The prospectus regime has been given a significant overhaul by the new Prospectus Regulation which applies in full from 21 July 2019. The regulation makes a number of important changes to a regime that has not changed much since its introduction in 2005.
The overall framework of whether an issuer is required to publish a prospectus for shares and, if so, what must be contained within it, has not significantly changed since the regime’s introduction in 2005 by the Prospectus Directive (2003/71/EC) (the Directive) and the former Prospectus Regulation (809/2004/EC).
The prospectus regime has been given a significant overhaul by the new Prospectus Regulation (2017/1129/EU) (the Regulation) which applies in full from 21 July 2019 (a handful of provisions came into effect in July 2017 and July 2018), replacing the Directive in its entirety. The Regulation makes a number of important changes and incremental improvements to the previous regime. Two key themes run through many of the changes: (i) reducing the length and improving the transparency of a prospectus; and (ii) protecting retail investors. The Regulation will result in a number of practical changes to the process of conducting and documenting offerings and admissions.
The key changes that are introduced by the Regulation can be grouped into the following categories.
General disclosure standard
There is new materiality wording in the disclosure test which recognises that the “necessary information which is material to an investor” in a prospectus may differ depending on the nature of the issuer, the type of securities and the circumstances of the issuer. The scope of necessary information is widened to include the reasons for the issuance and its impact on the issuer. There is also a new requirement for the disclosure to be written and presented in a form which is concise to encourage more focused disclosure.
A more prescriptive regime is introduced in an attempt to reduce the length of the summary. A new page limit of seven sides of A4 paper is introduced. The summary must be written in a concise manner and should be read as an introduction to the prospectus. The familiar tabular format is replaced by a requirement that the summary is organised under new question-style subheadings.
The Regulation introduces detailed requirements for the risk factor section of the prospectus. Risks must be material for the purposes of making an informed investment decision and be specific to the issuer. Risk factors will also need to be presented in no more than ten categories, depending on their nature, with the most material risks included first in each category. Risk factors must be corroborated by the content of the prospectus. This means that a risk factor cannot be included that relates to matters not disclosed elsewhere in the prospectus. The European Securities and Markets Authority (ESMA), has published guidance to assist competent authorities in reviewing risk factors in prospectuses and achieve consistency of approach.
The key content requirements for an advertisement are consistency with the prospectus and the inclusion of specific legends regarding the availability of the prospectus. Under the Regulation, these will include providing a hyperlink to the prospectus for electronic communications and providing details of the website on which it can be found on all other communications. Additional requirements apply to advertisements to retail investors. These will need to contain additional specified warnings and, in the case of an oral advertisement, identify the purpose of the advertisement at its start. The scope of things that may constitute advertisements has been broadened from “announcements” under the Directive to “communications” under the Regulation.
It will no longer be mandatory to include an auditor’s report on a profit forecast in a prospectus. While an auditor’s report is no longer required, the prospectus will be required to include a statement that the forecast has been compiled and prepared on a basis that is: (i) comparable with the historical financial information; and (ii) consistent with the issuer’s accounting policies. In other words, the issuer will be required to state itself what an auditor currently states in its opinion.
Secondary offerings and simplified disclosure
The Regulation will permit issuers that have been listed for at least 18 months to list and offer new securities, such as under a rights issue or open offer, using a short-form simplified prospectus which will be required to include only one year of accounts.
Universal registration document
The Regulation introduces the concept of a universal registration document. This enables issuers to publish a registration document on an annual basis which it can use to launch offerings by publishing a securities note (that is, the offering sections of a prospectus) on an accelerated basis during the year. This is similar to a US shelf registration programme. The concept is not expected to have a wide take-up except in countries such as France that already follow a similar practice.
The changes brought about by the Prospectus Regulation to the risk factors section of a prospectus are probably the most significant to issuers. The impact is likely to be twofold. Firstly, there may be a greater focus on this section by the issuer in order to ensure compliance with the ESMA requirements, which has the knock-on effect of increasing the time and costs involved in preparing a prospectus. Secondly, competent authorities are likely to raise more comments on the section, especially in the initial period following 21 July 2019, which could also have an impact on the timing of transactions.