On 21 July 2019, the new EU Prospectus Regulation (the Regulation) comes fully into force, replacing the existing Prospectus Directive.
The Regulation, which is directly effective in all Member States of the EU, was created as part of the European Commission's Capital Markets Union Action Plan, the objectives of which include making the publication of prospectuses less burdensome for issuers, and harmonising the approach taken to the approval of prospectuses by supervisory authorities across the EU. The FCA has published a Policy Statement setting out the changes which are being made to the FCA Handbook as a result of the coming into force of the Regulation.
Whatever happens with Brexit, the Regulation will (at least in the short term) have a potentially significant impact on the drafting of prospectuses in the UK, and the approach taken by the FCA to their approval. As a result, these changes will no doubt be of interest to practitioners involved in the drafting of UK prospectuses.
A number of changes brought about by the Regulation have already come into effect, the key ones being:
- the increase from 10% to 20% in the percentage of share capital that can be issued by an issuer in any 12 month period without having to publish a prospectus (which came into force on 21 July 2017); and
- the raising of the threshold for the small offers prospectus exemption to €8 million (which came into force on 1 July 2018).
A summary of some of the key changes now coming into force is set out below.
- Risk factors
One of the stated purposes of the Regulation is to improve the readability of prospectuses and the relevance of their contents to investors. One of the key issues highlighted was that, as a matter of practice, risk factor sections of prospectuses had become too generic and lengthy. In order to combat this, the Regulation is now more prescriptive as regards risk factors than was the case previously under the Prospectus Directive.
The European Securities and Markets Authority (ESMA) has published its Final Report on Guidelines on Risk Factors under the Regulation (the Guidelines). Although the Guidelines give the FCA and other national competent authorities a degree of flexibility in their approach to interpreting the Regulation, it is likely that the FCA will look to the Guidelines in its approach to commenting on risk factors.
Risk factors will now therefore need to:
- be specific to the issuer and/or the securities being offered (and not generic or "boiler plate");
- be sufficiently material for investors for the purposes of them making an informed investment decision;
- be "corroborated" by the rest of the contents of the prospectus;
- give an indication of the materiality of the relevant risk to the issuer and the likelihood of it occurring; and
- be presented in a limited number of categories (with each risk factor only appearing once, in the most appropriate category).
It is likely that the FCA will now give more focus to the risk factors in its comments on draft prospectuses submitted for approval, so it is advisable for issuers and their advisers to consider carefully at an early stage the risk factors and their applicability to the issuer and its business, their potential materiality and their likelihood of occurrence, and reflect these considerations in the first draft of the prospectus submitted to the FCA.
- Prospectus summaries
The now familiar "elements based" format for prospectus summaries is being replaced by a "Q&A" style format (more akin to a Key Information Document prepared under the PRIIPS Regulation). The summary must include the following section headings:
- key information on the issuer;
- key information on the securities; and
- key information on the offer and/or admission to trading.
- only the 15 most material risk factors for the issuer (at a maximum) may be included in the summary; and
- the financial information included in the summary must now be presented in the tabular format prescribed in the ESMA Regulatory Technical Standards made under the Regulation.
- Other prospectus content requirements
There are a number of other changes to prospectus content requirements now coming into force, some of which include:
- significant change statements must now refer to the "financial position or financial performance" of the Group, rather than the "financial or trading position" as was the case previously, on the basis that there was uncertainty as to the meaning of the phrase "trading position";
- the use of proceeds disclosure will not generally be able to state that funds are being raised solely for "general corporate" purposes; and
- a wider range of information may now be incorporated by reference into a prospectus.
- Profit forecasts
Profit forecasts included in prospectuses will now no longer need to be reported on by an auditor. Instead, the issuer will need to provide the confirmation currently contained in the auditor's report on a profit forecast, i.e., that the forecast:
- has been prepared on the basis that it is comparable with the historical financial information (HFI) included in the prospectus; and
- is consistent with the accounting policies of the issuer.
There will be a question as to what comfort the directors of the issuer will want to obtain when making such a profit forecast in a prospectus, given their potential personal liability for the prospectus contents. As such, it may be the case that the auditors will continue to provide an opinion on such profit forecasts (although in the form of private comfort rather than a public statement in the prospectus itself).
- Simplified procedures for secondary fundraisings
The Regulation now enables issuers who have been listed for more than 18 months and who are carrying out a secondary fundraising to publish a short form, simplified prospectus (rather than the full form prospectus that would have been required previously), which will, among other things:
- only need to include one year of HFI; and
- not need to include an Operating & Financial Review (it will only need to include significant trends since the end of the last financial year).
- Frequent issuers
Issuers which frequently carry out secondary fundraisings will be able to publish a Universal Registration Document (URD) (i.e., a "shelf" prospectus) which will be valid for one year. A securities note can then be published by that issuer for the purposes of secondary fundraisings during the period of validity of the URD. These securities notes will be subject to a 5 working day FCA approval process. If an issuer publishes an FCA-approved URD in two consecutive years, it will receive "frequent issuer" status, which means that subsequent URDs can be published by that issuer without prior FCA approval (although the FCA will review such documents post publication).
- Issue of securities in the context of securities exchange offer
Under the Regulation, an issuer is not required to publish a prospectus in circumstances where it is issuing shares as consideration to the shareholders of a target company in the context of a takeover or merger, so long as the issuer publishes another "Exempted Document" describing, amongst other things, the takeover or merger. ESMA has issued Technical Advice on Minimum Information Content for Prospectus Exemption which sets out the minimum amount of information to be contained in an Exempted Document. A simplified disclosure regime can apply to reduce the level of information to be disclosed, where the issuer already has securities admitted to a regulated market or SME Growth Market. Information otherwise required to be disclosed may be omitted if such information is considered not to be material or pertinent, provided an explanation for such omission is included in the Exempted Document.
It remains to be seen whether issuers and their advisers will make use of this exemption in practice. A different exemption (for a prospectus equivalent document) existed under the Prospectus Directive; however, it was only very rarely used in practice (with most issuers opting to publish a full prospectus instead, where a prospectus could not otherwise be avoided).
- Further reading
The following documents relating to the Regulation have recently been published and may of interest to readers:
- ESMA has published its Q&A on the Prospectus Regulation;
- the Commission has adopted the following delegated regulations which supplement the Regulation:
- Delegated Regulation with regard to the format, content, scrutiny and approval of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, including the Annexes to that Delegated Regulation setting out the content requirements for prospectuses published under the Regulation (which it is proposed will be incorporated by reference into the FCA's Prospectus Rules); and
- Delegated Regulation with regard to regulatory technical standards on key financial information in the summary of a prospectus, the publication and classification of prospectuses, advertisements for securities, supplements to a prospectus, and the notification portal;
- the FCA has published new cross-reference lists and Listing Rules checklists; and
- AIM has published AIM Notice 56 attaching marked up versions of the AIM Rules for Companies, AIM Note for Investing Companies, AIM Note for Mining, Oil and Gas Companies and the Prospectus Rules AIM Annex document to reflect the Regulation.