UK: Prospectuses To Become Rarer and Shorter

As a result of amendments to the Prospectus Directive that took effect at the end of 2010, UK rules are likely to be relaxed in the near future so that no prospectus will be required where securities are offered to less than 150 persons in the UK or where the total consideration for securities included in an offer is less than €5 million. Currently the limits are 100 persons and €2.5 million respectively. Fundraisings of up to €5 million will therefore be cheaper and easier, and the ability to invite investment from up to 149 people (not counting qualified investors) may encourage AIM companies and unquoted companies, in particular, to include a retail element in their fundraisings.

In the longer term, prospectuses published in connection with a rights issue or open offer by a Main Market or AIM company, or with an equity fundraising by an SME, will be shorter and cheaper to produce as less information will be needed.

In addition, more companies will be able to offer shares to their EU-based employees without having to produce a prospectus at all.

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Full Article

As a result of amendments to the Prospectus Directive that took effect at the end of 2010, UK rules are likely to be relaxed in the near future so that no prospectus will be required where securities are offered to less than 150 persons in the UK or where the total consideration for securities included in an offer is less than €5 million. Currently the limits are 100 persons and €2.5 million respectively. Fundraisings of up to €5 million will therefore be cheaper and easier, and the ability to invite investment from up to 149 people (not counting qualified investors) may encourage AIM companies and unquoted companies, in particular, to include a retail element in their fundraisings.

In the longer term, prospectuses published in connection with a rights issue or open offer by a Main Market or AIM company, or with an equity fundraising by an SME, will be shorter and cheaper to produce as less information will be needed.

In addition, more companies will be able to offer shares to their EU-based employees without having to produce a prospectus at all.

Background

The Prospectus Directive came into force at the end of 2003 and was implemented in the UK on 1 July 2005, principally through amendments to the Financial Services and Markets Act 2000 (FSMA) and the creation of the FSA's Prospectus Rules. Following a review by the European Commission of how well the Prospectus Directive has been working, an amending Directive (2010/73/EU) was published in the Official Journal of the EU and came into force on 31 December 2010. Among other things, the amendments are designed to simplify the capital-raising process for companies in various circumstances, and to iron out a number of difficulties and uncertainties that have arisen.

UK implementation

Member States have until 1 July 2012 to amend their national laws to implement the amendments. In the UK, this will entail changes being made to parts of FSMA (particularly as to when a prospectus need not be published) and to the FSA's Prospectus Rules. The Government has announced that it intends to implement early two changes which will mean that no prospectus will be needed where:

  • the total consideration for securities included in an offer is less than €5 million (currently the limit is €2.5 million), calculated on an EU-wide basis (currently it is not clear whether it should be calculated on this basis or a country-by-country basis); or
  • an offer is made to fewer than 150 natural or legal persons per Member State, not counting qualified investors (currently the limit is 99 persons).

We understand that the Government intends to consult later this month on introducing these two changes, with a view to them being introduced as soon as possible after the consultation closes.

As yet there is no indication as to when the other changes will be implemented: hopefully the Government will accept that there are compelling reasons to implement them before the deadline of 1 July 2012, although the "light touch" regime described below for rights issue and open offer prospectuses, and prospectuses published by SMEs, will depend on the Commission first publishing appropriate second-tier implementing legislation. The amending Directive also helpfully allows the Commission, by means of a streamlined legislative process, to raise the €5 million and 150 person limits in future.

Mini-prospectuses for rights issues and open offers?

Under a new proportionate disclosure regime, less information will have to be included in a prospectus published in connection with a rights issue or open offer carried out by a company with shares already admitted to trading on a regulated market (e.g. the UK Main Market) or certain multilateral trading facilities (MTFs), including AIM. However, the "light touch" regime will apply only where the offer is made in compliance with the mechanism set out in the Companies Act 2006 (or other national legislation applying to the issuer) for new shares to be offered first to existing shareholders in proportion to their holdings (the statutory pre-emption mechanism). In the UK, such an offer is sometimes known as a "Gazette route" offer, as it is extended to certain overseas shareholders by means of a notice published in the Gazette.

To date, UK practice has generally been for the statutory pre-emption mechanism to be disapplied on a rights issue or open offer for various reasons (including affording the company the flexibility to deal with fractional entitlements of shareholders that arise on pre-emptive offers of shares, and enabling the company to avoid extending the offer to shareholders resident in jurisdictions where the local securities laws would otherwise prohibit or make the offer considerably more difficult and costly to implement). The new light touch regime for Gazette route offers is likely to mean that they become more popular. But issuers that cannot comply with the statutory pre-emption mechanism - e.g. because they have convertibles or warrants in issue whose terms require new shares to be offered to the holders of those securities as if they were shareholders - will not be eligible for the light touch regime and will need to produce a full length prospectus.

Exactly what information will have to be included in a light touch prospectus published in connection with a pre-emptive offer will be clear only when the European Commission adopts suitable implementing legislation. In setting the contents requirements, the Commission will be guided by the European Securities and Markets Authority (ESMA) (formerly the Committee of European Securities Regulators (CESR)). For rights issues, and perhaps open offers, the UK Government will hopefully lobby for the prospectus content requirements to be limited to those proposed by the UK's Rights Issue Review Group in its November 2008 report. In particular, the Review Group recommended that a rights issue prospectus should not have to include:

  • historical financial information about the issuer, an overview of the issuer's business and activities, or details of the issuer's capital resources;
  • details about the issuer's senior management and their remuneration, and board practices; or
  • a summary of the key provisions of the issuer's articles of association, and key takeover rules.

Shorter prospectuses for SMEs and companies with a market capitalisation of less than €100 million

A similar "proportionate disclosure regime" will apply where a prospectus is published by:

  • an SME – i.e. a company that satisfies two of the following three criteria: an average number of employees of less than 250; a total balance sheet not exceeding €43 million; and an annual net turnover not exceeding €50 million; or
  • a company with securities listed on a regulated market that over the last three years has had an average market capitalisation of less than €100 million.

Again, the precise scope of the information that will be required will be specified in second-tier implementing legislation that has yet to be adopted by the European Commission.

Impact of the amendments on employee share plans

As a result of amendments to the existing exemption for employee offers, more companies will be able to offer shares to their EU-based employees without having to produce a prospectus at all. The amendments will particularly benefit:

  • European companies that have securities traded only on an MTF such as AIM, or that do not have securities traded on any market, that want to run substantial employee share purchase plans (such as HMRC-approved share incentive plans) across the EEA.
  • a number of non-EU companies with securities quoted on a non-EU market recognised by the Commission as equivalent to an EU regulated market that have a large number of employees across Europe but are unable to use one or more of the other exemptions - e.g. for free shares or options, offers below €2.5 million (to become €5 million), or offers made to fewer than 100 (to become 150) persons per Member State.

Once Member States have implemented the changes to the employee offers exemption, such European companies will be able to invite all their European employees to participate in an employee share scheme if they simply produce an employee information document containing certain information about the terms and conditions of the offer, the rights attached to the securities, and the number of securities for which employees can apply. But before a non-EU company with securities quoted on a non-EU market can take advantage of the wider exemption and simply publish an employee information document, the Commission must, in addition, and following a request by one or more Member States, formally have recognised the market on which the company's securities are traded as being equivalent to an EU regulated market. This is unlikely to happen for many months.

For further details see our Law-Now article published on 16 June 2010.

Other changes:

  • Financial intermediaries placing or subsequently reselling securities (in a so-called "retail cascade") will be entitled to rely upon the initial prospectus published by the issuer (so that no further prospectus will be required) provided that (i) it is valid and has been duly supplemented; and (ii) the issuer consents to its use.
  • A deadline of two working days for exercising a right of withdrawal will apply across all member states. Currently, the right to withdraw must be "exercisable within a time limit which shall not be shorter than two working days". Although the UK has opted for the minimum of two working days, other Member States have allowed a longer period, which can give rise to uncertainties where securities are offered in several jurisdictions.
  • A prospectus will always have to be published on a website.
  • The definition of "qualified investor" will be amended to extend the scope of the persons to be treated as qualified investors in order to encompass also those natural and legal persons who request to be treated as professional clients under MiFID. This change is designed to make it easier for firms that act as intermediaries to offer securities to their professional clients, as they will no longer have to check that those clients also fall within the definition of qualified investor in the Prospectus Directive.
  • Article 10 of the Prospectus Directive, which broadly requires issuers with securities admitted to trading on a regulated market to file with the competent authorities a document containing or referring to all information they have published or made public in the course of the last 12 months in accordance with legal requirements (which was implemented in the UK through the requirement in PR 5.2 to produce an annual information update) will be deleted.

For background on these issues see our Law-Now article published on 27 February 2009.

Amending Directive

The text of the amending Directive can be found here.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 17/01/2011.

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