EU Regulation 2017/1129 (the Prospectus Regulation) came into force in July 2017. It relates to the publication of prospectuses when either an offer of securities is made to the public or securities are admitted to trading on a regulated market. The Prospectus Regulation repeals and replaces Prospectus Directive 2003/71/EC and the old Prospectus Regulation 809/2004. The majority of the provisions of the new Prospectus Regulation will apply with direct effect from 21 July 2019. This means that it does not necessarily need any national transposing measures to be effective.
The old prospectus regime attracted criticism from various commentators, particularly from small and medium enterprises (SMEs) seeking to raise capital. It was said to impose significant administrative burdens for companies. Prospectuses are usually costly and onerous to produce. Prospectuses can also prove too complex for investors who have to process and consider excessively detailed information.
The main objectives of the Prospectus Regulation are:
- the reduction of the administrative burden for issuers when drawing up a prospectus, in particular for SMEs, frequent issuers of all types of securities and secondary issuances
- making the prospectus a more relevant disclosure tool for potential investors, especially when investing in SMEs
- avoiding overlaps between the EU prospectus and disclosure rules
Key provisions of the Prospectus Regulation
Minimum monetary thresholds where a prospectus is required
The obligation to publish a prospectus will not apply to capital raisings and crowdfunding projects, from an offer of securities to the public, where the total consideration in the EU is less than €1 million, calculated over a 12 month period. Additionally, each member state will have the discretion to exempt offers of securities to the public where the total consideration in the EU is less than €8 million, calculated over a 12 month period. This is provided it is not subject to notification under Article 25 of the Prospectus Regulation.
These exemptions will apply from 21 July 2018.
Issuers with securities already admitted to trading
The obligation to publish a prospectus will not apply to an admission to trading on a regulated market where:
- a regulated market issuer wants to admit further securities, or
- shares are issued on conversion or exchange of exchangeable securities. This is provided that in both cases the new securities/shares, as the case may be, represent less than 20% of the number of securities/shares already admitted to trading on the same regulated market
These exemptions apply as of 20 July 2017.
The summary must contain key information such as details on the issuer, securities and the offer of securities to the public and/or the admission to trading on a regulated marker. The summary should be clear and concise and contain specified categories including the most relevant 15 risk factors. The new simplified prospectus will benefit companies by providing more flexibility and less paperwork.
The list of required risk factors is simplified. A prospectus must contain a limited selection of risks which are deemed material and specific to the issuer and its securities. Issuers will be required to assess the materiality of the risk factors based on the probability of their occurrence and the expected magnitude of their negative impact. The risk factors will need to be categorised and, in each category, presented in order of their material risk.
The European Securities and Markets Authority (ESMA) has been tasked with developing guidelines to assist competent authorities in their review of the specificity and materiality of risk factors. The guidelines will also assist in reviewing the presentation of risk factors across categories depending on their nature.
A simplified and standardised prospectus, known as the "EU Growth Prospectus", will be available to SMEs, small issuances by unlisted companies and for non-SMEs where the securities are being admitted to an SME growth market. Issuers making offers to the public of less than €20 million in any 12 month period can avail of this simplified regime.
By 21 January 2019, the EU Commission must adopt delegated acts to supplement the Prospectus Regulation. The delegated acts will specify the reduced content and standardised format and sequence for the EU Growth Prospectus.
Universal Registration Document (URD)
This is a new concept which will allow issuers that draw up a URD each year to benefit from a fast track approval period of five days when seeking approval of a prospectus consisting of separate documents.
Issuers who have a URD approved by the competent authority every financial year for two consecutive years can file subsequent URDs without prior approval, provided one is filed every financial year.
The EU Commission is required to develop and adopt delegated acts and technical standards in a number of areas within 18 months of the Prospectus Regulation coming into force. It has formally requested technical advice from ESMA to prepare these delegated or supplemental acts. ESMA has published three consultation papers:
- Consultation Paper on the format and content of the prospectus (ESMA31-62-532)
- Consultation Paper on EU Growth prospectus (ESMA31-62-649)
- Consultation Paper on scrutiny and approval (ESMA31-62-650)
Consultations on these papers will close on 28 September 2017. ESMA is scheduled to deliver the technical advice to the European Commission by 31 March 2018.
It is hoped that the technical detail adopted in the delegated acts does not add unnecessary complexity to the provisions of the new prospectus regime. Until these delegated acts are adopted and published, it remains to be seen whether the Prospectus Regulation will achieve its objectives to make it cheaper for companies, and in particular SMEs, to access capital and improve prospectus accessibility for investors.
However, the reduction in complexity and reduced specified maximum lengths for prospectuses will be likely to drive production of more focused and clearer documents which will benefit both issuers and market participants generally.
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.