Brussels, 24 September 2009
Prospectus Directive: Frequently Asked Questions
1. Why does the European Commission propose to review the Prospectus Directive?
The general assessment of the overall effect of the Directive has been positive: in the five years since its entry into force, it has developed a single market for securities, boosted the cross-border capital raising and the competition among issuers. It has also generated a wider variety of products that are now available to investors, ensuring at the same time investor protection through a harmonized set of rules.
However, despite this general success, there is still room for improvement in terms of legal certainty and reduction of burdensome requirements for companies and financial intermediaries raising capital in the EU. This is in line with the Action Programme launched in 2007 by the European Commission for reducing administrative burdens of existing regulation in the European Union underlining its commitment to Better Regulation as part of the "Growth and Jobs" strategy.
Moreover, Article 31 of the Prospectus Directive required the Commission to assess the application of the Prospectus Directive five years after its entry into force and to present, where appropriate, proposals for its review. This exercise is also linked to the European Economic Recovery Plan and the financial services reform announced in the Communication of 4 March for the Spring European Council "Driving European Recovery.
2. What is the aim of the review?
The overarching goal of the current proposal is to simplify and improve the application of the Directive, increasing its efficiency and enhancing the EU's international competitiveness. The proposal keeps in mind the importance of enhancing the level of investor protection envisaged in the Directive and ensures that the information provided is sufficient and adequate to cover the needs of retail investors, particularly in the context of the financial market turbulence that started in 2007.
3. Was the Prospectus Directive responsible for the financial crisis?
No, a lack of transparency and irresponsible risk management on financial markets mainly caused the crisis. As a result, the main issues triggering the turbulence will be dealt with in the new rules on Credit Rating Agencies, agreed between the Council and the European Parliament earlier this year (see ), and a sound and consistent implementation of the securitization related Capital Requirement Directive disclosure requirements and a reliable valuation and auditing of illiquid assets see (see ).
The current Prospectus Directive already provides a full set of disclosure requirements which enables investors to make an informed investment decisions. The review as tabled today will enhance investor protection even more and assist retail investors in their investment decisions and to ensure comparability with a wide range of other investment products, the proposal mandates a more simple, readable and substantial summary in line with the Commission's Communication on Packaged Retail Investment Products (see ).
4. How does the review fit in with current discussions on increasing transparency on financial markets?
The prospectus regime provides a sound framework of disclosure requirements in terms of investor protection. However, a balance needs to be struck of course between providing all available information to the market and a certain level of disclosure. The current "one size fits all" approach of the prospectus regime might be in certain cases too costly and not effective.
More flexibility is therefore required. In fact, the cost of producing a full prospectus might not be justified in terms of investor protection in cases of Employee Shares Schemes, Government Guarantee Schemes, Rights Issues, for companies with smaller market capitalization, and at certain conditions for small credit institutions. The proposal exempts from the obligation to publish a prospectus Employee Shares Schemes and it introduces a proportionate disclosure regime for rights issues; for companies with smaller market capitalization in the case of offers of or above
EUR 2 500 000, and for small credit institutions in the case of offers of non-equity securities referred to in Article 1(2)(j) of or above EUR 50 000 000. Moreover, issuers of securities guaranteed by a Member State, when drawing up a prospectus according to Article 1(3) of the Directive, shall be entitled to omit information about such guarantors.
A proportionate disclosure regime corresponds better to the needs and size of small firms. This will need to be further specified in implementing measures to be adopted at a later stage through comitology bearing in mind that the priority of this exercise will be to maintaining a high level of investor protection regardless of the size of the issuer.
5. How does this proposal relate to other initiatives in the field of retail financial services?
In case of issuance of securities offered to non-qualified investors, the Prospectus Directive provides a set of disclosure requirements about all information which, according to the particular nature of the issuer and the securities, is necessary to enable investors to make an informed assessment of the assets and liabilities, financial position, profit and losses, and prospects of the issuer and of any guarantor, and of the rights attaching to such securities. This provides for sufficient guarantees in terms of investor protection for retail investors.
However, in the context of the current financial crisis, there is still room for improvement. In particular, in order to enable even further retail investors to make an informed assessment of offered securities, the format and the content of the summary of the prospectus can be improved in implementing measures to be adopted at a later stage through comitology, so as to enhance the simplicity and readability of the summary, and thereby improve its focus on the key information retail investors need to make investment decisions and compare the investment proposal described in the prospectus with other available investment products.
This exercise is in line with the approach to be adopted following the Commission's Communication on Packaged Retail Investment Products, which aims for horizontal requirements on pre-contractual disclosures and selling practices for a wide range of retail investment product types which will include financial instruments that fall under the Prospectus Directive and others that fall outside its scope. The Commission will seek to develop these two work streams in a consistent manner, to ensure a coherent overall approach.
6. Will the proposal require an amendment of the "Level 2" implementing measures of the Prospectus Directive?
Yes. The proposal will require a further amendment of the Commission Regulation (CE) 809/2004. In particular, the format and the content of the summary and the disclosure requirements of the proportionate disclosure regime for rights issues, companies with smaller market capitalization and, at certain conditions, small credit institutions will require the adoption by the Commission of implementing measures amending and specifying the current Level 2 measures implementing the Prospectus Directive.
1. Proposals for the simplification and increase of efficiency in the current regime of the Prospectus Directive.
1.1 Will the offering limits set in the scope of the Prospectus Directive be clarified?
The way limits of maximum offering amounts are calculated in the Directive may lead to varying interpretations in the different Member States. These may create uncertainties in the different Member States as to whether an offering is within the scope of the Directive or an exemption applies to the obligation to publish a prospectus. The proposal clarifies that the total consideration of the offers mentioned in Articles 1(2)(h) and (j) and 3(2)(e) of the Directive shall be computed on an EU-wide basis and not on a country-by-country basis. Moreover, as the limits set out in the Directive may eventually become outdated, in order to take account of the technical developments in the financial markets and to ensure uniform application of the Directive, the Commission shall be empowered to adopt implementing measures in relation to these limits.
1.2 Will the exemptions from the obligation to publish a prospectus when companies sell through intermediaries ("retail cascade") be clarified?
The obligations attached to "retail cascade" offers need some clarification. A retail cascade typically occurs when securities are sold to investors (other than qualified investors) by intermediaries and not directly by the issuer. In particular, it is unclear 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. This may increase costs for issuers and intermediaries resulting in certain cases in duplication of disclosure requirements. 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.
1.3 Will the definitions of qualified investor under the Prospectus Directive and of professional clients under MiFID be aligned?
The definition of qualified investors in the Prospectus Directive is different from the definition of professional clients set out in the Market in Financial Instruments Directive (MiFID, see )) and investment firms cannot rely on their categorization for a private placement and thus benefit from the exemption in the Prospectus Directive. This creates complexity and costs for investment firms in case of private placements: a firm has to double check whether its professional clients are registered as qualified investors or it has to renounce to place securities within its professional clients. As the categories of qualified investors in the Prospectus Directive and of professional clients in MiFID target the same classes of experienced individual investors, for the purposes of private placements of securities, investment firms and credit institutions shall be entitled to treat as qualified investors those natural or legal persons that the firms consider to be professional clients in accordance with MiFID.
1.4 Does the proposal clarify the rules on the obligation to supplement a prospectus and the exercise of the right of withdrawal?
Every significant new factor relating to the information included in the prospectus, which is capable of affecting the assessment of the securities and which arises between the time when the prospectus is approved and the final closing of the offer to the public or the time when trading on a regulated market begins, triggers the publication of a supplement to the prospectus. The current Prospectus Directive creates a certain degree of uncertainty in cases where the securities offered are also to be admitted to trading on a regulated market. The relationship between the "final closing of the offer to the public" and "the time when trading on regulated market begins" requires a clarification as to whether the requirement to supplement a prospectus ends with the start of trading of the securities on a regulated market irrespective of whether the offering period has finally closed. Therefore the proposal clarifies that the obligation to supplement a prospectus shall terminate at the final closing of the offering period or the time when trading of such securities on a regulated market begins, whichever occurs earlier.
1.5 Does the proposal clarify the rules on the right of withdrawal?
Yes. Every time a prospectus is supplemented in the course of an offer, the Prospectus Directive grants investors a right of withdrawal of their previous acceptances. Such right can be exercised during a period no shorter than two days following the publication of the supplement. As the time frame for the exercise of such right is not harmonised, Member States have set different periods through national implementing legislation and, in the case of a cross-border offer, it is unclear whether the time frame set out in the national legislation of the home Member State of the issuer should apply or those stemming from the legislation of each of the Member States where the offer or admission to trading takes place.
This lack of common time frame increases the costs of legal advice. Therefore, when a prospectus is supplemented, the harmonization at EU-level of the time frame for the exercise by investors of the right of withdrawal of their previous acceptances will provide certainty to issuers making cross border offers of securities. Moreover, the proposal provides flexibility to issuers from countries with traditionally a longer time frame, enabling the issuers to extend voluntarily the term for the exercise of this right.
1.6 Will retail investors be able to more effectively analyse the prospects and risks posed by a security before investing?
The prospectus regime provides a set of disclosure requirements in order to enable investors to assess securities and issuers. Moreover, the prospectus already requires a summary conveying the essential characteristics and risks associated with the issuer and the securities. This summary is in practice a key source of information for retail investors in their investment decisions. However, in order to enhance even more investor protection and assist retail investors in their investment decisions and to ensure comparability with a wide range of other investment products, the proposal requires the summary to be simple and comprehensible to the targeted investors. In particular, it should focus on the key information and it should not be restricted to any predetermined number of words. Moreover, the content of the summary should be determined in a way that ensures comparability with other investment products that are comparable to the investment proposal described in the prospectus. A more substantial summary document will strike a better balance between the need for investor protection and the need for comprehensibility for retail investors and it will help targeted retail investors to make informed investment decisions. A logical consequence of having a more substantial summary document is to attach civil liability on the basis of the summary not only if it is misleading, inaccurate or inconsistent, when read together with the other parts of the prospectus, but also if it does not provide key information enabling investors to take informed investment decisions and to compare the securities with other investment products.
2. Proposals for the reduction of administrative burden on issuers and intermediaries raising capital in the Single European Securities Market.
2.1 Will issuers of all non-equity securities be able to determine their home Member State?
The current Directive imposes a restriction on the choice of the "home Member State" for issues of non-equity securities. The choice is available only for debt securities with a denomination above €1.000 (issuers can choose supervisors among those Member States where the issuer has its registered office or where the debt is going to be admitted to trading on a regulated market or where the debt is offered to the public). Below this threshold the home Member State mandated by the Directive is the one where the issuer has its registered office.
The threshold of EUR 1 000 is causing practical problems to issuers of non-equity securities who may need to draw up several prospectuses for a single issue, i.e. one to cover a debt issuance program within the threshold and another for the remaining debt issuance activities which might exceed that threshold. Moreover, the threshold cannot apply to certain structured products which are not denominated. Therefore, in order to make the Single European Securities Market more attractive and competitive and in order to clarify the scope of the Prospectus Directive, the limitation on the determination of the home Member State for issues of non-equity securities with a denomination below EUR 1.000 shall be removed. Such a change would not create concrete risks in terms of investor protection because the characteristics of and the risks associated with debt securities do not depend on the denomination of the securities offered or traded in a regulated market. As a consequence of this proposal, the mechanism for the determination of the home and the host Member States in the Transparency Directive shall be amended accordingly.
2.2. Will the exemptions for employee share schemes be clearer?
This current exemption in the Prospectus Directive specifically for offers of securities to employees does not apply equally to all employees, but creates a less advantageous situation for the employees of two categories of companies, namely third country companies that do not have a listing on a regulated market within the EU, and EU non-listed companies or EU companies that have securities traded on EU "exchange-regulated" markets. The exemption is not available to third country issuers that do not have a listing on a regulated market because the concept of regulated market is by definition limited to the EU, as provided for in MiFID, and it is equally impossible for EU non-listed companies or EU companies that have securities traded on EU exchange-regulated markets to satisfy this condition because once again they are not listed on a regulated market in line with the applicable MiFID definition. Therefore, the exemption relating to employee shares schemes should be widened in order to cover the employee shares schemes of companies that are not listed on a regulated market.
2.3 Will some types of securities issue be subject to a more proportionate disclosure regime?
As said under question 4, the current "one size fits all" approach of the prospectus regime might be in certain cases too costly and not effective. Indeed, there are cases where a reduced amount of information may be justified without impairing the level of investor protection. This is the case for Rights Issues because existing shareholders have already made the initial decision to invest in the company and they should be familiar with it. Moreover, the disclosure requirements of the Directive might be overly burdensome and costly also for companies with smaller market capitalization in the case of offers of or above EUR 2 500 000, and for small credit institutions in the case of offers of non-equity securities referred to in Article 1(2)(j) of or above EUR 50 000 000. A proportionate disclosure regime corresponds better to the needs and size of small firms. However, this will need to be further specified at the Level 2 of the Lamfalussy process bearing in mind that the priority of this exercise will be to maintain a high level of investor protection regardless of the size of the issuer. Moreover, in relation to government guarantee schemes, as Member States publish abundant information on their financial situation and this is in general available to the public, there is no added value for investors in requiring the issuer to disclose in the prospectus information about Member States, as guarantors. Therefore, issuers of securities guaranteed by a Member State, when drawing up a prospectus according to Article 1(3) of the Directive, shall be entitled to omit information about such guarantors.
2.4 Will the validity period of a prospectus, a base prospectus and a registration document be extended?
The current Prospectus Directive limits the validity of the prospectus up to 12 months after its publication for offers to the public or admissions to trading on a regulated market in order to avoid that it becomes outdated. However, as this document can currently be supplemented according to Article 16 of the Directive or currently updated according to Article 12 of the Directive, and considering the costs and the time for drafting and approving a prospectus, the current validity period of 12 months of a prospectus, a base prospectus and a registration document shall be extended to 24 months, provided they are properly supplemented.
2.5 Will the disclosure requirements of the Prospectus Directive that currently overlap with the Transparency Directive be repealed?
Article 10 of the Prospectus Directive currently requires issuers with listed securities to provide annually a document containing or referring to all information published in the twelve months preceding the issuance of the prospectus. As the Prospectus Directive was adopted before the Transparency Directive, this requirement has now been superseded by the Transparency Directive, which provides for a comprehensive regime for the disclosure of information about issuers with listed securities, comprising the periodic financial information (annual and half-yearly financial reports, interim management statement) and the ongoing information (market abuse disclosures – i.e. inside information, information about major holdings, etc), and therefore it shall be repealed.
2.6 How can the "passport system" and the notification of the certificate of approval become more effective?
The current Directive requires that the competent authority of the home Member State shall notify the host competent authorities the certificate of approval attesting that the prospectus has been drawn up in accordance with the Prospectus Directive. However, in practice, uncertainty has arisen for the issuers as to whether and when a notification has actually been effected. Therefore the proposal amends the notification procedure of Article 18 of the Prospectus Directive so that the competent authority of the home Member State shall at the same time notify also the issuer or the person responsible for drawing up the prospectus of the certificate of approval in addition to the competent authority of the host Member State. This will reduce costs and risks for the issuer or the person responsible for drawing up the prospectus who will have certainty that it has not inadvertently contravened the law by offering securities to the public in a Member State where the passport is not yet effective due to an oversight or error on the part of competent authority of the home Member State.