The new EU Prospectus regime – what’s new?
Prospectus Regulation (EU) 2017/1129
A new prospectus regime applies across the EU since 21 July 2019. The Prospectus Regulation (the Regulation) was drafted by the European Commission with the intention of making it simpler and more cost-effective for businesses to raise funds publicly and to encourage smaller firms in particular to list on equity and debt markets. It repeals the existing regime under the Prospectus Directive 2003/71/EC (the Directive).
As well as the Regulation, two delegated regulations also took effect on 21 July 2019. These delegated regulations provide finer detail on what compliance with the new law involves. The first delegated regulation concerns the format, content, scrutiny and approval of a prospectus when securities are offered to the public or admitted to trading. The second relates to regulatory technical standards on key financial information in the prospectus summary, publication and classification of prospectuses, advertisements, prospectus supplements and the notification portal.
Guidelines & domestic measures
The EU legislative measures are supported by extensive guidelines and Q&A documents issued by ESMA and updated on a regular basis.
At a domestic level, the Minister for Finance signed the European Union (Prospectus) Regulations 2019 (the Irish Regulations) into law on 19 July 2019. As of the time of writing (25 July), the Irish Regulations have not been published.
The Central Bank has published new rules to replace its existing market abuse, transparency and prospectus requirements and consolidate them into a single statutory instrument. The Central Bank (Investment Market Conduct) Rules 2019 (S.I. No. 366/2019) came into force on 21 July 2019 and are supplemented by Guidance documents available on the Central Bank's website.
Irish primary legislation will also be required to amend the relevant sections of the Companies Act 2014. The Finance (Tax Appeals and Prospectus Regulation) Bill 2019 was introduced recently and will be considered by the Oireachtas in the autumn.
- A simplified disclosure regime is available to secondary issuances listed on an EU regulated market or an SME Growth Market for at least 18 months. The rationale for this is the assumption that investors will already be familiar with the company and will instead be focused on disclosure of any changes that have occurred since the last financial year end and the reason for the secondary issue.
- In practice, simplified disclosure will be most useful for rights issues and open offers. It may not be appropriate where the offering has a third country (non-EU) component with more stringent disclosure requirements.
- SMEs and other smaller companies will be allowed to draw up an EU Growth Prospectus provided that they have no securities admitted to trading at the time. The design of this simplified prospectus is based on the principle that the cost of producing a prospectus should be proportionate to the size of the company.
Universal Registration Document (URD)
- The URD, a form of shelf registration, is available for issuers with securities admitted to a regulated market, but not intending to immediately offer or list securities.
- Regular issuers of securities will have the option of drawing up a URD containing legal, business, financial, accounting and shareholding information, as well as providing a description of the issuer for that financial year.
- The URD must be filed annually and made available to the public. Once a URD has been approved by the competent authority for two consecutive years, subsequent URDs may be filed without first seeking approval.
- A key aim of shelf registration is to allow issuers that have filed URDs to enter the market more quickly. However, it is currently unclear if the URD will be usable when preparing a prospectus. If previously approved URD content needs to be reviewed again when the issuer files a prospectus, then the value of the URD is lessened considerably.
Exempted document for takeovers, mergers and divisions
- Securities offered in connection with a takeover, merger or division may be exempt from the requirement to publish a prospectus, provided that a document (exempted document) is published to describe the transaction and its impact on the issuer.
- An exempted document does not have to be approved and the liability regime for a prospectus does not apply to it.
Information incorporated by reference
- Issuers are permitted to cross-refer to information published elsewhere without having to reproduce it in the prospectus.
- Such information must have been previously or simultaneously published electronically and be contained in a prescribed document, as defined in the EU Regulation (which includes financial statements and corporate governance statements).
Categorisation of risk factors
- Material risk factors must now be categorised according to their nature, taking into account both the likelihood of occurrence and the magnitude of the impact. The most material risk factor should be presented first in each category.
- Issuers have the option of including quantitative information to illustrate the risk (e.g. through management reports or financial statements). They may also choose to qualify the risks using a scale of low, medium, or high.
- These new provisions may increase exposure to liability for persons responsible for a prospectus.
- The prospectus summary will now be shorter and contain more prescriptive information. It should be written in a "concise manner" and of a maximum length of seven sides of A4 paper. It should set out no more than 15 material risk factors specific to the issuer (and guarantor if applicable).
- The summary must contain four sections: (i) an introduction which contains warnings; (ii) key information on the issuer; (iii) key information on the securities; and (iv) key information on the offer of securities to the public and / or the admission to trading on a regulated market.
- Liability will arise in respect of a summary that is misleading or inaccurate only when read together with the rest of the prospectus. The prospectus and summary must therefore be read as a whole in order to evaluate all of the material risks.
Increased threshold for domestic offers
Member States have the discretion to exempt (or impose minimum disclosure requirements on) domestic issues of securities with total consideration over 12 months of up to €8m. This is an increase from the previous threshold of €5m.
In Ireland, the threshold remains at €5m currently, as primary legislation is required to change this. It is thought that this will be introduced in the autumn.
In the UK, the threshold has already been changed to €8m. Issuers with dual listings in the UK and Ireland will need to consider this.
Exemption for employee offers
- All non-EU companies, regardless of whether they have shares traded on any market, will now be able to offer shares to their EU employees without needing to produce a prospectus.
- Such companies will still have to prepare a document detailing the number and nature of the securities, reasons for the offer and details of same.
What remains the same?
The key triggers for requiring a prospectus remain the same; namely: (i) an offer of transferable securities is made to the public in an EU Member State ('public offer' trigger); or (ii) transferable securities are admitted to trading on an EU regulated market ('listing' trigger).
The distinctions between wholesale and retail offers are retained. Public offers with a minimum denomination of €100,000 continue to be exempt from the requirement to publish a prospectus. If they list on a regulated market and must produce a prospectus, modified disclosure rules still apply under the Regulation.
The Regulation retains some of the same general exemptions as the Directive, including exemptions for open-ended UCITS and securities guaranteed by a Member State.
The true effect of the new Regulation will only emerge in practice. We will continue to monitor this area and provide updates on notable developments.
For more information please contact Julie Murray, Knowledge Lawyer, or any member of the Corporate and M&A team.
Date published: 25 July 2019