CMU: European Parliament adopts report on Prospectus Regulation
Key differences in negotiating positions between the EU Council and Parliament in relation to the EU legislative proposal to reform the Prospectus Directive.
On 15 September 2016 the European Parliament (the Parliament) adopted its Report in the form of a draft regulation amending the European Commission’s (the Commission) legislative proposal to reform the Prospectus Directive, commonly known as PD3. This follows the publication of the PD3 negotiating position of the Council in June 2016.
The table below summarises the key differences in the positions of the Parliament and the Council which are of interest to issuers of equity securities:
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| Topic | Position of Council | Position of Parliament |
| Small offers | Offers of securities with a total consideration in the EU of less than €500,000, calculated over a 12 month period, are exempt from the requirement to publish a prospectus. Member States may exempt offers of securities with a total consideration of less than €10,000,000 in the EU, calculated over a 12 month period, from the requirement to publish a prospectus. |
Offers of securities with a total consideration in the EU of less than €1,000,000, calculated over a 12 month period, are exempt from the requirement to publish a prospectus. Member States may exempt offers of securities with a total consideration of less than €5,000,000 in the EU, calculated over a 12 month period, from the requirement to publish a prospectus. |
| 20% Limit for Convertibles | The requirement to publish a prospectus on a conversion or exchange of 20% or more of a company’s shares remains in the draft regulation, however the requirement will not apply in the case of mandatory conversion of contingent convertible securities issued by credit institutions. | The requirement to publish a prospectus on a conversion or exchange of 20% or more of a company’s shares remains in the draft regulation. |
| Less than 150 persons exemption | Offers of securities addressed to fewer than 150 natural or legal persons per Member State, other than qualified investors are exempt from the requirement to publish a prospectus. | Offers of securities to fewer than 350 natural or legal persons per Member State and to a total of no more than 4,000 natural or legal persons in the EU (other than qualified investors and certain venture capital funds) are exempt from the requirement to publish a prospectus. |
| Summaries | Summaries shall be limited to six pages of A4, with the exception of (i) a summary covering several securities (where an additional three pages of A4 is permitted if there is no PRIIPs Key Investor Information Document); and (ii) summaries in respect of securities which benefit from a guarantee (where an additional one page of A4 is permitted). | Summaries shall be limited to six pages of A4. In exceptional cases the competent authority may allow the issuer to draw up a longer summary up to a maximum of ten sides of A4 where the complexity of the issuer’s activities, the nature of the issue or the nature of the securities requires this and there would be a risk of investors being misled without the additional information. |
| Universal Registration Document | When an issuer has had a URD approved by the competent authority every financial year for three consecutive years, a subsequent URD may be filed without prior approval. | When an issuer has had a URD approved by the competent authority every financial year for two consecutive years, a subsequent URD may be filed without prior approval. |
| Reduced disclosure for secondary issuances | A reduced disclosure regime will be available for certain offers or admissions of securities issued by companies already admitted to trading on a regulated market or an SME growth market for at least 18 months. | A reduced disclosure regime will be available for certain offers or admissions of securities issued by companies already admitted to trading on a regulated market, an SME growth market or an MTF (other than an SME growth market) that has disclosure requirements equivalent to an SME growth market (as set out in MiFID) for at least 18 months. |
| Risk Factors | Risk factors should be categorised by type. Issuers have the option to disclose the probability of a risk arising and the magnitude of the negative impact of a risk, using the scale of low, medium and high risk. A maximum of ten risk factors may be disclosed in the summary. |
Risk factors should be limited to those which are specific and material. There is no requirement that risk factors be differentiated according to their relative materiality (low, medium and high risk.) |
| Third Country Issuers | Issuers in non-EEA states shall appoint a representative in their home Member State. The representative will be the contact point for the issuer in the EU, but will not be responsible for the contents of the prospectus nor responsible for the issuer’s compliance with the Prospectus Regulation. | Issuers in non-EEA states are not required to appoint a representative in their home Member State. However, competent authorities may charge third country issuers higher fees for the approval of prospectuses. |
| Timing | Grandfathering period of 24 months from the date of entry in to force of the new Prospectus Regulation. | Grandfathering period of 24 months from the date of entry in to force of the new Prospectus Regulation. |
New developments
Parliament has also made the following new proposals in its adopted amendments:
- The Commission’s original legislative proposal for a minimum disclosure regime for SMEs has been amended to introduce the concept of a “EU Growth prospectus.” The Growth prospectus will be a standardised document which is easy for issuers to complete and which covers key information on the issuer, the securities and the offer. It will be available to SMEs, issuers whose securities are being admitted to trading on an SME growth market and other issuers whose offer of securities is of a total consideration in the EU not exceeding €20,000,000 (calculated over a 12 month period.) In each case, the Growth prospectus will not be available where securities are being admitted to trading on a regulated market.
- Where a frequent issuer produces a “Universal Registration Document” (URD), as envisaged by the Commission’s legislative proposal, the requirement to publish a supplement to a prospectus may be avoided by way of a “dynamic reference to the most recent version” of the URD in the prospectus.
- The Commission should commence an initiative to regulate and harmonise crowdfunding regimes across Member States. A report by the Commission on this matter in May 2016 concluded there was currently no strong case for EU-wide regulation at that time.
- There should be greater convergence of the prospectus approval process by competent authorities to ensure greater consistency.
- Throughout the Report, it is envisaged that issuers will have a Legal Entity Identifier (LEI) which will be disclosed in the prospectus.
Next steps
PD3 will now move to the “trilogue” phase where the text of the draft regulation will be negotiated by the Commission, Council and Parliament. The Commission has stated its intention to accelerate Capital Markets Union and has called upon the Council and Parliament to agree the text of PD3 by the end of 2016. It is currently proposed that the new regulation will take effect 24 months after its publication in the Official Journal.
