The revision of the Prospectus Directive, which forms part of the Capital Markets Union (CMU) Action Plan, aims to offer numerous benefits for issuers and to improve the financial markets efficiency. A proposal for a regulation on the prospectus to be published when securities are offered to the public or admitted to trading (hereafter “the Proposal”) was published by the Commission in November 2015.
The key measures include:
- greater flexibility to raise equity or non-equity capital through the recourse to an annual "universal registration document" for frequent issuers. Prospectus approvals will be shortened to 5 working days, which will facilitate access to market opportunities;
- the creation of an alleviated disclosure regime for secondary issuances whose format is to be defined on level 2. Opened to issuers whose securities are already listed on a regulated market or on the future SME growth market, it could grant massive savings;
- a tailor-made disclosure regime for SMEs aiming at fostering their listings on multilateral trading facilities/SME Growth markets. A broadened definition of SMEs is set forth to include companies that have an average market capitalisation of less than EUR 200 million (on the basis of end-year quotes for the previous three calendar years).
Most of the proposed measures have been called for or supported by stakeholders as presented in an impact assessment. Nonetheless we believe that some points of the Proposal are problematic. The amendments we suggest below would reinforce the consistency of the Proposal with its objectives.
** The option granted to Member States to decide not to subject domestic offers to an EU prospectus
The Proposal keeps unchanged the scope of the prospectus requirement set out in the current Prospectus Directive; it only defines new thresholds: no prospectus will be required for offers of securities with a consideration below EUR 500 000 and Member States are given the choice to exempt from the harmonised prospectus all domestic^1 offers of securities with a total consideration between EUR 500 000 and an amount which cannot exceed EUR 10 000 000.
Nonetheless the option granted to Member States to establish a mechanism of national exemption should not be maintained, even though a reporting procedure by each Member State to the Commission and ESMA is set out.
Such an optional exemption contravenes one of the key objectives of the CMU aiming to create a more harmonised framework of regulations and practices within the EU. As regards issuers, it would also not ensure a level playing field for them due to the jurisdiction of their registration or the jurisdiction where their financial instruments are offered to the public. Moreover, issuers may be deterred from addressing retail investors in their targeted fund raising: this would also hinder the development of financial markets through the diversification of investor bases.
Hence, we suggest that no optional exemption mechanism at the discretion of Member States be set out in the final version of the Regulation.
** A non-differentiated approach for debt securities
Removal of the EUR 100 000 exemption for offers of non-equity securities to the public
Directive 2003/71/EC had made the choice to distinguish wholesale disclosures above the
EUR 100 000 denomination threshold to protect retail investors. The Commission considers that it has incentivised investment grade corporate issuers to reserve their non-equity securities’ issuances for institutional investors by using a denomination per unit of EUR 100 000 or above.
Hence, the Proposal removes the current prospectus exemption for offers of securities with a denomination above EUR 100 000. It aims to foster secondary liquidity on bond markets and retail investors’ access to non-equity securities offers. Issuers will nonetheless continue to benefit from a prospectus exemption only when offering non-equity securities to qualified investors or requiring a minimum commitment of EUR 100 000 per investor.
As a result, the need to produce a public offer prospectus including a summary for non-equity securities will not only increase the cost of wholesale issuances but above all impede the ability to seize market opportunities. In a context where market volatility and black-out periods already make fund raisings more complex, the requirement of drawing up a summary appears as neither pro-business nor key for targeted investors in their decision-making process.
Abolition of wholesale/retail dual regime
The Proposal also removes the dual standard of disclosure (retail / wholesale) currently applicable to admission prospectuses of non-equity securities admitted to trading on a regulated market. A unified more detailed prospectus template will be defined by delegated acts. We will have to be watchful and mindful of these draft acts to avoid a deterrent cost impact.
** The prospectus summary
To start with positive insights, the consistency of Prospectus requirements with other EU disclosure regulations is strengthened. Firstly, “closely modelled on the key information document required under the PRIIPS Regulation”, the summary format will hence be aligned and provide retail investors with a more efficient information quality. Secondly, the protective liability regime of the summary is intended to remain unchanged compared to Directive 2003/71/EC: liability attaches to the summary only if it is misleading, inaccurate or inconsistent when read together with the other parts of the prospectus. The goal is welcome but the phrasing should be clarified.
The length of the summary
However, with a proposed summary subject to a maximum length of 6 sides of A4-sized paper when printed (characters of readable size must be used), a quantitative approach has unfortunately prevailed in the Proposal and does not appear as realistic to capture the diversity of the transactions subject to a prospectus.
Yet, the objectives are clear: (i) to avoid endless and general developments which are not helpful to potential investors to take an informed investment decision and (ii) to provide an incentive for issuers to refocus their disclosure on specific and concise key items. Let’s also mention the “relaxation” of the maximum number of pages of the summary to be provided by the Commission through regulatory technical standards (RTS) to take into account the various types of securities and issuers: such flexibility is welcome but does offer sufficient guarantees.
With regards to the quality of information expected by investors, the broad range of financial products urges to adopt a qualitative rather than a quantitative approach to the summary’s length: plain vanilla bonds should not be treated as structured ones; public issuances should not be summarised as private placements either. In addition, the intervention of a guarantor in the issuance of non-equity securities triggers the inclusion of additional significant information on the guarantor itself and should benefit from more flexibility in the prospectus drafting process. Finally, some specific and key provisions of the issuing documentation may also require a description in the summary.
** Risk factors' disclosure
According to the Proposal, the issuer will be required to allocate risk factors across two or three categories based on materiality as assessed by the issuer. ESMA will be empowered to develop guidelines in that field.
The approach developed in the Proposal regarding risk factors disclosure may be problematic.
On the one hand, it makes sense to limit risk factors in the prospectus only to those that are material and specific to the issuer and its securities. It is essential that the financial regulation should encourage issuers to deliver key or material information that is expected by reasonable investors to base their investment decisions on. The new rule of allocation of theses specific risk factors across a maximum of three distinct categories “which shall differentiate them by their relative “materiality” is also not really questionable.
On the other hand, based on the issuer's assessment of the probability of their occurrence and the expected magnitude of their negative impact, the disclosure requirement will be a highly difficult task for the issuers. Moreover the arbitrage between those two criteria, sometimes opposed (low probability but high magnitude), will increase directors’ liability unreasonably and will demand frequent updates especially from financial issuers. A better balance should be struck, for instance through a categorisation based on the type of risks considering their nature and characteristics.
* * * As a conclusion, provided that the key points above are amended, the general appraisal of the Proposal is positive. The preservation of a high level of retail investors’ protection and a facilitated access to capital markets for issuers could be thereby better achieved.
^1 offers for which no passport notification to host Member States is sought.