CMU: Council publishes Prospectus Regulation (PD3) negotiating position

The Council of the European Union (the Council) has published its negotiating position in the form of a draft regulation regarding the proposed amendments to the Prospectus Directive, commonly known as PD3.

The draft regulation contains the following key points of interest to issuers of debt securities:

€100,000 minimum denomination exemption: The existing PD2 exemption, whereby offers of securities with a minimum denomination of €100,000 or above are exempt from the requirement to publish a prospectus, is proposed to be retained. 

Retail vs wholesale disclosure requirements: The draft regulation allows for differentiated disclosure requirements for securities with a minimum denomination of €100,000 or above, including no requirement to include a prospectus summary if the minimum denomination of the securities is €100,000 or above.

Summaries: The draft regulation provides that general summaries will be limited to six pages of A4, with the exception of (i) summaries in respect of several securities which differ only in some very limited details, such as the issue price or maturity date (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). 

Risk factors: In a move away from the Commission’s legislative proposal, the draft regulation does not provide for the categorisation of risk factor by materiality. Instead the draft regulation provides that 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 10 risk factors may be disclosed in the summary. 

Third country issuer representative: The requirement that issuers in non-EEA states appoint a representative in their home Member State remains, however the draft regulation provides that the representative will not be responsible for the contents of the prospectus nor responsible for the issuer’s compliance with the Prospectus Regulation.

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.

Timing: The draft regulation proposes a grandfathering period of 24 months from the date of entry in to force of the new Prospectus Regulation.

Next Steps

The Council will discuss the text of the draft regulation with the European Parliament (the Parliament). Once the Parliament has finalised its position, the legislation will move to the “trilogue” phase where the text of the draft regulation will be negotiated by the Commission, Council and Parliament.

Comment

The Council’s draft regulation contain some welcome changes to the Commission’s legislative proposal, in particular the re-instatement of the €100,000 minimum denomination exemption and the limitation of the requirement to include a prospectus summary to securities with a denomination of less than €100,000 only.

The timing for the conclusion of the PD3 regulation is still currently unclear and it is likely that the text of the PD3 will continue to evolve over the coming months.