New length restrictions will require issuers to focus on key information for investors.
By James Inness and Connor Cahalane
Under the Prospectus Regulation, which comes into force on 21 July 2019 (See EU Prospectus Regulation: New Format and Content Requirements), issuers preparing equity prospectuses will need to comply with new rules on the summary section. While the changes allow some flexibility on the information issuers must include in the summary, there are new requirements and restrictions that issuers need to be aware of.
The purpose of the summary section is to provide investors with key information to understand the nature and risks of the issuer. The disclosure tables for the summary section under the Prospectus Directive have been replaced by a requirement that the summary must be made up of four sections:
- An introduction
- Key information on the issuer (including key financial information)
- Key information on the securities
- Key information on the offer
These sections must be written in language that is clear, non-technical, concise, and comprehensible for investors, and presented in a Q&A format using headings set out in the Prospectus Regulation (for example, “Who is the issuer of the securities?” and “What is the key financial information regarding the issuer?”).
The introduction section must include the issuer’s name and contact details, as well as specific warnings (for example, that investors could lose all or part of their invested capital).
Key information on the issuer
Issuers must set out details of their domicile, legal form, principle activities, major shareholders, and key management. Issuers must also include a brief description of the most material risk factors specific to the issuer.
Key financial information
Issuers must disclose key financial information for the period covered by the historical financial information in the prospectus, including any pro forma financial information. The specific content and format requirements for this financial information — to be extracted from the income statement, balance sheet, and cash flow statement of the issuer — are set out in a delegated regulation, the Prospectus RTS Regulation. Issuers may also include additional line items or alternative performance measures as part of this key financial information.
As issuers will no longer be required to include a “selected financial information” section in the prospectus, the key financial information in the summary is likely to receive greater attention from investors (though the separate requirement to provide detailed historical financial information in the prospectus has not materially changed). Issuers and their advisors will need to carefully consider which financial information to include in the summary, particularly in light of the reduced maximum length of the summary section (see below) that will impose practical limits on the level of detail that issuers can include.
Key information on the securities
Issuers must outline details of the type, class, and trading venue of the securities offered, as well as the rights attached to them. Issuers must also include a brief description of the most material risk factors specific to the securities.
Key information on the offer
This section must include the general terms, conditions, and expected timetable of the offer, dilution levels, details of use of and estimated net amount of the proceeds, and whether or not the offer is subject to an underwriting agreement on a firm commitment basis.
Other important changes to the Summary Section
The Prospectus Regulation also introduces a key change to the summary, requiring that the section must not be longer than seven sides of A4-sized paper. This change will lead to a significant reduction in the size of summary sections for equity prospectuses. Given the specific requirements governing information on the issuer, the securities, the offer, and key financial information, issuers are likely to find they are constrained in their ability to provide detailed information on their business activities and the markets in which they operate. Therefore, issuers and their advisors will need to make a judgement call on what information is most relevant to investors.
Risk factors in the summary section
Under the new rules, issuers must not include more than 15 risk factors in total in the summary section. If issuers have more than 15 risks disclosed in the risk factor section of the prospectus, they will need to determine which risk factors can be omitted from the summary, keeping in mind the requirement to include the most material risk factors. However, as the summary is intended to be read together with other parts of the prospectus, issuers should not be overly concerned about not including certain risks in the summary provided they have sought to include those that are most material.
Requirement for separate summary document
The Prospectus Regulation requires issuers to make available a separate electronic copy of the prospectus summary section on the website where the full prospectus is published. Issuers will need to prepare a standalone summary document with the necessary cover page and notices to investors, and have this document available when the prospectus is published.
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