The new EU Prospectus Regulation entered into force on 20 July 2017, changing and in some areas simplifying the prospectus regime for listed issuers and companies making public offers of securities.
The majority of the new Prospectus Regulation will apply from 21 July 2019, but a few important provisions are already in effect, which will be of relevance to public issuers considering fundraisings.
The new EU Prospectus Regulation is intended to answer calls for a simplified and more proportionate prospectus regime. It replaces the Prospectus Directive which will cease to have effect from 21 July 2019.
Key changes which apply to issuers now
Two changes took effect on 20 July 2017, both relating to the exemptions from the requirement to publish a prospectus when admitting shares to a regulated market (such as the Main Market of the London Stock Exchange):
- An issuer with shares admitted to a regulated market is able to issue further listed shares of the same class without producing a prospectus as long as those new shares represent less than 20% of that class of share (aggregated over a 12 month period). That threshold was previously 10%.
- A prospectus will now be needed to list shares on a regulated market resulting from the conversion or exchange of other securities admitted to trading on a regulated market where those new shares represent over 20% of the total shares of that same class already listed (over a 12 month period). Share issues below that threshold will be exempt. Previously, any issue of listed shares resulting from convertible securities was exempt from the prospectus requirement regardless of amount provided they were of the same class of shares already admitted to trading.
These two exemptions will be slightly restricted from 21 July 2019, when they may not be combined if that could lead to the immediate or deferred admission to trading of more than 20% of the number of shares of the same class already admitted to trading on the same regulated market over a period of 12 months. There is no equivalent restriction currently.
Change to offer value exemption - which applies from 20 July 2018
From 20 July 2018 the new Prospectus Regulation will not apply to offers to the public of a total value of less than €1 million over a period of 12 months, but this €1 million threshold can be raised to up to €8 million at the option of the individual member states. However, whatever the threshold, companies relying on this exemption cannot also benefit from passporting to other member states.
The equivalent exemption in the current Prospectus Directive relates to offers where the total consideration in the EU is less than €5 million, calculated over a 12 month period.
Key changes applying from 21 July 2019
- Universal registration documents
Companies with securities listed on a regulated market or on a multilateral trading facility that expect to issue prospectuses frequently can from 21 July 2019 complete a US style universal registration document (URD) which describes the issuer’s organisation, business, financial position and prospects. Similar to the US ‘shelf’ registration procedure, this would allow an issuer to benefit from a fast track prospectus approval procedure of five working days (rather than the current ten working day process).
A URD must be submitted to the competent authority for approval. Once an issuer has had a URD approved for two consecutive financial years, subsequent URDs may be filed with the competent authority without prior approval, provided that one is filed each financial year
Whether or not this new system will improve the speed at which prospectuses can be published by frequent issuers will depend on whether URDs will be scrutinised by competent authorities when included in a prospectus. Competent authorities’ powers relating to the filing, approval, scrutiny and amendment of URDs will be set out in delegated legislation on which ESMA has been asked to produce technical advice.
- EU Growth prospectus
Issuers offering securities to the public and looking to benefit from less onerous disclosure obligations will be able to use an EU Growth prospectus from 21 July 2019. To use an EU Growth prospectus, as well as fulfilling other, prescribed criteria, issuers must not have any securities admitted to trading on a regulated market.
- Simplified prospectuses for secondary issues
Issuers with securities that have been admitted to trading on a regulated market or SME growth market continuously for at least 18 months will have the option of publishing a simplified prospectus for secondary issues. This will contain information which is necessary to enable investors to understand the prospects of the issuer, including any significant changes since the end of the last financial year, the rights attaching to the securities, and the reasons for the issue.
- Content of prospectuses
A number of changes, of varying significance, will be made to the content of prospectuses. Some of the detail is still to be confirmed, as ESMA is currently consulting on draft technical advice which supplements the Prospectus Regulation. The ESMA consultation is due to close on 28 September 2017, with a final report due in spring 2018. The changes include the following:
- Risk factors
Risk factors will be limited to risks that are specific to the issuer and are material for making an investment decision. Also, issuers must categorise risk factors as well as rating their materiality based on likelihood of occurrence and potential negative impact. Categorising and rating risks in this way is likely to make issuers uneasy – particularly when misrepresentation claims can be brought against companies that suffer the consequences of a risk that was labelled as ‘low risk’.
Summaries are changing in content and format. The summary must still have a uniform structure, but both the structure and the contents will be less rigidly prescribed than under the current regime. The Prospectus Regulation sets out a number of sections and sub-headings with certain information that should be included in the form of brief, narrative descriptions and figures where appropriate. Provided it is presented in a fair and balanced way, issuers have discretion to select the information they deem to be material and meaningful.
As well as being required to contain no more than the 15 most material risk factors, summaries will be reduced in size – they will be limited to seven sides of A4 paper (although member states will have the option to increase this).
- Incorporation by reference
More documents will be able to be incorporated into a prospectus by reference, including management reports, corporate governance documents and asset valuation reports. Also, electronic prospectuses will need to contain hyperlinks to all documents incorporated by reference to ensure ease of use by potential investors.
- General disclosure requirement
The general disclosure requirement will be slightly widened. Currently, the prospectus must contain “the necessary information which is material to an investor” for making an informed assessment of the assets and liabilities, profits and losses, financial position and prospects of an issuer and any guarantor and the rights attaching to the securities. Under the new regime this will be extended to the reasons for the issue and its impact on the issuer.
Timing and impact of Brexit
The majority of the changes will not apply until 21 July 2019.
As currently drafted, the draft European Union (Withdrawal) Bill provides that “direct EU legislation, so far as operative immediately before exit day” will form part of UK law. On that basis, the provisions of the Prospectus Regulation which do not apply until July 2019 will not automatically form part of UK law on the anticipated exit day in March 2019 under the Bill, as they will not be operating then.
What to take away
The majority of changes to the prospectus regime should ultimately simplify the process for issuers but Brexit will influence the extent of their impact on UK issuers after the date of withdrawal from the EU.