On 9 November 2020 ESMA issued revised Questions and Answers (Q&As) concerning the EU's Prospectus Regulation and Transparency Directive regimes in the context of the forthcoming end of the Brexit transition period. It also took the opportunity to add two new Q&As relating to an exemption for admission to trading in respect of fungible issues and one concerning identification of profit forecasts in prospectuses.
The Brexit transition period
Although the UK ceased to be an EU member state on 31 January 2020, the withdrawal agreement between the EU and the UK made under Article 50 of the Treaty on European Union provides for a transition period during which, for most purposes, the UK will continue to act as though it were a member state and the EU will continue to treat the UK as though it were a member state. This transition period is scheduled to end on 31 December 2020.
EU status of prospectuses approved by the UK FCA during the transition period
Perhaps the most important of ESMA's revised Q&As on the EU Prospectus Regulation addresses the question of the status after the end of the transition period of a prospectus approved by the UK's FCA during the transition period. The revised Q&As make it clear that after the end of the transition period:
- it will no longer be possible to passport such a prospectus into an EEA member state;
- for any such prospectus which has before the end of the transition period been passported into an EEA member state, it will no longer be possible after the end of the transition period to supplement such a prospectus; and
- for these reasons, such a prospectus, even if passported before the end of the transition period, will no longer be capable of being used to offer securities to the public or admit securities to trading on a regulated market within the EEA, even if the offer period begins before the end of the transition period.
How will this affect an open offer in the EEA which straddles the end of the transition period?
ESMA considers that an offer in a member state which depends upon a prospectus passported from the UK before the end of the transition period will be unable to continue after the end of the transition period as, in order to continue the offer, the issuer will need to have a new prospectus approved within the EEA and it will be unable to choose a home member state to approve that prospectus until after the end of the transition period. Instead ESMA considers such an issuer would need to start a new offer once a new prospectus is approved within the EEA.
How will this affect an admission to trading on a regulated market in the EEA?
The position is different for securities which have been admitted to trading on a regulated market in the EEA using a prospectus approved by the UK FCA and passported into the EEA. Provided admission to trading occurs before the end of the transition period, ESMA considers that the admission to trading will remain valid notwithstanding the end of the transition period.
How to make a new offer to the public or seek a new admission to trading in the EEA
In either case, after the end of the transition period ESMA considers it will be necessary for an issuer to have a new prospectus approved in its new EEA home member state. However, ESMA envisages that it should be a relatively simple process for the issuer to prepare a new prospectus largely replicating its existing FCA-approved prospectus with minor amendments.
How should an issuer choose a new home member state after the end of the transition period?
ESMA considers (applying the principles in Article 2(m)(iii) of the EU Prospectus Regulation) that such an issuer whose home member state until the end of the transition period was the UK should choose as its new home member state either:
- the EEA member state in which the issuer first makes an offer after the end of the transition period (including for this purpose an offer made during the transition period which continues after the end of the transition period); or
- the EEA member state in which the issuer first seeks admission to trading on a regulated market after the end of the transition period.
ESMA considers that an offer which closes before the end of the transition period is irrelevant for these purposes. However it considers that an admission to trading on a regulated market in an EEA member state before the end of the transition period which continues after the end of the transition period is relevant for these purposes and so would allow the issuer to choose the member state in which that regulated market is situated as its home member state even though no fresh application for admission to that regulated market is required after the end of the transition period.
More than one home member state
Although only tangentially mentioned in ESMA's Q&As, it is worth bearing in mind that for certain types of non-equity securities, notably those with a denomination of at least EUR 1,000 and those linked to underlying securities of non-group companies, the EU Prospectus Regulation regime permits an issuer to choose a home member state on an issue-by-issue basis.
Fungible issues
Article 1(5)(a) of the EU Prospectus Regulation contains an exemption from the obligation to produce a prospectus for the admission to trading on a regulated market of securities fungible with securities already admitted to trading on the same regulated market, provided that they represent, over a period of 12 months, less than 20% of the number of such securities already admitted to trading on the same regulated market. The two new Q&As explore with numerous examples how this proportion should be calculated to determine whether or not this 20% threshold is crossed.
Profit forecasts in a prospectus
This new Q&A recognises that there is often a fine line between what constitutes a profit forecast and what constitutes trend information. It contains many examples of statements which fall on either side of this line and is clear that ESMA adopts a "substance over form" approach concerning what financial measures may be viewed as profit forecasts for this purpose. It also emphasises that it is not necessary to refer to profit or loss for the year and that references to other measures of profitability (such as EBITDA) may constitute a profit forecast when these measures convey an expectation of a future performance.
Home member state for Transparency Directive purposes
ESMA has also taken this opportunity to update one of its Q&As on the EU Transparency Directive regime to clarify that an issuer which has had the UK as its Transparency Directive home member state before the end of the transition period and which has securities admitted to trading on one or several regulated markets in the EEA must determine a new Transparency Directive home member state according to the rules laid down in Article 2(1)(i) of the Transparency Directive.
ESMA considers that such issuers should choose and disclose their new home member state without delay after the end of the transition period. If the issuer does not disclose its new home Member State within a period of three months after the end of the transition period, ESMA is of the view that the member state (or if more than one, each member state) where the issuer’s securities are admitted to trading on a regulated market should be considered its home member state until a subsequent choice of a single home member state has been made and disclosed by the issuer.
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Authors: Mike Logie, Partner and Tim Morris, Expertise Consultant.
