This reform is part of the drive to create a single European Capital Market Union and to strengthen the effective Internal Market. Full harmonisation is intended to reduce the number of divergent rules in the Member States to a minimum.
The Commission is specifically pursuing four main objectives with the reform:
- Companies should be able to raise money more easily on the capital markets.
- Bureaucratic burdens and costs for issuers should also be reduced, particularly for small and medium-sized companies (SMEs).
- Investors should be able to obtain better and more appropriate information from the prospectus.
- Prospectus law should be more closely aligned with other rules on transparency and disclosure (e.g. the Market Abuse Regulation).
Therefore, the current draft provides for further exemptions from the obligation to publish a prospectus along with less onerous rules on preparing prospectuses.
Further exemptions from the prospectus requirement
Although the general requirement to publish a prospectus when making a public offer or an admission to trading of securities on a regulated market will remain, this will not apply if the issue volume is below EUR 1 million within 12 months.
The current limit is EUR 100,000. A Member State will also be able to provide further exemptions for public offers of up to EUR 8 million which are solely made in the domestic market.
A further important change concerns small share issues. Then, no prospectus is required if less than 20% of the company’s share capital is admitted to trading within 12 months. This represents a doubling of the existing threshold of 10%.
Lighter regime for secondary issues
The draft Regulation also provides for a simplified prospectus if an issuer had its securities admitted to trading on a regulated market or SME growth market continuously for at least the last 18 months and these securities are of the same class. This will make capital increases easier to handle in terms of the prospectus requirements.
Reliefs for SMEs
The draft provides for easier access to the capital markets for small and medium-sized enterprises as well as for issuers with a low market capitalisation (less than EUR 200 million over the last three years), unless they admit their shares to a regulated market. SMEs are defined as companies that meet two out of the following three criteria:
- fewer than 250 employees on average in the last financial year,
- balance sheet total not exceeding EUR 43 million,
- annual turnover not exceeding EUR 50 million.
The draft provides for a standardised, shorter prospectus with regard to form and content, which is referred to as an EU growth prospectus. The European Commission will set out the details by way of delegated acts. The growth prospectus should, however, be significantly easier and cheaper to prepare than a standard prospectus.
Introduction of a universal registration document
Regular issuers of securities will be given the option of filing an universal registration document (URD), which can be approved by the regulator in an accelerated procedure. The URD only contains information on the issuer itself and will form the securities prospectus together with the securities note (i.e. a description of the securities) and the issue-specific summary. The aim is to ensure that the issuer can have the sections of the prospectus not related to the specific issue available “on the shelf”.
Changes to the standard prospectus
Important reforms to the standard prospectus relate primarily to the summary and the risk factors.
The aim is to make the prospectus summary shorter and clearer. Accordingly, it may comprise no more than four sections and must not exceed seven A4 pages. The current limit is 7% of the overall content or a maximum of 15 pages. The size may be slightly increased if the prospectus includes a guarantee or covers multiple securities.
There are also far-reaching changes to the way risk factors are presented. No more than 15 factors may be included in the prospectus summary. This is likely to lead to discussions when preparing a prospectus about which risk factors to put in and which to leave out, particularly given the continuing lack of harmonisation of prospectus liability across Europe.
In the main section of the prospectus, the risk factors must be grouped into categories by type and arranged according to materiality. The most significant risk factors, as assessed by the issuer, must be listed first (likelihood of occurrence, impact on occurrence).
Whether this will achieve the aim of creating more readable prospectuses appears somewhat doubtful.
Entry into force
The reformed Prospectus Regulation is expected to come into force in the middle of this year, although it will only apply two years after that (probably from mid-2019). The increased thresholds for issues without prospectuses will, however, apply one year after the Regulation comes into force, while the 20% exemption will apply as soon as the Regulation enters into force.