Overhaul of prospectus rules

1 Dec 2015 11:55 AM

Small and medium-sized companies in particular will find it easier to raise funding when issuing shares or debt. Companies already listed on public markets will also benefit when they want to list additional shares or issue corporate bonds.

As part of its Capital Markets Union action plan, the European Commission has yesterday proposed an overhaul of the rules that allow companies to raise money on public markets or by means of a public offer with potential investors. The prospectus rules proposed yesterday will enable investors to make informed investment decisions, simplify the rules for companies that wish to issue shares or debt and foster cross-border investments in the Single Market. This is also an important measure in order to improve the regulatory environment for investments in the European Union, as announced in the Investment Plan for Europe. The Capital Markets Union is a project to unlock funding for businesses and provide more opportunities for investors in the EU. This proposal is also part of the Commission's commitment to simplify and make EU laws more effective and efficient.

Almost all companies that want to raise money from the public need to provide investors with a prospectus. A prospectus is a legal document that describes the company, its main line of business, its finances and shareholding structure. It contains the information an investor needs to have before making a decision whether to invest in the company.

The EU prospectus rules contain a set of disclosures so that investors across the European Union can benefit from the same level of information on companies that want to raise capital. Aligning disclosure standards aims to make it easier to invest cross border.

However, prospectuses can also be costly and burdensome for companies, especially smaller ones, to produce, often requiring hundreds of pages of detailed information. For investors, it can prove difficult to wade through very detailed information.

Commissioner for Financial Stability, Financial Services and Capital Markets Union Jonathan Hill said: "We need a prospectus regime that gives investors the information they need, but that does not pile up unnecessary costs and put companies off raising money on the public markets. Yesterday's proposal strikes a better balance. It will make the system simpler, cheaper and quicker. It will safeguard investors, while making it easier for small and medium-sized enterprises and other businesses to raise money."

The proposal will make the following changes:

Exempting the smallest capital raisings: There will be a higher threshold to determine when companies must issue a prospectus. No EU prospectus will be required for capital raisings below €500,000 (up from €100,000), providing much needed breathing space for many SMEs. Member States will also be able to set higher thresholds for their domestic markets, and we will double this threshold from €5m to €10m.

Creating a lighter prospectus for smaller companies:SMEs need a regime adapted to their needs and the needs of their investors, so that they can produce prospectuses without incurring costs that are not proportionate to the size of the fundraising or the benefits to investors. For smaller issuers who want to tap European markets, we will therefore create a genuinely lighter regime for less complex prospectuses. We will also double the existing threshold for SMEs who can take advantage of it – from €100m market capitalisation to €200m.

Shorter prospectuses and better investor information: The prospectus summary is often quite long and is written in complicated legal language that is not useful for most individual investors. It adds costs for companies without meaningful benefit for investors. We will take action to support shorter and clearer prospectuses by specifying more clearly the amount of information that is needed.

Simplifying secondary issuance for listed firms: Companies already listed on a public market that want to issue additional shares or raise debt (corporate bonds) will benefit from a new, simplified prospectus. This provides more flexibility and less paperwork for those companies that wish to tap into capital markets more than once. Currently, 70% of prospectuses approved annually are so-called secondary issuances for firms already listed on a public market.

Fast track and simplified frequent issuer regime: Companies that frequently tap into capital markets will also be able to use an annual "Universal Registration Document" (URD), a sort of "shelf registration" containing all the necessary information on the company that wants to list shares or issue debt. Issuers who regularly maintain an updated URD with their supervisors will benefit from a 5 day fast-track approval when they actually want to tap into capital markets by issuing shares, bonds or derivatives.

Single access point for all EU prospectuses: The European Securities and Markets Authority (ESMA) will for the first time provide free and searchable online access to all prospectuses approved in the European Economic Area. Investors will benefit as they will have a single portal where they can find information on companies that have listed shares or corporate bonds on markets where the general public can invest.

It now goes to the European Parliament and the Council of the EU (Member States) for discussion and adoption.

Background

The current Prospectus Directive 2003/71/EC harmonises rules for publishing prospectuses when companies want to raise capital either by listing shares or by offering investment opportunities to the general public. The Prospectus Directive was adopted in 2003 and revised in 2009 in order to make it easier and cheaper for companies to raise capital throughout the Union. Once a prospectus is approved by a supervisor in one Member State it can be used to list shares or issue corporate bonds and derivatives in all other Member States.

The Directive also ensures harmonised minimum protection for investors by guaranteeing that all prospectuses, wherever they are published, provide them with the clear, comprehensive and standardised information they need to decide whether they want to invest in a company. Investors therefore benefit from common EU standards for prospectus disclosures that enable them to invest with confidence in companies across the Union.

However, feedback from a Commission consultation conducted in 2015 pointed to shortcomings in the Directive. For companies, the current rules constitute a lot of legal paperwork often running into hundreds of pages. The information is often presented in legal terminology difficult to understand for many investors. This creates uncertainty and runs counter to the CMU objective of making capital markets more accessible for investors.

This proposal addresses these weaknesses whilst ensuring an appropriate level of disclosures formulated in clear and accessible language. By turning the current Directive into a Regulation, a more streamlined and coherent approach will be ensured across the Union, reducing national fragmentation, as well as the scope for differences in national implementation.

For more information

The proposed Regulation is a key action of the Capital Markets Union:

Capital Markets Union Action Plan press release & memo

More information on the review of the prospectus regime