By James Inness
A new prospectus regulation (Regulation (EU) 2017/1129) (the Regulation) will come into direct effect on 20 July 2017, with a small number of provisions applying immediately and the remainder applying from 21 July 2019. The changes under the Regulation will likely be relevant to issuers both before and after Brexit.
Which Provisions Will Apply Immediately?
The previous exemption allowing issuers to issue up to 10% of the number of shares of the same class already admitted without the need to publish a prospectus will be increased to 20%. The exemption also now applies to all types of securities, not just to shares. Clearly, issuers will welcome this increased flexibility and the market will undoubtedly see larger undocumented deals. Given investor resistance to larger cash-box offerings (absent shareholder approval) we do not expect the changes to the prospectus regime to affect market practice in relation to cash-boxes.
The Regulation will tighten the current exemption allowing issuers to admit shares resulting from convertible securities without a prospectus. The current exemption will now only be available where the issue of shares represents less than 20% of the total shares of a corresponding class of shares that are already admitted. This change is subject to exceptions including shares admitted in connection with convertible securities issued before 20 July 2017.
Additional Provisions That Will Apply from 21 July 2019
- Risk Factors – the Regulation will require risk factors in a prospectus to be categorised by their nature and presented in order of their “materiality” (to be assessed based on the probability of their occurrence and the expected magnitude of their negative impact). Generic risks serving only as disclaimers must not be included.
The prohibition on generic risk factors is welcomed although it largely reflects current market practice. Putting risks in order of materiality is, however, less welcome. Whilst the potential liability for risk factors is, in theory, increased, the change largely reflects market practice. An issuer with a well-considered, well-drafted, and accurate series of risk factors should not, in practice, be unduly concerned by this change.
- Prospectus Summary – the Regulation prescribes changes to the presentation and content of a prospectus summary, including that it must not exceed seven A4 sides of paper. In addition, a prospectus summary must not include summaries of more than 15 risk factors.
- Simplified Prospectus and Growth Prospectus – the Regulation allows the use of a simplified prospectus for secondary issuances. Similarly, the Regulation will introduce the concept of a “growth prospectus” allowing certain issuers (mainly small and medium-sized enterprises) to issue securities under a standardised prospectus that is written in simple language and easier for issuers to complete. Historically, shorter-form prospectuses have had limited traction in the market as they fail to satisfy the US disclosure standards required for international offers under Rule 144A. We expect this trend to continue for all but the smaller Regulation S deals.
Implementation and Brexit
The Regulation does not require further UK legislation to be implemented although upcoming European delegated legislation and ESMA guidelines will flesh out the Regulation. The Regulation will come into effect before Brexit and will be adopted in full under the proposed “Great Repeal Bill” — at least that is the current expectation. However, whether all aspects of the Regulation will eventually find their way into English law post-Brexit remains to be seen.