New prospectus regime: delegated regulation on format, content and scrutiny of prospectuses

On 14 March 2019, the EU Commission published the final draft text of a delegated regulation supplementing the new Prospectus Regulation. The delegated regulation sets out detailed requirements relating to the format, content, scrutiny and approval of prospectuses. It will enter into force 20 days after publication in the Official Journal and will apply from 21 July 2019.

Background

The Prospectus Regulation (2017/1129) was published in the Official Journal on 30 June 2017 and came into force on 20 July 2017, though most of its provisions will not be applicable until two years later - 21 July 2019. It repeals the Prospectus Directive with effect from that date.

As with the Prospectus Directive, the Prospectus Regulation provides a framework for the prospectus regime with more detail being provided by Level 2 delegated acts. In February 2017, the European Commission sent a mandate to ESMA seeking its assistance on certain of these delegated acts and in response to this mandate, ESMA published the following consultation papers containing draft technical advice:

• draft technical advice on format and content of the prospectus
• draft technical advice on scrutiny and approval of the prospectus, and
• draft technical advice on content and format of the EU Growth prospectus.

Following these consultations, ESMA published a final report on its technical advice on 03 April 2018. The draft text of the Commission’s delegated regulation, first published on 28 November 2018, was based on this final report. The Commission has now adopted a subsequent draft of the delegated regulation (the Delegated Regulation), together with associated annexes, though the European Parliament and the Council still have the right to object to it.

Delegated regulation on format content and scrutiny of prospectuses

The objectives of the Delegated Regulation are to set out the information that issuers must include in all types of prospectus (whether drawn up as a single or separate documents) and to ensure that all EU competent authorities and relevant companies can interpret and apply the new prospectus rules consistently. It details and clarifies the following points of the policy framework laid down in the Prospectus Regulation:

• format of the prospectus and the specific information that must be included in it
• reduced contents list and standard format of the EU Growth prospectus
• reduced information to be included in a simplified prospectus for secondary issuances
• minimum information to be included in the universal registration document, and
• criteria for scrutiny of prospectuses and the universal registration document.

Format and content of the prospectus

The Delegated Regulation follows the “building block approach” of the current Prospectus Directive regime, with the minimum information to be included in registration documents, securities notes and any additional information, detailed in separate annexes. It also maintains most of the content requirements set out in the existing prospectus regime but does, however, include several changes aimed at easing the burden on issuers.

Key points to note include the following:

• Cover note: ESMA had recommended that if an issuer were to voluntarily include a cover note to the prospectus, its length should be limited to 3 sides of A4 paper. This recommendation has not been adopted in the Delegated Regulation.

• Location of risk factors: To ensure that it is in a prominent position and easily accessible to investors, the Delegated Regulation requires that the risk factors section remain at the beginning of the prospectus – after the table of contents and the summary (or, in the case of a base prospectus, after the general description of the offering programme.)

  Under the new Prospectus Regulation, risk factors will be limited to risks which are specific to the issuer and/or the securities and which are material for taking an informed investment decision. They will also need to be presented in a limited number of categories depending on their nature, with the most material being mentioned first and must be corroborated by the content of the prospectus.

• Profit forecasts and estimates: The Delegated Regulation requires all published profit forecasts and estimates, which are still outstanding and valid, to be included in an equity securities prospectus. If a published profit forecast or estimate is still outstanding, but no longer valid, then the prospectus should include a statement to that effect and an explanation of why it is no longer valid. (ESMA’s original proposal for outstanding profit estimates or forecasts to be included in a non-equity securities prospectus has not been adopted.) The prospectus must also include a statement that any profit forecast or estimate has been compiled and prepared on a basis which is both comparable with the annual financial statements and consistent with the issuer’s accounting policies. The Delegated Regulation no longer requires, in any circumstances, an auditors’ report on any profit forecast or estimate included in a prospectus. An issuer may, however, choose to include such a report if is material for investors.

• Selected financial information: Under the current Prospectus Directive regime, an equity securities prospectus must include selected financial information which sets out the key figures summarising the financial condition of the issuer. This selected financial disclosure is no longer required under the Delegated Regulation.

• Issuer’s business strategy: The Delegated Regulation requires a new section to be included in the share registration document describing the issuer’s business strategy and objectives (both financial and non-financial (if any)). This description should take into account the issuer’s future challenges and prospects and go beyond the current requirement to disclose only exceptional factors relating to the issuer’s operations and principal activities.

• Issuer’s website address: The requirement to disclose the issuer’s website address in the equity securities registration document, only applies if the issuer actually has a website address. There is no separate requirement for an issuer to have one. The registration document must also include a disclaimer stating that information on the issuer’s website does not form part of the prospectus unless it is incorporated by reference into the prospectus.

• Size of shareholdings: Where a major shareholder is selling down their holding, the Delegated Regulation requires the size of that person’s shareholding, pre and post issuance, to be disclosed in the equities securities note (and not the registration document as was originally proposed.)

• Universal Registration Document: The Prospectus Regulation provides for a new registration document for issuers of securities admitted to trading on a regulated market or on an MTF – the Universal Registration (URD). The detailed disclosure requirements for the URD are set out in a separate Annex to the Delegated Regulation. ESMA was of the view that some flexibility in the order of information in the URD would be beneficial to the frequent issuers who will use it. As such, the Delegated Regulation leaves the placing of the section on risk factors to the issuer’s discretion, provided that those risk factors remain identifiable as a single section. This flexibility is not extended to standard registration documents, however. To ensure legal certainty, issuers should state in their URD whether it has been approved by the competent authority or merely been filed and published without prior approval.

Form and content of the EU Growth Prospectus

The new Prospectus Regulation introduces the EU Growth prospectus – a proportionate prospectus available for use by SMEs, mid-sized companies admitted to an SME growth market or for small issues of less than €20m by non-listed companies.

As required by the Prospectus Regulation, the EU Growth prospectus must consist of a specific registration document, securities note and a summary. It can be drawn up as either a single document or as separate documents. The Delegated Regulation sets out a standardised format and fixed order in which information in the EU Growth prospectus should be presented (but with some flexibility of ordering within each section of the prospectus.)

The detailed content requirements for the EU Growth prospectus are set out in separate annexes to the Delegated Regulation, with different registration document and securities note annexes for equity and non-equity securities. To ensure a proportionate regime for SMEs, the Delegated Regulation has adapted individual disclosure items to an issuer’s size and the complexity of their operations. In certain instances, disclosure of an item is not required at all (e.g. statutory auditors) whereas in others, reduced disclosure is required (e.g. principal activities and markets.) As in the case of an equity registration document, an independent accountant’s report will not be required for profit forecasts and estimates included in the EU Growth prospectus.

The content requirements for the EU Growth prospectus summary are also set out in a separate annex to the Delegated Regulation. They include an introduction and key information on:

• the issuer (including key financial information and a brief description of the most material risk factors specific to the issuer)
• the securities (including a brief description of the most material risk factors specific to the securities), and
• the offer (including a brief description of the reasons for the offer and the use of the proceeds.)

The maximum length of the summary is six sides of A4 paper, extendable in certain circumstances.

Secondary issuance

A simplified disclosure regime is available under the Prospectus Regulation for issuers with securities admitted to trading on a regulated market or on a SME growth market continuously for at least the last 18 months and which issue securities of the same class as those already admitted.

A simplified prospectus must include a summary (in accordance with Article 7 of the Prospectus Regulation), a specific registration document and a specific securities note. The detailed content requirements of the specific registration document and securities note are set out in separate Annexes to the Delegated Regulation and include the following:

• the list of disclosure requirements set out in Article 14(3) of the Prospectus Regulation, being (i) the annual and half-yearly financial information published in the 12 months prior to the approval of the prospectus, (ii) any outstanding and valid profit forecast or estimate, (iii) a concise summary of any Market Abuse Regulation disclosures made in the preceding 12 months, (iv) risk factors and (v) working capital statement, statement of capitalisation and indebtedness, relevant conflicts of interest and related party transactions, major shareholders and pro forma financial information (if relevant), and

• information required by the “necessary information” test under Article 14(2) of the Prospectus Regulation, being the reduced information which is necessary to enable investors to understand (i) the prospects of the issuer and the significant changes in the business and the financial position of the issuer and guarantor that have occurred since the end of the last financial year (if any), (ii) the rights attaching to the securities, and (iii) the reasons for the issuance and its impact on the issuer, including on its overall capital structure and the use of the proceeds.

As would be expected, several items that would normally be disclosed in a full prospectus, are not required under the simplified regime. These include an operating and financial review, organisational structure, capital resources, remuneration and benefits and board practices.

Scrutiny and approval of the prospectus and review of URD

Under the current Prospectus Directive regime, there are no standard criteria for scrutiny of the completeness, comprehensibility and consistency of a prospectus and national competent authorities (NCAs) are free to determine their individual approaches to scrutiny, within the framework of the prospectus regime.

With a view to harmonising this process, the Delegated Regulation establishes a set of standardised rules for scrutiny of prospectuses whilst taking into account the need for a proportionate approach based on the circumstances of the issuer and of the issuance. Issues that an NCA must consider when checking the comprehensibility of a prospectus include:

• whether the table of contents is clear and detailed
• whether related information is grouped together, and
• whether the draft prospectus is written in plain language and has a structure that enables investors to understand its contents.