The new EU Prospectus Regulation, which will repeal the current EU Prospectus Directive and Prospectus Regulation, was published in the Official Journal of the European Union on 30 June 2017, with the stated intention of making it easier and more cost-effective for companies to access the capital markets. The provisions in the new regulation concerning the format and content requirements of a prospectus will come into force on 1 July 2019 and are supported by the draft delegated regulation published in November 2018, which was informed by the technical advice that the European Securities and Markets Association (ESMA) published in March and July 2018.
Format of an equity prospectus
Under the new regime, a prospectus should comprise the following parts in the following order:
- a table of contents;
- a summary;
- risk factors; and
- other information items required by the new regulation.
The issuer is generally free to organise other information as it wishes.
The form of the summary section in a prospectus has been amended so that there are now four sections (ie, an introduction containing warnings, key information on the issuer, key information on the securities and key information on the offer of securities to the public and admission to trading on a regulated market) as opposed to the five under the old regime. While the information contained in a summary will, for the most part, not change, the new regulation requires a Q&A format to be adopted and has also limited the length of the summary to seven pages (as opposed to the current limit of 15 pages and 7% of the prospectus).
The new regulation requires risk factors to be categorised by their nature and presented in order of their materiality. ESMA published further draft guidelines on risk factors under the new regime, which stressed the need for them to:
- be concise and specific and have a clear and direct link with the issuer and its securities;
- be material, taking account of the probability of the risk's occurrence and the expected magnitude of its negative effect;
- include, where available, quantitative information demonstrating the potential negative effect;
- include mitigating language only to illustrate the risk's probability of occurrence and the expected magnitude of its negative affect (not to reduce the perception of the risk's materiality);
- be corroborated by the disclosure elsewhere in the prospectus; and
- be disclosed by categories.
ESMA stated that under the new regulation, issuers must state a specific use of proceeds and, in many cases, a blanket phrase stating that the proceeds will be used "for general corporate purposes" will be insufficient.
Profit forecasts and profit estimates
In ESMA's view the current requirement to include a reporting accountant's report on profit forecasts and estimates by the issuer creates additional costs without providing clear value to investors. Consequently, the draft delegated regulation has replaced this requirement with an obligation to include a statement by the issuer that any profit forecast or estimate has been compiled on the basis set out and prepared on a basis that is comparable with the issuer's annual financial statements and consistent with the issuer's accounting policies. While the abolition of the requirement to include an accountant's report could save cost, underwriters may seek the comfort of a private accountant's report as a matter of their own due diligence. The Association for Financial Markets in Europe (AFME) has urged the European Commission to reconsider the requirement for an accountants' report in the final delegated regulation.
Currently, a prospectus must include a statement setting out any significant change to an issuer's trading and financial positions since the date of the latest financial statements included in the document. The new rules delete references to 'trading position' (the meaning of which was considered unclear) and replace it with the requirement to include an additional statement concerning any significant change to the issuer's financial performance over the same period. This clarifies that an issuer's disclosure concerning significant change should focus on the issuer's balance sheet and income statement.
Under the new regime, issuers will now have to include in a prospectus:
- a comparison of participation in share capital and voting rights for existing shareholders before and after a capital increase, on the assumption that they do not acquire new shares; and
- a comparison of the net asset value per share from the date of the latest balance sheet before the capital increase and the price per share in the offer.
In addition, where a pre-emptive and non pre-emptive offer are run concurrently (eg, a firm placing and an open offer) the prospectus must include an indication of the dilution that existing shareholders will experience on the basis that they take up their entitlement.
The ESMA technical advice clarifies expectations under the new regulation for a prospectus in relation to an issuer with a complex financial history (ie, where its financial track record does not accurately reflect its business at the time of the prospectus). In the context of an issuer that has made a significant acquisition in the prior three years, they will be required to include substantive business disclosure similar to that which is expected to be made in relation to the issuer itself as well as financial statements, which are required under the current regime. While in practice certain of this qualitative disclosure is typically already made in an equity prospectus, the AFME has urged the European Commission to reinstate the less prescriptive current position in the final delegated regulation.
Under the current regime, an issuer may incorporate by reference only documents which have been approved or filed with a national competent authority. The new regulation expands this list to include documents such as:
- regulated information;
- management reports (as referred to in the EU Accounting Directive);
- corporate governance statements; and
- the issuer's memorandum and articles of association.
The draft delegated regulation has attempted to streamline prospectuses by removing the need for issuers to repeat information in different parts of the prospectus and include certain boilerplate disclosure. As such, the following changes are aimed at reducing the length of prospectuses:
- The disclosure requirements for the operating and financial review now mirror the requirements for a management report in the EU Accounting Directive in order to allow an issuer to more easily incorporate this information by reference.
- As the International Financial Reporting Standards require tangible fixed assets to be included in an issuer's financial statements, the requirement to disclose these elsewhere has been deleted.
- Disclosure in respect of the public takeover regime applicable to the issuer now needs to stipulate only the relevant national legislation to the issuer and give an overview of the position of a shareholder in case of a takeover and what frustrating measures can be imposed against a bid.
- Instead of including disclosure in relation to certain tax consequences of holding shares in an issuer, the tax disclosure must now include which tax regimes may apply and further information only where the proposed investment attracts a tax regime which is specific to the type of investment.
- The description of an issuer's constitutional documents in the prospectus may now be limited to the issuer's principal objects and purposes and any change of control provisions.
- The requirement to include a section on selected financial information has been removed as this information will be included elsewhere in the prospectus.
The new regime requires some additional items to be disclosed, including:
- the company's strategy and objectives;
- the issuer's regulatory environment as a standalone disclosure item and not part of the operating and financial review;
- the issuer's website address (with a warning that it does not form part of the prospectus);
- the issuer's legal entity identification number; and
- further information around stabilisation activities that must be publicly announced under the EU Market Abuse Regulation.
The new regulation allows that certain documents which must be available for inspection alongside a prospectus can be made available online and not in hard copy. ESMA has stipulated that where documents are made available electronically, their location should be relatively precise and should not simply refer to the home page of the issuer or a third-party website. Issuers must ensure that such web locations are kept up-to-date.
The new regime has also further refined the requirements for disclosure of a prospectus in connection with a secondary offer where the issuer has been admitted to trading for at least 18 months. While the new disclosure requirements could theoretically allow a secondary offer prospectus to be published more quickly and more cost-effectively, as broadly speaking there would be no need to repeat information that is already in the public domain, it remains to be seen whether issuers will adopt these voluntary requirements for secondary offers given the concerns that simplified disclosure may not satisfy the disclosure standards in non-EEA jurisdictions (eg, the United States) where the offer is made.
The new regulation requires an electronic version of a prospectus to be fully downloadable, printable, searchable and easy to access on a designated section of the issuer's website. The summary must be accessible in a standalone document in the same section of the website and there must be easier and more accessible links for investors to any information that is incorporated by reference.
Under the new regulation, it will be prohibited to place the prospectus behind a web-blocker or otherwise require potential investors to register or pay a fee to view the prospectus. Following implementation of the new EU Prospectus Regulation, ESMA will publish an online and searchable database of all prospectuses which will be accessible to all investors.
Ahead of the provisions coming into effect, ESMA intends to publish final draft guidelines on risk factors early in 2019. Issuers and their advisers will then need to ensure that they comply with the new regime in respect of any prospectuses to be published on or after 21 July 2019.
For further information on this topic please contact Dan Hirschovits, Ariel White-Tsimikalis? or Jamie Corner at Davis Polk & Wardwell London LLP by telephone (+44 20 7418 1300) or email ([email protected], [email protected] or [email protected]). The Davis Polk & Wardwell website can be accessed at www.davispolk.com.
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