The pros and cons of the Prospectus Directive

Author: | Published: 1 Sep 2005
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The implementation of Directive 2003/71/CE of the European Parliament and of the Council, on the prospectus to be published when securities are offered to the public or admitted to trading (the Prospectus Directive) has spurred developments in Portugal.

This Directive should have been implemented in all EU Member States no later than July 1 2005. Although this obligation granted enough time for each member state to transpose the Directive, it has not yet been implemented into Portuguese legislation, due to recent government changes.

To avoid confusion caused by the delay of the implementation in Portugal, a part of the Directive must be regarded as being already in force in Portugal, as stated by the Portuguese Securities Market Commission (CMVM) in a General Opinion issued on June 17.

The Prospectus Directive will impact not only European companies but also companies registered outside the EU. Under the terms of the Directive, foreign equity issuers will be subject to the regime of the first EU member state in which they make a public offering or an admission to trading of securities (at the choice of the issuer). And foreign non-equity issuers of securities with a denomination per unit of at least €1000 can choose between the regime of the first EU member state in which they make a public offering or admission to trading of securities or the framework of the member state were they already have securities admitted to trading in a regulated market.

The Prospectus Directive belongs to the maximum harmonization directives, also called detailed directives (directives detaillées), which leave member states a limited selection of means to achieve the imposed solution dictated by the directives' content. If a member state fails to transpose such a directive, it will be subject to the Level 4 enforcement procedures implemented by the Commission and can be judicially compelled to comply.

To complete the Prospectus Directive application, the Commission Regulation EC/809/2004 of July 19 has been approved. This Regulation came into force on July 1 2005 and is directly applicable in the local legislation of all the EU member states. This Regulation defines the information to be provided in the prospectus and covers its format, the information incorporated by reference, the publication of prospectuses and the dissemination of advertisements, establishing also a standard format for all prospectuses, irrespective of their use. The Regulation was largely based on technical advice given by the Committee of European Securities Regulators (CESR) to the Commission.

The aims of the Directive and its implementing measures are: investor protection, market transparency and efficiency, and the creation of a single European market for securities and financial services where wholesale and retail cross-border offers are facilitated by a passport regime, following in the footsteps of the Commission's communications "Risk capital action plan" and "Implementing the framework for financial market: Action Plan".

The Prospectus Directive's purpose is to harmonize requirements for the drawing up, approval and distribution of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market situated or operating within a member state.

Pursuing this objective, the Prospectus Directive involves a two-tier regime. The first regime relates to issues that are admitted to an EU regulated market, after the approval of a prospectus by the home competent authority. The second regime, which relates to unlisted securities, requires that, where securities are offered to the public in any member state, a prospectus must be produced and published unless: (i) the offer is addressed only to qualified investors; (ii) the offer of securities has a denomination above €50,000 euros; (iii) investors will have to subscribe at least €50 000; and (iv) the offer is to fewer than 100 persons per member state.

One of the measures the EC predicts will attain its goals is the implementation of a single authorization system (a single passport for issuers). Once approved by the competent authority in one EU member state, a prospectus will be accepted in another EU member state - provided the competent authority of that member state is notified - without further local examinations of its content or the imposition of additional conditions by the host-state competent authority.

Another intended driver of integration foreseen in the Directive is the possibility of the prospectus being produced in only one language in the case of multi-jurisdiction offers, either the language accepted by the competent authorities of the member states where the securities will be admitted to trade or offered or in a language customary in the sphere of international finance. This prospectus will enclose a summary, which might be subject to a translation requirement by the host-state authority, designed to accomplish the investor protection purposes of the Directive.

The implementation of the Prospectus Directive in Portugal will require the introduction of several amendments to the Portuguese Securities Code (Código de Valores Mobiliários or CVM) and a draft implementation Decree-Law was disclosed for public consultation on the last quarter of 2004. However, the enactment of the Directive's transposition Decree-Law is dependent on the government's empowerment by the parliament for its approval.

To reduce the confusion caused by the delay of the enactment of the Directive's transposition Decree-Law, CMVM has made public that, pursuant to the European Court of Justice's doctrine as to Directives' direct effect, the following provisions of the Prospectus Directive became enforceable in Portugal on July 1 2005:

  • sub-paragraphs m) and n) of Article 2(1), which lay down the definitions of home member state and host member state;
  • Article 3(2) on the non-application of the obligation to publish a prospectus in certain types of securities offers;
  • Article 4, which sets out certain exemptions from the obligation to publish a prospectus;
  • Article 5(3) and (4) and Article 12(3) and (4), on the drawing up of a prospectus comprised by one or more then one separate documents and of base prospectus;
  • Article 9, on the validity of prospectus, base prospectus and registration documents;
  • Article 11, which addresses the incorporation into the prospectus of references to previously or simultaneously published and approved documents;
  • Article 13(2) to (4), which rules the delays for approval of prospectus by the competent authorities; and
  • Articles 17 and 18, which implement the prospectus European passport mechanism.

As stated by the CMVM, the Portuguese Law is already in line with some provisions of the Prospectus Directive, such as: (i) the mandatory prior approval and publication of a prospectus in public offers of securities; and (ii) the option given to offerors to draft their prospectus in Portuguese or any foreign language of common use in the international financial markets.

As said, the CMVM proposed, on the last quarter of 2004, a draft Decree-Law to implement the Directive in question, having launched a public consultation process on this matter. Any Decree-law implementing the Prospectus Directive must introduce several amendments to the Portuguese Securities Code. The main amendments foreseen in the draft Decree-Law are related to the public offering of securities and to the rules on admission to trading on regulated markets.

If this draft Decree-Law is approved, it will imply the modification of over 50 articles of the CVM (and the addition of nine more), mainly its Title III. Such modification will include the following:

  • the creation of a European passport of prospectuses;
  • the definition of the national competent authority to approve the prospectus;
  • the possibility to choose the format of the prospectus: single or tripartite (including the registration document, the securities note and the summary note);
  • the new scheme of incorporation of information by reference;
  • the adoption of a base prospectus for offering programmes;
  • the obligation to provide annual information, that is, to report on information filed in other non-EU states pursuant to stock exchange requirements or securities laws;
  • the requirement to deliver a summary; and
  • the possibility of drafting the prospectus in a language customary in the sphere of international finance.

As far as public offerings are concerned, and given the differences between the new European regime for prospectuses and the Portuguese Law, the draft Decree-Law clarifies that the registration of a public offer implies the approval of a prospectus. This approval becomes the cornerstone of a public offering's administrative control. Nonetheless, the existence of an offering registration is maintained in view of lawfulness control because such control exceeds the scope of the information rendered in the prospectus. When a prospectus is not required for public offerings (for example, certain offerings to employees), the offering is exempted from the assistance of a financial intermediary and a simplified registration procedure is created.

To adopt the Prospectus Directive and the requirement to launch a public offer announcement (under the Portuguese Securities Code), the public offer announcement in public offers for distribution will need to be abolished, except for takeover bids (OPAs), as in this case the publication of the prospectus summary is not mandatory; and the announcement regarding the availability of the prospectus only when the offeror exclusively opts for the disclosure by means of electronic format must be retained.

Furthermore, some modifications will be introduced in the legal regimes of cash bonds, mortgage bonds and of collective investment undertakings and real estate funds, because the Directive also applies to the prospectus of public offers and admissions to trading of non-equity securities.

As a consequence of the implementation of the Prospectus Directive, two concepts will be redrafted: institutional investors and public offers.

The concept of qualified investors will replace the concept of institutional investors, as its scope will need to be extended to include:

  • financial institutions of states that are not members states of the EU;
  • entities trading in commodities and in derivatives on commodities;
  • national and regional governments, central banks and public entities that manage the public debt;
  • international and supranational institutions, such as the European Central Bank, the European Investment Bank, the International Monetary Fund and the World Bank;
  • other legal entities whose corporate purpose is to invest in securities;
  • companies that according to their last annual or consolidated accounts meet two of the following criteria: (i) an average number of employees of 250; (ii) a total balance sheet of €43 million; or (iii) an annual net turnover of €50 million.

Moreover, the Portuguese Securities Market Commission will be empowered to extend this qualification, through specific regulation, to other entities with sophisticated competence and expertise in the securities field, that is, issuers.

Regarding the term public offers, its scope now includes those offers addressed at, at least, 100 natural or legal persons other than qualified investors residing or established in Portugal, whereas in the current legal framework the reference number is 200 persons.

The main features of the new public offer regime intended to promote financial services integration are: (i) maximum harmonization; (ii) the full home country; and (iii) the mutual recognition and passport regime. Despite improvements in terms of transaction costs and comparability of information, the Directive raises several issues that have been highlighted by market participants.

The maximum harmonization characteristic makes the Directive arguably an excessive measure that will erase the benefits of regulatory competition. Although justified by the aim of fully implementing the passport regime and avoiding the transaction cost created by regulatory discrepancies, those objectives could be achieved by prohibiting host-state authorities imposing additional requirements upon a passport approved by the competent authority.

Moreover, the new regime could be criticized on the grounds of erasing the possibility of choice of the competent authority by the issuers. In particular, EU equity issuers will always be subject to the authority of the place of its registered and non-EU issuers and non-equity debt issuers have a limited choice. In spite of allowing full home country control, this policy option eliminates regulatory competition and its success is fully dependent on supervisory convergence between 25 member states with discrepant institutional structures and different levels of financial market development.

There are also high compliance costs of the disclosure requirements imposed by the Directive, in particular in relation to foreign issuers, which will be subject to the initial disclosure requirements foreseen in the Directive combined with the ongoing requirements established in the so-called Transparency Directive. This costs of this new disclosure regime are due, in particular, to the following: firstly, foreign issuers are faced with the risk of having to change their accounting requirements to comply with International Accounting Standards; secondly, the exemption regime to private placements still contributes only to the developments of the wholesale market and creates a complex regime to certain markets such as the debt market, whose exemption regime is subject to a denomination criteria.

The Prospectus Directive will involve the following main changes: (i) the amendment of definitions of institutional investors and public offer, with impact upon the scope of exempted offers; (ii) the new structure of the prospectus, in particular allowing for the shelf registration mechanism of frequent issuers and for a summary containing special warning to retail investors; (iii) the redefinition of the national competent authority to approve the prospectus with full control upon the relevant issuers; and (iv) the obligation to provide ongoing information.

Although these changes will not mean a complete revision in the Portuguese framework, they will have a two-fold impact. The revised disclosure regime will impose an additional disclosure burden on Portuguese, EU and foreign issuers offering or admitting securities subject to the Portuguese authority's competence, and impose additional supervisory costs on CMVM, which might have a broader competence and is subject to cooperation and supervisory convergence obligations. However, it will provide an environment for private placements under a unified regime with the remaining EU member states, and ideal conditions for cross-border retail public offers facilitated by the integrated regulations.

Taking all this into consideration, the Portuguese securities market expects that the implementation of the Prospectus Directive will permit a more friendly environment for public offerings and admissions in Portugal.

Author biographies

Jorge de Brito Pereira

PLMJ

Jorge de Brito Pereira is head of the capital markets department. His main practice areas are banking, finance and capital markets; corporate, mergers and acquisitions; and privatizations.

De Brito Pereira is a graduate of the Portuguese Catholic University Law School, Lisbon (1990) and holds a masters in law (legal sciences) from the University of Lisbon Law School (1998). He was admitted to the Portuguese Bar Association in 1992, and was conferred the title of Expert Lawyer in Finance Law by the Association in 2004.

Between 1990 and 2001, de Brito Pereira held several assistant professor positions at the University of Lisbon Law School, covering contracts, labour, banking, corporate and securities law. In 2004 he was head professor of securities law in the Portuguese Catholic University Law School.

Brito Pereira was vice-chairman of the board of the general meeting of the executive board of the Securities Institute until 2001. He is an arbitrator designated by several arbitration centres in the areas of financial and securities law and is chairman and vice-chairman of boards of the general meetings of several commercial companies. He was a member of the Commission for the Revision of the Securities Market Code in 2000.

De Brito Pereira is a member of the International Bar Association. He speaks Portuguese and English.

Sónia Teixeira da Mota

PLMJ

Sónia Teixeira da Mota focusses on banking, finance and capital markets.

Teixeira da Mota is a graduate of the Lusíada University Law School (1994) and holds a LLM in banking and finance law from the University of London (1995 – 1996). She was admitted to the Portuguese Bar Association in 1997.

Teixeira da Mota was a jurist at the Collective Investments Schemes Department of the CMVM – Securities Market Commission from 1998 to 2000 and a jurist at the Stock Exchange Managing Entities Supervision Department of the CMVM in 2001.

She has participated in working groups for the CMVM on the regulation of the Securities Code.