Changes in financial market regulation tend to be met with sighs from companies and investors alike, for habitually imposing onerous regulatory requirements and increasing compliance costs. The new Prospectus Regulation (PR3), however, was welcomed by a round of applause and praised for loosening the administrative red tape enclosing the secondary markets – making it cheaper for companies, especially small and medium-sized enterprises (SMEs), to access and raise money in the capital markets.
The EU has the ambition to establish by 2019 a Capital Markets Union (CMU), which it anticipates will enhance growth, make markets more efficient and, critically, help businesses tap into more diverse sources of capital. Part and parcel of the EU Action Plan – a sobriquet for the comprehensive programme of “building blocks” establishing the CMU – was a proposal to revise the prospectus regime and address the increasing criticism that current rules impose disproportionate costs and administrative burdens on companies seeking to raise funds.
PR3 is a direct response to these criticisms. It streamlines the administrative fundraising process and makes it cheaper for companies to access the capital markets. This has been achieved through:
- broadened allowances, providing more exemptions for issuers from the need to publish a prospectus;
- new categories of prospectus; and
- changes to the prescribed content of summaries and risk factors.
The new rules have been implemented in stages since they came into force in the summer, with full application kicking in on 21 July 2019. This gives firms just over 18 months to familiarise themselves with the new framework.
Companies contemplating capital raisings and crowdfunding projects of up to €1 million (previously €100,000) will benefit from the de minimis provision and will not be required to publish a prospectus. The EU opined that the cost of producing a prospectus for such companies is disproportionate to the envisaged proceeds of the offer and, as such, an obligation to publish one is inappropriate. Additionally, member states may – taking into account the level of domestic investor protection they deem suitable – elect to exempt companies from the need to publish a prospectus where offers of securities to the public do not exceed €8 million (previously €5 million). HM Treasury is expected to elect to do so. These larger thresholds mean that fewer companies will be required to publish a prospectus, incentivising smaller firms to participate in the secondary markets.
Further, under PR3, companies with securities already admitted to trading on a regulated market can now admit further shares without publishing a prospectus, provided that the new shares represent less than 20% of the same class already admitted to trading over a 12-month period (previously 10%). This provision came into force on 20 July 2017 and its impact has been evident: Starwood European Real Estate Finance and CATCo Reinsurance Opportunities are two examples of companies proposing to raise fresh capital through opportunistic tap issues pursuant to the new threshold. Starwood has the authority, but may not have started the placing programme yet.
The new regime contemplates varying types of prospectuses, tailored to specific companies with differing funding wants and needs. For example, from an equity perspective, the new EU growth prospectus will be available for certain companies (a comparatively simple document, suited for SMEs considering modest fundraises). On the debt side, an abbreviated corporate bond prospectus will be available for companies seeking admission to the wholesale debt markets. This prospectus was previously only available to debt issued in denominations of at least €100,000, which proved impassable for many investors seeking to trade in corporate debt. This restriction has been scrapped, promising to bring more liquidity into secondary markets for corporate bonds.
The new rules also loosen the publication requirements for repeated offerings and will replace the existing proportionate disclosure regime, which has never proved popular. A shorter prospectus will apply to offers or admissions of securities of companies with securities admitted to trading on a regulated market or an SME growth market for at least 18 months. Notably, the requirements regarding financial information in these types of prospectuses will be minimal and may be incorporated by reference. Additionally, companies that frequently access the capital markets will benefit from the new “frequent issuers” regime and be permitted to use a universal registration document (URD). Aped from the US, a URD will be a prescribed shelf registration document, containing key information on the company's business, financial position, governance and shareholding structure. Companies will be able to “activate” an issue once an opportunity to raise funds arises and benefit from a fast track approval process for prospectuses, easing the practice of multiple smaller offerings.
A further (underestimated) change is scrapping paper prospectuses: firms will no longer be required to publish a hard copy prospectus, unless a prospective investor explicitly requests one. This will result in considerable cost savings, helping to bring the prospectus regime into the digital age. ESMA will store these digital prospectuses on a free online database.
The EU's concern that legal advisers were relying on boilerplate and recycled risk factors has led to a turning of the screw in PR3. Risk factors must be specific and tailored to the issuer and securities at hand; generic disclaimer risk factors are prohibited.
PR3 has augmented the rule that risk factors must be material to investors making an informed investment decision. Now, companies will be required to assess the materiality of risk factors based on (i) the probability of their occurrence and (ii) the expected magnitude of a negative impact. The European Commission will produce additional delegated regulation to set out more specific guidelines as to how the materiality of a risk factor should be assessed. Issuers will be encouraged (but not compelled) to disclose their assessments of materiality. Issuers, will, however, be obliged to set out risk factors in order of materiality, even if they choose not to disclose their methodology for such determination.
Summaries: plain language
As before, a prospectus summary will need to be clear, concise and written in plain language so it can be easily understood and digested by investors. It should not be a compilation of excerpts from the bulk of the prospectus, but a self-contained part. Under PR3, the length of a summary must not exceed seven pages and any risk factors are limited to 15 in number – there is a clear intention here to make summaries more succinct. While this may demand greater deliberation from legal advisers, it is intended to facilitate investors making informed investment decisions.
The new prospectus regime aims to create a level playing field for SMEs in the capital markets, all the while ensuring the markets function efficiently and that investors are adequately protected – a true building block to the CMU. Despite the UK's impending exit from the EU, it is widely accepted that divergent approaches in capital markets regimes would result in market fragmentation. The UK is, therefore, likely to transpose PR3 into national law, as a starting step in ensuring that in a post-Brexit world, UK business will be able to continue to access diverse sources of capital in the EU.
In this issue
- GDPR: do you need a data protection officer?
- Prospectus to buy into
- From Milngavie to the Middle East
- Devolution after the Brexit hurly burly
- Reading for pleasure
- Opinion: Janys M Scott
- Book reviews
- President's column
- Forward from a landmark year
- People on the move
- Equality: is it practised?
- Alcohol pricing: a measured response?
- Private tenancies: rebalancing or just upheaval?
- Spending means savings: legal aid study
- Too late, too late?
- RebLaw Scotland – join the rebellion
- Sentences: having the last word
- Insolvency and jurisdiction update: stating the obvious?
- When threats are OK
- Enter yet another tenancy
- Rights of the funded
- Registration rejections – more than formalities
- Heritage holder
- Public policy highlights
- Society's first MOOC opens legal learning to all
- Where there's a will...
- Resolution for the new year
- Q & A corner
- A year to accredit
- Dilapidations: the pitfalls
- Scaling the depths
- Equality: a matter of choice?