European Union Prospectus and Transparency Directives

By Christopher McFadzean, Mark R. Cannon and Dipti Thakar

Executive Summary

Introduction

The new EU Prospectus Directive (the Prospectus Directive) has been published December 31, 2003 in the Official Journal of the European Community with certain of its provisions taking effect as of this date. The Prospectus Directive is the first directive to be implemented under the EU Financial Services Action Plan and EU member states are expected to bring it into legal effect by July 1, 2005. The Plan also includes the Transparency Directive and is designed to create a single pan-European capital market that issuers and investors will be able to access efficiently. The Transparency Directive, which is still in draft form, introduces financial public reporting requirements (see International Accounting Standards and Public Reporting) which will affect companies incorporated in the EU (EU issuers) and companies incorporated outside the EU (non-EU issuers). These requirements are intended to increase investor confidence in securities traded on regulated markets. As referred to in Background and Timing of the Legislative Process, below, many of the detailed provisions have yet to be finalised and approved and, as a result, there are more questions than can be currently answered. However, the purpose of this note is to give both EU and non-EU issuers a summary of the key provisions intended to come into effect. In particular, the following issues are causing concern:

Financial statements will need to be prepared to International Accounting Standards (IAS) and International Standards on Auditing will apply, unless for non-EU issuers the European Commission deems other accounting standards as "equivalent." No decision is likely before mid-2004.

Harmonization of prospectus requirements across Europe may mean there is little scope for flexibility by individual national authorities.

Potentially increased liability in all EU member states may mean that preparation of a prospectus is more costly and time-consuming.

Restrictions on the choice of regulatory jurisdiction to review and approve prospectuses as regards equity and equity-linked securities and low denomination debt issues.

Tougher on-going disclosure and officer certification requirements for prospectuses and accounts may be burdensome and costly to comply with and will carry an increased risk of liability for issuers and their directors.

Ambit of the Prospectus Directive

Under the Prospectus Directive, if securities are to be admitted to trading on a "regulated market" (see Glossary) in the EU, a prospectus will be required. Otherwise, a prospectus is only required to be prepared and approved if there is a non-exempt offer to the public in the EU. The exemptions available for securities which are not admitted to trading on a regulated market apply to (i) offers made to qualified investors; (ii) private placements to fewer than 100 persons per EU member state; (iii) offers of securities in denominations of at least Ä 50,000; and (iv) offers where the minimum subscription is at least Ä 50,000 per subscriber. In addition, issuers will be subject to standardized prospectus disclosure requirements and continuing disclosure obligations (see Impact of the Prospectus Directive).

Restricted Choice of Regulator

EU issuers which issue equity, equity-linked securities (including convertible bonds) and low-denomination debt securities (i.e. denominations of less than Ä 1,000, or the near equivalent in any other currency) (together Relevant Securities) that are to be offered to the public or listed within the EU will have their home member state as their home competent authority. Non-EU issuers which issue Relevant Securities will only have one opportunity effective from December 31, 2003 to choose the country (the home member state) where their prospectuses are approved, and where they file their ongoing disclosure, for all such Relevant Securities in the future. This will be a permanent choice and there will be no flexibility after the initial choice is made, unless the issuer de-lists the Relevant Securities and re-lists in another EU member state. All issuers will continue to have free choice of EU jurisdiction for the approval of prospectuses relating to debt securities with denominations of Ä 1,000 or more (or the near equivalent) but note that this exemption does not apply with respect to equity or equity-linked securities (see New Prospectus Regime).

Harmonization and Increased Liability

The Prospectus Directive harmonises requirements for the content and approval process for prospectuses across the EU. It greatly enhances the ability of issuers to have their securities offered to the public in each EU member state. However, this will also lead to issuers being exposed to liability for their prospectuses in all EU member states (see Mutual Recognition).

Financial Requirements

The proposed Transparency Directive will require issuers to make publicly available IAS financial statements (with an exception for non-EU companies if the accounting standards are regarded as "equivalent" by the European Commission). All issuers with retail securities admitted to trading will be required to make publicly available, at least, their annual report and half-yearly financial information under standards acceptable under the EU Regulation on the Application of International Accounting Standards (the IAS Regulation) (this does not apply if the issuer has only debt securities with a denomination of at least Ä 50,000 admitted to trading on a regulated market). In addition, issuers with shares admitted to trading on a regulated market will be required to publish quarterly financial information. A tight timetable is laid down for the publication of these periodic reports. They must be published as soon as possible, and in any event within 90 days of the period end in the case of annual financial statements, and within 60 days of the period end in the case of half-yearly and quarterly financial statements (see International Accounting Standards).

Impact on High Yield Debt

Most high yield bond offerings are made pursuant to exemptions from public offer rules and commonly only after closing are they listed on a regulated market. This process should be unaffected by the Prospectus Directive. Issues may arise in the disclosure requirements for the bonds from the fact that these bonds fall into the retail securities definition and hence require extensive disclosures in a prospectus. Also, for the first time, periodic disclosure requirements are made of high yield bond issuers (see Impact on High Yield Market below).

Background

The Prospectus Directive is a framework directive which sets out the major principles (Level 1) and has been approved and finalised by the European Commission (through its European Securities Committee) which has ultimate authority over the content of the Prospectus Directive. EU member states are expected to bring the Prospectus Directive into legal effect by July 1, 2005. More detailed requirements for prospectuses (Level 2 Advice) will be adopted on the basis of advice given by the Committee of European Securities Regulators (CESR) following public consultation. Several sets of recommendations have been produced to date by CESR. The Commission has until the end of June 2004 to produce final Level 2 Advice. The Level 2 Advice will then be supplemented by further guidance from CESR. It will therefore be after June 2004 that the full practical effects of the Prospectus Directive will be confirmed. The final stage in the legislative process is the adoption of implementing laws or regulations in each EU member state.

The following outlines the Prospectus Directive's main requirements and considers the impact on offers of securities and admission to trading. (References to Articles are to Articles in the Prospectus Directive unless otherwise stated.)

Impact of the Prospectus Directive

The Prospectus Directive deals with securities that are admitted to trading on a "regulated market" (see Glossary) and securities that are offered to the public in any EU member state.

Securities Trading on a Regulated Market

Many of the key provisions of the new regime relate to issues of securities admitted to trading on an EU "regulated market," including securities traded on domestic "secondary" markets which are not currently regarded as admitted to official listing (Article 3(3)). London's secondary equities exchange for small cap companies, AIM, is currently finalising plans to opt out of the Prospectus Directive and the London Stock Exchange is in the process of changing the status of AIM so that it no longer qualifies as a "regulated market."

Issuers applying for any securities to be admitted to trading on a regulated market will be required to prepare a prospectus and will be subject to standardised accounting requirements and continuing disclosure obligations. The new regime applies irrespective of whether the securities are actively traded on the market concerned.

A number of exemptions from the obligation to publish a prospectus for certain issues of securities will continue to apply (Article 4(1)-(2)). For example, accelerated placing with professional investors can still be made without a prospectus for offers of up to 10 percent of the number of shares already admitted to trading on the relevant regulated market (Article 4(2)(a)).

Offering of Securities to the PublicóUnlisted Securities

The Prospectus Directive requires that, where securities are not admitted to trading on a regulated market but are offered to the public in any EU member state, a prospectus must be produced by the person making the offer. However, there are a number of exemptions available from the obligation to produce a prospectus.

A prospectus will not be required (unless admission to trading on a regulated market is sought) for:

Offers made to qualified investors. This is the...

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