The new Prospectus Regulation entered into force on July 1, 2012. [1] This Regulation has direct effect in the member states as a result of which the Dutch prospectus regime changed considerably as per such date. In a prior newsletter, we already provided information in respect of the amendments to the Prospectus Directive. [2] These amendments were implemented in the Dutch Financial Supervision Act as per July 1, 2012.

In this newsletter, we wish to inform you of the main amendments resulting from the new Prospectus Regulation for the Dutch capital markets practice. It is not envisaged in this newsletter to provide a full overview of all changes applicable to the Dutch prospectus regime as per July 1, 2012 but it answers a number of key questions, divided in the following categories.

Base prospectus and final terms

  1. Which amendments follow from the new Prospectus Regulation in respect of the form of the base prospectus and the final terms?
  2. Your base prospectus was approved prior to July 1. Do the final terms for an issue under the base prospectus nevertheless need to be accompanied by a separate summary as the new Prospectus Regulation prescribes as per July 1?

The summary

  1. Which amendments follow from the new Prospectus Regulation in respect of the form, length and content of the summary?
  2. Does a summary still need to have the prescribed format and content if no summary is required and does this influence the sequence of information in the prospectus?

New rules for rights issues and 'small' issuers

  1. Does the new proportionate disclosure regime for rights issues also apply to a Dutch issuer despite the fact that the statutory pre-emption rights are normally excluded in Dutch rights issues?
  2. What does the proportionate disclosure regime entail for rights issues?
  3. Will the capital markets become better accessible for small and medium-sized enterprises and companies with a reduced market capitalisation?
  4. What if the issuer no longer qualifies as a SME or small cap following listing?

Miscellaneous

  1. Will we now have a European 'wild west sign' as well?
  2. Can we expect any additional amendments in the near future?

Base prospectus and final terms

The new Prospectus Regulation entails considerable amendments to the format and content of base prospectuses and final terms.

Question 1

Which amendments follow from the new Prospectus Regulation in respect of the form of the base prospectus and the final terms?

The new Prospectus Regulation introduces three categories of information that must be included in the base prospectus and the final terms.[3]  Category A is information which shall be included in the base prospectus that needs to be approved, such as risk factors, the responsibility statement, ratings of the issuer, priority of securities and limitations to the free transferability of the securities. Category B is information the generalities of which shall be described in the base prospectus whilst the details, as far as these are not yet known on the date of the base prospectus, may be included in the final terms. The European Securities and markets Authority ("ESMA") holds the view that such details are limited to amounts, currencies, dates, time periods, percentages, reference rates, screen pages, names and places.[4] Examples of Category B-information are the types of the offered securities, the rights attached to the securities, the manner in which the price will be determined and the potential markets upon which the issuer could apply for a listing. Lastly, category C is information which shall be included in the final terms, such as the ISIN, the currency of the offered securities, maturity dates, the yield and the particulars of the terms of a specific offer. 

Final terms cannot change or replace information included in the base prospectus. However, an issuer has a possibility - although limited - to add additional information in the final terms which does not relate to the securities note. Insofar the conditions to publish a supplement are satisfied,[5] the base prospectus shall be amended in such manner. Please note that in such case the withdrawal right of investors only applies to the specific issue and not also to prior issues under the base prospectus. Information which does not require the issuer to publish a supplement nor qualifies as information of any category as described above nor as permissible 'additional information' needs to be published by the issuer by means of a notice.

Question 2

Your base prospectus was approved prior to July 1. Do the final terms for an issue under the base prospectus nevertheless need to be accompanied by a separate summary as the new Prospectus Regulation prescribes as per July 1?

No, the new Prospectus Regulation provides for a transitional provision: most amendments following from the new Prospectus Regulation only apply to prospectuses that are approved on or after July 1, 2012.

The content and format of the final terms completing base prospectuses that are approved on or after July 1, 2012, are subject to more stringent rules and need to be accompanied with a separate summary. This special summary that relates to a specific individual issue contains a combination of i) information which is included in the base prospectus and which is relevant for the individual issue and ii) relevant information from the final terms. Like the final terms, the separate summary does not need to be approved. It does only have to be deposited with the regulator of the home member state and, to the extent that the base prospectus is approved on or after July 1, 2012, with the regulator(s) of the host member state(s).

The summary revisited     

Question 3

Which amendments follow from the new Prospectus Regulation in respect of the form, length and content of the summary?     

The summary of a prospectus is a major focus point in the new Prospectus Regulation. The summary should be a separately readable document. As such, cross references to other parts of the prospectus are not allowed. Pursuant to the amended Prospectus Directive the summary must include 'key information'.[6] The key information should convey the essential characteristics of, and risks associated with the securities and the rights attached thereto as well as information in respect of the issuer, the potential guarantor, the reasons for and terms and proceeds of the offering and/or listing. If the summary when read together with the other parts of the prospectus does not contain such key information, this may form an additional basis for potential (prospectus) liability.

The format and content of the summary in a prospectus are also standardised in the new Prospectus Regulation in order to simplify the comparison of different securities by an investor. A required sequence of sections applies which in turn contain required elements. The sections are the following:

                        A: introduction and warnings;

                        B: the issuer and any guarantor;

                        C: securities;

                        D: risks; and

                        E: offer.

ESMA expects that the issuer also includes in the summary the numbering of the elements as well as a heading above each element providing for a short introduction of the content of such element.[7]                      

If and to the extent that information included in the required elements does not apply, this should be clearly indicated and, as recommended by ESMA, a short explanation should be included as well.

The length of the summary does no longer need to be limited to 2500 words. The length of the summary shall take into account the complexity of the transaction but shall not exceed the longer alternative of either i) 7% of the total length of the prospectus or ii) 15 pages. It should be noted that no guidelines for lay-out, font or minimal font size are prescribed as yet.

Question 4

Does a summary still need to have the prescribed format and content if no summary is required and does this influence the sequence of information in the prospectus?

If an issuer is not required to include a summary in the prospectus, for example because the securities have a denomination of at least EUR 100,000 each, but the issuer does prefer to include a summarising overview in the prospectus, such summarising overview is not subject to the strict disclosure requirements in the new Prospectus Regulation provided that such overview will not be given the title 'summary'.

The question arises whether including a summarising overview with another title than 'summary' on a voluntary basis influences the required sequence of information in the prospectus as prescribed by the Prospectus Regulation.[8] This because the 'summary' as meant in the Prospectus Directive[9] shall be included immediately after the table of contents and immediately prior to the risk factors. The new Prospectus Regulation does not provide any information in this respect. ESMA holds the view that the required sequence does not prevent the issuer to be able to include a short cover note with general information regarding the issuer and the offer just prior to the table of contents. [10] Generally taken, such short cover note refers to the front page of the prospectus and not to any other summarising overview as described above. The AFM could take the view that such a summarising overview needs to be included at the back end of the prospectus, following all required information. However, we would like to argue for a pragmatic approach and for preservation of such a summarising overview in the same place in the prospectus as currently is the case, i.e. between the table of contents and the risk factors.          

New rules for rights issues and 'small' issuers

The new Prospectus Regulation provides for a proportionate disclosure regime for rights issues (equity), small and medium-sized enterprises and companies with reduced market capitalisation (equity and debt) as well as for certain credit institutions (debt): for this type of transaction and this type of issuers respectively, less requirements apply to the contents of the prospectus.

Question 5

Does the new proportionate disclosure regime for rights issues also apply to a Dutch issuer despite the fact that the statutory pre-emption rights are normally excluded in Dutch rights issues?

Yes, despite the fact that the statutory pre-emption rights are regularly excluded in Dutch rights issues, a Dutch issuer can make use of the new proportionate disclosure regime for rights issues subject to certain conditions.

The new Prospectus Regulation provides for a definition of 'rights issue'.[11] The term 'rights issue' also includes issues of rights in which statutory pre-emption rights are excluded and replaced by an instrument or a provision conferring near identical rights to existing shareholders when those rights satisfy certain conditions. These conditions are, amongst others, that these identical rights are generally negotiable and transferable, are offered free of charge to existing shareholders of the issuer, that shareholders are entitled to take up new shares in proportion to their existing holdings, that the minimum period during which shares may be taken up by exercising the identical rights is at least two weeks and that the identical rights lapse at the expiration of the exercise period.

Question 6

What does the proportionate disclosure regime entail for rights issues?  

The proportionate disclosure regime for rights issues applies both to issuers whose shares have been admitted to trading on a regulated market and - subject to certain conditions - to issuers whose shares are admitted to trading on a multilateral trading facility.

One mitigation that stands out is that all information relating to the issuer's financial position that needs to be included in the prospectus is limited to one historical financial year instead of three historical financial years. Therefore, the prospectus shall include merely the audited financial information concerning the most recent financial year. This mitigation is also reflected in other financial information that must be included in the prospectus, such as related party transactions, material contracts, investments, principal activities and significant changes impacting the principal markets for the issuer, etc.; such information only needs to be described in the prospectus in respect of the period between the most recent published annual financial statements and the date of the prospectus. 

Furthermore, it is no longer required to include in the prospectus the 'Operating and Financial Review' chapter. As such, a narrative description of the financial position of the issuer is no longer needed. In addition, the inclusion of the chapter 'Selected Financial Information' as well as the inclusion of cash flow statements is no longer required.

Finally, as shareholders may be deemed to have general information relating to the issuer at their disposal, a considerable amount of information does no longer need to be included in the prospectus. This entails, among other things, the description of the issuer's articles of association, holdings, subsidiaries, real estate and the financial facilities of the issuer.

Question 7

Will the capital markets become better accessible for small and medium-sized enterprises and companies with a reduced market capitalisation?  

Yes, small and medium-sized enterprises ('SMEs') and companies with reduced market capitalisation ('small caps') will now have the possibility to use a lighter prospectus regime.

SMEs are companies which, according to their last annual or consolidated accounts, meet at least two of the following three criteria: i) an average number of employees during the financial year of less than 250, ii) a total balance sheet not exceeding EUR 43 million and iii) an annual net turnover not exceeding EUR 50 million.

Smalls caps are companies which are listed on a regulated market and which have an average market capitalisation of less than EUR 100 million on the basis of end-year quotes for the previous three calendar years.

The extent of mitigation depends on the type of securities being offered or admitted to trading on a regulated market. In any event, the proportionate disclosure regime for SMEs and small caps mainly focuses on a limitation in respect of financial information that needs to be included in the prospectus.

In the event of an equity transaction, only two year historical financial information needs to be included in the prospectus instead of three years. Related information, such as 'selected financial information', investments and the principal activities and significant changes impacting the principal markets of the issuer, is also limited to the previous two years. The historical financial information can be prepared in accordance with national accounting standards without being required to present restatements in IFRS. From an administrative and financial perspective, this provides for a considerable mitigation for SMEs and small caps in the pre-IPO phase as most of such companies prepare their financial information in accordance with national accounting standards such as Dutch GAAP rather than IFRS. It should be noted that in such case, the issuer shall be required to include in the prospectus a description of all related party transactions entered into in the two financial years prior to the IPO. If the issuer prepares its financial information in accordance with IFRS, only a description of the related party transactions entered into in the period between the latest published financial statements and the date of the prospectus needs to be included in the prospectus. Another mitigation is provided by not requiring a narrative description of the financial position of the issuer in the chapter 'Operating and Financial Review' if and to the extent that full annual reports of the previous two financial years are included or incorporated by reference in the prospectus. Lastly, SMEs and small caps are not required to include in the prospectus semi-annual interim financial information if the prospectus is to be published 9 months following the latest published financial information.

Similar mitigated disclosure requirements apply to SMEs and small caps that issue debt securities, albeit that the historical financial information in such case can even be limited to the most recent financial year rather than the historical financial information in respect of the previous two financial years. 

Question 8

What if the issuer no longer qualifies as a SME or small cap following listing?

If an issuer was able to use the proportionate disclosure regime at the time of listing but expanded to such extent that it no longer qualifies as an SME or small cap, such issuer falls outside the scope of the proportionate disclosure regime in respect of a secondary offering unless such secondary offering is a rights issue and provided that the conditions that apply to such proportionate disclosure regime for rights issues are satisfied.

This implies that, in order to prevent additional costs for restatements, such an issuer can only complete a secondary offering at least two full financial years following the listing as only then the required IFRS financial statements will be available.

Miscellaneous

Question 9

Will we now have a European 'wild west sign' as well?  

The 'wild west sign', which was introduced in the Netherlands on January 1, 2012,[12] is aimed at warning investors that the offering of securities was not supervised by the AFM, and therefore no AFM approved prospectus was made available.[13] The 'wild west sign' must be included if the issuer is making use of an exception from the obligation to publish an approved prospectus with regard to an offer to the public in the Netherlands[14] other than the exception that applies if the offer is made to qualified investors only.

When no approved prospectus is required in accordance with the Prospectus Directive, the new Prospectus Regulation prescribes the inclusion of a warning to this effect in each advertisement[15], save for the issuer who does make an approved prospectus generally available despite of the applicable exception or exemption under the Prospectus Directive.

Unlike the Dutch 'wild west sign', the European warning does also apply to the offering of securities to qualified investors only. In case of such an offer, you therefore do not need to include a Dutch 'wild west sign' in advertisements, but you do need to include the aforementioned European warning.

Unlike the Dutch 'wild west sign', the European warning is not subject to any formal requirements as regards the content and not subject to any prescribed pictogram either.

Question 10

Can we expect any additional amendments in the near future?  

Yes. On June 4, 2012, the European Commission published a draft regulation amending the Prospectus Regulation as regards, among other things, additional requirements that should be satisfied in case of the use of a prospectus by financial intermediaries, such as underwriters, in a retail cascade.[16] This proposal also takes away the requirement to include an auditor's report in the prospectus in respect of profit estimates if certain stringent conditions are satisfied. Such mitigation is, however, not proposed in respect of profit forecasts.

On June 20, 2012, ESMA also submitted a third technical advice for consultation. This advice addresses the content requirements for convertible or exchangeable debt securities. The consultation paper mainly focuses on clarifying the content requirements in the prospectus for these types of debt securities. The content requirements differ depending on whether or not such financial instruments qualify as equity securities as well as whether or not the underlying shares are admitted to trading on a regulated market.

Also, the consultation paper addresses the possibility to use the proportionate disclosure regime for rights issues by issuers who issued pre-emption rights in the form of convertible or exchangeable debt securities which qualify as equity securities (i.e. convertible or exchangeable into shares or similar securities in the capital of the issuer). ESMA holds the view that such equity securities do fall within the scope of the proportionate disclosure regime for rights issues, provided that certain conditions are satisfied.[17]

Please be informed that it is beyond dispute that the proportionate disclosure regime for SMEs and small caps also applies in the event of an issue of convertible or exchangeable debt securities. This is also confirmed by ESMA in its technical advice.