CMU: European Parliament adopts report on Prospectus Regulation - Capital Markets

Following the publication of the European Parliament's report on Prospectus Regulation (PD3), we summarise the key differences in the positions of the European Parliament and the European Council.

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 debt securities:

Topic Position of Council Position of Parliament
€100,000 Minimum Denomination Exemption Offers of securities with a minimum denomination of €100,000 or above are exempt from the requirement to publish a prospectus. The existing PD2 €100,000 minimum denomination exemption is abolished.
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.
Retail v Wholesale Disclosure Requirements

Differentiated disclosure requirements for securities with a minimum denomination of €100,000 or above.

No summary is required if the minimum denomination of the securities is €100,000 or above.

Differentiated disclosure requirements depending on whether the non-equity securities are offered to qualified investors or non-qualified investors.

No summary is required if the prospectus has been prepared for the purposes of admitting to trading non-equity securities offered to qualified investors only.

Summaries Summaries shall be limited to six pages of A4, with the exception of (i) summaries in respect of 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 pages of A4 where the complexity of the issuer’s activities, the nature of the issue or the nature of the securities requires and there would be a risk of investors being misled without the additional information.
Supplements  The publication of a supplement shall trigger a two working day withdrawal period. The publication of a supplement shall trigger a five working day withdrawal period.
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.

A maximum of ten risk factors may be disclosed in the summary.

ESMA shall develop additional guidelines.

Third Country Issuers Issuers in non-EEA states shall appoint a representative in their home Member State. The representative 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 a representative in a Member State, however competent authorities may charge third country issuers higher fees for the approval of prospectuses.
Small offers

Offers of securities with a total consideration 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 calculated over a 12 month period from the requirement to publish a prospectus.

Offers of securities with a total consideration 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 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.
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

The Report also makes the following proposals:

  • 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.

Comment

There are a number of fundamental points upon which the Council and the European Parliament have conflicting views. In particular, the Council is proposing that the existing regime which delineates retail and wholesale offers by the €100,000 denomination threshold be retained, whereas the European Parliament wish to move to a regime which turns upon whether the securities are sold to qualified investors or non-qualified investors. Issuers of debt securities are likely to prefer the approach of the Council.

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.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.