The Prospectus Regulation (Regulation) was published in the EU Official Journal on 30 June 2017. This was the final step in a process, initiated in early 2015 by the EU Commission, of reviewing the existing prospectus regime with a view to helping smaller companies grow whilst at the same time protecting investors, as part of the Commission’s proposals to create an EU-wide Capital Markets Union.
The Regulation repeals and replaces the Prospectus Directive and related regulations, which have governed the offer of securities in the European Union, and the admission to trading of securities on a regulated market (such as the London Stock Exchange’s main market for listed securities), since 2005. The Regulation will come into force on 20 July 2017 (20 days after its publication). As an EU regulation, the Regulation will be directly applicable in all Member States, to ensure convergence of regulatory standards across the EU. The Regulation will apply to all prospectuses approved on or after 21 July 2019, although certain of its provisions apply from an earlier date, including the two revised admission to trading exemptions which apply from 20 July 2017, as discussed below. The effect of the Brexit timetable on the application of the Regulation to prospectuses to be published on or after 21 July 2019 remains to be seen.
The Regulation requires the new EU Commission and the European Securities and Markets Authority (ESMA) to develop certain implementing rules and standards in the coming months. On 6 July 2017, ESMA published three consultation papers containing draft technical advice on the content and format of the prospectus; the content and format of the new EU Growth prospectus; and the criteria for scrutiny and procedures for approval and filing of the prospectus, with a view to delivering technical advice to the European Commission by 31 March 2018.
The key changes for equity issuers include:
Changes applicable as from 20 July 2017
Admission to trading exemptions – shares and convertibles
A new prospectus will not be required for the admission to trading of shares representing less than 20% of the same class of shares already admitted to trading on the same regulated market, over a 12 month period. This is an increase from the current 10% limit, which will be welcomed by many issuers.
The current conversion/exchange exemption, under which, for example, the issuance of shares on conversion of a convertible bond were exempt up to an unlimited number of shares, will now also be subject to a cap. No prospectus will be required for the admission of shares resulting from the conversion or exchange of other securities where those shares represent less than 20% of the shares of the same class already admitted to trading, again over a 12 month period. (Note that the new 20% cap does not apply to existing convertible or exchangeable securities, which will be “grandfathered” i.e. the cap does not apply where the securities giving access to the shares were issued before 20 July 2017.)
In earlier drafts of the Regulation, these two exemptions had been treated as separate. However, the final Regulation provides that these exemptions cannot be combined together if doing so could lead to the immediate or deferred admission to trading of more than 20% of the same class of shares over the 12 month period. If this 20% threshold is breached by a combination of the issue of shares and convertible or exchangeable instruments, a prospectus will be required.
Changes applicable as from 21 July 2018
Public offer exemptions
No prospectus will be required for offers of securities with a total consideration in the EU of less than €1 million, which is an increase from the current threshold of €100,000. (Member States may impose disclosure requirements at the domestic level for smaller offers, provided they are not unnecessarily burdensome.)
Additionally, individual Member States may exempt domestic offers where the total consideration of each offer in the EU is between €1 million and €8 million. The current limit is €5 million, and each Member State will consult on the threshold to be adopted in that jurisdiction.
Changes applicable as from 21 July 2019
The new Regulation introduces a more prescribed regime for risk factors, representing significant changes to the substance of risk factors. Going forwards, risk factors included in the prospectus must be limited to risks that are specific to the issuer and/or the securities and which are material for taking an informed investment decision. Issuers will be required to allocate risk factors across a limited number of categories depending on their nature, and the most material risks within each category must be mentioned first, with materiality based on the probability of their occurrence and the expected magnitude of their negative impact.
The requirement for summaries to use the “elements” format has been removed. Issuers will have more discretion over the information that they include, within a new format which comprises four main sections – an introduction containing certain warnings; key information on the issuer; key information on the securities; and key information on the offer itself and/or the admission to trading.
Summaries will be shorter, at no more than seven sides of A4 in most cases, and should only contain a maximum of 15 of the most material risk factors. As in the current regime, cross-references to the body of the prospectus remain prohibited.
Proportionate EU growth prospectus for public offers
In order to foster access to the capital markets by small and medium-sized enterprises, a new proportionate disclosure “EU Growth prospectus” for a public offer of securities will be available for SMEs, mid-sized companies (market capitalisation below €500 million) admitted to an SME growth market or for small issues (up to €20 million) by companies which are not already listed on a regulated market.
Accordingly, such a growth prospectus route is not available to companies listed on the Main Market of the London Stock Exchange, but may be available to AIM companies.
Simplified disclosure regime for secondary issuances
A new simplified disclosure regime will replace the current regime for pre-emptive offers. A simplified prospectus will be available for secondary offers where the issuer has had securities admitted to trading on a regulated market or an SME growth market continuously for at least the last 18 months. This is intended to reduce further the disclosure requirements for secondary issuances, given the existing reduced disclosure regime, introduced in 2012, has not been widely used.
Universal Registration Document (URD)
There will be a new form of annual shelf registration mechanism – the URD – for issuers admitted to trading on a regulated market or on a multilateral trading facility (such as AIM). The URD can then be kept current by submitting updates as necessary (subject to the overriding obligation to issue a supplemental prospectus covering any new matters arising where the URD is in use as a constituent part of a prospectus in respect of a live offer of securities or application for admission to trading on a regulated market). After an issuer has had its URD approved by its competent authority for two consecutive financial years, subsequent URDs can then be filed without prior approval (though they will still be open to review by the competent authority). Such issuers would benefit from a faster review process by their competent authority should they wish to conduct an offering.
Incorporation by reference expanded
The Regulation broadens the scope of information that an issuer is able to incorporate by reference into a prospectus, to include (in addition to historic annual and interim financial information) corporate governance statements, asset valuation reports and remuneration reports.
Paul Airley, Partner, Fladgate LLP (firstname.lastname@example.org)
Nigel Gordon, Partner, Fladgate LLP (email@example.com)