ESMA consults on format, content and approval of prospectuses

Following the publication of the new Prospectus Regulation in the Official Journal, European Securities and Markets Authority (ESMA) has published three consultation papers setting out draft versions of its technical advice in relation to the format, content and approval of prospectuses.

Background

The Prospectus Regulation was published in the EU 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.

On 28 February 2017, ESMA received requests for technical advice from the European Commission in relation to a number of prospectus related issues. In response to the Commission’s requests, ESMA has now published the following consultation papers containing draft versions of its 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.

ESMA will consider all feedback received in relation to the consultations by 28 September 2017 and will publish final versions of its advice in Q1 2018.

Set out below are some of the key points in relation to each consultation.

Format and content of the prospectus

IPO/full issuance

ESMA considers that the basic format of a prospectus - registration document, securities note and summary - is already established at Level 1 (the Prospectus Regulation).

ESMA has suggested certain changes to the order of information in the prospectus, including that the use of a cover note (currently standard practice) be made mandatory. Although ESMA is not proposing to set precise rules about the content of the cover note, it has proposed that it should be written in plain language, should avoid the use of legal disclaimers and should clearly set out which actions national competent authorities have taken in terms of their scrutiny of the prospectus. ESMA has also proposed that risk factor disclosure be made after the summary and that the prospectus should include a new dedicated section providing clear information on how the issuer intends to use the proceeds of any particular issuance.

In terms of detailed disclosure requirements, ESMA has suggested that the existing schedules of Commission Regulation (EC) No 809/2004 (the 2004 Regulation) be used as a starting point, but with a reduction in the number of annexes and a streamlining of the combinations that are currently required to assemble a prospectus (particularly in light of the new regimes for secondary issuance and the EU Growth prospectus).

ESMA has usefully provided marked up tables showing the differences between the current disclosure requirements in the 2004 Regulation and those proposed under the Prospectus Regulation for each of the share registration document and the share securities note (as well as for the other annexes currently set out in the 2004 Regulation.) In relation to the content of the summary, Article 7 of the Prospectus Regulation sets out detailed requirements which will supersede Annex XXII of the 2004 Regulation. As such, ESMA does not consider it necessary to address this issue in further detail at this stage.

Significant changes to the proposed disclosure requirements include:

• Profit forecasts and estimates will no longer need a report from an independent accountant or auditor.
• A new section will be required 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.
• Selected financial information (currently under item 3 of Annex 1 2004 Regulation) will no longer need to be disclosed as full financial information is given under item 20 of that annex and also the operating and financial review provides a description of the issuer’s financial position and highlights any changes to the financial condition and results of operations.

Universal Registration Document

Section 5 of the consultation sets out ESMA’s proposal for the content of the new universal registration document (URD), which is intended to be used by frequent issuers to provide a “one-stop shop” for publication of annual and half-yearly financial reports under the Transparency Directive (2004/109/EC) and publication of a registration document within the prospectus regime.

As the URD must be fit for both equity and non-equity issuance, ESMA is proposing that it should be based on the disclosure requirements for the share registration document with additional disclosure items as required under the Transparency Directive. The URD should also clarify whether it had been approved before its publication or just filed (as will be permitted for issuers who have had a URD approved in two consecutive financial years).

Secondary issuance

A simplified disclosure regime will be available for issuers with securities admitted to trading on a regulated market or a small and medium size enterprise (SME) growth market continuously for at least the last 18 months and which issue securities of the same class as those already admitted.

Section 6 of the consultation sets out ESMA’s proposed content requirements for a simplified prospectus under the secondary issuance regime. It has suggested that the simplified prospectus should consist of 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 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).
• 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.
• The minimum information to be included in the summary (under Article 7 of the Prospectus Regulation).

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

EU Growth prospectus

Article 15 of the Prospectus Regulation introduces the EU Growth prospectus, which is a proportionate disclosure prospectus available to the following issuers: (i) SMEs; (ii) mid-sized companies (less than €500m three year average market capitalisation) with securities traded on an SME growth market and (iii) other issuers that do not have securities traded on a Multilateral Trading Facility (MTF), had less than 499 employees during the previous financial year and where the total consideration of the public offer in the EU does not exceed €20m calculated over a period of 12 months.

As required by the Prospectus Regulation, the EU Growth prospectus must consist of a registration document, securities note and a summary based on Article 7 of the Prospectus Regulation. ESMA has proposed a standardised format and sequence for the prospectus where the registration document and securities note are separate and also where they are combined into a single document. Both the registration document and securities note can be used for equity and non-equity issuance.

In order to ensure a proportionate regime for SMEs, ESMA has adapted individual disclosure items to an issuer’s size and the complexity of their operations. The key differences between the EU Growth registration document and a full equity registration document can be summarised as follows:

• disclosure is not required for a number of items, including statutory auditors, important events in the development of the issuer’s business, research and development and board practices, and
• reduced disclosure information is required in relation to a number of items including principal activities and markets, organisational structure, conflicts of interest, interim and other financial information and dividend policy.

As in the case of an equity registration document, an independent accountant’s report will not be required for profit forecasts and estimates.

Scrutiny and approval

The final consultation document sets out criteria for scrutiny and procedures for approval and filing of a prospectus.

ESMA is proposing that standard criteria for scrutiny of the completeness, comprehensibility and consistency of a prospectus be adopted, but beyond these standard criteria, national competent authorities should be given a certain level of flexibility in order to ensure investor protection.

In relation to the approval of a prospectus, ESMA has proposed that the relevant procedures be based largely on the current regulatory standards detailed in Commission Delegated Regulation 2016/31. These standards were introduced under the Omnibus II Directive and set out arrangements for the submission of an application for approval of a prospectus, changes to the draft prospectus, final submission of the prospectus and the receipt and processing of the application by the relevant competent authority.