Practical guide: Drafting prospectuses under the new prospectus regulation

Summaries

As before the implementation of the new regulations, the summary is included to provide the key information investors need to understand the nature and risks of the issuer and the securities being offered or admitted to trading and, in essence, must be composed of four key sections:

• An introduction, containing warnings;
• Key information on the issuer;
• Key information on the securities;
• Key information on the offer and/or admission.

In addition there are specific content requirements that expand the information under each of the four key headings.

Whilst the basic requirement for the summary is quite prescriptive, we have seen a number of different approaches to tackling these. At MC we have moved to a more ‘discursive’ style where the prescribed information is set out under the key headings, in some cases as responses to a number of questions. This is intended to make the summary more user-friendly and more akin to the traditional format of the ‘Additional Information’ section of the prospectus.  Other issuers have retained the traditional ‘table’ form, with each element of the prescribed information set out more rigidly.

What is apparent is that as long as the right information is there and is easily read, there is no right or wrong way and the style is largely the issuer’s choice. In practice this change is not as significant as may have been anticipated.

One key point to remember is that the total number of risk factors which may be contained in the summary cannot be more than 15 and they should reflect the order set out in the main body of the risk factor section of the prospectus.

Risk factors

One of the biggest changes under the prospectus regulations was to the ‘risk factor’ section of the prospectus. Emphasis was placed on ensuring the risk factors acted not as a generic disclaimer, but to ensure that investors can assess the relevant risks and can therefore make informed investment decisions in full knowledge of the facts.

In so doing, greater emphasis was placed on ensuring issuers made risk factors more focused and specific to the issuer as well as emphasising the importance of describing the materiality of that risk.

Whilst we have undoubtedly seen a change in approach from the regulator as a consequence of these changes, in practice this has not been as far reaching as some may have feared and our experience is that risk factors largely reflect the way the market was moving pre-implementation of the new regulations.

Focus on materiality

Undoubtedly, risk factors must be specific and relevant to the issuer but this has been the case for a while. In our view, the biggest change has been the emphasis on the assessment of the materiality of each risk factors based on both probability and expected magnitude as well as ensuring that this is reflected more broadly in the document.

This approach mirrors the stated goal of moving away from ‘disclaimer’ style risk factors. After all, if an issuer struggles to assess the materiality of the risk to its business, it is more likely that this is drifting into disclaimer territory.

This emphasis on assessment of materiality is important both within the risk factor itself but also in reflecting this risk more generally in the body of the prospectus. If a risk is fairly prominent in the risk factor section, it must be addressed in the main body of the document where relevant to the discussion of the issuer’s business and its impact and mitigation discussed.

Increased specificity

We have seen greater emphasis on including detail in the risk factors that we would previously have not have included where it was previously sufficient simply to flag the risk. As an example, where an issuer notes that licences will be required in order to develop the business, there is an emphasis on identifying the detail of those licences, to what they relate and the timing of any applications and the likelihood of their grant.

Approach to drafting

As with the summary, we have seen issuers take a variety of approaches with risk factors. On the whole, issuers have used drafting which reflects previous ‘UK’ formats, bearing in mind the greater emphasis on materiality and, whilst some issuers have elected to categorise risk factors (i.e. low, medium, or high) this has by no means been universally adopted. Other issuers have sought to reflect a more US style of drafting reflecting risk factors used by issuers making SEC filings.

Whilst we have seen that both approaches have been accepted, the emphasis on relevance, specificity and materiality should undoubtedly be central in any drafting.

Pre-adoption, there was a concern that issuers would no longer be allowed to rely on ‘industry standard’ risk factors which caused some concern particularly for dual-listed issuers who would be disclosing risks in one jurisdiction (i.e. Canada, Australia) but would be prohibited from doing so in London. This concern appears to be unfounded and there is acknowledgement that issuers operating within the same industry may be exposed to similar risks and therefore disclosure related to these types of issuers can indeed be similar. That being said, issuers must take into account how those risks would affect it specifically in relation to its business, size, market etc. and this should be reflected in the drafting.

ESMA guidance

On 1 October ESMA published additional guidance to assist competent authorities when reviewing the specificity, materiality and presentation of risks factors which is available here.

In 2019, Memery Crystal has been one of the most active advisers to issuers seeking admission to the Main Market and has completed a number of successful IPOs since the implementation of the new regulations. The above is intended only as a general guide based on our experience to date, but we would be happy to assist with any queries.