proposal to include SMEs under the new prospectus elevated the firms from the appropriability regime to the disclosure regime because SMEs intending to raise their revenue through public means could use the new disclosure rules. Advancing SMEs to the disclosure regime was estimated by the EU to increase the firms to about 45 million every year[7]. The proposal to act under the prospectus also meant that more SMEs could list on multilateral markets[8]. It offers opportunities for investor expansion into SMEs, thus reducing the burden brought about by the appropriability regime.

3.2 Background of the disclosure regime

Securities regulation is considered ideal in protecting investors and enhancing the stock market development. Most of the regulations that have emerged over the past decades were in response to financial crises, accounting scandals, and business governance issues. For instance, in the United States the Securities Act of 1933 as well as the Exchange Act of 1934 were established due to the stock market crash a few years prior and the Great Depression era that had troubled the nation[9]. The laws were placed to solve the irregularities between investors and securities. With time, other developed nations like the United Kingdom have followed suit to place such regulation, especially after the 2008 financial crisis[10]. The securities regulations primarily focused on firms that were capable of bringing about large security issues to the public. However, with the increasing investment-based crowd funding, security regulations started focusing on small entrepreneurs that have access to the public. It means that Small and Medium-sized Enterprises (SMEs) were to be under the new securities regulations. In the EU, the first attempt to implement regulation on SMEs was with the 2003/71/EC Directive of 4th November 2003.

The 2003 directive stipulated how and when to formulate a prospectus when securities are offered to the public[11]. Additionally, the directive was meant to ensure that equal and satisfactory disclosure standards were to be implemented in all EU countries. This was necessary in case the securities were to be offered by all European investors[12].  The directive was later amended through the 2010/73 Directive.  The 2010 Directive contained a reform known as a “proportionate disclosure” regime, was introduced in Prospectus Directive II and aimed at increasing the SME participation in the capital markets. Nevertheless, the alternative disclosure rules were barely used by issuers in most Member States mainly because it still proved too burdensome[13]. Consequently, a new directive was drafted in 2015 to address the issues. The 2015 directive was meant to reduce the burdensome obligations imposed on EU companies. When the commission assessed its impact, it realized that even thou the directive performed well, it could still be improved to minimize the administrative burden on companies under the prospectus, particularly SMEs[14]. Hence, the commission started deliberating on transforming the directive into a regulation.

3.4 EU Growth Prospectus-Scope

EU’s growth prospectus is unlike other prospectus because it allows SMEs to draft a simplified prospectus. Moreover, it will be available to companies that trade on SME growth market, but they must have market capitalization of €500 million and a maximum of 499 employees[15]. The move is considered positive because it eases SMEs ability to enter and compete favorably with other companies in the global market. The considerations for content and the format the prospectus is to follow have been established by European Securities and Markets Authority (ESMA) and are highlighted in the following sections.

3.5 EU Growth Prospectus- Content

The EU growth prospectus contains three important elements; a registration document, securities note, and a summary. These elements contain detailed content on both equity and non-equity securities. As for SMEs, the regulation provides for disclosure requirements in accordance with the issuer’s size and magnitude of their business operations[16]. The disclosure requirements are stipulated clearly in Article 14(3) of the PR. Any other information that is important and required is set out in Article 14(2) of the PR in the simplest of format to allow understanding for all users.

3.6 EU Growth Prospectus- Format

The growth prospectus to be put into action in July 2019 follows the format of the current prospectus directive regime approach “building block”[17]. It means that the registration documents, securities notes, and any other important information are contained in separate annexes. The key points to note in the format include[18];

  • Cover note
  • Location of risk factors: this part should be after the table of contents and summary. The risk factors should be those affecting the issuer or the securities.
  • Profit forecasts and estimates: all unsettled and valid profits estimates shall be included in the prospectus.
  • Financial information: the prospectus shall include key financial figures that summarize the issuer’s financial status.
  • Business strategy: the issue is to share a statement describing their business objectives.
  • Universal Registration Document: this new document is meant for issuers who are newly admitted to a regulated market.

Works Cited

Comistar Global. Simplifying Prospectus Requirements — Growth Prospectus. Accessed on 22nd May 2019 from

Council of the European Union. Proposal for a regulation of the European Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading. Brussels, 2015. Accessed from

Delivorias, Angelos. Prospectuses for investors. European Parliamentary Research Service (EPRS) (2017). Accessed from

Hornuf, Lars, and Armin Schwienbacher. “Should securities regulation promote equity crowdfunding?” Small Business Economics 49.3 (2017): 579-593.

Hurmelinna, Pia, Kalevi Kyläheiko, and Tiina Jauhiainen. “The Janus face of the appropriability regime in the protection of innovations: Theoretical re-appraisal and empirical analysis.” Technovation 27.3 (2007): 133-144.

New prospectus regime: delegated regulation on format, content and scrutiny of prospectuses. Accessed on 22nd May 2019 from markets/160319-new-prospectus-regime

Norton Rose Fulbright. Prospectus regulation. Accessed on 22nd May 2019 from

Seo, HanGyeol, et al. “SME’s Appropriability Regime for Sustainable Development-the Role of Absorptive Capacity and Inventive Capacity.” Sustainability 8.7 (2016): 665.

Smit, T. G. J. The appropriability regime as a tool to measure knowledge protection. BS thesis. University of Twente, 2014.



[2] Smit, 2.

[3] Hurmelinna, Kyläheiko, and Jauhiainen, 134.

[4] Seo, HanGyeol, et al, 2.

[5] Ibid, 3.

[6] Ibid, 4.

[7], 6.

[8] Ibid, 10.

[9] Hornuf and Schwienbacher, 579.

[10] Ibid, 580.

[11] Ibid, 584.

[12]Delivorias, 3.



[14] Ibid, 3.





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