Directive 2003/71/EC, as amended (the Prospectus Directive) served the market well in laying down a harmonised framework on how a prospectus is to be drawn up, approved and published when securities are offered to the public or admitted to trading on a regulated market. The Prospectus Directive was then supplemented by Commission Regulation (EC) 809/2004 (the Old Regulation), which set out, among other things, the specific disclosure requirements to be included in a prospectus. In addition to a number of other supplementary Regulations issued over the years, the Prospectus Directive was also amended in 2010.
Notwithstanding all of these supplements and amendments to the original Prospectus Directive, European legislators felt it necessary to overhaul and replace the existing framework to better address ever-changing market developments while making it easier and cheaper for companies to access capital. For example, the Regulation aimed to introduce simplification and flexibility for all types of issuers and introduced a retail investor-friendly summary of key information.
The Prospectus Regulation represents a significant part of the European Commission’s Capital Markets Union Initiative (CMU). The CMU project aims to develop a more diversified financial system with deep and developed capital markets; unlock the capital around Europe by giving investors more investment choices and offering businesses a greater choice of funding at lower costs; and establish a genuine single capital market in the EU where investors are able to invest their funds without hindrance across borders and businesses can raise the required funds from a diverse range of sources, irrespective of their location.
The triggers to publish a prospectus remain broadly unchanged pursuant to the Prospectus Regulation (i.e. when making an offer of securities to the public and/or when listing securities on a regulated market). However, the minimum threshold for the Prospectus Regulation to apply has been reduced to €1 million (previously set at from €5 million) while article 3 provides Member States with the option of exempting offers of securities to the public of up to €8 million from the obligation to publish a prospectus. The recitals to the Regulation expressly encourage member states not to extend (under national law) the obligation to draw up a prospectus for offers below €1 million, although member states may require other disclosure requirements for such offers to the extent that such do not create a disproportionate burden on the issuers.
The Prospectus Regulation also introduced new concepts while amending others. These include:
- Risk Factors – the Regulation requires risk factors to be categorised according to the type of risk and must be listed in order of materiality (which refers to a combination of likelihood of occurrence as well as the scale of consequences).
- Simplified disclosures for secondary issuances – in terms of article 14 of the Regulation, issuers whose securities have been admitted to trading on a regulated market or an SME growth market continuously for at least the last 18 months and who issue securities fungible with existing securities which have been previously issued may choose to draw up a simplified prospectus under the simplified disclosure regime for secondary issuances.
- EU Growth Prospectus – certain issuers may decide to draw up an EU Growth Prospectus in the case where they offer securities to the public provided that they have no securities admitted to trading on a regulated market. The EU Growth Prospectus is intended to alleviate the administrative burden, in particular for SMEs; and issuers eligible to make use of it are: (i) SMEs, (ii) non-SMEs trading on an SME growth market with an average market capitalisation of €500 million, and (iii) non-listed companies offering securities to the public of not more than €20 million in a 12-month period provided that they have fewer than 500 employees.
- Universal Registration Document (URD) – The Regulation introduced the URD concept, whereby frequent issuers, whose securities are admitted to trading on a regulated market or an MTF are given the right to draw up a URD every financial year describing the company’s organisation, business, financial position, earnings and prospects, governance and shareholding structure. Following acceptance of a URD by competent authorities, approval of prospectuses will be ‘fast-tracked’ for approval by national supervisors. The aim is to shorten approval time for frequent issuers from 10 to 5 working days.
- European Online Database – by virtue of the Prospectus Regulation, a European-wide online database containing all prospectuses approved within the EEA will be made available, thereby providing more transparency and accessibility to investors. All approved prospectuses should be published on the website of the competent authority of the issuer’s home Member State, and each prospectus should also be transmitted by the competent authority to ESMA along with the relevant data enabling its classification. The Regulation requires ESMA to provide a centralised storage mechanism of prospectuses allowing access free of charge and appropriate search facilities for the public.
In inviting ESMA to provide technical advice on possible delegated acts regarding the format of the prospectus and the schedules defining the specific information which must be disclosed in a prospectus, the Commission requested ESMA to follow the “building block approach” established by the Old Regulation. In a spirit of simplification, the Commission requested ESMA to explore ways to streamline these schedules in order to reduce the overall number of annexes compared to those included in the Old Regulation.
Following the advice received from ESMA, last March the Commission adopted Delegated Regulation (EU) 2019/980 regarding the format, content, scrutiny and approval of prospectuses to be published when securities are offered to the public or admitted to trading on a regulated market. Amongst other things, this Delegated Regulation contains a list of annexes which set out the disclosure requirements for different issuances.
Last March, the Commission also adopted Delegated Regulation (EU) 2019/979 regarding the regulatory technical standards 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.
ESMA also adopted a Q&A document (last updated on 12 July 2019) which aims to “promote common, uniform and consistent supervisory approaches and practices in the day-to-day application of the Prospectus Regulation.”
Guidelines on risk factors
ESMA also adopted guidelines on risk factors under the Regulation. These guidelines were developed pursuant to the mandate given to ESMA (article 16(4) of the Regulation) to develop guidelines to assist competent authorities in their “review of the specificity and materiality of risk factors and of the presentation of risk factors across categories depending on their nature.”
Technical advice on minimum information content for prospectus exemption in respect of merger, division or takeover.
On 28 February 2017, ESMA received a formal request from the Commission to provide technical advice on delegated acts concerning the Prospectus Regulation including the minimum information required to be made public and describing a merger, division or takeover in order to qualify for an exemption from the obligation to publish a prospectus. ESMA published a final report containing its advice on 29 March 2019, which advice includes a draft delegated act (supplementing the Regulation) on the documents containing minimum information describing a takeover by way of exchange offer, a merger or a division.
The Regulation became applicable on 21 July 2019, and the Prospectus Directive was, by and large, repealed on the same day. Article 46(3) of the Regulation also provides that prospectuses approved in accordance with the national laws transposing the Prospectus Directive before 21 July 2019 shall continue to be governed by that national law until the end of their validity, or until 21 July 2020, whichever occurs first.
This article was first published on the White Paper Plus 4 website on 16 September 2019