Prospectus Directive: Esma Publishes Final Report On Regulatory Technical Standards

Summary

ESMA's final report proposes the following key changes:

Prospectus approval

• All drafts of a prospectus must be submitted in searchable electronic format
• The first draft of a prospectus must be accompanied by cross-reference lists if requested by an NCA or the issuer/offeror may provide them voluntarily. Otherwise, if the order of information items in the prospectus does not coincide with that set out in the Prospectus Regulation, the prospectus must be annotated in the margin and accompanied by a document setting out the items that are not applicable
• All subsequent drafts must include a blackline, provided that (a) "page pulls" will suffice if there are limited changes only and (b) any changes not showing in the blackline must be identified in writing

Incorporation by reference

• No change to the existing regime – ESMA's original proposals have been dropped

Publication of prospectus

• A prospectus published in electronic form must (a) be easily accessible, in searchable electronic format, downloadable and printable and (b) not contain hyperlinks, except that it must include hyperlinks to each document incorporated by reference or the document's website
• Prospectuses made available on the website of the issuer or distributor "shall take measures" (e.g. insertion of a disclaimer) to avoid targeting jurisdictions where the public offer is not being made
• Access to a prospectus in electronic form must not be conditional on (a) registration, (b) acceptance of a disclaimer limiting legal liability or (c) payment of a fee

Advertisements

• Where a prospectus supplement has been published, an amended advertisement must be disseminated without undue delay where the original advertisement has thereby become inaccurate or misleading
• Any such amendment must refer to the original advertisement, state that it has been amended due to it becoming inaccurate or misleading and specify the differences between the two
• Advertisements must not contradict (or refer to information which contradicts) or present a "materially unbalanced view" of information in the prospectus
• Advertisements must not contain "alternative performance measures" – i.e. financial information not in the prospectus (other than financial measures defined in the applicable financial reporting framework)

Next Steps
The European Commission has until the end of September 2015 to decide whether to endorse ESMA's recommendations and the updated Draft RTS. The Draft RTS would become effective 20 days after publication in the Official Journal of the European Union.

Background

In September 2014, the European Securities and Markets Association (ESMA) published a consultation paper inviting comments on its proposed draft Regulatory Technical Standards in respect of certain aspects of the Prospectus Directive regime. The original draft Regulatory Technical Standards proposed important changes in the following four areas: (1) procedures for the approval of prospectuses; (2) the incorporation by reference of information in prospectuses; (3) the publication of prospectuses and final terms; and (4) the dissemination of advertisements relating to public offers and admissions to trading.

Following extensive comments, ESMA has recently (1 July 2015) published its final report and an updated version of the draft Regulatory Technical Standards (the Draft RTS) – which can be found here – and the European Commission now has three months to decide whether to endorse ESMA's recommendations and the updated Draft RTS.

(1) Procedures for the approval of prospectuses

ESMA has retained its original proposal that all drafts of a prospectus must be submitted electronically and in searchable electronic format. The Draft RTS recognise that submission of cross-reference lists identifying the relevant items from the Annexes to the Prospectus Regulation should normally only be required with the initial application for approval of the prospectus if required by a national competent authority (NCA) to facilitate its review; they can also be provided voluntarily by the issuer/offeror. Otherwise, if the order of information items in the prospectus does not align with that set out in the Prospectus Regulation, the prospectus must be annotated in the margin and be accompanied by a document setting out the items that are not applicable.

The original proposal that each blacklined draft of the prospectus submitted to an NCA be accompanied by a written statement from the issuer confirming that the blacklined version shows all changes made has been dropped from the Draft RTS. However, where not all changes are marked in a blacklined version (e.g. changes to a formula), the blacklined version will need to be accompanied by a written statement from the issuer identifying each unmarked change made from the preceding draft. Also, the Draft RTS expressly recognise that "page pulls" are allowed in cases where only limited changes have been made.

Finally, the Draft RTS contain some minor clarifications around the time periods for the prospectus approval process set out in Article 13 of the Prospectus Directive but propose no significant changes.

(2) Incorporation by reference of information in prospectuses

The most significant element of the final report is that ESMA recognises that its previous proposals – i.e. prescribing an exhaustive but limited list of what may be incorporated by reference in a prospectus – were not consistent with the widely held desire to reduce administrative burdens for issuers/offerors, especially where the result would be a more stringent regime for wholesale issuers (those issuing in denominations of over EUR 100,000, or equivalent) than for retail issuers. As a result, ESMA's previous proposals have been deleted in their entirety in the final report and ESMA is no longer proposing any change to the status quo (although ESMA does suggest the subject may be worth revisiting in the European Commission's imminent overall review of the Prospectus Directive).

It is worth noting that ESMA continues to support the current position that incorporation by reference should not be available to first-time applicants.

(3) Publication of prospectuses and final terms

ESMA has clarified a number of points relating to the publication of prospectuses and final terms. The Draft RTS require that prospectuses published in electronic form must (a) be easily accessible, in searchable electronic format, downloadable and printable and (b) not contain hyperlinks, except that a prospectus published in electronic form must contain hyperlinks to each document incorporated by reference or the website where such document(s) can be found. The report does emphasise that any such click through can link to a webpage (rather than the incorporated document itself), but the webpage should only contain a "limited number of documents such that [the incorporated documents] are easily identifiable and accessible".

The Draft RTS also specify that where a prospectus for a public offer is made available on the website of an issuer or distributor, it "shall take measures" – e.g. by the insertion of a disclaimer – to avoid targeting jurisdictions where the public offer is not being made.

In the case of electronic publication of a prospectus, case law has established that requiring investors to agree to a disclaimer limiting legal liability as a condition of access is not permissible. The Draft RTS confirm this and also prohibit any condition requiring investors to pay a fee or go through a registration process to gain access to the prospectus. However, Recitals to the Draft RTS provide that filters which warn of which jurisdictions an offer is being made in (as referred to above) or requiring investors to disclose their country of residence (or indicate that they are not resident in a particular country or jurisdiction) should not be considered as disclaimers limiting legal liability and should therefore be permitted.

ESMA's previous proposals to require an issuer to inform investors when its prospectus is published on the website of the issuer's group have also been dropped from the Draft RTS.

(4) Dissemination of advertisements

While ESMA's original proposals for requiring advertisements to be kept up-to-date were rather widely drawn, the Draft RTS align these requirements with the requirements in the Prospectus Directive concerning prospectus supplements. Thus, the obligation to update/amend an advertisement will only apply where there has been a "significant new factor, material mistake or inaccuracy" which renders the content of the advertisement misleading or inaccurate and the obligation will fall away at end of the public offer or on admission to trading. The updated or amended advertisement must refer to the original advertisement, state that it has been amended or updated due to it becoming inaccurate or misleading and specify the differences between the two. It must be disseminated without undue delay and, with the exception of orally disseminated advertisements, at a minimum, through the same means as the original advertisement.

The Draft RTS impose a new general standard for advertisements in addition to any that might apply under the national laws of a Member State. The Draft RTS specify that advertisements must not contradict (or refer to information that contradicts) or present a "materially unbalanced view" of information contained in the prospectus. In addition, ESMA has refined its proposals concerning the inclusion of numerical performance measures in advertisements: the new proposals are narrower and prohibit the inclusion of "alternative performance measures" which are not included in the financial information contained in (or to be contained in) the approved prospectus. "Alternative performance measures" comprise financial measures of historical or future financial performance, financial positions or cash flows other than financial measures defined in the applicable financial reporting framework.

Next steps

The European Commission has until the end of September 2015 to decide whether to endorse ESMA's Draft RTS. The Draft RTS would become effective 20 days after publication in the Official Journal of the European Union.