The European Commission Proposes New Prospectus Regulation
The European Commission has published a proposal for new prospectus regulation (announced on 30 November 2015). The proposal aims to overhaul and simplify the current regulatory framework for prospectuses as part of the Commission’s Capital Markets Union program. The changes can be useful especially where prospectuses are needed mainly for regulatory reasons.
The main objectives of the overhaul are:
to make it easier and cheaper especially for smaller companies to access capital markets,
to simplify prospectus regulation;
to provide a more flexible regime for secondary offerings and issuers that are already known to the capital markets and
to make prospectuses more informative for potential investors.
The proposed regulation will, once adopted, replace the Prospectus Directive (2003/71/EC) along with the Prospectus Regulation ((EC) 809/2004). In addition, the proposed regulation would affect the corresponding provisions of the Finnish Securities Markets Act (746/2012).
Main Changes in the Proposed Regulation
To achieve its objectives, the proposed regulation includes, among other, the following changes compared to current EU prospectus regulation:
Increasing the threshold for exempt capital raisings
Capital raisings that fall below EUR 500,000 threshold would be exempt from preparing a prospectus altogether. Individual member states can set the exemption threshold to a maximum of EUR 10 million.
Shorter prospectus summaries and focused risk factors for prospectuses
The proposed regulation would introduce a new structure for prospectus summaries comprising three main sections and covering information on the issuer, the security and the offer/admission. The proposed regulation would also limit the maximum length of a prospectus summary to six pages and therefore cause issuers to identify and include only the most essential information in the summary.
According to the proposed regulation, only risk factors that are material and specific to the issuer and security in question will be mentioned in a prospectus and the issuers will be required to categorise the risk factors according to their materiality. In addition, only most important risk factors will be featured in a prospectus summary. The proposed regulation would cause prospectus work to focus more on identifying the most essential risk factors and lead to more of the risk factors that are generic in nature to be omitted from prospectuses altogether.
Simpler prospectus requirements for secondary offerings
Simplified prospectus requirements would be introduced for companies whose securities are already listed on a regulated market. Going forward, such requirements would take into consideration the ongoing disclosure obligations of listed companies and aim to avoid duplicating information relating especially regarding financial statements and interim reports. In addition, any subsequent admission to of the same securities on the same regulated market would not require a prospectus provided that the newly admitted securities represent less than 20 per cent of the existing securities, a change that would provide more flexibility in situations where prospectus is required for regulatory purposes only. Examples of such situations could be e.g. listing shares offered in private placements or financing of already agreed upon corporate transactions.
Lighter prospectus requirements for smaller companies
Prospectus requirements would be adapted to the needs of SMEs and include information that is material and relevant for companies of smaller size, thus further diminishing the administrative burden for such companies of preparing prospectuses. In the proposed regulation, the definition of a SME would be expanded to include companies with a market capitalization of up to EUR 200 million making larger amount of companies eligible for the new lighter prospectus regime. It should be noted that in many cases disclosure will be based on investor requirements and it is possible that more extensive disclosure will still be the norm. Still, increased regulatory flexibility will facilitate offers by smaller companies.
Fast track prospectus approval process for frequent issuers
Listed companies that frequently tap into capital markets will be able to prepare an annual Universal Registration Document (URD) containing all the necessary information on the issuer. Companies that regularly maintain and update URD with their national supervisors will then be able to benefit from a 5 day fast-track approval for their prospectuses to enable them e.g. to quickly react to emerging market windows and opportunities.
The actual impact of the proposed regulation is likely to be partly determined by the type of the transaction concerned. If a prospectus is required by investors for the basis of their investments decisions, the market practice is likely to be determined by the demands of the market and institutional investors in particular. On the other hand, the simplified prospectus requirements included in the proposed regulation are likely to be more thoroughly observed if a prospectus relates to an already agreed upon corporate transaction and is therefore prepared mainly for regulatory purposes.
Following its publication, the proposed regulation will be transmitted to the European Parliament and the Council for adoption under the co-decision procedure. The Commission estimates that the proposed regulation could be approved in 2016 and its application would then begin approximately 12 months later. However, the actual application date of the proposed regulation will be determined by the preparation schedule of the necessary implementing measures of the proposed regulation to set out the minimum information contents of prospectuses.. As with any other EU regulation, the proposed Regulation would be legally binding on all members states without transposition into national law.