The European Commission proposes radical new simplified disclosure regime in response to the Covid-19 crisis, the 'EU Recovery Prospectus', and changes to sponsor's obligations relating to supplementary prospectuses.
Maximum 30 page prospectus for post IPO share issues proposed
EU Recovery Prospectus
The EU Recovery Prospectus is being introduced to help companies raise equity so that they can restore sustainable debt-to-equity ratios and become more resilient.
Key features of the EU Recovery Prospectus will be:
- It will only be available in respect of secondary fundraisings and to issuers that have been continuously listed for at least 18 months, replicating the conditions in the current regime for issuers wishing to draw up a prospectus under the simplified disclosure regime for secondary offers;
- It is available to issuers whose shares are already admitted to trading on a regulated market (which includes the Main Market and the Specialist Funds Segment) or an SME Growth market (which includes AIM) provided that a prospectus has been published for the offer of those shares;
- It will be subject to a maximum page limit of 30 pages;
- A summary of a maximum of 2 pages must also be produced (compared to a 7 page limit for a standard prospectus). The summary is required to contain the necessary information which is material to an investor for making an informed assessment and be made up of the same four sections required for a standard prospectus; and
- A new fast track approval process by national competent authorities of no more than 5 working days.
In terms of disclosure requirements, the aim is that the EU Recovery Prospectus will focus purely on the essential information that investors require to make an informed decision. As a balancing measure, incorporation by reference of information already available in the market would be allowed and that information would not be taken into account in the 30 page limit. The simplified disclosure requirements for the EU Recovery Prospectus will be set out in a new Annex, Annex Va which, the Commission (the "Commission") states, have been tailored to the specific needs of a post-crisis environment while maintaining the prospectus as a relevant tool for informing potential investors. The requirements include:
- a responsibility statement;
- the most material risk factors that are specific to the issuer and the shares. As with standard prospectuses, issuers, in conjunction with their sponsors and advisers, will need to conduct an internal assessment to identify the most material risk factors;
- financial statements (annual and half-yearly) for the period of 12 months prior to the approval of the prospectus. Where both annual and half-yearly statements have been published, only the annual statements shall be required where they post-date the half yearly statements;
- trend information –consisting of (i) a description of the most significant recent trends in production, sales and inventory, and costs and selling prices since the end of the last financial year to the date of the prospectus; and (ii) information on any known trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on the company’s prospects for at least the current financial year;
- final offer price and amount of shares, including firm commitments from shareholders above 5% and names of the underwriters;
- information about when and where to subscribe for the shares;
- reasons for the offer and use of proceeds;
- a working capital statement: whether the working capital is sufficient for the issuer’s present requirements or, if not, how the issuer proposes to provide the additional working capital needed;
- information about any conflicts of interest; and
- details of shareholdings and voting rights after the issue.
As the EU Recovery Prospectus has been proposed in direct response to the Covid-19 pandemic, it is intended as a temporary measure that will expire 18 months after the date of application of the new regulation. EU Recovery Prospectuses approved before the expiration of the regime will benefit from a grandfathering provision and will be able to be used until the end of their validity or until twelve months have elapsed after the temporary regime has come to an end, whichever occurs first.
The Commission is also proposing an amendment to the Prospectus Regulation's provisions relating to supplementary prospectuses that are intended to facilitate fundraising by banks. Currently, the publication of a supplement triggers a withdrawal right for investors to be exercised within two working days from the publication of the supplement. As part of their duty to protect investors, financial intermediaries must contact investors to inform them that a supplement was published on the day when the supplement is published. Such a deadline, as well as the broad qualification of “investors”, have, the Commission acknowledges, created difficulties for financial intermediaries.
To deal with those difficulties and free up resources for financial intermediaries, the proposals:
- clarify that financial intermediaries should only inform those investors that have purchased and subscribed securities through them of the possibility of the publication of a supplement, provided that the purchase or subscription was agreed upon between the time when the prospectus had been approved and the closing of the offer period or the time when trading on a regulated market had begun, whichever occurs later. Following the publication of a supplement, the financial intermediary must only contact those investors benefiting from a withdrawal right; and
- extend the deadline for financial intermediaries to contact investors when a supplement to a prospectus is published by one working day. In parallel, in order to protect investors and their rights, the deadline for investors to exercise their withdrawal rights when a supplement is published will be extended by one day, from two working days to three working days.
The proposed amendments relating to supplementary prospectuses will be a permanent amendment, rather than form part of the measures that will expire after 18 months.
The Capital Markets Recovery Package is part of the Commission's Coronavirus recovery strategy. The aim of the measures is to make it easier for capital markets to support European businesses to recover from the crisis. The package proposes targeted changes to capital market rules, which will encourage greater investment in the economy, allow for the rapid re-capitalisation of companies and increase banks' capacity to finance the recovery. The package follows the Commission's communication "Europe's moment: Repair and Prepare for the Next Generation", published in May, in which the Commission presented key instruments supporting the recovery plan for Europe, including measures that aim at kick-starting the economy and helping private investment. This Communication also stressed that liquidity and access to finance will be a continued challenge for companies.
Included in the package are the following proposed targeted amendments to the Prospectus Regulation (2017/1129).
The proposals also entitle credit institutions to an exemption from the obligation to publish a prospectus in case of an offer of certain non-equity securities issued in a continuous or repeated manner up to an aggregated amount of EUR 150 million in a 12 month-period (the current threshold is EUR 75 million). Again, this will be a temporary measure and will expire 18 months after being brought into force.
The European Parliament and the Council are now required to agree to the various legislative texts. The changes to the Prospectus Regulation will, once in force, be directly applicable in Member States. If brought into force before the end of 2020, the changes will also be directly applicable in the UK. Under the European Union (Withdrawal) Act 2018, the amended Regulation will continue to apply in the UK after the transition period ends and we would anticipate that the UK will issue a statutory instrument to amend the Regulation so that it will work in a UK context.
The legislative text amending the Prospectus Regulation is available here and the accompanying explanatory memorandum is available here. In addition, the Commission's recovery package includes other recommendations on investor protection including amendments to the Markets in Financial Instruments Directive ("MiFID II") as well as amendments to the securitisation framework (not covered in this briefing but see our separate Financial Services and Markets briefing here).