The Prospectus Directive (2003/71/EC) (the “Current Prospectus Directive”), as supplemented by the current Prospectus Regulation (EC No. 809/2004) (the “Current Prospectus Regulation, together with the Current Prospectus Directive, the “Current Prospectus Regulation”) provides for a single regime throughout the EU governing the content, format, approval and publication of prospectuses.
The Current Prospectus Directive requires a prospectus to be published where either an offer of transferable securities is made to the public or securities are admitted to trading on a regulated market.
The Current Prospectus Regulation prescribes the form and content of a prospectus required by the Current Prospectus Directive. Transferable securities are defined as those classes of securities which are negotiable on the capital market, with the exception of instruments of payment, such as:
- shares in companies and other securities equivalent to shares in companies, partnerships or other entities, and depositary receipts in respect of shares;
- bonds or other forms of securitised debt, including depositary receipts in respect of such securities; and
- any other securities giving the right to acquire or sell any such transferable securities or giving rise to a cash settlement determined by reference to transferable securities, currencies, interest rates or yields, commodities or other indices or measures
The Current Prospectus Regulation has been repealed and replaced by a new Prospectus Regulation (EU) 2017/112 (the “New Prospectus Regulation”). The New Prospectus Regulation which entered into force on 20 July 2017 repeals the Current Prospectus Directive with effect from 21 July 2019, save for a few provisions which applied from 20 July 2017 or 21 July 2018. As it is an EU regulation, the New Prospectus Regulation will have direct effect in EU members states without the need for national implementing legislation. As the New Prospectus Regulation will not apply retroactively securities with prospectuses that are compliant with the Current Prospectus Directive prior to 21 July 2019 will be grandfathered.
In this note we will discuss which provisions of the Current Prospectus Directive will remain and what changes take effect once the New Prospectus Regulation is fully applicable.
Key provisions of the New Prospectus Regulation
- Exemption from the requirement to publish a prospectus for a public offer of securities with total EU consideration less than EUR 1 million over 12 months. Effective on 21 July 2018, under the New Prospectus Regulation, no prospectus will be required for an offer of securities with a total consideration of less than EUR 1 million over a period of 12 months.
- Exemption from the requirement to publish a prospectus for a public offer of securities with total EU consideration less than EUR 8 million. Effective on 21 July 2018, the threshold beyond which a prospectus is mandatory is increasing from EUR 5 million to EUR 8 million. In addition, EU member states may exempt offers of securities to the public where the total consideration of each offer in the EU over a period of 12 months is between EUR 1 million and EUR 8 million.
- Retention of the EUR 100,000 debt securities minimum denomination safe harbour from the requirement to publish a prospectus. Effective as of 21 July 2019. The New Prospectus Regulation retains the safe harbour for debt securities issues in denominations greater than EUR 100,000 in addition to other safe harbours such as offers of debt securities solely to qualified investors or to fewer than 150 qualified investors or where the total consideration from each investor is less than EUR 100,000.
- Exemption from the requirement to publish a prospectus for certain convertible and exchangeable securities. Effective since 20 July 2017, the New Prospectus Regulation imposes a 20% limit on the exemption available for shares resulting from the conversion or exchange of other securities, which had no such limit under the Prospectus Directive.
- Exemption from the requirement to publish a prospectus for additional issuance of less than 20% of existing listed securities. Effective since 20 July 2017, the New Prospectus Regulation will permit issuers with existing securities admitted to trading on a regulated market to admit additional securities of the same class on the same regulated market without publishing a prospectus provided that the newly admitted securities are the same class, traded on the same regulated market and represent less than 20% of the existing securities. Under the Prospectus Directive, this exemption was limited to equity securities representing a maximum of 10% of outstanding shares.
- Retention of the EUR 100,000 distinction between wholesale and retail issues for disclosure purposes. Effective as of 21 July 2019. The New Prospectus Regulation retains the requirement under the Prospectus Directive that retail bond issues must have a higher level of disclosure than wholesale bond issues, which are issued in minimum denominations of EUR 100,000 and are targeted to institutional investors.
- Categorisation of risk factors. Effective as of 21 July 2019. Under the New Prospectus Regulation, issuers are required to categorise risk factors according to their materiality whereas under the current rules, prospectuses must set out risk factors relating to the issuer’s ability to fulfil its payment obligations under the securities and including the risk factor in the prospectus is based on whether the risk is ‘material to making investment decisions.
- Retention of prospectus summaries. Effective as of 21 July 2019. The New Prospectus Regulation retains the concept of summaries but they are to be shorter and more prescriptive. The New Prospectus Regulation does not require a summary for debt securities trading on a regulated market that either has a minimum denomination of EUR 100,000 or is traded on a specific segment of a regulated market that is limited to qualified investors. Summaries need to contain 4 sections: (1) an introduction containing warnings; (2) key information on the issuer; (3) key information on the securities; and (4) key information on the offer of the securities to the public and/or admission to trading. Under the New Prospectus Regulation, summaries must set out the 15 most material risk factors specific to the issuer and the guarantor, if applicable. The format and length of summaries shall be similar to those of KIDs.
- Introduction of the shelf registration disclosure. Effective as of 21 July 2019. The New Prospectus Regulation adopts the concept of ‘shelf registration’, which will allow issuers that are listed on a regulated market or multilateral trading facility to file an annual universal registration document (“URD”) to be approved even where they do not intend to immediately offer or list securities. URDs will set out all relevant information on the issuer and its business.
- Expansion of the range of information that can be incorporated by reference into a prospectus. Effective as of 21 July 2019. The New Prospectus Regulation widens the range of information that may be incorporated by reference, including (1) information in existing prospectuses, supplements and final terms; (2) regulated information under the Transparency Directive and Market Abuse Regulation; (3) annual and interim financial information, audit reports and financial statements; (4) asset valuation reports; and (5) memoranda and articles of association.
- Clarification of the prospectus publication process. Effective as of 21 July 2019. The New Prospectus Regulation details what is sufficiently ‘public’. The prospectus must be published on a dedicated section of an easily accessible website, downloadable, printable and searchable in electronic format.
- Expansion of the SME disclosure regime. Effective as of 21 July 2019. The New Prospectus Regulation introduces an “EU Growth” prospectus which is geared towards SMEs that do not have securities trading on a regulated market. SME’s will benefit from less stringent disclosure rules. Under the Prospectus Directive, a prospectus is not required for securities listed on a multi-lateral trading facility, provided they are not offered to the public and this exemption has been retained in the New Prospectus Regulation.
- Expansion of retail cascades and secondary issues. Effective as of 21 July 2019. As is the case under the Prospectus Directive, under the New Prospectus Regulation, a prospectus will be valid for up to 12 months for retail cascades provided that it is supplemented and the issuer consents in writing to its use by financial intermediaries for resale. Issuers will also have the option to draw up a simplified prospectus and securities note for secondary market issuances where its securities have been admitted to trading on a regulated market or SME growth market continuously for at least 18 months and it issues more securities of the same class.
Ron is a partner at Cummings Fisher and heads the derivatives and documentation practice. Drawing on his work in private practice with buy-side clients and in house at investment banks, he has broad experience in providing legal advice in relation to derivatives and structured finance transactions, prime brokerage and asset custody arrangements.
If you would like to discuss any of the points we raise, please contact me or one of our other lawyers.
Phone: +44 (0)207 861 4170