Companies wishing to finance themselves on capital markets issue securities (such as shares, bonds, etc.) which investors can buy. Potential investors can find necessary information about the security and its issuer in the publicly available prospectus. It must contain the necessary information for investors to make an informed investment decision. The prospectus is therefore a key element to generate confidence in securities markets.
A prospectus has to be drawn up, approved by the supervisor of the home Member State and published whenever securities are either offered to the public or are admitted to trading on a regulated market. Once approved by a Member State supervisor, the prospectus enables an issuer to raise capital across all EU capital markets simultaneously thanks to the "single passport" principle.
In 2014, 3 838 prospectuses were drawn up and approved in the European Economic Area (EEA).
The prospectus enables the investor to assess the assets and liabilities, financial position, profit and losses, and prospects of the issuer and of any guarantor, and of the rights attaching to the security in question. It is composed of a registration document (describing the issuer, its business, financial statements, board of directors, shareholding structure, risk factors, material properties and any other material information), a securities note (describing the shares, bonds or options offered, as well as their terms and conditions) and a summary.
2. Why are we revamping the prospectus regime?
The aim of the Capital Markets Union is to help businesses tap into more diverse sources of capital from anywhere within the EU, to make markets work more efficiently and to offer investors and savers additional opportunities to put their money to work, in order to enhance growth and to create jobs. The "Action Plan on Building a Capital Markets Union" of 30 September 2015 prioritises lowering barriers to accessing capital markets across the Union through a review of the current prospectus regime.
The main objectives of the prospectus revamp are:
- making it easier and cheaper for smaller companies to access capital markets;
- simplification and flexibility for all types of issuers, in particular for secondary issuances and frequent issuers which are already known to capital markets;
- improving prospectuses for investors by introducing a retail investor-friendly "key information"–type summary, catering for the information and protection needs of investors.
The revamped prospectus regime will ensure that appropriate rules cover the full life-cycle of companies from their beginning as start-ups, until their maturity as frequent issuers on regulated markets.
Under the proposal, each stage of this "funding escalator" will be accompanied by adequate arrangements:
- Entrepreneurs will be exempt from preparing a prospectus when raising small amounts of capital.
- Once the company has grown and wants to access capital markets, a tailored disclosure regime will help SMEs and companies with a reduced market capitalisation access capital markets without the burden of doing a full prospectus. The "SME and small cap"-prospectus is adapted to their size and to the length of their track record and available to private companies and companies trading on Multilateral Trading Facilities (MTFs, including "SME Growth Markets").
- Companies which are returning to capital markets can draw up lighter prospectuses for so-called secondary issuances. Frequent issuers can benefit from a fast-track approval when choosing to draw up an annual "universal registration document" containing all the relevant information about the issuer. This makes sure that issuers already known to markets do not have to disclose unnecessary or redundant information.
These changes will ensure the right balance between cutting unnecessary administrative burdens for issuers whilst safeguarding investor protection through adequate information.
3. When would companies need a prospectus?
The Commission's proposal will introduce certain exemptions from current requirements to produce an EU prospectus.
No EU-prospectus would be required for offers of securities with a total value 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 is below EUR 500 000..
Besides, Member States are given the choice to exempt from the harmonised EU-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 million. This exemption only applies to domestic offers for which no passport notification to host Member States is sought.
If no EU-prospectus is required under the Regulation, issuers may still opt into the EU regime and draw up a 'voluntary' prospectus entailing the same rights and obligations as a prospectus required under the Regulation (including a passport).
In addition to the above thresholds, the existing exemptions will continue to apply. In particular, a prospectus will not be required for offers of securities addressed to qualified investors only, or to a restricted circle of less than 150 investors who are not qualified investors. Likewise, offers of free shares to existing shareholders, dividends paid in the form of shares or securities offered to employees in the context of an employee share scheme (see Question 13) are not covered by the scope of this proposal.
4. What will change for SMEs?
A key objective of CMU is to make it easier for small and mid-sized firms to raise capital. Whilst private equity and business angels typically invest in SMEs at an earlier stage of their development, SMEs can also access public markets to attract a wider range of investors and provide the former with exit opportunities. Prospectuses for SMEs and small caps only contain information that is material and relevant for smaller sized companies with a shorter track record. In the past, SMEs have been deterred from offering securities to the public by the paperwork involved and the high costs incurred. Now, it should become easier for such companies to fulfil their disclosure obligations, but in a way that investors are still well-informed about the products they are investing in.
In addition, a new optional "question and answer" format will help SMEs and small caps draw up their own prospectus for shares and bonds, sparing them considerable legal fees. This format should help these companies prepare the prospectus mostly in-house, as the format will already contain standardised language, and guidance will be available on how to fill in the missing information, which is specific to the company and securities.
5. Secondary issuances: what kind of prospectus for issuers already known to the market?
Around 70% of all prospectuses approved annually are drawn up by companies whose securities are already listed on a regulated market, and which are therefore already subject to ongoing disclosure requirements under the Market Abuse Regulation and the Transparency Directive. Such issuers should have the possibility to prepare a lighter prospectus in case of subsequent offers to the public or admissions to trading ("secondary issuances") in order to avoid duplicative disclosures, to reduce costs and to make the resulting disclosure more relevant for potential investors.
Directive 2010/73/EU introduced a proportionate disclosure regime for offers of new shares by issuers whose shares of the same class are admitted to trading on a regulated market or a multilateral trading facility [MTF] providing they have not dis-applied the statutory pre-emption rights ("rights issue"). However, this optional regime was little used in practice because its scope was very narrow.
The new proposal significantly widens the range of situations where a lighter prospectus may be prepared by an issuer or an offeror, namely by covering:
- issuers whose securities have been admitted to trading on a regulated market or an SME growth market for at least 18 months and who issue additional securities of the same class,
- issuers whose equity securities have been admitted to trading on a regulated market or an SME growth market for at least 18 months and who issue non-equity securities, and
- offerors of a class of securities admitted to trading on a regulated market or an SME growth market for at least 18 months.
Lastly, to reduce the administrative burden on issuers whose securities are already admitted to trading on a regulated market, any subsequent admission of the same securities on the same regulated market will not require a prospectus provided that the newly admitted securities represent less than 20% of the existing securities. This represents a significant extension of an existing exemption under Directive 2003/71/EC, the scope of which was limited to shares only and subject to a dilution limit of 10% only.
6. What is a tri-partite prospectus?
A prospectus can be drawn up either as a single document ("stand-alone prospectus") or as separate documents ("tripartite prospectus"). In the second case, the three documents can be approved separately and at different points in time. This allows the information relating to the issuer in the registration document to be prepared in advance and kept up-to-date "on the shelf" and then completed later by adding a securities note and a summary, e.g. when market conditions are favourable for the issuer to raise capital. This provides issuers with increased flexibility because producing a securities note and a summary at the time of issue is much less time consuming than the preparation of a full, stand-alone prospectus.
7. Frequent issuers: how can they get fast-track prospectus approval?
Capital-raising by frequent issuers will be facilitated by introducing an optional fast-track approval mechanism for issuers admitted to trading on regulated markets or multilateral trading facilities. This mechanism is subject to the issuer drawing up a "universal registration document" every year. This new feature enables issuers to draw up a complete registration document annually and thereby benefit from quicker approval by the supervisor whenever they submit a prospectus for approval. Since the universal registration document as a main part of the prospectus has either already been approved or is already available for review by the supervisor, the supervisor should be able to scrutinise the remaining documents (securities note and summary) within 5 working days, instead of 10.
The use of such a universal registration document will promote the drawing up of prospectuses as separate documents ("tripartite prospectus"), as this will be cost-effective and less burdensome for issuers, and enable them to quickly react to market windows. The universal registration document will also serve as a consolidated and well-structured source of reference on the issuer. It will supply 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, regardless of whether an offer to the public or an admission of securities to trading on a regulated market is taking place.
The proposal allows frequent issuers admitted to trading on a regulated market to, under certain conditions, fulfil their ongoing disclosure obligations under the Transparency Directive by integrating their annual and half-yearly financial reports into the universal registration document. This “two in one” approach avoids duplicative requirements, alleviates unnecessary burdens and concentrates the information investors need in one single document which is updated at least every year.
8. How is the base prospectus regime for non-equity securities improved?
A base prospectus is a particular kind of prospectus which is typically used by banks and very large companies for debt securities (so-called "non-equity securities" in particular bonds and derivatives).When submitted for approval to the national supervisor, it contains all relevant information concerning the issuer and the securities to be offered to the public or to be admitted to trading, except the final terms of the offer. Once a base prospectus is approved, the issuer is allowed to issue non-equity securities as many times as it wants during the following 12 months, provided that it files the final terms of each offer with the supervisor in advance of the offer.
The base prospectus is a flexible tool because (i) the final terms are not subject to approval and (ii) an issuer only needs one approved base prospectus to proceed with repeated offers of different types of securities within one year, instead of having to draw up a new prospectus for each new issuance. In 2014, nearly 40% of all prospectuses approved in the EU were base prospectuses.
Overall, the current base prospectus regime is working well for issuers of non-equity securities. Still, the proposal introduces some improvements to ensure that it works even more efficiently in the future:
- First, all types of issuers of non-equity securities can now use a base prospectus if they wish to do so.
- Second, base prospectuses can from now on consist of separate documents ("tripartite base prospectuses"), including a "universal registration document" for frequent issuers using the fast-track approval process.
- Third, the obligation to draw up a summary of the base prospectus, if the final terms are not contained therein, is removed, so that only an “issue-specific” summary is required to be produced and annexed to the final terms, when those are filed.
9. How can information which is already published be used in a prospectus?
When preparing a prospectus, issuers can refer to certain information which has been previously or simultaneously published electronically and filed with a supervisor. This practice, known as "incorporation by reference", helps avoid unnecessary duplication of information in prospectuses. Compared with the current prospectus regime, the proposal significantly widens the range of information that an issuer may incorporate by reference in a prospectus, and places issuers on regulated markets and those on multilateral trading facilities on equal footing in terms of their ability to incorporate information by reference. Under the new proposal, information that may be incorporated by reference in a prospectus can come from the following sources:
- prospectuses, supplements and final terms,
- documents prepared in the context of takeovers, mergers and divisions;
- regulated information which needs to be disclosed under the Transparency Directive and the Market Abuse Regulation;
- annual and interim financial information, audit reports and financial statements, management reports and corporate governance statements, for those issuers outside the scope of the Transparency directive, or exempted from some of its disclosure requirements and
- memoranda and articles of association.
To ensure adequate investor protection, such information must be the most recent available to the issuer.
10. How does the new user-friendly summary improve investor protection?
The purpose of the prospectus summary is to provide the key information relating to the securities and their issuer in a concise and non-technical manner, in order to help investors in their investment decision. It therefore represents a useful source of information for investors, in particular retail investors, and is essential to promote investor protection. Taking into consideration the view expressed by stakeholders that the summary format introduced by the amending Directive 2010/73/EU has not met its objectives, this proposal now closely models the summary on the consumer-tested key information document (KID) required under the PRIIPS Regulation.
While a summary under the current Prospectus Directive can be 15 pages or even longer, the proposal reduces its size to a maximum length of 6 A4-sized pages to ensure that investors will not be deterred from reading it and to encourage issuers to select the information which is essential for investors. The new summary contains three main sections covering key information on the issuer, the security and the offer/admission respectively. For securities falling under the scope of the PRIIPS Regulation, the issuer can choose to replace the “securities” section of the summary with the content of the KID.
11. Risk factors: how to refocus on relevant, specific and material risks which investors need to be aware of?
Investors need to make investment decisions in full knowledge of the facts. Issuers are therefore required to prominently disclose in the prospectus any risk factors pertaining to the issuer and its securities. Yet, prospectuses are currently often overloaded with generic risk factors which might obscure the more specific risk factors that investors should be aware of. This market practice serves to protect the issuer or its advisors from legal liability, but it is detrimental to investor protection.
Under the new proposal, only risk factors which are material and specific to the issuer and its securities should be mentioned in a prospectus. The issuer will be required to allocate risk factors to categories based on the issuer's assessment of the probability of their occurrence and the expected magnitude of their negative impact. This will allow investors to have a better understanding of potential risks when making their investment decision. In addition, only the most important risk factors selected by the issuer will be featured in the summary.
12. Bond markets: how does this proposal intend to lift barriers to secondary market liquidity?
The favourable treatment granted by the Prospectus Directive to non-equity securities with a denomination per unit (i.e. the nominal value of the securities) of EUR 100 000 or above has changed issuance denominations which may have led to unintended consequences and making a significant share of bonds issued by investment-grade companies inaccessible to a wider range of potential investors.
The threshold of a minimum EUR 100 000 denomination per unit is currently used in the Prospectus Directive to distinguish between wholesale prospectuses and more detailed retail prospectuses, when non-equity securities are admitted to trading on a regulated market. It also triggers a prospectus exemption for offers of non-equity securities. This threshold was originally conceived to protect consumers, as the prices of these bonds are beyond the reach of retail investors and these issuers generally seek the less costly option of making wholesale-type disclosure with less information and without summary.
As most investment-grade issuers are therefore incentivised to issue non-equity securities in denomination of EUR 100 000 or above to avoid the prospectus burden, this may lead to less secondary market liquidity and investors having access to only a smaller and pool of potential investments, limiting portfolio diversification.
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 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. The prospectus exemption of Article 3(2)(d) of Directive 2003/71/EC for offers of securities with denomination above EUR 100 000 is also removed. However, 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.
13. Where can investors find prospectuses and related documents?
It is currently not possible to search for prospectuses in the EU in an efficient and effective manner, as no EU-wide public or private database allows for searches of all approved prospectuses. This limits the choice and/or the comparability for potential investors. To remedy this lack of access to prospectus disclosures, ESMA (The European Securities and Markets Authority) will provide free and searchable online access to all prospectuses approved in the EEA (European Economic Area). Prospectuses and related documents have to be available on the websites of the issuers to ensure easy access in all relevant languages. The obligation for issuers to provide a free paper copy of the prospectus to anyone who requests it is maintained.
14. Do employee share schemes need a prospectus?
Incentivising employees to hold securities of their own company can have a positive impact on companies' governance and help create long-term value by fostering employees' dedication and sense of ownership, aligning the respective interests of shareholders and employees, and providing the latter with investment opportunities.
The exemption currently provided by the Prospectus Directive for offers of securities to employees does not apply equally to all EU employees. This disadvantages employees of third country companies that do not have a listing on a regulated market within the EU. In particular, the exemption is not available to third country issuers that do not have a listing at all or that are listed on a third-country market, unless the Commission adopts an equivalence decision regarding that third-country market. Therefore, the proposal widens the exemption in order to cover the employee shares schemes of third-country companies, irrespective of whether they are listed on a regulated market or not.
15. What is the role of national supervisors?
Supervisors scrutinise the completeness of the prospectus according to the minimum disclosure requirements laid down in the implementing regulation, the consistency (no contradictions), and the comprehensibility (understandable wording) of the information given in the prospectus. The supervisor has 10 days to perform this scrutiny after the issuer has submitted a draft prospectus. It is important to know that supervisors do not check whether the information contained in the prospectus is correct and truthful, and hence do not perform any due diligence assessments. The supervisor oversees the general compliance of market participants with the Prospectus Regulation, in particular the advertisements for securities offered or admitted to trading under a prospectus.
16. Does the proposal provide for sanctions in case of wrongdoing?
The proposal provides for minimum administrative sanctions and measures that supervisors should have the power to impose, including monetary fines. Furthermore, supervisors can publish a statement concerning the wrongdoing and the name the person(s) responsible and can prohibit further and/or repetitive wrongdoing. Member States can choose to provide for more measures and higher sanctions as well as sanctions of a criminal nature, if they wish to do so.
To ensure effective supervision and compliance with the Regulation, supervisors can ask for information and documents; suspend or prohibit public offers, advertising activities and admission to trading on regulated markets; require the issuer to disclose all material information to ensure investor protection; and carry out on-site inspections.
17. How is this review of the prospectus regime different from the review in 2009?
The 2009-2010 review amended the 2003 Directive (Directive 2003/71/EC) only in a limited number of areas to provide increased legal clarity and reduce the regulatory burden on EU companies. The main measure consisted of creating two proportionate disclosure regimes for SMEs and secondary issuances (also known as "rights issues").
Whilst these changes have been helpful, according to feedback from the public consultation carried out between February and May 2015, the proportionate disclosure regime for SMEs was perceived by many stakeholders as being burdensome and granting few advantages compared to a regular prospectus. In particular, companies did not want to be perceived as giving a "lower" level of disclosure, and therefore opted for the standard disclosure regime instead. Moreover, the proportionate disclosure regime for rights issues that was put in place by the 2010 amendment has a very narrow scope, and this has equally affected its use.
The new proposal is the result of a comprehensive review of the prospectus regime with a view to bringing about real advantages, with a considerable alleviation in the content and a broader scope both for SMEs and secondary issuances.
18. How does the proposal fit within the Commission's commitment to Better Regulation?
The proposal is part of the Commission's commitment to simplify and make EU laws more effective and efficient. The Prospectus Directive was included in the Regulatory Fitness and Performance programme (REFIT, COM(2014)368) because stakeholders have expressed concerns regarding the high costs of preparing a prospectus and getting it approved by the competent authority. REFIT aims to reduce regulatory burdens and simplify existing laws in order to ensure that the objectives of the legislation or policy can be reached in a more effective and efficient way. The proposal has been prepared in an open, transparent manner, informed by the best available evidence and backed up by involving stakeholders during a public consultation held between February and May 2015 (IP/15/4433). It relies on an impact assessment which builds on the findings of an evaluation of the last reform of the Prospectus Directive undergone in 2010.
19. What are the next steps and when will the revamped regime become applicable?
The Prospectus Regulation was transmitted on 30 November 2015 to the European Parliament and the Council for adoption under the co-decision procedure. On 3 June 2016, Council gave its backing to the Commission's proposal to reform by granting the Council presidency a negotiating mandate for trilogues. The Commission expects trilogues with the European Parliament to commence after the summer.
As with any other EU Regulation, its provisions will be legally binding in all EU Member States without transposition into national law as from the day of entry into application. The proposed Regulation, once adopted, will replace Directive 2003/71/EC which will be repealed, along with its corresponding implementing measures (including Commission Regulation (EC) No 809/2004). New implementing measures will be adopted to set out the minimum information contents of prospectuses. The proposed Regulation will enter into application only after such implementing measures are adopted.
The proposal contains a "grandfathering clause" for prospectuses approved in accordance with Directive 2003/71/EC before the date of entry into application of the proposed Regulation. Those prospectuses will continue to be governed by Directive 2003/71/EC.
- On the CMU Action Plan, please refer to the full MEMO/15/5732
 Transferable securities as defined in Directive 2014/65/EU on markets in financial instruments (MiFID) ,i.e. 'classes of securities which are negotiable on the capital market, with the exception of instruments of payment', with the exception of money market instruments having a maturity of less than 12 months.