The stance taken by the European Union to reform the capital markets regulatory regime could be said to be the result of a long-standing desire by the industry to have certain key aspects of the prospectus regulatory framework revamped in order to enhance investor protection and market efficiency, promoting the proper functioning of the capital markets union in due course. Additionally, the new regime is aimed at addressing problems caused by the workings of the current regime, which include, inter alia, the high costs related to the preparation of a prospectus and the rigid requirements which all but exclude SME participation in regulated capital markets.
Full harmonisation across the EU, evidenced by the fact that a regulation (Regulation (EU) 2017/1129), rather than a directive, seems to be the end-goal for authorities. The ‘marked date’ on all authorities’ and industry players’ calendars is that of the 21st of July 2019, when the applicable regulation comes into full force. This follows a ‘staggered approach’ taken by the legislator, whereby different clauses contained within the regulation came into force at different times.
Amendments and new additions to the existing regime are the natural consequence of the emergence of a new law. Regulators, legal practitioners and all relevant players within capital markets will need to be on their toes and embrace such changes in order to provide an accurate service offering to their clients, irrespective of whether the aforementioned is the issuer or the end-investor.
Herein, we shall highlight six key features of the regulation.
Each member state has been granted the leeway to exempt offerings on a small scale, which equal to a total consideration of between one million Euro and eight million Euro when calculated over a 12-month period, from the requirement of drawing up a prospectus. Each member state has set its own limit. Malta has retained the five million Euro ceiling which was previously in force.
The introduction of a simplified disclosure regime applicable for issuers conducting a secondary issue has been introduced through Article 14 of the regulation. In this respect, the following issuers may draw up a simplified version of the prospectus:
The simplified prospectus in question shall contain the relevant reduced information which is necessary to enable investors to understand:
The growth prospectus is a measure undertaken by the legislator in order to promote SME and mid-sized companies’ participation in capital markets. The information which is to be included in such type of prospectuses is to be ‘lighter’ than that expected by standard issuers. The regulation does indicate the building blocks which must constitute such prospectuses; however, specific content to be included is governed by Regulation (EU) 2019/980 of the 14th March 2019.
With regards to eligibility to be able to benefit from such ‘lighter touch’ regime, the following companies are considered to be eligible:
In either of the above-mentioned cases, the issue conducted by the respective company cannot exceed that of twenty million Euro. Moreover, in order to ensure that investors are not subject to conflicting offering documents, companies which have already admitted specific securities to trading will not be able to make use of this regime.
A change brought about by the regulation is that risk factors must be categorised and noted in order of materiality. Additionally, issuers will have to limit risk factors to those determined to be material and specific to the issuer. Additionally, risk factors will have to be set out in a limited number of expressly stated categories depending on their nature, with the most material listed first. The concept of materiality in this regard encapsulates the likelihood of occurrence of the risk in question and the possible negative impact it shall have on the issuer, the issue and investor.
In an attempt to ensure that the rationale behind a summary’s inclusion is, practically, achieved, the regulation, whilst retaining the need for a summary (unless exempt, for example, in cases of debt instruments with a minimum denomination of one hundred thousand Euro), notes changes to the effect that such summaries must be shorter and more accurate.
The importance of the summary is further elevated by the fact that civil liability attaches to persons who tabled such summary with regards to misleading, inaccurate and/or fraudulent misstatements. The general stance taken by the regulation revolves around the length of the summary and the need for this to be short due to the fact that it is, after all, a summary.
By way of overview, substantially, such summaries must include an introductory section noting the key warnings relative to the issue, key information on the issuer, the securities being offered and on the offer in question and a section pertinent to the risks associated with the offer, with the latter consisting of 15 of the most material risks pertinent to the issuer and related parties.
This is a new addition by the regulation which is aimed at increasing efficiency within capital markets. The universal registration document (‘URD’) provides a swifter and faster pathway which issuers that have already issued such URDs for two years in a row must follow in order to access the capital market. Hence, issuers seeking to conduct an issue of securities may incorporate a URDs by way of reference in its prospectus. Such URDs may be passported and may hence be used by issuers conducting different issues in different states.
It is safe to say that the new prospectus regulation, as a ‘parent regulation’ upon which more technical and specific acts have been and are to be conducted, embodies the EU’s efforts to improve access to capital markets whilst still providing a high level of protection to investors.
The impending date of the 21st of July is indeed the last date upon which all the provisions within the regulation come into force, however, it is the very same date which signals the kick-off for all players in capital markets to make use of the different features found within the regulation and to ‘test’ the manner each provision ties with another on both a legal and practical level.