News : Prospectus Regulation
As a part of the EU’s Capital Markets Union Action Plan and with the aim to improve the current prospectus regime (i.e. under Directive 2003/71/EC1 (the “PD”)), a new set of rules has been adopted: Regulation (EU) 2017/1129 (the “PR”), which entered into force on 20 July 2017. The PR will become automatically and directly applicable2 as of the second semester of 2019, with some exceptions.
B. Problems detected at the level of the current prospectus regime
The European Commission published on 30 November 2015 a staff-working document3 within which it pointed out the major blemishes of the current regime :
High costs related to prospectus requirements. There is a need to reduce administrative costs especially in order to enable small and medium-sized enterprises (the “SMEs”) to access more easily the capital markets.
Ineffective investor protection. The length and the wordings of prospectuses caused uncertainty and irritation among investors. Moreover, prospectus summaries are especially referred to as being ‘too long, unwieldly and not comprehensive’, thus ineffective when it comes to investor protection.
Inflexible and non-appropriate framework for SMEs (and some securities). Requirements between specific situations and issuers are neither adequately differentiated nor sufficiently proportionate, which result in administrative burden.4
Unachieved harmonization goals. The PD provided Member States with considerable discretion at the level of its implementation and application; it is therefore criticized for being insufficiently harmonized.
“Outdated”. The PD is considered outdated since it is not in line with more recent EU laws5 .
C. Entry into force and application of the Prospection regulation
As already mentioned before, the PR came into force on 20 July 2017 and will automatically and directly become applicable on 21 July 2019 with some exceptions that are illustrated in the timeline-chart below.
D. Updates and innovations
Along with modifications of existing rules, the PR also introduces new concepts like the universal registration document or the EU Growth prospectus. Here follows some key innovations and changes :
1. Exemptions applicable before the applicability date, i.e. 21 July 2019
As from 20 July 2017, regulated market issuers are exempt from their obligation to publish a prospectus of :
securities fungible with securities already admitted to trading on the same regulated market;
shares that result from the conversion or exchange of other securities or from the exercise of rights conferred by other securities, where the resulting shares are of the same class as the shares already admitted to trading on the same regulated market; and
securities resulting from the conversion or exchange of other securities, own funds or eligible liabilities by a resolution authority due to the exercise of powers referred to in the Bank recovery and resolution Directive6
For the two exemptions listed under point 1. and point 2., a 12-month period and a threshold of 20 percent must be respected in order to benefit from the respective exemption.
As from 21 July 2018 :
the exemption according to which small offerings with a total consideration in the EU of less than EUR 1 million calculated over a 12-month period will replace the current exemption rule in this matter; and
Member States are granted the possibility to provide for an exemption concerning public offerings, which are not subject to notification rules contained in article 25 of the PR, provided the total consideration of each of such offers across the EU is less than EUR 8 million over a 12-month period.
2. New summary requirements
The PR provides for a more ‘investor-friendly’ summary within which key information are provided to investors in order to understand nature and risks of the issuer, the guarantor and the securities offered or admitted to trading on a regulated market.
According to the Commission’s staff-working document, this element needed a major improvement since drafters of prospectuses tend to focus on liability instead on investor information. Recital 33 of the PR provides in this respect that no civil liability should be attached to any person solely on the basis of the summary, including any translation thereof, unless it is misleading, inaccurate or inconsistent with the relevant market of the securities.
In the view to get summaries that are clearer and more comprehensive for investors, the PR imposes several technical rules, which prospectus drafters shall comply with while designing such documents.7
3. EU Growth Prospectus
In the view to foster the access to capital markets (especially) by SMEs, a new concept has been introduced: the EU Growth Prospectus. Under this regime, the information document to be published shall be of standardized format, written in a simple language and shall be easy for issuers to complete. It shall further consist of a specific summary, a specific registration document and a specific securities note. The information contained therein shall be presented in a standardized sequence in accordance with the delegated act, which shall be adopted by the Commission by 21 January 2019.
4. Universal Registration Document
The PR also introduced a new approval procedure allowing any (frequent) issuer, whose securities are admitted to trading on a regulated market or an MTF, to draw up a universal registration document (the “URD”). The concerned issuer may draw up every year a registration document in the form of a URD describing the company’s organization, business, financial position, earnings and prospectus, governance and shareholding structure.
Once an issuer has obtained approval of its URD from its local competent authority for 2 consecutive years, it will be considered a ‘well-known issuer’. This status grants the issuer the right to file subsequent URDs with the competent authority without prior approval. However, if such issuer fails to file a URD for one year, approvals shall again be required for 2 consecutive years in order to regain the well-known issuer status.
5. Risk factors
New rules are provided for risk factors set out in both the summary and the body of a prospectus :
Risk factors contained in the prospectus summary should consist of a limited selection of specific risks, which the issuer considers to be of most relevance to the investor when the latter is making an investment decision. These factors should therefore be specific to the relevant offer and prepared for the benefit of investors only. It shall not give general statements on risk nor consist in a limitation of liability. Additionally, the total number of risk factors included in the summary shall not exceed 15 in total.
With respect to the body of a prospectus, factors of risk shall be presented by their probability of occurrence and by the extent of their impact in order to ensure that investors can make informed decisions. Risk factors must therefore be presented in a limited number of categories according to their type and nature. Within such category, the most material risk factor must be mentioned first. We believe that this very last exercise may constitute some kind of challenge for prospectus drafters in terms of defining and determining the risks especially since this effort is unquestionably based on a quantitative judgement made by the latter.
The first glance of the PR shows that this new set of provisions has been drafted in order to modernize and to move forward with the completion of the Capital Markets Union Action Plan by introducing a more flexible and efficient regime. The major changes will nevertheless only become applicable in approximately two years; hence, only time may reveal whether this new set of rules will be able to fix the flaws detected at the level of the current regime.
1 As amended by Directive 2010/73.
2 It shall be noted that a regulation, unlike a directive, is a legal act of the EU that need not to be implemented by any of its Member States in order to become enforceable as law across the Union.
4 E.g. The PD along with the Transparency Directive tend to create an exemption threshold that hinders issuers to offer debt securities with low denomination per unit which leads to liquidity problems. Such threshold may also prevent small and retail investors to enter capital markets because of their inability to accept the required price (p. 9 and following).
5 E.g. the threshold of ‘companies with reduced market capitalization’ definition under the PD does not match with the threshold given for the same concept under MiFID II.
6 Directive 2014/59/EU (Article 53(2), 59(2) or 63 (1) or (2)).
7 E.g. article 7(4) of this regulation provides for a predefined structure for summaries: The summary shall be made up of the following four sections: (a) an introduction, containing warnings; (b) key information on the issuer; (c) key information on the securities; (d) key information on the offer of securities to the public and/or the admission to trading on a regulated market. Furthermore, the summary shall not count more than seven A4-sides of a printed paper and the characters of the document shall still be in readable size and the language and wording of the document shall be clear, non-technical, concise and comprehensible for investors