European Union: Prospectus Directive: The Commission's Proposal For A New Prospectus Regulation

The European Commission, as part of its Capital Markets Union action plan and its commitment to simplify and harmonize EU laws, on November 30, 2015 adopted a proposal for a new prospectus regulation, intended to replace the EU Prospectus Directive 2003/71/EC as amended (the "Prospectus Directive") along with its corresponding implementing measures. The new proposal aims mainly at simplifying the rules for companies wishing to issue shares or debt on the market and reducing the costs of preparing a prospectus, thus fostering cross-border investments in the single market, while at the same time still enabling investors to make informed investment decisions. In addition, transforming the Prospectus Directive into a regulation would serve the purpose of addressing the problems that typically arise in the transposition of a directive and enhancing coherence and integration throughout the internal market, while reducing divergent and fragmented rules across the Union.

The Proposed Changes to the Current Disclosure Regime

The high costs of compliance with the Prospectus Directive, the rigid and "one-fits-all" type of disclosure as well as the insufficient harmonization of disclosure regimes across the EU are the main issues that seem to still hinder the raising of capital on an EU-wide basis and that led the Commission to propose the amendments discussed in this note.

Effective and Focused Disclosure

The proposal includes a number of amendments to the documents, or parts thereof, that issuers are currently required to file with the competent authorities when they wish to raise capital on the markets.

  • The prospectus summary. The current summary would be replaced with a new prospectus summary, closely modeled after the key information document (KID) required under Regulation (EU) No. 1286/2014 (PRIIPS Regulation on key information documents for packaged retail and insurance-based investment products) and subject to a maximum length of six sides of A4 – sized paper when printed. Together with an introductory section containing warnings, the summary would be comprised of three main sections, covering key information on the issuer, the securities and the offer, respectively. The prohibition to incorporate information by reference into the summary will remain, so as to avoid the summary to become a mere collection of hyperlinks and cross-references thus losing its purpose. The liability regime applicable to the prospectus summary would remain unchanged. These changes would allow investors to benefit from a shorter document, from which it would be much easier to grasp the relevant information and which would lead to a considerable reduction in administrative burden for issuers.
  • Risk factors. The risk factors to be included in a prospectus would be limited to risks that are material and specific to the issuers and its securities. They would have to be allocated across a maximum of three distinct categories, based on materiality and the expected magnitude of their negative impact, for the assessment of which by the competent authorities the European Securities and Markets Authority (ESMA) will develop specific guidelines. The aim of this change is to curb the tendency of overloading the prospectus with generic risk factors, which obscure the more specific risk factors that investors should be aware of, and only serve to protect the issuer or its advisors from liability.
  • Incorporation by reference. The proposal broadens the scope of the documents that would be incorporated by reference (e.g., annual and interim financial information, audit reports and financial statements, corporate governance statements, management reports, memorandum and articles of association) provided that the information is published electronically and complies with the language regime set forth by Article 25 of the proposal (e.g., depending on whether the offer to the public is made or admission to trading on a regulated market is sought in the home member state or in one or more than one member state, the prospectus will have to be drawn up in a language accepted by the competent authority of the home member state or either in a language accepted by the competent authorities of those member states or in a language customary in the sphere of international finance). The proposal also goes in the direction of allowing companies that do not fall under the scope of the Transparency Directive (for example, companies whose securities are traded on an MTF) to incorporate by reference all or parts of their annual and interim financial information and management reports.

Small Issuances

  • Exemptions for the smallest capital raisings. The proposal sets out higher thresholds to determine when companies must issue a prospectus. A EU prospectus will not be required for capital raisings below EUR 500,000 (vs. current threshold of EUR 100,000). This change acknowledges that the cost of preparing a prospectus is disproportionate as compared to the proceeds of an offer of securities that is lower than EUR 500,000. Member States will be given the choice to set higher thresholds, provided that the offer is only made in that member state and the total consideration of the offer does not exceed EUR 10,000,000.
  • Lighter disclosure for smaller companies. The proposal, recognizing the need to adapt the disclosure regime applicable to smaller companies to their economic needs, goes in the direction of a lighter disclosure regime applicable to small-to-medium enterprises (SMEs), introducing the possibility for SMEs to prepare prospectuses that are tailor-made when they offer securities to the public, with a focus on information that is material and relevant for companies of such small size. Compared to the existing Annexes XV to XXVIII of Regulation (EC) No 809/2004 further alleviations will be introduced, so as to ensure proportionality between the company size and the cost of preparing a prospectus. The proposal also introduces an optional format of the prospectus for SMEs, which can take the form of a "question and answer" disclosure document (the details of which will be included in the delegated acts). ESMA will be empowered to develop guidelines helping SMEs to draw up a prospectus under the new format. The proposal also raises to EUR 200 million (from the current EUR 100 million) the threshold of market capitalization below which SMEs can benefit from this lighter disclosure regime. This new regime will apply to SMEs provided that they have no securities already admitted to trading on a regulated market so to avoid creating a two-tier disclosure standard on markets, which might undermine investor confidence.

Simplifications for Secondary and Frequent Issuers

  • Secondary issuers. The proposal provides an alleviated disclosure regime for offers or admissions concerning securities issued by companies already admitted to trading on a regulated market or an SME growth market for at least 18 months, allowing these companies to only focus on essential disclosure when they wish to tap the capital markets. This change recognizes that secondary issuance prospectuses represent the vast majority of all approved prospectuses in a given year and tries to provide more flexibility and less paperwork for such companies, thus reducing costs and making disclosure more relevant for investors. In addition, such companies are already subject to ongoing disclosure requirements under the Market Abuse Regulation and either the Transparency Directive or the rules of the operator of the SME growth market. The alleviated prospectus is proposed to contain minimum financial information covering the last financial year only (which may be incorporated by reference), as well as information that issuers are not otherwise currently required to disclose on an ongoing basis under the Market Abuse Regulation and the Transparency Directive Regulation (such as the terms of the offer, use of proceeds, risk factors, board practices, directors' remuneration, shareholding structure or related-party transactions).
  • Frequent issuers. The proposal sets out a quicker and simplified disclosure regime for companies that frequently tap the capital markets that are admitted to trading on regulated markets or multilateral trading facilities, to be implemented through (i) the use of a "universal registration document" ("URD"), and (ii) a reduction in the prospectus approval time. The URD consists of an optional shelf registration mechanism, whereby issuers would draw up every year a complete registration document containing all the necessary information on the frequent issuer, to be filed with the competent authority. When required to then prepare a prospectus to carry out a capital market transaction, such issuers would be awarded "fast-track" approval with the competent authority. In fact, since the main part of the prospectus would have either already been approved or would be already available for review by the competent authority, the authority should be able to scrutinize the remaining documents (securities note and summary) within five working days, instead of ten. In addition, issuers that have received approval for a URD for three consecutive years would be considered "well-known" to the competent authority, and therefore any subsequent URD should be allowed to be filed without prior approval and reviewed on an ex-post basis by the competent authority. In furtherance of the foregoing, the proposal also allows frequent issuers admitted to trading on a regulated market, under certain conditions, to fulfill their ongoing disclosure obligation under the Transparency Directive by simply integrating their annual and half-yearly financial reports into the URD, this way avoiding duplicative requirements and concentrating the information investors need in one single document which is updated at least every year. This approach acknowledges that currently only a very small percentage of prospectuses benefit from approval periods shorter than ten days and the incremental burden that this creates to issuers in a volatile market environment, where market windows are generally very short. Such change also recognizes the need to alleviate the incremental burden of disclosure on frequent issuers, which is however counterbalanced by the supply to their investors and analysts on a recurrent basis of a minimum set of information needed to make an informed judgment on the company's business, financial position, earnings and prospects, governance and shareholding, including at a time when the issuer is not carrying out an offer to the public or requesting the admission of its securities to trading.

Non-equity Securities Issuance Documents

  • Bond issuances. The EUR 100,000 denomination is used in the current disclosure regime to distinguish wholesale and retail disclosure regimes as well as to provide a prospectus exemption for offers of non-equity securities. This regime appears to have created unintended distortions in the European bond markets in that it makes a significant portion of bonds issued by investment-grade companies inaccessible to a wider number of investors. The proposal, therefore, removes the EUR 100,000 exemption for retail offers of non-equity securities and introduces a uniform prospectus requirement for bond issuances, irrespective of its minimum denomination, thus trying to provide an incentive to issuers of debt securities to choose minimum denominations that make their bonds more attractive to a wider range of investors, and as a consequence, remove a barrier to secondary liquidity on the European bond markets.
  • Base prospectus. Although the functioning of the base prospectus under the new proposal would remain the same, the following changes would be implemented: (i) issuers would be allowed to prepare a base prospectus for any kind of non-equity securities (and not only for those issued under an offering programme or in a continuous and repeated way by credit institutions); and (ii) issuers would be allowed to use a "tripartite" base prospectus, and the registration document forming part of it would represent a URD. The new proposal would also remove the obligation to draw up a summary of the base prospectus when the final terms are not contained therein, and issuers would only have to prepare and file the summary containing the information relevant for the offer when the final terms are filed.

How and Where Will Disclosure Information be Made Available to Investors

The proposal also sets forth a series of changes and simplified procedures relating to the dissemination of the disclosure documents.

Publication of the Prospectus

The prospectus will be deemed available to the public when published in an electronic form on either (i) the website of the issuer; (ii) the website of the financial intermediaries conducting the offer; or (iii) the website of the regulated market where the admission to trading is sought, or of the operator of the MTF, where applicable. The proposal also removes two of the options provided under the Prospectus Directive for publishing an approved prospectus (i.e., by insertion in one or more newspapers and in a printed form to be made available, free of charge, at the registered office of the issuer), while maintaining the requirement to provide a free paper copy to anyone who requests it. Based on the Commission's proposal, ESMA will develop an online storage mechanism with a search tool that EU investors may use for free.

Single Access Point for all EU Prospectuses

ESMA will have to provide for the first time free and searchable online access to all prospectuses approved in the European Economic Area. Investors will therefore have a single portal where they can find information on companies that have listed shares or corporate bonds on markets where the general public can invest, instead of going through local searches. This will facilitate research, enforcement and increase the efficiency of prospectus pass-porting.

Next Steps and Transitional Regime

The draft regulation has been sent to the European Parliament and the Council of the EU for discussion and adoption under the co-decision procedure. The regulation will enter into force on the twentieth day following its publication in the official journal and will apply from the date that is 12 months after its entry into force. A number of delegated acts will need to be adopted by the Commission and draft regulatory and technical standards and guidance will need to be developed by ESMA in respect of various provisions of the new regulation. The Commission will monitor the impact of the new regulation in co-operation with ESMA and national competent authorities on the basis of the reports on prospectuses approved in the EU, which ESMA will be empowered to prepare every year.

The proposal contains a specific transitional clause for prospectuses approved in accordance with the Prospectus Directive before the date of entry into application of the proposed regulation: those prospectuses will continue to be governed by the Prospectus Directive.

Challenges and Major Concerns

More than ten years have passed since the Prospectus Directive has been originally issued, thousands of prospectuses have been approved by Member States authorities and many different types of transactions have been carried out in the European capital markets. This proved to be a considerable set of information for assessing the level of harmonization and efficiency among the different Member States' systems and the effectiveness of the disclosure regime towards investors.

The main concern related to the "new" disclosure regime is how the simplifications introduced by the Commission's proposal will fit in the "old style" disclosure regime: i.e., does lighter disclosure mean less protection for the investors? The first-hand answer is no. In fact, the consultation conducted by the Commission before issuing its proposal highlighted the length of the prospectuses as a minus in the disclosure regime, as well as the fact that such prospectuses are often drafted with the objective to address potential legal liabilities of the issuers rather than to inform investors in a proper way, which seemed to run opposite the objective of allowing investors to make informed decisions. The attention, therefore, should not be on the fact that the new proposal lightens and reduces the old disclosure regime, but rather on the fact that it tries to focus the disclosure on areas that are relevant for each different type of investment. The whole purpose of the proposal for the new regulation is to make the key disclosure document for investors more accessible and easier to understand, so to provide clear and comparable information to investors across Europe, and help them fully understand the business and the offer they are investing in. Obviously, whether the new proposal will achieve such a goal is difficult to predict now and will necessarily be confirmed after the new regime takes effect.

Similarly, and by looking at the matter from a different angle, one might wonder whether this "simplified" disclosure regime raises the liability profile for issuers and underwriters or whether it changes the standard which issuers are required to attain. Under the new proposed regulation, the standard of liability remains unchanged for issuers and focused on its ultimate purpose of making available to investors "the information which, according to the particular nature of the issuer and of the securities offered to the public or admitted to trading on a regulated market, is necessary to enable investors to make an informed assessment of the assets and liabilities, financial position, profit and losses, and prospects of the issuer and of any guarantor, and of the rights attaching to such securities." What will need to change is therefore the way in which issuers, with the guidance of the Commission and the ESMA, look at what such "information" really is, and how to present it to investors. Again, it is too early to determine whether this purpose will be achieved through the proposed changes.

From a procedural stand-point, it is still somewhat unclear what the role of the Member States' authorities and of their implementing rules and regulations (both the existing ones and the ones that would be necessary) will be in light of the new regulation. In particular, it is not clear whether local laws will have to be modified or altogether repealed to the extent they do not reflect the terms of the proposed regulation and what rule-making responsibilities the regulators of each Member State will retain.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.