The European Commission is attempting to overhaul the existing Prospectus Directive regime. The Commission has provided for material changes in its proposed Prospectus Regulation published on 30 November 2015, both as to when a prospectus is needed and also the content of the prospectus.
The Prospectus Regulation, provided by the European Commission (the "Commission"), is aimed at addressing concerns that prospectuses are overly long and unwieldy and are not fit for purpose. Prospectuses are viewed by some as liability management tools for the issuer rather than serving to protect investors. The Prospectus Regulation also aims to provide a lighter regime for SMEs so that it will be easier for these types of issuers to access capital markets.
If adopted, the Prospectus Regulation will have direct effect without requiring implementation at the national level, unlike the previous Directives. Once finalised, the regulation will come into effect 12 months after it enters into force. The main changes are:
1. Universal Registration Document
A disclosure process similar to the ‘shelf registration’ disclosure process in the US is being introduced. This will involve a fast track procedure for prospectus approval for frequent issuers who draw up an annual ‘universal registration document’. The aim is to allow issuers who have filed this document to tap into the market more quickly.
2. Change in minimum issuance thresholds where a prospectus is required
Under the Prospectus Regulation, no prospectus will be required for an offer of securities in the EU with a total consideration below €500,000 - calculated over 12 months. Member States will have discretion to set the threshold for the exemption from the requirement to produce a prospectus for domestic issues of securities, with no cross-border passporting, between €500,000 and €10 million - calculated over 12 months.
Market commentators differ as to the effect this change will have on the thresholds under the existing Prospectus Directive, as the drafting under the existing directive is inconsistent.
3. Change to summaries
Summaries will change in both content and format so that they will be similar to a key information document under PRIIPs - the Packaged Retail Investment and Insurance Products Regulation.
The allowable page limit is being reduced from 15 to six pages. No more than five risk factors relating to the issuer and five risk factors relating to the securities may be included.
4. Change to risk factors
Issuers will be required to categorise each risk factor as high, medium or low risk and will no longer be permitted to include generic risks. Having to categorise the risk factors will be difficult for issuers and they may be reluctant to categorise risks as medium or low in case this exposes them to liability if it turns out subsequently that the categorisation was incorrect. There is a concern that almost by definition a risk factor that transpires but was categorised as “low” or “medium” may be regarded as incorrectly categorised.
5. Removal of safe harbour from prospectus requirement for issues with denominations of at least €100,000
The minimum denomination of at least €100,000 exemption has been removed. This will likely result in issuers increasingly relying on the remaining safe harbours such as offering securities:
- to qualified investors;
- to fewer than 150 non-qualified investors; or
- with a minimum commitment of €100,000 per investor,
in order to avoid producing a prospectus.
This change is intended to address a concern that issuers were issuing debt securities in large denominations in order to avoid the prospectus burden, and that this was leading to less secondary market liquidity and investors having access to a smaller pool of potential investments.
6. ESMA online storage and search function
ESMA will introduce a free and searchable online database containing all prospectuses approved in the European Economic Area.
7. Clarification on position for retail cascades
The term “retail cascade” is used to describe a distribution mechanism where low denomination securities are offered to retail investors by a distribution network of financial intermediaries, rather than by the issuer directly.
Under the new regime, financial intermediaries should be able to rely on the initial prospectus produced and published by the issuer as long as the issuer consents to its use and it is valid and properly supplemented. This will have the effect of making the prospectus a ‘live’ document rather than a ‘one day’ document. Financial intermediaries will need to take a view on the continued validity and accuracy of the prospectus after the issue date.
It is difficult to anticipate how this will work in practical terms, as well as the knock-on impact it may have on the process for producing the prospectus including issues such as verification.
8. Scope expanded for minimum disclosure regimes for follow-on issuances and SMEs
The new regime widens the circumstances where a ‘minimum disclosure’ prospectus may apply for issuers on a regulated market or an SME growth market for at least 18 months where they issue debt securities or equity securities of the same class. In addition, for the minimum disclosure regime for SMEs, the threshold market cap for qualifying as an SME has been increased from €100 million to €200 million.
It is not known what will be required under the minimum disclosure regimes until the Commission publishes regulatory technical standards on it this year.
9. Admission to trading exemption increased from 10% to 20%
Subsequent issues of securities on the same regulated market will not require a prospectus provided that the securities being offered represent less than 20% of the existing securities. This significantly increases the existing exemption which is limited to shares only with a maximum of 10% of existing shares. This may be of limited practical effect in Ireland given the pre-emption rights requirements of the applicable corporate governance codes.
10. Scope to incorporate documents by reference has been expanded
The range of information which an issuer can incorporate by reference has been expanded. For new issuers this can include their financial information and for existing issuers it may also include management reports and corporate governance statements.
It will remain to be seen whether the Prospectus Regulation will achieve its stated intentions. While some of the changes are helpful, the practical effects will need to be monitored. The change to the way risk factors in the prospectus may be expressed may prove difficult for issuers, at least in the short term. Many market commentators feel the Prospectus Regulation did not introduce sufficient levels of changes or improvements to achieve its aims. A lot of the detail for the changes remains to be developed in secondary legislation, so how the proposed changes will apply in practice will need to be reviewed carefully on an ongoing basis.