The European Commission on 30 November 2015 announced proposals to overhaul the prospectus rules to improve access to finance for companies and simplify information for investors.
The new prospectus regulation forms part of the European Commission’s Capital Markets Union action plan and, once adopted, will replace current Prospectus Directive 2003/71/EC (along with its corresponding implementing measures). In its press release announcing the proposals, the European Commission states that the new rules ‘will enable investors to make informed investment decisions, simplify the rules for companies that wish to issue shares or debt and foster cross-border investments in the Single Market’.
1. Higher threshold for determining when a prospectus is required for smaller capital raisings
It is proposed that the threshold for determining when a prospectus is required for a capital raising will be increased from EUR 100,000 to EUR 500,000 (calculated over 12 months). This is a significant increase and, as the European Commission notes, will provide ‘much needed breathing space’ for many small and medium sized enterprises (SMEs).
In addition, EU Member States will have the ability to increase the EUR 500,000 threshold for their domestic markets. An EU Member State will be able to opt to exempt offers of securities to the public from the prospectus requirement if: (i) the offer is exclusive to that Member State; and (ii) the total consideration of the offer is between EUR 500,000 and EUR 10 million (double the current EUR 5 million threshold).
2. Simpler regime for SMEs
SMEs will be able to submit a 'lighter' prospectus in the case of an offer of securities to the public (provided they have no securities admitted to trading on a regulated market). It is proposed that the existing threshold for SMEs who can take advantage of the 'lighter' regime will be doubled to include SMEs with a market capitalisation up to EUR 200 million (the current limit is EUR 100 million).
The new regime will ensure that the cost of producing a prospectus is realigned with the size of the issuer’s fundraising.
3. Simpler regime for secondary issuances by listed companies
Listed companies that wish to raise additional capital by secondary issuance will also benefit from simplified prospectus requirements. The new regime, which will apply to companies admitted to trading on a regulated market or an SME growth market for at least 18 months, takes account of the reduced risk posed by listed companies already subject to ongoing disclosure obligations. The European Commission notes in its press release that currently 70% of prospectuses approved annually are secondary issuances for companies already listed on a public market.
4. New prospectus summary and changes to risk factors
The European Commission believes that currently prospectus summaries are quite long and often written in complicated legal language that is not useful for most individual investors. The new regime, which aims to produce shorter and clearer prospectuses, provides that a summary will contain three main sections covering key information on the issuer, the security and the offer/admission respectively. The proposals provide that the length of a summary will be restricted to six sides of A4 paper when printed (characters of readable size), significantly shorter than current market practice.
The new rules provide that issuers will be required to tie risk factors across two or three materiality based categories to ensure issuers only draw investors’ attention to risk factors that are material and specific to the issuer and its securities. The European Commission notes that at present prospectuses ‘are overloaded with generic risk factors which often obscure relevant risk factors’. The European Securities and Markets Authority (ESMA) will be tasked with producing guidelines for competent authorities on this area.
5. Fast-track approval for frequent prospectus issuers
Companies that frequently access the capital markets will be able to use an annual universal registration document (URD). Companies who regularly update their URD will be able to take advantage of a five working day fast-track approval when they wish to issue shares, bonds or derivatives. The European Commission notes, in its Fact Sheet ‘Revamping the prospectus, the gateway to European Capital Markets’, that the use of URDs ‘will promote the drawing up of prospectuses as separate documents, as this will be cost-effective and less burdensome for issuers, and enable them to quickly react to market windows’.
6. Single access point for all EU prospectuses
ESMA will provide and maintain a free searchable online portal containing all prospectuses approved in the European Economic Area.
Timeframe for implementation
The Prospectus Regulation will now be sent to the European Parliament and the Council of the EU for discussion and adoption under the co-decision procedure.
The suggested amendments to the current regime indicate a real willingness to lower the barriers to accessing capital markets in the European Union. In particular, the focus has shifted to easing regulatory burdens for SMEs and listed companies. The proposals, if implemented, will reduce issuer costs, avoid duplicative disclosures and ensure that the information disclosed is tailored to the specific issue of shares, bonds or derivatives.