On 21 July 2019, a new prospectus regime came into effect across the European Union. The Prospectus Regulation (Regulation (EU) 2017/1129) (the ‘Regulation’) repeals the Prospectus Directive 2003/71/EC (the ‘Prospectus Directive’) and puts in place a harmonised framework which is intended to ensure investor protection and to drive supervisory convergence at the EU level where securities are offered to the public or admitted to trading on a regulated market in an EU Member State. The European Commission felt that a reform of the existing prospectus regime was necessary in order to better facilitate access to capital market fundraising by cutting ‘red tape’ and making prospectuses less burdensome for issuers.
The Regulation sets out when a prospectus is required and its content, while also providing a new fast track prospectus approval process for companies that frequently access capital markets. A reduced disclosure regime for both secondary issuers and small and medium enterprises is also being introduced.
The Regulation is directly effective in all EU Member States, meaning that it does not strictly require any national transposing legislation to have effect.
However, the European Union (Prospectus) Regulations 2019 (the ‘Irish Regulations’) have been signed by the Minister for Finance to reflect the changes that came into effect on 21 July 2019. They replace the existing Irish Prospectus (Directive 2003/71/EC) Regulations 2005.
In addition, the Central Bank of Ireland has updated its existing Prospectus Rules and is consolidating them into the Central Bank (Investment Market Conduct) Rules 2019, together with the Transparency Rules and Market Abuse Rules.
Finally, the Finance (Tax Appeals and Prospectus Regulation) Bill 2019 has recently been published which will amend the prospectus law provisions in Part 23 of the Companies Act 2014. It will be enacted once it has made its way through the Houses of the Oireachtas.
Already in force
Certain elements of the Regulation came into force prior to 21 July 2019.
1. From 20 July 2017 - Secondary issuances and conversions/exchanges of securities on regulated markets
Fungible securities: The existing exemption in relation to the admission to trading of fungible securities has been increased from 10% to 20%. An issuance of new securities of the same class will not require a prospectus, provided that the new securities represent less than 20% of the number of securities already admitted to trading on the same regulated market, calculated over a period of 12 months.
Convertible securities: Subject to certain exceptions, a 20% cap has been applied to the exemption for shares resulting from the conversion or exchange of other securities, or from the exercise of the rights conferred by other securities. The resulting shares must represent not less than 20% of the number of shares of the same class already admitted to trading on the same regulated market, calculated over a period of 12 months.
BRRD exemption: A new exemption has been introduced for securities resulting from the conversion or exchange of other securities, own funds or eligible liabilities by a resolution authority under certain provisions of the Bank Recovery and Resolution Directive (BRRD).
2. From 21 July 2018 - Monetary thresholds for publication of a prospectus
Offers to the public in the EU of a total value of less than €1m calculated over a period of 12 months are now exempted from the prospectus regime entirely. In addition, each Member State was given the discretion to increase the threshold for the requirement to publish a prospectus for a public offer of securities to not more than €8 million. At the time, Ireland opted to maintain the status quo of a threshold of €5 million. However, the recently published Finance (Tax Appeals and Prospectus Regulation) Bill 2019 proposes to increase the threshold for local offers to the maximum permitted level of €8 million. It remains to be seen if and when this proposed amendment will take effect.
New elements from 21 July 2019
The following are the remaining key aspects of the Regulation that came into effect on 21 July 2019.
1. Simplified disclosure regime
A new and simplified EU Growth prospectus is being made available for SMEs, non-SMEs (where the securities are being admitted to an SME growth market) and unlisted companies with less than 500 employees when making offers of less than €20 million. Reduced disclosure requirements will apply, but the prospectus still must contain enough information to enable investors to make an informed investment decision.
In addition to the EU Growth prospectus, companies already trading on a regulated market or an SME growth market for at least 18 months may avail of a new, simplified prospectus when looking to issue additional shares or raise debt.
2. Universal Registration Document (URD)
Regular issuers of securities will have the option of preparing a Universal Registration Document (URD) which outlines issuer-level disclosure such as legal, business, financial, accounting and shareholding information as well as providing a description of the issuer for that financial year.
The URD must be approved by the competent authority for two consecutive years before the issuer can file URDs without prior approval. The URD will form a main part of the prospectus, together with the summary and securities note.
3. Prospectus summary
In the case of retail securities being offered to the public, a new, shorter prospectus summary is being introduced, which has been modelled on the existing key information document (KID) required under the PRIIPs Regulation. The summary must be a 'short document written in a concise manner' disclosing the 15 most relevant risk factors on a maximum of seven sides of A4 paper when printed (which may be extended in exceptional cases). If a KID has already been provided, it can be inserted into the prospectus summary.
4. Risk factors
The Regulation seeks to prevent overly broad disclosure of risk factors by stipulating that issuers should only set out risk factors that are material to enable an investor to make an informed investment decision and which are specific to the issuer.
The European Securities and Markets Authority (ESMA) has published Guidelines on Risk Factors in March 2019. The materiality of the risks must be assessed by the issuer based on probability and the magnitude of any potential damage. A qualitative scale of low, medium or high can be used for this assessment. ESMA has suggested a limit of 10 categories of risk factor, depending on the nature of the issuer, with the most material risk factor being mentioned first according to the issuer's assessment. Such risk factor disclosure should be corroborated elsewhere in the prospectus.
Prospectuses approved in accordance with the national laws transposing the Prospectus Directive before 21 July 2019 will continue to be governed by that national law until the end of their validity, or until 12 months have elapsed after 21 July 2019, whichever occurs first.