On 30 November 2015, the European Commission (EC) published a proposed new Prospectus Regulation (PD3) which will repeal and replace the existing Prospectus Directive and Prospectus Regulation. PD3 is on a fast track and is an important step in building the Capital Markets Union. Once finalised, PD3 will enter into force 20 days after publication in the Official Journal and will take “direct effect” in Member States 12 months thereafter (probably late 2017 or early 2018).
PD3 is intended to solve various problems present in the current regime, including:
- Prospectuses being unwieldy “liability management” tools with confusing summaries and numerous generic risk factors;
- SMEs continuing to avoid the capital markets; and
- Reduced liquidity and too few retail investors resulting from the large denominations encouraged by the public offer exemptions for EUR100,000 denominations and the wholesale disclosure regime.
The key changes proposed are as follows:
- The 10% exemption under the admission to trading prospectus trigger will be reworded to cover all fungible securities (currently only applies to shares of the same class) and increased from “less than 10%” to “less than 20%”; and
- a Member State will be able to exempt offers of securities to the public from the prospectus requirement if the offer is only made in that Member State and the total consideration for the offer does not exceed EUR10 million (or such lower amount above EUR500,000 chosen by that Member State).
- General disclosure requirements:
- Prospectuses should be “easily analysable, succinct and comprehensible”; and
- The distinction between “wholesale” and “retail” disclosure will be removed (the new disclosure starting point will be Annexes IX and XIII, with additional material necessary for retail).
- “Public Offer” exemptions:
- Removal of the EUR100,000 minimum denomination exemption.
- Will be shortened to maximum six pages (unless multiple securities are covered by the prospectus);
- In a new, prescribed four-section format;
- May include only the five most material risk factors specific to the issuer; and
- Will also be required for wholesale debt prospectuses.
- Risk factors:
- Must be limited to specific*, material* risks (i.e., fewer or no boilerplate risks);
- Be graded into three categories* according to materiality; and
- Corroborated by the content of the prospectus (failing which, regulators may request issuers to remove said risk factors).
*The European Securities and Markets Authority (ESMA) is to develop guidelines on specificity, materiality and categorization.
- New concepts:
- Two new specific disclosure regimes (rather than the existing proportionate disclosure regimes) will apply to SMEs (defined slightly more broadly than under the current Prospectus Directive) and to secondary issuances by issuers with existing securities admitted to trading;
- A “universal registration document” concept (similar to a US shelf registration statement) will be introduced for frequent issuers established in a Member State (this will not be available for third country issuers) allowing the fast-track approval of such issuer’s prospectuses;
- A third country issuer must designate a representative established in its home member state, which is subject to and supervised under EU financial services regulation, as a contact point for the competent authority (similar to the requirement for a sponsor in a premium London listing, though the International Capital Market Association (ICMA) is seeking further clarity from the EC on both the rationale for this requirement and the potential liability that will attach to such representatives);
- Approved prospectuses will only be deemed “available to the public” once published in electronic form on the website of the issuer or the relevant financial intermediary or regulated market. Prospectuses must be easily accessible with no requirement to register, accept a disclaimer of liability or pay a fee in order to access them. Filters warning investors of the countries in which the offer is being made or requiring them to disclose their country of residence should be permissible; and
- ESMA will introduce a centralised storage mechanism for prospectuses.
One of the key objectives of PD3 is to improve secondary market liquidity and increase retail participation, however, the removal of the EUR100,000 minimum denomination exemption is unlikely to achieve this because (a) there are other reasons why issuers may choose to continue to target wholesale investors only (e.g. pricing and liability under national consumer laws), and (b) issuers may choose to use other exemptions such as “QI only” or to use high denominations in order to ensure they benefit from the “total consideration” public offer exemption for the purposes of secondary market trading.
Another of PD3’s main aims is to reduce the administrative burden of drawing up of prospectus for all issuers, and yet wholesale debt issuers will now be required to draft prescriptive summaries. Paradoxically, a strict page limit may cause the investor to misinterpret the information provided, both on the potential benefits and risks of the product. As such, the more challenging (and therefore expensive) it is likely to be to draft. In addition, the new rules pertaining to the risk factors section could cause liability concerns, particularly in a 144A/Reg S context, if issuers are requested to remove uncorroborated risk factors from their prospectuses.
In summary, whilst PD3 represents an improvement in many aspects, further discussion between the EC, the other EU institutions and the national regulators is required before it can achieve all of its aims.