On July 20, 2017, Regulation (EU) 2017/1129 of the European Parliament and of the Council ("New Prospectus Regulation") came into force in the EEA. When fully implemented, it will repeal the existing Prospectus Directive and introduce a new prospectus regime for prospectuses to be used in an offer of securities to the public and/or admission to trading on a regulated market in the EEA. The vast majority of the provisions of the New Prospectus Regulation will not apply until July 21, 2019 (although certain provisions have applied from July 2017, and others will apply from July 2018).
The aim of the New Prospectus Regulation is to enhance capital flow in the European financial markets by streamlining the prospectus requirements, whilst continuing to ensure investor protection. To that end, changes have been made to the form and content required for prospectuses, and some amendments have been made to the exemptions from certain prospectus requirements in relation to certain categories of offers or issuers.
Impact on Structured Products Transactions
We highlight below some of the key changes that may impact structured securities programs and issuances:
New exemption from obligation to publish a prospectus introduced: Many of the current Prospectus Directive exemptions remain unchanged. However, with effect from July 21, 2018, individual member states may exempt offers of securities to the public in such member state with a total consideration of up to maximum of 8 million (an exemption automatically applies under the New Prospectus Regulation for all offers with a total consideration of less than 1 million in any event). It is not yet clear the extent to which member states will utilize this option.
Prospectus Summaries: A number of significant changes have been made to the requirements for prospectus summaries. From July 21, 2019, issuers will longer be required to include a "pro-forma" summary in a base prospectus. This should help reduce the complexity and length of a base prospectus. However, where applicable, an issue-specific summary will continue to be required for each issue of securities under the base prospectus. It is currently unclear whether a form of the issue-specific summary will need to be included with the form of final terms in the base prospectus. This will hopefully be clarified in the delegated legislation necessary to give effect to the detailed content requirement for prospectuses referred to below.
As is currently the case, there will be an exemption to the summary requirement in respect of an admission to trading of non-equity securities with a minimum denomination of 100,000. This exemption is further extended where the prospectus relates only to an admission to trading of securities that are to be traded only on a regulated market (or specific segment) accessible only by qualified investors.
Although the requirements for summaries under the New Prospectus Regulation will be less prescriptive than under the existing Prospectus Directive, the summary will be subject to new requirements, including that it be written in a concise manner and be no longer than seven sides of A4 paper using characters of a readable size. The summary will be required to have four sections:
· an introduction with a set of warnings;
- key information on the issuer;
- key information on the securities; and
- key information relating to the offer of securities to the public and/or admission to trading.
The summary will also need to include a maximum of 15 key risks that are specific to the relevant issuer and the securities.
Of particular relevance to structured products in the form of securities, the prospectus summary requirements under the New Prospectus Regulation overlap in several respects with the recent EU regulation relating to key information documents for packaged retail and insurance-based investment products ("PRIIPs Regulation"), which applies from January 1, 2018. Where a key information document ("KID") is required to be prepared under the PRIIPs Regulation for securities offered to the public to which the New Prospectus Regulation will also apply, the "key information on the securities" section in the summary required under the New Prospectus Regulation may substituted with a KID complying with the PRIIPs Regulation.
Risk Factors: The New Prospectus Regulation contains important new provisions relating to risk factors to be included in a prospectus. Risk factors will be required to be limited to risks that are specific to the issuer and/or the securities and that are material in the context of a person making an informed investment decision. The person drawing up the prospectus must assess the materiality of the risk factors based on the probability of their occurrence and the expected negative impact if the risk materializes. The risk factors must also be presented in a specified number of categories depending on their nature, and in each category the most material risk factors shall be listed in order of materiality from high, medium to low, as assessed based on the criteria set out above.
These new provisions relating to risk factors may cause particular difficulties in relation to structured products issuances, particularly in relation to complex products where there may be challenges in ranking the risk factors. As highlighted above, the limit of 15 risk factors in the summary may also be challenging and give rise to liability concerns, as there is always a danger of the determination as to the most material risk factors being judged with the benefit of hindsight where a risk that was judged to be relatively minor at the time of issuance comes to fruition several years later.
Universal Registration Document: Issuers whose securities are admitted to trading on a regulated market or a multilateral trading facility will be able draw up a universal registration document providing certain information about the issuer, which, after being approved by the competent authority of its home member state for two consecutive financial years, may be filed with the competent authority without prior approval in subsequent years. However, where the universal registration document is used as part of a prospectus, any amendments to the universal registration document will need to be supplemented (and approved) in accordance with the New Prospectus Regulation. Therefore, although the initial filing will be "fast tracked" in that no approval is required, it seems that subsequent amendments are still subject to the same level of approval and therefore similar to existing practice.
Detailed Form and Content Requirements: In relation to the detailed requirements for the content of the various elements of a securities prospectus, the New Prospectus Regulation will continue to follow the existing "building blocks" approach with a secondary "tier 2" delegated regulation setting out required information in different annexes that include the information to be included in the registration document and securities note for each issuance. The annexes that are relevant to a particular issuance will depend upon the nature of the security, including whether it is an equity or debt issuance or wholesale or retail debt. There are also specialist annexes for particular types of securities, including derivative securities (which will be relevant to many structured products), convertible and exchangeable securities, and asset-backed securities.
In a Consultation Paper published in July 2017, the European Securities and Market Authority ("ESMA") sets out its draft technical advice to the EU Commission on the format and content of the prospectus under the New Prospectus Regulation. ESMA proposes to largely maintain the existing regime; however, there are some proposed changes aimed at reducing the administrative burden on issuers, including removing the requirement for a report by auditors or independent accountants on profit forecasts. In relation to derivative securities, more detailed disclosure is required for underlying securities and reference obligations and certain disclosures to bring the requirements in line with the EU Benchmark Regulation. Responses on the Consultation Paper can be made up until September 28, 2017, and ESMA has indicated it intends to publish a final report with its recommendations in the first quarter of 2018.
Overall Impact of the New Prospectus Regulation on Structured Products
The New Prospectus Regulation is unlikely to have a major impact on the drafting of prospectuses for structured products issued in the form of transferrable securities; however, issuers of such products will have to make various changes to the form of their existing base prospectuses. Although most of the new requirements will not apply until July 2019, issuers should ensure they make the necessary plans for compliance with the new requirements well in advance of them coming into effect. As mentioned, the rules in relation to the new summary requirements and risk factors may pose particular issues for some structured products.
One other issue that all issuers of relevant securities should have in mind, is the impact of Brexit where securities are offered both in the UK and the rest of the EU. Although the New Prospectus Regulation is currently in force in the UK, July 2019, when most of the provisions come into effect, is likely to be after the effective date of Brexit. It is currently unclear as to whether provisions that only become applicable under the New Prospectus Regulation after the date of Brexit will apply under UK law. Hopefully, this position will become clearer as the Brexit negotiations develop and transitional provisions are finalized. This is, however, an area that issuers of securities will need to keep under careful review.