On 20 October 2017, the European Securities and Markets Authority (the “ESMA”) updated its Questions and Answers Prospectuses document (27th version) (the “Q&A”) in relation to the new prospectus regulation (EU 2017/1129) (the “Regulation”) published in the Official Journal of the European Union on 30 June 2017.
The enactment of the Regulation has demonstrated a certain degree of business acumen following a three-month consultation launched by the Commission back in February 2015. The consultation concluded that, while meeting its objectives of market efficiency and investor protection, the former prospectus directive (2003/71/EC) (the “Directive”) was also hampering capital raising on the securities market by creating legal uncertainty and onerous requirements.
The main issues were that access to capital markets for many small and medium-sized enterprises (“SMEs”) was reduced and considered too costly or burdensome. The Regulation could be a significant improvement for investors since it has often proved difficult to get through the very detailed information required under the Directive. The Regulation aims to address these flaws while ensuring regulatory continuity in harmonising minimum protection for investors by guaranteeing that all prospectuses, wherever they are published, provide them with clear, comprehensive and standardised information. Application in time
The Regulation entered into force on 20 July 2017 with respect to certain aspects; however, the application of most of the provisions of the Regulation has been postponed until:
- 21 July 2018 with regard to the exemptions provided in the section “Easier access to capital markets for SMEs” below;
- 21 July 2019 with respect to the other provisions.
Prospectus approved in accordance with the Luxembourg law dated 10 July 2005 on prospectuses for securities shall continue to be governed by it until either their expiry or 12 months have elapsed after 21 July 2019, whichever occurs first.
Exemptions entered into force on 20 July 2017
Following the entry into force of articles 1(5) §1 a), b) and c) and 1(5) §2) of the Regulation on 20 July 2017, the Q&A provides further details in questions 27 (deleted), 29, 31, 32 and 44. These clarifications concern, in particular, securities/shares already admitted to trading on the same regulated market representing less than 20% of the number of securities/shares already admitted to trading.
Easier access to capital markets for SMEs
- Exemption to offers under EUR 1 million
Here, the Regulation definitely beats the odds and addresses the disproportionate costs of producing a prospectus for small offers when taking into account the expected proceeds. The Regulation's scope excludes offers of securities to the public with a total consideration in the Union of less than EUR 1,000,000, which permits start-ups and SMEs to raise up to EUR 1,000,000 on local growth markets. Nevertheless, the withdrawal of the benefit of the passport regime under the Regulation balances out this exemption.
- Option of exempting offers under EUR 8 million
While the Directive gave Member States the option to exempt offers of securities to the public not exceeding EUR 5 million in their national law, the Regulation provides for the option for Member States to raise the threshold up to EUR 8 million considering the varying sizes of financial markets across the Union. Again, such offers will not benefit from the passporting regime under this Regulation.
Improved prospectus for investors
Providing equivalent investor protection at Union level shall be ensured by providing investors with information sufficient and objective in order to enable them to make an informed investment decision. The prospectus shall contain a more concise and accessible summary written in plain, non-technical language presenting a limited selection of the relevant specific risks.
The Regulation provides for a summary which must contain the key information that investors need, with a maximum length of seven sides of A4 paper when printed. The ESMA has been directed to develop draft regulatory technical standards to specify the content and format of presentation of the key financial information referred to in the Regulation to be submitted to the Commission by 21 July 2018.
This could be seen as a step into the digital age by the Regulation and it could lead to considerable cost savings. Access to information will be provided by the ESMA through a centralised storage mechanism for prospectuses, allowing access free of charge and appropriate search facilities for the public. Any potential investor will, on request, be sent a free copy of the prospectus on a durable medium by the issuer, the offeror, the person asking for admission to trading on a regulated market or the financial intermediaries placing or selling securities.
Simpler and more flexible prospectuses
The new rules set out in the Regulation intend to strip away burdens and deliver better information for investors.
Universal registration document (the “URD”). Issuers whose securities are admitted to trading on a regulated market or an MTF (Multi Trading Facility) may every financial year draw up a URD containing legal, business, financial, accounting and shareholding information together with a description of the issuer. Provided the URD has been filed and received approval from the competent authority for two consecutive years, the issuer shall be considered as known to the competent authority and then subsequent URDs and any amendments thereto should therefore be allowed without prior approval and be reviewed on an ex post basis.
With a view to providing better access to capital markets, frequent issuers producing a URD are granted the benefit of a faster approval process, since the main part of the prospectus has been reviewed or is already available for review.
Prospectus for secondary issuances. Considering that a significant number of prospectuses approved each year are drawn up by issuers whose securities are already listed on a regulated market and therefore already subject to ongoing disclosure requirements (under the Market Abuse Regulation), a lighter prospectus is required for subsequent offers to the public or admissions to trading in order to avoid duplicative disclosures, reduce costs and make the resulting disclosure more relevant.
The Regulation significantly widens the range of situations where a lighter prospectus may be prepared by an issuer or an offeror, as follows:
- issuers whose securities have been admitted to trading on a regulated market or an SME growth market continuously for at least the last 18 months and that issue securities fungible with existing, previously issued securities
- issuers whose equity securities have been admitted to trading on a regulated market or an SME growth market continuously for at least the last 18 months and that issue non-equity securities;
- offerors of securities admitted to trading on a regulated market or an SME growth market continuously for at least the last 18 months.
New ‘EU Growth’ prospectus regime. The Regulation provides for a proportionate disclosure regime which will foster the ability of SMEs to raise money across the single market while not indulging in practices harmful to investor protection.
Using a standardised format document that is easier to complete, the reduced information required under the ‘EU Growth’ prospectus regime will strike a balance between cost-efficiency access to financial markets and sufficient information disclosure for investors to make their investment decisions.
The Commission shall, by 21 January 2019, adopt delegated acts in accordance with article 44 to supplement the Regulation by specifying the reduced content and standardised format and sequence for the ‘EU Growth’ prospectus, as well as the reduced content and standardised format of the specific summary.
The Regulation constitutes a new milestone for the Capital Markets Union; notably, it:
- reduces significantly the impediments for smaller companies to access capital;
- introduces simplification for all kinds of issuer, notably those that are already known to capital markets (for secondary issuances and frequent issuers); and
- caters for the specific information and protection needs of investors.
Further developments are expected in the field of crowdfunding, which will benefit from the cost-effective measures implemented for SMEs to raise money in the capital markets and especially the EUR 1 million exemption.
Only mandatory above EUR 8 million (almost twice the previous threshold of EUR 5 million), the measures will support the growth of local and regional stock exchanges (including the future SME growth markets introduced by the directive (EU 2014/65) on markets in financial instruments (MIFID II)).