Prospectus Directive to be repealed and replaced

Key Points

• Prospectus Directive regime to be repealed and replaced by a new European prospectus regime.
• Wholesale vs. retail distinction to be retained and extended.
• Requirement for base prospectus summary abolished.
• Requirements for summaries revised but remain highly prescriptive.
• The ability to incorporate information by reference greatly extended but the information must still have been published prior to or simultaneously with the prospectus.
• Risk factors must be presented in a limited number of categories and, in each category, in order of priority.
• Introduction of the universal registration document – unlikely to have much impact in practice.
• Passporting mechanism to be extended to registration documents (including universal registration documents).
• New obligations concerning prospectus supplements placed on financial intermediaries through which securities are purchased or subscribed.
• Prospectuses approved before the date from which the new Regulation applies will be grandfathered for up to twelve months.
• The new Regulation will have become effective before the UK exits the European Union but it remains to be seen to what extent the UK's Great Repeal Bill will transpose it into English law after the UK ceases to be a member state.

New Regime

A new Regulation on prospectuses¹, which was published in the Official Journal of the European Union on 30 June 2017 and will come into effect on 20 July 2017, will repeal the Prospectus Directive regime and replace it with a new European prospectus regime from 21 July 2019. Unlike the Prospectus Directive which requires implementing legislation in each member state, the new Regulation will have direct effect in each member state. Much of the detail of the new regime will be put in place over the next two years but it is already possible to discern its outlines. This briefing highlights the principal features of the change to the new regime.

Wholesale vs. retail distinction

Under the current Prospectus Directive regime debt securities with a minimum denomination of at least EUR 100,000 (or equivalent) are commonly referred to as "wholesale" debt securities and are subject to a somewhat less onerous regime than debt securities with a lower denomination (commonly referred to as "retail" debt securities). Under the new Regulation this less onerous regime will be broadly maintained. Furthermore it will be extended to non-equity securities which are to be traded only on a regulated market, or a specific segment of one, to which only qualified investors have access for trading purposes.

Summaries – exemptions extended

In the current regime the base prospectus summary has become a very tangled web of conflicting requirements. The new Regulation addresses this head on by abolishing the requirement for a base prospectus to include a summary at all. However the final terms for each individual issue under the programme described in the base prospectus must have a summary of the issue annexed to it. In view of this:

• as there is a market practice to have an introductory section in a base prospectus which summarises the key features of the programme, it is likely that base prospectuses will continue to have similar but less prescriptive or formulaic sections, perhaps described in some other way such as "overview" or "introduction"; and
• it is likely that the template form of the final terms in the base prospectus will be required to include the template form of the summary of the individual issue. This is because the new Regulation provides that the summary of the individual issue will be subject to the same requirements as the final terms and must be annexed to them and that the base prospectus must contain a template form of the final terms to be filled out for each individual issue.

Also in the current regime, the only common situation where a summary is not required for a prospectus is where the prospectus relates to wholesale securities. The new Regulation extends this exemption to any prospectus which relates to the admission to trading on a regulated market of non-equity securities which are to be traded only on a regulated market, or a specific segment of one, to which only qualified investors can have access for trading purposes.

Summaries – requirements to remain highly prescriptive

The new Regulation requires that a summary must not exceed seven sides of A4 paper, subject to extension in certain limited circumstances, and that it must be made up of four sections, (a) to (d):

• Section (a) is largely made up of health warnings.
• Section (b) must describe the issuer, its principal activities, its major shareholders, its key managers, a selection of historical key financial information presented for each financial year covered by the prospectus and any subsequent interim financial period (accompanied by comparative data) and the most material risk factors specific to the issuer.
• Section (c) must describe the main features of the securities and, if there is a guarantee, the nature and scope of the guarantee, as well as a description of the guarantor (including similar information to that required in relation to the issuer) and the most material risk factors specific to the securities (and, if there is a guarantee, the guarantor).
• Section (d) must describe the general terms of the offer and/or the admission to trading, including the total expenses and the expenses charged to the investor, and the reasons for the offer.

The overall number of risk factors which can be included in the summary (risks relating to the issuer, the guarantor (if there is one) and the securities) is limited to 15.

Incorporation by reference

The new Regulation somewhat extends the range of information which can be incorporated by reference in a prospectus. However it retains the requirement that such information must have been published prior to or simultaneously with the prospectus, although it will be sufficient that the information is published electronically and it will no longer be necessary that it be approved by or filed with any competent authority. Most significantly, all regulated information, not just filings under the prospectus or transparency regimes, will now be capable of being incorporated by reference. Furthermore, historic annual and interim financial information and audit reports wherever published and for whatever reason will now be capable of incorporation by reference.

Risk factors

The new Regulation requires risk factors to be presented in a limited number of categories depending on their nature and, in each category, in order of priority according to the issuer’s assessment of their magnitude and potential negative impact. It also mandates ESMA to develop guidelines concerning risk factors' specificity materiality and presentation across categories depending on their nature.

Registration documents

The new Regulation introduces a new feature into the prospectus regime: the universal registration document. This is a registration document drawn up by an issuer which already has securities admitted to trading on a regulated market or a multilateral trading facility in a member state and which is designed (a) to enable an issuer to "fast track" the approval of its prospectuses and (b) to avoid duplication of filings under the prospectus regime and the transparency regime. However it is doubtful that in practice this innovation will have much impact. Nevertheless it is worth noting that under the new regime it will become possible to passport registration documents (including universal registration documents) in certain circumstances.

Financial intermediaries

New obligations will be imposed on financial intermediaries through which securities are purchased or subscribed to inform investors of the possibility of a supplement being published, where and when it would be published and that the financial intermediary would assist them in exercising their rights to withdraw acceptances and to contact investors on the day when any supplement is published. This will require financial intermediaries to introduce new compliance procedures and also to ensure that they are promptly notified by an issuer when it publishes any supplement.

Grandfathering

The new Regulation will repeal the Prospectus Directive and all regulations made under it (including the PD Regulation (EC) No 809/2004)), but it provides that prospectuses approved in accordance with the national laws transposing the Prospectus Directive before the date from which the new Regulation applies shall continue to be governed by that national law until the end of their validity, or until twelve months have elapsed after the date from which the new Regulation applies, whichever occurs first.

Brexit

On 29 March 2017 the UK formally invoked the mechanism under Article 50 of the Treaty on European Union by which the UK will exit the EU with the intention that the UK will cease to be a member state by the end of March 2019 at the latest. On 30 March 2017 the UK government published its proposals for the Great Repeal Bill whose purpose is (1) to repeal the European Communities Act 1972 (ECA), which incorporates EU law into the UK domestic legal order, on the day the UK leaves the EU and (2) to convert the ‘acquis’ – the body of European legislation – into UK law at the moment of repeal of the ECA so that, to the greatest practical extent, the same rules and laws will apply in the UK on the day after exit as on the day before. In the absence of an express agreement concerning the prospectus regime as part of the UK's withdrawal negotiations, of which there is currently no indication, it seems likely that if and when the UK ceases to be a member state it will either continue with the current Prospectus Directive regime (which will still be current immediately after exit) or it will adopt the new Prospectus Regulation regime (which will be in effect immediately before exit but which, by its own terms, will not be applicable for the most part until some weeks after exit). Which of the these alternatives transpires will depend upon the precise wording of the Great Repeal Bill which has yet to be published.

Debt and equity capital markets – in depth

For a more in-depth discussion of the new regime looking at both equity and debt capital markets, see the attached article which Simon Bullock, Anna Delgado, Caroline Chambers and Tim Morris have written for Practical Law Magazine.

This article first appeared in the July 2017 issue of PLC Magazine.

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