SMEs’ Equity Financing : Does Corporate Law Matter?

Lack of appropriate financing is a major issue for European small or medium-sized enterprises (SMEs). They are highly dependent on bank lending for external funding, while there is a strong need for wider use of alternative finance, and especially of equity capital with respect to innovative and growth-oriented firms. In this Article, we explore the relationship between corporate law and SMEs’ access to equity finance, concluding that the organizational and governance structure of the enterprise is essential for making it attractive for investors. First, we provide evidence of this relationship showing the importance that US corporate law, and particularly Delaware corporate law, had in the successful funding of Silicon Valley’s startups. Second, we analyze the European framework. On one side, we address the measures adopted by the EU regulators for promoting SMEs’ alternative finance, which have been ineffective and have completely ignored business organization law. On the other side, we describe how a number of EU jurisdictions – with a focus on the Italian system – have amended their corporate law, easing access to equity finance. Finally, we discuss some empirical data and the possible implications in terms of regulatory competition among the EU Member States