The Prospectus Regime – so called PD III – applies to prospectuses where securities are being offered to the public in the European Union (EU) and/or traded on a regulated market. The PD III regime introduces significant changes to risk factors and summaries and a range of changes to disclosure requirements more generally.
We set out below some brief answers to some frequently asked questions regarding PD III. These should be considered together with our podcast and article, each of which contains more detail on this topic.
- The EU Commission promised a change of course in its approach to risk factors – how has this played out?
- What are the headline points that issuers of shares need to know on the changes to the Summary requirements?
- How have the general disclosure requirements changed?
- How have the rules regarding profit forecasts changed?
- What is the secondary issuance regime and how might it be used in an equity capital markets context?
- Has the approach to scrutiny and approval by Competent Authorities changed?
- Are there any operational issues arising from the PD III regime?
- How have the publication requirements changed?
- Has the supplements regime changed?
- Are there any changes to the advertisements regime that market participants should be aware of?
The EU Commission promised a change of course in its approach to risk factors – how has this played out?
The approach to risk factors is one of the most significant areas of change. The EU Commission and the European Securities and Markets Authority (ESMA) have both indicated that a change of course is needed. As is the case under the current rules, risk factors are required to be material and specific. The most material risk factors should be placed first.
In addition, risks should be substantiated by the contents of the prospectus and backed up by quantitative information where possible. An issuer may also disclose its assessment on a scale of low, medium or high (although this is not mandatory).
PD III introduced specific limitations on the number of categories of risk factors that may be included. A standard single security prospectus, such as a typical prospectus for equity, should not have more than ten categories and sub-categories of risks in total.
In addition, competent authorities may challenge issuers if they are not satisfied with the information provided, for example if the section is deemed to be incomprehensibly long.
The guidelines preserve some flexibility for competent authorities when it comes to setting out risk factors. Indeed, we are already seeing some inconsistency in approach between different jurisdictions in terms of how much of an overhaul of risk factor disclosure is expected.
Much depends on the approach of different competent authorities (some of whom may have regarded their review of risk factors under the previous regime as already compliant with ESMA’s Guidelines on Risk Factors). Many of the shares issues that A&O advise on are prepared to US standards, as a distribution into the US is common for larger size deals. It is therefore helpful that ESMA’s Guidelines are consistent with US Rule 144A practice.
What are the headline points that issuers of shares need to know on the changes to the Summary requirements?
Summaries look quite different under PD III. Issuers of shares should expect that this section will require redrafting. Prospectuses are no longer subject to a disclosure annex for the summary. Instead the annex has been replaced with subsections and mandated sub-headings, with the detailed requirements being included in the Regulation itself. The length of the summary has been reduced to seven pages.
The summary includes four parts: an introduction with warnings; the issuer; securities; and the offer/admission. A maximum of 15 risk factors may be covered within the issuer and security sections. Tables setting out key financial information must also be included.
How have the general disclosure requirements changed?
There are a number of changes to the disclosure requirements that need to be taken into account. PD III specifically requires hyperlinks for all documents referenced in the prospectus. These links must be functional for ten years, which may present challenges given that websites may be updated and restructured periodically.
How have the rules regarding profit forecasts changed?
It is no longer mandatory to include an auditor’s report on a proﬁt forecast in a prospectus. However, the prospectus is required to include a statement that the forecast has been compiled and prepared on a basis that is:
- Comparable with the historical ﬁnancial information.
- Consistent with the issuer’s accounting policies; therefore, the issuer itself will be required to state what an auditor currently states in its opinion.
In addition, the rules concerning the reasonableness and full disclosure of the assumptions that were used in preparing the proﬁt forecast remain applicable. It is anticipated that issuers will continue to seek an auditor’s report on proﬁt forecasts included in a prospectus for shares given these requirements and to mitigate the general risks associated with making a profit forecast. However, auditors are expected only to offer that type of report on a private basis: that is, they will provide a private comfort letter or commentary report (without any opinion) addressed to the issuer, sponsor (if applicable) and sponsors or underwriters, rather than a report to be included in the prospectus.
What is the secondary issuance regime and how might it be used in an equity capital markets context?
The regime for secondary issuances has been simplified. The aim is to reduce the disclosure requirement for issuers with equity already admitted on a regulated market for 18 months who are looking to issue further securities (including non-equity securities). Issuers need only provide financial statements for the previous 12 months, and half-yearly financial statements. No description of the group, or indication of whether the issue is dependent on other entities in the group, is required.
The prospectus must also include a concise summary of the information disclosed by the issuer under the market abuse regulation over the past 12 months. This is not required in the mainstream annexes relevant for shares, and arguably could complicate rather than simplify disclosure for issuers
Has the approach to scrutiny and approval by Competent Authorities changed?
The scrutiny and approval provisions have been designed to drive convergence of competent authorities' approaches. The focus is on the "three Cs": completeness of information; comprehensibility (it must be clear, legible and free from unnecessary reiterations); and consistency (it must be free from internal material discrepancies).
There are helpful provisions that allow a competent authority to take a proportionate approach to scrutiny. For example, the first draft of a prospectus that is substantially similar to a previously approved prospectus should take less time to scrutinise.
Are there any operational issues arising from the PD III regime?
Competent authorities have to provide ESMA with around 30 items of data once a prospectus is approved, to allow ESMA to produce its annual reports. ESMA has advised EU authorities that it does not yet require the full data set to be submitted (pending system changes). When the data submission requirement is fully operational, competent authorities are likely to pass the burden of this requirement on to issuers. In some instances, such as the requirement for details of consideration offered, it is not clear what ESMA is asking for, making this issue one of the most potentially problematic elements of the new rules from a practical perspective.
How have the publication requirements changed?
Most of the publication requirements are broadly the same. But new rules specify that publication must be in electronic form on a dedicated section of a website.
A competent authority must also publish a prospectus. For the UK, the FCA helpfully addressed a concern (that may still be relevant outside the UK) that this may mean that the competent authority publishes earlier than the issuer, thereby potentially creating a risk relating to the disclosure of inside information, especially for equity capital market issues.
Has the supplements regime changed?
The application of withdrawal rights is broadly unchanged. These will be granted to investors that have already agreed to purchase securities before the supplement was published and where the securities are not yet delivered. New investor notification requirements apply to financial intermediaries in relation to supplements, which may present challenges – “financial intermediaries” is not defined, but underwriters are likely to be caught by this term. Please contact us for a suggested solution regarding this issue.
Helpfully, the market view that withdrawal rights are not regarded as applying to exempt offers has been endorsed.
The triggers for preparing a supplement are broadly unchanged.
Are there any changes to the advertisements regime that market participants should be aware of?
Industry efforts have led to the development of language that may be used to streamline compliance with the new advertisement requirements.
The definition of advertisement has been expanded to refer to 'communications' rather than announcements, so that a wider range of disclosures, including bilateral communications, could be caught. Road show materials could also be considered advertisements, as could other disclosures relating to retail offers. The range of items that are caught is helpfully still limited by the test of whether it relates to a specific offer or admission, and is aimed at specifically promoting the subscription or acquisition of securities.
As before, an advertisement needs to be consistent with the prospectus and has to be updated if a supplement is produced. It must not present things in a materially unbalanced way, or include alternative performance measures not contained in the prospectus.
Oversight is the responsibility of each competent authority in any jurisdiction where the advertisement is disseminated. This decision may result in a fragmentation of compliance requirements. However, it is worth noting that scrutiny of advertisements by a competent authority is not a precondition to the offer or admission taking place.
Although the Prospectus Regulation was intended to minimise the scope for inconsistency across the EU, competent authorities inevitably retain some scope for interpreting the new rules. Taken together, the changes are not entirely straightforward or unambiguous, meaning that market participants are likely to have to tolerate a period of adjustment before the dust finally settles on PD III.
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