14 December 2015

Raising Capital in Europe - the proposed new Prospectus Regulation

The European Commission has published its proposals for reforming the European prospectus regime. They follow a consultation launched by the Commission earlier this year and form part of its wider Capital Markets Union project, designed to improve access to the European capital markets. As with the Commission's previous efforts at reform in this area, the changes focus on giving companies more freedom to raise capital without having to publish a costly and time-consuming prospectus and, where the rules do require a formal document, cutting down on inessential content.

At this stage the Commission has only published its proposed rules in draft, and much of the detail is still to come. This bulletin focuses on the headline changes affecting share issues.

When a prospectus will not be required

  • Small capital raisings. Currently, companies can raise up to €5 million from the general public without having to comply with EU prospectus rules, but national regulators can still require a prospectus for public offers above an EU-wide threshold of €100,000. One important aspect of the new regime is to raise the €100,000 threshold so that "over-protective" EU countries can no longer require a prospectus for offers of up to €500,000. At the same time, the Commission is proposing to replace the €5 million limit with a new discretion allowing individual countries to set their own financial limits for public offers that are only made within their borders, up to a maximum offer value of €10 million. These prospectus exemptions will continue to sit alongside the existing carve outs for private placings of shares to professionals ("qualified investors") and to less than 150 non-professional investors per EU state, or where the minimum payment per investor is at least €100,000.
  • Raising the threshold for listed companies. At the moment, with some exceptions, a company with shares traded on an EU regulated market (such as the London Stock Exchange's main market) has to publish a prospectus if it plans to issue a further 10% or more of its shares, whether or not it offers these shares to the public. The Commission intends to give companies more flexibility by raising this threshold to 20% (although there will usually be other constraints limiting its use, such as institutional investor guidelines on share offerings).
  • Takeovers and mergers. A potentially helpful change will allow companies to issue shares or other securities as part of a takeover or merger without having to produce a full prospectus or equivalent document, even if it involves a public offer, or the issue of more than 20% of a listed company's shares. The only requirement will be making a document available "containing information describing the transaction and its impact on the company". Depending on the content that regulators prescribe for this document, this could cut down very significantly on the paperwork (and time) required for M&A activity.
  • AIM and other junior markets. The Commission appears to have abandoned its unpopular suggestion of requiring companies to publish a full prospectus in order to float on junior markets such as AIM in the UK.

If a prospectus is required

  • Prospectus summary and risk factors. Despite previous reform efforts, these are still seen to be overly-long and unwieldy. The Commission proposes to itemise the specific content of summaries and restrict them to six sides of A4. Companies will have to limit risk factors (at present, often 20 pages or more) to those which are material and specific to the company and, in a new and unwelcome challenge for companies and their advisers, to grade them into two to three categories based on materiality (although further guidance on this will be issued).
  • Smaller companies and secondary issues. Recognising that the existing content concessions have not worked, the EU regulators plan to revisit this area with a view to creating two new reduced disclosure regimes, the first for a prospectus produced by a small or medium-sized company, and the second for an existing listed company that is issuing further shares (via a rights issue or in any other way). The threshold for SME qualification will also be increased from €100 million to €200 million market capitalisation. While these are welcome changes, their value will depend on the scope of the concessions, details of which are still awaited.
  • Universal registration document. A listed company that regularly has to publish a prospectus will instead be able to publish a "universal registration document" (URD) every year, leaving it with only the prospectus summary and details of the share offering to produce when required. Although "shelf registration" regimes are nothing new in themselves, a potentially interesting development is the ability for a company to replace its annual reports and accounts with a URD. However, the need for regulatory approval of the URD is likely to be a stumbling block for many companies (although the new rules dispense with this requirement after a company has published a URD for three years).
  • Avoiding the "kitchen sink" approach. One of the challenges for regulators is to shift market practice, where 250-page prospectuses have become the norm even for rights issues. This in part reflects rule changes over the last decade, and the need to comply with global offering standards. However, it also stems from concerns over the liability risks for those responsible for a prospectus, including directors, if the document does not meet the general disclosure standard that applies on top of the specific content requirements. In a helpful new development that may go some way towards addressing these fears (and cutting down on unnecessary content), the draft rules indicate that the general disclosure standard for secondary offerings will focus instead on the company's prospects based on its most recent financial year only, and the reasons for and impact of the share offering. (Less helpfully, the Commission does not appear to be extending a similar concession to the reduced prospectus regime for SMEs.)

Companies will welcome most of these changes, although many will feel they could go further, and without the detailed rules the resulting time and costs savings cannot be assessed at this stage. The proposed new regime will not be available before 2017, as the rules still need to pass through the usual EU legislative process and there is then a one year lead-in period.

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