On 7 December 2016, the European Parliament, the Council and the European Commission (hereinafter ‘EC’) reached an agreement on the Regulation proposed by the EC on 30 November 2015 and aiming at reducing divergent rules across the EU.
Below we summarize the main provisions of the new Regulation, underlining what we consider to be its ‘failures’, and, in the conclusions, we recall the main ‘missing points’ and suggest a future direction for looking ahead.
Home Member State
The definition of the Home Member State (hereinafter ‘HMS’) is the same as in the Prospectus Directive. The freedom of the issuer to choose its Member State (hereinafter ‘MS’) between the HMS where the issuer has its registered office and the MS where securities are admitted to trading continues to be recognized only for issuers of certain non-equity securities.
The Regulation is not applicable to offers of securities below €1 million; below that threshold, a prospectus as described in the regulation cannot be required. The regulation could have been even more ambitious as the average cost of an equity prospectus, according to the EC Impact Assessment, is around €900,000. Below €1 million, MS may ask for other disclosure requirements, which shall not be disproportionate or unnecessary.
Positively, the Regulation maintains the exemption from the publication of a prospectus for offers of securities whose denomination per unit amounts to at least €100,000.
MS may decide to exempt from the prospectus obligation offers not exceeding €8 million. This is an improvement from the Directive’s threshold (€5 million); however, the Regulation could have been more ambitious as, in any case, the threshold is not harmonized, and offers exempted from the prospectus obligation will not be ‘passportable.’ Additionally, the exemption is not applicable to the admission to trading on regulated markets. Below the chosen threshold, MS may ask for other disclosure requirements, which shall not be disproportionate and unnecessary.
The Regulation introduces some improvements: firstly, it clarifies that the summary is to be read as an introduction to the prospectus; secondly, it introduces an exclusion for non-equity securities traded on regulated markets, or for specific segments reserved to qualified investors; thirdly, it maintains the exclusion for non-equity securities with a denomination per unit of €100,000.
The Regulation, however, introduces points that are more controversial; in particular, it introduces a 7-page limit for the Summary and a 15-item limit for the risks factors to be inserted. In both cases, slight increases are possible under certain conditions.
Unfortunately, the Regulation maintains the exclusion in the summary of cross-references, or incorporations by reference.
Issuers already listed on a regulated market or an SME growth market continuously for at least 18 months may benefit from a simplified prospectus, which will include the financial information of the previous financial year, a summary of the relevant information disclosed under Market Abuse Regulation (‘MAR’), relevant conflicts of interest and related party transactions. Additionally, the EC shall adopt delegated acts. While the EC consultation document envisaged the option of an exemption from the prospectus obligation for secondary issuances – which, according to the Feedback Statement, was supported by the majority of respondents - the outcome is quite unsatisfactory. In fact, issuers listed on regulated markets, who already publish regulated information according to the Transparency Directive and MAR, are still obliged to publish a prospectus under a simplified regime left to the delegated acts, the outcome of which is not predictable.
EU growth prospectus
A proportionate prospectus is available to certain entities, provided that they have no securities admitted to trading on a regulated market:
b) issuers, other than SMEs, whose securities are traded on an SME growth market, provided that they had an average market capitalisation of less than €500,000,000;
c) issuers whose offer to the public is of a total consideration that does not exceed €20,000,000 and the average number of employees is up to 499;
d) offers of securities issued by issuers referred to in points (a) and (b).
This provision - similar to the mechanism of proportionate disclosure under the Directive - is not available to issuers which make an offer on a regulated market, to avoid creating ‘a two-tier disclosure standard on regulated markets which might undermine investor confidence.’
In our view, the simplification should have covered all SMEs without distinction between regulated markets and multilateral trading facilities (‘MTFs’). The EU legislation shows again a big contradiction. On one side, it aims at alleviating the burdens for SMEs and, on the other side, it does not allow all SMEs to benefit from prospectus simplification, and other pieces of EU legislation (such as MAR) impose burdens on all SMEs (listed on regulated markets or on MTFs), as recently recognized in the Consultation Document CMU mid-term review 2017.
Regrettably, the Regulation does not introduce any major changes in the scrutiny process. However, it rightly stresses the need for a major convergence of different National Competent Authorities’ (‘NCAs’) scrutiny approaches. To this aim, NCAs shall provide on their websites guidance on the scrutiny and approval process, and the EC shall adopt delegated acts to specify the criteria for the scrutiny of prospectuses and the procedures for the approval.
Moreover, ESMA shall develop guidelines on supervision and enforcement of prospectuses, and foster convergence regarding the efficiency, methods and timing of scrutiny, using, in particular, peer review.
While the new rules reduce marginally some costs, they fail to meet the primary goals of the revision, in particular, being a gateway for issuers in need of finance, reducing market segmentation and favouring capital mobility through Europe.
The revision could have been more ambitious. In particular, companies should have been left free to choose their HMS; the maximum threshold of €8 million should have been harmonised; the replacement of the whole prospectus with the Key Information Document (‘KID’) should have been considered; secondary issuances should have been exempted from the publication of the prospectus, provided that updated information is made available by the issuer; the regime of simplification for SME growth markets should have included also SMEs on regulated markets.
Even if the new Regulation is a missed opportunity, and a further revision is not envisageable at least in the short run, the debate on prospectus regulation should nevertheless continue.
Some interesting suggestions have been advanced by Luca Enriques in this blog. He proposes a radical change, moving away from imposing itemized disclosure and securities regulators’ pre-approval of the prospectus. As an intermediate step, the possibility of an option for all issuers to disclose a ‘European prospectus’, approved by ESMA, under the default regime established by the new Regulation, could be explored to help overcome the fragmentation created by different national approaches.