EU Prospectus Regulation to be Revised

Key Points

The European Commission has published a package of proposed amendments to the EU Prospectus Regulation regime which include:

• Removal of the need to supplement a base prospectus to update the annual or interim financial information incorporated by reference.
• Removal of the requirement to present risk factors in order of materiality and a new prohibition on risk factors that are generic or only serve as disclaimers.
• Changes to prospectus supplement requirements including clarification that a supplement to a base prospectus may not be used to introduce to the programme a new type of security for which the necessary information has not already been included in that base prospectus.
• Provisions seeking to make prospectuses shorter, particularly for issuers of shares, for SMEs and for follow-on issuances.
• Extended exemptions for follow-on or 'fungible' offerings and for shares resulting from the conversion or exchange of other securities.
• Provisions to standardise the format of prospectuses and the sequence in which information is presented.
• For prospectuses relating to non-equity securities that are advertised as taking into account ESG factors or pursuing ESG objectives, provision for specifying the ESG-related information to be included in the prospectus.

More information

On 7 December 2022, as part of a Capital Markets Union package on listing and corporate insolvency, the European Commission adopted proposals for a Regulation which will, among other things, make detailed amendments to the EU Prospectus Regulation regime. This briefing focuses on those elements of this new Regulation which will affect the EU Prospectus Regulation regime.

Information incorporated by reference and prospectus supplements

The EU Prospectus Regulation currently permits information to be incorporated by reference in a prospectus provided that it appears in one or more documents which are listed in Article 19. Information incorporated by reference must have been published electronically and in a language meeting the relevant language requirements. The proposal would change this permissive regime to a mandatory one. Most importantly for issuers under a base prospectus, the proposal provides that the issuer will not be required to publish a supplement to update the annual or interim financial information incorporated by reference in the base prospectus during the 12-month validity period of the base prospectus.

Risk factors

Once again the Commission is revisiting its Sisyphean task of seeking to make risk factors brief and punchy. It proposes to add an express prohibition on risk factors that are generic, that only serve as disclaimers or that do not give a sufficiently clear picture of the specific risk factors that investors are to be aware of. At the same time, in a helpful change to issuers, the Commission proposes to remove the requirement to present risk factors in order of materiality.

Shorter prospectuses

The main focus of these amendments is to seek to make it easier and less expensive for companies, particularly small and medium sized enterprises (SMEs), to offer shares to the public for the first time (IPOs) or make follow-on offerings shortly after their initial offering. To this end, the proposal will introduce:

• a new EU Growth issuance document, which will replace the current EU Growth prospectus. An EU Growth issuance document will be primarily for (a) SMEs, (b) other issuers whose securities are, or are to be, admitted to trading on an SME growth market and (c) other issuers where the total consideration for the securities offered is less than EUR50,000,000; and
• a new EU Follow-on prospectus, which will replace the current simplified prospectus for secondary issuances of equity or non-equity securities. For share issuances, an EU Follow-on prospectus must have a maximum length of 50 sides of A4-sized paper. It will also have a standardised format and present the required information in a standardised sequence.

The proposal will also introduce a 300-page limit for a prospectus that relates to shares and will empower the Commission to lay down rules to require prospectuses to be in a standardised format and to disclose information in a standardised sequence. The 300-page limit will not apply to a prospectus that relates to non-equity securities.

Exemptions for follow-on offerings

The proposal will introduce a new exemption from the obligation to publish a prospectus for an offer of securities which are to be admitted to trading on a regulated market or an SME growth market and are fungible with securities already admitted to trading on the same market, provided that they represent less than 40% of the number of securities already admitted to trading on the same market (calculated over a 12-month period). The current similar exemption for a follow-on admission of securities to trading on a regulated market will be extended from 20% to 40%, as will the current exemption for shares resulting from the conversion or exchange of other securities.

Prospectus supplements

In 2021, the Commission's Capital Markets Recovery Package response to the Covid pandemic introduced some temporary amendments concerning prospectus supplements and their effects. These temporary measures will expire on 31 December 2022 but the Commission's proposal will reinstate and extend them. In particular, the extension of the period during which withdrawal rights may be exercised from two to three working days is made permanent.

Also these temporary amendments helpfully clarified that, when a supplement is published, a financial intermediary's obligation to contact investors is confined to those investors which agreed to purchase through that financial intermediary. Furthermore, financial intermediaries were required to inform investors about withdrawal rights by the end of the first working day after the date of publication of the supplement. The Commission's proposal will reinstate these amendments on a permanent basis and provide that the financial intermediaries obligation is to contact investors by "electronic means" about their withdrawal rights. Financial intermediaries will also be required to warn investors which do not agree to be contacted by electronic means to monitor the issuer’s or the financial intermediary’s website until the closing of the offer period or delivery of the securities to check whether a supplement is published.

Separately, a new provision is added to make clear that a supplement to a base prospectus may not be used to introduce to the programme a new type of security for which the necessary information has not already been included in that base prospectus. ESMA is tasked with developing guidelines to specify the circumstances in which a supplement is to be considered as introducing a new type of security that is not already described in a base prospectus.

Goodbye to printed prospectuses?

Currently, a prospectus must be delivered to any potential investor, upon request and free of charge, "on a durable medium" and printed on paper if the investor requests. The Commission proposes to abolish the requirement for a printed prospectus and replace the current obligation with an obligation to deliver a copy of the prospectus in electronic format upon request and free of charge.

Order of presentation of information

Currently, the EU Prospectus Regulation regime is pretty flexible when it comes to the order in which information is presented in a prospectus. After the cover page, a prospectus must have a table of contents followed by the summary (if there is one), the risk factors and then the other information referred to in the Annexes to the EU PR Regulation that is to be included in that prospectus. It is up to the issuer to decide how to present the information items included in the Annexes according to which the prospectus is drawn up and in what order. However, the Commission proposes to change this by requiring the prospectus to be a document of a standardised format with information presented in a standardised order in accordance with delegated acts to be made by the Commission.

In addition, while the EU Prospectus Regulation prescribes in detail the information to be included in a summary, it is currently silent upon the order in which that information is to be presented. The Commission's proposal will also stipulate an order for that information.

The summary

As mentioned above, the proposal will mandate the order in which information appears in a prospectus summary. It will also permit an issuer to present information in the summary in the form of charts, graphs or tables.

Green bond annex

The Commission proposes that it be empowered to adopt a new Annex to the EU PR Regulation by delegated act specifying the ESG-related information to be included in any prospectus relating to non-equity securities that are advertised as taking into account ESG factors or pursuing ESG objectives.

English language

The rules governing the language(s) in which a prospectus must be drawn up are to be amended to provide issuers with the flexibility to draw up the prospectus in English only (as the language customary in the sphere of international finance), irrespective of whether the offer or admission to trading is domestic or cross-border. The proposal will limit the translation requirement to the prospectus summary only.

No page limit for non-equity securities

It is worth emphasising that the proposed 300-page limit will only be introduced for a prospectus relating to shares (or equivalent). The proposal expressly provides that a page limit would not be appropriate for convertible bonds (which are classed as equity securities) or for any non-equity securities.

Universal registration documents

The EU Prospectus Regulation allows an issuer which has received approval for a universal registration document for two consecutive years to be designated a frequent issuer and thereafter be allowed to file without prior approval all subsequent universal registration documents and any amendments. The Commission proposes that the period necessary to obtain the status of frequent issuer be reduced to one year.

Harmonisation of small offers

The EU Prospectus Regulation does not apply to offers of securities to the public with a total consideration of less than EUR1,000,000. In addition, Member States have a discretion to exempt offers of securities from the obligation to publish a prospectus where the offer is less than a threshold, which Member States may set between EUR1,000,000 and EUR8,000,000. The Commission's proposal will replace all of this with a single harmonised threshold of EUR12,000,000 below which offers will be exempt from the obligation to publish a prospectus.

Next steps

This proposal will now be considered by the European Parliament and the Council but the Commission does not propose that it will take effect until some time in 2024 in order to give market participants time to adjust to these new requirements.

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