Knowing last Friday’s much-anticipated “Guidelines on risk factors under the Prospectus Regulation” will be essential for any lawyer drafting the prospectus for a public securities issue under the new Prospectus Regulation. They follow the recent issuing of two RTS relating to form and content etc. of prospectuses, leaving the Regulation on track for its 21st July start date. Readers are aware that the industry had pushed back on several of ESMA’s proposals (e.g. the proposal to ban the recycling of standard risk disclosure paragraphs), and ESMA has moved a little, but has reiterated that article 16 (“Risk factors”) of the Prospectus Regulation (and recital (27)) is there to bring about change, and if ESMA has its way, change there will be. The guidelines are for the national prospectus regulators, to ensure similarity of approach across the EU. They consist of a mere 8 pages, and the entire ESMA report is only 41. A few nuggets:

  • A frequently-used phrase is that “the competent authority should challenge…”. This replaces earlier draft wording referring to the power of an NCA under article 20(5) to refuse approval of a prospectus, and clarifies that it is not for NCAs to assess the materiality of a risk factor, nor to take responsibility for the prospectus. One respondent had amusingly asked whether the NCA would provide an indemnity if the person responsible for the prospectus was subsequently sued for not including a risk factor that the NCA had insisted was removed! So the NCA is encouraged to ask for greater clarity if it is unclear why a risk factor is included in a draft, and a more activist approach from regulators can be expected.
  • ESMA has partially relented on its war on the recycling of previously-used risk factor disclosures and accepts that similar risk factor disclosure can be used from one prospectus to the next, but “what is of fundamental importance is that the disclosure of risk factors clearly illustrates the specificity of that risk to a particular issuer or security. For example, the size or market share of an issuer operating in a given industry might leave it disproportionality exposed to a risk in comparison to others within the same sector. Consequently, NCAs are being instructed to look for the details which customise the risk factor and move it away from the framework of non-specificity”. There are even some examples given of how this specificity can be provided – in other words, explaining the link between the risk and the issuer. It will not be beyond the wit of a lawyer to add a phrase or sentence to do this, if it is not already in the old language; but it will need to be done or the NCA is likely to pick up on its absence.
  • ESMA has relented on its suggestion that, as a rule of thumb, the number of categories to be included in a risk factor section should not usually exceed 10.

ESMA has also issued some Q&A.