Explanatory Memorandum to COM(2015)583 - Prospectus to be published when securities are offered to the public or admitted to trading - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2015)583 - Prospectus to be published when securities are offered to the public or admitted to trading. |
|---|---|
| source | COM(2015)583  |
| date | 30-11-2015 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
The revision of the Prospectus Directive 1 is an important step to build the Capital Markets Union. The harmonised EU prospectus is the 'gateway' for issuers in need of finance to gain access to European capital markets. A reform of the prospectus rules was announced in the Investment Plan for Europe 2 as part of the third pillar for improving the business environment and represents a key element of the Capital Markets Union. The Capital Markets Union Action Plan 3 presents a comprehensive and ambitious programme of measures to strengthen the role of market-based finance in the European economy.
A key objective of the Capital Markets Union is notably to facilitate raising on capital markets. Capital markets offer access to a wide set of funding providers and provide an exit opportunity for private equity and business angels, which invest in companies at an earlier stage of their development.
Prospectuses are legally required documents presenting information about a company. This information aims to be the basis on which investors can decide whether to invest in a variety of securities issued by that company. It is therefore crucial that the prospectus does not act as an unnecessary barrier to accessing public markets to raise capital. In particular, SMEs can be deterred from offering securities to the public simply because of the paperwork involved and the high costs incurred. It should become easier for firms to fulfil their administrative obligations, but in a way that investors are still well informed about the products they are investing in.
Although the prospectus regime functions well overall, certain requirements of the Prospectus Directive might still be improved to alleviate administrative burden for companies which draw up a prospectus (especially SMEs) and to make the prospectus a more valuable information tool for potential investors. Further alignment of the prospectus rules with other EU disclosure rules (e.g. the Transparency Directive 4 and the Regulation on key information documents for packaged retail and insurance-based investment products (PRIIPs) 5 could enhance the efficiency of the prospectus. The review of the Prospectus Directive is singled out in the Capital Markets Union Action Plan as one of its early and high-priority actions. Its overarching rationale is to reduce one of the principal regulatory hurdles that issuers face when offering their equity and debt securities to the investing public. This proposal contributes to the objective of screening the acquis to identify specific areas where rules can be simplified, burdens reduced and costs saved. For that reason, the Commission's impact assessment builds on the findings of an evaluation which was conducted in the context of the Regulatory Fitness and Performance programme (REFIT, COM(2014)368).
The revision of the Prospectus Directive pursues a simple goal: provide all types of issuers with disclosure rules which are tailored to their specific needs while making the prospectus a more relevant tool of informing potential investors. In consequence, the proposal puts special emphasis on four groups of issuers: i issuers already listed on a regulated market or an SME growth market, which want to raise additional capital by means of a secondary issuance, i SMEs, (3) frequent issuers of all types of securities and i issuers of non-equity securities. It also intends to further incentivise the use of the cross-border 'passport' for approved prospectuses, which was introduced by the Prospectus Directive.
The proposed measures should (i) reduce the administrative burden of drawing up of prospectus for all issuers, in particular for SMEs, frequent issuers of securities and secondary issuances; (ii) make the prospectus a more relevant disclosure tool for potential investors, especially in SMEs; and (iii) achieve more convergence between the EU prospectus and other EU disclosure rules.
Contents
- Secondary issuances
- SMEs
- Frequent issuers
- Treatment of non-equity securities with a high denomination per unit
- SMEs
- Secondary issuances
- Frequent issuers
- Debt issuers
- Investors
- National authorities and ESMA
- Compliance costs for issuers
- Scope of the prospectus obligation (Articles 1, 3 and 4)
- Definitions (Article 2)
- Voluntary prospectuses (Article 4)
- The prospectus summary (Article 7)
- The base prospectus (Article 8)
- The universal registration document (Article 9)
- Specific disclosure regimes (Articles 14 and 15)
- Treatment of non-equity securities of high denomination per unit (Article 1 and 13)
- Risk factors (Article 16)
- Incorporation by reference (Article 18)
- Publication of the prospectus (Article 20)
- Administrative measures and sanctions (Articles 36 to 41)
Issuers whose securities are already listed on a regulated market (this category accounts for around 70% of all prospectuses approved in a given year), or the future SME growth market, should enjoy the benefit of an alleviated prospectus for their secondary issuances. The reformed minimum disclosure rules for secondary issuances are expected to reduce the cost of drawing up prospectuses and to make the resulting disclosure more relevant for potential investors.
SMEs should likewise be offered the option to draw up a distinct, tailor-made prospectus when they offer securities to the public, focusing on information that is material and relevant for companies of such size. This kind of prospectus should however not be available to SMEs admitted to trading on regulated markets to avoid creating a two-tier disclosure standard on regulated markets which might undermine investor confidence. In addition, a new optional 'question and answer' format is expected to help SMEs in drawing up their own prospectus, thus saving considerable legal fees.
The envisaged annual 'universal registration document' for frequent issuers should result in cost reductions for companies who intend to have frequent recourse to capital markets and want to have a 'shelf' registration document in place that is cleared by the competent authority and allows them to swiftly seize opportunities to raise capital. Recourse to the proposed universal registration document intends to shorten prospectus approvals, once the opportunity to raise capital presents itself from currently 10 to 5 working days.
Based on evidence presented in the impact assessment, the favourable treatment granted by the Prospectus Directive to non-equity securities with a denomination per unit of EUR 100 000 or above have led to unintended consequences, creating distortions in the European bond markets and making a significant share of bonds issued by investment-grade companies inaccessible to a wider number of investors. The Regulation therefore removes the incentives to issue debt securities in large denominations with a view to removing one of the identified barriers to secondary liquidity on European bond markets.
• Consistency with other Union policies
The prospectus reform aims to complement the Capital Markets Union objectives of reducing fragmentation in financial markets, diversifying financing sources and strengthening cross border capital flows. The Commission's top priority is to boost Europe's economy and stimulate investment to create jobs. Stronger European capital markets are an important part of the response to this pressing challenge, as it can increase the volume of finance available and channel it more efficiently to deserving investment opportunities across the EU.
As part of the Capital Markets Union Action Plan is the conviction that capital market based finance, in all its forms, – including venture capital, crowdfunding and the asset management industry – can provide funding solutions to companies that need more capital to run or expand their business. The Capital Markets Union Action Plan also aims to enable more private investment in infrastructure projects, to offer investors and savers additional opportunities to put their money to work more effectively, and to remove barriers to cross-border investment.
Capital Markets Union will work to the advantage of all 28 Member States. Those Member States with the smallest markets and high growth potential have a lot to gain from a better channelling of capital and investment into their projects. More developed market economies will benefit from greater cross-border investment and saving options. A more diversified funding mix will also deliver additional benefits: it will support financial stability, and reduce the dependence of the business sector and wider economy on bank lending. For this reason, Capital Markets Union is also an important part of the work on the completion of the European Economic and Monetary Union.
This review may also help to facilitate investor engagement with publicly offered equity and debt securities by better calibrating the information that is provided, and focussing on information that is relevant to the formulation of sound investor assessments of the proposed investment
• Consistency with existing policy provisions in the policy area
The Prospectus Directive governs the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market. The original aim of the Directive was to make it easier and cheaper for companies to raise capital throughout the Union on the basis of a single approval from a regulatory authority ("home competent authority") in only one Member State. Under the Directive, issuers, offerors or persons asking for the admission to trading on a regulated market can 'passport' their prospectuses for cross-border offers and listings.
In ensuring harmonised minimum protection for investors by guaranteeing that all prospectuses, wherever they are published, provide them with the clear, comprehensive and standardised information they need to make informed investment decisions, the Prospectus Directive is complementary to the ongoing and ad-hoc reporting obligations laid down in particular in the Transparency Directive and the Market Abuse Regulation 6 . The complementary nature results from the fact that the Prospectus Directive only concerns initial disclosure requirements for a public offer or listing on a regulated market.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
The legal basis for action is Article 114 of the Treaty on the Functioning of the European Union. The choice of this legal base reflects the crucial role that a harmonised prospectus regime with attendant passporting opportunities play in the functioning of an internal market for raising equity and debt.
Disclosure of information in case of offers of securities to the public or admission of securities to trading on a regulated market is vital to protect investors by removing asymmetries of information between them and issuers. Harmonising this disclosure allows for the establishment of a cross-border passport mechanism which facilitates the effective functioning of the internal market in a wide variety of securities. Divergent approaches would result in fragmentation of the internal market since issuers, offerors and persons asking for admission would be subject to different rules in different Member States and prospectuses approved in one Member State could be prevented from being used in other Member States. In the absence of a harmonised framework to ensure uniformity of disclosure and the functioning of the passport in the Union it is therefore likely that differences in Member States legislation would create obstacles to the smooth functioning of the internal market for securities. Therefore to ensure the proper functioning of the internal market and improve the conditions of its functioning, in particular with regard to capital markets, and to guarantee a high level of consumer and investor protection, it is appropriate to lay down a regulatory framework for prospectuses at Union level.
• Subsidiarity
A harmonised EU prospectus is an essential tool to integrate capital markets throughout the Union. Once a competent national authority approves a prospectus, the issuer can ask for a passport to use this prospectus in another EU Member State. No further approvals or administrative procedures relating to the prospectus will be necessary in this 'host' Member State. This passport operates on the assumption that minimum content of the prospectus is harmonised at EU level by the applicable prospectus rules (the basic rules and the delegated and implementing acts).
As the passport is therefore European in nature, any improvements can only be tackled at EU level. The possible alternatives, such as action at Member State level) could not sufficiently and effectively achieve the objectives to create the harmonised basis for the 'passporting' of prospectuses.
Streamlining the above mentioned aspects of the EU prospectus is expected to lead to a more level playing field for issuers and investors alike and contribute to avoiding regulatory arbitrage. The proposed reforms would give a clear and consistent signal throughout the EU that the prospectus regime performed well even during the financial crisis, but that improvements need to be made to create a truly single market for those target groups which have hitherto not had the full benefit of a harmonised prospectus regime (SMEs, frequent and/or secondary issuers). Making the prospectus more accessible for SMEs and for frequent issuers can be conducive to deepening the pan-European capital pools available to such issuers. In the case of SMEs, this involves designing a distinct prospectus regime whose content and format is suitable for both issuers and investors. This aim constitutes a key plank of establishing a Capital Markets Union. These objectives cannot be achieved by the Member States alone and can be better achieved by the Union.
• Proportionality
On balance, the chosen options are designed to reduce the compliance burden for the following target groups: SMEs, secondary issuers, frequent issuers, issuers of non-equity securities.
All of these groups are expected to benefit from the proposed reforms to varying degrees.
The impact assessment contains initial estimations on cost savings, based on factual and realistic assumptions concerning the 'take up' of the universal registration document and the two proposed disclosure regimes for SMEs and for secondary issuers respectively.
Provided that they are not admitted to trading on a regulated market, SMEs wishing to raise capital by means of a public offer will benefit from new disclosure rules, including a new 'question and answer' format, which should lower the cost of preparation of a prospectus. Additional savings are expected for those SMEs which are listed on a regulated market or an SME growth market as they will benefit from the alleviated disclosure regime applying to secondary issuances (see below). Recourse to the new disclosure regime for SMEs could, according to rough estimates, result in SMEs collectively around 45 million per year.
Data provided by Member States indicates that around 70% of all prospectuses approved in a given reference year pertain to a secondary issuance of securities by companies already admitted to trading on a regulated market or a multilateral trading facility. Extrapolating from available data on equity prospectuses approximately 700 prospectuses per year could benefit from the alleviated disclosure regime for secondary issuances. Figures on the cost of drawing up a prospectus as derived from the public consultation indicate that this could translate into savings of around 130 million per year.
Increased recourse to the proposed universal registration document for equity and non-equity prospectuses could result in faster prospectus approvals, increasing the number of prospectuses approved every year in less than 10 working days by 150% (equity) and 70% (non-equity).
A uniform prospectus requirement for bond issuances, irrespective of denomination sizes, provides an incentive for all issuers of debt to choose denomination sizes that make their bonds more attractive for a wider range of investors. A wider range of investors is, in turn, expected to increase buying and selling interest in bonds, thus increasing the liquidity of corporate bond markets in the EU.
Making prospectuses more reader-friendly and targeted to the specific situation of the issuer has the double advantage of decreasing cost and increasing the relevance of the prospectus for potential investors. Refocusing the risk factors of a prospectus on those risks which are material and specific with help investors distinguish the information that is essential for taking an informed investment decision.
Advantages resulting from the reform of the prospectus summary and the introduction of a searchable prospectus database are more difficult to quantify: the impact assessment relies on a more qualitative assessment in these respects. Nevertheless, the rationale for reforming the prospectus summary builds on the work already carried out in the context of the key information document for packaged investment products.
The proposed alleviations should not trigger relevant costs for national budgets and administrations. On the contrary, competent national authorities should benefit from the simplifications of the prospectus as this would also render the approval process for prospectuses easier.
Making all prospectuses searchable online on the website of ESMA could trigger incremental IT-related costs for ESMA. These costs appear justified when compared to the significant benefits in lower search costs and easy, centralised access that could result for investors and potential investors interested in a broad variety of securities issued in the EU.
The choice of a recast taking the form of a Regulation should not have a relevant impact on the compliance costs for issuers and enforcement costs for competent authorities. The impact of the proposed measures on compliance costs and enforcement costs can be summarised as follows.
The new disclosure regimes for secondary issuances and SMEs should both result in lower compliance costs for issuers and also reduce the work load of competent authorities as less information will have to be disclosed and scrutinised. This reduction in costs would apply even more to issuers that could not benefit from these regimes so far but will become eligible in the future. There would, however, be a certain cost for those issuers that are using the current schedules as they might have to familiarise themselves with the new rules.
The stakeholders that would face higher compliance costs would be issuers that currently benefit from the prospectus exemption and alleviations for offers of non-equity securities in denominations of EUR 100 000 or more. Those of them that cannot avail themselves of any other exemptions would have to prepare a prospectus either under the standard regime, the base prospectus regime or the specific disclosure regime for secondary issuances where applicable.
Transforming the prospectus summary in a document similar to the key investor information document would also mean a considerable reduction in compliance costs as the summary would be much less extensive and therefore less expensive to produce. Besides, where securities fall under the scope of both this Regulation and Regulation (EU) No 1286/2014, full reuse of the contents of the key information document should be permitted in the summary in order to minimise compliance costs and administrative burden for issuers.
• Choice of the instrument
The 2003 Prospectus Directive, even after the reform of 2010, has given rise to a number of cases where the heterogeneous implementation of the Prospectus Directive was observed in some Member States. Transforming the Prospectus Directive into a Regulation would address such problems which typically arise in the transposition of a Directive and would enhance coherence and integration throughout the internal market, while reducing divergent and fragmented rules across the Union, in coherence with the goals of the Capital Markets Union.
A single rule book will also eliminate the problem that even relatively minor divergences between national laws, require issuers and investors who are interested in raising or investing capital across borders to compare national rules in order to ensure that they have fully understood and comply with the relevant laws. With the use of a Regulation such unproductive search costs could be avoided. The adaptation of national laws which transposed the current Prospectus Directive to the proposed Regulation should be facilitated by the fact that the implementing measures currently in place already take the form of a Regulation. Therefore, the preferred option is to transform the Prospectus Directive into a Regulation.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Ex-post evaluations/fitness checks of existing legislation
The Prospectus Directive has been included in the European Commission's REFIT programme. Further details about this evaluation can be found in the section 'Regulatory fitness and simplification' below.
• Stakeholder consultation
The principles of Better Regulation as described in the Better Regulation Guidelines (SWD(2015) 111 final) and the corresponding toolbox have been followed by conducting a public consultation from 18 February to 13 May 2015. A total of 182 responses were received, of which 124 responses from organisations (associations) and companies (banks, stock exchanges, crowd-funding platforms), 22 responses from public authorities (Member States, national competent authorities and ESMA) and 36 responses from private individuals. Country-wise, 21% of the responses originated from Germany (38 responses), 21% from the UK (37), 11% from France (20), 9.5% from Belgium (17), and the rest was split amongst the other Member States.
Throughout the consultations stakeholders were largely supportive of the review and the proposed options. The general aim of alleviating the prospectus for frequent issuers, secondary issuances and SMEs of unnecessary and repetitive information was shared by all stakeholders, including Member States. Creating a new form of prospectus summary following the model of the key information document and a centralised ESMA storage mechanism for prospectuses was also endorsed by the stakeholder community.
• Impact assessment
The impact assessment analyses several policy options to achieve the dual goals of alleviating administrative burden for companies which draw up a prospectus (especially SMEs) and of making the prospectus a more valuable information tool for potential investors. It also assesses the issue of how to deepen the investor base for non-equity issuances (denomination sizes).
The table below provides a summary of the different alleviations and investor protection measures chosen as well as their impact on relevant stakeholders and the overall market in which these stakeholders operate.
| Preferred policy options | Cost impact on stakeholders | Impact on relevant markets/sectors |
| Set to EUR 10 million the maximum offer consideration below which Member States may decide not to subject domestic offers to an EU prospectus | Approximately 100 prospectuses (around 3% of annually approved prospectuses) may no longer be obliged to draw up an EU prospectus, depending on the choice of Member States. | Cost savings depend on whether Member States exempt domestic offers with a total consideration below EUR 10 million. |
| Alleviated disclosure regime for secondary issuances | Very significant market potential as approximately 70% of all equity prospectuses approved annually concern 'secondary issuances', meaning around 700 out of 935 equity prospectuses could benefit. Overall annual savings are estimated to be around 130 million. | Impact on equity markets: increase in secondary issuances facilitates raising equity capital after successful initial public offerings, a major plank of the ongoing effort to build a Capital Markets Union. |
| Raise dilution threshold for prospectus exemption in case of admission to trading (Article 1(4)(a)) | Cost savings of up to 1 million per prospectus if admission of less than 20% of outstanding securities. | Impact on equity markets: increase in secondary issuance facilitates raising of equity capital in line with the Capital Markets Union. |
| Universal registration document for frequent issuers on regulated markets or multilateral trading facilities | Significant market potential as currently only 20% of equity prospectuses and 32% of non-equity prospectuses (excluding base prospectuses) benefit from approval periods inferior to 10 days. Taking the example of France, where a similar system has been in place for nearly two decades, the universal registration document could increase this percentage to 50% for equity (= 370 equity prospectuses/year across the EU) and 55% (= 838 prospectuses/year for non-equity issuances across the EU). | Fast track approval brings benefits to frequent issuers of equity and non-equity securities. The reduced prospectus approval time of 5 days will save cost and allow frequent issuers to exploit market windows to raise capital or debt. |
| Uniform prospectus for non-equity securities listed on regulated markets (abolition of the wholesale / retail dual regime) | Slight increase resulting from the need to produce an admission prospectus including a summary for non-equity securities. Increase can be appropriately mitigated in the design of the uniform non-equity prospectus template in the delegated acts. | Lower denominations result in more buying and selling interest which enhances liquidity and investor base in EU bond markets. Investors benefit from diversification of portfolios. |
| Abolish the EUR 100 000 exemption for offers of non-equity securities to the public | Increase resulting from the need to produce a public offer prospectus for non-equity securities. Likely to be compensated by the availability of other exemptions (qualified investors / minimum commitment of EUR 100 000). Balanced against the benefit of a larger market for corporate bonds. | Lower denominations result in more buying and selling interest which enhances liquidity in EU on multilateral trading facilities. Investor benefit from diversification of portfolios. |
| Specific disclosure regime for SMEs | Potentially 320 SME prospectuses would benefit from the new 'pro-SME' prospectus resulting in expected annual savings of around 45 million. Additional savings above those indicated above could arise if the 'question and answer' format takes off. | With a less costly and more user-friendly 'pro-SME' prospectus, more SMEs would be able to list on multilateral trading facilities/SME Growth markets. More SME listings facilitate investor portfolio diversification. |
| New prospectus summary modelled after the key information document | Equity and non-equity issuers benefit from the flexibility to draft brief narratives and assemble material information from the prospectus under accessible headings. Issuers would also benefit by reusing the contents of an existing key information document in the prospectus summary. | Retail investors benefit from the redesign of the summary with maximum page limit. Predetermined/user-friendly headings inspired by the key information document allow for easier comparison of investment opportunities. |
| Electronic publication (centralised storage mechanism at ESMA) | Single access point facilitates research, enforcement and increases the efficiency of prospectus pass-porting. | Essential tool for online access to prospectuses enabling comparability and fostering the objectives of the Capital Markets Union. |
Several of the preferred options would complement each other. For example, the universal registration document for frequent issuers is complementary to the alleviated prospectus for secondary issuances and the two options in combination could yield savings that are not captured by the analysis in this impact assessment (which looks at both options in isolation). Equally, due to its cross-cutting nature, the prospectus summary in the form of an enhanced key information document would reinforce the two specific regimes and especially the one for SMEs: for example, an SME could obtain a listing on an SME Growth market enjoying the cumulative benefit of a prospectus in 'question and answer' format which, in turn, also contains the of the enhanced key information document.
In addition, the cross-cutting initiative concerning denomination sizes for non-equity securities benefits all issuers thanks to a deeper and more liquid secondary market for corporate debt. Again, SMEs and frequent issuers stand to benefit from a summary taking the form of an enhanced key information document, their respective specific disclosure regimes and the abolition of the incentives to issue non-equity securities in large denomination of EUR 100 000 or above.
The impact assessment therefore concludes that the proposed 'package' will result in a reduction in the administrative burden for issuers, will make access to capital markets for SMEs easier and cheaper and improve investor protection by improving the appropriateness of the disclosure documents and ultimately enlarging choice of prospectus-based securities. This should then translate into further integration of capital markets in the Union in the form of more prospectus-based securities being offered across borders and greater transparency and comparability.
It should be noted, however, that the Prospectus Directive only covers a fraction of the financial instruments traded in the Union and is only one factor among many that influence the functioning of capital markets. The proposed measures should therefore be seen in the context of the broader Capital Markets Union Action Plan of which it forms part.
• Regulatory fitness and simplification
In June 2014 the Prospectus Directive has been included in the REFIT programme (COM(2014)368). Inclusion in the REFIT programme was justified as stakeholders had expressed concerns regarding the high costs of preparing a prospectus and getting it approved by the competent authority.
The evaluation of the Directive was conducted in 2015 to ensure that the results would be available in time for the report on the application of the Directive which the European Commission has to send to the European Parliament and the Council by 1 January 2016 at the latest (Article 4 of Directive 2010/73/EU). This evaluation examines the effectiveness, efficiency, coherence, relevance and added value of the Directive. It is annexed to the Commission's impact assessment and its conclusions are as follows.
When Directive 2003/71/EC was adopted in 2003, it replaced two directives on listing particulars (1980) and prospectuses (1989) which had faced strong criticisms from stakeholders because they allowed widely varying practices across the Union and were based on a system of mutual recognition with significant discretion left to the host Member State authorities (including for instance that of requiring the translation of the full prospectus into the host Member State official languages).
In comparison, the Prospectus Directive can be credited for having facilitated the raising of capital across borders in Europe, thanks to the application of the 'single passport' principle which implied that only one set of disclosure documents could be approved by the home country authority and accepted throughout the EU for public offer and/or admission to trading on regulated markets. The contribution of the Prospectus Directive for building up a single European securities market can therefore not be underestimated and it may be considered as a mile-stone in that regard.
Still, the 2010 review rightly identified a number of shortcomings in Directive 2003/71/EC, affecting the legal clarity of some of its concepts and undermining its efficiency in establishing the right balance between market efficiency (areas of excessive regulatory burden) and investor protection (quality, readability and materiality of disclosures). Directive 2010/73/EU introduced targeted changes to address them.
Three years after Directive 2010/73/EU entered into application, statistical data and stakeholders' feedback suggest that the diagnosis made during the previous review is still very much valid today. Indeed, it seems that the trends identified back then (prospectus used as a 'liability shield', retail investors shunning prospectuses and their summaries, inappropriate scaling of the disclosure requirements between initial public offerings and secondary issuances) have continued, arguably because the remedies proposed by the amending Directive either did not produce the expected results (the prospectus summary) or were not ambitious enough (the proportionate disclosure regimes), or because Directive 2010/73/EU did not contain measures to address them.
In view of the shortcomings identified in this evaluation it is appropriate to thoroughly review the Prospectus Directive. In particular, with respect to the amendments performed by the 2010 review, it is appropriate to readdress the 'proportionate disclosure regimes' (for SMEs and Small Caps and for rights issues) and the prospectus summary as the amendments introduced by Directive 2010/73/EU have failed to reach their objectives.
• Fundamental rights
Future legislative measures on the prospectus regime, including appropriate sanctions, need to be in compliance with relevant fundamental rights embodied in the EU Charter of Fundamental Rights, and particular attention should be given to the necessity and proportionality of the legislative measures. Only the protection of personal data (Article 8), the freedom to conduct a business (Art. 16) and consumer protection (Art. 38) of the EU Charter of Fundamental Rights are to some extent relevant. Limitations on these rights and freedoms are allowed under Article 52 of the EU Charter of Fundamental Rights. The objectives as defined above are consistent with the EU's obligations to respect fundamental rights. However, any limitation on the exercise of these rights and freedoms must be provided for by the law and respect the essence of these rights and freedoms. Subject to the principle of proportionality, limitations may be made only if they are necessary and genuinely meet the objectives of general interest recognised by the Union or the need to protect the rights and freedoms of others.
In the case of the prospectus-related legislation, the general interest objective which justifies certain limitations of fundamental rights is the objective of ensuring market integrity. The freedom to conduct a business may be impacted by the necessity to follow certain disclosure, approval and filing obligations in order to ensure an alignment of interests in the investment chain and to ensure that potential investors act in a prudent manner. As regards the protection of personal data, the disclosure of certain information in the prospectus is necessary to ensure that investors are able to conduct their due diligence. It is however noted that these provisions are currently already in place in EU law. All proposed legislative actions safeguard proportionality with regard to limitation of fundamental rights.
In other words, the objective of this Regulation is to balance on the one hand the trade-off between ensuring investor protection and limiting administrative burden for issuers and on the other hand the trade-off between fostering the internal market for capital and the Capital Market Union and preserving sufficient flexibility for national and local markets.
4. BUDGETARY IMPLICATIONS
The proposal will have budgetary implications for ESMA in two respects: on the one hand ESMA will have to prepare regulatory and implementing technical standards and on the other hand it will have to upgrade its existing prospectus register and to transform it into an online storage mechanism with a search tool that the public can use for free to access and compare EU prospectuses from a single location. Furthermore, the data gathered in the storage mechanism will allow ESMA to establish detailed statistics on prospectuses approved in the EU and to draw up an annual report.
The specific budgetary implications for ESMA are assessed in the financial statement accompanying this proposal.
The proposal has implications for the Community budget in the form of the Commission's share of forty per cent of the financing of ESMA.
5. OTHER ELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
A monitoring of the impact of the new Regulation will be carried out in cooperation with ESMA and national competent authorities on the basis of the annual reports on prospectuses approved in the Union which ESMA will be empowered to produce every year. In particular, such reports will keep track of the extent to which the disclosure regimes for SMEs and secondary issuances and the universal registration document for frequent issuers will be used throughout the Union.
The revised prospectus rules will be evaluated five years after they enter into force. Careful scrutiny should reveal whether the stated objectives have been achieved. Key parameters to measure achievement of the stated objectives will be:
– the number of prospectuses approved annually under the two disclosure rules for secondary issuances and for SMEs; success will be measured against the estimates on take-up as set out above and in the accompanying impact assessment;
– the number of prospectuses that have benefitted from the universal registration document as described above to obtain a fast-track approval;
– the overall reduction in approval times that results from the introduction of the universal registration document;
– the share of retail investors among the investors in non-equity debt issuances (yardstick of success is a decrease in denomination sizes for non-equity issuances);
– the cost of preparing and getting a prospectus approved compared to the current costs;
– the share of prospectuses that have been passported to other Member States.
Input data for the above measurements will be sourced primarily from ESMA (including the annual reports previously mentioned) and trading venues. A study or survey will have to be launched to gather formation on the cost of preparing and getting a prospectus approved compared to the current costs.
• Detailed explanation of the specific provisions of the proposal
Article 1 of the Proposal consolidates all articles in the current Prospectus Directive that pertain to the scope of the prospectus requirement. In particular, Article 1(3) and i set out a number of circumstances in which an offer of securities to the public or an admission of securities to trading on a regulated market is outside the scope of the requirement to publish a prospectus.
While most of the provisions on scope remain unchanged, the Proposal sets out new thresholds in Article 1(3)(d) and Article 3 i, of EUR 500 000 and EUR 10 000 000 respectively, in such a way as to ensure legal clarity.
Under Directive 2003/71/EC, the prospectus requirement applies to offers of securities with a total consideration of EUR 5 000 000 or above, and Member States are free to set out their national rules below that amount (currently 17 Member States require a prospectus below the threshold of EUR 5 000 000). Article 1(3)(d) provides that no prospectus is required under this Regulation for offers of securities with a consideration below EUR 500 000. This acknowledges that the cost of producing a prospectus is disproportionate with regard to the envisaged proceeds where an offer of securities to the public has a consideration below EUR 500 000, as is typically the case on securities-based crowdfunding platforms. Increasing the range of small offers where the harmonised prospectus established by this Regulation does not apply will not, however, preclude Member States from requiring appropriate forms of disclosure for such issuance sizes, as long as Member States calibrate such requirements in a proportionate way, in keeping with the spirit of simplification and better integration of markets.
While Article 3 clarifies that prior publication of a prospectus is mandatory for the offer of securities to the public and the admission of securities to trading on a regulated market situated or operating within the Union, its paragraph 2 establishes a mechanism of optional exemption at the discretion of Member States. Member States are given the choice to exempt from the harmonised prospectus established by this Regulation all offers of securities with a total consideration between EUR 500 000 and an amount which cannot exceed EUR 10 000 000. This exemption only applies to domestic offers for which no passport notification to host Member States is sought. Those Member States who choose to apply this exemption in their jurisdiction will report so to the Commission and ESMA and indicate the maximum consideration of domestic offers which are exempted from the prospectus in their jurisdiction.
The main change in the area of definitions is the definition of SMEs which now encompasses both SMEs defined under point (f) of Article 2 i of Directive 2003/71/EC and SMEs defined under Directive 2014/65/EU, thereby raising to EUR 200 million the EUR 100 million threshold that previously defined 'companies with reduced market capitalisation' under point (t) of Article 2 i of Directive 2003/71/EC.
Article 4 allows issuers to opt in for the EU prospectus. Approval of such a voluntary prospectus by the competent authority will entail the same rights and obligations as a prospectus required under this Regulation, i.e., it would make the issuer eligible for the EU passport.
Subsequent resale of securities / 'Retail cascade' (Article 5)
In some markets, securities are distributed by 'retail cascade'. A retail cascade typically occurs when securities are sold to investors (other than qualified investors) by intermediaries and not directly by the issuer. Article 5 clarifies how the requirement to produce and update a prospectus, and the provisions on responsibility and liability, should apply when securities are placed by the issuer with financial intermediaries and are subsequently, over a period that may run to many months, sold on to retail investors, possibly through one or more additional tiers of intermediaries. A valid prospectus, drawn up by the issuer or the offeror and available to the public in the final placement of securities through financial intermediaries or in any subsequent resale of securities, shall provide sufficient information for investors to make informed investment decisions. Therefore, financial intermediaries placing or subsequently reselling the securities 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. However, in case the issuer or the offeror responsible for drawing up such initial prospectus does not consent to its use, the financial intermediary should be required to publish a new prospectus. The financial intermediary could use the initial prospectus by incorporating the relevant parts by reference into its new prospectus.
Article 7 takes into consideration the general views expressed in the public consultation that the summary format introduced by the amending Directive 2010/73/EU has not met its objectives. The new summary is now closely modelled on the key information document required under the PRIIPS Regulation and is subject to a maximum length of 6 sides of A4-sized paper when printed (characters of readable size must be used). The liability regime of the summary, set out in Article 11 i, is kept unchanged compared to Directive 2003/71/EC: liability attaches to the summary only if it is misleading, inaccurate or inconsistent when read together with the other parts of the prospectus. Next to the usual section containing warnings, there are three main sections in the summary, covering key information on the issuer, the security and the offer/admission respectively. For each of them, general headings are introduced, as well as indications on their content, but issuers have latitude to develop brief narratives and select the information which is material. For securities falling under the scope of the PRIIPS Regulation, the issuer can replace the “securities” section of the summary with the content of the key information document. A relaxation of the maximum number of pages of the summary is provided in case the summary covers several securities differing only in some very limited details. The prohibition to incorporate information by reference into the summary, currently set out in Article 11 i of Directive 2003/71/EC is maintained in order to avoid that the summary becomes a mere collection of hyperlinks and cross-references.
Article 8 aims at clarifying the functioning of the base prospectus, which remains broadly unchanged compared to Directive 2003/71/EC, except for the following points. A base prospectus may now be drawn up for any kind of non-equity securities, not only for those issued under an offering programme or in a continuous and repeated way by credit institutions. Base prospectuses consisting of several documents (the so-called 'tripartite prospectus') are now possible, and the registration document of a base prospectus may take the form of a universal registration document. The obligation to draw up a summary of the base prospectus, when the final terms are not contained therein, is removed, so that only the “issue-specific” summary is required to be produced and annexed to the final terms, when those are filed. Article 8(10) clarifies how 'straddling offers' should be dealt with under a base prospectus, i.e. cases where an offer starts under one base prospectus and continues unchanged under a new, succeeding base prospectus.
Article 9 (which should be read in conjunction with Articles 10 i, 11(3), 13 i and 19(5)) contains detailed rules on the new 'universal registration document', an optional shelf registration mechanism for 'frequent issuers' admitted to trading on regulated markets or multilateral trading facilities. This new feature of the prospectus regime is based on the premise that where an issuer makes the effort of drawing up every year a complete registration document, it should be awarded a fast-track approval with the competent authority when a prospectus is later required. Since the main constituent part of the prospectus has either already been approved or is already available for review by the competent authority, the competent authority should be able to scrutinise the remaining documents (securities note and summary) within 5 working days, instead of 10. Besides, outside the context of an offer or admission to trading, the frequent issuer should be allowed to file its universal registration document, without prior approval, providing that previously three universal registration documents have been approved consecutively. The competent authority may then control it on an ex-post basis.
The alleviations granted to frequent issuers using the universal registration document promote the drawing up of prospectuses as separate documents, which is cost-effective and less burdensome for issuers and enables them to quickly react to market windows. The universal registration document should also serve as a consolidated and well-structured source of reference on the issuer, supplying investors and analysts with the minimum information needed to make an informed judgement on the company’s business, financial position, earnings and prospects, governance and shareholding, even where neither an offer to the public nor an admission of securities to trading on a regulated market is taking place. For that purpose, Article 9(12) allows frequent issuers admitted to trading on a regulated market, under certain conditions, to fulfil their ongoing disclosure obligation under the Transparency Directive by integrating their annual and half-yearly financial reports into the universal registration document. This efficient “two in one” approach is meant to avoid duplicative requirements, alleviate unnecessary burdens and concentrate the information investors need in one single document which is updated at least every year.
Articles 9 and 10 i also incorporate detailed rules on the practical administration of the universal registration document. They clarify which documents shall be approved in case the universal registration document has been either approved or filed without approval, and describe the process for amending the universal registration document, which follows a different approach from the process for supplementing a prospectus (as there is no public offer nor admission to trading, until the universal registration document becomes part of a prospectus).
Delegated acts will set out the minimum information contents of the universal registration document, including a specific schedule for credit institutions, which should be similar to the existing Annexes I or XI of the implementing Regulation (EC) No 809/2004.
The proposal contains two sets of specific disclosure rules, one for secondary issuances and the other for SMEs. These specific disclosure rules are of optional use. They replace the 'proportionate disclosure regimes' for rights issues and SMEs introduced by the amending Directive 2010/73/EU, which have not achieved their objectives, as explained in the Impact assessment.
The alleviated regime for secondary issuances will apply to offers or admissions concerning securities issued by companies already admitted to trading on a regulated market or an SME growth market for at least 18 months. Such companies are therefore subject to ongoing disclosure requirements under the Market Abuse Regulation and either the Transparency Directive or the rules of the operator of the SME growth market as required under Directive 2014/65/EU and its implementing measures. The alleviated prospectus will only contain minimum financial information covering the last financial year only (which may be incorporated by reference). Still, investors need to be provided with consolidated and well-structured information on such elements as the terms of the offer, use of proceeds, risk factors, board practices, directors’ remuneration, shareholding structure or relating-party transactions. As such information is not currently required to be disclosed on an ongoing basis under Regulation (EU) 596/2014 and Directive 2004/109/EC, the prospectus drawn up in case of secondary issuance will need to include them.
The specific regime for SMEs will allow these companies to draw up a distinct prospectus in case of an offer of securities to the public provided that they have no securities admitted to trading on a regulated market. For such companies the prospectus schedules (which will be designed in details by delegated acts) will focus on information that is material and relevant for companies of such size and a bottom-up approach will be taken to build the new information schedules. Compared to the existing Annexes XXV to XXVIII of Regulation (EC) No 809/2004, further alleviations will be introduced, so as to ensure proportionality between the company size and the cost of producing a prospectus.
Article 15 also introduces an optional format for the prospectus for SMEs in the form of a 'question and answer' disclosure document, which will be designed in details by delegated acts. ESMA will be empowered to develop guidelines helping SMEs to draw up a prospectus under that format.
Like for all the minimum disclosure requirements under the prospectus regime, delegated acts will be adopted to specify the reduced information which must be included in the simplified registration document and securities note.
The EUR 100 000 denomination is currently used in the Directive 2003/71/EC to distinguish wholesale disclosures. It also triggers a prospectus exemption for offers of non-equity securities. This threshold, originally conceived as a consumer protection, prices bonds beyond the reach of retail investors, as issuers generally seek the less costly option of making wholesale-type disclosure. As most investment-grade issuers can raise the funds they need from institutional investors, there is little incentive for them to offer bonds in smaller sizes. However, this may mean that non-institutional investors may have access to a smaller and/or riskier pool of potential investments, and are less likely to have a well-diversified portfolio of securities.
Based on evidence presented in the impact assessment, the favourable treatment granted by the Prospectus Directive to non-equity securities with a denomination per unit of EUR 100 000 or above may have contributed to unintended consequences, creating distortions in the European bond markets and making a significant share of bonds issued by investment-grade corporate issuers inaccessible to a wider range of potential investors.
The Proposal therefore removes the incentives to issue debt securities in large denominations, currently featured in Articles 3(2)(d) and 7(2)(b) of Directive 2003/71/EC. For non-equity securities admitted to trading on a regulated market, the dual standard of disclosure (retail / wholesale) is therefore removed and a unified prospectus template will be defined through delegated acts, taking the existing wholesale disclosure annexes of Regulation (EC) No 809/2004 (Annexes IX & XIII) as a starting point and adding only the information items necessary for retail investor protection. Besides, the prospectus exemption of Article 3(2)(d) of Directive 2003/71/EC for offers of securities with a denomination above EUR 100 000 is removed. Issuers offering non-equity securities solely to qualified investors or requiring a minimum commitment of EUR 100 000 per investor will still benefit from a prospectus exemption. Through the above amendments, the proposal aims at removing one of the identified barriers to secondary liquidity on bond markets.
Article 16 provides that only risk factors which are material and specific to the issuer and its securities should be mentioned in a prospectus. The aim is to curb the tendency of overloading the prospectus with generic risk factors which obscure the more specific risk factors that investors should be aware of, and only serve to protect the issuer or its advisors from liability. To that aim, the issuer is required to allocate risk factors across two or three categories based on materiality. ESMA is empowered to develop guidelines on that field.
The scope of documents whose information may be incorporated by reference in a prospectus is enlarged, subject to the condition that the information be published electronically and complies with the language regime of Article 25. A list of documents is set out in Article 18 and ESMA is empowered to develop draft regulatory technical standards to complete the list with further types of documents required under Union law. The proposed list covers documents filed or approved by the competent authority of the home Member State in accordance with this Regulation as well as regulated information. It also permits companies which are not under the scope of the Transparency Directive (e.g. companies whose securities are traded on a multilateral trading facility) or which are exempted from some of its requirements (e.g. issuers exclusively of debt securities admitted to trading on a regulated market, the denomination per unit of which is at least EUR 100 000) to incorporate by reference all or parts of their annual and interim financial information and management reports.
Two of the options provided under Directive 2003/71/EC for publishing an approved prospectus (namely the insertion in a newspaper and the printed prospectus available at the offices of the issuer) have been removed as they were considered largely outdated. However, the obligation to provide a free paper copy to anyone who requests it is maintained (Article 20(10)). The responsibility of publishing the prospectus lies with the issuer, the offeror or the person asking for admission to trading, as is currently the case under Directive 2003/71/EC. The prospectus shall be deemed available to the public when published in electronic form either on the website of the issuer, the offeror or the person asking for admission (or, if applicable, of the financial intermediaries placing or selling the securities) or on the website of the regulated market where the admission to trading is sought, or of the operator of the multilateral trading facility. ESMA will develop an online storage mechanism with a search tool that EU investors may use for free. Consequently, whenever competent authorities send to ESMA the electronic version of each approved prospectus, they will also send a set of meta-data (e.g. type of issuer, type of security, type of trading venue, consideration of the offer, type of issuance: initial or secondary, etc) which will enable the indexing of prospectuses on ESMA’s website. The data gathered in the storage mechanism will allow ESMA to establish detailed statistics on prospectuses approved in the EU and draw up an annual report that should be granular enough to identify trends and provide evidence on the effects of the reforms introduced by this Proposal (Article 45) .
The Commission Communication on sanctions 7 confirmed that 'ensuring proper application of EU rules is first and foremost the task of national authorities, who have the responsibility to prevent financial institutions from violating EU rules, and to sanction violations within their jurisdiction', but stressed at the same time the co-ordinated and integrated way in which national authorities should act.
In line with the Communication and following other initiatives at EU level in the financial sector, this proposal contains provisions on sanctions and measures aimed at introducing a harmonised approach to sanctions in order to ensure consistency. It is important that administrative sanctions and measures are applied where key provisions of this proposal are not complied with and that those sanctions and measures are effective, proportionate and dissuasive