Striking Right Balance of Disclosure: European Prospectus Regime Revision Continues
What are the right levels of disclosure for securities offerings? What is the best way to ensure that investors get all the information they need while not overburdening companies with administrative and legal requirements? These are some of the questions that European Union (EU) policymakers have been pondering for the past few months.
As part of the European Capital Markets Union (CMU) Action Plan, the European Commission published in November 2015 a legislative proposal to revise the current pan-EU Prospectus Directive (which I discuss in this post). The prospectus is a detailed legal document setting out company information as well as the terms and risks of an investment. The prospectus consists of three documents: a registration document, a summary, and a securities note. It is thus a key disclosure document that informs the investment decision-making process.
Unified EU Rules: From a Directive to a Regulation
The Prospectus Directive provides for an EU-wide regime for capital market prospectuses. The current prospectus regime has not, however, been working optimally, leading the Commission to propose a revision of the legislation. The main revision point has been to change the legal basis of the prospectus regime from a Directive to a Regulation. The current Directive has set minimum standards across the EU, with leeway for discretional national rules. However, the new Regulation, once agreed on, will aim at harmonizing the rules across Europe and will be directly applicable in all 28 EU Member States.
The Commission’s proposal is currently being analyzed separately by the Council that represents EU Member States and by the European Parliament. The main topics of discussion since the Commission’s proposal have focused on the proposed exemptions, simplified requirements for certain issuers, and required levels of disclosure — for example, in the summary document. The following provides details of these discussion points.
Thresholds for Prospectus Exemptions
The Commission has proposed new thresholds for when issuers can be exempt from the pan-EU prospectus rules. The Member States would have to exempt from the EU prospectus rules all offers of securities with a total consideration under €500,000. They could also choose to exempt offers of up to €10 million. For offers below the chosen threshold, the issuers would have to follow only national prospectus rules, and the issuer would not be allowed to offer securities for trading in other EU Member States, unless given a special permission to do so by another Member State’s national regulator.
The European Parliament published its draft report on the revision of the Prospectus Directive on 7 April 2016. The draft report presents the Parliament’s initial views on the revision, but the final, official position will be decided in the coming months. In the draft report, the Parliament indicates a willingness to increase the exemption thresholds. Their proposal is that EU level prospectus rules would not apply to any issuances of less than €1 million. The Member States would also be allowed to increase the threshold to €20 million. The Parliament’s initial position aims to further facilitate the perceived needs of Small and Medium-Sized Enterprises (SMEs).
Philippe de Backer, a former Member of the European Parliament, explains his views on the Prospectus Directive revision. As a former Rapporteur, Mr. de Backer was leading the discussions on the revision of the Prospectus Directive in the European Parliament until 1 May 2016.
In the Council, the Member State representatives have so far held two political discussions on the Commission’s proposal. There is broad support among the Member States for the thresholds proposed by the Commission.
Simplified Requirements for SMEs
The Commission has proposed a new prospectus regime for SMEs with reduced disclosure requirements, provided that they are not listed on a stock exchange. The Commission’s proposal is that SMEs be able to draw up their prospectus in a new “Question and Answer” (“Q&A”) format instead of following the ordinary prospectus structure. The new, simplified format would be available to offers of securities to the public by SMEs whose securities are traded on multilateral trading facilities, such as SME Growth Markets, and would make it easier for SMEs to enter the markets without excessive legal costs. Nonetheless, the Commission has not further specified the exact content and format of the “Q&A prospectus.” Instead, the Commission has proposed that those details would be developed later by the European Securities and Markets Authority (ESMA—please see our related blog post).
The Parliament’s draft report also underlines the need for SMEs to have easier access to the capital markets. The draft report proposes the creation of an “EU Growth Prospectus”, which would be available for all companies with an issuance size between €1 million and €20 million calculated over a 12-month period. The new rules would be specifically aimed at easing entry into the markets for SMEs and mid-cap companies, and it is thus an extension of the Commission’s original “Q&A prospectus” idea. The proposed EU Growth Prospectus would be similar in format to the Commission’s Q&A prospectus because it would cover only basic questions on the issuer and the security.
In the Council, the Member States have not yet held extensive discussions on the Parliament’s EU Growth Prospectus proposal. Instead, the Member States are currently considering some changes to the Commission’s original Q&A prospectus regime. For example, the Council underlines that “it is not appropriate to define the minimum content of prospectuses for SMEs by merely subtracting information items from the disclosure requirements normally used for larger issuers.” The Member States are thus indicating that the disclosure requirements for SMEs should go beyond the bare minimum.
Typical summaries under the current Prospectus Directive are often dozens of pages long. In the revision, the Commission has proposed that the new prospectus summary would be closely modelled on the Key Information Document (KID) as required under the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation. The maximum length of the summary would be six sides of A4-sized paper with an easily readable font. The Commission has further proposed that the new prospectus summary would have three main sections covering key information on the issuer, the security, and the offer/admission, respectively. There would be general headings for each of the sections, as well as indications on their content, but issuers would have the freedom to select the information they think is material. No hyperlinks or cross-referencing to other parts of the summary document would be allowed in order to enhance the summary’s readability. Issuers should also include no more than five risk factors on the issuer and five on the security offered.
Unlike the Commission, the Parliament would tentatively allow for cross-referencing across the summary document. The issuer would also have to indicate the extent to which investors could lose their investment. Other than those two issues, the Parliament’s draft report does not significantly deviate from the Commission’s proposal on the summary document.
In the initial Council considerations, the Member States have suggested that the summary document would also need to include a list of any conflicting, material interests that are relevant to the issuer or the offer. The prospectus should also include the Legal Entity Identifier (LEI) code. In addition, the summary should include the relative seniority of the securities in the issuer’s capital structure in the event of the issuer’s insolvency. As to the risk factors, the Member States have initially proposed that the summary should include a maximum number of 10 risk factors, but the issuers could choose whether the 10 risk factors relate to the issuer, security, or guarantor.
Political Agreement By Christmas?
In addition to the three issues just noted, the political discussions so far have covered, for example, other exemptions allowed within the pan-EU prospectus regime, rules on advertisements, and issues related to countries located outside of the EU (the so-called “third-country” rules).
The Members of the European Parliament (MEPs) are currently considering amendments to the Parliament’s draft report, with a vote on the final report tentatively scheduled for mid-June 2016. Depending on the number and content of the MEPs’ amendments, the vote may be postponed to the third quarter. In the Council, the Member States are holding meetings about the revision of the Prospectus Directive every few weeks. A final political agreement among the Member States (a “General Approach”) can possibly be expected in June 2016.
Once both the Parliament and the Council have their final reports ready, they will start so-called “trialogue” negotiations under the supervision of the Commission. The final text agreed on in the trialogues will be the final Prospectus Regulation that needs to be implemented in all the 28 EU Member States. If the trialogues finish by this Christmas, the new prospectus rules could be in place at the end of 2018.
CFA Institute is closely following the negotiations in both the Parliament and the Council and looks forward to seeing how the discussions on some of these key topics develop. In the coming weeks, we will publish further video interviews with other MEPs about the revision. We are also currently working on a research project on the topic — stay tuned for further details in the coming months.
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Photo credit: iStockphoto.com/DNY59