The Prospectus Directive (PD) forms a key role in implementing the EU’s aim of a single EU market in financial services. Its implementation, which must occur in all member states by 1 July 2005, will involve a major overhaul of UK legislation relating to offers of securities to the public and of the Listing Rules. The Public Offers of Securities Regulations 1995 will be repealed, significant changes will be made to the Financial Services and Markets Act 2000 (FSMA) and the FSA will introduce a new source book divided into:-
- Listing Rules - for issuers of securities admitted to the Official List;
- Disclosure Rules - governing the control and publication of "inside information"; and
- Prospectus Rules - specifying the circumstances when a prospectus will be required and the information it must contain.
The FSA will no longer use the name UKLA to describe its competent authority function.
Key changes
Despite the changes, the regulatory framework will, in substance, seem comfortingly familiar from 1 July 2005, at least in relation to the Official List. The key changes effected by implementation of the PD will be that:-
- A prospectus will be required where there is either (a) an offer of securities to the public or (b) the admission of securities to trading on a regulated market, such as the Official List, (AIM is no longer a regulated market - see below);
- All prospectuses must meet specified disclosure standards and be approved by the issuer’s relevant competent authority, i.e. the FSA in the UK; and
- An approved prospectus will provide issuers with a "passport" allowing them to offer securities or seek admission to markets throughout Europe.
The specific minimum disclosure requirements are set out in the EU Prospectus Directive Regulation (which has direct effect in the UK) and will be reproduced in the Prospectus Rules published by the FSA. Apart from the changes required by the move to International Accounting Standards, the minimum disclosure requirements will be similar to the current requirements.
Avoiding the need for a prospectus
The definition of an offer of securities to the public under the PD is very wide and includes "any communication to persons in any form by any means, presenting sufficient information on the terms of the offer and the securities to be offered, so as to enable an investor to decide to purchase or subscribe to these securities." However, there are a number of exemptions which will take an offer outside the prospectus regime. These include:-
- an offer to fewer than 100 people per member state;
- an offer to qualified investors - this is defined slightly wider than under existing legislation; and
- an offer where the minimum subscription commitment is 50,000 euros or more.
These exemptions can be used in conjunction with one another.
In addition, any company seeking to raise less than 2,500,000 euros (in any 12-month period) will also fall outside the prospectus requirements.
A company applying for listing of its securities on the Official List cannot, of course, rely on these exemptions as it is obliged to publish a prospectus by virtue of its application for listing so that the question of whether it is making an offer to the public is irrelevant. The current exemption for a listed company issuing less than 10% of its issued share capital will continue to apply.
Implications for AIM
As AIM is now an "exchange regulated" market rather than a "regulated market", a company coming to AIM will not be required to publish a prospectus (unless it is seeking to offer securities to the public at the time of first admission). The current practice of publishing an admission document is expected to continue.
However, an AIM company will be required to publish a prospectus which must be approved by the FSA if:-
- it offers securities on a takeover; or
- it makes a pre-emptive offer (e.g. by way of rights issue or open offer) of securities to its own shareholders;
- and there is no exemption or combination of exemptions to take it outside the prospectus obligation.
An institutional placing by an AIM company to "qualified investors" will not require a prospectus and we believe this may result in AIM companies seeking to obtain significantly greater pre-emption disapplication authorities.
AIM will continue to be a prescribed market for the purposes of the market abuse regime and Part VIII of FSMA and the FSA’s Code of Market Conduct will continue to apply. There will no longer be a fast track route from AIM to admission to the Official List.
Changes to listing regime
The key features of the new Listing Rules will be:-
- new Listing Principles - these Takeover Code style principles will be enforceable as FSA Rules and are designed to ensure that the spirit, as well as the letter, of the rules is followed.
- the main eligibility criteria will be retained, including three-year revenue earning track record and a working capital statement. However, requirements such as demonstrating independence from a controlling shareholder, directors’ experience and control of assets are to be removed.
- a more flexible approach to the presentation of financial information outside the ambit of the Directive is to be adopted which will allow the use of unaudited financial information as long as it is properly sourced, fairly presented and comparable.
- the Model Code is to be simplified and extended to all persons discharging managerial responsibilities.
- There are no separate chapters for property, mineral or scientific research based companies in the new Listing Rules.
- Chapter 25 on high net worth companies has been removed and no specific replacement provisions included.
Implications for Sponsors
The existing sponsor regime will be retained but the supervision of sponsors by the FSA has been strengthened. Provisions relating to a sponsor’s systems and controls are being expanded to include management of conflicts of interest and record keeping requirements. The sponsor will continue to be required to give certain confirmations to the FSA including as to working capital, financial reporting procedures and, additionally, the issuer’s ability to comply with the Listing Principles.
Further Information
The changes above briefly summarise the most important implications of the Prospectus Directive and the current consultation paper issued by the FSA. Jones Day will be producing a guide to the new regime based on the final enacted legislation and, in the interim, will be holding a series of private seminars for clients and contacts to appraise them in more detail of the proposed changes and their effect. For further information please contact your usual Jones Day contact partner or one of Jones Day London’s corporate finance partners.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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