Legislative framework
Primary EU legislation
The Prospectus Regulation repeals and replaces the Prospectus Directive (“PD”) in its entirety. Two further regulations, which also came into force on 21 July, contain additional details (together the “Delegated Regulations”) and replace the PD delegated regulations:
- Delegated Regulation (2019/980), containing provisions relating to the format, content, scrutiny and approval of prospectuses. The ‘building blocks’ annexes can be found here; and
- Delegated Regulation (2019/979), containing regulatory technical standards (“RTS”) on key financial information in the summary of a prospectus, the publication and classification of prospectuses, advertisements for securities, supplements to a prospectus, and the notification portal.
UK rules and guidance
The Prospectus Regulation is directly applicable in the UK without the need for implementation, but the FCA has introduced new rules – the Prospectus Regulation Rules (“PRR”), which have replaced the previous prospectus rules – to make sure its Handbook stays up to date. The FCA published the final PRR earlier in the month. The PRR is, broadly, a copy out of the provisions contained in the Prospectus Regulation and Delegated Regulations. The Financial Services and Markets Act 2000 has also been amended to align it with the Prospectus Regulation.
The FCA’s Knowledge Base materials (such as technical notes and procedural notes) are based on the provisions of UK national law implementing the old PD; the FCA has stated that it will publish revised materials to reflect the requirements of the Prospectus Regulation in autumn 2019. In the meantime, the guidance provided by the current materials should be applied to the extent it is compatible with the Prospectus Regulation.
ESMA guidance
It is important to note that certain ESMA guidance will still be relevant. Guidance has been published in respect of the new rules on risk factors (see further information below) alongside technical advice on the simplified disclosure requirements where there is a merger or takeover. New ESMA Q&As have also been introduced and ESMA is continuing to analyse certain of the old Prospective Directive Q&As in terms of whether they should be carried forward.
ESMA proposes to introduce new guidelines in two areas in relation to investment funds:
- when a fund uses securities financing transactions (“SFT”) and total return swaps other than for the purposes of efficient portfolio management, certain disclosures should be made (so as to align the prospectus disclosure requirements with those in the SFT regulation); and
- guidance to clarify what the ‘brief description’ of the entity providing investment advice should entail. The rationale for the inclusion of this new draft guideline is that a basic level of transparency should be provided in relation to an entity that can influence the use of a fund’s assets.
ESMA states that the remaining guidance in relation to funds contains only some minor adjustments which is not intended to impact the substance of what is currently contained in the CESR recommendations.
Longer term, the European Commission has requested ESMA to provide technical advice, by 31 August 2020 or sooner, of equivalent criteria for prospectuses drawn up under the laws of third countries.
Live transactions
Prospectuses which were approved prior to 21 July 2019 will remain valid for up to 12 months (or the end date of the existing placing programme, if earlier). Supplementary prospectus issued on or after 21 July 2019 in relation to a prospectus approved before that date will need to address only old regime’s requirements rather than the provisions of the Prospectus Regulation.
Going forward, (as confirmed by the FCA in an Update published on 5 July), any issuer seeking approval of a draft prospectus must do so under the new regime. Applications submitted to the FCA containing draft prospectuses that have been prepared in accordance with the pre-21 July regime will not be valid and will not be approved: in practice, the approval process for any prospectus dated under the old rules will now start again.
The Update also confirms that issuers and their advisors should update references to the new Prospectus Regulation Rules where required – for example, referencing the right exemptions when applying for admission to the Official List.
There are new FCA checklists for documents being submitted for approval under the new regime. The approval process remains unchanged. There will, however, be a new requirement for issuers to send to the FCA a “data checklist” (including the issuer’s LEI and information about the securities), so that the FCA can submit this information to ESMA. However, as ESMA has advised that it does not require the full data set to be submitted at present, the FCA has confirmed that it is currently making only limited changes to its electronic submission portal for the submission of documents, and issuers and their advisers should continue to use existing processes for the time being.
Content requirements
General disclosure standard
New wording has been introduced into the disclosure test; a prospectus must now contain necessary information which is ‘material’ to an investor in relation to it making an informed assessment. The scope of information specifically stated in the disclosure standard has been also widened to include “the reasons for the issuance and its impact on the issuer”. Although the principle of disclosure remains the same, the changes should encourage more focussed disclosure.
Summary – form and content
A key change is to the rules relating to the preparation of the summary of the prospectus. The content requirements under the new regime are far more prescriptive than they were before.
The summary must:
- be written and presented in a concise manner, and read as an introduction to the prospectus;
- follow a new question-style format (i.e. it is no longer a requirement to present the summary in tabular form);
- include the most material risk factors (specific to issuer and securities), with a total maximum limit of 15 risk factors; and
- be accurate, fair, clear and not misleading. Recital 31 of the Prospectus Regulation states that issuers have discretion in selecting the information that they deem to be material and meaningful for inclusion in the summary.
The summary must now be split into four sections. The Prospectus Regulation stipulates the content requirements for each:
- Introduction;
- Issuer key information;
- Securities key information; and
- Offer key information.
There is new page limit, seven sides of A4 (previously, the limit was 7% of a prospectus, or 15 pages, whichever was longer).
The introduction section must include a warning to investors about the potential loss of their investment.
There are new restrictions on how key financial information is presented in the summary. The information must be presented in accordance with tables set out in the RTS contained in Delegated Regulation (2019/979), which vary depending on the type of issuer and the securities being issued. Closed ended funds are required to provide the information contained in the table at Annex VI. For listed funds, it is now required to have separate line items in the summary financial disclosures showing accrued and paid management and performance fees.
Where an issuer does not have an item appearing in a table in its financials (which is likely to be the case in respect of accrued fees) it may substitute the corresponding item from its accounts. Issuers are also permitted to include additional line items or alternative performance measures.
Risk factors
The disclosure regime in respect of risk factors has changed, with the aim of making the risk factor section of a prospectus shorter and more relevant. Under the new regime, risk factors should be limited to those risks specific to the issuer or the securities in question which are material to making an informed investment decision.
In addition, risk factors must be:
- adequately described;
- corroborated by information elsewhere in the prospectus; this is in contrast to current practice where risk factors are sometimes on topics not covered elsewhere in the prospectus; and
- presented in no more than ten categories, with the most material risk included first in each category. “Material” for this purpose will need to take into account the probability of occurrence and expected magnitude of a negative impact.
The approach taken in the new regime is akin to the UK’s current approach i.e. an increased focus on specific, material and tailored risk factors. In its current technical note on risk factors, the FCA states that risk factors should be presented and grouped in a coherent manner, and those considered to be of the greatest significance should be prominently placed at the beginning of each section or group within the ‘risk factors’ section.
ESMA has published new guidelines on risk factors. ESMA’s guidelines are designed to assist competent authorities; however in practice they should also be considered by those responsible for drafting risk factors. The guidelines propose that competent authorities should challenge the inclusion of risk factors that have not been drafted specifically for the issuer or securities or are generic and only serve a disclaimers or where there is no direct link between the issuer or the securities and the risk factor.
The guidelines contain some useful practical drafting points:
- a risk factor should only appear once, in the most appropriate category;
- whilst the most material risk factors have to be presented first, it is not mandatory for all remaining risk factors within each category to be ranked in order of materiality;
- category headings should be easily identifiable, i.e. appropriate spacing and in bold;
- sub-categories should only be used where inclusion can be justified – the example given in ESMA’s
guidance is where there are multiple types of securities. This would be relevant for C share issues; and
- ESMA states that risk factors should be amended where mitigating language is included which obscures the
remaining risk.
More time is likely to be spent in preparing this section of the prospectus, which will be under increased scrutiny. The real impact will be seen once the FCA’s new approach to risk factors becomes clear. In practice, balancing the Prospectus Regulation requirements and 10 b 5 disclosure standards and practices where there is an offer to institutions in the United States may prove to be difficult.
Building Blocks
The Annexes which formed part of the old regime, and which governed the content of the main body prospectuses, have also been repealed and replaced. Although the Annexes have been rewritten, there are not many substantive differences.
