What is it?
The Prospectus Regulation (PR) is the latest attempt by the
EU to regulate how issuers of capital markets instruments in
the EU and the European Economic Area prepare their
prospectuses. Its aim, as with most initiatives these days, is
Adopted in June 2017 as part of the Capital Markets Union
Action Plan, the PR aims to it make easier and cheaper for
companies to access capital and improve the user-friendliness
for investors of SME prospectuses. It also seeks to make a
distinction between the sorts of prospectuses provided to
retail clients with those given to institutional investors.
Have we been here before?
Yes, many times. The prospectus regime has been constantly
evolving since it came into effect in 2003 and reviewed in
2008, but the regime for wholesale investors remains broadly
The first Prospectus Directive went into effect on December
2003, with each state needing to implement by July 2005. This
latest iteration will repeal and replace the Prospectus
Directive (PD) and the existing PR.
It’s fair to say many in the industry have
prospectus rules fatigue by now. "I have been looking at these
rules for the best part of 18 years now," says Lachlan Burn,
partner at Linklaters and member of the International Capital
Markets Association’s legal and documentation
committee. "It would be nice to have a few years of the status
quo now, and stop tweaking. The low levels of securities
litigation suggest the current framework is working."
Where are we now?
On July 6, the European Securities and Markets Authority
(Esma) published three consultation papers containing draft
technical advice on the format and content of the prospectus,
with a view to delivering technical advice to the European
Commission by March 31 2018.
At an IFLR Prospectus Rules conference on September 26 Johan
van Gruijthuijsen, policy officer of the prospectus team at
the Commission confirmed that once Esma’s
technical advice has been received in March, the Commission
will draft a delegate act that will be prepared and discussed
with member states.
Its intention is to draft one single delegated act rather
than multiple delegated acts, according to the official. The
delegated act will be part of Esma’s feedback
mechanism, allowing stakeholders the opportunity to comment on
the final draft before it is adopted.
Once in place the new regime will not apply retroactively.
Securities with PD-compliant prospectuses or base
prospectuses before the PR fully applies on July 21 2019
will be grandfathered.
When will compliance requirements start to
Some already have. Implementation
has been staggered, with the first set of requirements kicking
in from July 20 this year. These include an increased threshold
for issuers with existing securities admitted to trading on a
They can take advantage of an exemption from the requirement
to publish a prospectus in connection with new securities that
are fungible with securities already admitted to trading on the
same regulated market, if the new securities represent less
than 20% of the existing listed securities for a 12-month
period. This is an increase from the last threshold of 10%.
""It would be nice to have a
few years of the status quo now, and stop
It’s not all good news though. Under
the previous rules, the prospectus requirement for
securities admitted to trading on regulated
markets didn’t apply to shares resulting from
the conversion or exchange of other securities or from the
exercise of the rights conferred by other securities, as long
as they are the same class as the shares already trading.
Under the new rules, this exemption is available only where
the resulting shares represent less than 20% of the shares of
the same class already admitted to trading on the same
Other measures kick-in in the following year. From July 21
2018, no prospectus will be required for an offer of securities
with a total consideration in the EU of less than €1
million ($117 million) over a period of 12 months. And at same
time in 2018, a universal registration document (URD) -
fast-track approval and reporting substitutes for frequent
issuers will be introduced.
Fast-track - that sounds good. But is
It could be, but the URD has
received a mixed response from national competent authorities
at the level 2 consultation stage.
It is initially a French concept and has been in place there
for more than a decade. The URD is an optional, specific
registration document that contains legal, financial accounting
information. It is intended for frequent issuers admitted to
trading on regulated markets or multilateral trading
facilities. Every year an issuer would complete a
The aim is that once an issuer has gone through the work of
putting one together they can re-use it for future issuances.
While popular in France, other panellists questioned its
applicability across non-equity instruments.
How are wholesale and retail investors
Under the regime, the level of disclosure required depends
on whether the prospectus is for a retail or wholesale bond
issue. Retail bond issues require a higher level of disclosure
than wholesale bond issues, which are issued in minimum
denominations of €100,000 and are aimed mainly at
The PR keeps this distinction, and expands the scope of the
wholesale disclosure regime to include debt securities trading
on a specific segment of a regulated market where only
qualified investors can trade them.
How does PR treat risk factors?
Risk factors have, by most accounts, got out of hand. Many
prospectuses feature reams of boilerplate statements displaying
an unpleasant mixture of cautious or lazy drafting.
Under the new rules, issuers will have to categorise risk
factors according to their materiality. Different thresholds of
risk will need to be established, with procedures put in place
to determine what factors to include in each category.
'Materiality’ in this sense will need to take
into account both the likelihood of occurrence and the expected
magnitude of the negative impact of such risks. This
process will involve quantifying risk in a way that is novel in
capital markets regulation.
Although risk factors undoubtedly need to be improved, some
are concerned about liability issues if they’re
miscategorised. If an issuer labels a very remote risk as
'low-risk’ and it then materialises in unusual or
unforeseen circumstances, will the issuer or its officers be
liable for misrepresentation? This still needs to be grappled
with at level 2 by Esma.
Who is overseeing this?
Until recently, the National Competent Authorities (NCAs)
were the obvious candidate to enforce much of the PR at a
national level. But in September 2017, the Commission published
its proposal to amend the regulations dealing with the
functions of European Supervisory Authorities.
Clearly inspired by Brexit and a push to give Esma greater
powers within the remaining EU markets and avoid regulatory
arbitrage, the changes could move powers for approving
prospectuses away from the NCAs and into the hands of the
already overworked Esma.
This move is unpopular. One senior figure at a European
stock exchange views it as a solution to a problem that
doesn’t exist. "NCAs in Europe concerned with the
debt capital markets have built up experienced and competent
teams that allow them to respond quickly to market needs," they
said. "This won’t help issuers or investors."
EU Prospectus Regulation Conference: key
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