The new Prospectus Regulation (Regulation (EU) 2017/1129) (known as PD3) was published in the Official Journal on 30 June 2017.
It will apply from 21 July 2019 (with some limited exceptions (set out below)) and will be directly effective in Member States.
In its 30 September 2015 Capital Markets Union Action Plan, the European Commission confirmed its plan to modernise the existing Prospectus Directive. In particular, the Commission was concerned about the costs of producing prospectuses (especially for SMEs), the level of complexity in prospectuses (making it difficult for investors to establish what information is critical) and the need for a streamlined approval process.
The key provisions of PD3 are summarised in this briefing. The prescriptive changes concerning the length and content of the prospectus summary, and the requirement to categorise and limit risk factors, are extremely significant for both equity and debt issuers. For equity issuers, the broadening of the existing exemption in respect of fungible securities is welcome and, for debt issuers, the retention of the wholesale-retail distinction is good news.
Wholesale retail distinction remains
The Commission's original proposal to remove the `wholesale' exemption from the requirement to publish a prospectus was not agreed, meaning that for public offers of debt securities with a minimum denomination of 100,000, the exemption from the requirement to publish a prospectus remains.
The exemptions for offers addressed solely to qualified investors, and for offers addressed to fewer than 150 natural or legal persons per Member State, also remain.
Drafting the Prospectus
PD3 requires that each prospectus be written and presented in a format that is "easily analysable, concise and comprehensible", taking into account the nature and circumstances of the issuer, and the type of securities.
No summary is required in respect of non-equity securities which will be traded on a regulated market (or a specific segment of a regulated market) to which only qualified investors have access, or where those non-equity securities have a denomination per unit of at least 100,000.
Where a summary is required, it must be:
- accurate, fair, clear and not misleading;
- read as an introduction to the prospectus;
- consistent with other parts of the prospectus; and
- capped at 7 A4 sides (subject to the extensions set out below).
PD3 is quite prescriptive as to the summary's content. The summary must be divided into four sections:
- an introduction containing warnings;
- a section setting out key information on the issuer;
- a section setting out key information on the securities; and
- a section setting out key information on the offer of securities to the public, and/or the admission to trading on a regulated market.
Article 7 further prescribes what information must be included in each of those sections in considerable detail.
Where a Key Information Document (KID) is separately required under the 2014 Regulation on KIDs for packaged retail and insurance-based investment products, the KID itself may be included in the summary instead of the section setting out key information on the securities.
The page limit of 7 A4 sides can be extended:
- by 2 A4 sides where one summary is covering several securities which do not significantly differ;
- by 3 A4 sides where the KID is used (where the summary covers several securities, it can be extended by 3 A4 sides per additional security); and
- by 1 A4 side where there is a guarantee attached to the securities.
In the case of a base prospectus, a summary will not be needed until the final terms are approved or filed, and the summary must be specific to the individual issue.
In the Summary:
Brief descriptions of up to 15 risk factors can be included in the summary, comprising:
- the most material risk factors specific to the issuer;
- the most material risk factors pertaining to the guarantor (if there is one); and
- the most material risk factors pertaining to the securities.
In the Prospectus: Risk factors in the prospectus must be:
- limited to issuer-specific or securities-specific risks which are "material for taking an informed investment decision";
- presented in a limited number of categories, with (in each category) the most material risks listed first; and
- adequately described (and details of the materiality assessment may be disclosed by categorising the risks as "low", "medium" or "high").
When preparing a prospectus, the issuer, offeror or person seeking admission to trading must assess whether each risk factor is material based on the likelihood of the risk materialising, and the scale of any negative impact should that risk materialise.
Universal registration document
To facilitate a faster prospectus approval process, an issuer whose securities are admitted to trading on a regulated market or multilateral trading facility will be allowed to file a document in each financial year (known as a "universal registration document") that lists its organisation, business, financial position, earnings and prospects, governance and shareholding structure. There will then be an approval waiver for an issuer who has a universal registration document approved by the relevant competent authority for two consecutive financial years that issuer may file subsequent universal registration documents without prior approval (unless it fails to file a universal registration document for one financial year).
The universal registration document will, subject to any updates required, form the base prospectus for an offering by the issuer.
Incorporation by reference
A broader list of information will be capable of being incorporated by reference into a prospectus, including "regulated information" under the amended Transparency Directive (i.e. information that the issuer is required to disclose under that Directive, or under the provisions of the market abuse regime dealing with the requirement to disclose inside information).
The validity period for a prospectus, registration document or universal registration document will be 12 months.
EU Growth Prospectus
SMEs and certain issuers who come within certain thresholds will be allowed to prepare an EU Growth prospectus under a "proportionate disclosure" regime which will comprise a standardised document comprising a specific summary, a specific registration document and a specific securities note.
Certain issuers will also be allowed to prepare a simpler prospectus under a "simplified disclosure regime" for secondary issuances.
Takeover by means of exchange offer
Securities offered in connection with a takeover by means of an exchange offer will be outside of PD3's scope if a document is available containing information describing the transaction and its impact on the issuer. However, as under the current regime, it will not be possible to passport that document.
Employee share schemes
Employee share schemes will also be out of scope, subject to certain provisos.
Fungible securities exemption from publishing a prospectus on admission to trading
PD3 broadens the existing exemption in respect of fungible securities in that they must represent less than 20% of the securities already admitted to trading on the same regulated market over a 12 month period, rather than 10%.
Conversion or exchange
Subject to certain exceptions, PD3 tightens the exemption from publishing a prospectus on admission to trading for shares resulting from the conversion or exchange of other securities, or from the exercise of the rights conferred by other securities; a cap has been introduced whereby the resulting shares must represent less than 20% of the number of shares of the same class already admitted to trading on that regulated market for the exemption to apply.
WHAT PROVISIONS APPLY STRAIGHT AWAY?
From 20 July 2017, the following exemptions will apply:
- the exemption in respect of fungible securities referred to above;
- the exemption in respect of shares resulting from a conversion or exchange (referred to above); and
- the exemption from the obligation to publish a prospectus for the admission to trading on a regulated market of securities resulting from the conversion or exchange of other securities, own funds or eligible liabilities by a resolution authority due to the exercise of a power referred to in specific provisions of the Bank Recovery and Resolution Directive.
WHAT PROVISIONS WILL APPLY IN 2018?
From 21 July 2018:
- PD3 will not apply to an offer of securities to the public with a total consideration in the EU of < 1 million which shall be calculated over a period of 12 months; and
- Member States may decide to exempt offers of securities to the public from the obligation to publish a prospectus provided that (a) those offers are not subject to notification in accordance with Article 25 and (b) the total consideration of each such offer in the EU is less than a monetary amount calculated over a period of 12 months which shall not exceed 8,000,000.
LEVEL 2 AND LEVEL 3
Much of the finer detail regarding how PD3 will operate will be set out in Level 2 and Level 3 measures, and these are unlikely to be finalised until early-mid 2018. The Commission and ESMA have already started to work on some of these measures.
What Level 2 measures must the Commission prepare?
The Commission has asked ESMA to provide it with technical advice (by March 2018) on the Level 2 measures that the Commission must adopt in respect of:
- the format of the prospectus, the base prospectus and the final terms, and the specific information to be included in a prospectus;
- the minimum information to be included in the universal registration document;
- the reduced informant to be included under the simplified disclosure regime for secondary issuances;
- the reduced content and the standardised format and sequence for the EU Growth prospectus;
- the criteria for the scrutiny of prospectuses and universal registration documents and the procedures for their approval; and
- in respect of the universal registration document, the procedures for filing it, the criteria for reviewing it, and the conditions under which frequent issuer status will be lost.
The Commission has asked ESMA to provide it with technical advice (by August 2018) on the Level 2 measures that the Commission must adopt in respect of:
- the minimum information content of documents describing a merger or takeover by way of exchange offer; and
- general equivalence criteria for prospectuses drawn up under the laws of third countries.
What Level 2 measures must ESMA prepare?
ESMA must also prepare technical standards in the following areas by 21 July 2018:
- when a significant new factor, material mistake or material inaccuracy will necessitate the publication of a prospectus supplement;
- the presentation of key financial information in the prospectus summary;
- the data necessary for ESMA to classify prospectuses in the freely-accessible storage mechanism that ESMA will put in place;
- advertisements and their dissemination; and
- technical arrangements for the functioning of the notification portal that ESMA will establish to which each competent authority will upload certificates of approval and final terms.
What Guidelines must ESMA prepare?
ESMA must also prepare guidelines for competent authorities on:
- reviewing the specificity and materiality of risk factors, and the presentation of risk factors the Commission has the option to adopt Level 2 measures on this point;
- prepare guidelines for the competent authorities on supervision and enforcement of the requirements of PD3; and
- control over the compliance of advertising activity.
No time-frames have been specified for the preparation of these guidelines.
Other possible Level 2 measures
ESMA may (or in certain cases must, on request from the Commission) prepare technical standards on the following:
- the information that a competent authority can authorise to be omitted from a prospectus under certain conditions;
- the list of documents from which information may be incorporated by reference;
- further requirements in relation to the publication of prospectuses;
- standard forms, templates and procedures for the notification of certificates of approval, the prospectus, any supplements and any translations;
- standard forms, templates and procedures for the notification of the certificate of approval relating to the registration document, the universal registration document, and its translation;
- the minimum content of cooperation arrangements between competent authorities of Member States and supervisory authorities in third countries;
- the information to be exchanged between competent authorities, and related standard forms, templates and procedures; and
- the procedures and forms for the provision of information by competent authorities to ESMA.
ESMA will also need to develop a storage mechanism whereby the public can access all prospectuses that it receives from competent authorities free of charge on its website, together with a notification portal for dealings between it and the various competent authorities.
The speed that the Commission is working at to implement the Capital Markets Union is welcome but it remains to be seen whether PD3 will in fact contribute towards better functioning capital markets.
The retention of the 100,000 wholesale exemption is a welcome development for debt issuers, and the increase from 10% to 20% is equally welcome for equity issuers. However, it remains to be seen whether a more prescribed format for the presentation of risk factors will result in improved disclosure. Limiting the scale of risk factor disclosure will certainly increase risk for issuers and it is likely to prove challenging to condense, into a 7-page summary, material information for a complex transaction, with significant input from issuers and advisors required to agree on what information should be treated as key.