With the entry into force of the new financial services act (FINSA) on 1 January 2020, and in addition to the regulation of financial services and their providers, the prospectus law in particular has been standardised for all financial instruments with securities quality. As from 1 December 2020, the new regulation replaces the previous provisions of the Swiss Code of Obligations (articles 652a, 752 and 1156) and from 1 December 2020, the publication of prospectuses approved by the reviewing bodies (SIX Exchange Regulation AG; BX Swiss AG) is mandatory for the public offering of securities if no exemption to publish a prospectus applies.
The new prospectus regime, including its exemptions, is also applicable to bonds and convertible bonds issued in Switzerland. But even if an exemption to publish a prospectus would apply, there are still some important specialities to be taken into consideration in relation to bond offerings in Switzerland and in particular to convertible bonds.
A. Obligation to publish a prospectus
As a general rule, a prospectus according to FINSA must be published if securities are publicly offered or if securities are sought to be admitted to trading on a trading venue in Switzerland. The prospectus obligations do not only apply to primary market transactions but also have to be respected in secondary market transactions if an existing shareholder were to publicly offer shares for sale.
Securities are defined as standardised securities, be they certificated or uncertificated securities, derivatives or intermediated securities, if they are suitable for mass trading. Bonds and convertible bonds do typically qualify as such securities.
B. Exemptions from the Obligation to publish a Prospectus
The new provisions of FINSA provide for various exemptions from the obligation to publish a prospectus, depending on the type of offer and type of offered securities as well as for admission to trading. The most relevant exemptions are:
- if the public offer is addressed at less than 500 potential investors;
- if the public offering provides for a minimum denomination or a minimum investment of CHF 100'000;
- if the public offering does not exceed a total value (meaning the total issue price) of CHF 8 million, calculated over a period of 12 months.
Hence, if a convertible bond is issued and one of the above conditions is met, the issuer could rely on an exemption and would therefore be relieved from the obligation to publish a prospectus.
C. Additional Requirements under Banking Law
Historically, it was an absolute requirement to prepare a prospectus when publicly offering a bond, not only from a corporate, but also from a banking law perspective. The prospectus, if drawn up in line with the Swiss Code of Obligations separated the banking activity of accepting money from the public against payment of interest from the raising of capital through issuance of a bond. As both the prospectus issuance under corporate law as well as the acceptance of funds from the public under banking law were linked to the public offering there was a principal alignment in the protection of the public.
Notwithstanding the new exemptions for the publication of the prospectuses on a corporate level according to FINSA, the lawmakers still see a need for the issuer to provide standardised information to the public from a banking law perspective in all cases of a bond or convertible bond issuance (Art. 5 para. 3 lit. b Banking Ordinance). Accordingly, in the event of an exception under FINSA applying, the issuance of a bond or convertible bond nonetheless requires the publication of certain minimum information in relation to the issuer itself, in particular regarding its financial statements (including audit reports) as well as in relation to certain bond terms and creditor representatives. This information must be published in accordance with the provisions of FINSA when publishing a prospectus.
If no such minimum information is published, the issuance of the bond constitutes a banking activity subject to a license from FINMA. In these cases FINMA could order repayment of the amounts received, issue fines to the persons involved in the issuance or even order the liquidation of the capital raising entity due to it pursuing a banking activity without having the necessary banking license.
D. Key Information Document (KID) Exemption for Convertible Bonds
As a general rule and irrespective of whether or not an exemption to publish a prospectus applies, the offering (both private and public) of financial instruments to retail clients requires the preparation of a so called key information document (KID) in accordance with Annex 9 of the financial services ordinance (FINSO).
However, FINSA provides for certain exemptions, even in the distribution to retail clients. In fact, no KID must be prepared if securities in the form of shares and securities equivalent to shares which confer participation rights, such as participation certificates (Partizipationsscheine) or profit participation certificates (Genussscheine), as well as debt securities without derivative character are offered. Under FINSO convertible bonds actually qualify as securities equivalent to shares such as tradable subscription and pre-emption rights allocated to existing shareholders in connection with a capital increase or the issue of convertible bonds do. Hence, according to the new provisions of FINSA, the issuer does not need to prepare a separate KID if a convertible bond is offered.
Compared to the regulation of the European Union, namely regulation No. 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs Regulation) this seems to be a considerable relief. In July 2018, the Joint Committee of European Supervisory Authorities prepared an analysis on the classification of corporate bonds within the scope of the PRIIPs Regulation and classified convertible bonds to be in the scope of the PRIIPs Regulation. Likewise, the German Financial Supervisory Authority (BaFin) published an information sheet on the regulatory classification of individual features of corporate bonds on the basis of the PRIIPs Regulation. Amongst others, BaFin stated that if a corporate bond has conversion or subscription rights to other securities (e.g. shares), as is the case with (mandatory) convertible bonds and bonds with warrants, these bonds are to be qualified as PRIP.
Consequently, whilst convertible bonds constitute as PRIP under the European Regulation and require the preparation of a KID if offered to retail clients, no KID needs to be prepared if convertible bonds are offered to retail clients in Switzerland.
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.