Changes to the EU’s Prospectus Regime: the new Prospectus Regulation

Introduction

  • EU Regulation 2017/1129 and its Delegated Regulation (dated 14 March 2019) come into force on 21 July 2019 in full, replacing the previous prospectus regime.
  • The principal purpose of the reforms is to make it easier and less costly for businesses to access the capital markets by reducing the regulatory burden on issuers, and in particular on SMEs. The new rules allow (among other things) for shorter prospectuses and faster approval times. The reforms are also intended to enable investors to better understand investments by requiring statements in prospectuses to be clearer and more specific.
  • The FCA is revising its handbook in accordance with the new regime, which will include its new Prospectus Regulation Rules.

The key changes

Changes to risk factors

  • The new presentation of risk factors may well have the greatest practical impact.
  • This new approach will also be imported into AIM admission documents under the revised AIM Rules for Companies.
  • Risks must be specific, material for making an informed investment decision and corroborated by information in the rest of the prospectus.
  • Materiality is to mean a combination of probability and magnitude.
  • Risks are to be categorised by their nature -such as those relating to the issuer’s business and sector; legal and regulatory; risks relating to the securities; and those relating to listing.
  • The most material risk must be placed first in each category. No more than 10 categories should be identified.
  • Generic risks and mitigation or disclaimers will not be accepted.
  • Quantitative and qualitative information to explain the potential negative impact of the risk is encouraged.
  • The summary of the prospectus must include no more than 15 risk factors.
  • Therefore issuers must properly consider and tailor risk factors to:
    • Establish appropriate categories
    • Apply a weighting so as to identify the most material risk in each category, and select the 15 most material for inclusion in the Summary
    • Ensure a clear and direct link is established between the risk factor and the disclosures in the prospectus; and
    • Delete or refine risk factors failing the new tests.

Three new reduced disclosure regimes

Growth prospectus

  • SMEs making a public offer have the option to prepare an EU growth prospectus which includes less information.
  • Eligible companies include:
    • SMEs (as defined)
    • Companies listed on (or applying to) an SME growth market (ie multilateral trading facilities such as the LSE’s AIM market (AIM) and the NEX Exchange Growth Market (NEGM)) if valued below €500 million; and
    • Unlisted companies with fewer than 500 employees and whose offer is below €20 million;

In each case provided their securities are not listed on a regulated market.

  • The prospectus for these eligible issuers (for an equity offering) will be limited to the following sections:
    • Summary
    • Persons responsible
    • Strategy, performance and business environment
    • Risk factors
    • Corporate governance
    • Financial information and KPIs;
    • Shareholder information; and
    • A working capital statement will only be required for issuers valued over €200 million.
  • Since July 2018, no prospectus has been required for a UK public offer if the consideration is not more than €8 million in a 12 month period (and offers below €1 million are outside the prospectus regime).

Secondary offerings can be made using a simpler prospectus

  • This will be available to companies that have been listed on a regulated market or SME growth market (including the Main Market, AIM and NEGM) for at least 18 months, in the case of an offer of securities to the public or of an admission to trading of securities on a regulated market.
  • The prospectus is to include:
    • Financial statements covering the last 12 months
    • A summary of MAR disclosures over last 12 months
    • Risk factors; and
    • Statements on capitalisation and debt, working capital, related party information and major shareholders.
  • Since July 2017, issuers have been able to issue and list on a regulated market (such as the Main Market) additional securities representing up to 20% of existing issued securities over a 12 month period without needing a prospectus (including securities arising from the conversion or exchange of other securities). The July 2018 increase of the public offer exemption to €8 million in any 12 month period is also applicable to secondary offers.

Frequent issuers may file an annual universal registration document (URD)

  • This will allow fast track approval of a prospectus.
  • If a URD has been approved in 2 consecutive years future annual URDs need not be approved; and
  • It will be available to companies listed on a regulated market or SME growth market (including the Main Market, AIM and NEGM).

Conclusions

  • These reforms, together with those already enacted in 2017 and 2018, will somewhat lighten the regulatory burden, in particular on smaller companies, in transactions where a prospectus is, or would previously have been, required and will therefore be welcomed by the market.
  • It is possible, for example, that AIM and NEGM companies may decide to take advantage of the growth market prospectus regime to access the market by making a larger non pre-emptive open offer to shareholders.
  • Further, the removal of the need for a working capital statement in relation to SME growth market transactions will inevitably reduce the costs of such an exercise, and we note that NEX Exchange is consulting whether to remove the requirement from its NEGM admission documents.

View by author:


Would you like to hear more?