Final Changes to the Prospectus Regime – New Prospectus Regulation in full effect from 21 July 2019

The key changes will be the following:

• A prospectus will not be required where securities are offered to the public in the context of a takeover, merger or division, provided that a document is made available containing information on the number and nature of the shares and the reasons for and details of the offer or allotment (Article 1).
• The exemption from publishing a prospectus where shares are offered, allotted or to be allotted to directors and employees will no longer be limited to issuers that have a head or registered office in the EU, have securities admitted to trading on a regulated market, or have securities admitted to trading on a third country market with approved equivalence (Article 1).
• A universal registration document may be prepared by issuers whose securities are admitted to trading on a regulated market or MTF. If a universal registration document has been approved by a competent authority (in the UK, the UK Financial Conduct Authority (“FCA”)) for 2 consecutive years, in the third and following years (provided no year of filing is missed) it may be filed without review (Article 9).
• A proportionate disclosure regime is available for secondary issues and an EU Growth prospectus regime for offers of securities to the public by certain parties that do not already have securities admitted to trading on a regulated market (Articles 14 and 15).
• There is an expansion of the range of information which may be incorporated by reference into a prospectus, such as information in existing prospectuses, information under the Transparency Directive and Market Abuse Regulation, annual and interim financial information, audit reports and financial statements, asset valuation reports and constitutional documents (Article 19).

In terms of changes to prospectus content, the significant changes are as follows:

Prospectus summaries

Under Article 7, the prospectus summary structure and requirements are to be amended.

The summary shall provide the key information investors need to understand the nature and risks of the issuer and the securities being offered or admitted to trading. The summary should be read together with the other parts of the prospectus.

No summary is required where the prospectus relates to specified non-equity securities.

The summary is to be written in a concise manner with a maximum length of 7 sides of A4-sized paper when printed, the mandatory table and referencing structure has been removed.

The summary must be laid out in a way which is easy to read with characters of a readable size in language which is clear, non-technical, concise and comprehensible for investors.

The summary shall be made up of the following four sections:

• An introduction, containing warnings;
• Key information on the issuer;
• Key information on the securities;
• Key information on the offer of the securities to the public and/or admission to trading on a regulated market.

Articles 7(5) to 7(8) provide for certain specific/minimum content requirements which must be met for each of these four sections.

The total number of risk factors which may be contained in the summary cannot be more than 15; therefore the issuer and its advisers could be faced with a choice as to which of the risk factors are most significant and/or likely to occur.

The summary may not contain cross-references to other parts of the prospectus or incorporate information by reference.

Risk factors

Due to a perception that a “one size fits all” approach has been taken to risk factors, the New Prospectus Regulation will require issuers to be more focussed and specific in describing risk factors and to quantify and allocate likelihood of the relevant risk materialising.

Article 16 provides that risk factors shall be limited to risks which are specific and material to the issuer and its securities, as supported by the registration document and securities note.

The issuer must assess the materiality of the risk factors based on:

• probability of their occurrence; and
• the expected magnitude of their negative impact.

The intended format is for each risk factor to be described in sufficient detail with a subsequent paragraph then assessing the materiality of the risk factor, this could (but does not need to) include allocating a scale of low, medium or high.

Risk factors are to be presented in a limited number of categories by reference to their nature, with the most material risk factors mentioned first.

ESMA has published guidelines to assist competent authorities in their review or analysis of risk factors, under these new requirements. In summary, the guidelines suggest that:

• While there are a number of risk factors which may be common to issuers and their securities within the same industry, the size, market share or industry specific sector is likely to mean that issuers are affected differently and therefore these differences should be reflected in each risk factor.
• The inclusion of risk factors which appear to only serve as disclaimers should be challenged.
• The risk factor must include a level of materiality. While the competent authority’s role is not to assess the materiality of the risks, it should ensure that the materiality of the risk factor is disclosed, as should the potential negative impact of the risk factor on the issuer and/or the securities.
• Risk factors which contain excessive or inappropriate mitigating language should be challenged, especially where such language confuses or complicates the understanding of the probability of its occurrence.
• The materiality and specificity of the risk factor must be supported by information contained in other parts of the prospectus or the overall picture of the issuer.
• Risk factors should be presented by category, with those of highest risk stated first. A risk factor should only appear once.
• Competent authorities should challenge the size of risk factors, indicating that they should be drafted to be concise and relevant.
• Presentation of the risk factors in the summary should be consistent with the approach taken as to materiality given to them in the risk factor section.

The FCA has made available supporting documentation to reflect the final changes being made by the New Prospectus Regulation.

Now that we are only a few months away from the final implementation of the New EU Prospectus Regulation, issuers and advisers will need to carefully consider transaction structure and timetable to determine whether they should be preparing a prospectus or implementing a transaction in accordance with the new regime.