On 30 June 2017, a new EU prospectus regulation (the “New Prospectus Regulation”) was published in the Official Journal of the European Union. The New Prospectus Regulation will, through a phased implementation, repeal and replace the existing EU Prospectus Directive (Directive 2003/71/EC), which has governed securities offerings in the EU since 2005. The regulation comes into force on 20 July 2017 although many of its provisions will become effective later, as set out below. As it is an EU regulation, the New Prospectus Regulation will have direct effect in EU member states without the need for national implementing legislation. It will also apply to EEA member states.
The New Prospectus Regulation tasks the Commission and the European Securities and Markets Authority (“ESMA”) with developing implementing rules and standards. On 6 July 2017, ESMA published three consultation papers containing draft technical advice on the format and content of the prospectus; the content and format of the new EU Growth prospectus; and the criteria for scrutiny and procedures for approval and filing of the prospectus, with a view to delivering technical advice to the Commission by 31 March 2018.
Increased Threshold for Exempting Additional Issuance of Less Than 20% of Existing Listed Securities
Issuers with existing securities admitted to trading on a regulated market can take advantage of an exemption from the requirement to publish a prospectus in connection with the issuance of new securities that are fungible with securities already admitted to trading on the same regulated market, if the new securities represent less than 20% of the existing listed securities for a 12-month period. This is an increase from the prior threshold of 10%. Moreover, the exemption now applies to all types of listed securities, not just shares. The increased threshold and expanded scope of the exemption are expected to facilitate more efficient capital raising by listed companies, through accelerated bookbuild offerings and tap issuances. However, even if no prospectus is required, follow-on securities offerings may still be subject to other legal requirements, such as the need to obtain shareholder or bondholder approval or pre-emptive rights, and other timing constraints.
New 20% Cap on Shares Issued on Conversion of Convertible or Exchangeable Securities
The New Prospectus Regulation imposes a 20% cap on the exemption available for shares resulting from the conversion or exchange of other securities, which previously had no such limit. As a result, a new prospectus will not be required for the admission to trading of shares resulting from conversion or exchange of securities if the resulting shares represent, over a period of 12 months, less than 20% of the same class already admitted to trading on the same regulated market. The new cap will not affect convertible securities:
In the case of shares, with effect from 21 July 2019, these two exemptions cannot be combined. Thus, if this 20% threshold is exceeded by a combination of a fresh issue of shares (in (say) a secondary offer) and the issue of shares upon the conversion or exchange of other securities in a 12-month period, a prospectus will be required.
Public Offer of Securities with Total EU Consideration Less Than €1 Million
No prospectus will be required for an offer of securities with a total consideration in the EU of less than €1 million over a period of 12 months. Additionally, individual Members 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 €1 million and €8 million. This compares to the current disapplication of the Prospectus Directive to offers below EUR 5 million (in total over a period of 12 months). However, these exempted offers will not benefit from the passporting regime under the New Prospectus Regulation. Also, these exemptions only apply to public offers of securities. If the securities are also to be admitted to trading on a regulated market, a prospectus will still be required unless any of the exemptions applicable to such admissions apply. As a result, and also given the small offering size, exemption may be of limited use in cross-border transactions.
Exception to the Offer and Admission of Non-Equity Securities by Credit Institutions for Total Consideration of Less Than €75 Million
The New Prospectus Regulation will provide for a new exemption for the offer or admission of non-equity securities issued in a continuous or repeated manner by a credit institution, where the total aggregated consideration in the EU is less than €75 million calculated over a period of 12 months, provided that those securities: (i) are not subordinated, convertible or exchangeable; and (ii) do not give a right to subscribe for or acquire other types of securities and are not linked to a derivative instrument.
Universal Registration Document (“URD”) as Fast-Track Approval and Reporting Substitutes for Frequent Issuers
For issuers whose securities are admitted to trading on a regulated market or a multilateral trading facility (MTF), there will be a new form of shelf registration type mechanism, under which frequent issuers can benefit from faster access to the capital markets and more streamlined financial reporting. If the issuer has had a URD approved by a competent authority for two consecutive years, subsequent URDs can be filed or amended without prior approval (but subject to ex post review), and a prospectus using such URDs benefits from a faster approval process (within 5 working days as opposed to the typical 10 business days).
Moreover, the URDs can be used in lieu of annual financial reports (if published within four months after the end of the year) or half-yearly financial reports (if published within three months after the end of the first six months of the year) required under the Transparency Directive. This allows frequent issuers to use a single annual disclosure document and save the cost and time of having to make duplicative public disclosures to the market.
New Simplified Disclosure Regime for Secondary Issuances
The New Prospectus Regulation will relax disclosure requirements for follow-on issuances by issuers with existing listings. Issuers that have had securities already admitted to trading on a regulated market or an SME growth market continuously for at least the last 18 months will be able to benefit from a short form disclosure regime for secondary issuances. This could be particularly beneficial for the issuance of debt securities, or additional shares, by issuers that have had equity securities already admitted to trading for the requisite period, especially if the securities are not intended to be offered in the United States, where more fulsome disclosure standards will still be applicable.
EU Growth Prospectus
Provided they do not have securities admitted to trading on a regulated market, SMEs and certain other issuers that either (i) have an average market capitalisation of less than €500 million over three calendar years with securities traded on an SME growth market or (ii) are offering securities with a total EU consideration of less than €20 million over a 12-month period and do not have securities traded on an MTF, will be able to use a standardised EU Growth prospectus in order to gain easier and more cost-efficient access to capital markets financing. Simplified contents requirements will apply to such prospectus, including information on the issuer’s organisational structure, the company’s strategy and objectives related to its development and future performance, the company’s management and business operations, financial statements and key performance indicators, and shareholders’ information.
For this purpose, SMEs means companies which either:
Changes to Prospectus Disclosure Requirements
The New Prospectus Regulation makes some important changes to the requirements for a prospectus to include a summary that provides the key information to investors about the nature and risks of the issuer, any guarantors and the securities being offered or admitted to trading. The summary will be made up of the following four sections:
The length of the summary is limited to seven A4-size pages (reduced from the current limit of 15 pages and 7% of prospectus). No summary will be required for prospectuses relating to the admission to trading on a regulated market of non-equity securities that are accessible only by qualified investors or with a per unit denomination of at least €100,000.
Furthermore, the required content and format of risk factors will also change. The New Prospectus Regulation limits the risk factors to only those specific to the issuer and/or the securities and which are material to investors. The risk factors will need to be presented in a limited number of categories depending on their nature and each category must list risk factors in order of materiality. Among others, risk factors must include those resulting from the level of subordination of a security, the impact on the expected size or timing of payments to holders of the securities in the event of bankruptcy and, if there is a guarantee, the risk factors pertaining to the guarantor’s ability to fulfil its commitment under the guarantee.
Accountant/Auditor’s Report for Profit Forecasts or Estimates
Where profit forecasts or profit estimates are included in a prospectus, there is currently a requirement that they be accompanied by a report by an independent accountant or auditor. Because profit estimates are based on the issuer’s most recent financials and will in due course be published as part of the issuer’s annual report and accounts, EMSA considers the report requirement to be unnecessarily onerous and costly. It has therefore proposed that such requirement be removed. As for the profit forecasts, which are forward-looking statements, ESMA considers auditor’s report to be of limited value and has proposed to allow such forecasts be included in a prospectus without auditor’s reports so long as the issuer provides clear, unambiguous forecasts in an explicit manner with full assumptions.
As with the current regime’s focus on disclosing “necessary information to make an informed assessment,” the revised regime continues to focus on “necessary information which is material for making an informed assessment.” Although the basic underlying principles seem largely unchanged, the added emphasis on materiality and uniformity in disclosure is intended to reduce costs for issuers in accessing European capital markets. However, the market continues to debate about whether the New Prospectus Regulation could have been more ambitious. For instance, some have argued that certain secondary issuances could have been exempted from the prospectus publication requirement. It remains to be seen how the specific details of the disclosure and content requirements under the delegated acts will address some of the concerns and wishes raised by the market.
 Regulation (EU) 2017/1129 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market.