Two seemingly unconnected bits of news that hit the media this week are very much strongly related. First, the European Commission published proposals to overhaul prospectus rules to improve access to finance for companies and simplify information for investors. Then Malta’s first crowdfunding platform, ZAAR, was launched. Both are critical to our economy as they present new opportunities for investment.
One may ask what is all this excitement about. Our country has thrived for decades on the strength of the foreign investment it has attracted. The manufacturing sector is one example of this. The developments in the financial services sector is another. This does not mean that we have not had Maltese persons who came forward and very happily invested in our economy.
Examples include (and I am sure I am going to leave someone out, so my apologies) Farsons, Foster Clark, Corinthia and Bortex. Most of the investment in the tourism sector is local and there are other areas, such as IT, where there has been strong local investment aimed at the export market.
The crowdfunding platform will allow entrepreneurs with good ideas but without cash to develop and commercialise such ideas
There have been other investors who have put their money into property or the importation and distribution sector. This is not to say that they have done something wrong or that the country did not need such investment. The country did need such investment but clearly such investment had very little to do with innovation.
The crowdfunding platform is there to assist entrepreneurs seeking funding for their start-ups. Such entrepreneurs will not be receiving large sums of money from a small number of people but small sums of money from a large number of people. To achieve this objective these entrepreneurs will need to have a very interesting proposal, in which many other people will have to believe. However, it will open up sources of funds which would otherwise have been unavailable.
The crowdfunding platform will allow entrepreneurs with good ideas but without cash to develop and commercialise such ideas. Without the crowdfunding platform this spirit of entrepreneurship would have been lost and Malta would have been worse for it.
The issue of access to funding is also related to the European Commission proposals to overhaul prospectus rules when SMEs seek to tap the financial market for funds. One of the most ambitious programmes of the European Commission is the Investment Plan for Europe. The plan is a recognition that to improve the competitiveness of businesses in Europe there needs to be a positive attitude towards investment by the private sector.
However, it is also recognised that small- and medium-sized enterprises may not have access to finance to the same extent as the large companies. Moreover, the new banking regulations have not made it any easier for banks to lend money to SMEs as such lending may actually lead to a higher capital requirement for the banks.
As one analyst recently put it so exceptionally well, the willingness to provide equity funding has returned to the levels experienced pre-2008 (for this read pre-Lehman Brothers collapse); however, the level of bank lending to support this equity funding will not return to the levels experienced prior to the Lehman Brothers collapse for another 25 years.
Therefore SMEs are being forced to source financing through the financial markets. However, even in this case, regulation may be seen to be an inhibition and the European Commission proposal is seen as a means to remove this inhibition.
Through the Capital Markets Union, the European Commission is seeking to unlock funding for businesses and provide more opportunities for investors in the EU. This proposal is also part of the Commission’s commitment to simplify and make EU laws more effective and efficient.
One of the good things about Malta is that there is liquidity in the economy as evidenced by the reactions whenever private or public bonds are issued or as evidenced by the price of property. This liquidity needs to be put to better use to create greater wealth and more employment.
This is why the setting up of the crowdfunding platform and the European Commission proposals to improve access to finance for SMEs are steps in the right direction.