Prospectus rules are set to change significantly. This follows on from the recent publication of a draft Prospectus Regulation (the “Draft Regulation”) which will, once it becomes applicable, replace the existing Prospectus Directive 2003/71 and its implementing legislation. Among other things, the Draft Regulation seeks to facilitate increased access to funding by small and medium enterprises (“SMEs”) and to introduce a simplified and more flexible regulatory framework for secondary issuances and for frequent issuers. Significantly, the Draft Regulation removes the lighter disclosure standards for a prospectus published solely for the offering or admission to trading on a regulated market of “wholesale” debt securities.
In another development, the European Commission has adopted a new draft Delegated Regulation containing technical standards for the approval and publication of prospectuses and dissemination of advertisements (“Delegated Regulation”).
The Prospectus Directive as amended (the “Prospectus Directive”) together with its Implementing Regulation 809/2004 (“Implementing Regulation”) sets down harmonised rules governing the circumstances in which a prospectus must be made available to the public. It also provides for a single regime governing the content, format, approval and publication of prospectuses. Once a prospectus is approved in one Member State, it may be used to offer securities to the public or seek admission to trading on a regulated market in other EEA Member States, subject to notification procedures.
The Draft Regulation has its roots in the Capital Markets Union (“CMU”), which is a major European Commission (“Commission”) initiative designed to tackle fragmentation and market inefficiencies. One of the CMU’s key objectives is to improve access to funding for business, including in particular SMEs, and to diversify funding sources. When the Commission launched its CMU Action plan in February 2015, it identified a review of the existing prospectus regime as a priority for early action and published a related consultation paper. Subsequently, at the end of September 2015, the Commission indicated in its Action Plan on Building a Capital Markets Union that it would modernise the Prospectus Directive to make it less costly for businesses to raise funds publicly and review regulatory barriers to small firms listing on equity and debt markets.
The Draft Regulation
The Draft Regulation, which was published on 30 November 2015, is intended to repeal and replace the Prospectus Directive along with its corresponding implementing measures. It has two main objectives, namely to alleviate the administrative burden for companies which draw up a prospectus, and to make the prospectus a more valuable information tool for potential investors. The Draft Regulation also further aligns the prospectus rules with other EU disclosure rules, including the Transparency Directive 2004/109 and Regulation 1286/2014 on key information documents for packaged retail and insurance-based investment products (“PRIIPs”).
The changes introduced by the Draft Regulation will affect both when a prospectus is required and the information to be included in it. The Draft Regulation also provides for specific disclosure requirements for SMEs and secondary issuances, as well as an optional fast-track approval mechanism for frequent issuers.
When is a Prospectus Required?
The Draft Regulation makes a number of changes to the existing provisions dealing with the publication of the prospectus which affect publication thresholds, the prospectus exemption for certain offers of non-equity securities and the prospectus exemption for certain futher issuances of securities already admitted to trade on a regulated market. It also clarifies the law applicable in cases of distribution by retail cascade.
Thresholds - the Prospectus Directive requires a prospectus to be published where either an offer of securities is made to the public or securities are admitted to trading on a regulated market with a total consideration of €5,000,000 or more. Under the Draft Regulation, this publication requirement does not apply to offers of securities with a total consideration of less than €500,000 (currently €100,000). It also empowers Member States to provide a more extensive exemption from the publication requirement, up to an amount of €10,000,000, provided the offer of securities to the public is made only on the domestic market. Member States can themselves decide whether a prospectus is required for offers of securities with a total consideration between €500,000 and €5,000,000.
Offers of non-equity securities - the Draft Regulation removes the current prospectus exemption for offers of non-equity securities with a denomination per unit amounting to at least €100,000. According to the Commission, this exemption, together with the more favourable disclosure requirements for bond issuances having a denomination per unit of at least €100,000, is making a significant share of bonds issued by investment grade issuers inaccessible to non-institutional investors.
If adopted in its current form, the Draft Regulation will remove the distinction between “wholesale” and “retail” debt securities as regards the requirement to publish a prospectus. However, it is worth noting that there are several other exemptions from the requirement to publish a prospectus which may be relevant for wholesale debt. In particular, issuers offering non-equity securities solely to qualified investors or requiring a minimum commitment of €100,000 for each separate offer will still benefit from a prospectus exemption.
Further Issuances - currently, there is no requirement to publish a prospectus for the admission to trading on a regulated market of shares representing less than 10% of the number of shares of the same class already admitted to trading on the same market.
The Draft Regulation extends the scope of this exemption. It provides that issuers whose securities are already admitted to trading on a regulated market, will not be required to provide a prospectus if the newly admitted securities represent less than 20% of the existing securities. This represents a significant extension of the existing exemption.
Retail Cascades - the Draft Regulation clarifies the requirements applicable in cases of distribution by “retail cascade”, eg where securities are sold to investors (other than qualified investors) by intermediaries and not directly by the issuer.
Financial intermediaries will be entitled to rely upon the initial prospectus as long as this is valid and duly supplemented and the issuer or the person responsible for drawing up the prospectus gives written consent to its use.
What information is included?
The Draft Regulation makes changes to the requirements governing the prospectus summary, disclosure requirements when issuing wholesale debt, the inclusion of risk factors in the prospectus and incorporating information by reference. It also amends the provisions regarding base prospectuses.
The Prospectus Summary - the Draft Regulation sets out a new summary format which is closely modelled on the key information document (“KID”) required under the PRIIPs Regulation. Next to the usual section containing warnings, the new summary contains three main sections covering key information on the issuer, the security and the offer/admission. For securities falling under the scope of the PRIIPs Regulation, the issuer can choose to replace the “securities” section of the summary with the content of the KID. Under the Draft Regulation, a summary may not exceed six A4 pages in length.
Wholesale debt – the Draft Regulation removes the lighter disclosure standards for a prospectus published for the admission of “wholesale” debt securities to trading on a regulated market. According to the Commission, a unified prospectus template will be defined through delegated acts, taking the existing wholesale disclosure annexes in the Implementing Regulation (Annexes IX & XIII) as a starting point and adding only the information items necessary for retail investor protection.
Risk Factors – currently, the prospectus must prominently disclose any risk factors pertaining to the issuer and its securities. The Draft Regulation provides that an issuer should only mention risk factors which are material and specific to it and its securities. An issuer must also allocate risk factors to categories based on its assessment of the probability of their occurrence and the expected magnitude of their negative impact.
Incorporation by Reference - the Draft Regulation significantly enlarges the scope of documents from which information may be incorporated by reference in a prospectus. It also places issuers on regulated markets and those on multilateral trading facilities on an equal footing in terms of their ability to incorporate information by reference.
The Base Prospectus - the Draft Regulation permits a base prospectus to be drawn up for any kind of non-equity securities. An issuer is allowed to draw up a base prospectus consisting of several new documents (tripartite base prospectuses) and, where the issuer is a frequent issuer, the registration of a base prospectus may take the form of a universal registration document (see below). The Draft Regulation removes the requirement to draw up a summary of the base prospectus if the final terms have not been included: the issuer must instead produce (and annex) an issue specific summary once the final terms are filed.
What are the New Specific Disclosure Regimes?
The Draft Regulation contains two sets of specific minimum disclosure regimes, one for SMEs and the other for secondary issuances, which will enable them to draw up a distinct prospectus in the case of an offer of securities to the public. These new rules will replace the existing “proportionate disclosure regimes”.
The new minimum disclosure requirements will apply to SMEs that do not have securities admitted to trading on a regulated market. Secondary issuers can use the minimum disclosure regime if they have been admitted to trading on a regulated market or an SME growth market for at least 18 months. Each regime will consist of a specific registration document and specific securities note. SMEs offering shares and non-hybrid debt securities will also have the option of using a question and answer format for preparing the prospectus.
What are the New Requirements for Frequent Issuers?
The Draft Regulation includes an optional fast-track approval mechanism for frequent issuers admitted to trading on regulated markets or multilateral trading facilities. This mechanism is subject to the issuer drawing up an annual “universal registration document” (“URD”) describing the company’s organisation, business, financial position, earnings and prospects, governance and shareholding structure. Once an issuer has had the URD approved by the relevant competent authority for three consecutive years, subsequent URDs can be filed without approval.
The URD will form a main part of the prospectus (along with the summary and securities note). In the event a prospectus is later required, the relevant authority should be able to approve the prospectus within five working days, instead of ten, since the URD has already been approved, or is available for review.
The Draft Regulation will be sent to the European Parliament and the Council for discussion and adoption. It will apply 12 months after it enters into force, at which point it will repeal the Prospectus Directive along with its corresponding measures. Any prospectus that has been approved under the Prospectus Directive will continue to be governed by it until either the end of the prospectuses’ validity or twelve month after the Prospectus Regulation applies, whichever is the earlier. It is unlikely that the Prospectus Regulation will enter into force before late 2016 at the earliest.
The Delegated Regulation sets out regulatory technical standards for the approval and publication of the prospectus and dissemination of advertisements. In particular, it includes requirements for amended advertisements to be disseminated where there has been a significant new factor, material mistake or inaccuracy. Any amended advertisements will need to make reference to the previous advertisement and specify the differences between the two versions of the advertisement. The European Parliament and the Council of the EU must now consider whether or not to oppose the Delegated Regulation.