Alleviated disclosure requirements
The new Prospectus Regulation is part of the EU capital markets union action plan, which aims to make it easier for companies to enter and raise capital on public markets. Some of the changes are improvements from the perspective of both the issuer and the investor; however, the new prospectus rules will not make a significant difference to the cost and time involved in accessing EU capital markets.
The Prospectus Regulation does however introduce a lighter prospectus regime for issuers already listed on a public market that want to raise debt, issue additional shares or obtain a secondary listing. In addition, an alleviated corporate bond prospectus will be available for those seeking admission to wholesale debt markets. Frequent participants in the capital markets will have the benefit of a frequent issuer regime that they can activate when an opportunity to raise funds arises. For prospectuses that satisfy all requirements, the approval times will be cut in half, to now only five days. The extent to which the market will adopt these lighter disclosure regimes remains to be seen, especially when taking into account the disclosure requirements in non-European jurisdictions (and in particular, practices related to offerings to US institutional buyers under Rule 144A).
Content of prospectuses
Many rules on the content of prospectuses have been rephrased and reordered. In most cases, the changes are not substantive: they simply clarify the rules and make prospectuses more accessible. However, prospectus summaries must now be shorter, and the language used must be easier to understand for investors. Boilerplate language is to be avoided where possible. Standard prospectus chapters on taxation and selected historical financial information, which normally use a lot of boilerplate language, will no longer be mandatory.
In the risk factors chapter, the only risks that may be included are those that are: specific to the issuer or the securities, and material for an investor to make an informed investment decision. Risk factors should stem from, and be supported by, other information in the prospectus. Materiality is to be assessed based on the probability of a risk occurring, and the expected magnitude of its negative impact. Furthermore, risk factors should be categorised by their nature and presented in order of their materiality. Although this approach to risk factors largely corresponds to current market practice for equity, regulators are expected to heavily scrutinise the risk factors following the new Prospectus Regulation and ESMA’s guidance.
No EU prospectus will be required for offers of securities to the public below EUR 1 million. However, member states will be able to set higher thresholds for their domestic markets. In the Netherlands, the legislature has set the threshold at EUR 5 million. An EU growth prospectus will be available for small and medium-sized enterprises (SMEs), mid-caps admitted to an SME Growth market, or small issuances by non-listed companies.
Relevant exemptions for share issuers
Two exemption provisions relevant for share issuers have been in effect since 20 July 2017, when the Prospectus Regulation entered into force. The previous 10% exemption from the prospectus requirement for the listing of securities within a 12-month rolling period, was extended to permit the listing of 20% of securities without a prospectus within a 12-month rolling period. However, this exemption does not apply to the prospectus requirement for securities offerings. Accordingly, for each transaction, whether a separate exemption is available for the offering of new securities needs to be analysed.
The previous unlimited exemption from the obligation to prepare a prospectus for the listing of new securities that result from the conversion of other securities (such as convertible bonds, dual class of shares and non-employee options) was restricted to 20% during a 12-month rolling period. This restriction may be relevant for listed companies with outstanding large or multiple convertible bonds. It does not apply to convertible securities that were offered or listed based on a formal prospectus.