The prospectus regime is being amended throughout Europe and this Alert provides (i) a summary of the key provisions of Directive 2010/73/EU (the "Amending Directive"), which amends the Prospectus Directive 2003/71/EC (the "Prospectus Directive"), and (ii) details of the related recently published delegated amending regulations, which amend the Prospectus Regulation 809/2009 (the "Prospectus Regulation"). Some of these changes have already been implemented in the UK and others will come into force on 1 July 2012.
These changes will modify:
- when the Prospectus Directive does not apply;
- when a prospectus which complies with the Prospectus Directive (a "Prospectus") must be published;
- requirements in relation to the form and content of a Prospectus; and
- certain other aspects of Prospectus regulation.
The Prospectus Directive, as supplemented by the Prospectus Regulation, was implemented in the European Union ("EU") on 1 July 2005. It requires that a Prospectus must be published whenever securities (debt or equity) are offered to the public in the EU and/or an application is made for securities to be admitted to trading on an EEA regulated market. It aims to (i) standardise requirements in relation to Prospectuses, (ii) protect investors by setting out minimum disclosure requirements and (iii) facilitate access to capital by, amongst other things, introducing a passporting regime which allows issuers to use a Prospectus already approved by the competent authority (such as the Financial Services Authority ("FSA") in the UK) in its home country in connection with an offer or admission to trading of securities in any other EU member state without seeking further approval. Typically, an issuer's home country is the member state in which such issuer's registered office is located or, for issuers located outside the EU, the member state in which the securities are offered to the public for the first time.
The European Commission was required to carry out an evaluation of the Prospectus Directive on its fifth anniversary. This evaluation highlighted the need for various amendments, which culminated in the amendments provided for in the Amending Directive. A detailed discussion of the Amending Directive is set out in our client alert entitled "Amendments to the EU Prospectus Directive: Summary of Key Changes" published on 23 June 2010. Pursuant to the Amending Directive, the European Commission has published Commission Delegated Regulation 486/2012/EU and another draft delegated regulation on 4 June 2012, which amend the Prospectus Regulation. The content of the delegated regulations is based on technical advice provided by the European Securities and Markets Authority ("ESMA") (the new European supervisory authority for the securities sector).
The changes required by the Amending Directive must be incorporated into national law by each member state by 1 July 2012. The UK is on track to meet this deadline. It has already implemented certain provisions of the Amending Directive designed to facilitate efficient access to capital on public markets by small and medium sized enterprises ("SMEs") (see The Prospectus Regulations 2011 (S1 2011/1668)) and it has promulgated legislation in relation to the remaining amendments, which will come into force on 1 July 2012 (The Prospectus Regulation 2012 (S1 2012/1538)). The delegated regulations will, in any event, automatically become law in all member states on the same date.
Key provisions of the Amending Directive and delegated regulations in force on 1 July 2012
When the Prospectus Directive does not apply
The Amending Directive revised Article 1(2) of the Prospectus Directive, which sets out when the Prospectus Directive will not apply, so that the following types of offers will fall outside the scope of the Prospectus Directive (and the relevant issuers are exempt from producing a Prospectus):
(i) offers of securities where the total consideration is less than EUR 5m (increased from EUR 2.5m), which must be calculated over a period of 12 months; and
(ii) offers of non-equity securities issued in a "continuous or repeated manner by credit institutions" where the total consideration is less than EUR 75m (increased from EUR 50m).
ESMA recently updated its guidance in relation to prospectuses by providing additional information about how issuers should determine whether they have reached the threshold described at sub-paragraph (i) above. According to ESMA, equity and debt securities should be considered separately for calculation of the limit. Also, offers made during a 12 month period which qualify for other exemptions (such as offers to qualified investors) or where a Prospectus has already been registered should not be taken into account for the calculation of the limit.
The UK has already implemented the changes described above by amending the Financial Services and Markets Act 2000 ("FSMA"), which also provides a mechanism for calculating whether an offer of securities denominated in a currency other than euros meets the thresholds set out above. In particular, it states that the calculation to determine the equivalent euro amount should take place, "at the latest practicable date before (but in any event not more than 3 working days before) the date on which the offer is first made" (see 86(1)(5) and s86(1)(6) of FSMA).
When the obligation to publish a Prospectus does not apply
Article 3(2) of the Prospectus Directive sets out when the obligation to publish a Prospectus does not apply and Article 4 of the Prospectus Directive sets out exemptions from the obligation to publish a Prospectus. The Amending Directive has altered these provisions in the following ways:
Qualified investor definition -- A Prospectus is not required for an offer of securities addressed solely to qualified investors. The Amending Directive has aligned the definition of qualified investor to points (1) to (4) of Section I of Annex II to Directive 2004/39/EC (MiFID) to "reduce the complexities and costs for investment firms in the event of private placements because the firms would be able to . . . rely on the list of professional clients and eligible counterparties drawn up in accordance with MiFID and no separate regime for registers should be maintained."
Smaller offers -- The Amending Directive has raised the thresholds set out in Article 3(2), so that a Prospectus is not required for offers of securities (i) addressed to fewer than 150 (increased from 100) people or organisations in each member state; (ii) with denominations of at least EUR 100,000 (increased from EUR 50,000); and (iii) where the total consideration received per investor is at least EUR 100,000 (increased from EUR 50,000) for each separate offer. The UK has already implemented the exemption described at (i) above.
Employee share schemes -- The Amending Directive has expanded the exemption from publishing a Prospectus for employee offers of securities by listed companies set out in Article 4(1)(e) of the Prospectus Directive, so that it will apply to all companies whose registered or head office is in the EU (not just EU listed companies) and non-EU companies whose securities are admitted to trading either on a regulated market or a third country market in respect of which the European Commission has adopted an equivalence decision.
The form and content of a Prospectus
Levels of disclosure -- The Amending Directive amends the minimum information requirements set out in Article 7 of the Prospectus Directive. As a result of the Amendment Directive, Prospectuses published in relation to a listing of debt securities with a minimum denomination of EUR 100,000 (increased from EUR 50,000) will qualify for the reduced "wholesale" disclosure regime under Annexes IX and XIII of the Prospectus Regulation. In addition, a proportionate disclosure regime will be available for pre-emptive ("rights") issues of equity securities offered (i) by companies whose shares of the same class are admitted to trading on a regulated market and some other multilateral trading facility; (ii) by SMEs; and (iii) by listed companies with a market capitalisation of less than EUR 100m. The regime will also be available to credit institutions for offers of specific types of non-equity securities. The proportionate disclosure regime permits issuers to draw up Prospectuses in accordance with the annexes of the Prospectus Regulation that contain less onerous information requirements. For instance, they do not include the requirement to provide three years' worth of audited financial statements. Despite such advantages, it remains to be seen whether eligible issuers will opt to comply with the full disclosure regime to avoid deterring investor appetite.
Profit forecasts and estimates -- The draft delegated regulation dated 4 June 2012 seeks to clarify existing disclosure requirements, in particular in relation to profit forecasts and estimates, and amends the related annexes of the Prospectus Regulation. These amendments clarify that although a profit forecast or estimate must be accompanied by an independent accountants' or auditors' report, a report will not be required in relation to certain financial information if specific conditions are met. These conditions are:
- the financial information relates to the previous financial year and only contains non-misleading figures substantially consistent with the final figures to be published in the next annual audited financial statements for the previous financial year, and the explanatory information necessary to assess the figures; and
- the Prospectus includes all of the following statements:
(i) the person responsible for this information, if different from the one who is responsible for the prospectus in general, approves that information;
(ii) independent accountants or auditors have agreed that this information is substantially consistent with the final figures to be published in the next annual audited financial statements; and
(iii) this financial information has not been audited.
Summary -- The Amending Directive has amended the requirements in relation to the summary which must be included in a Prospectus, so that the summary must (i) contain the information that falls within the scope of the new definition of "key information" (which includes (a) a short description of the risks associated with the essential characteristics of the issuer, guarantor and securities; (b) the general terms of the offer; (c) details of admission to trading; and (d) reasons for the offer and use of proceeds) and (ii) be drawn up in a standard format "in order to facilitate comparability of the summaries of similar securities". Detailed requirements in relation to the format of the summary and key information are set out in Commission Delegated Regulation 486/2012/EU. In particular, the delegated regulation amends Article 24 of the Prospectus Regulation, so that a summary must contain tables entitled "A. Introduction and Summary", "B. Issuer and Guarantor", "C. Securities", "D. Risks", and "E. Offer". Each table must list out "elements" of information in a prescribed order. An irrelevant "element" must not be omitted; it must be labelled "non-applicable". The length of the summary is also rigidly prescribed by the delegated regulation, which states that it must not exceed 7% of the length of the Prospectus, or 15 pages, whichever is longer. Despite these restrictions on length, the summary must be a standalone document and it must not contain cross-references to other parts of the Prospectus. Those responsible for the content of the summary should pay particularly close attention to these changes, as the Amending Directive expands the circumstances in which civil liability can arise. Previously, liability would only arise if a summary was misleading when read in conjunction with the other parts of the Prospectus, whereas (under amended Article 6 of the Prospectus Directive) liability may arise if a summary "does not provide, when read together with other parts of the prospectus, key information in order to aid the investor when considering whether to invest in such securities".
Final terms -- Commission Delegated Regulation 486/2012/EU emphasises that "the final terms should not amend or replace any information contained in the base prospectus as any new information which may affect the investor's assessment of the issuer and of the securities is to be included in a supplement or a new base prospectus, which is subject to prior approval by the competent authority. Accordingly, the final terms should not include any new description of any new payment conditions which was not included in the base prospectus." In practice, the final terms will consist of a list of relevant information and any free text will appear in the other documents, including the Prospectus. The delegated regulation introduces a new annex to the Prospectus Regulation which groups the information requirements set out in the existing annexes of the Prospectus Regulation into categories A, B and C to clarify (and limit) exactly what type of information is eligible to be included in the final terms. The guidance in relation to Prospectuses recently published by ESMA (referred to above) provides further information on these changes and includes examples of final terms incorporating some of the changes. Most issuers will need to replace the existing base prospectus in order to accommodate the recent amendments, but they will enjoy some "breathing space", as the changes introduced by Commission Delegated Regulation 486/2012/EU will only apply to Prospectuses and base prospectuses approved on or after 1 July 2012. Prospectuses and base prospectuses approved before this date will remain valid for one year from the date of approval.
Other aspects of Prospectus Regulation
Timing of supplementary prospectus and withdrawal rights -- The Amending Directive introduces amendments aimed at clarifying time periods set out in the Prospectus Directive. In particular, (i) Article 16(1) of the Prospectus Directive has been amended to provide that the period in respect of which a supplementary prospectus is required to be published is the later of (a) closing of the offer or (b) commencement of trading; (ii) Article 16(2) of the Prospectus Directive has been amended to provide that withdrawal rights (a) apply only where there has been an admission to trading and (b) must be exercised within two business days of publication of the supplement (unless the issuer extends this period); and (iii) Article 9(1) of the Prospectus Directive has been amended to provide that a Prospectus is valid for 12 months after approval (rather than publication).
Electronic publication -- The Amending Directive has amended Article 14(2) of the Prospectus Directive which sets out the acceptable methods of publication, so that a Prospectus is deemed available to the public when published either on the issuer's website or (rather than as well as) the website of the financial intermediaries placing or selling the securities.
Abolition of annual information update -- The Amending Directive has deleted Article 11 of the Prospective Directive, so that an annual information update is no longer required. This is to ensure that the Prospectus Directive does not duplicate the information disclosure requirements of the Transparency Obligations Directive 2004/109/EC.
Retail cascades -- Subsequent resales of securities by financial intermediaries constitute separate offers under the Prospectus Directive and require a separate exemption from the original offer or publication of a Prospectus. The amendments introduced by the Amending Directive to Article 3(2) of the Prospectus Directive provide that a new Prospectus is not required in a subsequent resale or final placement of securities through financial intermediaries, as long as a valid Prospectus is available and the issuer or person responsible for the Prospectus consents to its use by means of a written agreement. Commission Delegated Regulation 486/2012/EU sets out corresponding disclosure requirements.
The changes introduced by the delegated regulations will automatically become law in member states on 1 July 2012. As discussed above, the UK has taken steps to implement the Amending Directive by introducing The Prospectus Regulation 2011 (S1 2011/1668) (which is already in effect) and The Prospectus Regulation 2012 (S1 2012/1538) (which will take effect on 1 July 2012). These UK statutory instruments amend FSMA and the FSA Handbook, which is published by the FSA and contains the Prospectus Rules, Listing Rules and Disclosure Rules. The FSA Board has already approved the necessary amendments to its handbook.
Overall, the changes generally provide useful clarifications and streamline existing requirements. Nevertheless, issuers, advisors and other professionals active in the European financial markets should take note of the changes introduced by the Amending Directive and the delegated regulations as they are likely to require issuers to make significant changes to their documentation, particularly in the case of issuers using base prospectuses as part of their European debt issuances programmes. In addition, it will be important for interested parties to continue to monitor developments as the European Commission and ESMA continue to be very active in the area of further refining and providing guidance on the Amending Directive.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have about the Amending Directive and the EU Prospectus Directive. Please contact the Gibson Dunn lawyer with whom you work, or any of the following lawyers: