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European Commission launch a review of the Prospectus Directive

On 24th September 2009, the European Commission published a proposal for the review of the Prospectus Directive. The intention behind the initiative is to simplify and improve the application of the Directive, increasing its efficiency and enhancing the EU's international competitiveness, while ensuring that a high level of investor protection remains. Joe Beashel discusses the proposal and some of the resulting advantages which it may introduce
The review of the Prospectus Directive is prescribed for in Article 31 of the Directive which requires the European Commission to assess its application five years after its entry into force and to present proposals for its review. Although, the general assessment of the overall effect of the Prospectus Directive has been positive since its entry into force on 31 December 2003, it has been identified that there is still scope for improvement in terms of legal certainty and the reduction of the burdensome requirements for companies and financial intermediaries raising capital in the EU. Moreover, in January 2007, the European Commission launched the Action Programme for reducing administrative burdens in the European Union to measure administrative costs arising from legislation in the EU and reduce administrative burdens by 2012. The Prospectus Directive was identified as one of the areas for improvement. Against this backdrop, the Commission published a consultation document in January 2009, including proposals to improve and simplify this Directive. The current proposal incorporates comments received from stakeholders participating in this consultation, together with the issues highlighted in the Commission's impact assessment and the observations and analysis contained in reports published by the Committee of European Securities Regulators ('CESR') and by the European Securities Markets Expert Group ('ESME') on the topic. The following is a summary of the key changes which are proposed:

Format and content of the prospectus and disclosure requirements
The format and content of the prospectus summary will be enhanced. As a consequence of having a more substantial summary, it is proposed to attach civil liability if the summary is misleading, inaccurate or inconsistent with other parts of the prospectus or does not include key information.

The current 'one size fits all' approach of the prospectus regime can be in certain cases too costly and not effective. The proposal sets out a more proportionate disclosure regime which exempts from the obligation to publish a prospectus Employee Shares Schemes and introduces new requirements for rights issues for companies with smaller market capitalisation, for small credit institutions in the case of offers of certain non-equity securities and where an issuer's securities are guaranteed by a Member State, information about such guarantees may be omitted from a prospectus.

Currently, the Prospectus Directive limits the validity of the prospectus up to 12 months after its publication. It is proposed to extend this to a 24 month period after publication provided that it has been properly supplemented.

Obligation to supplement a prospectus and exercise the Right of Withdrawal
There is currently a degree of uncertainty with regard to when a supplement to a prospectus is triggered. The proposal addresses this by stating that, the requirement to publish a supplementary prospectus should end at the final closing of the offering period or the time when trading of such securities on a regulated market begins, whichever is earlier. It is also proposed to amend the time frame for an investor's right of withdrawal following publication of a supplementary prospectus.

Clarification regarding offering limits
The way in which limits of maximum offering amounts are calculated in the Directive may create uncertainties in the different Member States as to whether an offering is within the scope of the Directive or whether an exemption applies to the obligation to publish a prospectus. The proposal clarifies that the total consideration of certain offers set out in the Directive shall be computed on an EU-wide basis and not on a country-by-country basis. This does not affect the main exemptions typically availed of, i.e. an offer of securities denominated in amounts of €50,000 or more.

The definitions of qualified investor under the Prospectus Directive and of professional clients under MiFID to be aligned

The definition of 'qualified investors' in the Prospectus Directive will be aligned with that of 'professional clients' in the Markets in Financial Instruments Directive ('MiFID'). The current definition of "qualified investors" in the Prospectus Directive creates complexity and costs for investment firms in the case of private placements as they have to check whether their professional clients are registered qualified investors. Therefore, it is proposed that for the purpose of a private placement, investment firms and credit institutions may treat their professional clients as qualified investors.

The obligations attached to retail cascades
There are clearer exemptions set out in the proposal concerning the obligation to publish a prospectus when companies sell through retail cascades. A retail cascade typically occurs when securities are sold to investors (other than qualified investors) by intermediaries and not directly by the issuer. The proposal states that if a financial intermediary resells securities they should be entitled to rely upon the initial prospectus published by the issuer or the offeror as long as this is valid and duly supplemented and the issuer or the offeror responsible for drawing up such prospectus consents to its use. In this case no other prospectus should be required. This will avoid the duplication of disclosure requirements thus reducing costs.

Issuers of non-equity securities
The current Directive imposes a restriction on the choice of the "home Member State" for issues of non-equity securities. The choice is available only for debt securities with a denomination above €1.000. In order to make the European securities market more attractive and competitive, this limitation will be removed so that issuers of all non-equity securities will be able to determine their home Member State. As a consequence of this proposal, the mechanism for the determination of the home and the host Member States in the Transparency Directive will be amended accordingly.

Conclusion
The proposals are to be welcomed because they remove some ambiguities, introduce some flexibility and reduce many of the administrative burdens which currently exist. The proposal now passes to the European Parliament and the Council of Ministers for consideration.


Joe Beashel is a partner in the Banking and Financial Services Department and head of the firm’s Regulatory Risk Management and Compliance Group at Matheson Ormsby Prentice and can be contacted on +353 1 232 2000 or by email: joe.beashel@mop.ie. Further information on Matheson Ormsby Prentice is available at www.mop.ie.