FinSA / FinIA – Our blog series with the most important findings for the business world (post 3)
When the Financial Services Act (FinSA) and the Financial Institutions Act (FinIA) enter into force on 1 January 2020, this overhaul of Swiss financial market law will not stop at the prospectus requirement. Whether a prospectus must be published for an offer or listing of securities (tradable instruments such as equities, bonds, funds or derivatives) has a noticeable impact on the cost and time involved in the placement and the liability risks of the persons involved. We will give you an overview of the legal situation to be.
Introduction of a general obligation to publish a prospectus
Under current law, an issue or listing prospectus only has to be published in certain cases. In the case of shares and bonds in particular, the statutory obligation to publish a prospectus is generally limited to public primary placements. Since, depending on the situation, different legal bases are relevant, the exceptions and simplifications to the prospectus requirements as well as the substantive and formal requirements for the prospectus are correspondingly fragmented as well.
The Financial Services Act (FinSA - German only), which is expected to come into force on 1 January 2020, will standardize the prospectus requirement (c.f. blog post of 24 May 2017). In principle, there will now be a general obligation to publish a prospectus (art. 35 FinSA):
- The obligation to publish a prospectus applies firstly if a public offering of securities is made in Switzerland. This applies not only to public offers on the primary market (subscription to new securities), but also to secondary market transactions (acquisition of existing securities).
- Secondly, the obligation to publish a prospectus applies if an application is made for securities to be admitted to trading on a trading venue (stock exchange or multilateral trading system) in Switzerland. Accordingly, this aspect of the prospectus requirement is no longer regulated by the trading venues but directly in the FinSA.
The obligation to publish a prospectus is that of the offeror or the issuer. In the framework of the prospectus requirement, in particular for the exceptions, the term "clients" is sometimes used in the FinSA, even though there is typically no client relationship between the investors and the offeror or the issuer. The background to this is that financial service providers are required pursuant to the FinSA to reassign their clients to certain segments with different needs for protection (art. 4 FinSA). Where these segments are referred to in the FinSA, the corresponding terminology (such as "professional clients" and "private clients") is used also in connection with the prospectus requirement.
Numerous exceptions to the general obligation to publish a prospectus
With the final version of the FinSA, the numerous exceptions to the obligation to publish a prospectus have now been largely determined (the final FinSA ordinance, FinSO, is expected in autumn or winter 2019). The most important exceptions to the prospectus requirement under FinSA can be divided into the following categories:
Exceptions according to the type of offer (art. 36 FinSA): For public offerings where the investors' need for protection is considered limited, the FinSA contains various exceptions. In particular, a prospectus does not have to be published if the public offering is directed only at professional clients (such as regulated financial intermediaries and insurance institutions as well as larger companies) or if investors have to make a substantial investment (at least CHF 100,000) as part of the offering. Also exempted are "smaller" public offers, i.e. offers directed at a limited number of investors (less than 500) or not exceeding a certain volume (CHF 8 million calculated over 12 months).
These exceptions only apply to a specific offer. If, for example, the public offering of a new issue is directed exclusively at professional clients, a subsequent public offering to resell these securities to other investors is not automatically exempt from the obligation to publish a prospectus. However, if a valid prospectus is available (e.g. due to an initial placement less than 12 months ago) and the issuer has consented to its use, financial service providers are exempted from the obligation to publish a prospectus for subsequent public offerings.
Exceptions according to type of security (art. 37 FinSA): For constellations in which it is assumed that investors are already sufficiently informed about the securities the FinSA also contains exceptions. Under certain circumstances, it is therefore possible to exchange securities for equity securities or convert them into equity securities without a prospectus (for example, in the case of convertible bonds). A prospectus is not required either for certain transactions under company or takeover law if certain or equivalent information to the contents of a prospectus is available (e.g. in a takeover offer or merger report). Securities offered or allotted within the framework of employee participation programmes are equally exempt from the prospectus requirement.
The FinSA provides for further, more technical exceptions. This means that the public offering of securities issued or guaranteed by certain institutions (such as the Confederation, cantons or a central bank and, with certain restrictions, non-profit institutions) is possible without the need for a prospectus. Finally, medium term notes (pure saving products), money market instruments (maturity of less than one year) and derivatives not offered in the form of an issue are exempt from the prospectus requirement.
Exceptions for admission to trading (art. 38 FinSA): The exceptions provided for in the context of admission of securities to trading primarily concern situations in which the corresponding securities or equity securities of the same class are already admitted to trading on a trading venue. In such situations, increases, exchanges or conversions, as well as admission to other trading venues are possible without a new prospectus under certain conditions.
If admission is sought for a trading segment which is only open to professional clients trading for their own account or for the account of professional clients only, no prospectus need be published either. In this situation, the investors' need for protection is considered limited. It can be expected that this rule will increase the demand by issuers for such trading segments.
The key information document
The obligation to prepare a key information document (art. 58 et seq. FinSA) is related to the prospectus requirement. The key information document is a separate document that must be easy to understand and contains essential information for an informed investment decision and the comparison of different financial instruments. The key information document must be drawn up by the person who creates the respective financial instrument or makes changes to the financial instrument.
In principle, a key information document must be drawn up if a financial instrument is offered to private clients outside an asset management contract. In principle, all financial instruments are covered, not just securities such as in the case of the prospectus requirement. However, no key information document is required for certain traditional or easily understandable financial instruments (such as shares and similar equity securities as well as debt securities without derivative character) or if equivalent documents under foreign law are used instead (art. 58 et seq. FinSA, art. 80 et seq. E-FinSO).
Legal consequences of the obligation to publish a prospectus
If the obligation to publish a prospectus applies (i.e. in particular if none of the exceptions applies), a prospectus must be drawn up in accordance with the requirements of art. 44 et seq. FinSA. As a rule, the prospectus must be examined by a review agency before it is published. For this reason, the general obligation to publish a prospectus for securities is not expected to apply until six months have elapsed since the approval of a review agency by FINMA (whereby special transition periods are provided for collective investment schemes and structured products). So far, BX Swiss AG and SIX Exchange Regulation AG are publicly known to have applied as review agency. The requirements for the prospectus and its review will be examined in more detail in a later blog post. With respect to new issues of shares and bonds in particular, the applicable requirements will be considerably stricter compared with the current legal situation.
Deliberate breaches of the obligation to publish a prospectus or to produce a key information document can also be punished under criminal law (with a fine of up to CHF 500,000).
Legal consequences of the existence of an exception
If there is no obligation to publish a prospectus, offerors and issuers must treat investors equally when providing them with "essential" information on a public offer (art. 39 FinSA). The exact scope of this special duty of equal treatment and the relationship to the relative principle of equal treatment under stock corporation law (art. 717 para. 2 of the Swiss Code of Obligations) are currently still open.
Overall, it should be noted that a large number of the aforementioned exceptions from the prospectus requirement already apply under the applicable law in one form or another for the type of securities in question. In the FinSA, the prospectus requirement and its exceptions are now codified in a clear and updated form and are largely bundled and standardised, which is to be welcomed in the interests of transparency. For new issues of shares and bonds, the specific exceptions to the prospectus requirement (in particular that offers to less than 500 investors are prospectus-free) provide welcome legal certainty and somewhat cushion the stricter requirements for the content of the prospectus and the examination of the prospectus.
It is to be hoped that the review agency and, if necessary, the Federal Council holding the pen on the ordinances take account of recognised international standards and foreign legal developments (in particular in accordance with EU Prospectus Regulation 2017/1129) in the practical application and the further development of the individual exceptions to the prospectus requirement.