Publication The New EU Prospectus Regulation
STOCKHOLM (June 4, 2019) – The new EU Prospectus Regulation will take full effect on July 21, 2019. Listed companies and other issuers can expect some good news but also some news that may cause concern.
Highlights for Equity Issuers
- Simplified prospectuses for secondary issues for companies already listed on a regulated market or a SME growth market.
- A standardized, simplified prospectus for small and medium-sized enterprises (SMEs).
- A universal registration document (off-the-shelf) for frequent issuers.
- The content requirements for full prospectuses remain largely the same albeit with some challenging changes, such as shorter summaries and a more rigorous view on risk factors.
Exemptions Under the New Prospectus Regime
In line with the current EU prospectus regime, the new regulation requires a prospectus in two situations: Where there is an offer to the public and where there is an admission to trading on a regulated market such as Nasdaq Stockholm, with each having different exemptions. The new regime introduces some new exemptions and alters some existing ones.
Public Offer Exemptions:
Sweden will maintain the exemption for offers to the public with a total consideration of less than €2,500,000. To benefit from this exemption, the total consideration for the offer must be aggregated with the consideration for all offers within the previous 12 months, and that aggregate consideration must be less than €2,500,000.
Other key exemptions continue to include offers addressed to qualified investors, offers to fewer than 150 persons per member state, and offers to investors, who acquire securities for at least €100,000 per investor.
The current exemptions for securities offers involving takeovers and mergers, as well as offers to employees, are maintained, but have been broadened.
Admission to Trading Exemptions:
Key exemptions include listing additional securities of the same class as and amounting to less than 20 percent (a threshold effective since 2017) of the number of those securities already listed on the same regulated market and calculated over a 12-month period. A 20 percent limit has been imposed on the exemption available for shares resulting from the conversion or exchange of other securities (also effective since 2017).
Where an issuer has listed securities on a regulated market for more than 18 months and has complied with the obligations of that market, the securities can be admitted to trading on another regulated market subject to the publication of a summary instead of a full prospectus. Just as with the existing regime, a prospectus must have been prepared for the initial listing in order for an issuer to benefit from this exemption.
Prospectus Contents: A Slightly Revised General Disclosure Requirement
The new prospectus regime follows the approach of the current regime, with the minimum information to be included in a registration document and a securities note, with detailed information requirements specified in annexes. It maintains most of the content requirements set out in the existing prospectus regime, even though the general disclosure requirement has been slightly revised and requires that the prospectus includes the necessary information that is material to an investor to make an informed assessment of (1) the assets and liabilities, profits and losses, financial position, and prospects of an issuer, (2) the rights attaching to the securities, and (3) the reasons for the issuance and its impact on the issuer. There is also a new requirement for the prospectus to be drafted in a “concise” form.
New Format for Summaries
The new regulation retains the concept of summaries, but it is less prescriptive and the maximum length is reduced to seven pages. The number of risk factors permitted in the summary is limited to 15. Prescriptive templates for key financial information are introduced, which reduce the issuers’ discretion in how key financial information is presented. These changes may likely prove challenging to issuers, at least initially, and until there is a more firm market practice.
More Rigorous View on Risk Factors
Risk factors must be specific to the issuer/securities and must be material for taking informed investment decisions; generic risk factors and disclaimer like wording, must be avoided. Risk factors must also be corroborated by information published elsewhere in the prospectus.
Risks must be categorized by their nature, with the most material risk presented first (materiality being a combination of probability of occurrence and magnitude of effect). Where quantitative information is not available, the potential negative impact of the risk should be described using a qualitative approach. Where a qualitative approach is used, the materiality may be described by referring to a risk as low, medium, or high. Issuers should give careful consideration to these new requirements to avoid increased liability and can expect the Swedish Financial Supervisory Authority (FSA) to follow new risk factor guidelines aimed to streamline the review.
New Section on Business Strategy & Objectives
A new section describing the issuer’s business strategy and objectives (both financial and non-financial), is introduced. This section should take into account the issuer’s future challenges and prospects, and it goes beyond the current requirement to include exceptional factors relating to the issuer’s operations and principal activities. On the other hand, there is no longer a requirement to include selected financial information. The requirement to include financial and non-financial key performance indicators is maintained. The requirement to include an operational and financial review for the three preceding years is also maintained, though the requirement has been slightly revised, and issuers may incorporate this information by referring to its management reports.
A Note on Profit Forecasts & Profit Estimates
In line with the existing regime, the new regime requires all published profit forecasts and estimates, which are still outstanding and valid, to be included in a prospectus. The prospectus must also state that the profit forecast or estimate has been prepared on a basis both comparable with the annual financial statements and consistent with the issuer’s accounting policies. The good news is that an auditors’ report is no longer required. If a profit forecast or profit estimate has been published and is still outstanding, but no longer valid, the prospectus must include a statement to that effect, as well as an explanation.
Simplified Requirements for Disclosure on Investor Taxation
The current regime includes generic information requirements on the taxation of investors. As a main rule, the new regime only requires the prospectus to contain a warning that the tax legislation of the investor’s member state and of the issuer’s country of incorporation may impact the income received from the securities.
Good News for Secondary Issues on Nasdaq Stockholm & Other Regulated Markets
Issuers listed on a regulated market or SME growth market for at least 18 months may use a simplified prospectus. The content requirements include (1) the annual and half-yearly financial information published in the 12 preceding months, (2) any outstanding and valid profit forecast or estimate, (3) a summary of any Market Abuse Regulation disclosures made in the preceding 12 months, (4) risk factors, and (5) working capital statement, statement of capitalization and indebtedness, relevant conflicts of interest and related party transactions, major shareholders, and pro forma financial information (if relevant).
There is no requirement for an operating and financial review, organizational structure, or for disclosure on capital resources, remuneration and benefits, and board practices. However, issuers should note that a simplified prospectus must meet the general information test (see above under “Prospectus Contents”).
Good News for Growth Companies
The new regulation allows qualifying issuers not traded on a regulated market to prepare a standard, simplified document for offerings to the public — a so-called growth prospectus. These rules will apply to (1) small and medium-sized enterprises (SMEs), (2) other issuers with an average market capitalization of less than €500 million for the prior three years and who are or will be traded on a SME growth market, and (3) other issuers, where the offer does not exceed €20 million over a period of 12 months provided that the issuer is not traded on a multilateral trading facility and that the average number of employees was not more than 499 during the previous year.
Good News for (Very) Frequent Issuers
The new regulation introduces the universal registration document (URD). This will allow issuers listed on a regulated market or multilateral trading facility to file an URD to be approved, even where they do not intend to immediately offer or list securities. The URD will need to be filed annually. For the first two years, it must be approved by the FSA. Thereafter, an issuer may file it without prior approval. An issuer with a URD will benefit from faster prospectus approval process (five rather than 10 working days).
The Time Frame for Reviews is Maintained, but Issuers Must Use New Web Portal
The new regime lays down rules, which aim to streamline the review process between the EU member states. Just as today, the FSA must notify the issuer within 10 working days from the submission of the draft prospectus of its approval (or its comments/questions). In case of an offer to the public, the initial time frame is extended to 20 working days if the issuer does not have any securities admitted to trading on a regulated market or has not previously offered securities to the public.
All communication must be handled via a particular web portal (instead of via email). Issuers will need to create an account and give authority to any advisors who assist with the application.
A Stricter Approach to Marketing Materials
More detailed rules are introduced for advertisements on offers and listings. Any advertisement must include a link to the prospectus. It is also spelled out that all information concerning the offer or the listing, even where not for advertising purposes, must be consistent with the information contained in the prospectus. Also, in the event that material information is addressed to one or more selected investors, such information shall either be disclosed to all other investors to whom the offer is addressed (in the event that a prospectus is not required due to an exemption) or be included in the prospectus or a supplement.
Situations that Trigger a Prospectus Supplement
The new regime requires a prospectus supplement if a significant new factor, material mistake, or material inaccuracy that could influence the assessment of the investment, arises before the closing of the offer or the start of trading on a regulated market. A (non-comprehensive) list of situations where a supplement is mandatory has been introduced.
In line with the current regime, a supplement triggers a right for investors to withdraw from an offer to the public (exercisable within two working days after the publication of the supplement). Financial intermediaries must now inform investors about supplements.
Hope for Non-EU/EEA Issuers
The new regime includes third-country equivalence provisions similar to those under the current regime. These provisions would allow the FSA to approve a prospectus drawn up in accordance with the national legislation of the third-country issuer. However, this requires the EU Commission to adopt an “equivalence decision” — i.e. a decision that the information requirements of the third-country legislation are “equivalent” to the new regulation — which is not likely to happen before August 31, 2020. In addition, the FSA must have concluded cooperation arrangements with the supervisory authorities of the third-country issuer.
REGULATION (EU) 2017/1129 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC
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This communication is for general information only. It is not a full analysis of the matters presented and should not be relied upon as legal advice.