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Prospectus and reporting issues

April 2011

The Prospectus Directive and the Transparency Directive have recently been amended by a further EU directive (“Amending Directive”).

The Amending Directive came into force on 31 December 2010 but will not have force of law in any EU Member State until that Member State passes national laws to give effect to it.  Under the Directive, Member States have until 1 July 2012 to achieve this. In the meantime, consideration needs to be given at the time of an issue or establishment or update of a programme as to whether or not the Amending Directive has yet been implemented in the relevant Member State.

The Amending Directive was published following a review of the practical application of the Prospectus Directive by the EU Commission over the last 2 years. The changes are generally intended to clear up inconsistencies in the existing legislation and to improve the process for issuers wishing to offer and admit securities to trading in the EEA (although the increase in the €50,000 thresholds described below will in some respects have the opposite effect).

We describe below some of the key changes made by the Amending Directive which are most likely to impact on Australian issuers of debt securities in Europe.

Exemptions from the requirement to produce a prospectus and consequential changes to the standard EEA selling restrictions 

Some of the most significant changes introduced by the Amending Directive are the amendments made to Article 3(2) of the Prospectus Directive which sets out the exemptions from the obligation to publish a prospectus when making an offer of securities to the public in the EEA.

The Amending Directive makes the following changes to these exemptions:

  • (a) the exemption for an offer of securities addressed to fewer than 100 natural or legal persons per Member State (excluding qualifying investors) has been expanded to apply to offers addressed to fewer than 150 such persons (“Small Offering Exemption”);
  • (b) the €50,000 (or equivalent) threshold for the exemption for an offer of securities addressed to investors who acquire securities for a total minimum consideration has been increased to €100,000 (or equivalent) per investor per offer thereby limiting the application of that exemption (“Minimum Consideration Exemption”);
  • (c) the exemption for securities with a denomination per unit of at least €50,000 (or equivalent) has similarly been limited in application so as to apply to securities with a denomination per unit of at least €100,000 (or equivalent) (“Minimum Denomination Exemption’).

Therefore, while the changes have broadened the scope of the Small Offering Exemption, they have narrowed the scope of the Minimum Consideration and Minimum Denomination Exemptions which may make it harder for investors to allocate securities between funds as well as preventing issuers from tapping earlier issuances with a €50,000 denomination.

Although these changes have considerably less impact on an issuer who admits securities to trading on an EU regulated market and who is therefore required to publish a prospectus regardless of whether or not an exemption applies, such an issuer will nevertheless need to amend the EEA selling restrictions in its prospectus to reflect these amendments.

To this end, the International Capital Market Association (“ICMA”) has responded to the publication of the Amending Directive by revising its standard form EEA selling restrictions. Given that the changes to the exemptions will not be effective in each of the Member States until implemented by that Member State, the new ICMA standard form has been drafted to deal with both existing exemptions and those that will apply on implementation in the relevant Member State. 

ICMA has not yet published its revised selling restrictions in its handbook but the form is now agreed and can be seen in a number of prospectuses published after 31 December 2010. This new form should be used in all prospectuses going forward.

Additionally, we note that Article 3(2) of the Prospectus Directive contains an exemption for offers made to “qualified investors” and the definition of “qualified investors” has been amended by the Amending Directive to align it with the concept of “professional” under the Markets in Financial Instruments Directive (or “MiFID”). The key elements of the two definitions are very close in concept and the overall impact of the change is likely to be minor.

Wholesale denominations for the purposes of the Prospectus Directive and the Transparency Directive

Another key change is the raising of the threshold for the wholesale issuers’ disclosure and continuing obligations regime.

Currently, in addition to the exemption from publication of a prospectus for high denomination securities, an issuer who issues debt securities with a minimum denomination of €50,000 (or equivalent) enjoys the following benefits:

  • (a) ability to admit securities to a regulated market with a prospectus that is produced in accordance with the reduced disclosure regime available under the “wholesale” annexes of the Prospectus Regulation;
  • (b) less onerous ongoing obligations under the Transparency Directive including an exemption from the financial reporting requirements.

The Amending Directive increases the €50,000 threshold in both cases to €100,000.

Third country issuers (ie issuers outside the EU including Australian issuers) often take advantage of the reduced prospectus disclosure provided by the wholesale regime and will need to increase minimum denominations to €100,000 when issuing in a Member State where the Amending Directive has been implemented.

Third country issuers are also aware of and are generally very keen to avoid triggering the periodic reporting requirements under the Transparency Directive. There are some grandfathering provisions introduced by the Amending Directive which protect securities with a denomination of at least €50,000 (or equivalent) and which are admitted to trading on a regulated market before 31 December 2010. However any issuer wishing to avoid the financial reporting requirements of the Transparency Directive must ensure that debt securities that it issues and admits to trading on a regulated market after 31 December 2010 have a minimum denomination of at least €100,000 (or equivalent) otherwise the Transparency Directive reporting requirements will be triggered once the relevant home Member States implements the Amending Directive into its domestic law.

ICMA did lobby the European Commission on this issue but were unfortunately unsuccessful.

Other

The Amending Directive makes a number of other changes to the Prospectus and Transparency Directives. These are outside the scope of this update but include the abolition of the Annual Information Update; clarification regarding the information permitted to be included in Final Terms; amendments to some of the form and content requirements for the Summary in a prospectus; and some changes to the provisions dealing with Supplementary Prospectuses and the publication requirements for prospectuses.

Author(s)

  • Sophie Chalton
    Senior Associate | London
    T: +44 20 7496 1700
    M: +44 7917 421 539
    Email
 

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