The full regulation will come into force in July, imposing new requirements for prospectuses
The new EU Prospectus Regulation will take full effect on 21 July 2019. Issuers and other parties to capital markets transactions can expect changes in the following areas:
- Prospectus summary: New content requirements and length restrictions will make the summary section more concise while allowing issuers the flexibility to include key information for investors.
- Risk factors: With some material changes to the rules relating to risk factors and new ESMA guidelines, risk factors are likely to be a particular focus area for regulators.
- Simplified prospectus: A new reduced disclosure regime will apply to secondary issues, such as rights issues.
- Growth prospectus: Certain issuers, mainly SMEs, will be able to make public offers using an EU Growth Prospectus with lighter disclosure requirements and a standardised format.
Although the new rules will not take effect until July, competent authorities are already applying the new requirements to any prospectuses under review that are expected to be approved after 21 July 2019. In the coming weeks, Latham & Watkins will publish additional posts that take a more detailed look at the changes to the summary section, risk factors, and other areas that will impact transactions.
The new EU Prospectus Regulation (Regulation (EU) 2017/1129) came into force on 20 July 2017, but only a limited number of provisions applied from that date. (See What Will the New EU Prospectus Regulation Mean for Issuers?) The full regulation will take effect on 21 July 2019 and will overhaul the EU’s prospectus regime to align rules on content, format, and the approval process.
New content requirements aim to make the prospectus summary more useful to investors, as issuers will have the flexibility to include any information that is “material and meaningful” to investors. The summary must include four sections: the introduction, key information on the issuer, key information on the securities, and key information on the offer. The regulation sets out content requirements for each section. The new reduced length (not longer than seven sides of A4 paper) will force issuers to keep summaries concise, while the requirement for clear, non-technical language should improve readability. The number of risk factors permitted in the summary is limited to 15, a requirement that should prompt issuers to focus on the risks that are most material to investors.
Issuers are likely to welcome the move away from overly proscriptive content requirements for the summary, as the old rules (which required summaries to include elements from specific disclosure tables) often resulted in the inclusion of immaterial information.
One objective of the new rules is to encourage issuers to include only risk factors that are specific to the company or their securities and avoid including generic risks. Risk factors should only include issues that are material for taking informed investment decisions and should be corroborated by information published elsewhere in the prospectus. Risks must be categorised by their nature, with the most material risk presented first (based on the probability of the occurrence and the expected magnitude of the negative impact). However, other risks within the category do not need to be ranked in order of materiality.
These changes, along with the new ESMA Guidelines on Risk Factors, will no doubt result in competent authorities becoming more rigorous in their review of risk factors, which could lengthen the timetable for prospectus approvals. However, if issuers follow the new rules and guidelines in drafting the relevant disclosures, they should not be overly concerned about the new requirements in relation to risk factors. The authors of this post believe that the new rules and guidelines on risk factors are generally consistent with current market practice in the UK, for example not including generic risks, though the new requirement to present the most material risks in each category first will focus minds on the ordering of risk factors.
The Prospectus Regulation introduces a new simplified disclosure regime for secondary issues, which replaces the current proportionate disclosure regime for rights issues. Issuers that have been listed for at least 18 months on a regulated market or SME growth market may use a simplified prospectus consisting of a summary, a specific registration document, and a specific securities note containing reduced disclosure requirements. A simplified prospectus requires only one year of historical financial information, in addition to a working capital statement.
The Prospectus Regulation will allow qualifying issuers to prepare an EU Growth Prospectus under a proportionate disclosure regime using a standardised format that is intended to be more attractive to issuers than the reduced disclosure requirements introduced by the Prospectus Amending Directive in 2012.
These new Growth Prospectus rules will apply to SMEs; other issuers traded on an SME growth market with an average market capitalisation of less than €500 million for the prior three years; and other issuers where an EU offer does not exceed €20 million over 12 months, provided that such issuer is not traded on an MTF and had up to an average of 499 employees during the previous year.
In the experience of the authors of this post, reduced disclosure prospectuses such as the simplified prospectus and the EU Growth Prospectus prepared under the new Prospectus Regulation will likely fail to satisfy the disclosure requirements under US securities laws, making them unsuitable for international offers under Rule 144A.