Financial Services Update: The Eagle Has Landed – What Prospectus Regulation Means for Debt Securities Issuers
03 July 2019
With the exception of those provisions that already applied in 2017 and 2018, Regulation (EU) 2017/1129 will become fully applicable across all EU member states from 21 July 2019. The Regulation completely repeals and replaces the previous Prospectus Directive regime, i.e. Directive 2003/71/EC and related instruments.
The Regulation flows from the European Commission’s 2015 action plan for building a capital markets union. In this plan, the Commission stated its intention to modernise the Prospectus Directive to make it cheaper for businesses to raise funds publicly, to review regulatory barriers which effectively barred small firms from listing on equity and debt markets and to support their listing activities through European advisory structures.
The general requirement
The general requirement is for a prospectus to be published and approved by a competent authority where securities are either (i) offered to the public within the EU and/or (ii) admitted to trading on an EU regulated market. Certain general exemptions apply in all cases, while some apply specifically to offers to the public or admission to trading on a regulated market.
The Regulation retains some of the same general exemptions as the Prospectus Directive, such as for open-ended UCITS and securities guaranteed by a member state or one of its regional or local authorities. A key change to the specific exemptions, which applied from 21 July 2018, is that the total consideration threshold for the public offer exemption below which a prospectus is not required has been lowered from EUR 5,000,000 to EUR 1,000,000.
Public offer exemptions
The important wholesale – retail distinction from the Prospectus Directive still remains. That is, public offers with a minimum denomination of EUR 100,000 are exempt from the requirement to publish a prospectus. This exemption does not apply to the requirement for a prospectus for admission to trading on a regulated market.
The exemptions for public offers addressed solely to qualified investors and to fewer than 150 natural or legal persons per member state have also been retained. A key change (which applied from 21 July 2018) is that Member States can choose the threshold of total consideration below which a prospectus is not required for offers to the public in that Member State, provided that it is a minimum of EUR 1,000,000 and a maximum of EUR 8,000,000 (under the Prospectus Directive the limit was set at EUR 5,000,000 for all Member States). In Ireland, the threshold is currently set at EUR 5,000,000 but this may be reviewed in future. In the UK the threshold is set at EUR 8,000,000.
Regulated market exemptions
A useful change here (which has applied since 2017) is that the Regulation now allows issuers to issue share or debt securities which are ‘fungible’ with other securities admitted to trading on the same regulated market, provided that they amount to less than 20% of the number of securities already admitted to trading on such market. The change is that this exemption has been increased from the previous 10% threshold and debt securities are now also included.
New: the prospectus summary
The Regulation introduces new summary requirements, aimed at giving issuers more flexibility than they had under the Prospectus Directive in the way they present information. The new prospectus summary is closely modelled on the key information document (KID) required under the PRIIPs Regulation (1286/2014). In circumstances where issuers have already provided a KID, they may opt to simply include the KID into the prospectus summary. There is an exemption from the requirement for a summary for equity securities admitted to trading on a regulated market, provided that they have a denomination of at least EUR 100,000.
New: the universal registration document
The option of preparing a new universal registration document (URD) is made available for regular issuers of securities admitted to trading on a regulated market or a multi-lateral trading facility. The URD contains issuer-level disclosure such as its organisation, business, financial position, earnings and prospects, governance and shareholding structure. Once the URD has been approved for two consecutive financial years by the competent authority, the issuer may file subsequent URDs without prior approval (provided that at least one URD is filed every year).
New: simplified disclosure for secondary issuances and SMEs
Issuers that have their securities already admitted to trading and that have already published certain information (including information required under the Market Abuse Regulation or the Transparency Directive) will have the option of publishing a simplified prospectus instead of a full prospectus. SMEs and ‘EU Growth’ prospectus issuers will also enjoy reduced disclosure requirements.
It is also worth noting that on 21 June 2019, the European Commission also published a Delegated Regulation (for the purposes of MIFID II) clarifying the requirements an SME issuer must meet to qualify as an SME and for its securities to be traded on an SME growth market, which will apply from 11 October 2019.
New: risk factors
The Regulation aims to make this section more useful for investors assessing risks, as there was a perception that under the Prospectus Directive it was being primarily used a as a risk management tool by issuers who were disclosing risks very broadly.
Issuers should now only outline risks that are material for making an investment decision and which are specific to the issuer. Risks must be evaluated the according to the probability of their occurrence and the magnitude of potential damage. These risks must be presented by category, with the most material risk presented first in each category.
ESMA technical advice and delegated regulations
Having considered ESMA’s technical advice, on 21 June 2019 the European Commission published two delegated regulations to clarify certain provisions of the Regulation, both of which will apply from 21 July 2019:
- Commission Delegated Regulation as regards the format, content, scrutiny and approval of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market; and
- Commission Delegated Regulation with regard to regulatory technical standards (RTS) on key financial information in the summary of a prospectus, the publication and classification of prospectuses, advertisements for securities, supplements to a prospectus, and the notification portal.
In Ireland, the Companies Act 2014 provides that the Central Bank of Ireland (the Central Bank) can make rules to ensure that the provisions of Irish prospectus law are complied with. On 10 December 2018, the Central Bank published a consultation paper (CP 127) to consult on, among other things, amendments to the Central Bank’s Prospectus Rules required by the Regulation. The consultation closed on 11 March 2019 and it is expected that updated Irish Prospectus Regulations will be issued.
Issuers will no longer be able to make their prospectus available to the public by publishing it on the Central Bank’s website. Instead, the proposal is that the Central Bank will publish a list of prospectuses it has approved and include hyperlinks to the websites where they can be found. Issuers will need to provide those hyperlinks to the Central Bank prior to approval, and maintain (or notify the Central Bank of any changes to them) for 10 years after publication of the prospectus.
Significant effort has been put into revising the existing regime. Many provisions of the Prospectus Directive which were considered to be effective have been retained, such as the wholesale exemption. On the other hand, more flexible requirements have been introduced to make the cost of publishing a prospectus proportionate to the size of the fundraising.
It remains to be seen, however, whether the new provisions will strike an appropriate balance between making access to capital markets more cost-effective for issuers while providing adequate disclosure to investors, particularly given the constraints placed on risk factors and the new requirements for prospectus summaries. The effectiveness of the provisions of the Regulation will also depend on how they will be implemented on national level by Member States.
For more information on the Regulation and the potential impact on your organisation’s activities in this regard, contact a member of our Financial Services team.