Author Archives: Scribestar

Sequoia Economic Infrastructure Income Fund

Now more than ever, efficiency-boosting technology is coming to the fore to really prove itself – for example, platforms such as cloud-based ScribeStar, which facilitates collaborative working toward the completion of intense capital markets transaction documents.

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What does the final report of the EU’s Capital Markets Union mean for stock exchanges ?

In the midst of the COVID19 fall out, and coinciding with countries gradually opening their economies to an uncertain future, on June 10th 2020 the European Commission published the long-awaited High Level Forum (HLF) report on the EU Capital Markets Union* (Report). European economic recovery in many ways depends on reviewing its capital markets, and Europe has yet to crack the code on how to make public equity financing a more attractive proposition for non financials and SMEs.

Pent-up demand has left investors sitting on piles of dry powder, eagerly looking for investment opportunities and fresh IPOs. Untapped investment resources are even greater among retail and individual investors, with the latter group still awaiting exposure to equity investing at the level enjoyed by US peers. Corporates entered the year already highly leveraged, and the pandemic has certainly not helped. Going forward, debt won’t suffice and equity investors and capital markets will have to play a significantly stronger role.

There is a sense of responsibility and urgency among economies and policy makers to rapidly remove the obstacles hampering access to public capital markets. On the supply side this implies making going public and staying public more efficient, cost effective, and transparent. On the demand side it means finding solutions which bring capital markets closer to retail and individual investors. The common denominator of both of these challenges is that the solutions also lie in technology and digitalisation.

As for the supply side, however devastating the COVID19 effects on the economy may be, the inability to do things in the traditional way has become a huge tailwind for digitalisation in capital markets. Even the most basic form of digitalisation, things such as e-roadshows and video conferencing have made headlines on the back of efficiencies they have brought to the capital raising process.

This is but a small-scale proof of concept for what technology can do. Industry has been focusing on tech and innovations on the trading side, leaving the non-trading, administrative, and regulatory processes somewhat ignored. This is starting to change, and we at ScribeStar, who have been propagating use of digital means to facilitate equity and debt issuances, are happy to see this happening and thankful to our clients who have been early adopters of this vision.

The key moment is only just on the horizon. The HLF Report sets out seventeen recommendations for moving the EU capital markets forward, and it is wonderfully clear and precise on what capital markets need to do in terms of technology and digitalisation.

First, HLF calls for an EU-wide digital access platform for companies public financial and non-financial information, as well as other financial product or activity-relevant public information. This in the first instance applies to all information of companies with securities listed on EU Regulated Markets, including their periodic ongoing information disclosures pursuant to securities markets legislation. To deliver on this request, all the national authorities and their reporting mechanisms will have to be aligned and tech-enabled to facilitate digital reception and handling of reports and submissions, as well as structured data collection and processing. The European Securities and Markets Authority (ESMA) will be tasked to develop technical standards for data fields and formats, where it will most likely look to the approach used in the European Single Electronic Format with XBRL for annual financial reports or the Prospectus Register.

Second, HLWG calls upon ESMA to coordinate and drive this implementation with national authorities in order to ensure that the public information collected at national level is accompanied by the correct data fields and in case of structured information, that information submitted by companies complies with the applicable format requirements.

“…it is wonderfully clear and precise on what capital markets need to do in terms of technology and digitalisation.”

ScribeStar fully supports these proposals. We would also emphasise that in order to achieve this objective, stock exchanges and regulators will have to become receptive to solutions like those offered by ScribeStar and allow a rethinking of their listing and ongoing compliance processes. Ultimately, stock exchanges and regulators alike will have to enable prospective issuers and listed companies to use digital means to access capital markets and fulfil their ongoing obligations.

ScribeStar has been successfully working with issuers for the past four years, and most recently with stock exchanges to implement its proprietary digital capital markets platform, wherein complex market documents and processes can be done in exactly such a digital environment, thus enabling the use of structured data and fulfilling the preconditions for AI deployment, big data applications, and data reuse.

ScribeStar is of the opinion that those stock exchanges that start early with digital adoption will be the ones reaping the benefits, and also taking over the share of the ICO and STO future market. Our experience is that this sort of change is not easy and requires time. We advocate an evolutionary, rather than a revolutionary approach. Exchanges should ease themselves into this process, and so should the regulators and key market participants, on a collaborative journey.

Success will eventually be measured by the increase in the number of listings, which will be a consequence of the cost and time savings of going public and staying public, as well of the overall efficiency and transparency of the processes. Digitalisation and technology have the power to deliver on these objectives.

ScribeStar looks forward to the developments on the CMU front and invites those who believe in digital capital markets to reach out and learn about our vision and our work.

“…stock exchanges that start early with digital adoption will be the ones reaping the benefits…”

When is a prospectus not a prospectus?

Today, when a company IPO’s we are presented with a large bound document; the hundreds of pages that make up the prospectus. Pages that have been put together describing the company, the shares it is issuing, its financials, market position, management team, the advisers who have diligenced the information and various risk factors to warn you of what could potentially go wrong. This document will have been carefully crafted, considered, certified and ultimately presented to you in your consideration of whether to subscribe for shares. There will be analyst reports available, pitch presentations (also carefully vetted and verified) to also help you decide on whether to invest. This is a well-trodden process and has been developed over the hundreds of years of public markets since the Dutch East India Company IPO’d in 1602.

But, I believe we are about to go through a technology driven revolution in prospectus drafting that will ultimately mean we may not even have a prospectus at all. This is not a coordinated effort specifically targeted at ridding the world of the prospectus, but the result of a combination of the way ESEF is changing the way companies report, and the way stock exchanges are looking to improve the attractiveness of capital markets as a source of capital to help drive economic growth. The European Single Electronic Format (ESEF) became law in May 2019, forcing a process of digitisation which, as many have commented, will have a profound effect on company reporting across Europe. However, the implications of ESEF on capital raising in the UK and Europe are equally profound. ESEF means that all listed entities and PIEs from this year will have to file annual reports digitally as inline XBRL filings – allowing not only humans to read them, but also machines. The idea being that the data contained can be used to do much greater analysis and improve business transparency, particularly for investors, pension funds, investment banks etc.

At the same time stock exchanges are looking to improve the attractiveness of public capital markets for SMEs which are the heart of a good economy. The number of SMEs going public to raise capital in the UK and Europe has been falling for over 20 years with key factors being the cost of issuance and ongoing governance. Public capital competes with private capital and as stock exchanges look to improve the competitiveness of public markets they have to look at reducing the cost of capital for companies looking to list – a lower cost of capital and simpler ongoing governance will drive interest in companies listing. The competition for capital is where technology will come into play for stock exchanges.

Stock exchange driven technologies combined with the ongoing reporting required by ESEF will come together and ultimately mean the most efficient prospectus is not one that is documented and presented in the way that it has been for hundreds of years, but one that has been produced in a digital form. The prospectus will be a set of XBRL readable data containing information produced, approved and authorised by the traditional participants. Information that the regulator can review by AI quicker, more efficiently and at lower cost. Information that can be read by the investors’ models in the way that allows them to focus on the parts they are interested in. Information that works with the investors’ tax algorithms. Information allowing comparisons to peers. Information that combines with other data sets in similar XBRL form allowing easier analyst reviews.

So why will we need a prospectus at all? We will need something because investor protection matters. However, the shape and the form of the prospectus as we know it will become obsolete. An authorised data set will be all that is needed. Data that the investors know has been vetted, that has all the required parts as needed by the regulator, that they only get access to once approved.

So, when is a prospectus not a prospectus? Much sooner than you think…

How technology can help SMEs’ raise capital

Public Capital Markets Evolution for SME’s

Despite the importance of Small and Medium Enterprises (SME’s) to the global economy, 2008’s global financial crisis forced a contraction in traditional sources of finance for SME’s, including Initial Public Offerings (IPOs) capital markets. Questionably, this contraction has not yet been fully addressed. It certainly created new financing avenues for SME’s largely using technology, such as Peer2Peer (P2P) lending, crowdfunding and digitisation offerings in the form of Initial Coin Offerings (ICOs) and Security Tokens (STOs). At the same time, the role of traditional public capital markets as a source of funds for SME’s has declined dramatically and the banks seem reluctant to provide the much-needed capital. How these traditional public markets and their regulators can make debt and equity capital attractively accessible to SME’s once again is yet to be tackled properly.

Crypto industry insiders describe the traditional IPO as “a 40-year-old gardening equipment company owner” while an ICO/STO is “an 18-year-old computer geek building his supercomputer in his father’s garage”. There is no valid reason for this to be the case. Many of the traditional financial services companies have steered clear of digital assets due to lack of regulation, although this is changing. Arguably the crop of up-and-coming digital exchanges would appear to be ahead on the technology adoption curve.

We are now seeing many jurisdictions globally pass crypto and tokenisation laws and, against the established exchanges, the narrative of “same business, same rules” will soon come fully into effect. Given that the mainstream markets are already a regulated industry, they should be favourably positioned against any challenger to adopt and implement new technologies in the regulated space – a space where the ‘disruptors’ will certainly struggle. Once the regulatory playing field is levelled, if the mainstream markets sort their technology out, they are ideally placed. With $20 billion raised via ICOs and STOs in 2018, it clearly highlights there is certainly no shortage of investors or firms looking to raise fresh funds.

The dramatic imposition of mandatory remote working as a result of Covid-19 will expose the structural problems more starkly and could well be a catalyst for accelerated development of a genuine end to end digital ecosystem in the public markets as SME’s seek new capital. However, those traditional incumbents will need to adapt and adopt rapidly to a truly digital world or risk becoming extinct.

That said, even the nimbler Fintech firms that are using Blockchain to create Digital Assets are still not delivering a truly digital product and will not be regarded as mainstream until they do. This will become particularly apparent as regulation starts to bite. Blockchain technology is being used to improve the efficiency of Know Your Client (KYC), Anti Money Laundering (AML) checks, trading, settlement and custody services. However, if the securities prospectus drafting to comply with the regulations is still done in the traditional, unstructured way, via uploads of PDF’s, Excel spread sheets or Word files following manual application of regulations and rules, the new digital exchange proposition will be limited and certainly less appealing. Hence the need for the collation of verified structured data, otherwise we do not solve the conundrum of ‘garbage in garbage out’, no matter how slick the technology is.

Why has the SME use of traditional public markets declined?

Over time, accelerated by legislative responses to the global financial crisis, raising funds in public markets for SME’s has gone in reverse as a result of structural inefficiencies, increasing complexity, conflicts of interest, decreasing incentives and breath taking costs.  Current antiquated mechanisms and “one size fits all” regulatory initiatives including MiFID and monitoring communications to identify market abuse (MAR) have made matters worse, driving costs up even further. There has been a shift in focus the towards larger capitalised companies undermining the attractiveness for SMEs to use public markets for debt or equity finance. According to the Federation of European Securities Exchanges (FESE), the cost of an IPO transaction in the mid-1990’s was 2% to 2.5%. By 2015, these costs had risen 10% to 15% for an IPO of less than €6 million, and 6% to 10% for up to €50 million. When added to ever higher ongoing compliance costs, it is unsurprising that funds raised via public markets is half of what it was in the 1990’s. The costs of an IPO and the follow-on governance and compliance costs are real barriers to listing – driven by largely manual processes. No wonder many SME’s and start-ups have sought alternative funding sources and stayed private, often driven into the arms of the Venture Capital and Private Equity funds.

What is being done about the decline?

The problems described here for SME’s that are considering raising equity or debt via the mainstream public markets are obviously now well-recognised. There are numerous initiatives in Europe, such as the EU Growth Prospectus, and ongoing discussions amongst various bodies in the UK, the EU and elsewhere as to what response is best. In Europe, the  FESE itself is now lobbying the European Commission to “Establish a level playing field in requirements applicable to private and public companies, as well as an appropriate level of investor protection which includes a European collective redress mechanism”.

There is a noticeable and positive trend in recent years of the rise of innovation hubs and regulatory sandboxes to support tech development in the world of financial services. The ESMA, EBA and EIOPA joint report on innovation hubs and sandboxes indicates that “21 EU Member States and 3 EEA States have established innovation hubs and 5 EU Member States have regulatory sandboxes in operation”.

Another initiative worth noting is the European Single Electronic Format (ESEF) which became law in 2019, forcing a process of digitization which, as many have commented, will have a profound effect on companies reporting across Europe. As one ACCA commentator said, “The world’s financial markets are gradually crossing the digital divide and taking listed company annual reports with them”. ESEF means that all listed entities from 2020 will have to file annual reports digitally as inline XBRL filings – allowing not only humans to read them, but also machines. The idea is that the data contained can be used to do much greater analysis and improve business transparency, particularly for investors, pension funds, investment banks etc.

It is important to note that both the EU Growth Prospectus regulations and the ESEF are applicable to both traditional markets and the new digital exchanges.

What has been the progress to date?

While this is all very well, no exchange (traditional nor digital) will truly reap the rewards of lower costs and improved efficiency until the entire process is built on structured data.

The lifecycle of raising equity and debt capital for SME’s in the traditional public markets still has a long way to go before it is, again, truly attractive and can offer a viable option for SME’s to raise funds. The challenge is enormous given the number of organisations involved, the ever-changing rules/regulation (coupled with siloed systems) and an archaic IT infrastructure where computers are unable to communicate with each other. Progress towards digitisation in the traditional equity and bond markets has been slow and none of the stakeholder regulators nor exchanges (even the alternative digital exchanges) are yet offering a truly comprehensive technological approach that tackles the current structural problems head-on while policy and legislation continues to evolve.

So far, digitisation of the listing and ongoing obligations processes in the mainstream markets has focused on discrete elements, such as the shorter prospectus for SME’s and on digitising the financial reporting. While this progress is welcomed, the efforts are granulated and potentially markets’ participants are missing out on the tech advancements that arise from a fully digitalised environment and data processing.

Nasdaq, for instance, prides itself on its technology-based “end-to-end capital raising solutions”. However, even Nasdaq’s “end to end” process does not tackle digitising a large part of the ‘pain’ of an IPO – the documentation process. That process relies heavily on unstructured data and manual processes and is left to the responsibility of the SME in the supply chain. The exchanges and their regulators are still consuming PDF’s, Excel spread sheets and Word files i.e. unstructured data that ends up having to be re-keyed (with inevitable errors) is hard to analyse without significant effort and expense. Even the most advanced AI/NLP search and analysis engines will miss things hidden in PDF’s.

Nasdaq is not alone. Just about every established mainstream exchange and related regulator in the world – Greece, Hungary, France, Cayman, Bermuda, Ireland, UK, Canada, Hong Kong, Australia and South Africa, to name a few – distribute rules, regulations and forms in PDF or Word that a prospective SME issuer typically must pay an intermediary to obtain, analyse and translate into a process which the SME can follow. A few, such as Singapore and the UK FCA, update participants in HTML but there is no direct digital link from the rules to the content being prepared to comply with the rules.

Existing equity and bond markets or the new Blockchain-powered platforms, currently are  unable to offer an end to end digital solution while their front-end documentation process remains unlinked and unstructured. While rules, regulations, guidance, forms, templates, prospectuses, circulars, offering memoranda, ancillary agreements, board minutes, due diligence and governance/expert reports, content verification and regulatory submission processes continue to be completed manually by email, Excel, MSWord and PDF generation and submission, the status quo will remain.

Conclusion

If traditional public securities exchanges and their regulators take a stronger initiative to lower costs and speed up SME issuances, now (to ease the SME issuer burden via use of technology), this sends out encouraging signals to those SME’s looking at fast, cost-effective and efficient ways of raising funds that the mainstream capital markets are no longer the “40-year-old gardener” and have rather been reborn as the “tech savvy leader”!

However, should traditional exchanges, brokers, bankers and their regulators continue with their long lead times for change and fail to take a more innovative approach to technology use, then the field will be left wide open for the new Blockchain-powered Fintech firms to move in and take over. What is more likely is, that while there may be casualties among the existing regulated exchanges (and there will undoubtably be consolidation between the new Blockchain based firms), each camp will likely learn from the other and adopt best technologies and practices. Hopefully, as our lives become more digitised, we will see regulators and markets embrace new technology, enabling capital (whether that be via debt or equity) to become more flexible, efficient, compliant and with less risk. SMEs are going to need new sources and ways to raise the capital with which they need to grow, alongside creating jobs that are desperately needed.

ScribeStar joins CMS’ equIP

London, 29 April, 2020. ScribeStar, a digital ecosystem that improves the efficiency and reduces the cost and time required for document production for capital markets transactions, has been selected by CMS, one of the world’s largest law firms, to join its accelerator program, equIP.

CMS’ equIP programme brings together a network of international start-ups and helps them with their growth ambitions. ScribeStar will benefit from the support and strength of CMS through legal advice and contacts within the legal sector, and through the network effect of partnering with other equIP companies.

Srinivas Suravarapu, CEO of ScribeStar, said: “We are delighted to join CMS’ exclusive equIP programme. It offers us an exciting opportunity to expand the use of our technology in capital markets and leverage CMS’ network of other leading legaltech companies across the world. Our track record in the UK in capital markets keeps growing. In the same way that datarooms went online, we are seeking to bring digital benefits to the capital markets documentation process. Our partnership with CMS takes us a step closer to realising that goal.”

Charles Kerrigan, Fintech Partner at CMS, comments: “We are very pleased to welcome ScribeStar to CMS equIP. The programme has developed a track record of supporting some of the brightest minds in the start-up world, and we think that ScribeStar’s innovative platform will be a perfect fit. ScribeStar is at the forefront of the digitalisation of capital markets transactions, transforming what was previously a manual process into something much more efficient. We plan to work with ScribeStar in our capital markets practice globally and use its technology in other areas of our firm.”

CMS has used ScribeStar for capital markets transactions for almost three years. Mostly recently, in February, CMS completed the Sequoia Economic Infrastructure Income Fund prospectus on ScribeStar’s platform.

Other capital markets documents produced on ScribeStar’s platform include: the Aston Martin IPO registration document and prospectus; both Smithson Investment Trust Plc IPO prospectuses – the first being the largest ever investment trust IPO; S4 Capital plc’s last three fundraising prospectuses; and the Equiniti Group plc rights issue prospectus.

Contact Simon Barker at sbarker@barkercomms.com 

+44 7866 314 331