The end is nigh: The world of public offerings will come to an end soon – at least as we know it. The reason is that from July on the new EU Prospectus Regulation will apply and bring plenty of changes for investors and issuers. Here is what you need to know.
Until recently, some people were under the misguided impression that they had found a way to circumvent existing securities regulations. By issuing cryptotokens, many issuers of Initial Coin Offerings (ICOs) publicly claimed in their respective whitepaper – the equivalent to a prospectus for traditional securities issuance- that securities laws were not applicable. By now, we know that in the large majority of cases this was not true. Just in in traditional finance, the public offering of securities or their admission to the regulated market is bound by legal obligations. For instance, issuers of securities must inform investors in a prospectus about the opportunities and risks of the investment. These documents often run into the hundreds of pages and are rarely easy to understand for investors because they sometimes cover.
A revolution even bigger for the investment community than the appearance of this alternative fundraising model are the new rules introduced by the upcoming EU Prospectus Regulation effective as of 21 July 2019 following a two-year implementation period.
Great Ambitions
The new Prospectus rules are highly ambitious: they seek to ensure that prospectuses are made simpler and more user-friendly. Investor protection ought to be improved by targeted and compact information in shorter prospectus summaries, enabling investors to make more informed investment decisions.
At the same time, the new Prospectus Regulation aims to facilitate access to capital markets for companies by reducing the required effort to draft a prospectus, a task that currently keeps experienced lawyers busy for countless hours. Examples of the new framework aims to achieve this are higher thresholds for prospectus requirements and reduced prospectus requirements especially for small and medium-sized enterprises and for secondary issues, thus making fundraising easier and cheaper.
And possibly even more important is the new regulation’s role in the harmonization of European markets and the creation of a European Capital Markets Union. The objective is close the gap between supervisory law and supervisory practice, which is symbolized by the European lawmakers decision to introduce the new framework through a directly applicable regulation as opposed to the previous practice of using directives that required the transition into national law, which often does not go as smoothly as lawmakers would hope for.
Which Prospectus?
The new rules also differentiate between the kind of prospectus: for smaller companies, the new EU growth prospectus, is available to SMEs, companies with up to 499 employees (small mid-caps) admitted to an SME growth market or small issuances by unlisted companies.
Then there is the simplified prospectus for secondary issuers whose securities have been admitted to trading on a regulated market or SME growth market continuously for at least 18 months and where these companies simply issue more securities of the same class.
Another example for the variety of prospectus choices would be the wholesale prospectus for non-equity securities and, of course, a base prospectus for everyone else.
Growth for SMEs
Another word on the Growth Prospects whose purpose is to make things easier for small and medium-sized enterprises: Its key elements are reduced content obligations, a condensed summary and a presentation according to certain standards.
It is open to SMEs as well as certain other issuers whose securities are traded or are to be traded on an SME growth market, provided that those issuers had an average market capitalisation of less than EUR 500 000 000 on the basis of end-year quotes for the previous three calendar years; and issuers, other than those referred to in points (a) and (b), where the offer of securities to the public is of a total consideration in the Union that does not exceed EUR 20 000 000 calculated over a period of 12 months, and provided that such issuers have no securities traded on an MTF and have an average number of employees during the previous financial year of up to 499.
The aim of this new format is to create new sources of finance for SMEs and reduce the cost of raising capital.
What needs to go in
The Prospectus Regulation also amends the information requirements that documents need to provide. It must contain the information that is essential and necessary for an investor make an informed decision on the assets and liabilities, the profits and losses, the financial position and prospects of the issuer and any guarantor, the rights associated with the securities and the reasons for the issue and its effects on the issuer.
Delegated acts provided by ESMA explains in more detail for different cases of securities issuance, which information should be provided and in what form.
The universal registration document
Talking about the form of information provision: once the EU Prospectus Regulation becomes applicable, all issuers need to draw up every financial year a report in the form of a universal registration document. This document describes the company’s organisation, business, financial position, earnings and prospects, governance and shareholding structure.
Again, the content of the new Universal Registration Document was developed by ESMA with the intention to function as a useful shelf registration document, allowing issuers to quickly offer securities to the market.
Summaries and Publication
The EU Prospectus Regulation also contains new provisions on summaries in prospectuses that in principle should not be longer than seven pages. The contents of the EU Prospectus Regulation provide four summary sections: an introduction with warnings, basic information about the issuer, basic information about the securities, as well as basic information on the public offering and / or admission to trading on a regulated market.
With regard to the publication of prospectuses the date of publication of the prospectus will no longer be based on its approval but on the beginning of the public offering or admission to trading on the regulated market .As a result, the prospectus is no longer to be published immediately after approval, but only in good time before and at the latest at the beginning of the public offer or admission to trading.