As widely anticipated as part of the European Commission's Capital Markets Union (CMU) Action Plan, a legislative proposal for a "radical overhaul" of the Prospectus Directive was due to be released before the end of 2015 (see our overview of the CMU proposals in Edition 17 of this SCM Briefing for background). In late November 2015, the European Commission released a proposal for a Regulation on the Prospectus to be published when securities are offered to the public or admitted to trading, that would replace in its entirety the existing Prospectus Directive (Directive 2003/71/EC, as amended, referred to here as the "PD" or "PD regime") with a new regime intended to reduce administrative burdens and costs for companies, and make prospectuses more valuable tools for investors. The new rules would also align the PD regime with other disclosure obligations such as those set out in the Transparency Directive (and the retail package set out in the Regulation on Information for Packaged Retail and Insurance-based Investment Products, or "PRIIPs"). The key aspects of the proposal are as follows:
- Secondary issuances: issuers whose securities are already listed on a regulated market (which account for around 70% of prospectuses approved each year) would have an "alleviated prospectus" for secondary issuances (provided their securities have already been admitted to trading for at least 18 months). Reformed minimum disclosure rules (which require minimum information covering only the last financial year) would reduce the costs of drawing up the prospectus and make the resulting disclosures more meaningful for potential investors. New rules for "retail cascades" would govern sales to retail investors.
- SMEs: an entirely separate option would be available for small- and medium-sized entities (SMEs) (defined as (including) those with a market capitalisation with a new threshold of €200,000 rather than the existing €100,000) to draw up a distinct, tailor-made prospectus when they offer securities to the public (but not when they are admitted to trading, to avoid creating a two-tier market), with an optional "question and answer" format that would save considerable fees (with details to be specified in Regulatory Technical Standards). It is proposed that new prospectus schedules will be developed (also in the form of Regulatory Technical Standards) to specify the new proportional information to be included.
- Frequent issuers: would be able to use the new "universal registration document" which would act as a fast-track "shelf" registration document pre-cleared by the relevant competent authority that would shorten the time to market from ten to five working days (see further below). Issuers may also, in certain circumstances, fulfil their ongoing disclosure obligations under the Transparency Directive by integrating annual and half-yearly financial reports into the universal registration document. Amendments to the universal registration document would be different in that there would no longer be a prospectus "supplement" and no offer or admission to trading required until it becomes part of a prospectus. The minimum contents of the universal registration document would be set out separately by the European Securities and Markets Authority (ESMA) in a new set of Regulatory Technical Standards.
- High denominations: the proposal would remove the incentives to issue "high denomination" securities (i.e. €100,000 or above per unit) for non-equity (i.e. debt) securities, which is intended to make bonds more attractive to investors and improve liquidity. However, this would mean that fewer issuers would be able to use the exemptions available (which would remain broadly as under the current PD regime). It would also mean that the dual standard of retail / wholesale disclosure is in practice removed from the legislation. The exemption for offers above €100,000 would be removed, although issuers offering non-equity securities to qualified investors (or requiring a minimum commitment of €100,000 per investor) would still benefit from a prospectus exemption - see the information on thresholds below.
- New thresholds: new thresholds would be introduced such that no prospectus would be required for any offers of securities with a consideration below €500,000 (currently it is €100,000). Member States would have the option to exempt all (domestic) offers with a total consideration between €500,000 and €10,000,000 for which no passport is sought. Issuers could however opt-in to the "EU prospectus" on a "voluntary" basis. Existing exemptions (such as the "qualified investor", "less than 150 investors" and for securities offered in the context of an employee share scheme) would continue to apply. However, removing the €100,000 threshold would (in effect) require "wholesale" issuers in future to comply with other aspects of the legislation from which they are currently exempt, such as the enhanced disclosure requirements, so these proposals may not be as beneficial as they appear at first glance.
- Documentation: the various document formats available would be: the base prospectus, which remains largely unchanged from the PD regime, and which (under the proposal) may be drawn up for any kind of non-equity securities, with "tripartite prospectuses" made up of several documents possible (and which may be prepared and approved at different points in time under the proposal), and the registration document of a base prospectus may take the form of a "universal registration document". Summaries of base prospectuses would no longer be required when the final terms are not contained in the base prospectus (only an "issue-specific summary" would be required). A new "universal registration document" is proposed for use as an optional shelf registration document for frequent issuers to allow fast-track approval with the separate securities note and summary to be approved within five days rather than ten.
- Disclosure: two sets of disclosure rules are provided, for secondary issues and for SMEs, that would replace the existing "proportionate disclosure regimes" for rights issues and SMEs.
- Risk factors: the proposal "calibrates" the information made available to that which is relevant to sound investor assessment of the potential investment: more reader-friendly provisions would be required, with risk factors more focused on material and specific risks and not on generic risks. ESMA is empowered to develop Guidelines on the content of risk factors across two or three categories, based on materiality.
- Incorporation by reference: the proposal would introduce a wider set of documents that may be incorporated by reference, subject to certain conditions. ESMA may prepare further Regulatory Technical Standards on the documents that may be incorporated by reference in a prospectus.
- Summaries: reform of the prospectus summary into a document similar to a "key information document" (KID, as required under the (retail) PRIIPs Regulation), subject to a maximum length of six sides of A4 paper when printed (the liability regime would remain largely unchanged), is proposed.
- Publication: the introduction of a free, searchable prospectus database run by ESMA on which all approved prospectuses would be published, is proposed. The proposal would remove the requirement to publish a prospectus by inserting details of its publication in a newspaper / making printed copies available at the offices of the issuer, but maintains the obligation to provide a free paper copy to anyone who requests it.
Overall, the Commission's view is that the use of a Regulation going forward will address problems with the inconsistent implementation of the PD and reduce fragmentation across the EU. Note that the grandfathering provisions would apply the existing PD to all issues of securities approved prior to the proposed new Regulation taking effect. The Commission notes that the next step is that the proposal will be discussed and negotiated amongst the trialogue of the European Commission, Council and Parliament, so (as with any European legislative proposal), it may be subject to further (heavy) amendment prior to it being finalised. A set of Frequently Asked Questions on the legislative proposal has also been released which provides additional background and information on the proposal.
European Commission, Proposal for Regulation on the Prospectus to be published when securities are offered to the public or admitted to trading and FAQs (30 November 2015)