Post by alanbond on Jan 31, 2018 7:13:58 GMT 4
Timeline
«Although the prospectus regime functions well overall» 1, nevertheless the EU legislator considered it appropriate to revise the current Prospectus Directive 2003/71/EC 2, as part of the «Capital Markets Union Action Plan» 3.
Regulation (EU) 2017/1129 4 was published on June 30th 2017, in the Official Journal of the European Union. While it entered into force on 20 July 2017, it will only be applicable 5 starting from 21 July 2019.
The «Level 2» Regulation still needs to be drafted 6, but in the meantime the competent authority, the European Securities and Markets Authority (ESMA) will have to provide technical advice to the European Commission as early as 31 March 2018.
On 6 July ESMA published three consultation papers, addressing i) format and content of the prospectus 7, ii) the EU growth prospectus 8 and iii) scrutiny and approval 9. The consultations on these papers ended on 28 September last.
The Key Objectives of the new Regulation
The Prospectus Regulation aims at providing issuers with tailor-made disclosure rules, while inducing, at the same time, the prospectus to be a more relevant tool of information for potential investors. The need for a revision of the previous regulation, arises from the growth in capital-raising on capital markets and the need, especially for SMEs, to participate in this growth.
The new Regulation also seeks to level the playing field by removing the existing differences between the rules applicable in different Member States. As long as disclosure of information is considered to be «vital to protect investors by removing asymmetries of information between them and issuers» 10, harmonisation of the disclosure regime should be the answer to the long–known concern of transparency for investors 11.
The Prospectus Regulation applies to both equity and non–equity securities offered to the public or admitted for trading on regulated markets.
The key changes introduced by the new Regulation
1) The obligation to publish a Prospectus
Offers to the public where the total consideration is less than €1 million, are exempted from the obligation of drawing up a prospectus. This is because the costs of producing a prospectus are likely to be disproportionate to the «envisaged proceeds of the offer» 12. However, Member States can ask for other disclosure requirements, if they don't constitute an unnecessary burden in relation to such offers of securities.
Considering the different sizes of financial markets across the Union, the legislator deemed it appropriate to give Member State the possibility of exempting offers of securities to the public not exceeding €8 million from the obligation to publish a prospectus.
The threshold resulting from this provision, should thus vary, depending on the Member State, between €1 and €8 million. Beyond the threshold chosen, the drafting of the prospectus is mandatory. It is worth nothing that offers below the threshold cannot benefit from the pass–porting regime 13.
The prospectus should not be required for offers of securities to the public which are limited to qualified investors 14. Also, when an offer of securities is addressed to a restricted circle of (not qualified) investors (150 persons), no prospectus is required. Both these exemptions are already applicable in Italy as part of the Regolamento Emittenti (Article 34-ter, 1b), 1a) 15.
Finally, when an offer is addressed simultaneously to qualified investors and to non-qualified investors that commit to invest at least € 100.000 each, the offer is exempted from the obligation to publish a prospectus 16.
When an issuer already has shares traded on a regulated market, any issuance of new shares of the same class on the same regulated market –provided that the newly admitted shares represent a limited proportion in relation to shares of the same class already admission– is exempt from the need to draw up a prospectus. The EU legislator increased the threshold from 10% to 20%: securities must represent, over a period of 12 months, less than 20% of the number of securities already admitted to trading on the same regulated market. This provision has entered into force on the 20th of July, 2017 17.
2) Prospectus summary 18
The summary is designed as a useful source of information for retail investors. It became clear to the legislator on the basis of the public consultations that the format set out in Directive 2010/73 had not met its objectives. The new summary is modelled on the key information document (KID) required under the PRIIPS Regulation 19, and is subject to a maximum length of 6 sides of A4-sized paper. The prohibition to incorporate information by reference into the summary, currently set out in Article 11(1) of Directive 2003/71/EC is maintained in order to avoid that the summary becomes a mere collection of hyperlinks and cross-references.
3) Base prospectus 20
The rules in relation to the base prospectus remain almost unchanged compared to Directive 2003/71/EC. But, thanks to the new clarifications, all non-equity securities, including those that are issued in a continuous or repeated manner, may now have a base prospectus. «In order to enhance the flexibility and cost-effectiveness of the base prospectus», the drafting can consist of three separate documents, and the registration document of a Base prospectus can now take the form of a universal registration document.
4) Universal registration document 21
«Companies who intend to have frequent recourse to capital markets» 22 can draw up a universal registration document. Thus, issuers whose securities are admitted to trading on regulated markets or MTFs should have the option, but not the obligation, to draw up and publish every financial year, a universal registration document containing legal, business, financial, accounting and shareholding information. «This new feature of the prospectus regime is based on the premise that where an issuer makes the effort of drawing up every year a complete registration document, it should be awarded a fast-track approval with the competent authority when a prospectus is later required» 23.
5) Specific disclosure regimes 24
Special optional regimes are provided for secondary issuers and for SMEs, that are already admitted to trading on a regulated market or a SME growth market for at least 18 months, in case of an offer of securities to the public or of an admission to trading of securities on a regulated market.
These companies are already subject to disclosure requirements under MAR and either Transparency Directive or the rules of the operator of the SME growth market 25. The special prospectus contains minimum financial information (solely the last financial year, that could also be incorporated by reference), but other elements, such as risk factors, board practices, directors' remuneration, still need to be included (especially since such information is not necessarily disclosed under Regulation (EU) 596/2014 and Directive 2004/109/EC).
6) Risk factors 26
Because there is a tendency to include every risk including generic risk factors (mostly serving as disclaimers), only those risk factors that are material and specific to the issuer are to be mentioned in the prospectus.
7) The Definition of SMEs
One of the core objectives of the Capital Markets Union is to facilitate access to financing on capital markets for SMEs. The definition of SMEs has changed, comprising now both SMEs defined under point (f) of Article 2(1) of Directive 2003/71/EC and SMEs defined under Directive 2014/65/EU, thereby raising to €200 million the original €100 million threshold that previously defined "companies with reduced market capitalisation" under point (t) of Article 2(1) of Directive 2003/71/EC.
Conclusions
The new Prospectus Regulation has clearly lessened the administrative difficulties that arise in drafting a prospectus. It did so by keeping as the key guideline the principle that an issuer must not be unduly burdened when drawing up a prospectus. Although it's surely a beneficial shift for SMEs and for the keeping down of the costs in general, some concerns remain. The new Regulation has not provided for the harmonization of the documents required for takeover bids, with the new Regulation: the drafting of the offer document still remains for thresholds that now have been exempted from the drawing up of the prospectus.
As for Italy, the hope is that the threshold under which the drafting of a prospectus is not required, is raised to €8 million, as permitted by Article 3(2), point b 27. By increasing the threshold, the raising by SME on secondary markets –through, for example, capital increases by option, or offers to the public of debt instrument– should be facilitated as well as for public tender offers regarding SMEs below the €8 million threshold.
Footnotes
[1] Explanatory Memorandum in the «Proposal for a Regulation of the European Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading» COM (2015) 583 final.
[2] Considering that « certain changes introduced by that Directive have not met their original objectives», Regulation (EU) 2017/1129, memorandum 6.
[3] COM (2015) 468 final.
[4] Regulation «of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC».
[5] As provided by Article 49, the Regulation (EU) 2017/1129, shall apply from July 21st 2019, except for Article 1(3) and Article 3(2) which shall apply from July 21st 2018, concerning offers of securities to the public with total consideration below a certain threshold, and points (a), (b), (c) of the first subparagraph of Article 1(5) and the second subparagraph of Article 1(5) which shall apply from July 20th 2017.
[6] A specific regulatory process in financial services was suggested by the Lamfalussy Report, in 2001. The aim of the report was to improve the regulatory process in financial services, in order to make the legislative process faster and more effective. The Lamfalussy approach involves four levels of regulation process: at level 1 the European Parliament and Council adopt the basic laws proposed by the Commission, in the traditional co-decision procedure. As the co-decision procedure is considerably time-consuming, level 1 should only involve the creation of framework principles. Level 2 should implement the principles within a broad conceptual framework, with the help of consultative bodies. At level 3, as part of a stronger cooperation between authorities, committees of national supervisors advise the Commission with regards to the adoption of level 1 and 2 rules and issue guidelines on the implementation of the rules. At level 4, the report advocates a stronger role for the Commission in ensuring the correct enforcement of the European rules by national governments.
[7] ESMA31-62-532.
[8] ESMA31-62-649.
[9] ESMA31-62-650.
[10] Regulation (EU) 2017/1129, memorandum 3.
[11] Scepticism about disclosure being a useful tool to protect retail investors, comes from L. Enriques, «EU Prospectus Regulation: Some Out-of the-Box Thinking», May 10th 2016, Oxford Law, available at: www.law.ox.ac.uk/business-law-blog/blog/2016/05/eu-prospectus-regulation-some-out-box-thinking. According to Enriques, «while reasonable minds may differ on whether mandatory disclosure does enhance the efficiency of capital markets by reducing the costs securities analysts and sophisticated investors have to bear in order to acquire and process the information they need for their investment decisions, a strong and convincing body of evidence exists showing that retail investors are unable to make better investment decisions by processing available information about an issuer».
[12] Regulation (EU) 2017/1129, memorandum 12.
[13] A cross border passport regime was introduced by the Prospectus Directive, under which, Issuers, offerors or persons seeking the admission to trading on a regulated market can passport their prospectuses for cross border offers and listings.
[14] The exemption is quite common among legislations, considering the idea underneath is one of common sense: the exemption is an offer to investors that are considered by the legislator as not being in need of protection at the time when securities are offered to them. Regolamento emittenti, article 34ter 1b.
[15] The offer to the public of securities is exempted if it's addressed to a number of subjects inferior to one hundred fifty.
[16] No prospectus is required where the denomination per unit is at least Euro 100,000 or the offer is addressed to investors who acquire securities for a total consideration of at least Euro 100,000. Both these provisions are provided by the Italian Issuer's Regulation, at article34-ter 1b and 34-ter 1e.
[17] Article 1(5) point (a), Regulation (EU) 2017/1129.
[18] Article 7, Regulation (EU) 2017/1129.
[19] Regulation 1286/2014.
[20] Article 8, Regulation (EU) 2017/1129.
[21] As provided by article 9, Regulation (EU) 2017/1129.
[22] Explanatory Memorandum in the «Proposal for a Regulation of the European Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading» COM (2015) 583 final.
[23] Explanatory Memorandum in the «Proposal for a Regulation of the European Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading» COM (2015) 583 final.
[24] As provided by articles 14, 15, Regulation (EU) 2017/1129.
[25] As required under Directive 2014/65/EU.
[26] As provided by article 16, Regulation (EU) 2017/1129.
[27] «[...] a Member State may decide to exempt offers of securities to the public from the obligation to publish a prospectus [...] provided that [...] the total consideration of each such offer in the Union is less than a monetary amount calculated over a period of 12 months which shall not exceed EUR 8 000 000».
«Although the prospectus regime functions well overall» 1, nevertheless the EU legislator considered it appropriate to revise the current Prospectus Directive 2003/71/EC 2, as part of the «Capital Markets Union Action Plan» 3.
Regulation (EU) 2017/1129 4 was published on June 30th 2017, in the Official Journal of the European Union. While it entered into force on 20 July 2017, it will only be applicable 5 starting from 21 July 2019.
The «Level 2» Regulation still needs to be drafted 6, but in the meantime the competent authority, the European Securities and Markets Authority (ESMA) will have to provide technical advice to the European Commission as early as 31 March 2018.
On 6 July ESMA published three consultation papers, addressing i) format and content of the prospectus 7, ii) the EU growth prospectus 8 and iii) scrutiny and approval 9. The consultations on these papers ended on 28 September last.
The Key Objectives of the new Regulation
The Prospectus Regulation aims at providing issuers with tailor-made disclosure rules, while inducing, at the same time, the prospectus to be a more relevant tool of information for potential investors. The need for a revision of the previous regulation, arises from the growth in capital-raising on capital markets and the need, especially for SMEs, to participate in this growth.
The new Regulation also seeks to level the playing field by removing the existing differences between the rules applicable in different Member States. As long as disclosure of information is considered to be «vital to protect investors by removing asymmetries of information between them and issuers» 10, harmonisation of the disclosure regime should be the answer to the long–known concern of transparency for investors 11.
The Prospectus Regulation applies to both equity and non–equity securities offered to the public or admitted for trading on regulated markets.
The key changes introduced by the new Regulation
1) The obligation to publish a Prospectus
Offers to the public where the total consideration is less than €1 million, are exempted from the obligation of drawing up a prospectus. This is because the costs of producing a prospectus are likely to be disproportionate to the «envisaged proceeds of the offer» 12. However, Member States can ask for other disclosure requirements, if they don't constitute an unnecessary burden in relation to such offers of securities.
Considering the different sizes of financial markets across the Union, the legislator deemed it appropriate to give Member State the possibility of exempting offers of securities to the public not exceeding €8 million from the obligation to publish a prospectus.
The threshold resulting from this provision, should thus vary, depending on the Member State, between €1 and €8 million. Beyond the threshold chosen, the drafting of the prospectus is mandatory. It is worth nothing that offers below the threshold cannot benefit from the pass–porting regime 13.
The prospectus should not be required for offers of securities to the public which are limited to qualified investors 14. Also, when an offer of securities is addressed to a restricted circle of (not qualified) investors (150 persons), no prospectus is required. Both these exemptions are already applicable in Italy as part of the Regolamento Emittenti (Article 34-ter, 1b), 1a) 15.
Finally, when an offer is addressed simultaneously to qualified investors and to non-qualified investors that commit to invest at least € 100.000 each, the offer is exempted from the obligation to publish a prospectus 16.
When an issuer already has shares traded on a regulated market, any issuance of new shares of the same class on the same regulated market –provided that the newly admitted shares represent a limited proportion in relation to shares of the same class already admission– is exempt from the need to draw up a prospectus. The EU legislator increased the threshold from 10% to 20%: securities must represent, over a period of 12 months, less than 20% of the number of securities already admitted to trading on the same regulated market. This provision has entered into force on the 20th of July, 2017 17.
2) Prospectus summary 18
The summary is designed as a useful source of information for retail investors. It became clear to the legislator on the basis of the public consultations that the format set out in Directive 2010/73 had not met its objectives. The new summary is modelled on the key information document (KID) required under the PRIIPS Regulation 19, and is subject to a maximum length of 6 sides of A4-sized paper. The prohibition to incorporate information by reference into the summary, currently set out in Article 11(1) of Directive 2003/71/EC is maintained in order to avoid that the summary becomes a mere collection of hyperlinks and cross-references.
3) Base prospectus 20
The rules in relation to the base prospectus remain almost unchanged compared to Directive 2003/71/EC. But, thanks to the new clarifications, all non-equity securities, including those that are issued in a continuous or repeated manner, may now have a base prospectus. «In order to enhance the flexibility and cost-effectiveness of the base prospectus», the drafting can consist of three separate documents, and the registration document of a Base prospectus can now take the form of a universal registration document.
4) Universal registration document 21
«Companies who intend to have frequent recourse to capital markets» 22 can draw up a universal registration document. Thus, issuers whose securities are admitted to trading on regulated markets or MTFs should have the option, but not the obligation, to draw up and publish every financial year, a universal registration document containing legal, business, financial, accounting and shareholding information. «This new feature of the prospectus regime is based on the premise that where an issuer makes the effort of drawing up every year a complete registration document, it should be awarded a fast-track approval with the competent authority when a prospectus is later required» 23.
5) Specific disclosure regimes 24
Special optional regimes are provided for secondary issuers and for SMEs, that are already admitted to trading on a regulated market or a SME growth market for at least 18 months, in case of an offer of securities to the public or of an admission to trading of securities on a regulated market.
These companies are already subject to disclosure requirements under MAR and either Transparency Directive or the rules of the operator of the SME growth market 25. The special prospectus contains minimum financial information (solely the last financial year, that could also be incorporated by reference), but other elements, such as risk factors, board practices, directors' remuneration, still need to be included (especially since such information is not necessarily disclosed under Regulation (EU) 596/2014 and Directive 2004/109/EC).
6) Risk factors 26
Because there is a tendency to include every risk including generic risk factors (mostly serving as disclaimers), only those risk factors that are material and specific to the issuer are to be mentioned in the prospectus.
7) The Definition of SMEs
One of the core objectives of the Capital Markets Union is to facilitate access to financing on capital markets for SMEs. The definition of SMEs has changed, comprising now both SMEs defined under point (f) of Article 2(1) of Directive 2003/71/EC and SMEs defined under Directive 2014/65/EU, thereby raising to €200 million the original €100 million threshold that previously defined "companies with reduced market capitalisation" under point (t) of Article 2(1) of Directive 2003/71/EC.
Conclusions
The new Prospectus Regulation has clearly lessened the administrative difficulties that arise in drafting a prospectus. It did so by keeping as the key guideline the principle that an issuer must not be unduly burdened when drawing up a prospectus. Although it's surely a beneficial shift for SMEs and for the keeping down of the costs in general, some concerns remain. The new Regulation has not provided for the harmonization of the documents required for takeover bids, with the new Regulation: the drafting of the offer document still remains for thresholds that now have been exempted from the drawing up of the prospectus.
As for Italy, the hope is that the threshold under which the drafting of a prospectus is not required, is raised to €8 million, as permitted by Article 3(2), point b 27. By increasing the threshold, the raising by SME on secondary markets –through, for example, capital increases by option, or offers to the public of debt instrument– should be facilitated as well as for public tender offers regarding SMEs below the €8 million threshold.
Footnotes
[1] Explanatory Memorandum in the «Proposal for a Regulation of the European Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading» COM (2015) 583 final.
[2] Considering that « certain changes introduced by that Directive have not met their original objectives», Regulation (EU) 2017/1129, memorandum 6.
[3] COM (2015) 468 final.
[4] Regulation «of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC».
[5] As provided by Article 49, the Regulation (EU) 2017/1129, shall apply from July 21st 2019, except for Article 1(3) and Article 3(2) which shall apply from July 21st 2018, concerning offers of securities to the public with total consideration below a certain threshold, and points (a), (b), (c) of the first subparagraph of Article 1(5) and the second subparagraph of Article 1(5) which shall apply from July 20th 2017.
[6] A specific regulatory process in financial services was suggested by the Lamfalussy Report, in 2001. The aim of the report was to improve the regulatory process in financial services, in order to make the legislative process faster and more effective. The Lamfalussy approach involves four levels of regulation process: at level 1 the European Parliament and Council adopt the basic laws proposed by the Commission, in the traditional co-decision procedure. As the co-decision procedure is considerably time-consuming, level 1 should only involve the creation of framework principles. Level 2 should implement the principles within a broad conceptual framework, with the help of consultative bodies. At level 3, as part of a stronger cooperation between authorities, committees of national supervisors advise the Commission with regards to the adoption of level 1 and 2 rules and issue guidelines on the implementation of the rules. At level 4, the report advocates a stronger role for the Commission in ensuring the correct enforcement of the European rules by national governments.
[7] ESMA31-62-532.
[8] ESMA31-62-649.
[9] ESMA31-62-650.
[10] Regulation (EU) 2017/1129, memorandum 3.
[11] Scepticism about disclosure being a useful tool to protect retail investors, comes from L. Enriques, «EU Prospectus Regulation: Some Out-of the-Box Thinking», May 10th 2016, Oxford Law, available at: www.law.ox.ac.uk/business-law-blog/blog/2016/05/eu-prospectus-regulation-some-out-box-thinking. According to Enriques, «while reasonable minds may differ on whether mandatory disclosure does enhance the efficiency of capital markets by reducing the costs securities analysts and sophisticated investors have to bear in order to acquire and process the information they need for their investment decisions, a strong and convincing body of evidence exists showing that retail investors are unable to make better investment decisions by processing available information about an issuer».
[12] Regulation (EU) 2017/1129, memorandum 12.
[13] A cross border passport regime was introduced by the Prospectus Directive, under which, Issuers, offerors or persons seeking the admission to trading on a regulated market can passport their prospectuses for cross border offers and listings.
[14] The exemption is quite common among legislations, considering the idea underneath is one of common sense: the exemption is an offer to investors that are considered by the legislator as not being in need of protection at the time when securities are offered to them. Regolamento emittenti, article 34ter 1b.
[15] The offer to the public of securities is exempted if it's addressed to a number of subjects inferior to one hundred fifty.
[16] No prospectus is required where the denomination per unit is at least Euro 100,000 or the offer is addressed to investors who acquire securities for a total consideration of at least Euro 100,000. Both these provisions are provided by the Italian Issuer's Regulation, at article34-ter 1b and 34-ter 1e.
[17] Article 1(5) point (a), Regulation (EU) 2017/1129.
[18] Article 7, Regulation (EU) 2017/1129.
[19] Regulation 1286/2014.
[20] Article 8, Regulation (EU) 2017/1129.
[21] As provided by article 9, Regulation (EU) 2017/1129.
[22] Explanatory Memorandum in the «Proposal for a Regulation of the European Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading» COM (2015) 583 final.
[23] Explanatory Memorandum in the «Proposal for a Regulation of the European Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading» COM (2015) 583 final.
[24] As provided by articles 14, 15, Regulation (EU) 2017/1129.
[25] As required under Directive 2014/65/EU.
[26] As provided by article 16, Regulation (EU) 2017/1129.
[27] «[...] a Member State may decide to exempt offers of securities to the public from the obligation to publish a prospectus [...] provided that [...] the total consideration of each such offer in the Union is less than a monetary amount calculated over a period of 12 months which shall not exceed EUR 8 000 000».