Prospectus Regulation: European Commission proposes amendments to the supplement notification requirements and extension to walkway rights period

Key points

The European Commission proposes to amend the Prospectus Regulation supplement notification requirements to provide:

• Increased clarity as to which investors a financial intermediary must contact in relation to the publication of a prospectus supplement;
• Additional time for financial intermediaries to notify investors following the publication of a supplement; and
• Extension of the time period during which investors may withdraw their acceptances after publication of a supplement.

The Commission also proposes further amendments including a new short-form "EU Recovery Prospectus" for fungible equity offerings and an increase in the threshold in relation to the prospectus exemption for certain non-equity securities issued in a continuous or repeated manner by credit institutions.

Background

When the Prospectus Regulation regime came fully into effect in July 2019 it introduced a new requirement for financial intermediaries to inform investors of the possibility of a prospectus supplement being published, where and when a supplement would be published and that the financial intermediary would assist the investors to exercise their right to withdraw from their purchase or subscription acceptances as a result of such publication. More controversially, it also introduced a requirement on the part of the financial intermediary to "contact investors on the day when the supplement is published" (Article 23 of the Prospectus Regulation).

The new requirements have led to uncertainty in the market as to the scope of a financial intermediary's obligations in terms of which investors it is obliged to inform and practical difficulties in relation to how to ensure compliance with the same day supplement notification requirement.

On 24 July 2020 the European Commission published a proposal to amend the Prospectus Regulation which seeks to clarify the supplement notification requirements and, relatedly, extend the period during which investors can withdraw acceptances. The other objective of the proposal is to introduce amendments to the Prospectus Regulation to facilitate the raising of funds by companies in an expedited manner during the COVID-19 pandemic.

Investors who must be notified of a prospectus supplement

As currently drafted, the Prospectus Regulation is unclear as to which investors must be provided with the more general notification of the possibility of a supplement being published, where it will be published and the possibility of withdrawal rights, and the Prospectus Regulation is particularly unclear as to which investors must be provided with notification of the publication of a specific supplement. On the former, the Commission's proposal clarifies that the general notification obligation is owed by financial intermediaries to investors who agree the purchase or subscription with the intermediary in the period from approval of the prospectus and ending with the later of the closing of the offer period or the time when trading on a regulated market begins – effectively consistent with the period during which the issuer is obliged to supplement the prospectus.

More importantly, with regard to the specific obligation on the part of the financial intermediary to contact investors upon publication of a supplement, the Commission proposes to restrict the scope of investors to be notified to those who are owed the general notification described above, but only to the extent that each such investor would have the right to withdraw its acceptance upon publication of the supplement pursuant to Article 23(2) of the Prospectus Regulation (so-called "walkaway rights"). Accordingly, if the publication of a supplement would not trigger walkaway rights for a particular investor (for example, if the significant new factor, material mistake or material inaccuracy which triggered the supplement arose or was noted after the close of the offer period or the delivery of the securities to the investor), then the financial intermediary need not contact that investor.

Deadline by which to notify investors of a prospectus supplement

Under the current terms of the Prospectus Regulation, the financial intermediary must notify the relevant investors of a new supplement on the same day as its publication. This has led to practical difficulties and protracted discussions between issuers and financial intermediaries over the timing of publication of prospectus supplements and what obligations issuers will accept to notify intermediaries in advance of such publication in order to give intermediaries sufficient time to comply with the deadline. Acknowledging the difficulties caused by the same day notification requirement, the Commission proposes to extend the deadline by which investors must be contacted from the actual day of publication of a prospectus supplement to within one working day following the day of publication of a supplement.

Extension of walkaway rights period

As a consequence of extending the prospectus supplement notification requirement to the working day after publication, the Commission proposes to extend the withdrawal right period correspondingly by a further working day. Therefore, under the proposal, investors would have three working days after the publication of the supplement (or such longer period as the issuer may grant) to withdraw their acceptances.

Other amendments

The Commission also proposes temporary amendments (to last for 18 months) to the Prospectus Regulation to assist entities in raising funds during the COVID-19 pandemic. In particular, the Commission proposes to amend the Prospectus Regulation to:

• Provide for a new short-form prospectus (a so-called "EU Recovery Prospectus") which would be available to any issuer whose shares have been admitted to trading on a regulated market or an SME growth market continuously for at least the last 18 months and which is for the purpose of issuing shares fungible with existing shares which have been previously issued; and

• Increase the existing threshold from EUR 75,000,000 to EUR 150,000,000 (calculated over a period of 12 months) for the exemption from the obligation to publish a prospectus in order to make an offer to the public of certain non-equity securities issued in a continuous or repeated manner by credit institutions (intended to help smaller credit institutions raise additional funds on a regular basis).

Next steps

The Commission’s proposals have been submitted to the European Parliament and the Council for review. Once agreed among the co-legislators, these changes would be published in the Official Journal, thought likely to happen in the autumn, and apply directly in all member states and the United Kingdom twenty days after such publication.

Visit our Finance Hub for analysis and commentary on developments affecting global financial markets, including the Prospectus Regulation, the Benchmarks Regulation, PRIIPs/KID, EMIR and LIBOR transition.

Authors: Mike Logie and Tim Morris