Amendments to Prospectus Directive

Directive 2010/73/EU was published in the Official Journal of the European Union last Saturday and shall enter into force on 31 December 2010. The new Directive amends the Prospectus Directive (2003/71/EC).

The amendments were made with the aim of increasing legal clarity and efficiency in the prospectus regime and reducing administrative burdens for issuers and intermediaries. Certain changes are specifically designed to support the overall objective of the Prospectus Directive, namely enhancing the level of investor protection and to ensure that sufficient and adequate information is provided to retail investors. The impetus for the amendments was Article 31 of the Prospectus Directive, which required the European Commission to assess the application of the Prospectus Directive five years after its entry into force and to present, where appropriate, proposals for its review. Member states have to implement the amendments into national law by 1 July 2012 at the latest.

Among the most significant changes are the following:

Adjustment of EUR 50,000 threshold

Prospectus Directive exemptions from the obligation to publish a prospectus upon an offering include offers addressed to investors who acquire securities in denominations of at least EUR 50,000 and offers with a subscription of at least EUR 50,000. This EUR 50,000 threshold is raised to EUR 100,000 as it is argued that the current threshold no longer reflects the distinction between retail investors and professional investors in terms of investment capacity, as it appeared that even retail investors made investments of more than EUR 50,000 in a single transaction.

Adjustment of 100 persons exemption

The exemption for offerings addressed to fewer than 100 non-qualified investors per EU member state has been amended to allow fewer than 150 non-qualified investors to be targeted with an offering without the obligation to publish a prospectus.

Scope of the Prospectus Directive

Securities included in an offer fall outside the scope of the Prospectus Directive if the total consideration of the offer, calculated over a period of twelve months, is less than EUR 2.5 million. The amendment clarifies the scope by making it clear that the threshold needs to be computed at the level of the European Economic Area and thus not on a country-by-country basis. In addition, the amount is raised to EUR 5 million.

The foregoing calculation method also applies to other maximum offering amounts in the Prospectus Directive, e.g. to certain offers of credit institutions with a total consideration of less than EUR 50 million, which amount is raised to EUR 75 million, and to the exemption for offerings with a total consideration of less than EUR 100,000.

Moreover, the European Commission is empowered to adopt implementing measures to adjust thresholds like these if they become outdated.

Prospectus summary

The current standard of liability for the summary section of the prospectus was not amended, except that a new requirement is added to provide, when read together with the other parts of the prospectus, 'key information' in order to aid investors when considering whether to invest in the offered securities. Key information shall include the risks associated with, and the essential characteristics of, the issuer, any guarantor and the securities offered. It shall also provide the general terms of the offer, details of the admission to trading, and reasons for the offer and use of proceeds.

In addition, the summary will have to be drawn up in a common format in order to facilitate comparability of the summaries of similar securities. The EU Commission shall be required to lay down the rules for the details of such format.

Retail cascade

A retail cascade takes place when securities are sold to retail investors by intermediaries and not directly by the issuer. For such subsequent offers an amendment is made to clarify that a prospectus will not be required as long as a valid prospectus is available and the person responsible for the prospectus consents to its use by means of a written agreement. If such consent is not given, the intermediary is required to publish a new prospectus.

Alignment of qualified investor definition

Investment firms conducting private placements are currently not entitled to treat as qualified investor those persons that are considered to be professional clients or eligible counterparties under MiFID (2004/39/EC). Investments firms therefore have to double check the status of the persons to whom the private placement have to be addressed, creating complexity and costs for these firms. This undesired effect will be ended by aligning the definition of qualified investors in the Prospectus Directive with the definition of professional clients set out in MiFID.

Employee share schemes

The current exemption for companies which have securities already admitted to trading on a regulated market is extended to all companies with employee share schemes whose head office or registered office is in the EU. Such companies will need to make an alternative document available containing information on the number and nature of the securities and the reasons for and details of the offer.

In addition, non-EU companies with securities admitted to trading on a regulated market or third country market will also be exempted from the obligation to publish a prospectus, if (i) the same alternative document is made available as the EU companies are required to publish, and (ii) in the event of an admission to trading on a third country market, the EU Commission has decided that the market's regime is equivalent to the regime in the EU.

Choice of home member state for issuers of non-equity

Currently, issuers of non-equity securities are entitled to choose a home member state for offerings of securities whose denomination is at least EUR 1,000. The EU Commission will review whether this provision should be maintained or removed.

Validity of prospectus

A prospectus remains to be valid for a period of 12 months, but it is clarified that this period runs from the date of approval of the prospectus and not the date of its publication. The date of approval can be more easily verified by the competent authority.

Publication of prospectus

The prospectus shall be considered available to the public once it has been published in electronic form on the issuer's website or, if applicable, on the website of the financial intermediaries placing or selling the securities, including paying agents. It will be no longer required that both issuer and any financial intermediary place the prospectus on their website in order to make this document validly available.

Click here to view the full text of the new Directive.