The Prospectus Regulation: where are we now?

With Brexit and the introduction of the Market Abuse Regulation taking up the majority of attention over the summer, the acceleration of the EU’s plans for a Capital Markets Union has gone largely under the ECM radar.  One of the key prices of legislation forming the CMU will be the introduction, for the first time, of a directly effective Prospectus Regulation to harmonise and codify the ground rules for the offer of securities across the EU.   The European
Parliament has recently revised the Commission’s proposals for the Prospectus Regulation, setting out their position on a number of key areas as a prelude to the next informal negotiation stage of the EU legislative process.

Background to the Prospectus Regulation – perceived shortcomings in the existing regime
and a new driver in the CMU

The EU Prospectus Directive is the current legal framework regulating the requirement on issuers to publish a prospectus when making an offer of securities to the public or listing on a regulated market in the EU.   In the UK, it is incorporated into English law by the Financial Services and Markets Act 2000 and the Prospectus Rules issued by the FCA.

Since its introduction in 2005, the Directive has been amended to increase the flexibility for companies to raise capital without the need to publish a prospectus – an obligation which, in the Commission’s words, is often “perceived as expensive, complex and time consuming, especially for SMEs and companies with reduced market capitalisation.”

Under EU law the Commission was required to assess the application of the Directive by 1 January 2016. It brought that review forward to support its push for the Capital Markets Union, an initiative we discuss in more detail here, and its review was published in February last year. As the Commission noted in its review, the “prospectus is the gateway into capital markets for firms seeking funding… It is crucial that it does not act as an unnecessary barrier to the capital markets.”   The objective of the Commission’s review was to “reform and reshape the current prospectus regime in order to make it easier for companies to raise capital throughout the EU and to the lower the associated costs, whilst maintaining effective levels of consumer and investor protection.”

In addition to the costs associated with producing a prospectus, the Commission identified other potential shortcomings of the existing regime:

• an inconsistent approach to offers under €5 million, which the Directive exempts from the requirement to publish a prospectus, at Member State discretion;
• differing prospectus approval procedures across Member States; and
• a trend towards overly long prospectuses, with a lack of focus on information relevant to the investment proposition.

The Commission’s November 2015 proposals

Following the publication of its review, in November 2015 the Commission put forward concrete legislative proposals.  These included:

• Increasing the threshold for smaller fundraisings: the Commission proposed that no prospectus will be required in any EU Member State for capital raisings below €500,000. The current minimum is set at €100,000, and a number of EU states set their domestic threshold at this
  level.  The Commission also proposed that Member States will be able to set higher thresholds for their domestic markets, up to a maximum of €10m (raised from a current maximum of €5m).  However, where an offer is made in more than one EU jurisdiction, it was proposed that ability to apply domestic exemptions of up to €10m falls away. This was seen at the time by many commentators as a potentially retrograde step in facilitating
  small cross-border capital raisings, as previously the lowest domestic threshold (of up to €5m) of each of the relevant EU states in which the
  offer was made represented the functional limit on the size of a non-prospectus cross-border fundraising.
• Creating a lighter prospectus regime for smaller companies: The proposals included an initiative to create “a genuinely lighter regime for less complex prospectuses” for SMEs looking to access European capital markets, and to double the existing threshold for SMEs who can take advantage of it – from €100m market capitalisation to €200m.
• Doubling the size of secondary issues on regulated markets without triggering a prospectus requirement:  The Commission proposed to give regulated market issuers the ability to offer up to 20% of their existing listed capital without the need to issue a prospectus, up from 10% currently.
• Working towards shorter prospectuses and better investor information: The Commission noted that “the prospectus summary is often
  quite long and is written in complicated legal language that is not useful for most individual investors. It adds costs for companies without meaningful benefit for investors. We will take action to support shorter and clearer prospectuses by specifying more clearly the amount of information that is needed.”
• Providing a new simplified prospectus for secondary issues: The Commission argued for simplified prospectus requirements to apply to secondary equity and debt issues by listed issuers. This proposal recognises the less risky nature of follow-on issues, given the continuing
  disclosure obligations to which listed companies are subject.
• Creating a new fast track and simplified frequent issuer regime: The Commission proposed the creation of an annual “Universal Registration Document” (URD), a “sort of ‘shelf registration’ containing all the necessary information on the company that wants to list shares or issue debt.” Issuers who regularly maintain an updated URD with their competent authority would benefit from a five day fast-track approval for each new security issue.
• Establishing a single access digital point for all EU prospectuses: The Commission believes this will benefit investors by giving them
  access to “a single portal where they can find information on companies that have listed shares or corporate bonds on markets where the general public can invest.”

The latest developments – European Parliament amendments to the Commission’s proposals

In September 2016, the European Parliament adopted a number of amendments to the Commission’s proposals. Of principal interest are:

• Changes to the thresholds for smaller fundraisings: Parliament has sought to balance competing views on investor protection by increasing
  the blanket exemption for offers beneath €1m (up from the Commission’s €500,000 proposal), whilst reducing the upper limit to €5m (i.e. halving
  the Commission’s proposal and reverting to the current maximum).  But Parliament recognises that the concept of wholly domestic offers is out of step with the reality of capital raising in a digital environment. So, instead of a mandatory €500,000 maximum threshold where an offer is made outside the principal Member State as proposed by the Commission, where an offer is made between €1m and €5m under a domestic exemption, the offer is lawful provided that it:
  • will not benefit from the passporting regime under the Regulation,
  • must contain clear indication that the public offer is not of a cross-border nature; and
  • must not “actively solicit” investors outside the “home” Member State.

Offers addressed to fewer than 350 (previously 150) natural or legal persons per member state and to a total of no more than 4,000 natural or legal persons in the EU, other than qualified investors and other prescribed venture capital investors, will also be exempt.

• Growth prospectus for SMEs and other applicable issuers: Parliament has introduced the concept of an EU growth prospectus. It proposes that the following entities would be able to draw up an EU growth prospectus in the case of an offer of securities to the public, except where such securities are to be admitted to trading on a regulated market (such as the London Stock Exchange’s Main Market):
  • SMEs;
  • issuers, other than SMEs, where the offer to the public concerns securities which are to be admitted to trading on an SME growth market; and
  • issuers, other than those referred to above, where the offer of securities to the public is of a total consideration in the EU that does not exceed €20 million, calculated over a period of 12 months.
    
    Parliament intends for EU growth prospectuses to be standardised documents, designed in a way which is easy for issuers to complete.  It is anticipated that secondary legislation will specify the reduced content and format of the EU growth prospectus.

Osborne Clarke view

The legislative tussle between Parliament and the Commission highlights the issue at the very root of securities regulation – where should the balance between investor protection and access to capital lie?  For the moment at least, it looks as though investor protection is winning out, and there is a feeling of an opportunity missed to give SMEs the efficient access to capital they need to help unlock economic development in the Eurozone, where growth remains sluggish.

Perhaps most eye-catching of Parliament’s proposed changes (unfortunately, for the wrong reasons) is the reduction in the maximum exemption threshold to €5m, its current limit. Whilst the growth prospectus may provide something of a halfway house, experience in the past has been that issuers inevitably trend towards the high watermark of disclosure when presented with reduced disclosure options, for completely understandable reasons.  A
clear legislative green light towards shorter, leaner documents under the proposed growth prospectus regime is needed.

It is also clear that the EU, in common with many regulators across the globe, is struggling to keep pace with the rapidly developing capital markets landscape, with crowdfunding the obvious touchstone for this.  What might uncharitably be called the “fudge” proposed by the Parliament in respect of issues above €1m in the draft Regulation (where issuers “must not actively solicit investors” from outside the “home” Member State) does not seem to sit very easily with the realities of crowdfunding platforms and appears, at this stage, to be laden with uncertainty.  We are hopeful that the Commission’s work on crowdfunding will result in complementary regulation to provide a route through this uncertainty.

The impact of Brexit – does any of this matter for future UK issuers?

For issuers in the UK faced with the prospect of Brexit sometime in 2019, does any of this matter?  The short answer is yes.

There is clear appetite within the EU for the CMU agenda to be pushed through quickly, and it may well be that a Prospectus Regulation will be in force prior to 2019.  If the UK does not secure a specific derogation from the Prospectus Regulation in anticipation of Brexit, the Great Repeal Act would, if and when passed, freeze the Regulation into domestic law on exit day and it will likely stay on the UK statute book for some time thereafter. As the Prime Minister made clear earlier this week, it would then be open to the UK to amend or repeal the legislation; how the UK might seek competitive advantage by amending its own securities legislation is a question that may come to the fore as Brexit nears.

Although that question of competitive advantage is an interesting one, and irrespective of the eventual shape of Brexit, for UK issuers looking to raise funds across the EU post-Brexit, or for issuers using digital platforms where European investors may actively seek out opportunities to invest without a specific offer being made in their own country, the EU prospectus regime will remain relevant to shaping offer structures following Brexit.