The new Prospectus Regulation (EU) 2017/1129 came into effect on 21 July 2019 (the “Prospectus Regulation”) which repealed and replaced the current Prospectus Directive 2003/71/EC (the “Prospectus Directive”). As a result, new prospectuses approved after 21 July 2019, must follow the new regulations and structures of the Prospectus Directive.
The new prospectus regime effectively consists of:
- the Prospectus Regulation;
- the Commission Delegated Regulation (EU) 2019/980 (the “Delegated Regulation”) supplementing the Prospectus Regulation in regards to scrutiny, content, format and approval of the prospectus; and
- the Commission Delegated Regulation (EU) 2019/979 (the “RTS Regulation”) supplementing the Prospectus Regulation in regards to advertisements for securities, regulatory technical standards on key financial information in the summary of a prospectus, the notification portal, supplements to a prospectus and the publication and classification of prospectuses.
THE PROSPECTUS REGULATION
The goal of the revisions to the prospectus summary is to make them more useful and palatable to investors. Clear and non-technical language is mandatory, so it is important that the summary is easy to read and understand. Issuers are still free to include any information that is material and meaningful however, the summary in the prospectus cannot exceed more than seven sides of A4 paper. In addition, the summary must follow a strict format and include the following four sections:
- key information on the issuer;
- key information on the securities; and
- key information on the offer.
In addition, only 15 risk factors are permitted to be mentioned in the summary.
The two main changes to this section are as follows:
- risk factors should only include issues that are necessary for making informed investment decisions and should be corroborated by information published elsewhere in the prospectus; and
- risks must be categorised by their nature, with the most material risk listed first. Beyond this, risks can be listed in any order.
As such, issuers will need to consider this new approach to risk factors when drafting prospectuses and consider the increased liability of mischaracterising a risk and how much information will be needed in light of the new rules. ESMA has released a consultation paper on risk factor guidelines for competent authorities to follow and to ensure a more streamlined approach, so if issuers follow the rules and guidelines they should not be too concerned of falling foul of the new regime.
To view the consultation paper, please click here.
THE RTS REGULATION
A significant amount of the RTS Regulation provided for in the Prospectus Directive carries over into the Prospectus Regulation. The following sets out the key changes:
- issuers have been given more freedom in the forms of tables used to disclose financial information. The RTS Regulation allows issuers to omit items that are not relevant to them or include additional items or alternative performance measures where the issuer deems appropriate;
- hyperlinks are permitted for referenced information as well as other websites, however, for the additional websites, the issuer must acknowledge that the information on the website does not form part of the prospectus, nor that it has been scrutinised or approved by a competent authority;
- in regards to advertisements, the definition has changed. An advertisement now only has to be a “communication” whereas, under the Prospectus Directive, it had to be an “announcement”. What this means is that the scope of the term has been broadened to include things such as bilateral conversations; and
- the RTS Regulation requires that ESMA creates a free platform where the public can access all prospectuses received from Member States competent authorities, including any supplements and final terms. Competent authorities are required to provide this information to ESMA, as well as some statistical data.
THE DELEGATED REGULATION
The following covers a number of non-material changes introduced with respect to the general form and content of prospectuses:
- the requirement for certain prospectuses to include a “selected financial information” section is removed;
- for proprietary index-linked securities, a description of the index in the prospectus is no longer necessary if the index administrator appears in the EU benchmarks register;
- a tax disclosure for each jurisdiction does not need to be included anymore where the securities are being offered. Instead, issuers can use a general tax warning. Particular disclosures are only required where there is a specific tax regime for the securities;
- a legend describing the home Member State’s competent authority’s role in scrutinising and approving the prospectus and claiming responsibility is now required;
- the declaration required by those responsible for the prospectus has changed, requiring individuals to state the information in the prospectus is complete “to the best of their knowledge” rather than “having taken all reasonable care”, a subtle but significant change; and
- historical financial information is no longer required to be displayed. However, the documents containing provisions concerning meetings of subscribers will now need to be available on a website described in the prospectus.
Additionally, if the issuer has published a profit forecast or a profit estimate:
- for non-equity securities, inclusion of the profit forecast or estimate is voluntary;
- for equity securities, inclusion of the profit forecast or estimate is required; and
- for all cases, requirement to include accompanying accountant’s or auditor’s report has been removed.
In regards to retail prospectuses only, the requirement for a description of principal investments and sources of funds since the last published financial information is replaced by a requirement for a description of material changes in the issuer’s borrowing and funding structure and expected financing of the issuer’s activities. Further, the requirement for a description of the issuer’s audit committee and corporate governance regime is removed. And for an issuer subject to the PRIIPs Regulation, the requirement to indicate the amount of any expenses charged to the purchaser is extended to include those expenses contained in the price (to the extent that they are known).
Scrutiny and Approval
Under the Prospective Directive there was no universal standard criteria for the scrutiny of the completeness, comprehensibility and consistency of prospectuses and competent authorities had a significant amount of free reign in their approach to scrutinising a prospectus.
The Prospectus Regulation aims to harmonise and establish a consistent approach across competent authorities for the scrutiny of prospectus. The new key criteria that competent authorities must consider when scrutinising prospectuses for comprehensibility, completeness and consistency include:
- whether or not the prospectus is structured in a way that helps investors understand the concepts within the document;
- whether the table of contents is detailed and clearly laid out;
- whether related information is grouped together;
- whether or not the prospectus defines components of mathematical formulas;
- where applicable if the prospectus clearly describes the product structure; and
- whether or not the prospectus is written in plain language.
As one can see, the overarching principal in the new Prospectus Regulation is for prospectuses to be more clear and accessible to its readers.
Issuers that have been listed for at least 18 months on a regulated market or small and medium sized enterprises (“SME”) growth market are allowed to use a simplified prospectus for secondary issues. The simplified prospectus needs only to contain a summary, a specific registration document, and a specific securities note containing reduced disclosure requirements. Further, a simplified prospectus requires only one year of historical financial information and a working capital statement.
EU GROWTH PROSPECTUS
The new EU Growth Prospectus is available to assist small and growing companies that are looking to raise money across the single market. It is a new term introduced by the Prospectus Regulation and simplifies the prospectus requirements for SME’s. The main benefit of the Growth Prospectus is that it reduces the cost of preparing a prospectus thus, using up less of the funds raised.
As with the above the prospectus must be written in simple language in order to make it easier for issuers to complete. Moreover, the prospectus has reduced content requirements consisting of only a specific summary, specific registration document and specific securities notes.
The new Growth Prospectus will apply to:
- SMEs (i.e. companies with a new maximum market capitalisation of €200 million Euros);
- other issuers traded on an SME growth market with an average market capitalisation of less than €500 million for the prior three years; and
- other issuers where an EU offer does not exceed €20 million over 12 months, provided that such issuer is not traded on an MTF and had up to an average of 499 employees during the previous year.
Qualifying SME companies are therefore allowed to produce an abbreviated and standardised form of a prospectus.
UNIVERSAL REGISTRATION DOCUMENT (“URD”)
This is a new form of a self-registration mechanism for issuers who wish to raise funds through the capital market on a regular basis. The mechanism can be used by issuers whose securities are admitted to trading on a regulated market or on a multilateral trading facility, such as the Alternative Investment Market. If the issuer has a URD approved by a competent authority, this would then allow them to go through a fast track approval process. Further, if the URD has been approved for two consecutive years, then subsequent URDs can be filed or amended without prior approval, significantly reducing the time and cost this would usually involve for issuers.
WHOLESALE DISCLOSURE REGIME
A reduced standard of disclosure is allowed for prospectuses prepared by issuers for admissions to the trading of non-equity securities on regulated markets. However, this only applies to either non-equity securities that only qualified investors have access to, or to non-equity securities that have a minimum denomination of at least €100,000.
Issuers can incorporate a larger range of documents by reference. These documents include all regulated information, management reports, and corporate governance reports. However, the information can only be incorporated into the prospectus if it has been previously or simultaneously published electronically and adheres to the Prospectus Regulation’s plain language requirement.
CROSS-REFERENCE LISTS AND CHECKLISTS
The Financial Conduct Authority (“FCA”) has published new cross-reference lists for issuers to use when submitting documents for FCA approval under the Prospectus Regulation together with new Listing Rules checklists. The new lists are to be used for submissions to be approved on or after 21 July 2019.
To view the Prospectus Regulation rules cross reference lists, please click here.
ESMA has clarified that in the event of a no-deal Brexit, prospectuses and supplements that are approved by the FCA cannot be used in the EU27 Member States. Issuers of equity securities and non-equity securities below €1,000 who currently have the UK as their home Member State must choose a new home member state in the EU27.
Prospectuses and supplements approved in the EU27 will be able to benefit from a grace period in the UK so that any prospectuses that are valid in the UK before exit day (including those approved by a competent authority in a different EU Member State) will remain valid for 12 months after their date of approval (i.e. a grandfathering period). Final terms for issuances into the UK after exit day will need to be filed with both a regulator in the EU home Member State and in the UK with the FCA.
To view ESMA’s Q&A clarifying the prospectus and transparency rules in case of a no-deal Brexit, please click here.
Prospectuses approved by or before 21 July 2019 will have a one year grandfathering period. This is either 12 months after the prospectus was approved, or 12 months after 21 July 2019, whichever comes first. During this time, the Prospectus Directive rules will still apply to validity, supplements, final terms, and passporting. The grandfathering period does not apply to advertisements and other marketing materials as those items will have to follow the Prospectus Regulation.
To view the Prospectus Regulation, please click here.
For more information, and any guidance or advice on drafting your prospectus and the new Prospectus Regulation, Cleveland & Co External in-house counselTM, your specialist outsourced legal team, are here to help.