After a long time on the radar, the EU Prospectus Regulation is now fully in force and has introduced a new regime for prospectuses. A reminder of the key changes is set out below.
EU Prospectus Regulation – Key Reminders
What has changed?
The EU Prospectus Regulation has replaced in its entirety the old prospectus regime which was based on the EU Prospectus Directive. This means that new rules now apply when prospectuses are being drafted and approved. However, the two triggers for a prospectus remain the same, namely admission to trading on a regulated market and an offer of securities to the public.
When did this happen?
The Prospectus Regulation came fully into force on 21 July 2019. However, a handful of provisions had come into force over the past couple of years:
- In July 2017, the exemption for secondary issues was amended to allow a company to issue without a prospectus up to 20% (increased from 10%) of its share capital of the same class that is already admitted to trading on the same regulated market.
- In July 2018, the consideration exemption changed in the UK from EUR 5 million to EUR 8 million. As before, this is calculated over 12 months and on an EEA-wide basis. EEA states have the option to set this exemption between EUR 1 million and EUR 8 million so the various thresholds will have to be checked when offering securities into other jurisdictions.
The remainder of the provisions which have now come into force affect the look and feel of the prospectus. The main aims of the Prospectus Regulation include making prospectuses shorter (especially for secondary issues), more relevant and easier to understand.
What are the transitional provisions?
Base prospectuses and stand-alone prospectuses which were approved prior to 21 July 2019 will remain valid for 12 months. Going forward, prospectuses will be approved under the new regime.
There are new FCA checklists for documents being submitted for approval under the new regime.
There will be a new requirement for issuers to send to the FCA a "data checklist" (including the issuer's LEI and information about the securities), so that the FCA can submit this information to ESMA. However, as ESMA has advised that it does not require the full data set to be submitted at present, the FCA has confirmed that it is currently making only limited changes to its electronic submission portal for the submission of documents, and issuers and their advisers should continue to use existing processes for the time being.
What about Brexit?
The Government has confirmed that it intends to treat prospectuses that are valid in the UK before exit (including EU prospectuses passported into the UK) as valid for the remainder of the 12 months from their date of approval, even where that includes a period after the UK exits the EU.
However, prospectuses that are approved before Brexit by the FCA will not be able to be used on a passported basis in the EU the event of a no-deal Brexit. In time, there may well be a divergence between the EU prospectus rules as amended in the future, and the position as adopted by the UK upon exit – but for now they are aligned.
How do the new rules apply?
The Prospectus Regulation is directly applicable in the UK without the need for implementation, but the FCA has introduced new rules – the Prospectus Regulation Rules ("PRR"), which have replaced the previous Prospectus Rules which were introduced in 2005 – to make sure its Handbook stays up to date.
The FCA published the final PRR last week and these also took effect from 21 July 2019. It is important to note that certain ESMA guidance is still relevant, although new ESMA Q&As have also been introduced – these focus on the Prospectus Regulation and the transition to the new regime. Post-Brexit, existing ESMA guidance will not form part of retained EU law and therefore will not be onshored.
Contents of a prospectus
The key changes affecting the content of a prospectus are set out below.
- General disclosure standard – new materiality wording has been introduced into the disclosure test, and the scope of information required to be disclosed has been widened to include "the reasons for the issuance and its impact on the issuer”. Although the principle of disclosure remains the same, the changes should encourage more focussed disclosure.
- Summary – the new format is shorter and easier to read. It must: - be no longer than seven sides of A4; - be presented in a Q&A format; - comprise four sections: an introduction, containing warnings about the investors' potential losses; and key information regarding the issuer, the securities and the offer to the public or admission to trading; and - include a short description of the most material (no more than 15) risk factors.
- Risk factors – the disclosure of risk factors in prospectuses has changed and the new requirements aim to make the risk factor section of a prospectus shorter, more relevant and more specific to the issuer. As a result, there is now a general prohibition on generic or boilerplate risk factors being included. Going forward, risk factors must be:
- specific to the issuer and securities being offered;
- clear as to materiality and must adequately describe the potential negative consequences of the risk while avoiding mitigating language;
- corroborated by information elsewhere in the prospectus; and
- presented and organised by category, with up to a maximum of ten categories permitted, and the most material risks should be included first within each category. "Material" for this purpose will need to take into account the probability of occurrence and expected magnitude of their negative impact.
More time is likely to be spent in preparing this section of the prospectus, which will be under increased scrutiny. The real impact will be seen once the FCA's new approach to risk factors becomes clear.
- Annexes – The Annexes which formed part of the previous Prospectus Regulation, and which governed the content of prospectuses, have also been repealed and replaced. Although the Annexes have been rewritten, there are not many substantive differences. Annex 1 is the new Annex for the registration document for shares, Annex 11 for the securities note and Annex 20 for pro forma financial information.
- Profit forecasts – A prospectus containing a profit forecast no longer has to include an auditor's report. However, given that a prospectus has to include a statement that the forecast has been prepared on a basis that is comparable with the historical financial information and consistent with the issuer's accounting policies, we expect that sponsors will continue to seek comfort from auditors, albeit on a private basis. In this respect we anticipate that practice will largely follow that underpinning working capital statements.
- Operating Financial Review (“OFR”) – The requirements have been amended to align with the management report requirements set out in the EU Accounting Directive and make it easier for issuers to incorporate by reference their management report to meet many aspects of the Prospectus Regulation’s OFR disclosure requirements. It remains to be seen if issuers will adopt this practice.
- Universal registration document or "URD" – a URD is a shelf document maintained by an issuer on an ongoing basis. It enables issuers to conduct an offering on an accelerated basis by using the URD together with a securities note. It is not anticipated that this will be commonly used in the UK but may be more popular in jurisdictions which already adopt a similar approach.
- New simplified disclosure regime for secondary issues – where its securities have been admitted to trading on a regulated market for at least 18 months, an issuer is now able to use a short-form prospectus to offer further shares, such as under a rights issue or open offer. Differences from a normal prospectus include the requirement to include only one year (as opposed to three years) of accounts, and the lack of requirement for an operating and financial review. This will generally not be used where there is any significant fundraising activity in the US and the prospectus will be expected to conform to general US disclosure standards. However, it is expected to be used for non-US fundraisings or those that include a small US offer to a limited number of large institutional investors in the US. The approach taken will depend on the size and nature of any US portion of the offer and the level of comfort on the prospectus disclosure required by the relevant banks involved.
- EU Growth Prospectus for SMEs – there is a simplified disclosure regime for offers to the public, but not for admission to trading on a regulated market. This is intended to facilitate access to capital markets and reduce administrative costs of raising capital for smaller companies. Again, it remains to be seen how widely used this will be.
Implications for AIM issuers
Although AIM companies are only required to produce a prospectus when they make an offer to the public, the changes to the Annexes also affect the content of AIM admission documents. There is a new version of the AIM Rules for Companies which includes an updated Schedule 2 setting out the new contents requirements for admission documents, and a revised Prospectus Regulation - AIM Annex, with the usual colour coding indicating the provisions which are carved out. There are also other consequential changes to the AIM Rules for Companies. All the changes took effect on 21 July 2019.