Prima facie, the question raised appears provocative - even incongruous - for it is hard to imagine that a change of such magnitude could be made in a subtle manner and escape the attention of commentators. Moreover, an affirmative answer would be surprising: not only would it bear a revolutionary character, it would also undermine well-established notions used by practitioners.
However, attentive readers of the new European rules must acknowledge, as a matter of principle, the inclusion of private placements into a new notion of public offering which, under the new Regulation, has become extremely broad.
This substitution, as radical as it may be, arises implicitly. It results mainly from the removal of the distinction that could be inferred from the Prospectus Directive between, on the one hand, the non-application of the obligation to publish a prospectus for certain ‘categories of offers’, including ‘offers’ of securities (i) intended solely for ‘qualified investors’, (ii) to fewer than 150 persons, (iii) to investors acquiring securities for a total amount of at least €100,000, or (iv) for a total amount of less than €5 million over a period of 12 months in the EU (Art. 1 and 3); and, on the other hand, the exemption from the obligation to publish a prospectus for certain ‘offers to the public’, such as shares issued in exchange for pre-existing shares of the same class, securities offered in connection with a takeover by means of an exchange offer, and shares offered to a company’s directors or employees (Art. 4).
Although the Prospectus Directive does not explicitly use the term ‘private offerings’ or ‘private placements’ to describe the offers listed in Articles 1 and 3, such a characterisation is induced by the differentiation from offers to the public listed in Article 4. Indeed, in principle, both types of offers are antithetical.
However, it is true that the Directive’s drafting creates some ambiguity, potentially allowing for another interpretation. Indeed, it could be argued that the non-application of the obligation to publish a prospectus to certain categories of ‘offers’ in Article 3 (2) is not justified by their ‘private’ nature, but reflects instead the intention of the lawmaker to have such offers exempted for reasons of expediency. Some Member States appear more favourable to this interpretation, especially the United Kingdom, and potentially Luxembourg and Sweden.
Nevertheless, if this interpretation was indeed in line with the Commission’s original intentions, given its counter-intuitive character, it would have been preferable to express it in clearer terms. This would have prevented other Member States, such as France, Germany, Italy, Spain, Belgium and Portugal, which have sought to maintain a genuine distinction between public and private offerings, from being accused of incompatibility with the European provisions.
The 2017 Prospectus Regulation leaves little doubt in this respect. It discards, in matters of securities, any potential distinction between private offerings and exempted public offerings, explicitly assimilating the first one to the second (see Art. 1 (3) and (4), confirmed by Recitals (12), (13), (20) and (25)).
However, if offering securities to a very small number of persons or a few qualified investors is no longer sufficient to be excluded from the category of public offering, one may wonder whether there remain any limits to the scope of public offerings, and if the very concept of private placements still exists. If this extension would be conceivable for certain so-called private placements based on their overall amount, which may involve the use of public solicitation, describing an offer intended solely for a ‘restricted’ group of investors as ‘public’ is a contradiction in terms. By a mirror effect, the notion of public offering is also challenged as a category, since its excessive dilution strips it of any distinctive content. Its positive definition in Article 2 (d) of the Regulation is of little help, as it includes any “communication in any form and by any means whatsoever to persons and with sufficient information on the terms of the offer and the securities to be offered, so as to enable an investor to decide whether to purchase or subscribe to these securities.” In practice, it is quite difficult to conceive of any offer of securities which does not resemble such a ‘communication’. At least, the plural form used to refer to the ‘persons’ receiving the offer seems to exclude an offer made to a single person, or to a single entity.
The obliteration of the distinction between private and exempted public offerings introduces a notional confusion. It denies the existence of private offerings as a legitimate, independent concept. Private offerings are henceforth automatically labelled ‘public’ and submitted to the obligation to publish a prospectus, unless they can benefit from an exemption. This logical inversion is not neutral, especially in the field of interpretation.
It is therefore surprising that, to the best of our knowledge, this reform of the Prospectus system has not given rise to any particular discussion or public explanation to help understand its justification. Such justification could be found in the attempt to further harmonise the legislations of Member States which, as we observed earlier, do not all enforce a clear distinction between public and private offerings. However, a harmonisation of the European rules following a model mostly prevailing in the UK would, in times of Brexit, prove to be quite paradoxical.
Finally, special attention should be drawn to the considerable collateral effects that this extreme dilution of the notion of public offerings entails. Indeed, outside the field of prospectuses, this notion is commonly used in Member States’ financial or company law, for example to define the scope of market authorities’ competencies, or to prohibit private companies from offering their securities to the public. Therefore, wherever the meaning of ‘public offering’ is defined with reference to the Prospectus Regulation, it is imperative to reconsider this alignment in order to avoid creating legal uncertainty. Clearly, the excessively broad understanding of the notion of public offerings in the Prospectus Regulation should lead to its disqualification as a general notion of reference.
This post is an excerpt of a paper available here. A French version was originally published in the Bulletin Joly Bourse 1st Jan 2018, n°1, p.60.
Alain Pietrancosta is Professor of Law at the Sorbonne Law School (University of Paris). He is a member of the ‘Legal High Advisory Committee for Financial Markets of Paris’, the ‘Legal High Advisory Committee for Corporate law’, the ‘Issuers Committee’ of the French Financial Market Authority (AMF), the Labex (‘Excellence Research Center’) ‘Financial Regulation’, the ParisEuroplace legal committee, and the ‘European Company Law Experts Group’ (ECLE).
Alexis Marraud des Grottes, Ph.D. Sorbonne Law School (University of Paris 1), is a Partner at Orrick Paris.