The EU has provisionally agreed a new set of rules providing for a single prospectus regime across member states, governing when a prospectus is needed, what information it contains and how it is approved.
Why is a new prospectus regime being implemented?
The EU Prospectus Directive is the key to the current legislative framework, setting out the requirements on issuers to publish a prospectus when either making an offer of securities to the public or listing securities on a regulated market (such as the LSE Main Market) in the EU. Reform of the prospectus regime forms part of the EU's Capital Markets Union (CMU) Action Plan, intended to create more integrated capital markets in the EU member states. As part of the Action Plan, the EU committed to modernising the prospectus regime, above all to address increasing criticism that the current regime under the Directive imposes significant cost and administrative burdens on companies, particularly SMEs, seeking to raise funds publicly.
The overarching aims of the new regime are straightforward: to improve access to finance, including cross-border investment, for companies, and to simplify information for investors.
What will change under the new regime?
The proposed changes are welcome, giving more flexibility for companies to raise capital either without publishing a prospectus at all or using a more streamlined document, but modest – perhaps inevitable given the tension between giving issuers more freedom whilst retaining adequate protection for investors.
Key proposed changes include:
Exemptions
- Small capital raisings of up to EUR 1 million (in total over a period of 12 months) will be exempt and no prospectus will be required. This is increased from EUR 100,000 under the existing regime and significantly increases opportunities for very small offerings and crowdfunding projects.
- The threshold at which a prospectus is mandatory for offers to the public will be raised from EUR 5 million to EUR 8 million (in total over a period of 12 months). Member states can decide to exempt offers below this threshold from the requirement to issue a prospectus. Currently in the UK, an offer of securities does not require the issue of a prospectus for offers below EUR 5 million (in total over a period of 12 months). It will be a matter for HM Treasury to decide whether to increase this exemption threshold when the new Prospectus Regulation is implemented in the UK. Exempted offers will not benefit from the EU passporting regime.
- Companies with securities admitted to trading on a regulated market can currently admit further shares without publishing a prospectus provided they represent less than 10% of the same class already admitted to trading (over a 12 month period). This will be increased to securities representing less 20% of the same class (over a 12 month period).
- Companies with securities admitted to trading on a regulated market can currently admit shares resulting from conversion or exchange of other transferable securities to the same market without publishing a prospectus. Under the new regime, a cap will be introduced so that the exemption only applies (subject to certain relaxations) where the resulting shares represent less than 20% of the shares of the same class already admitted to trading (over a 12 month period).
EU growth prospectus
- A new EU growth prospectus will be introduced, allowing the following entities to draw up a standardised, lighter and easy to complete document when offering securities to the public, provided their securities are not traded on a regulated market:
- SMEs
- issuers other than SMEs, whose securities are traded or to be traded on an SME growth market, with an average market cap of less than EUR 500 million for the three previous years
- issuers other than either of the above, where the offer does not exceed EUR 20 million (over a period of 12 months), who also have no securities traded on an MTF (such as AIM) and had a maximum of 499 employees on average during the previous financial year.
Further streamlining
- A frequent issuer regime, offering fast-track prospectus approval times (reduced from 10 days to 5 days) where the issuer files an approved optional universal registration document each financial year. This takes the form of a "shelf registration" document, containing key information describing the company's organisation, business, financial position, governance and shareholding structure. This option is available to issuers admitted to trading on regulated markets (such as LSE Main Market) and MTFs (such as AIM).
- A shorter prospectus for secondary offerings will apply to offers or admissions of securities by companies whose securities have been admitted to trading on a regulated market or an SME growth market for at least the last 18 months. In particular, the requirements for financial information in this shorter prospectus will be minimal and may be incorporated by reference. This change has not been extended to companies with securities admitted to trading on MTFs (such as AIM).
- Shorter, clearer prospectus summaries, including a standard maximum length of seven sides of A4.
- Paper prospectuses will only be required if a potential investor expressly asks for one, offering an opportunity to save costs.
When and how will the new regime be implemented?
The current EU Prospectus Directive is implemented into UK law by the FCA's Prospectus Rules and the Financial Services and Markets Act 2000 (FSMA). Unlike the Directive, the Prospectus Regulation will be directly applicable in the UK – it will not need to be implemented by UK legislation to take effect. Consequential amendments will, however, need to be made to the UK Prospectus Rules and FSMA to reflect its implementation and the repeal of the Directive.
The draft Prospectus Regulation is still working its way through the EU legislative process and, although informally agreed, the final text is yet to be published. It is anticipated that the new Prospectus Regulation will come into force in May or June this year, with most of its provisions applying 24 months after the effective date. A small number of provisions will come into effect earlier:
- The new 20% threshold on admitting further shares and the amended conversion exemption (described above) will take effect immediately on the coming into force of the Prospectus Regulation. The FCA is currently consulting on the changes to the UK's Prospectus Rules required as a result of the implementation of these provisions.
- The new small capital raisings limit of EUR 1 million and the member state discretion to exempt raisings below the increased threshold of EUR 8 million (described above) will take effect 12 months after the effective date of the Prospectus Regulation.
How will Brexit impact implementation of the new regime?
Until exit negotiations run their course the UK remains a full member of the EU and must continue to apply EU legislation. It is not yet clear to what extent EU legislation will continue to apply in the UK post-EU membership. It is likely that EU regulations and legislation will effectively be frozen into UK law by what has been dubbed "the Great Repeal Bill", continuing to apply until such time that the UK decides to amend, repeal or retain them. Given the vast body of legislation involved, those decisions could take a significant amount of time.
If you would like to discuss the new Prospectus Regulation or any aspect of the prospectus regime please speak to your usual contact at Burges Salmon or Nick Graves.
This update was written by Alyson Whale.