From 1 July 2012, prospectuses published in connection with pre-emptive offers of shares by Main Market or AIM companies, and prospectuses published by SMEs and small cap Main Market companies, will be shorter and cheaper to produce as less information will be needed. In addition:
- Summaries, which appear at the front of prospectuses, will in most cases be slightly longer, and specified information will have to be presented in a particular order.
- More companies will be able to offer shares to their EEA-based employees without having to produce a prospectus.
- Across all EEA states, investors will have the same amount of time to withdraw their acceptance if a supplementary prospectus is published.
- Where securities are offered via a “retail cascade”, it will be clearer who is legally responsible for information provided to investors, and on what terms financial intermediaries are authorised to resell or place securities on the basis of the issuer’s prospectus.
The Prospectus Directive came into force at the end of 2003 and was implemented in the UK on 1 July 2005, principally through amendments to the Financial Services and Markets Act 2000 (FSMA) and the creation of the FSA’s Prospectus Rules. The Directive requires a prospectus to be published where transferable securities are offered to the public or admitted to trading on an EU regulated market (regulated market). What information must be included in a prospectus is prescribed by various Annexes to an EU Regulation that accompanies the Directive (the PD Regulation): for an issue of equity shares, Annexes I and III and, in some circumstances, Annex II, must be followed. Following a review by the European Commission of how well the Prospectus Directive and PD Regulation have been working, an Amending Directive (2010/73/EU) was published in the Official Journal of the EU and came into force on 31 December 2010. The PD Regulation is being amended by means of two Delegated Regulations. Among other things, the amendments are designed to simplify the capital-raising process for companies in various circumstances, and to iron out a number of difficulties and uncertainties that have arisen.
In particular, the Commission accepted that prospectuses published in connection with offers to existing shareholders (pre-emptive offers) could be shorter, as the investors to whom such offers are addressed can be assumed already to know, or have ready access to, a considerable amount of information about the issuer, its history and recent financial performance. Similarly, the cost and effort of producing a “full” prospectus can discourage SMEs and smaller listed companies from offering their shares to the public or seeking admission to a regulated market, so the Commission decided to allow such issuers to omit certain information from their prospectuses. As a result, the Prospectus Directive and PD Regulation as amended now include a so-called “proportionate disclosure regime” for prospectuses published in connection with a pre-emptive offer, or by an SME or smaller cap listed company.
Member States have until 1 July 2012 to amend their national laws to implement the amendments to the Prospectus Directive. In the UK, this entails changes being made to parts of FSMA (particularly as to when a prospectus need not be published) and to the FSA’s Prospectus Rules. On 31 July 2011 two amendments to the Directive were implemented in the UK: no prospectus is now required where securities are offered to fewer than 150 persons in the UK or where the total consideration for securities included in an offer is less than €5 million. Previously the limits were 100 persons and €2.5 million respectively. The remaining amendments will be implemented on 1 July 2012.
Because the PD Regulation has direct effect, it does not need to be implemented through national legislation. Instead, in the UK the FSA intends to copy out in Appendix 3 to its Prospectus Rules the relevant parts of the amended PD Regulation. Note that the changes to Appendix 3 are very unlikely to appear on the FSA’s website until several days after 1 July: partly this is due to the fact that the Commission has still not published the final version of the second Delegated Regulation to amend the PD Regulation. This article is therefore based on the draft version of that Regulation which was published at the beginning of June: the final version is unlikely to be significantly different.
Shorter prospectuses for pre-emptive offers
Under the new proportionate disclosure regime, less information will have to be included in a prospectus that is published in connection with a “rights issue” if the company has shares that are already admitted to trading on:
- a regulated market (e.g. the UK Main Market); or
a multilateral trading facility (MTF) whose rules:
- require annual financial results to be published on the company’s website within six months of the year end, and half-yearly results within four months of the half-year end;
- require inside information to be published on the company’s website; and
- include provisions designed to prevent insider dealing and market manipulation in the same way as the Market Abuse Directive.
AIM would appear to be a qualifying MTF for this purpose, and the FSA has confirmed to us informally that it expects to recognise AIM as such.
“Rights issue” is defined as an offer:
- made in compliance with statutory pre-emption rights, which is addressed only to existing shareholders and allows them to subscribe for new shares. In the UK, this means compliance with sections 561-2 Companies Act 2006: an offer that complies with these sections is sometimes known as a “Gazette route” offer, as it can be extended to certain overseas shareholders by means of a notice published in the London Gazette; or
- in respect of which statutory pre-emption rights have been disapplied but existing shareholders enjoy “near identical” rights. In particular, the rights to subscribe must be transferable or “if not, the shares arising from the rights [if not taken up] are sold at the end of the offer period for the benefit of those shareholders who did not take up [their] entitlements”.
In order to provide flexibility to deal with fractions, and for other technical reasons, most FTSE 350 companies obtain annual authorisation from their shareholders to issue up to two-thirds of their existing ordinary share capital without complying with the statutory pre-emption rules on the basis that most, if not all, of the existing shareholders are given the right to subscribe for new shares in proportion to their holdings (in compliance with the pre-emption requirements in the Listing Rules).
If an issuer with shares traded on the Main Market or AIM does a rights issue (where existing shareholders have the right to subscribe in proportion to their holdings or to sell their rights, and any rights that are not taken up by an existing shareholder are sold in the market on his behalf), it will qualify for the proportionate disclosure regime whether the Gazette route is followed or not. But if such an issuer wants to do an open offer and take advantage of the new proportionate disclosure regime, it will need either to use the Gazette route (which historically has been uncommon) or make it a compensatory open offer, in which rights that are not taken up by a shareholder by the end of the offer period are sold in the market on his behalf. Very few compensatory open offers have been made to date, but the benefit of being able to produce a shorter prospectus may encourage issuers to use them more.
Information that can be omitted from a pre-emptive offer prospectus
Annexes XXIII and XXIV of the PD Regulation, which are new, specify the information that must be included in a registration statement and a securities note (respectively) for a pre-emptive offer. An issuer will be able to comply with these Annexes instead of Annexes I and III of the PD Regulation. In most issues of equity securities, the registration statement and securities note are amalgamated into a single document. If, as a result of the issue or any related transaction - such as an acquisition by the issuer - there will be a “significant gross change” (of more than 25%) in the size of the issuer’s business, the prospectus will also need to include pro forma financial information, illustrating the effect of the transaction on the issuer’s financial results, that complies with Annex II of the PD Regulation.
A prospectus for a pre-emptive offer prepared in accordance with Annexes XXIII and XXIV will be shorter than a “full” prospectus in the following key ways:
- It will need to include information about certain matters and events only if they have occurred since the date of the issuer’s last published audited financial results: in particular, material investments made by the issuer; any significant changes in the principal activities of the issuer, or the principal markets in which it operates; and any transactions between the issuer and a related party (provided that the issuer reports its financial results under IFRS, which requires certain details of related party transactions to be disclosed in the accounts).
The following types of information will not need to be included:
- Operating and financial review (OFR) – i.e. a review of the issuer’s financial condition, operations, profits and significant changes that have affected those results.
- Selected financial highlights from the last three years of the issuer’s financial results and any later interim period.
- The issuer’s capital resources and cash flows, borrowing requirements and funding structure.
- Details of any significant subsidiaries.
- Existing or planned material tangible fixed assets, including leases and any charges.
- Material environmental issues.
- History of the issuer and its incorporation and development.
- History of the issuer’s share capital.
- Research and development policies over the last three years.
- Numbers and categories of employees.
- Summary of the issuer’s memorandum and articles, the rights attached to its shares and how they can be changed, when and how general meetings are held, any restrictions on changes of control, and when shareholdings must be disclosed.
- Any rules on mandatory offers that apply to the issuer.
- Any takeover bids that have been made for the issuer during the previous or current financial year.
An issuer whose shares are traded on a regulated market will not need to include:
- Details of its directors’ remuneration, pension or other benefits, their term of office or service contracts.
- Details about the issuer’s audit and remuneration committees and which corporate governance guidelines it follows.
- Only one year’s financial information will need to be included.
- Material contracts outside the issuer’s ordinary course of business will need to be described only if they have been entered into in the last year (rather than two years as at present).
All the other information that is normally required for a “full” prospectus will have to be included, such as risk factors relating to the issuer and the transaction; any interim or quarterly results published since the last year end; any material litigation in which the issuer is involved; a statement as to whether any significant change in the financial or trading position of the group has occurred since results for the last year or half-year were published (significant change statement); a statement that the issuer will have sufficient working capital for at least the next 12 months (a working capital statement); and a capitalisation and indebtedness statement. Details of the terms and conditions of the offer will of course also need to be included.
If the offer is being into the United States or another jurisdiction with well-developed securities laws, the issuer will of course need to obtain local advice as to whether a shorter form prospectus will contain sufficient information to comply with the relevant securities laws and meet investor expectations.
Shorter prospectuses for SMEs and small caps
Annex XXV of the PD Regulation, which is also new, specifies the information that must be included in a registration statement published by an SME or a “company with reduced market capitalisation” that is offering its equity securities to the public or seeking to have them admitted to trading on a regulated market. An issuer will be able to comply with this Annex instead of Annex I of the PD Regulation. The securities note will need to include all the information specified in Annex III and if, as a result of the issue or any related transaction, there will be a “significant gross change” in the size of the issuer’s business, the prospectus will also need to include pro forma financial information that complies with Annex II. Annex XXVIII of the PD Regulation specifies the information that must be included in a registration statement where such an issuer is issuing depositary receipts over its shares: this is not discussed further in this article.
An SME means a quoted or unquoted company that satisfies two of the following three criteria:
- an average number of employees of less than 250;
- a total balance sheet not exceeding €43 million; and
- an annual net turnover not exceeding €50 million.
A company with reduced market capitalisation means a company with securities already listed on a regulated market that over the last three years has had an average market capitalisation of less than €100 million. Such companies are referred to below as Main Market small caps.
Where a prospectus is required in the following circumstances, it will need to include less information than previously:
- an SME does an IPO on a regulated market, with or without an offer to the public;
- an SME whose shares are unquoted, or traded on an MTF, offers its shares to the public;
- an SME whose shares are already traded on a regulated market issues further shares of the same class and/or offers its shares to the public;
- a Main Market small cap issues further shares of the same class and/or offers its shares to the public.
If an SME or Main Market small cap does a pre-emptive offer, it will be able to take advantage of the proportionate disclosure regime for pre-emptive offers.
A prospectus prepared in accordance with Annex XXV and Annex III will be shorter than a “full” prospectus in the following key ways:
Less financial information will be required. In particular:
- The prospectus need not include historical financial information for any period (currently, three years of financial statements must be included).
- The prospectus need not include interim financial information even if the last annual financial results were published over nine months before the prospectus.
- Instead, the prospectus must include a statement that the issuer has published at least two years’ annual results under IFRS or (for Member State issuers) the GAAP of a Member State or (for non-Member State issuers) a national GAAP that has been recognised by the Commission as equivalent to IFRS. Even where the issuer’s financial results have historically been prepared in accordance with non-equivalent accounting standards, and the results have to be restated for the purposes of the prospectus, the issuer must simply state that it has published restated financial results. In each case, the prospectus must also state where the financial information can be obtained.
- Similarly, if the issuer has published half-yearly or quarterly financial information since the date of its last audited financial statements, the prospectus must include a statement to that effect and details of where the information can be obtained.
- Financial information for the previous two financial years does not need to be restated in accordance with the accounting standards that will apply to the issuer’s next annual results.
- Even if the issuer has been operating in its current sphere of activity for less than one year, there is no need to draw up accounts prepared in accordance with IFRS or any other specified accounting standards.
- However, if the issuer chooses not to include such financial information in the prospectus, it must instead include an OFR.
- Related party transactions: If the issuer already reports its financial results under IFRS, only related party transactions that have occurred since the end of the last audited financial period need be included in the prospectus. Otherwise, details must be included of any related party transactions that have been entered into during or since the last two financial years.
The following types of information will not need to be included:
- Existing or planned material tangible fixed assets, including leases and any charges.
- The issuer’s capital resources and cash flows, borrowing requirements and funding structure.
- The remuneration and benefits of each individual director, if they have already been publicly disclosed or individual disclosure is not required in the issuer’s home country.
- Details of the issuer’s significant subsidiaries (provided that details were included in the issuer’s financial statements).
Of course, in practice the issuer may need to include some or all of the above information in order to meet the expectations of its sponsor and potential investors.
Employee share plans
In practice, many employee share plans can be structured so that the issuer is exempt from having to publish a prospectus – for example, because employees are offered free shares or options, the total consideration is less than €5 million, or the offer is made to fewer than 150 persons per Member State. However, it may be necessary to obtain local advice on how the relevant exemption is interpreted in each Member State where employees are located.
Where it is not possible to rely on one of these general exemptions – for example, because 150 or more employees in any Member State are to be invited to subscribe for shares – it may be possible to rely on the specific employee share schemes exemption in Article 4(1)(e) of the Prospectus Directive. This exempts certain companies from needing to produce a prospectus where securities are offered to their employees provided that a short information document is provided to the employees (see below).
At present, the employee share schemes exemption applies only to companies that have securities listed on an EEA regulated market. From 1 July 2012, however, the exemption is being extended so that it will apply to a company that:
- has its head office or registered office in the EU (or, as a result of the EEA Agreement, in a non-EU member state of the EEA);
- was established outside the EEA but has securities traded on an EEA regulated market. Non-EEA companies with shares traded on AIM (or another MTF or non-regulated market) will therefore not be able to rely on the exemption; or
- was established outside the EU and has securities traded on a third country market (i.e. a market in a country outside the EEA) that the European Commission has formally recognised its legal and supervisory framework as equivalent to EEA regulated markets. Although it was hoped that, by or shortly after 1 July 2012, the major non-EEA equity markets (such as the NYSE) would be recognised as being equivalent, ESMA recently announced that work on determining the equivalence of third country markets has been postponed due to the on-going review of the Transparency and Market Abuse Directives. It is likely to be at least 2014 before any non-EEA market is recognised as equivalent.
The meaning of “company” in this context is ambiguous. Although it is probably intended to mean the company whose securities will be issued (usually the parent company of the group), it could also be interpreted to mean that the exemption can be relied upon provided the employing company is an EEA company. To date, neither the Commission nor ESMA has published any guidance on this, so the cautious approach is to assume it refers to the issuer of the securities. However, non-EEA issuers who are unable to rely on the exemption but have an employing company established in the EEA may be inclined to favour the second, broader, interpretation.
Companies which are unable to rely on the extended employee share schemes exemption will, as before, need to try and structure their offers to take advantage of one of the other exemptions or, if they are unable to do so, produce a prospectus.
Where a company relies on the employee share schemes exemption, it must provide a short “information document” to employees. The information document must contain certain information about the terms and conditions of the offer, the rights attached to the securities and the number of securities for which employees can apply. In the case of companies falling within the third bullet point above, the information document must be in a “language customary in the sphere of international finance” (i.e. English). Because the issuer must produce an information document, the employee share schemes exemption is sometimes referred to as a “qualified” exemption, and companies tend to rely on one of the general exemptions if they can.
Currently, all prospectuses must include a summary of no more than 2,500 words. It must “convey the essential characteristics and risks associated with the issuer and the securities” but, subject to this, issuers can choose what information is included in the summary and in what order.
In practice, the summary is a key source of information for investors, particularly retail investors. In order to make the summary more useful, and to facilitate comparability between prospectuses and with other investment products, the summary will now:
- Have to contain the “key information items” specified in a new Annex XXII to the PD Regulation. Where an item is not applicable, the summary will have to say so. The information must be presented in the order specified in Annex XXII, and will consist of five “tables”: introduction and warnings; the issuer and any guarantor; the securities; risks; and the offer.
- Have to be no more than 7% of the length of the prospectus or 15 pages, whichever is the longer.
- Not be permitted to contain cross-references to other parts of the prospectus. This is because the summary should be capable of being read as a free-standing document.
Summaries will therefore become significantly longer than they tend to be at present, and their format and content will become much more standardised.
In the UK, section 90 FSMA will be amended so that an issuer and its directors will be liable to pay compensation to investors if the summary does not include “key information”, as well as if it is misleading, inaccurate or inconsistent when read together with the other parts of the prospectus. For this purpose, key information means information which is essential to enable investors to understand the securities to which the prospectus relates and to decide whether to consider the offer further. The key information must include:
- the essential characteristics of, and risks associated with, the issuer and any guarantor, including their assets, liabilities and financial positions;
- the essential characteristics of, and risks associated with, investment in the securities, including any rights attaching to the securities;
- the general terms of the offer, including an estimate of the expenses charged to an investor by the issuer and the person offering the securities to the public, if not the issuer;
- details of the admission to trading; and
- the reasons for the offer and proposed use of the proceeds.
Consent to use a prospectus in a retail cascade
A retail cascade typically occurs when securities are sold on to retail investors by intermediaries, rather than being issued directly by the issuer itself. Usually it is debt securities that are sold via a retail cascade, but occasionally similar arrangements are made to distribute equities this way. In some markets, almost all primary offerings of debt securities involve an initial sale of securities by the issuer to one or more large firms, followed by an on-sale by those firms. The sale by the intermediaries to investors generally takes place over a period of several weeks to months. During that period, the price at which the intermediaries offer the securities to their customers will fluctuate – typically many times a day - in line with secondary market prices. In such cases there can be multiple offers by different offerors in accordance with different terms of business.
There is considerable uncertainty about how the Prospectus Directive applies to a “retail cascade”. In particular, it is unclear how the requirement to produce and update a prospectus, and the provisions on responsibility and liability, should apply. Under the amended Directive, financial intermediaries placing or subsequently reselling securities in a retail cascade will be entitled to rely upon the initial prospectus published by the issuer (so that no further prospectus will be required) provided that it is valid and has been duly supplemented and that the issuer gives written consent to its use. For this purpose, under a new Annex XXX to the PD Regulation the prospectus will have to include, among other things:
- Express consent by the issuer to the prospectus being used by financial intermediaries for the purpose of reselling or placing its securities.
- A statement that the issuer prospectus accepts responsibility for the content of the prospectus with respect to any subsequent resale or final placement of its securities by any financial intermediary which has been given consent to use the prospectus.
- How long such consent lasts (up to a maximum of 12 months), and the period in which subsequent resales or final placements can be made by financial intermediaries, and in which Member States.
- Any other conditions attached to the consent.
- A notice in bold informing investors that the financial intermediary will provide information on the terms and conditions of any offer made by the financial intermediary at the time such offer is made.
Where the issuer restricts its consent to the use of the prospectus to one or more specific financial intermediaries, the prospectus must also include:
- The names and addresses of the financial intermediaries entitled to use the prospectus.
- An indication of how any new information with respect to financial intermediaries unknown at the time of approval of the prospectus is to be published and where it can be found.
If the issuer chooses to give consent to use the prospectus to all financial intermediaries, the prospectus must also contain a notice in bold informing investors that any financial intermediary using the prospectus must state on its website that it is using the prospectus in accordance with the consent and the conditions attached to it.
A supplementary prospectus must be published if, between the time when the prospectus is approved and the final closing of the offer to the public or the time when trading on a regulated market begins, a significant new factor emerges that is capable of affecting investors’ assessment of the securities being offered. When a supplement is published, investors who have already agreed to acquire shares are entitled to withdraw their acceptance. The Prospectus Directive specifies that this right must be exercised during a period no shorter than two working days following the publication of the supplement. Although the UK has opted for the minimum of two working days, other Member States have allowed a longer period, which can give rise to uncertainties where securities are offered in several jurisdictions.
Under the amended Directive, a deadline of two working days for exercising a right of withdrawal will apply across all Member States. It will also be made clear that the right of withdrawal arises only if securities are offered to the public (and not if they are simply admitted to trading on a regulated market).
Definition of Qualified Investor
No prospectus is required for an offer that is made to “qualified investors” only. Qualified investor is defined in the Prospectus Directive. In the UK, it also means an investor who is on the list of qualified investors kept by the FSA. Under the Markets in Financial Instruments Directive (2004/39/EC) (MiFID), however, qualified investor has a different definition. This can cause administrative problems in practice, particularly for banks that are involved in an offer, because some investors who are qualified investors for the purposes of MiFID may not qualify for Prospectus Directive purposes.
Recognising this problem, the Commission has decided to amend the definition of qualified investor in the Prospectus Directive to bring it into line with MiFID. Placing letters, terms of placing and selling restrictions will need to be amended accordingly. The FSA register of individuals and SMEs who are qualified investors will be abolished.
Prospectuses to be published on a website
A prospectus will always have to be published on the website of the issuer or (if relevant) of the financial intermediary placing or selling the securities.
Annual information update abolished
The requirement for listed companies to announce and file with the FSA an annual information update will be abolished, as its purpose is now duplicated by the requirement under the Transparency Directive to make regulated information publicly available (i.e. via the National Storage Mechanism).
Implementation of the changes in other Member States
Although Member States are required to implement the changes to the Prospectus Directive by 1 July 2012 and, because the PD Regulation has direct effect, amendments to the Regulation take effect automatically on that date, issuers should not assume that all national regulators will apply the new rules from that date. Where an offer has a cross-border element, the issuer should take legal advice in each relevant Member State and, where necessary, engage early on with the relevant national regulator, before relying on the new rules. This applies in particular where:
- A prospectus published in connection with a pre-emptive offer, or by an SME or Main Market small cap, is to be approved by the FSA and passported into one or more other Member States.
- A group with an EEA-based parent company that has securities traded only on an MTF or whose securities are not publicly traded at all, or a group with a non-EEA-based parent company, proposes to offer shares to its EEA-based employees.
- Securities are to be resold or placed by intermediaries in a cross-border retail cascade.
- The issuer is relying on the exemption for offers with a total consideration of less than €5 million or for offers addressed to fewer than 150 persons per Member State.
Prospectus Directive (2003/71/EC): http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2003:345:0064:0089:EN:PDF
PD Regulation (No 809/2004): http://ec.europa.eu/internal_market/securities/docs/prospectus/reg-2004-809/reg-2004-809_en.pdf
Note that a number of technical amendments have been made to the Directive and PD Regulation since they came into force: details can be found on the Prospectus Directive page on the Commission’s website http://ec.europa.eu/internal_market/securities/prospectus/index_en.htm
Amending Directive (2010/73/EU): http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2010:327:0001:0012:EN:PDF
Delegated Regulation (No 486/2012) to amend aspects of the PD Regulation relating to the contents of the summary, what information must be included in a prospectus published in connection with a pre-emptive offer or by an SME or Main Market small cap: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:150:0001:0065:EN:PDF
Delegated Regulation () to amend aspects of the PD Regulation relating to the retail cascade – draft published on 4 June 2012: http://ec.europa.eu/internal_market/securities/docs/prospectus/20120604_delegated_regulation_en.pdf
As noted above, the Commission has still not published the final version of the second Delegated Regulation. The final version is unlikely to be significantly different from the draft.
Prospectus Regulations 2012 (SI 2012/1538) amending FSMA to implement the changes to the Prospectus Directive: http://www.legislation.gov.uk/uksi/2012/1538/pdfs/uksi_20121538_en.pdf
Instrument amending the FSA’s Prospectus Rules (FSA 2012/29): http://media.fsahandbook.info/Legislation/2012/2012_29.pdf
The FSA has also said that Appendix 3 of its Prospectus Rules will be amended to copy out the amendments to the PD Regulation.