The EU Capital Markets Union: from a Prospectus Directive to a Regulation

Early this year, the European Union (EU) leaders gathered in Rome to celebrate the 60^th anniversary of the Treaty of Rome. Many consider this Treaty as a major stepping stone in the creation of the EU since it focused overwhelmingly on economic co-operation and the freedom to move goods, capital and people. An important European project emanating from the principles of the Treaty of Rome and which marked the beginning of a new phase for the European capital markets was launched on 30 September 2015. Accordingly, on this date, the European Commission (EC) published its action plan for a Capital Markets Union (CMU) which was mainly intended to kick-start growth in Europe by revitalising the capital markets while at the same time maintaining stability.

But why is the CMU initiative so vital for the financial stability of the EU? The EC recognised that companies in Europe remain largely reliant on bank financing, which made them vulnerable during the financial crisis when banks limited their lending to businesses. The CMU is therefore intended to reduce or eliminate obstacles to cross-border investment, and to make the capital markets more accessible to small and medium-sized enterprises (SMEs) as an alternative to bank borrowings.

From the early stages of the CMU project, the EC has identified a list of key changes intended to be targeted in the immediate term. In this respect, on 30 November 2015, the EC proposed a reform of both the Prospectus Directive 2003/71/EC and the supplemental EU Regulation 809/2004 (the latter prescribes the form and content of a prospectus required by the Directive) with the aim of introducing a lighter, less burdensome prospectus regime.

While the existing Prospectus Directive has worked relatively well since 2005, the EC recognised that it has created some legal uncertainties and imposed some burdensome requirements, leading to increased costs and the creation of inefficiencies, which could impede the process of raising funds on the securities markets in the EU. In particular, it has been acknowledged that since the existing European prospectus regime derives from a Directive, which had to be transposed into domestic law by member states, there has been some divergence among member states in how its provisions have been interpreted in the transposing legislation. Consequently, a decision was taken that the existing framework should be replaced with a new, directly effective Prospectus Regulation, which, as an EU Regulation, as opposed to a Directive, will not require the passing of implementing legislation at member state level (this is a similar process to that which led to the replacement of the old Market Abuse Directive last year with a new directly effective Market Abuse Regulation). Accordingly, on 8 June 2016, the European Parliament, the EU Council and the EC agreed on a revamped EU prospectus regime, ensuring that the facilitation of the approval process makes it easier for companies to raise capital throughout the EU, reduce costs involved and simplify information for investors. On 5 April 2017, the proposal for the new Prospectus Regulation was approved by the European Parliament and on 20 July 2017 (after its publication in the Official Journal on 30 June 2017), the new Prospectus Regulation entered into force.

The provisions of the new Prospectus Regulation will begin applying on a rolling basis, with full application from 21 July 2019. The new Regulation includes several changes relevant for both equity and debt capital market transactions which relate to prospectus exemptions and the content and format of prospectuses.

One key change emanating from the new Prospectus Regulation relates to the exemptions under which no prospectus is required for the public offering of securities or the admission of securities to trading on a regulated market, in particular: (i) for the listing of securities which are fungible with securities already admitted to trading on the same regulated market, if the new securities represent less than 20 per cent (previous threshold had been 10 per cent) of the securities already listed over a 12-month period (this change entered into force on 20 July 2017); and (ii) for small offerings, which will only be exempt if they are for a total consideration of €1 million or less over a 12-month period (previously €2.5 million). This threshold may be increased to an upper limit of €8 million for the same period at the discretion of Member States (previously the upper threshold was €5 million). Member States can require other disclosure requirements at the national level for issues not exceeding the threshold if they are not unnecessarily burdensome. This requirement will take effect 12 months from the date the Regulation enters into force (i.e. in the third quarter of 2018).

Another key change to the prospectus regime will target SMEs where they will be able to use a simplified EU Growth Prospectus. This new concept will allow certain qualifying entities to benefit from lower disclosure obligations than under a standard prospectus. The EC is currently consulting the European Securities and Markets Authority (ESMA) and the wider market on the content and format of the EU Growth Prospectus. This consultation will close on 28 September 2017.

An important update resulting from the new Prospectus Regulation relates to the form and content of the summary note. Key changes are that the summary note will be shortened to a maximum length of seven pages of A4 written in a concise manner. Moreover, it can only contain the 15 most material risk factors specific to the issuer (cross-references to other sections remain prohibited). The summary has to comprise four sections – (i) an introduction containing warnings; (ii) key information on the issuer; (iii) key information on the securities; and (iv) key information on the offer itself and/or the admission to trading. For each of the sections, the new Prospectus Regulation introduces a number of subsections with specific content requirements. Among others, the section regarding key information on the issuer will contain a subsection covering the key financial information regarding the issuer, consisting of a selection of historical key financial information, whose content and format has to be developed further by ESMA during the consultation period which closes on 28 September 2017.

Another change to the prospectus regime is the introduction by ESMA of a free and searchable online database containing all prospectuses approved in the European Economic Area (EEA) and related documents. This has been in the making for a number of years and will be quite significant in practice, as it will make it much easier to access prospectuses for offerings across the EU on one platform. The intention is to assist consumers in taking investment decisions by allowing a more thorough comparison of investment products. Issuers will still be required to provide a free paper copy of the prospectus to anyone who requests it.

In the coming months, the EC and ESMA are to develop several implementing rules and standards required by the new Regulation. As a result, in addition to the above mentioned consultations, the EC is also consulting ESMA and the wider market on the format and content of the prospectus, and the scrutiny and approval process of the prospectus. The consultation period closes on 28 September 2017, and ESMA plans to deliver the technical advice to the EC by 31 March 2018. It is anticipated that the bulk of the new proposed Prospectus Regulation will be in place by 2019.

However, Brexit is posing a challenge to the CMU initiative. In fact, this has recently forced the EU to rethink its flagship project. On the one hand, it is a major challenge for the CMU given the importance of the City of London for EU capital markets. On the other hand, Brexit has prompted the need to further strengthen and integrate EU capital markets and EU-wide supervision to achieve the ambitious project.

In conclusion, the new Prospectus Regulation will change current prospectus rules and practice for both equity and debt issuances and will contribute to a more uniform European prospectus regime. It remains to be seen how ESMA and the EC will shape a number of the Regulation’s provisions in further implementing acts, and how all the new rules will be applied in practice from 2019.

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