Nik Paskevic looks at the new EU Prospectus Regulations which came into force on 21 July 2019, replacing the previous Prospectus Regulations in full.
The new EU Prospectus Regulations aim to make it easier for businesses, especially SMEs, to access capital markets, and to enable investors to enhance their understanding of investments by requiring prospectuses to contain statements that are clearer and more specific. It does so by simplifying and streamlining the rules and procedures.
Significant changes are as follows:
Risk Factors
- Risk factors must be categorised by type of risk, must be specific to the business and set out in order of materiality. Materiality is based on the likelihood of risk occurring and magnitude of consequences should that specific risk materialise. This is a significant change to the previous approach where disclosure was based on potentially material risks to the issuer’s business. Issuers will now have to assess the materiality of risk based on the probability of its occurrence and the negative impact should it occur.
- In its final guidelines on risk factors, The European Securities and Markets Authority (ESMA) concluded that the risk section of prospectuses has “… often been used…as a way to mitigate liability for the information contained in the prospectus…” The New Regulations therefore have fully dispensed with risk factors being drafted in a generic, mitigating or disclaiming way and prospectuses that contain such risks will no longer be accepted. The aim is to ensure that investors make a full assessment of risks involved and thus take decisions in full knowledge of the facts.
- Therefore, when preparing the risk section of the prospectus the issuers will now have to:
o Establish appropriate categories.
o Conduct a comprehensive review of the risks and identify the most material risk in each category, with the first one being the most material (occurrence and magnitude).
o Select the 15 most material risks for inclusion in the summary, a requirement that will potentially be burdensome on issuers.
o Ensure that a clear and direct link exists between the risk factors identified and the entire prospectus.
EU Growth Prospectus
- The New Regulations now allow certain qualifying entities to benefit from lower disclosure obligations, in the case of an offer of securities to the public.
- Provided they have no securities admitted to trading on a regulated market, the following entities will now benefit from EU Growth Prospectus: (i) SMEs; (ii) non-SMEs traded on an SME growth market (AIM and NEX) with market capitalisation of less than EUR 500,000,000; and (iii) unlisted companies of less than EUR 20 million market capitalisation (calculated over a period of twelve months) and with up to 499 employees.
- The prospectus for the eligible entities will now be limited to the following sections:
o Summary
o Persons responsible
o Strategy, performance and business environment
o Risk factors
o Corporate governance
o Financial information and KPIs
o Shareholder information
o Working capital statement (where issuers are valued over EUR 200 million).
Summaries
- A summary in a prospectus will now have to comprise three sections: (i) the issuer; (ii) the securities; and (iii) the offer/admission.
- The New Regulations place emphasis on ensuring that summaries are concise, clear and written in non-technical language. This is to ensure that they are investor friendly.
- A summary may now only contain up to 15 material risks (as discussed above).
- A summary must not be longer than 7 pages, potentially representing (to some issuers) loss of flexibility.
Secondary Offerings
- The new Regulations now permit issuers that have been listed on a regulated market or SME growth market (AIM or NEX) for at least the last 18 months to enjoy a simplified prospectus regime.
- Issuers will benefit from reduced disclosure regarding the issuer and its business, as well as not having to include operating and financial review.
- The simplified prospectus will need to include the following:
- Risk factors.
- Financial statements covering the last 12 months prior to approval of the prospectus
- Summary of MAR (Market Abuse Regulations) disclosures covering the last 12 months prior to approval of the prospectus.
- Working capital statement, statement of capitalisation and indebtedness, a disclosure of relevant conflicts of interest and related party transactions and major shareholders.
- This simplified prospectus is oriented to focus on proportionality between the size of the company and the cost of producing a prospectus.
Conclusion
The new EU Prospectus Regulations should somewhat reduce the burden, in particular to SMEs, in admissions where a prospectus would otherwise be required. Furthermore, the simplified prospectus regime in respect of secondary issuances will no doubt be welcomed by smaller companies aiming to admit their securities on a Standard or Premium List of the Main Market.
However, as the EU commission endeavours to create more investor friendly prospectuses the approach of simply providing industry specific risks to investment will no longer be sufficient and issuers will now be faced with the burdensome task of making judgments in their disclosure. Under the New Regulations issuers will now have to identify and include those risks that are specific to the issuer and those that are material to the investor.
If you need contractual advice or help in drafting agreements for all types of Corporate & Commercial matters, please contact Nik Paskevic or another member of our expert Corporate & Commercial Team on 020 7631 4141 or you can email company@bishopandsewell.co.uk.
