The Prospectus Regulation, which has applied since 21 July 2019, introduced various amendments to the risk factor regime in prospectuses. Building on that, the European Markets and Securities Authority (“ESMA”) has now issued guidelines (the “Guidelines”) on risk factors, which will take effect from 4 December 2019.

The Guidelines are directed at the competent authorities and aim to implement the goals of the reforms under the Prospectus Regulation.

Specificity

One of the most important goals of the Prospectus Regulation (Article 16(1)), was to replace generic risk factors with transaction-specific ones. To this end, the Guidelines specify that risk factors must describe a relevant risk and not consist of standard risk factors or recycle those from other prospectuses. The materiality and specificity of the risk factor must be demonstrated by either specific corresponding information or disclosed elsewhere in the prospectus.

Materiality

The issuer, the offeror or the person asking for admission to trading on a regulated market must assess the materiality of the risk factors based on the probability of their occurrence and the expected magnitude of their negative impact. Each risk factor must be adequately described, explaining how it affects the issuer or the securities.

The assessment of the materiality of the risk factors may also be disclosed by using a qualitative scale of low, medium or high. The potential negative impact of the relevant risk must be clear from either quantitative or qualitative disclosure, and mitigating language should not obscure the materiality of the risk.

Categories

Risk factors must be categorised under appropriate headings and the number of categories should be limited to ten for a standard, single issuer, single security prospectus. ESMA would permit sub-categories and a degree of flexibility for larger, more complex prospectuses. In each category the most material risk factors should be mentioned first.

Conciseness

Risk factors should be focused and comprehensible. The competent authorities are encouraged to question any risk factors that appear unnecessarily long.

The Summary

The disclosure of risk factors in the prospectus summary should be consistent with the presentation in each category, namely with the most important risks presented first. The Prospectus Regulation sets the maximum number of risk factors which may be included in any summary at fifteen.