European Commission proposes major relaxations to the EU prospectus regime
Published on 30th Nov 2015
The European Commission has today announced proposals to introduce significant deregulatory reform of the EU prospectus regime. Whilst the detailed proposals will take some time to finalise, the key aspects of the proposed reforms have been set out by Jonathan Hill, the Commissioner for Financial Stability, Financial Services and Capital Markets Union. He commented:
“We need a prospectus regime that gives investors the information they need, but that does not pile up unnecessary costs and put companies off raising money on the public markets. Today’s proposal strikes a better balance. It will make the system simpler, cheaper and quicker. It will safeguard investors, while making it easier for small and medium-sized enterprises and other businesses to raise money.”
The proposals form part of the EU Commission’s broader Capital Markets Union initiative, which we discuss here.
Key proposals
- Increasing the threshold for smaller fundraisings: The current regime will be amended to ensure 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. As is currently the case, 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). In the UK, the Financial Conduct Authority has historically applied the maximum threshold (and, indeed, took steps to expedite the adoption of the current maximum threshold of €5m when it was last increased by the EU), and so we anticipate it will look to apply the increased threshold in full. However, the draft regulation which accompanies the Commission’s announcement provides that, where an offer is made in more than one EU jurisdiction, the ability to apply domestic exemptions of up to €10m falls away and a prospectus will generally be required for all securities issues above €500,000. This is 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. Although the creation of a standard exemption for smaller cross-border offers would be welcome, a €500,000 threshold is unlikely to be of much benefit to many cross-border issuers.
- Creating a lighter prospectus regime for smaller companies: The proposals include 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.
- Working towards shorter prospectuses and better investor information: The Commission notes 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: Simplified prospectus requirements will 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 is proposing 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 will benefit from a five day fast-track approval for each new security issue.
- Establishing a single access point for all EU prospectuses: The European Securities and Markets Authority will for the first time provide free and searchable online access to all prospectuses approved in the European Economic Area. 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.”
Next steps
The proposals will now go before the European Parliament and the Council of the EU for discussion and adoption. While no specific timeframe has been set, we are optimistic that the EU will look rapidly to implement today’s proposals.
Osborne Clarke comment
Today’s proposals are welcome. As EU capital markets continue to mature and diversify, with the growth of new models such as crowdfunding, deregulating access to capital to stimulate and sustain economic growth is clearly a step in the right direction.
In the past, binary changes to the regime (such as increasing thresholds under which prospectuses are not required) have proved most helpful in practice and so we see the doubling of the maximum threshold to €10m as the most eye-catching of today’s proposed changes. However, we see the mandatory prospectus requirement for cross-border issues above €500,000 as one area which warrants further consideration, especially as pan-European capital raisings are a key focus for many crowdfunding platforms and a limit at this level would represent a significant impediment to this. It is difficult to reconcile this proposal with the aims of the Capital Markets Union initiative, as it will reduce the incentive to look internationally for new sources of finance. Accordingly, we expect that this element of the Commission’s proposals will be subject to a significant amount of push-back from the industry.
What remains to be seen is whether the Commission’s proposals to simplify the disclosure requirements for SME and secondary issues will lead to significant changes in practice. Previous initiatives by the EU and the FCA to reduce the volume, whilst improving the quality and relevance, of disclosure have, by and large, failed to significantly influence issuer behaviour (given the general perception that by saying less and avoiding boilerplate disclosure, risks for issuers increase). A clear legislative “green light” to genuinely simplified disclosure in appropriate cases is needed.
