On 18 February 2015, the European Commission (Commission) published a consultation paper on the review of the Prospectus Directive and its implementing legislation. The review is being launched in order to assess the effectiveness of the regime and ascertain what steps should be taken to improve access for companies (including small and medium sized enterprises (SMEs)) to the EU capital markets, whilst ensuring the effective protection of investors and consumers. A key focus of the review will be to reduce the administrative burden on issuers and lower any associated costs which may create barriers of entry to the EU's capital markets.
Click here to read the consultation.
The review in the context of the Commission's plan for a Capital Markets Union
The review is intended to complement the Commission's other work stream which was announced on the same date by the publication of its Green Paper on 'Building a Capital Markets Union'. The initiative seeks to break down barriers to cross border investment in the EU and to access to raising finance on the EU's capital markets. As the prospectus is the route to raising finance on the EU's capital markets, the Commission's review is focussed on ensuring that the Prospectus Directive regime does not create unnecessary barriers to raising capital finance in the EU. We report separately on the Commission's action plan for a Capital Markets Union in this edition of Corporate News.
Key focus of the review
The Commission's review is based on three fundamental questions:
When is a prospectus needed?
The Commission seeks views on a possible recalibration of the obligation to draw up a prospectus, and in particular, questions whether the current exemption thresholds should be amended. The Commission is also interested to hear views on whether there should be an exemption for secondary issuances in certain circumstances and whether a prospectus should be required for the admission of securities to trading on multilateral trading facilities (MTFs), such as the AIM market (which currently does not require a prospectus to be produced for securities admitted to trading on its platform).
What information should a prospectus contain?
The Commission seeks views on the regime's existing tools which were intended to provide flexibility for issuers when drawing up the prospectus. Views are sought on various matters including the effectiveness of the proportionate disclosure regime and whether it should be modified; whether the 'incorporation by reference' mechanism should be modified to provide more flexibility; whether there should be a simplified prospectus regime for SME issuers and companies admitted to trading on SME Growth Markets; whether the rules regarding the prospectus summary should be reassessed; and whether there should be a length limit to the entire prospectus (note that there is currently a limit to the prospectus summary, but none for the prospectus as a whole). Additionally, the Commission seeks views on the liability and sanctions regimes, including whether there is a need to harmonise the regimes across the EU.
How prospectuses are approved?
The Commission notes that national competent authorities have different approaches to the scrutiny and approval of prospectuses across Member States due to different national administrative laws, supervisory practices and liability regimes. It calls for views on whether more consistent approaches are needed in order to ensure a level playing field. Additionally, views are sought on ways to make the approval process more transparent for the public and more flexible for issuers. In particular, the Commission suggests that this could be achieved by making public the first submission of a draft prospectus for review and by allowing issuers to carry out certain marketing activities in relation to the offer or admission to trading in the period between its first submission of the prospectus and the approval of the final version.
The consultation closes on 13 May 2015, following which, the Commission will revert this summer with its roadmap and timeline for putting in place the key actions required to implement the Capital Markets Union by 2019.
Prospectus regime – will buy-side and sell-side unite for reform?
The review of the Prospectus Directive regime is likely to provoke some interesting debate in the next few months. SMEs and their representatives have long been campaigning for the removal of the administrative and costly burden of producing a prospectus. They, together with other sell-side stakeholders, are likely to welcome the possibility of exempting prospectuses in relation to certain secondary offers and the introduction of a simplified prospectus regime for SME Growth Markets.
Similarly, there are also gains to be shared with the buy-side. Investors will want to ensure that their interests are protected and there is scope for this in a more simplified and streamlined regime. For example, a shorter prospectus is likely to be attractive to investors to digest key information quickly before making their investment decision - one which typically is required in a short period of time.
The Commission will need to consider its proposals very carefully and engage with stakeholders to produce a revised regime which achieves the intended outcome. There is no doubt that considerable time and expense were spent in implementing the proportionate disclosure regime – however, in practice, this route to market has not been used as frequently as one would have expected – perhaps, due to the complexity of the provisions or a perception that investors would not be keen to invest on the back of a shortened prospectus? Consequently, it is hoped that this consultation will flesh out the key issues for all stakeholders and propose a successful solution for the EU markets.