Equity Capital Markets Update: New Prospectus Regulation to Improve Accessibility to Capital Markets
31 May 2018
The new Prospectus Regulation (EU 2017/1129) which came into force on 20 July 2017 will, through a phased implementation, repeal and replace existing European Prospectus law. The bulk of the changes will apply from July 2019, however, there are a number of changes that took effect in July 2017 and will take effect later this year. We highlight the recent changes and the changes applying from July 2018.
The new EU Prospectus Regulation (EU 2017/1129) (New PR) which came into force on 20 July 2017 will repeal and replace the provisions of the Prospectus Directive 2003/71/EC) (the Prospectus Directive) with effect from 21 July 2019. A small number of provisions of the New PR already apply.
The aim of the New PR is to improve access to capital markets for small and medium businesses (SMEs) by lessening the administrative burden and costs associated with joining a public market. We previously explored in detail the main changes that the New PR will introduce in Equity Markets Update: Good news for SMEs accessing financing on capital markets.
We recap on the changes that took effect in July 2017 and that will take effect later this year below.
Changes applicable since 20 July 2017
A prospectus is not required for the admission to trading of securities representing, over a 12 month period, less than 20% of the same class of securities already admitted to trading on the same EU regulated market. This can be contrasted with the former 10%.
The exemption from the requirement for a prospectus for conversions and exchanges is now subject to a cap. No prospectus is required on the admission of shares resulting from the exchange or conversion of other securities provided those shares represent, over a period of 12 months, less than 20% of the number of shares of the same class already admitted to trading.
The UK Pre-emption Group, which issues guidance and standards on share capital management issued a statement that this 20% exemption will not cause the Pre-Emption Group to introduce any changes or additional flexibility to its principles on the annual dis-application of pre-emption rights. Their 2015 Statement of Principles recommends that the annual dis-application of pre-emption rights be subject to an overall limit of 10%. Of the 10% limit, the first 5% is for general corporate purposes and, when applied for, the second 5% is for use only in connection with an acquisition or specified capital investment.
Changes applicable from 21 July 2018
The exemption for offers with a total consideration in the EU of less than €100,000 over a 12 month period will be repealed.
Changes will be introduced to the size of offers thresholds to determine when companies must issue a prospectus:
- Offers with a total consideration in the EU of less than €1 million, calculated over a 12 month period, will not be subject to the New PR. This represents a change from the current level of €5 million
- Member States may opt to exempt offers if the total consideration of the offer in the EU is less than a specified monetary amount calculated over a 12 month period which must not exceed EUR8 million
The role of ESMA in respect of prospectuses
The European Commission requires the European Securities and Markets Authority (ESMA) to develop and adopt delegated acts and technical standards in a number of areas within 18 months of the New PR coming into force. This has resulted in ESMA publishing a number of consultation papers.
The first set of consultation papers seeking input on draft technical advice were published in July 2017. On 3 April 2018, ESMA published its final report on the technical advice under the New PR arising from the consultation papers. The final ESMA report to the European Commission sets out the changes to the draft technical advice that ESMA proposed in its consultations, including in relation to the following areas:
- format and content of prospectus
- format and content of growth prospectus
- scrutiny and procedures for the scrutiny and approval of the prospectus
Subject to endorsement by the European Commission, the technical advice will form the basis of the delegated acts to be adopted by the European Commission by 21 January 2019. See link to the ESMA: Final Report: technical advice under the Prospectus Regulation for a copy of the final report.
ESMA has published a further consultation paper seeking views on the proposed draft regulatory technical standards it has prepared in accordance with the mandates laid down in the New PR. This consultation date closed on 9 March 2018. ESMA has a mandate to provide technical advice by, 31 August 2018, focusing on documents containing the minimum information required for a takeover by way of exchange offer, a merger or division, together with further advice relating to general equivalence criteria to be applied in respect of the information requirements imposed by third countries.
ESMA has updated versions of its Prospectuses: Questions and Answers (Q&A) in recent months. The intention of these Q&A is to promote common supervisory approaches and practices in the application of the Prospectus Directive and its implementing measures. In October 2017 it published version 27 which made a number of amendments to existing questions and deleted Question 27 on convertible or exchangeable securities which was no longer relevant due to changes introduced in the New PR. A new question 102 was added to the Q&A in version 28 published on 28 March 2018. Question 102 is designed to assist in the identification of profit forecasts.
It remains to be seen whether the New PR will strengthen the role of market-based finance in the European economy and make it easier for European small and medium sized to raise funds publicly. Only time will tell. We will continue to update you with any future developments and publications issued by ESMA.
For more information on the New PR and advice on the changes, contact a member of our Equity Capital Markets team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.