A Brief Commentary by Fenech Farrugia Fiott Legal on the introduction of EU Prospectus Regulation (EU Regulation 2017/1129), governing securities offered to the public or admitted to trading on a regulated market situated or operating within EU Member States
The new EU Prospectus Regulation (EU Regulation 2017/1129) (the “Prospectus Regulation”) came into force on 20 July 2017, repealing the Prospectus Directive (EC Directive 2003/71/EC) (the “Prospectus Directive”). The Prospectus Regulation shall be directly applicable to all entities offering securities to the public or admitted to trading on a regulated market situated or operating within EU Member States as from the 21 July 2019, save for some specific provisions which have been applicable since July 2017 and July 2018.
The Prospectus Regulation primarily aims at facilitating the access to financial markets, particularly for small and medium enterprises (“SMEs”), simplifying the issuance of equity and non-equity securities and strengthen investor protection. Whilst certain rules and principles contained in the Prospectus Directive have been upheld and transposed in the new Prospectus Regulation, other concepts have been revised and new additions have been made in the interest of the EU’s capital market. This reform is expected to increase the level of confidence in issuers and their securities, integrate and develop capital markets further across EU Member States within a harmonised framework.
The Prospectus Regulation shall be further supplemented with Level II and Level III delegated legislation, as specified by the European Commission, which shall detail additional disclosure measures under the new regime.
This article highlights the salient changes to the prospectus regime pursuant to the new Prospectus Regulation.
1. Exemption Threshold
The Prospectus Regulation increases the minimum which triggers the requirement to publish a prospectus, to an aggregate offer amounting to €1 million, from the previous €100,000 contemplated under the Prospectus Directive. This is a substantial adjustment, which shall make is easier for SMEs falling outside the scope of the Prospectus Regulation to penetrate the EU’s capital market and raise funding. In addition to this, each Member State is empowered to extend the exemption for the requirement of publishing a prospectus to smaller entities offering securities issue of up to €8,000,000 over a period of 12 months within their domestic market.
2. Prospectus Summary
The prospectus summary requirements under the Prospectus Directive were viewed by many as demanding overbearing technical and immaterial information. The Prospectus Regulation shifts towards a more investor-friendly summary disclosure, limited to seven slides of A4 paper. Furthermore, the Regulation waives the requirement of a prospectus summary for debt securities trading on a regulated market that either have minimum denominations of €100,000 or are traded on a specific segment of a regulated market that is limited to qualified investors.
3. Risk Factors
Guidance as to the information required when disclosing the risks associated to the issuer and/or the securities is also heightened under the Prospectus Regulation. The disclosure of the risk factors under the Prospectus Regulation entails a thorough assessment of the risks which are limited specifically to the issuer and/or to the securities in question. The issuer is also required to determine the materiality of such risks and have them categorised in order of priority in the prospectus, depending on their nature. Through this amendment, it is expected that a prospectus will not contain any generic risk factors which are not relevant to the issuer’s business and/or the securities.
4. Universal Registration Document
The Prospectus Regulation introduces a multi-purpose passportable shelf document, which may be utilised by frequent issuers admitted on the regulate market, known as the Universal Registration Document (“URD”). This URD promises an accelerated access to the capital markets and a more efficient financial reporting process for the issuers electing this option.
5. EU Growth Prospectus
A striking feature of the Prospectus Regulation is that it proves to be far more attractive to SMEs when compared to its predecessor. The Prospectus Regulation contemplates a lighter regime for SMEs and eliminates burdensome requirements for the issuance of a prospectus. Subject to certain qualifying pre-conditions, smaller corporate entities will have the option to draw up a standardised prospectus, known as the EU Growth Prospectus, which promises an alleviated level of disclosure requirements.
6. Secondary Issuances
Issuers already listed on a regulated market or an SME growth market, having debt or equity securities admitted to trading for at least 18 consecutive months, may avail themselves of a simplified disclosure regime when undertaking a secondary issue. While issuances of this nature are eligible to benefit from reduced disclosure requirements, the Prospectus Regulation necessitates that prospectus contains the information required to enable investors to understand:
i. the prospects of the issuer and the significant changes in the business and the financial position of the issuer and the guarantor that have occurred since the end of the last financial year, if any;
ii. the rights attaching to the securities; and
iii. the reasons for the issuance and its impact on the issuer, including on its overall capital structure, and the use of the proceeds.
7. Single Access Point for all EU Prospectuses
The European Securities and Markets Authorities, is expected to create an online repository, providing access to all prospectuses approved within the European Economic Area. In addition, the publication of prospectuses in paper format are no longer required under the Prospectus Regulation, unless a potential investor requests them.