New legislative proposal by the European Commission to overhaul the Prospectus Directive 2003/71/EC - A first step of opening up the markets for companies in the context of the Capital Markets Union action plan
On 30 November 2015, the European Commission adopted a new legislative proposal for a regulation of the European Parliament and Council on the prospectus to be published when securities are offered to the public or admitted to trading. Its purpose is to overhaul the current prospectus regime covered by the Prospectus Directive 2003/71/EC, which was revised by the amending Directive 2010/73/EU.
The overarching goal of this proposal is to make it easier for businesses in the whole EU to obtain funding on the capital markets by the creation of a "simpler, cheaper and faster regime", as was stated by commissioner Jonathan Hill during the press conference on the new proposal. This closely aligns with the recently announced action plan by the European Commission to work towards a Capital Markets Union by removing barriers to a single, integrated and deep market in order for companies to have access to a wide variety of funding and for investors to have further investment opportunities.
The prospectus proposal, in particular, aims to lessen the burden and lower the costs for companies when raising funds on the capital markets on the one hand, while enabling investors to understand the information contained in the prospectus document on the other hand.
With regard to companies, this will imply an easier, cheaper and faster access to capital markets, both for small and medium-sized enterprises (SMEs), as for companies regularly issuing shares and corporate bonds on the capital markets. In 2014, companies in the EU raised EUR 370 billion through the issuance of investment products on the capital markets, while companies in the US raised about three times that amount. With the idea of a Capital Markets Union in mind, the prospectus proposal aims to increase the amount of capital raised on EU capital markets.
With regard to investors, the proposal returns to the original purpose of a prospectus, which is to provide investors with sufficient and comprehensive information on the investment product, in order for them to make the independent assessment whether to invest or not. Whereas prospectuses under the current regime tend to be very long and not necessarily suited for investment decision-making purposes, prospectuses in the future will be shorter, containing less information, albeit with a sharpened focus on the relevant information.
The proposed text focuses on five different areas, which are explained hereunder.
An increase of the amount of capital to be raised on EUmarkets without the need for a prospectus
It should be easier for small businesses to obtain funding through the capital markets. Therefore, the proposal raises the threshold from EUR 100,000 to EUR 500,000 for "small offers". The obligation to publish a prospectus shall not apply to an offer of securities with a total consideration of less than EUR 500,000, this limit being calculated over a period of 12 months. The rationale behind this exemption can be found in the disproportionate balance between the cost of writing a prospectus and the anticipated proceeds from the offer of securities to the public, the total consideration of which is less than EUR 500,000.
Furthermore, the new proposal will allow member states to exempt "small offers" for an amount up to EUR 10 million for domestic offers to which the passport notification requirement does not apply.
The exemptions under the old prospectus regime will still be in place. This implies that there is no prospectus requirement for offers of securities to certain addressees, such as "qualified investors". These investors are considered to have a sufficient high level of expertise and access to information that can justify the absence of protection through the issuance of a prospectus. Qualified investors are inter alia all professional investors, such as credit and financial institutions, investment firms and insurance companies.
Moreover, no prospectus will be required for the offer of securities to a small group of a maximum of 150 investors who are not qualified investors, or to investors who acquire securities for a total consideration of at least EUR 100,000 per investor, for each separate offer. The latter threshold was already raised by the amending Directive 2010/73/EU.
There is no longer a prospectus exemption for offers of securities with a denomination above EUR 100,000.
Special regime for smaller companies
The "proportionate disclosure regime" for companies with a reduced market capitalization and SMEs introduced by Directive 2010/73/EU seems to have missed its objectives.
The new proposal, first of all, has increased the amount of SMEs being able to benefit from a distinct regime, by doubling the threshold from a market capitalization of EUR 100 million to EUR 200 million.
Secondly, in order for SMEs to be able to access the public markets more easily, and provided that they have no securities admitted to trading on a regulated market, a distinct minimum disclosure regime will allow them to file prospectus schedules, which will be tailored to the size and length of the track record of such companies by focusing on information that is both material and relevant.
The simpler and smaller prospectuses must ensure that the investments in time and money made by drawing up prospectuses is not disproportionate to the amount of money raised through the issuance of securities. The information to be included in the simplified specific registration document and specific securities note will be set out in delegated acts. The registration document, containing information regarding the securities, and the securities note, containing information regarding the securities, form together with the prospectus summary the "tri-partite form" of a prospectus.
Thirdly, SMEs making use of this regime are given the option to draw up a prospectus under a standardised "question and answer" disclosure format, to be designed by the European Commission in delegated acts, and to be filled in by the issuer. The European Securities and Markets Authority (ESMA) will develop guidelines for SMEs on how to draw up a prospectus under this standard format.
Streamline the process for companies that have already issued a prospectus
A new minimum disclosure regime will be available for subsequent offers to the public or admission to trading of securities on a regulated market for:
- issuers whose securities have been admitted to trading on a regulated market or an SME growth market for at least 18 months and who issue more securities of the same class;
- issuers whose equity securities have been admitted to trading on a regulated market or an SME growth market for at least 18 months and who issue non-equity securities; and
- offerors of a class of securities admitted to trading on a regulated market or an SME growth market for at least 18 months.
Prospectuses drawn up by these companies represent around 70 percent of all prospectuses approved annually.
This regime will allow companies to reduce costs in case of subsequent offers to the public or admissions to trading. Moreover, it will reduce the chance of duplicative disclosures and will enable investors to make use of more relevant information, such as the minimum financial information covering the last financial year only, the rights attaching to the securities, the reasons for the issuance and its impact on the issuer.
Lastly, a prospectus will not be required in case of any subsequent admission of the same securities on the same regulated market, provided the newly issued securities represent less than 20 percent of the number of the existing securities.
Shorten the approval time by creating a frequent issuer regime
Frequent issuers admitted to trading on regulated markets or multilateral trading facilities will be able to opt for a fast-track prospectus approval procedure by drawing up a yearly universal registration document. This document will contain a consolidated set of minimum information useful for investors and analysts to make an informed judgement of the company's organisation, business, financial position, earnings and prospects, governance and shareholding structure. The company making the efforts of drawing up such a universal registration document every financial year will be awarded with a fastened approval with the competent authority of a maximum of five working days when a prospectus is later required. Moreover, frequent issuers will be allowed, under certain circumstances, to integrate their annual and half-yearly financial reports, as imposed by the Transparency Directive, into the universal registration document.
After obtaining an approved universal registration document, the issuer will be required to draw up only the securities note and the prospectus summary when securities are to be offered to the public or admitted to trading on a regulated market. In this way, the prospectus proposal tries to stimulate the use of separate documents. This is perceived to be a cost-effective and less burdensome way for issuers to respond quickly to market windows.
Furthermore, when an issuer has had a universal registration document approved for three consecutive years, subsequent universal registration documents may be filed with the competent authority without prior approval.
Making prospectuses more useful for investors
Except for the "two-in-one" approach in the universal registration document, which allows one to integrate financial information to be concentrated for investors into a single document published yearly, the prospectus proposal also tries to render a prospectus more useful for investors in other ways.
A new regime for the prospectus summary is one way of doing this. As the introduction of a summary format by the amending Directive 2010/73/EU may not have met its objectives, the proposed summary regime is in line with the key information document (KID) required under the Packaged Retail and Insurance-based Investment Products (PRIIPS) Regulation. The content of a KID may even replace the section on securities in the summary, for securities within the scope of the PRIIPS Regulation. It will be a short document, written in a concise manner, containing a maximum of six A4-sized pages, instead of 15 pages under the old regime. Furthermore, the prospectus will be written in a way that will enable potential investors to understand the information it contains by using clear, non-technical and comprehensible language. The prospectus summary will contain "key information" on the issuers, on the securities and on the offer itself and/or the admission to trading.
Another way of improving the usefulness of a prospectus for investors is for ESMA to make sure that investors are able to find all prospectuses and related documents approved in the European Economic Area (EEA) by means of free and convenient online access.
When will the new prospectus regime be in place?
The prospectus proposal presented on 30 November 2015 is transmitted to the European Parliament and the Council and is to be adopted under the co-decision procedure. Given the legal nature of an EU regulation, it will be legally binding in all member states as from the day of entry into force, without having to be transposed.
The current Prospectus Directive 2003/71/EC will be repealed along with its implementing measures. As the minimum information requirements of prospectuses need to be adopted through implementing measures, the proposed prospectus regulation will not enter into force before such measures are adopted.