EC Prospectus Regulation cautiously welcomed

Author: Tom Young | Published: 1 Dec 2015
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The European Commission has released proposals to overhaul its new Prospectus Regulation. Small and medium-sized enterprises (SMEs) and frequent issuers are expected to benefit from the changes.

While the proposals, released on November 30, are welcome, some concerns remain over the lack of distinction between wholesale and retail disclosure requirements.

Released as part of the Commission’s Capital Markets Union initiative, the plans aim to cuts costs for SMEs looking to raise capital in the region.  

The EC has exempted the smallest capital raisings, with a higher threshold to determine when companies must issue a prospectus.  No EU prospectus will be required for capital raisings below €500,000 ($530,000), up from €100,000.

KEY TAKEAWAYS

  • The European Commission has released proposals to overhaul its prospectus rules;
  • Small and medium-sized enterprises (SMEs) and frequent issuers are expected to benefit from the changes;
  • The EC has exempted the smallest capital raisings, with a higher threshold to determine when companies must issue a prospectus.;
  • The Commission has also removed all references across the board to minimum denomination of €100,000 for those in-scope;
  • It has failed to make distinctions between wholesale and retail prospectuses though, which has led to concern over disclosure costs for those issuing to institutional investors.

While SMEs are expected to benefit from the changes, issuers in the wholesale market may be less impressed. 

One of the most controversial proposals is the removal of the €100,000 denomination distinction for disclosure purposes, and application of a single disclosure regime to all securities.  “From our point of view, representing the wholesale debt markets, this is the biggest change,” said Charlotte Bellamy, director at the International Capital Market Association in London.

Bellamy had hoped the denomination would be removed and replaced by some other form of distinction between wholesale and retail prospectuses. It hasn’t.

Jonathan Hill, EC
EC's Jonathan Hill:
"This will make the system
simpler, cheaper & quicker"
Failure to distinguish between wholesale and retail issues could mean that retail disclosure standards and a summary would be required for all issues of bonds admitted to trading on a regulated market in Europe.

That would impose greater disclosure burdens and increased costs on issuers selling securities to institutional investors only, who are capable of understanding final terms without a summary.

“The increased costs associated with preparing retail, as opposed to wholesale, disclosure can be significant,” said Bellamy.

In other changes under the proposals, no EU prospectus will be required for capital raisings below €500,000, up from €100,000. 

Member states will also be able to set higher thresholds for their domestic markets, and the Commission has said that it will double this threshold from €5 million to €10 million.

Another practical change will be the introduction by the European Securities and Markets Authority (Esma) of a free and searchable online database containing all prospectuses approved in the European Economic Area.

A lighter regime

The EC said it will also create a lighter prospectus for smaller companies, but uncertainty surrounds this so-called SME proportionate disclosure regime.

The prevailing regime is perceived by many as burdensome, with few advantages compared to a regular prospectus. Many companies have been unwilling to be perceived as giving a lower level of disclosure, and so have opted for the standard disclosure regime instead.

But under the latest proposals, the offering document for in-scope issuers will take the form of a Q&A that SMEs can complete in-house. The EC expects this to lower external legal costs.

This may be unlikely though. “With the retail cascade provisions ensuring each entity distributing these bonds could have some degree of liability for the accuracy of the prospectus there could be issues,” said David Shearer, partner at Norton Rose Fulbright in London.

SMEs are unlikely to be aware of who their investors are, so will need to hire a placing agent or underwriter. And those parties are highly likely to insist on having any offering document legally vetted and checked. “So I suspect the idea of SMEs filling in their own prospectuses in-house is unlikely to be realised in practice,” added Shearer.

Much of the detail is still to be confirmed in upcoming regulatory technical standards. Before that, the EC will send the rules to the European Council for negotiations and then these will be admitted to European Parliament.

Market participants expect the final rules to be in place before the end of 2016.

If adopted, the Prospectus Regulation will have direct effect without needing implementation at the national level.

See also

Can securitisation prompt European growth?

Action plan shifts CMU priorities