Brussels, 30th May 2001
Proposed Directive on Prospectuses Frequently Asked Questions (see also IP/01/759)
What is a prospectus and how it is used?
A prospectus is a disclosure document containing all the necessary information to enable investors to make a correct assessment of the assets and liabilities, financial position, profit and losses, and prospects of the issuer and of the rights derived from securities being offered to the public or admitted to trading.
The specific information required in the prospectus is adapted to the particular nature of the issuer and of the securities in question.
A prospectus must be approved by a competent authority before it can be published and before procedures for placing the securities can begin.
What is wrong with the two existing prospectuses Directives?
Issuers and investment banks have criticised the existing regime in this area, the Directives on listing particulars (1980) and prospectuses (1989), because it has not achieved its aim of facilitating the raising capital across borders in Europe.
Under the present system, mutual recognition is granted only to prospectuses (for listing or public offer) that set out the information specified in the Listing Particulars Directive (80/390/EEC) and approved by the competent authorities. The host country authority, in the case of recognition of the prospectus, is authorised to require additional information related to the domestic market (including translation into the host country languages). The cost of translating all of the prospectus is currently very high and burdensome.
Regulations and practices vary widely in European Member States. The result has been that EU capital markets remain fragmented and it has rarely proved possible to use the existing prospectuses to raise capital across frontiers within Europe. . Additionally there is no European recognition system for securities falling outside the scope of the 80/390/EEC Directive.
The full application to prospectuses of the "single passport" principles referred to in the March 2000 Lisbon European Council conclusions implies that there should be only one set of disclosure documents, approved by the home country authority (of the issuer), and accepted throughout the EU for public offer and/or admission to trading on regulated markets.
How would investors benefit from the proposal?
An integrated market, properly regulated and prudentially sound, will deliver major benefits to consumers of investment products. The simplification of capital raising procedures and regulations cannot be carried out, or indeed encouraged, at the expense of full investor protection. Harmonised disclosure standards will promote investor confidence in the market. Disclosure standards will be at high level and in line with those acceptable at international level (Disclosure Standards set by IOSCO, the International Organisation of Securities Commissions).
The proposed Directive also provides for centralised filing in order to ensure easy access to prospectuses for all European investors irrespective of the Member State in which they are resident. The proposal would introduce a new obligation to ensure the prospectus was available on the web-site of competent Member State authority and would allow the possibility for the issuer to publish the prospectus in electronic format. As a result, investors would have effective and free access to information on a real-time basis..
To avoid loopholes and disparities in the treatment of retail investors within the EU, the proposal would introduce a standard definition of public offer to ensure that investors were not deprived of the information provided for in the prospectus.
How would issuers benefit from the proposal?
A single financial market will be a key factor in promoting the competitiveness of the European economy by lowering the cost of raising capital for companies of all size.
To simplify capital raising procedures, the proposal would introduce a new system for registration of documents that would allow the publication of the prospectus as a set of disclosure documents instead of a single prospectus document.
The proposal envisages that a prospectus be split into a Registration Document, a Securities Note and a Summary Note each of which may circulate separately. The Registration Document (RD) would contain the information related to the issuer while the Securities Note (SN) would contain the information related to the specific securities issued. The Summary Note would contain a résumé of the two documents and the risk warning. It would permit a fast track procedure for the approval of prospectuses.
The system would be complemented by rules on the incorporation by reference of certain documents (e.g. using documents already published and filed with the competent authority etc.). This procedure would make the life of the issuer easier, lowering the costs of regulatory compliance without compromising investor protection.
Issuers would also benefit from the introduction of a new concept of "single passport", i.e. there would be only one prospectus approved by the home country authority (of the issuer), which would have to be accepted throughout the EU for public offer and/or admission to trading on regulated markets. Compared to the existing regime, which is a system of mutual recognition subject to certain conditions (full translation of the prospectus and possibility for the host country authority to introduce additional requirements), the new system would be based on compulsory automatic recognition of prospectuses drafted in accordance with the Directive.
Would this proposal only apply to prospectuses used in a cross border context?
No, even though the problems are due mainly to the patchwork of different regulations and practices in the Member States, the aim of the proposed Directive is to create the conditions for an integrated financial market in the EU. The Directive therefore would have to apply to all public offers and admission to trading on regulated market.
The new proposal would also consolidate the two existing Directives harmonising the requirements for the different types of operations (i.e. the Listing Particulars Directive (80/390/EEC) and Directive 89/298/EEC on prospectuses to be published when securities are offered to the public), thereby ensuring a level playing field throughout the Community.
In the case of multinational offers or admissions to trading, the prospectus (or the Registration Document, the Securities Note and the Summary) would have to be made available in a language which is customary in the sphere of finance and generally accepted by the host competent authority. The host authority would be entitled to require that only the Summary Note was translated into its domestic language.
The prospectus (or the Registration Document, the Securities Note and the Summary Note when the registration system is used) would have to be approved by the home country authority of the issuer and mutually recognised in all European markets subject to a simple notification procedure and without additional information requirements.
Information details related to the treatment of securities in the host market and other relevant investor information would have to be included in the original prospectus.
How does the proposal take account of the interests of SMEs and unlisted issuers?
The proposed Directive provides for a single set of disclosure documents, irrespective of the size of the issuer. In order to ensure investor protection and confidence, upgraded information and high level disclosure standards are more important and necessary as regards small companies traded on unregulated markets than as regards large and global issuers traded on official listing.
Issuers not planning to admit their securities to trading (i.e. those who only offer securities to the public) would be free to decide to publish the prospectus as a single document and would be given the option of not drafting a registration document and would not have to comply with the annual update.
Which conditions would issuers have to fulfil in order to comply with the proposed Directive?
In order to ensure the same treatment throughout the EU, together with a yearly update of the information provided for in the Registration Document, the proposed Directive envisages that all issuers whose securities are traded on regulated markets would be obliged to file a Registration Document.
This system would benefit issuers raising capital on a regular basis. The proposal envisages introducing a reduced time limit for approval when this concerns the Securities Note and the Summary Note only.
The proposed system could also benefit issuers that do not raise capital on a frequent basis. By meeting minimum updating and filing requirements with competent authorities, investor confidence can be increased, and pan-European capital raising made easier.
It is not expected that this proposed system would introduce additional costs for issuers. Obligations to disclose price sensitive information in the case of securities traded on regulated markets (as provided for by Directive 79/279/EEC on coordinating the conditions for the admission of securities to official stock exchange listing) and to publish regular reports are already applicable. They are not affected by the registration procedure. The updating of the Registration Document could be used for the purposes or fulfilling the obligation to publish annual reports provided for by the Fourth and Seventh Company Law Directives. Issuers would not need to duplicate disclosure documents.
When would the benefits of this proposal be felt?
The Resolution of the March 2001 Stockholm European Council on more effective securities market regulation in the EU, asked for implementation by the end of 2003 of the priorities set out in the February 2001 report by the Committee of the Wise Men chaired by Alexendre Lamfalussy. The Commission would like this proposal for a Directive on prospectuses be adopted by the EU's Council of Ministers and the European Parliament in 2002. However, the benefits of the proposed Directive will be available in practice only once it has been implemented into the legislation of all Member States. If the deadline for adoption is met, implementation should take place by the end of 2003. This proposal is one more building block to help deliver the basis for the creation of an efficient internal market in financial services.