The European Commission has published a consultation paper on the operation of the Prospectus Directive (the Directive).
The Directive is the legal framework regulating the requirement on issuers to publish a prospectus when making an offer of securities to the public or listing on a regulated market in the EU. Since its introduction in 2005, the Directive has been amended to increase the flexibility for companies to raise capital without the need to publish a prospectus – an obligation which, in the Commission’s words, is often “perceived as expensive, complex and time consuming, especially for SMEs and companies with reduced market capitalisation.” The objective of the Commission’s latest review is to further:
“reform and reshape the current prospectus regime in order to make it easier for companies to raise capital throughout the EU and to the lower the associated costs, whilst maintaining effective levels of consumer and investor protection.”
Relationship with the Capital Markets Union agenda
Under EU law the Commission was required to assess the application of the Directive by 1 January 2016. It has brought that review forward to support its push for an EU-wide Capital Markets Union, an initiative we discuss in more detail here. As the Commission notes, the “prospectus is the gateway into capital markets for firms seeking funding… It is crucial that it does not act as an unnecessary barrier to the capital markets.”
Shortcomings of the existing prospectus regime
In addition to the costs associated with producing a prospectus, the Commission has also identified other potential shortcomings of the existing regime:
- an inconsistent approach to offers under €5 million, which the Directive exempts from the requirement to publish a prospectus;
- differing prospectus approval procedures across Member States; and
- a trend towards overly long prospectuses, with a lack of focus on information relevant to the investment proposition.
Have your say on the prospectus regime
The consultation paper invites responses on a series of questions designed to identify potential solutions to the areas of weakness identified by the Commission. These are grouped into three general headings:
- When is a prospectus needed? The Commission is mulling a number of issues, including:
– whether the current exemptions (for example the €5 million test and the 150 persons exemption) remain fit for purpose, in light of experience since 2005 and new developments such as investment-based crowdfunding (the Quoted Companies Alliance, in its separate but timely review of the Prospectus Directive published earlier this month, suggests the exemptions should be increased to €20 million and 500 persons, respectively); and
– whether a distinction should be drawn more sharply between IPOs and various types of secondary issues.
- What information should it contain? The Commission is considering:
– the effectiveness of the “proportionate disclosure regime”, introduced in 2010 to streamline prospectuses issued in connection with rights issues but little used in practice;
– whether a reduced disclosure regime should apply to SMEs and companies with reduced market capitalisation admitted to an “SME growth market” (a new concept introduced by MiFID II, being a designated market on which at least half of the issuers are SMEs with market capitalisations of less than €200 million);
– whether the requirement for a summary at the front of each prospectus is meeting its regulatory objectives;
– introducing a maximum length for prospectuses; and
– harmonising sanctions for false or misleading information in prospectuses.
- How prospectuses are approved. The Commission is assessing the role that competent authorities in each member state play in the approval process, and how that process could be further streamlined.
Responses are invited by 13 May 2015.
Osborne Clarke comment
Despite the fundamental nature of some of the questions posed by the Commission’s consultation paper, it is hard to envisage that the regulatory environment around prospectuses will change radically as a result of the Commission’s review.
However, it is clear from the language of the paper that efficient access to capital is high on the political agenda and so further deregulation – building on the 2010 amendments to the Directive which had a significant and positive impact on access to capital for smaller listed companies – is both welcome and likely.
It will be interesting to see how the Commission balances the competing aims of investor protection and efficient access to capital, given the disruptive influence of crowdfunding and other novel forms of capital raising, and the political capital invested in SMEs as the engine of a balanced recovery.