The EU Prospectus Directive, which has been in effect in the EU since July 2005, has been the subject of two recent reports. The first was published on June 13, 2007, by the Committee of European Securities Regulators (CESR), while the second was published on September 5, 2007, by the European Securities Markets Expert Group (ESME), a group of market experts set up by the European Commission with a mandate to examine how EU Securities Directives work in practice, determine whether or not they are delivering the intended results and propose changes where necessary. The CESR report is based on the experience of regulators together with the responses of market participants to a call for evidence conducted in early 2007, while the ESME report reflects the views and experience of members of the group.

Both reports deliver a mixed verdict on the operation of the Prospectus Directive. CESR compiles statistics obtained from national regulators that suggest a marked increase in the number of prospectuses used on a cross-border basis. The single European passport — the ability for issuers to use a prospectus that has been approved by the issuer's home State regulator in any other EU State without any further regulatory approval or administrative procedures — is a core objective of the Directive. To the extent that these statistics are reliable (the CESR report hedges them with a number of caveats) they indicate, therefore, that the Directive has already achieved a significant measure of success in facilitating the cross-border raising of capital. The ESME report, too, concludes that the passport regime has made it significantly easier to offer and list securities in several countries at the same time and has delivered real benefits to issuers. However, both reports also highlight a number of issues that are hampering the effectiveness of the regime and which require redress, possibly through amendment to the Directive itself.

These two reports will be followed by a further report by the European Commission. The Commission is required by the Directive to assess the application of the Directive and to present a report by the end of 2008, accompanied, if necessary, by proposals for the amendment of the Directive. Officials have indicated that a draft report is likely to be published for consultation in the Spring of 2008, with the publication of the final report at the end of the year once responses to the consultation have been reviewed and reflected.

This is an excellent opportunity for a serious review of an important piece of legislation, described by ESME as a "cornerstone of European securities market regulation." The issues identified in the reports by CESR and ESME are causing tangible problems for issuers. For example, the application of the Directive to employee share schemes is unclear and to a large extent arbitrary. Third-country companies in particular are hard hit, since issuers are not exempt from the requirement to produce a prospectus for offers to employees if they do not have securities listed on a European regulated market. There is evidence that a number of companies have suspended, or are considering suspending, their European share schemes as a result. Similarly, lack of clarity about how the Directive applies where securities are sold through intermediaries — a common method of distribution of bonds — is having a chilling effect on the retail debt markets in a number of Member States. It would be a bizarre result if a Directive with the primary objective of investor protection actually deprived retail investors of the ability to invest directly in certain classes of securities.

The Commission review will therefore be a valuable exercise, and the CESR and ESME reports provide solid primary material. If the outcome is a proposal to amend the Prospectus Directive, this should not be viewed as a sign of failure: the EU securities markets need a mature legislature that keeps its rules under proper review and will modify them where necessary.

The CESR report is available at and the ESME report can be found here.