Many EU states miss Prospectus Directive deadline

Author: | Published: 1 Jul 2005
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Is it the end of legal certainty in Europe's securities markets? Temporarily, this seems to be the case. Europe's debt markets are set to go into near hibernation for at least a month from July 1, when the Prospectus Directive (PD) was implemented, due to uncertainty stemming from differing approaches to local law implementation of this harmonization of offering rules.

Frighteningly, of the 16 EU member states featured in IFLR's special focus on implementation (the remaining nine will feature in the August issue), only six countries (Finland, Ireland, Luxembourg, The Netherlands and the UK) have fully implemented the Directive on time, and there is some legal ambiguity even in those countries. The remaining 10 countries have either partially implemented the Directive or missed the deadline altogether. This not only raises concerns about the legal basis for securities offerings in the interim period between July 1 and local implementation in these countries, but it also raises the spectre of conflict between the direct effect of the European Commission's implementing regulation and the pre-Prospectus Directive local offering rules.

A rush of deals hit the markets in June as issuers completed transactions before July 1, especially in the Eurobond programme markets, where re-documentation to ensure full PD compliance is a real problem. To allow issuers whose programmes are up for renewal on July 1 or July 4, the Luxembourg Stock Exchange went as far as giving these issuers an extension for compliance until July 5. Thanks to Luxembourg's organized approach to implementation, however, other programme issuers listed there can relax as the exchange and its regulator have interpreted the PD in a way that means a programme only has to become PD compliant when the programme's prospectus is due for annual renewal. The UK, the other principle home of listed debt programmes and Eurobonds, is another jurisdiction comparatively well prepared for the Directive, with the required legislation ready and most of the uncertainties cleared up. A final hurdle was cleared at the end of June, when UK regulator the Financial Services Authority accepted that Alternative Investment Market (Aim) placings of shares with discretionary private client brokers, who invest on behalf of private clients, would not require full PD-compliant prospectuses. The FSA had previously indicated that it would interpret the placing as a placing with each private client rather than a single institutional broker. The PD requires that an offer can only be made to less than 100 people if it is to be non-public and escape the requirement for a prospectus.

In most other countries, there is less certainty. Italy has not clarified any details of PD implementation and has only passed legislation empowering the government to implement the Directive at some point over the next two years. Spain has only partially implemented the Directive and concepts such as home member state and qualified investors will not be clarified until secondary legislation is passed later this month or in August.

When taken individually, most jurisdictions will - up to a point - be able to rely on the Commission's implementing regulation for the PD, which has direct effect and so does not need transposing into local law. Lawyers will surely be able to structure deals that comply with the Directive even when local rules are not ready. But when taken together, the fact that so many countries do not yet have their regulatory framework set up for issuers to comply at the local level creates an enormous amount of uncertainty for cross-border deals, especially for third country issuers.

It is inevitable that legislation to create a genuine pan-European securities market will create some disruption as companies and their advisers grapple with the new environment.

The London and Luxembourg stock exchanges may have done enough to assuage foreign issuer worries to maintain their Eurobond business, but some Asian and Latin American issuers may still be tempted elsewhere. Those EU member states that have missed implementation must act quickly to finalise implementation if even European issuers are to feel confident enough to undertake ambitious pan-European offerings of securities. As IFLR went to press, Spanish bank Banco Santander completed the first PD-compliant equity deal with a secondary listing in London. Nevertheless, no issuer or investor is likely to feel all the potential benefits of the Directive until legal certainty returns to the whole of the market.

The following pages contain analyses of the status of implementation in 16 member states as of the end of June 2005. IFLR would like thank all the lawyers who took the time to contribute.

What is the Prospectus Directive?

The Directive is a piece of European law that aims to make it easier and less expensive for companies to raise money in the European capital markets, while increasing protection of retail investors.

The Directive creates a so-called passport for a prospectus or offering circular, which allows an issuer to create a single document that, once approved by one regulator in the EU, can be used to sell securities in any other EU member state without the need for further regulatory approval or documentation beyond (in some countries) a simple summary in the local language.

To protect investors, the Directive makes any public offer of shares or equity-linked bonds subject to the Directive's disclosure requirements (including accounts under Europe's International Accounting Standards). In addition, any bonds in denominations of less than €50,000 will also be subject to the Directive. This is called the retail regime. Bonds in denominations of over €50,000 escape the Directive by falling into the wholesale regime, which does not have the same disclosure requirements because it assumes any entity buying bonds in denominations of more than €50,000 is a professional investor who knows the risks associated with their investments.

At its best, the Directive makes a Google-style initial public offering (IPO) a possibility in Europe by clearing the way for a company to create a single Directive-compliant prospectus, post it on its website and let retail and professional investors from all around Europe buy shares. Unfortunately, given the state of implementation, this possibility remains remote.

The bad side of the Directive has pushed the London and Luxembourg stock exchanges to create new, technically unregulated market segments for debt securities to avoid the requirement for non-EU issuers to account under IAS. Most foreign Eurobond issuers would not have accepted the extra expense and would have relocated their convertibles and other Eurobonds to Singapore or Switzerland.

Prospectus Directive implementation explained

IFLR's guide to how the Prospectus Directive is being implemented and what it means for issuers


Czech Republic
The Netherlands

* Articles on the remaining nine EU jurisdictions will appear online with the August issue of IFLR