The European Parliament, the EU Council and the EU Commission have agreed on a revamped Prospectus Regulation. The reform was proposed by the Commission last November, as part of its Capital Markets Union Action Plan, in order to improve access to finance for companies and simplify information for investors.
The existing EU prospectus regime principally consists of an EU Directive (Directive 2003/71/EC), which was subsequently amended, and a supplemental EU Regulation (No. 809/2004) prescribing the form and content of a prospectus required by the Directive. The amended Directive together with the Regulation provides for a single regime throughout the EU, governing the content, format, and approval of prospectuses, and when they are required to be published. The Directive has been implemented in Ireland by regulations which were first published in 2005 and amended in 2012. The regime is also supplemented by prospectus rules published by the Central Bank of Ireland.
While the existing regime has worked relatively well, it has been acknowledged by the Commission that it has created some legal uncertainty and imposed some burdensome requirements, leading to increased costs and the creation of inefficiencies, which could impede the process of raising funds on the securities markets in the EU. In particular, it has been acknowledged that because the existing European prospectus regime derives from a Directive, which had to be transposed into domestic law by member states, there has been some divergence among member states in how its provisions have been interpreted in the transposing legislation. Consequently, a decision was taken that the existing framework should be replaced with a new, directly effective Prospectus Regulation, which, as an EU Regulation, as opposed to a Directive, will not require the passing of implementing legislation at member state level (this is a similar process to that which led to the replacement, last year, of the old Market Abuse Directive with a new directly effective Market Abuse Regulation).
The proposed Regulation, once adopted, will replace Directive 2003/71/EC which will be repealed, along with its corresponding implementing measures (including Commission Regulation (EC) No 809/2004). New implementing measures will also be adopted to set out the minimum information contents of prospectuses. It is believed that the proposed Regulation will enter into application only after such implementing measures are adopted.
Key proposed changes to the current prospectus regime
According to a Commission press release, a number of reforms are being proposed, which will be welcomed by companies seeking to raise funds in Ireland. The key changes to be implemented are to include the following:
- Capital raisings and "crowdfunding projects" up to €1 million will not need a prospectus. However, the revised compromise text indicates that, while member states will not be able to impose a requirement to draw up a prospectus for such offers of securities, they will be able to impose other disclosure requirements at national level "to the extent that such requirements do not constitute [a] disproportionate or unnecessary burden".
- No prospectus will be required for the admission to trading on a "regulated market" (in Ireland, this is the Main Securities Market of the Irish Stock Exchange) of securities fungible with securities already admitted to trading on the same regulated market, provided that they represent, over a period of 12 months, less than 20 per cent of the number of securities already admitted to trading on the same regulated market (this will be an increase from the current exemption applicable in these circumstances which is set at 10%).
- The Commission press release says that a prospectus will only be mandatory under the new Prospectus Regulation where amounts in excess of €8 million, calculated over 12 months, are to be raised in the EU (up from the existing €5 million threshold); for offerings below that threshold, it indicates that issuers will be able to raise capital "according to local market rules issued by growth markets". However, the compromise text of the Regulation indicates that member states will be given the option of exempting offers of securities to the public from the obligation to publish a prospectus where the amount to be raised is less than €8 million. It remains to be seen what measures, if any, will be introduced in Ireland, to regulate the making of public offers up to that level, over and above the measures already contained in the Companies Act 2014.
- There will be a new EU growth prospectus that will be available for SMEs, mid-caps admitted to an SME Growth market or small issuances by non-listed companies. This will boost the ability of small and growing companies to raise money across the single market.
- What is described as an alleviated corporate bond prospectus, previously only for debt issued in denominations of at least €100,000, will be available for admission to wholesale debt markets. The new prospectus aims to introduce more liquidity into secondary markets for corporate bonds.
- Frequent participants in the capital markets will be able to benefit from a frequent issuer regime that they can activate once an opportunity to raise funds arises, which the Commission says will halve approval times from 10 days to 5.
- A shorter prospectus for secondary issuances will allow issuers already admitted to stock markets and SME growth markets to benefit from a lighter prospectus for any "follow-up" issuances.
- Prospectus summaries will not be allowed to exceed seven sides of A4 paper; in addition, it will only be permissible for a limited number of risk factors to be included in summaries.
- No more paper prospectuses will be required, unless a potential investor explicitly requests one.
What happens next?
The agreed text now goes to the European Parliament and the Council of the EU for a final vote. After that, the final version of the agreed Regulation will have to be published, which is currently expected to occur sometime later this year, possibly by June. It is anticipated that the bulk of the new Regulation will apply 2 years after that, with some of its provisions applying from earlier dates.