New Prospectus Regulation update: ESMA technical advice, standards and guidelines

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.

In February 2017, the European Commission sent a mandate (Mandate) to ESMA seeking its technical advice on certain delegated acts to supplement elements of the Prospectus Regulation. (The Mandate has subsequently been updated and republished several times).

The Mandate is divided into two parts: Part I sets out the acts for which the Commission requires ESMA to provide technical advice by 31 March 2018 and Part II sets out the acts for which ESMA must provide technical advice by 31 August 2018.

In July 2017, ESMA published the following consultation papers containing draft technical advice on the matters set out in Part I of the mandate:

• 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.

For further information in relation to these consultation papers see “ESMA consults on format, content and approval of prospectuses.”

The Prospectus Regulation also requires ESMA to submit to the Commission by 21 July 2018, draft regulatory technical standards (RTS) on various prospectus related issues. ESMA must, however, conduct a public consultation before submitting any draft RTS to the Commission. As such, in December 2017, ESMA published a consultation seeking stakeholders’ views on its proposals for the RTS. For further information on this consultation, see “Prospectus Regulation: ESMA consults on draft regulatory technical standards.”

ESMA final report on technical advice under the Prospectus Regulation (April 2018)

Following the July 2017 consultations on its draft technical advice under Part I of the Mandate (see Background above), ESMA published its final report on this technical advice on 03 April 2018. The technical advice follows these three consultation papers and covers the areas of format and content of the prospectus, the EU growth prospectus and the scrutiny and approval of the prospectus.

Subject to endorsement by the Commission, this technical advice will form the basis for the delegated acts to be adopted by the Commission by 21 January 2019.

Format and content of the prospectus

The technical advice generally proposes to maintain most of the content requirements set out in the existing prospectus regime. It does, however, set out a number of changes aimed at easing requirements for issuers, with a view to reducing the cost and administrative burden of using a prospectus whilst ensuring that there is sufficient protection for investors.

Key points from the final report include the following:

• Cover note - ESMA has withdrawn its proposal for a mandatory cover note to the prospectus. If a cover note is included voluntarily, its length should be limited to 3 sides of A4 paper. ESMA will consider providing Level 3 guidance on the content of the cover note.

• Location of risk factors - ESMA has maintained its position that the risk factor disclosure should be in a prominent position and easily accessible to investors. As such, ESMA will state in its technical advice that the risk factors section should remain at the beginning of the prospectus after the summary (or, in the case of a base prospectus, after the general description of the programme.)

• Section on “Use of Proceeds” - ESMA has decided to withdraw the requirement for a stand-alone use of proceeds section. It will retain the disclosure items as set out in the various annexes but will not require that these are set out in a dedicated section of the prospectus.

• Issuer’s website address - ESMA has clarified that in the “Information about an Issuer” section of the share registration document, an issuer need only disclose a website address if it has one. There is no requirement for an issuer to have a website address. Information on any issuer’s website does not form part of the prospectus unless it is incorporated by reference into the prospectus.

• Profit forecasts - In relation to equity prospectuses, ESMA has decided that outstanding, previously published profit forecasts and profit estimates, must be disclosed based on the materiality of such valid outstanding reports, in the context of an equity issuance only. (This will not be required for a non-equity prospectus.) ESMA notes that this new requirement is compensated by the removal of the requirement to include an auditors’ report on the profit forecast or estimate.

• Size of shareholdings - ESMA has decided to include in its technical advice, the requirement to disclose the size of shareholdings pre and post issuance, where a major shareholder is selling down their holding. This requirement will be included in the securities note however, rather than the registration document and will not be in the non-equity disclosure annexes.

• Universal Registration Document (URD) - ESMA is proceeding with its proposals in relation to the URD (a new registration document for issuers of securities that are admitted to trading on a regulated market or an MTF). ESMA is of the view that some flexibility in the order of information in the URD may be beneficial to the frequent issuers who will use it. ESMA proposes to state in its technical advice that the placing of the section on risk factors is at the issuer’s discretion, provided that there is a distinct section on risk factors in accordance with item 3 of Annex 1 (Risk Factors). This flexibility will not, however, be extended to standard registration documents.

  Format and content of the EU Growth prospectus

  The technical advice identifies the minimum disclosure requirements for the EU Growth prospectus (available for SMEs, mid-sized companies admitted to an SME growth market or for small issues (less than €20m) by non-listed companies.)

  ESMA has included separate schedules for equity and non-equity issues in the final advice, whereas the consultation paper set out a single table detailing the disclosure items for both types of issue.

  To ensure a proportionate regime for SMEs, ESMA has adapted individual disclosure items to an issuer’s size and the complexity of their operations.

  Scrutiny and approval

  ESMA has confirmed that its standard criteria for scrutiny of the completeness, comprehensibility and consistency of a prospectus should be adopted. Currently no across-the-board scrutiny criteria exist and national competent authorities (NCAs) are free to determine their individual approaches to scrutiny, within the framework of the prospectus regime. ESMA believes, therefore, that establishing a set of standardised rules for scrutiny of prospectuses will undoubtedly harmonise the process.

  At the same time as pursuing harmonisation, ESMA is also required to take a proportionate approach based on the circumstances of the issuer and the issuance. ESMA has, therefore, maintained a level of NCA discretion in its technical advice, allowing NCAs to not apply the criteria to already scrutinised or reviewed material and to apply criteria beyond those laid down in the proposed rules, when necessary for investor protection.

ESMA Final Report on Regulatory Technical Standards (17 July 2018)

Following its December 2017 consultation (see Background above) ESMA issued a final report with draft regulatory technical standards (RTS) in relation to the Prospectus Regulation.

Key areas covered by the RTS include the following:

• Key financial information for the prospectus summary - ESMA has confirmed its proposal of providing six templates setting out the minimum key financial information disclosure requirements for different types of issuers and securities. Each template requires information to be disclosed from an issuer’s income statement, balance sheet and cash flow statement (where required by the Prospectus Regulation.) Issuers will also have the flexibility to include additional key financial information that it considers to be material for investors (including alternative performance measures.

• Advertisements - the current requirements in relation to advertisements (in Commission Delegated Regulation 2016/301) will be carried over into the draft RTS in so far as they are compatible with the new regime. The draft RTS will also include some additional requirements. Following feedback from the consultation, ESMA has clarified in which circumstances the requirements apply to written advertisements only (due to practical implications in relation to oral advertisements.)

• Publication of a supplement - the current rules on publishing a supplementary prospectus (as set out in Commission Delegated Regulation 382/2014) will be carried over into the RTS. ESMA has also included additional requirements to cover new elements in its technical advice on the format and content of the prospectus (see above.) ESMA notes in the final report that respondents to its consultation agreed that profit forecasts or estimates published after the approval of the prospectus but before the end of an offer period or the date of admission of securities to trading, should trigger the obligation to produce a supplement. It has amended the draft RTS to clarify that where the issuer is under an obligation to include an outstanding profit forecast (or otherwise includes a profit forecast in the prospectus,) it should also produce a supplement when it withdraws a published profit forecast. This is to fully inform investors of the relevance of such information.

The final report also includes RTS on technical arrangements for a “notification portal.” These RTS were not consulted on in the December 2017 consultation. Under Article 25(6) of the Prospectus Regulation, ESMA must establish a notification portal into which each competent authority will upload certificates of approval and electronic copies of prospectuses.

ESMA consultation on guidelines on risk factors (13 July 2018)

ESMA has published a consultation paper seeking views on its draft guidelines on risk factors in accordance with the mandate laid down in the new Prospectus Regulation.

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, as corroborated by the content of the registration document and securities note.

Issuers will be required to assess the materiality of the risk factors based on the probability of their occurrence and the magnitude of their potential negative impact. This assessment of materiality may, at the issuer’s discretion, be disclosed using a qualitative scale of low, medium or high. Risk factors will also need to be presented in a limited number of categories depending on their nature, with the most material being mentioned first.

The draft guidelines set out in the consultation paper have been prepared to assist NCAs in their review of the specificity and materiality of risk factors included in a prospectus and of their presentation across categories. They aim to encourage appropriate, focused and more streamlined disclosure of risk factors, in an easily analysable, concise and comprehensible form. The guidelines are general in nature and not limited to the risk factors of any particular type of entity or any particular type of prospectus.

The closing date for this consultation was 05 October 2018. A final version of the guidelines is expected to be published by 31 March 2019.

ESMA consultation on draft technical advice on minimum information content for prospectus exemption (13 July 2018)

In accordance with the new Prospectus Regulation, issuers may offer/admit securities connected with a takeover, merger or division without publishing a prospectus, provided that an alternative document is made available to investors which describes the transaction and its impact on the issuer. Under Part II of the Mandate (see Background above) ESMA was requested to provide technical advice, including in relation to the minimum information content of such an alternative document.

In response to the Mandate, ESMA has published for consultation a draft version of its technical advice on the minimum information that this alternative document must contain, specifically in relation to the following:

• the offer of securities to the public or the admission to trading of securities on a regulated market, and

• the description and impact that a takeover, merger or division may have on the issuer’s operational and financial activities.

ESMA has also set out proposals for operative provisions that it believes are necessary to ensure that exempted documents are fit for purpose.

The closing date for this consultation was 05 October 2018. A final version of the technical advice is expected to be published by 31 March 2019.