European Union: Brexit: Some Initial Thoughts On Prospectus Requirements For Issuers Offering Financial Securities In The UK/EU

Last Updated: July 8 2016
Article by Peter Green and Jeremy C. Jennings-Mares

The United Kingdom has voted in a referendum by a narrow majority to leave the European Union ("Brexit").

The outcome of the referendum will have far-reaching consequences on financial markets and international capital raising. This Briefing sets out some initial thoughts on the potential impact of Brexit on issuers and distributors of financial securities in the context of the prospectus requirements applying to offers of financial securities in the UK and rest of the EU.

Effect of Brexit Vote

The referendum result is advisory only and therefore has no automatic effect under UK or EU laws. For the time being, the UK remains a member of the EU and subject to the EU treaties. All existing EU-derived laws and regulation continue to apply in the UK. However, the UK government has stated that it intends to give effect to the result of the referendum. The UK will need to commence the process of its exit from the EU by serving a notice of its intention to leave the EU under Article 50 of the Lisbon Treaty ("Article 50 Notice"). Once the Article 50 Notice is served, the UK will have two years to negotiate and agree the terms of its exit. The terms would need to be approved by a qualified majority of the European Council (excluding the UK), and the consent of the European Parliament. If no agreement is reached within such two-year period, or any extended period agreed by all member states, the UK would automatically cease to be a member of the EU.

There is no prescribed timescale for the UK to submit its Article 50 Notice and it is not currently expected to be presented to the EU Council of Ministers until sometime after David Cameron's successor as Prime Minister has been appointed. This is currently expected to happen by early September 2016.

A key issue in determining the effect of Brexit on the issuance and distribution of financial securities is the legal and trading relationship put in place between the UK and the EU following Brexit and, in particular, if and the extent to which the UK will continue to have access to the EU single market after leaving the EU. We do not consider in detail in this Briefing the various options that the UK may seek to pursue in this regard. It is, however, worth noting that the option that would cause the least disruption in the context of financial regulation is what has been termed the "Norwegian model". Under this model, the UK would leave the EU but remain a member of the European Economic Area ("EEA") and the European Free Trade Area ("EFTA"). This would continue to give the UK access to the EU single market, but it would also require the UK to make financial contributions towards the EU without having any right to participate in EU rule-making and would require the UK to be bound by many of the rules of the EU which have been unpopular with Brexit supporters, including the free movement of people. The general view of market and political commentators at the moment is therefore that this route is unlikely to be the favoured route of the UK government in Brexit negotiations. Such option would, however, have a relatively small impact on EU financial regulation, as the vast majority of such regulation applies to EEA members.

It is currently regarded as more likely that the UK will seek to pursue a free trade agreement model with the EU along the lines of the free trade agreements between the EU and South Korea, and the EU and Canada, which would preserve some access to the EU single market. However, these agreements took many years to agree and it would seem ambitious to expect arrangements between the UK and the EU to be agreed within a two-year period. These agreements also do not provide access to the EU single market for financial services in any material way. Having regard to the scale and importance of the financial services market to the UK, preserving the UK's access to such market is likely to be an important objective in its negotiations with the EU. The extent to which this can be achieved is, however, very uncertain at present.

The Existing Prospectus Directive

The Prospectus Directive ("PD") imposes form and content requirements for prospectuses in respect of offers of financial securities to the public in the EU or where the issuance is listed on an EU-regulated exchange. Where the securities are not listed on a regulated exchange in the EU, there is an exemption from the need to prepare a PD-compliant prospectus in certain cases. The most commonly used exemption at present is for securities with a denomination of at least €100,000. Other exemptions include offers to qualified investors (primarily institutional and professional investors) and offers made to fewer than 150 persons, other than qualified investors, per member state.

Before securities within the scope of the PD can be offered to the public in the EU, a PD-compliant prospectus must be approved by the competent authority in the issuer's "home member state". Following such approval, the issuer can take advantage of "passporting" provisions and offer the securities across all EU member states without the requirement for any further authorisations.

Assuming that the UK does not remain a member of the EEA following Brexit, subject to the Brexit terms agreed between the UK and the EU, the PD will cease to apply to the UK (and the rest of this Briefing assumes this to be the outcome following Brexit). The UK will therefore need to decide whether to replicate the PD (or if it has then come into force the new Prospectus Regulation referred to below) into UK law. UK law currently implements the existing provisions of the PD, so this should not be a major exercise. In view of the amount of other issues the UK will need to deal with in relation to Brexit, it would seem unlikely that making changes to the current approach to prospectus regulation will be high on its list of priorities. In addition, many issuers of financial securities seek to distribute them to investors in both the UK and the rest of the EU. It would be highly undesirable for such issuers to have to comply with two different sets of prospectus requirements. We therefore believe it is very likely that immediately after Brexit, the UK rules in relation to prospectuses for offers of financial securities will be consistent with those then applying in the EU.

However, even if the UK does replicate the PD following Brexit, the UK Financial Conduct Authority as the UK Listing Authority (the "UKLA") will cease to be a relevant competent authority for the purpose of the PD. Issuers of securities into the EU would therefore not be able to utilise the UK as their home member state and would have to seek approval of the prospectus of its "home member state" within the EU. For issuers of non-equity securities with a denomination of at least €1,000, the issuer has a choice of its home member state–the home member state can be either the jurisdiction in which it has its registered office (if in the EU) or a member state where the securities are admitted to trading or offered to the public. Therefore, absent any special agreement between the UK and the EU following Brexit, it is likely that the issuers of securities offering those securities in the UK and elsewhere in the EU would be faced with obtaining approval by both the UKLA and a competent authority within the EU. Provided that the UK continues to have in place regulation identical or very similar to the PD, then under the PD, other EU competent authorities will have the power (but not the obligation) to approve a prospectus drawn up by a UK issuer on the basis that it has been drawn up in accordance with international standards equivalent to the PD.

Because the Main Market of the London Stock Exchange would cease to be an EU-regulated market for the purposes of the PD following Brexit, any securities listed on that market would not automatically require a PD- compliant prospectus to be approved by an EU competent authority even if offered in the EU. Therefore, if in these circumstances an appropriate exemption to the PD applies, it would be possible for the issuer to avoid the need for approval of the prospectus by an EU competent authority (although it may still need to be approved by the UKLA if the UK replicates the PD into UK law).

The New Prospectus Regulation

The issues relating to prospectus approval in the aftermath of Brexit are somewhat complicated by the potential implementation of the draft Prospectus Regulation prior to Brexit. The draft Regulation forms part of the EU's Capital Markets Union ("CMU") Action Plan aimed at encouraging further access to the EU capital markets. The proposed Prospectus Regulation will significantly overhaul the PD. The more significant changes include:

  • the current "wholesale" exemption for debt securities with a denomination of at least €100,000 referred to above will be abolished. However, the other exemptions will be largely unchanged including the current exemption related to offers of securities addressed to investors who acquire securities for a total consideration of at least €100,000 per investor for each separate offer;
  • the requirements in relation to prospectus summaries are significantly overhauled and will be required for all prospectuses (they are not currently required for securities with a denomination of at least €100,000);
  • the introduction of a "Universal Registration Document" intended to be a shelf regulation mechanism similar to that used in the U.S. which will apply to frequent issuers admitted to trading on a regulated market or MTF in the EU;
  • a new minimum disclosure regime for SMEs and other companies with a market capitalisation not exceeding €200 million;
  • non-EU issuers seeking approval of a prospectus under the new Regulation (which will include the UK after Brexit) must appoint a representative established in the issuer's home member state which will, together with the non-EU issuer, be responsible for compliance with the Prospectus Regulation; and
  • various changes related to content, including detailed rules relating to risk factors.

The draft Regulation was published by the EU Commission back in November 2015 and is currently going through the EU legislative process. We understand that, prior to the Brexit referendum, the EU Commission hoped that the Regulation could be adopted by the relevant EU institutions and come into force by the end of 2016 or early 2017. The current draft of the Regulation provides that its provisions will become effective one year after the Regulation comes into force. On this basis, the new Prospectus Regulation may well be in force prior to the finalisation of the Brexit arrangements.

In this regard it should be noted that in the aftermath of the Brexit vote, some doubt has been cast on the future of the CMU, including the new Prospectus Regulation, particularly as this was an initiative led by Lord Hill of the UK as EU Commissioner for Financial Stability, Financial Services and Capital Markets Union, who immediately tendered his resignation following the referendum result. However, although the CMU had strong support from the UK, it is an initiative supported by many other EU member states. It is therefore far from certain that there will be any significant delay in the various elements comprising the CMU. In particular, the new Prospectus Regulation was not regarded as one of the more controversial elements of the CMU with many jurisdictions advocating an overhaul of the PD.

Assuming that the Prospectus Regulation does come into effect before Brexit, this would simplify the UK's approach, assuming it decides to seek to replicate the EU's rules in relation to prospectus regulation. Otherwise it would potentially be in the position of taking necessary steps to ensure that provisions equivalent to the PD continue to apply under UK law, and then having to amend the legislation to reflect the provisions of the Prospectus Regulation once it comes into force.

Concluding Remarks

The whole issue of prospectus regulation is therefore subject to a number of uncertainties in the context of Brexit, and it will not be possible for those involved in securities issuances to undertake any detailed planning their approach in the future until the UK serves the Article 50 Notice and there is much greater clarity as to the basis on which the UK will leave the EU and its future relationship with the EU, particularly in relation to financial services. Firms should, however, at some time over the next few weeks and months start to give some thought as to how their future debt securities issuances will be managed in the UK and the EU following Brexit.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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
Peter Green
Jeremy C. Jennings-Mares
 
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.