EU-Prospectus Regulation: Capital market participants need to be aware that certain exemptions of the new EU‑Prospectus Regulation immediately came into force (the "Regulation") on 20 July 2017.
On 30 June 2017 the EU-Prospectus Regulation was officially published in the Office Journal of the European Union. As part of the so called "Action Plan on Building a Capital Markets Union" dated 30 September 2015 the Regulation aims to ensure investor protection and market efficiency. At the same time, the internal market for capital should be enhanced.
The new Regulation will replace the European Prospectus Directive 2003/71/EC and the national implementation acts thereof. In Germany, this affects large parts of the German Securities Prospectus Act (Wertpapierprospektgesetz – "WpPG").
Since the Regulation entered into force on 20 July 2017, the European Commission (the "Commission") is empowered to adopt delegated acts under the conditions laid down by the Regulation. However, the Regulation becomes effective only gradually. The majority of the provisions shall only be effective as from 21 July 2019.
Furthermore, there are provisions which have already been directly effective in all Member States of the European Union (the "Member States") since 20 July 2017 and some that will not be applicable until 21 July 2018.
Exemptions with immediate effect
With the Regulation entering into force, the amendments to three exemptions became immediately effective, all of which release from the obligation to publish a prospectus under certain circumstances.
Exemption from the obligation to publish a prospectus for the admission to trading of securities resulting from a 20%-capital increase
The admission to trading of securities, that are fungible with securities already admitted to trading on the same regulated market, will not trigger the obligation to publish a prospectus according to Art. 1 para. 5 sub-para. 1 lit. (a) of the Regulation. This, however, only provided that they represent, over a period of 12 months, less than 20 % of the number of securities already admitted to trading on the same regulated market.
This provision replaces Section 4 para. 2 no 1 WpPG. The main difference lies in the widening of the relevant threshold from up to 10% to up to 20%. It is unclear, however, whether this expansion will have any practical effect in case of German stock corporations. For an exclusion of subscription rights within the scope of a capital increase against cash contribution is limited to 10% of the share capital under simplified conditions pursuant to Section 186 para. 3 sentence 4 of the German Stock Corporation Act (so called "simplified exclusion of subscription rights").
As soon as shareholders are granted subscription rights, however, this consti-tutes a public offering according to the Regulation triggering the obligation to publish a prospectus irrespective of the volume of new shares issued.
Exemption for the recovery and resolution of credit institutions and investment companies
According to Art. 1 para. 5 sub-para. 1 lit. (c) of the Regulation another exemption from the obligation to publish a prospectus applies for securities which result from the conversion or exchange of other securities, own funds or eligible liabilities by a resolution authority due to the exercise of a power pursuant to European Directive 2014/59/EU. This directive governs the framework for the recovery and resolution of credit institutions and investment companies. So far the WpPG did not provide for a comparable exemption.
Exemptions for convertible, option and exchangeable bonds
The third exemption can be found in Art. 1 para. 5 sub-para. 1 lit. (b) of the Regulation. Accordingly, there will be no obligation to publish a prospectus for the admission to trading of shares that result from the conversion, exchange or the exercise of the rights conferred by other securities. This, however, applies only if:
- the resulting shares are of the same class as the shares already admitted to trading on the same regulated market, and
- the resulting shares represent, over a period of 12 months, less than 20% of the number of shares of the same class already admitted to trading on the same regulated market.
This exemption primarily relates to convertible bonds, options and exchangable bonds.
The main difference to the previously applicable Section 4 para.2 no 7 WpPG lies in the introduction of a threshold value of a maximum of 20% over a period of 12 months. According to Art. 1 para. 5 sub-para. 2 of the Regulation the ex-emption also applies without the 20% volume limit in each of the following cases:
- where a prospectus has already been prepared for the offer to the public or admission to trading on a regulated market of the securities conferring the conversion or exchange or option rights,
- where the securities conferring the conversion or exchange or option rights were issued before 20 July 2017,
- where the shares qualify as Common Equity Tier 1 items of a credit institution or an investment company and result from the conversion of Additional Tier 1 instruments issued by that institution, and
- where the shares qualify as eligible own funds or eligible basic own funds pursuant to the European Directive 2009/138/EC on the taking-up and pursuit of the business of Insurance and Reinsurance and result from the conversion of other securities which was triggered for the purposes of fulfilling the obligations to comply with the Solvency Capital Requirement or Minimum Capital Requirement or the group solvency requirement pursuant to the aforementioned Directive.
Exemptions with effect from 21 July 2018
On 21 July 2018 Art 1 para. 3 and Art. 3 para 2 of the Regulation will become effective.
This provision exempts public offerings of securities with a total consideration in the European Union (the "Union") of less than one million euros from a pro-spectus requirement with this threshold value being calculated over a period of 12 months.
Currently there is a similar provision in the WpPG under Section 1 para. 2 no 4 WpPG. However, this provision contains a threshold of five million euros and only applies to CRR-credit institutions or issuers whose shares are already ad-mitted to trading on a regulated market. Art. 1 para. 3 sub-para. 2 of the Regulation allows the Member States to stipulate other disclosure requirements on national level for public offerings with a total consideration of less than one million euros to the extent that such requirements do not constitute a dispropor-tionate or unnecessary burden.
Art. 3 para 2 of the Regulation, furthermore, allows Member States to exempt public offers from the obligation to publish a prospectus up to a total consideration of up to eight million euros over a period of 12 months.
The Member States are obliged to notify the Commission and the European Securities and Markets Authority ("ESMA") whether and how they intend to make use of this possibility especially with regard to the stipulated threshold on national level.
Necessary implementation measures in the Member States
The gradual effectiveness of particular provisions is attributable to the fact that besides the adoption of delegated acts by the Commission and the ESMA, the Member States need sufficient time to take the necessary measures on national level. If necessary the Member States have to take measures to:
- Ensure that the laws, regulations and administrative provisions on civil liability apply to those persons responsible for the information given in a prospectus (which, depending on the circumstances, could be the issuer, its administrative, management or supervisory bodies, the offeror, the person asking for the admission to trading or the guarantor).
- Ensure that the national provisions on the liability of competent authorities apply only to approvals of prospectuses by the competent authorities.
- Designate a single competent administrative authority responsible for carrying out the duties resulting from the Regulation.
- Ensure that the competent authority is equipped with the necessary supervisory and investigatory powers.
- Ensure that the competent authority has the power to impose administrative sanctions and other administrative measures.
- Ensure that decisions taken under the Regulation are based on reasonable grounds and subject to a right of appeal before a tribunal.
Schedule until final implementation
In the upcoming two years the harmonised scope for prospectuses which is set by the Regulation will continuously be expanded by the Union with the aid of the Commission and the ESMA. Necessary transposition measures on national level will be implemented by the Member State and the competent authority designated by each Member State.
Until the Regulation enters into force in its entirety on 21 July 2019 the capital market participants in the Union must ensure that in each case the applicable provision is fulfilled and the national transposition measures are complied with.