Timeline

«Although the prospectus regime functions well overall» [1], nevertheless the European lawmaker felt the urge to revise the Prospectus Directive 2003/71/EC [2], as part of the «Capital Markets Union Action Plan» [3].

Regulation (EU) 2017/1129 [4] was published on June 30th 2017, in the Official Journal of the European Union. While entering into force on July 20th, it will be applicable [5] starting from July 21st 2019.

«Level 2» Regulation still needs to be drafted, but ESMA should deliver technical advice to the European Commission by March 31st 2018.

On July 6th ESMA issued three consultation papers, addressing format and content of the prospectus [6], the EU Growth prospectus [7] and scrutiny and approval [8], and consultations ended on September 28th.

Focus

Growth of the raising activity on capital markets should only be achieved with alleviation of administrative burdens for companies that need to draw up a prospectus (especially SMEs). Thus, the Prospectus Regulation aims at providing issuers with tailor-made disclosure rules, while inducing, at the same time, the prospectus to be a more relevant tool of information for potential investors.

Another target of the new Regulation, is the one of «levelling the playing field» in the attempt of opposing fragmentation of the internal markets. As long as disclosure of information is considered to be «vital to protect investors by removing asymmetries of information between them and issuers» [9], harmonisation of the disclosure regime should be the answer to the long–known concern of transparency for investors [10].

Prospectus Regulation applies to both equity and non–equity securities offered to the public or admitted to trading on regulated markets.

The key changes

Publication of a prospectus

Offers of securities to the public with a total consideration, in the European Union, of less than € 1 million, are exempted from the obligation of drawing up a prospectus. Costs of producing a prospectus are likely to be disproportionate to the «envisaged proceeds of the offer» ([11]). However, Member States can ask for other disclosure requirements, if they don’t constitute unnecessary burden.

Considering the different sizes of financial markets across the Union, the legislator considered appropriate to give Member State the possibility of exempting offers of securities to the public not exceeding EUR 8 millions, from the obligation to publish a prospectus.

The threshold resulting from this provision, should thus vary between 1 million and 8 millions. Over this threshold the drafting of the prospectus is mandatory. It is worth nothing that the exempted offers cannot benefit from the pass–porting regime.

The prospectus should not be required for offers of securities to the public which are limited to qualified investors [12]. Also, when an offer of securities is addressed to a restricted circle of (not qualified) investors (150 persons), no prospectus should be required. Both exemptions are already part of the Italian Issuer’s Regulation (hereinafter Regolamento Emittenti), article 34-ter, 1b), 1a) [13].

Finally, when an offer is addressed simultaneously to qualified investors, to non-qualified investors that commit to invest at least € 100.000 each, the offer should be exempted from the obligation to publish a prospectus [14].

When an issuer already has admitted shares on a regulated market, any issuance of new shares of the same class on the same regulated market –provided that the newly admitted shares represent a limited proportion in relation to shares of the same class already admission– there’s no need to draw up a prospectus. The European lawmaker increased the threshold from 10% to 20%: securities must 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 has entered into force on the 20th of July, 2017 [15].

Prospectus summary [16]

The summary is designed to be a useful source of information for retail investors, and, according to the public consultations, the format introduced by the –soon to be amended– Directive 2010/73 had not met its objectives. The new summary is modelled on the key information document (KID) required under the PRIIPS Regulation [17], and is subject to a maximum length of 6 sides of A4-sized paper. The prohibition to incorporate information by reference into the summary, currently set out in Article 11(1) of Directive 2003/71/EC is maintained in order to avoid that the summary becomes a mere collection of hyperlinks and cross-references.

Base prospectus [18]

It remains almost unchanged compared to Directive 2003/71/EC. But, thanks to the new clarifications, all non-equity securities, including those that are issued in a continuous or repeated manner, may now have Base prospectus. «In order to enhance the flexibility and cost-effectiveness of the base prospectus», the drafting can consist of three separate documents, and the registration document of a Base prospectus can now take the form of a universal registration document.

Universal registration document [19]

Being an optional shelf for frequent issuers, the aim of the lawmaker is to incentivise the drawing up of the prospectus as separate documents, because it could reduce their cost of compliance. Thus, issuers whose securities are admitted to trading on regulated markets or MTFs should have the option, but not the obligation, to draw up and publish every financial year, a universal registration document containing legal, business, financial, accounting and shareholding information. «This new feature of the prospectus regime is based on the premise that where an issuer makes the effort of drawing up every year a complete registration document, it should be awarded a fast-track approval with the competent authority when a prospectus is later required» [20].

Specific disclosure regimes [21]

Special optional regimes are provided for secondary issuers and for SMEs, that are already admitted to trading on a regulated market or a SME growth market for at least 18 months, in case of an offer of securities to the public or of an admission to trading of securities on a regulated market.

These companies are already subject to disclosure requirements under MAR and either Transparency Directive or the rules of the operator of the SME growth market [22]. The special prospectus contains minimum financial information (solely the last financial year, that could also be incorporated by reference), but other elements, such as risk factors, board practices, directors’ remuneration, still need to be included (especially since such information is not necessarily disclosed under Regulation (EU) 596/2014 and Directive 2004/109/EC).

Risk factors [23]

Considering the tendency of overwhelming prospectuses with generic risk factors (mostly serving as disclaimers), only risk factors that are material and specific to the issuer are to be mentioned in the prospectus.

SME

One of the core objectives of the Capital Markets Union is to facilitate access to financing on capital markets for SMEs in the Union. Precisely the definition of SMEs has changed, comprising now both SMEs defined under point (f) of Article 2(1) of Directive 2003/71/EC and SMEs defined under Directive 2014/65/EU, thereby raising to EUR 200 million the EUR 100 million threshold that previously defined “companies with reduced market capitalisation” under point (t) of Article 2(1) of Directive 2003/71/EC.

Conclusions

The new Prospectus Regulation surely has alleviated the administrative difficulties involved with the drafting of a prospectus. It did so, having, as guideline, the principle that an issuer is exempted, when drawing up a prospectus constitutes an «unnecessary burden». Although it’s surely a beneficial shift for SMEs and for the keeping down of the costs in general, some concerns remain open. There hasn’t been an overall harmonization of the documents required for takeover bids, with the new Regulation: the drafting of the offer document still remains for thresholds that now have been exempted from the drawing up of the prospectus.

As for the Italian lawmaker, the hope is that the threshold under which the drafting of a prospectus is not required, is raised to 8 millions Euro, as article 3(2), point b, permits [24]. By increasing the threshold, the raising by SME on secondary markets –through, for example, capital increases by option, or offers to the public of debt instrument– should be facilitated as well as for public tender offers regarding SMEs below the 8 millions Euro threshold..