UK and EU Regulators Consult on Next Steps for Amendments to the Prospectus Directive
Christopher Bernard | Bloomberg Law
UK implementation of Amending Directive 2010/73/EU: Simplifying the EU Prospectus and Transparency Directives – Financial Services Authority and HM Treasury Consultation Paper CP 11/28 of 13 December 2011; ESMA’s technical advice on possible delegated acts concerning the Prospectus Directive as amended by the Directive 2010/73/EU – ESMA Consultation Paper ESMA/2011/444 of 13 December 2011
On 13 December, the Financial Services Authority (FSA) and HM Treasury published a joint consultation paper setting out the way in which they propose to implement amendments made to the Prospectus and Transparency Directives.1 The amendments are set out in a new directive (Amending Directive)2 that came into force on 31 December 2010, and Member States are required to implement them into national legislation by 1 July 2012.
New rules broadening the exemptions from the requirement to publish a prospectus have been effective in the UK since July. The latest consultation covers the remaining changes.
Also on 13 December, the European Securities and Markets Authority (ESMA) launched a consultation seeking views on technical advice that it proposes to give to the European Commission on a number of possible delegated acts (or rules) concerning the amendments to the Prospectus Directive.
Earlier in the year, ESMA provided advice on delegated acts regarding the format of the final terms and prospectus summary, the key information to be required in the summary, and a proportionate disclosure regime. This latest consultation covers delegated acts regarding the consent to use a prospectus in a retail cascade as well as a review of the provisions of Regulation 809/2004/EC (PD Regulation), as amended.
With these two latest consultations, the European prospectus regime continues to take shape and the Amending Directive moves one step closer to being fully implemented in the UK and throughout the EU.
The Amending Directive
The Amending Directive broadly seeks to improve legal clarity and overall efficiency of the prospectus framework, while also reducing administrative burdens for issuers without sacrificing investor protection. It also makes changes to the Prospectus and Transparency Directives to help ensure consistency and eliminate duplicative disclosures between the two regimes. The Prospectus Directive governs the preparation of prospectuses for public offers of securities and for the admission of securities to trading on regulated markets, while the Transparency Directive provides ongoing disclosure requirements for issuers once their securities have been admitted to trading.
Among other things, the Amending Directive:
- Introduces a proportionate disclosure regime for pre-emptive offers such as rights issues and open offers (provided that statutory pre-emption rights have not been disapplied), as well as for offers by small- and medium-sized enterprises and issuers with reduced market capitalisation;
- Amends the format and content of prospectus summaries, which will now be required to include “key information” on the issuer and its securities, and clarifies the extent to which liability attaches to prospectus summaries;
- Specifies when information not included in a base prospectus should be added by means of a final terms document and when it must appear in a supplementary prospectus;
- Increases the total consideration exemption threshold from €2.5 million to €5 million for offers in the EU and the public offer exemption threshold from 100 to 150 investors per Member State;
- Increases the exemption threshold for offers of non-equity securities issued in a continuous or repeated manner by credit institutions over a 12-month period from €50 million to €75 million;
- Increases the denomination and minimum consideration thresholds for wholesale securities from €50,000 to €100,000;
- Extends the exemption for employee share schemes to companies from outside the European Economic Area (EEA) with employees in the EEA, provided that there is adequate information available to investors and the legal and regulatory framework of the third country is considered equivalent to that of the EU;3
- Formalises the exemption for “retail cascades,” which allows financial intermediaries placing or reselling securities to rely on the original prospectus so long as it remains valid, provided the issuer or the person who drew up the prospectus has given their consent in writing;
- Clarifies when a supplement must be produced to reflect a new factor, mistake, or inaccuracy as well as the circumstances in which an investor may withdraw from an investment;
- Repeals the Prospectus Directive requirement to produce an annual disclosure document, as it overlaps with a similar requirement under the Transparency Directive;
- Makes the definition of a “qualified investor” consistent with the definition of a professional client provided in MiFID,4 and requires investment firms and credit institutions to communicate their classification of investors to issuers on request, without prejudice to data protection legislation; and
- Confirms that where securities are guaranteed by a Member State, information relating to that Member State can be omitted from the prospectus.
On 25 January, the Commission mandated ESMA to provide advice on delegated acts regarding the Prospectus Directive, as amended by the Amending Directive.5 ESMA was also asked to consider a number of technical adjustments and clarifications to the PD Regulation, which implements certain elements of the Prospectus Directive.
ESMA published a call for evidence on 26 January, asking interested parties to provide their views on the content of its advice to the Commission,6 and provided its final advice on delegated acts regarding the format of the final terms and prospectus summary, the key information required in the summary, and the proportionate disclosure regime on 4 October.7 ESMA’s latest consultation is confined to delegated acts regarding the consent to use a prospectus in a retail cascade and the provisions of the PD Regulation.
— Retail Cascades
With regard to retail cascades, ESMA’s consultation includes the following advice:
- Offers by intermediaries may only be made in accordance with the terms and conditions disclosed in the prospectus, including the methods for determining the price of the securities being offered;
- The issuer’s consent to use the prospectus cannot extend beyond the validity of the prospectus;
- The written agreement containing the consent to use the prospectus need not be disclosed to the public, though the consent itself must be published together with the identity of the financial intermediaries and any relevant conditions to the consent, including its duration; and
- The consent should be included in the prospectus or the base prospectus/final terms.
According to ESMA, the prospectus should include the following disclosures:
- That the issuer intends to offer securities via financial intermediaries;
- That the issuer consents to the use of the prospectus by financial intermediaries and accepts responsibility for its content with respect to those offers;
- The identity of the financial intermediaries who are allowed to rely on the prospectus; and
- Any conditions attached to the consent that are relevant for the use of the prospectus, including its duration.
ESMA also provides advice on what information should be included in the base prospectus and what can be added in the final terms, depending on when the information is known to the issuer. If a financial intermediary is appointed after filing of the final terms, replacement final terms must be published and filed. In the case of a standalone prospectus, ESMA asks whether a supplement would be necessary or appropriate to disclose the appointment of financial intermediaries after the prospectus has been approved.
— Prospectus Regulations
With regard to its review of the PD Regulation, ESMA has given the following advice:
- The current requirement to disclose information on taxes from securities withheld at source should not be changed.
- The description of an index composed by the issuer should continue to be disclosed in the prospectus, and this requirement should be expanded to include an index composed by any entity belonging to the same group as the issuer, or by an entity acting in association with, or on behalf of, the issuer. With regard to Item 2.10 of Annex XV, however, which refers to a “broadly based and recognised published index,”8 it is sufficient to indicate where information about the index can be found rather than providing a description of the composition of the index.
- The requirement to include a report by independent accountants or auditors with profit forecasts or estimates should continue to apply. However, “preliminary statements” should not be deemed profit forecasts, and therefore should be excluded from this requirement, provided they meet certain criteria.
- ESMA is not in favour of reducing the requirement for audited historical financial information from three to two years. In its view, the need for investors to have adequate information on which to base their investment decision outweighs any cost savings to issuers that may be achieved by such a change.
ESMA will consider comments received on its consultation paper by 6 January 2012, with a view to providing its advice to the Commission by the end of February. ESMA will address the equivalence of third-party financial markets, compare the liability regimes of the various Member States, and advise on the prospectus disclosure requirements for convertible or exchangeable debt securities at a later date.
Implementation Measures in the UK
In the UK, HM Treasury decided to implement the increases to the total consideration and public offer exemption thresholds on 31 July,9 one year ahead of the 2012 deadline, as they would be beneficial to companies, in particular smaller companies.
The new joint consultation paper addresses the implementation of the remaining amendments. Some of these changes will be implemented through theFinancial Services and Markets Act 2000, for which HM Treasury has responsibility, while others will require amendments to the Prospectus Rules (PR), Listing Rules (LR), and Disclosure and Transparency Rules (DTR), which are the responsibility of the FSA. The proposed amendments are annexed to the consultation paper. Amendments reflecting the proportionate disclosure regime will be made once ESMA has completed its technical work.
With regard to the revised definition of “qualified investors,” HM Treasury interprets the new language “without prejudice to the relevant legislation on data protection” to mean that the firm must comply with relevant legislation, not that the relevant legislation will not apply, and asks what data protection legislation would be relevant.
Both HM Treasury and the FSA have stated that the expected costs of transitioning to the amended regime should be minimal, while the cost savings afforded by the new rules should be significant. Interested parties are invited to submit comments by 31 March 2012.
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