The Prospectus Directive - Creating a Pan-European Securities Market
At the time of writing, it has been announced that the final form of the Prospectus
Directive has been adopted by the EU Council of Ministers but no final form
has actually been published. Once it has been published in the Official Journal,
member states will have 18 months to implement the directive. The latest news
on when implementation of the new regime will occur is May 2005. In the meantime,
the consultation process relating to the detailed disclosure requirements which
will need to be complied with is drawing to a close and are expected finally
to be confirmed by the third quarter of 2004.
From a UK perspective, the new regime will effectively sweep away the Public
Offers of Securities Regulations and the United Kingdom Listing Authority (UKLA)
Listing Rules. On a European level, the current system of “mutual recognition”
of prospectuses for listed issues approved by a competent authority in one jurisdiction
but allowing the offering of the relevant securities in another jurisdiction
will also go. In their place, standard disclosure and offering rules applying
to all issuers in EU member states will be introduced. The final form of these
rules is not yet known. However, on the basis of the materials published by
the Committee of European Securities Regulators (CESR) to date, the proposed
regime has already assumed a clear shape.
The Prospectus Directive is only one part of the EU Financial Services Action
Plan that has as its aim the harmonisation of European financial services in
order to promote a Europeanwide market which operates in a more efficient and
competitive manner. Other pending European legislation includes the Market Abuse
Directive, the Transparency Directive and the Investment Services Directive.
The particular aim of the Prospectus Directive is to introduce pan-European
issuance on the basis of one set of disclosure and offering rules, which will
then be administered and applied by each home state. Whilst it is acknowledged
that the current mutual recognition system has not worked well and pan-European
offerings were a daunting exercise, there is a great deal of concern that the
new regime will, at worst, be stiflingly prescriptive and inflexible, and, at
best, confusing and inconvenient. But these concerns should be measured against
the inclusion of a number of positive and simplifying changes to the existing
regime. It is unsurprising that the legislation should garner such reactions.
It is, after all, an ambitious and radical overhaul of the entire European securities
The speed with which the very detailed consultation process has taken place,
in relation to the Prospectus Directive and associated disclosure requirements,
has been criticised as being politically driven at the cost of proper consideration
of the 11 International Securities Quarterly Norton Rose December 2003 wider
ramifications of some of the proposed changes. The consultation process has
followed the procedure, intended to promote more efficient law-making, proposed
in the Lamfalussy Report, that has as its basis the following four levels:
Whilst it may seem like tiresome, procedural detail, it is useful to know about
and appreciate the significance of each of the different levels of development
when getting to grips with the inexorable rounds of consultation papers. The
same procedure is being followed in relation to the other pending legislation.
To which issues does the Prospectus Directive apply?
“Offerings of securities to the public and admission of securities to
trading on a regulated market are the two circumstances in which, absent an
applicable exemption, a prospectus will first be required to be published in
compliance with the detailed requirements of the Prospectus Directive and implementing
This, of course, applies to offerings in each European member state, not just
to those intended to be marketed on a pan- European basis, although presumably
the drawing of this distinction will become very “old hat” once
the regime has come into force.
The definition of an offer of securities to the public as contained in the
Prospectus Directive is extremely wide and would apply to any communication
in any form which presents sufficient information on the terms of the offer
and the securities to be offered to enable an investor to make the decision
to purchase. Although some commentators have concluded that in order to constitute
an offer, the issue price would need to be part of the relevant communication,
there are concerns that marketing activity may be (and may need to be) curtailed
as a result of caution as to whether an offer is being made without first having
an approved prospectus. The definition of the admission to trading on a regulated
market will be dealt with in the Investment Services Directive but seems likely
to be wider than the concept of being admitted to listing.
Exemptions include offers made to “qualified investors”, private
placements (an offer to less than 100 persons per member state) and offers of
securities whose denomination per unit amounts to at least €50,000 (as
opposed simply to the issue of securities with denominations of over €50,000).
However, if any such issues were to be admitted to trading on a regulated market,
the exemptions would not apply. Secondary sales of initially exempted issues,
would need to fall into the same or another exemption or a prospectus would
be first be required to be published before such sale could be made.
Qualified investors include authorised or regulated persons, collective investment
schemes, pension funds as well as entities without authorisation, whose corporate
purpose is solely to invest in securities (which would capture securitisation
special purpose companies), governments, central banks, certain small and medium-sized
enterprises and certain individuals who apply for recognition as such (sophisticated
and experienced investors).
For all EU issuers of securities with denominations of over €1,000, there
will be a free choice on an issue by issue basis of which member state’s authority
will be the “home member state” for each issue. EU issuers of equity
and debt securities with denominations of less than €1,000 will have to
submit their prospectuses to their member state authority in the jurisdiction
in which they have their registered office. Non-EU issuers of equity and debt
securities with denominations of less than €1,000, will be committed to
the member state authority through which they first issue such securities after
a date in November 2003, which at the time of writing is not known. Clearly,
if the Prospectus Directive has the desired effect, it should make no real difference
which authority is responsible for approving the prospectus, but whether this
will in fact be the case is doubted by some.
The Prospectus Directive also distinguishes between retail and wholesale issues
and relaxes some of its requirements for wholesale issues. Wholesale issues
are those which involve non-equity securities having a denomination of at least
€50,000. In principle, wholesale issues are to be treated as requiring
less detailed disclosure but on the assumption of a more sophisticated investor
base. This does not lead to a greater level of discretion as to disclosure merely
less detailed requirements in certain circumstances. This distinction comes
more clearly into focus in the context of the detailed disclosure requirements
as it will dictate which elements of the disclosure package will need to be
complied with. This is described in further detail.
Although it will still be possible to publish a single prospectus containing
all the relevant disclosure required, a new, modular approach has been introduced
as an alternative. There are three elements to this: the registration note,
the securities note and the summary note. The registration note contains corporate
details about the issuer and will be valid for 12 months. The securities note
will set out the details of the securities to be issued, and the summary note
will contain a non-technical overview of the “essential characteristics
and risks associated with the issuer.. …and the securities”. A summary
can be dispensed with if the issue is a wholesale issue.
The idea is that the registration note could be used again, unchanged (in the
absence of any relevant developments) for subsequent issues within the 12-month
period of its validity with the addition of a securities note and summary note
reflecting the terms of each new issue. This idea has been generally welcomed
as providing flexibility to issuers who issue more than once in a 12-month period
but who may not wish to establish a programme for issuance (as to which see
below). However, the summary note in particular has come in for criticism. There
are two related concerns: liability and language. First, the Prospectus Directive
provides that, although there must be a statement that the summary should be
read as an introduction to the prospectus and any decision to invest should
be based on the prospectus as a whole, if the summary is misleading, inaccurate
or inconsistent, when read together with other parts of the prospectus, civil
liability will result. Secondly, this liability extends to any translation of
the summary, which can be required by member states if the prospectus is in
a different language than their own.
In relation to the establishment of programmes, a “base prospectus”
may be used for non-equity securities. The base prospectus must contain all
relevant information about the issuer and the securities to be issued and may
be supplemented from time to time. The base prospectus will be valid for 12
months. The “final terms” may then be filed with the competent authority
when each offer of securities is made. It is likely that the final terms will
be broadly similar to pricing supplements now published in respect of MTN programmes.
Within the above framework, the concept of packaging disclosure requirements
into “building blocks” has been introduced. The intention was clearly
intended to simplify and streamline the compilation of the appropriate contents
of each prospectus. However, for the time being at least, it has caused some
confusion. Using the building blocks will involve choosing from schedules of
disclosure requirements relevant for the registration document for equity issues,
retail debt issues, wholesale debt issues, asset backed securities issues or
bank debt issues. The building blocks for the securities note require a selection
to be made from equity, retail and wholesale debt and derivative securities.
In addition, further building block schedules include those for required pro
forma financial information, guarantees, asset backed securities (relating to
the information to be included about the assets themselves) and depositary receipts.
There are two main concerns relating to the practical use of these building
blocks. First, it will not always be clear which combination to use in all circumstances.
Secondly, they may not be sufficiently flexible to permit innovations in the
market other than in the form of new features in existing deal types or in relation
to entirely new kinds of instruments. The consultation process to develop these
building blocks has been intense, and CESR, which has been responsible for conducting
this process and generating the schedules, has also published commentary /feedback
on the comments received by them. In addition, CESR has produced “technical
advice” – essentially a gloss on how the building blocks should
be used and this has gone a long way to alleviating some of the areas of confusion.
However, a number of areas of uncertainty persist.
There remains a general obligation that the prospectus contains all information
which is necessary to enable investors to make an informed assessment of the
assets and liabilities, financial position, profits and losses and prospects
of the issuer and the rights attaching to such securities. There is also a general
requirement that this be presented in an easily analysable and comprehensive
form. The detailed disclosure requirements therefore represent the minimum disclosure
required, with further information being included, if necessary, after applying
the test set out in the general obligation.
Both the Prospectus Directive and the technical guidance published by CESR
have alluded to the possibility that a decision can be made to exclude information,
notwithstanding a specific requirement to include it, where such information
is inappropriate or where no such information in fact exists. The Prospectus
Directive makes provision for this only on an “exceptional” basis,
although a number of the disclosure requirements contained in the building blocks
encapsulate the idea of only providing information to the extent appropriate/in
existence. However, there remain concerns that these provisions do not go far