Proposed EU Delegated Regulation on the Format and Content of Prospectuses and their Regulatory Scrutiny 

What has happened?

The European Commission has published its proposals for a new regulation on both the format and content of prospectuses and on the regulatory scrutiny and approval of prospectuses by competent authorities (the Delegated Regulation) here and here. The new Regulation will take effect as “delegated acts” under the new Prospectus Regulation which was published in June 2017 (see our briefing:  Prospectus Directive to be repealed and replaced). Assuming the Delegated Regulation is adopted without amendment, it will apply, together with the new Prospectus Regulation, from 21 July 2019.  The Delegated Regulation follows from ESMA's final report of 3 April 2018 and, with only a few exceptions, enacts ESMA's recommendations.

Key points

Format and content: the Delegated Regulation includes a number of detailed changes to the format and content of prospectuses, including:

• The requirement under the current regime for certain prospectuses to include a “selected financial information” section is removed

• For equity securities only, if the issuer has published a profit forecast or a profit estimate (which is still outstanding and valid), then such profit estimate or profit forecast must be included in the prospectus. However, there is no requirement to include an accompanying accountant’s or auditor’s report

• For credit linked securities, the current disclosure requirements in relation to the underlying reference entity or reference obligation are enhanced in order to align them with those applicable to the obligors of asset-backed securities
• For proprietary index-linked securities, the current requirement to include a description of the index in the prospectus is abolished if the index administrator appears in the EU benchmarks register maintained by ESMA
• The tax disclosure requirements in each jurisdiction where the securities are being offered to the public is replaced by a general tax warning and there is a requirement for particular disclosure only where there is a specific tax regime for the securities
• Issuers and guarantors must include their website addresses in the prospectus

The Commission has not adopted the recommendations made by the ESMA in its final report concerning a "cover note" to the prospectus.

Scrutiny and approval: the Delegated Regulation includes criteria which competent authorities must consider when scrutinising prospectuses for "comprehensibility". These include (amongst others): whether the draft prospectus has a structure that helps investors understand its contents; whether the draft prospectus defines the components of mathematical formulas and, where applicable, clearly describes the product structure; and whether the prospectus is written in plain language. However, the last criterion (and certain other criteria set out in the Delegated Regulation) are not required to be considered where the prospectus is in relation to securities which have a denomination of at least EUR 100,000 (or equivalent) or which are to be traded only on a specific segment of a regulated market to which only qualified investors have access.

Next steps

The Commission has invited comments on its proposed Delegated Regulation to be received by 26 December 2018 with a view to the Commission adopting the Delegated Regulation by 21 January 2019 as required by the Prospectus Regulation.  The proposed Delegated Regulation will apply, together with the Prospectus Regulation, from 21 July 2019, and will constitute the bulk of the new prospectus regime.  However, in the coming months we can expect proposals for a number of regulatory technical standards (RTS) covering such things as the content of the key financial information for the prospectus summary, situations where a supplement to a prospectus is required and provisions concerning advertisements.  We can also expect ESMA guidelines on the criteria for assessment of specificity and materiality of risk factors.

Background

The new Prospectus Regulation  came into effect on 20 July 2017 and repeals and replaces the current Prospectus Directive  regime with a new European prospectus regime from 21 July 2019 (see our briefing:  Prospectus Directive to be repealed and replaced). As with the Prospectus Directive, the new Prospectus Regulation is skeletal and it expressly requires the European Commission to put flesh on its bones by adopting so-called Level 2 delegated acts in a number of areas by 21 January 2019. Following formal requests from the Commission for technical advice on the content of the delegated acts, on 3 April 2018 ESMA delivered a final report to the Commission in relation to the format and content of the prospectus, the base prospectus and the final terms, and the schedules defining the specific information which must be included in a prospectus, together with the criteria for scrutiny and review of prospectuses and the procedures for their approval.  Based upon ESMA's recommendations, the Commission published the Delegated Regulation which will supplement the new Prospectus  Regulation with detailed requirements for the format, content, scrutiny and approval of prospectuses.  The Delegated Regulation will effectively repeal and replace the current regulation  (the PD Regulation) which performs the same function under the current Prospectus Directive regime.

Prospectus format and content requirements

The Delegated Regulation follows the “building block approach” of the current Prospectus Directive regime, distinguishing between the schedules for registration documents and those for securities notes, as well as other appropriate building blocks. Essentially, the Delegated Regulation represents, to a large extent, a copy across of the relevant provisions of the PD Regulation without wholesale change, although in the Delegated Regulation the Commission has sought to streamline a number of provisions by, for example, re-drafting and re-ordering a number of the current annexes of the PD Regulation and removing largely redundant annexes and replacing them with shorter building blocks. We summarise some of the main changes to prospectus format and content below.

The summary

Article 7 of the new Prospectus Regulation sets out detailed requirements for the prospectus summary which will supersede the requirements of the existing regime. Accordingly, the Delegated Regulation does not include an equivalent provision to Article 24 (Content of the summary of the prospectus, of the base prospectus and of the individual issue) or to the detailed provisions on summary content set out in Annex XXII, of the PD Regulation. However, on 17 July 2018 ESMA provided technical advice to the Commission concerning the key financial information to appear in the summary, including draft RTS in the form of a Commission Delegated Regulation.

Cover note

In its final report, ESMA recommended that, if an issuer  voluntarily includes a cover note in the prospectus, the page length should be limited to three sides of A4-sized paper.  This has not been adopted in the Delegated Regulation although one element of it has, namely a requirement for a prospectus to contain a form of disclaimer to the effect that the approval of the prospectus by the home member state competent authority should not be considered as an endorsement of the issuer.

Risk factors

The Delegated Regulation mandates the order in which the risk factors must appear in the prospectus, which is immediately after the summary or, in case of a base prospectus, after the general description of the programme.  Furthermore, risk factors must be set out in "a limited number" of categories with, in each category the most material risk factors set out first, and must be corroborated by the content of the prospectus.

Selected financial information

The current prospectus regime requires that a prospectus for equity securities or debt or derivative securities with a denomination of less than EUR 100,000 (or equivalent) must provide a section of key figures that summarise the financial condition of the issuer and any guarantor (in addition to audited and interim financial statements). This selected financial disclosure is no longer required under the Delegated Regulation.

Profit forecasts and estimates

Under the current prospectus regime:

• A profit estimate is a profit forecast for a financial period which has ended but for which results have not yet been published; and

• A profit forecast is an indication in figures or words of the likely level of profits or losses for a current or future financial period.

Currently, it is a decision for the issuer whether to include an outstanding profit estimate or profit forecast in a prospectus, with a presumption in the case of equity securities that such an estimate or forecast is always material and no such presumption in the case of non-equity securities. However, where the issuer does decide to include such an estimate or forecast, it has to be accompanied by an accountant’s or auditor’s report.

ESMA originally proposal that an outstanding profit estimate or profit forecast must be included in in a prospectus for non-equity securities but this has not been adopted in the Delegated Regulation. Nevertheless, the Delegated Regulation does require an outstanding profit estimate or profit forecast to be included in any prospectus for equity securities unless the estimate or forecast is no longer outstanding and valid. It is worth noting that in any event a profit estimate or profit forecast must be included in a prospectus if it is material information for investors, whatever the nature of the securities. However, the Delegated Regulation has in all cases removed the requirement for an accountant’s or auditor’s report on the estimate or forecast (but again it is worth noting that an issuer may choose to include such a report if one is produced which the issuer considers material information for investors).

Disclosure on the underlying for derivative securities, particularly credit linked securities

Further information on the underlying

The current prospectus regime requires disclosure of “[d]etails of where information on the underlying can be obtained including an indication of where information about the past and the future performance of the underlying and its volatility can be obtained.” This is unchanged; however, the Delegated Regulation supplements this disclosure by requiring an indication of where such information can be obtained by electronic means and whether or not such information can be obtained free of charge.

Disclosure on the underlying for credit linked securities

For credit linked securities, the Delegated Regulation adopts ESMA's recommendation that the disclosure requirements in relation to the underlying reference entity or reference obligation are to be aligned with the disclosure requirements in relation to the obligors of asset-backed securities. In particular, this will mean that, where (i) the reference entity or reference obligation comprises of a single entity or obligation (or in the case of a pool of underlyings where a single reference entity or reference obligation represents 20% or more of the pool), and (ii) the reference entity (or issuer of the reference obligation) has no securities admitted to trading on a regulated market, equivalent third country market or SME Growth Market, then the prospectus must include information relating to the reference entity (or to the issuer of the reference obligation) as if it were the issuer of the overlying securities (in accordance with the wholesale non-equity securities registration document schedule), so far as the issuer is aware and/or able to ascertain from information published by the reference entity (or by the issuer of the reference obligation).

Disclosure on the index for proprietary index-linked securities

For derivative securities linked to an index "composed by the issuer or by any legal entity belonging to the same group" or to an index provided by someone "acting in association with, or on behalf of, the issuer", the requirement to include a description of the index in the prospectus is abolished if the index administrator appears in the register maintained by ESMA under the EU Benchmarks Regulation .  In the case of an index provided by someone "acting in association with, or on behalf of, the issuer", the description of the index has dropped from Category A to Category B type information. 

Issuer's website

The Delegated Regulation introduces a requirement for the information about an issuer (and any guarantor) in a prospectus to include the website address of the issuer (and any guarantor), if it has one, together with a disclaimer that the information on the website does not form part of the prospectus. The Commission has decided to carry forward this proposal despite the concern raised by a number of stakeholders that it is possible that the disclaimer may not be effective in certain jurisdictions and that investors could possibly be misled to consider that website information is part of the prospectus.

Disclosure on taxation

The current prospectus regime includes rather confusing requirements for disclosure on taxation. The Delegated Regulation replaces these with a requirement for a general warning to the effect that an investor should consider the tax implications of the securities and a requirement for specific disclosure where there is a tax regime specific to that type of investment.

Scrutiny and approval of a prospectus

Recital (60) of the new Prospectus Regulation provides that “[i]t is important to ensure that all competent authorities take a convergent approach when scrutinising the completeness, consistency and comprehensibility of the information contained in a prospectus taking into account the need for a proportionate approach in the scrutiny of prospectuses based on the circumstances of the issuer and of the issuance.”  In order to harmonise the vetting of prospectuses by competent authorities, the Delegated Regulation requires that, in determining whether or not a prospectus meets the requirement of “comprehensibility”, the relevant authority must consider in particular whether the draft prospectus meets the following criteria:

• The table of contents is clear and detailed;
• The draft prospectus is free from unnecessary reiterations and related information is grouped together;
• An easily readable font size is used;
• Where applicable, the summary is written in a non-technical language and where technical terms are exceptionally used, they are explained;
• The draft prospectus has a structure that helps investors understand its contents; and
• The draft prospectus defines the components of mathematical formulas and, where applicable, clearly describes the product structure.

Also, for each prospectus other than that drawn up in accordance with the wholesale non-equity securities annexes, the relevant competent authority shall further consider whether the draft prospectus meets the following additional criteria:

• The draft prospectus is written in plain language;
• The draft prospectus clearly describes the nature of the issuer’s operations and its principal activities; and
• The draft prospectus explains trade or industry specific terminology.

IMPACT ON MULTI-PRODUCT BASE PROSPECTUSES?

A key objective of the new Delegated Regulation is to achieve a more harmonised approach in relation to the review of prospectuses by competent authorities, and it appears that the “comprehensibility” requirement may be interpreted more robustly by such authorities under the new regime. This may have little if any impact on certain multi-product base prospectuses (e.g. those drafted in accordance with UKLA Technical Note 632.1 will already satisfy at least some of the above criteria), but depending on the view taken by the relevant competent authority together with the scope, size and complexity of the applicable prospectus, it may be that some prospectus restructuring is required.

Will the EU prospectus regime continue to apply in the UK after Brexit?

Most of the provisions of the new Prospectus Regulation will come into force on 21 July 2019. In November 2018, the UK government published a policy note which reminds readers that the EU (Withdrawal) Act 2018 (EUWA) will only convert EU legislation into UK law that is in force and "operative" before the day that the UK exits the EU.  If, as currently scheduled, exit day is 29 March 2019, most of the provisions of the new Prospectus Regulation will not be adopted into UK law by the EUWA.  However the policy note goes on to say that it is the UK government’s intention to domesticate these provisions of the new Prospectus Regulation (though it does not say when).  On 23 November 2018, a draft Bill (The Financial Services (Implementation of Legislation) Bill) was published which provides that HM Treasury may make regulations which correspond (or are similar to) specified EU financial services legislation (including the provisions of the new Prospectus Regulation that apply from 21 July 2019) with any adjustments the HM Treasury considers appropriate, including adjustments resulting from the withdrawal of the United Kingdom from the EU.

If the UK ratifies the withdrawal agreement with the EU endorsed by the European Council on 25 November 2018, then notwithstanding the UK's exit from the EU the UK will continue to apply EU law in such a way that it produces in the UK the same legal effects as those which it produces within the EU until the end of the transition or implementation period (currently scheduled for 31 December 2020). This would mean that the UK would in fact apply the new Prospectus Regulation in accordance with its terms from 21 July 2019.

Further information

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