Q3 2020

EU BUSINESS NEWS / Q3 2020 9 Capital Chasm Set to Spell Economic Disaster more money to taxpayers, over the long term. Aside from further capital provided by central banks, the report also recommends incentivising the provision of equity capital to SMIDs. Tax regimes that currently favour loan capital should come under scrutiny while incentives for the provision of new equity capital – either at IPO or for subsequent raises – should be improved. To level the environment for SMIDs, rather than fuel demand for larger-cap issuances, the report recommends these incentives be tapered, with investors benefitting most from fresh capital injected into micro-cap stocks. The report also recommends tax benefits could be conditional or proportional to the period over which the newly released equity is held to protect against short term investments, and that measures remain flexible so they can be carefully calibrated on an ongoing basis to respond to changes in the capital ecosystem. Neil Shah, report author and Director of Research at Edison Investment Research, commented: “Broadly speaking, the overarching recommendation of the report is that investors, companies and governments start considering now the likely impact of a capital chasm emerging, and that they begin to make preparations to limit its effects as quickly as possible. Whilst we don’t think the emergence of a capital chasm is a certainty, we do think it is important that market participants, constituents and policymakers take the risks involved seriously as in the worst-case scenario the chasm could see many smaller caps affected. And, if bankruptcies multiply and jobs are lost, the effect on the economy could be devastating so much so that it becomes a black hole rather than a chasm.”