From 1 July 2012, prospectuses published in connection with
pre-emptive offers of shares by Main Market or AIM companies, and
prospectuses published by SMEs and small cap Main Market companies,
will be shorter and cheaper to produce as less information will be
needed. In addition:
- Summaries, which appear at the front of prospectuses, will in
most cases be slightly longer, and specified information will have
to be presented in a particular order.
- More companies will be able to offer shares to their EEA-based
employees without having to produce a prospectus.
- Across all EEA states, investors will have the same amount of
time to withdraw their acceptance if a supplementary prospectus is
- Where securities are offered via a “retail
cascade”, it will be clearer who is legally responsible for
information provided to investors, and on what terms financial
intermediaries are authorised to resell or place securities on the
basis of the issuer’s prospectus.
The Prospectus Directive came into force at the end of 2003 and was
implemented in the UK on 1 July 2005, principally through
amendments to the Financial Services and Markets Act 2000 (FSMA)
and the creation of the FSA’s Prospectus Rules. The Directive
requires a prospectus to be published where transferable securities
are offered to the public or admitted to trading on an EU regulated
market (regulated market). What information must be included in a
prospectus is prescribed by various Annexes to an EU Regulation
that accompanies the Directive (the PD Regulation): for an issue of
equity shares, Annexes I and III and, in some circumstances, Annex
II, must be followed. Following a review by the European Commission
of how well the Prospectus Directive and PD Regulation have been
working, an Amending Directive (2010/73/EU) was published in the
Official Journal of the EU and came into force on 31 December 2010.
The PD Regulation is being amended by means of two Delegated
Regulations. Among other things, the amendments are designed to
simplify the capital-raising process for companies in various
circumstances, and to iron out a number of difficulties and
uncertainties that have arisen.
In particular, the Commission accepted that prospectuses published
in connection with offers to existing shareholders (pre-emptive
offers) could be shorter, as the investors to whom such offers are
addressed can be assumed already to know, or have ready access to,
a considerable amount of information about the issuer, its history
and recent financial performance. Similarly, the cost and effort of
producing a “full” prospectus can discourage SMEs and
smaller listed companies from offering their shares to the public
or seeking admission to a regulated market, so the Commission
decided to allow such issuers to omit certain information from
their prospectuses. As a result, the Prospectus Directive and PD
Regulation as amended now include a so-called “proportionate
disclosure regime” for prospectuses published in connection
with a pre-emptive offer, or by an SME or smaller cap listed
Member States have until 1 July 2012 to amend their national laws
to implement the amendments to the Prospectus Directive. In the UK,
this entails changes being made to parts of FSMA (particularly as
to when a prospectus need not be published) and to the FSA’s
Prospectus Rules. On 31 July 2011 two amendments to the Directive
were implemented in the UK: no prospectus is now required where
securities are offered to fewer than 150 persons in the UK or where
the total consideration for securities included in an offer is less
than €5 million. Previously the limits were 100 persons and
€2.5 million respectively. The remaining amendments will be
implemented on 1 July 2012.
Because the PD Regulation has direct effect, it does not need to be
implemented through national legislation. Instead, in the UK the
FSA intends to copy out in Appendix 3 to its Prospectus Rules the
relevant parts of the amended PD Regulation. Note that the changes
to Appendix 3 are very unlikely to appear on the FSA’s
website until several days after 1 July: partly this is due to the
fact that the Commission has still not published the final version
of the second Delegated Regulation to amend the PD Regulation. This
article is therefore based on the draft version of that Regulation
which was published at the beginning of June: the final version is
unlikely to be significantly different.
Shorter prospectuses for pre-emptive
Under the new proportionate disclosure regime, less information
will have to be included in a prospectus that is published in
connection with a “rights issue” if the company has
shares that are already admitted to trading on:
- a regulated market (e.g. the UK Main Market); or
- a multilateral trading facility (MTF) whose rules:
- require annual financial results to be published on the
company’s website within six months of the year end, and
half-yearly results within four months of the half-year end;
- require inside information to be published on the
company’s website; and
- include provisions designed to prevent insider dealing and
market manipulation in the same way as the Market Abuse
AIM would appear to be a qualifying MTF for this purpose, and the
FSA has confirmed to us informally that it expects to recognise AIM
“Rights issue” is defined as an offer:
- made in compliance with statutory pre-emption rights, which is
addressed only to existing shareholders and allows them to
subscribe for new shares. In the UK, this means compliance with
sections 561-2 Companies Act 2006: an offer that complies with
these sections is sometimes known as a “Gazette route”
offer, as it can be extended to certain overseas shareholders by
means of a notice published in the London Gazette; or
- in respect of which statutory pre-emption rights have been
disapplied but existing shareholders enjoy “near
identical” rights. In particular, the rights to subscribe
must be transferable or “if not, the shares arising from the
rights [if not taken up] are sold at the end of the offer period
for the benefit of those shareholders who did not take up [their]
In order to provide flexibility to deal with fractions, and for
other technical reasons, most FTSE 350 companies obtain annual
authorisation from their shareholders to issue up to two-thirds of
their existing ordinary share capital without complying with the
statutory pre-emption rules on the basis that most, if not all, of
the existing shareholders are given the right to subscribe for new
shares in proportion to their holdings (in compliance with the
pre-emption requirements in the Listing Rules).
If an issuer with shares traded on the Main Market or AIM does a
rights issue (where existing shareholders have the right to
subscribe in proportion to their holdings or to sell their rights,
and any rights that are not taken up by an existing shareholder are
sold in the market on his behalf), it will qualify for the
proportionate disclosure regime whether the Gazette route is
followed or not. But if such an issuer wants to do an open offer
and take advantage of the new proportionate disclosure regime, it
will need either to use the Gazette route (which historically has
been uncommon) or make it a compensatory open offer, in which
rights that are not taken up by a shareholder by the end of the
offer period are sold in the market on his behalf. Very few
compensatory open offers have been made to date, but the benefit of
being able to produce a shorter prospectus may encourage issuers to
use them more.
Information that can be omitted from a pre-emptive
Annexes XXIII and XXIV of the PD Regulation, which are new, specify
the information that must be included in a registration statement
and a securities note (respectively) for a pre-emptive offer. An
issuer will be able to comply with these Annexes instead of Annexes
I and III of the PD Regulation. In most issues of equity
securities, the registration statement and securities note are
amalgamated into a single document. If, as a result of the issue or
any related transaction - such as an acquisition by the issuer -
there will be a “significant gross change” (of more
than 25%) in the size of the issuer’s business, the
prospectus will also need to include pro forma financial
information, illustrating the effect of the transaction on the
issuer’s financial results, that complies with Annex II of
the PD Regulation.
A prospectus for a pre-emptive offer prepared in accordance with
Annexes XXIII and XXIV will be shorter than a “full”
prospectus in the following key ways:
- It will need to include information about certain matters and
events only if they have occurred since the date of the
issuer’s last published audited financial results: in
particular, material investments made by the issuer; any
significant changes in the principal activities of the issuer, or
the principal markets in which it operates; and any transactions
between the issuer and a related party (provided that the issuer
reports its financial results under IFRS, which requires certain
details of related party transactions to be disclosed in the
- The following types of information will not need to be
- Operating and financial review (OFR) – i.e. a review of
the issuer’s financial condition, operations, profits and
significant changes that have affected those results.
- Selected financial highlights from the last three years of the
issuer’s financial results and any later interim
- The issuer’s capital resources and cash flows, borrowing
requirements and funding structure.
- Details of any significant subsidiaries.
- Existing or planned material tangible fixed assets, including
leases and any charges.
- Material environmental issues.
- History of the issuer and its incorporation and
- History of the issuer’s share capital.
- Research and development policies over the last three
- Numbers and categories of employees.
- Summary of the issuer’s memorandum and articles, the
rights attached to its shares and how they can be changed, when and
how general meetings are held, any restrictions on changes of
control, and when shareholdings must be disclosed.
- Any rules on mandatory offers that apply to the issuer.
- Any takeover bids that have been made for the issuer during the
previous or current financial year.
- An issuer whose shares are traded on a regulated market will
not need to include:
- Details of its directors’ remuneration, pension or other
benefits, their term of office or service contracts.
- Details about the issuer’s audit and remuneration
committees and which corporate governance guidelines it
- Only one year’s financial information will need to be
- Material contracts outside the issuer’s ordinary course
of business will need to be described only if they have been
entered into in the last year (rather than two years as at
All the other information that is normally required for a
“full” prospectus will have to be included, such as
risk factors relating to the issuer and the transaction; any
interim or quarterly results published since the last year end; any
material litigation in which the issuer is involved; a statement as
to whether any significant change in the financial or trading
position of the group has occurred since results for the last year
or half-year were published (significant change statement); a
statement that the issuer will have sufficient working capital for
at least the next 12 months (a working capital statement); and a
capitalisation and indebtedness statement. Details of the terms and
conditions of the offer will of course also need to be
If the offer is being into the United States or another
jurisdiction with well-developed securities laws, the issuer will
of course need to obtain local advice as to whether a shorter form
prospectus will contain sufficient information to comply with the
relevant securities laws and meet investor expectations.
Shorter prospectuses for SMEs and small
Annex XXV of the PD Regulation, which is also new, specifies the
information that must be included in a registration statement
published by an SME or a “company with reduced market
capitalisation” that is offering its equity securities to the
public or seeking to have them admitted to trading on a regulated
market. An issuer will be able to comply with this Annex instead of
Annex I of the PD Regulation. The securities note will need to
include all the information specified in Annex III and if, as a
result of the issue or any related transaction, there will be a
“significant gross change” in the size of the
issuer’s business, the prospectus will also need to include
pro forma financial information that complies with Annex II. Annex
XXVIII of the PD Regulation specifies the information that must be
included in a registration statement where such an issuer is
issuing depositary receipts over its shares: this is not discussed
further in this article.
An SME means a quoted or unquoted company that satisfies two of the
following three criteria:
- an average number of employees of less than 250;
- a total balance sheet not exceeding €43 million; and
- an annual net turnover not exceeding €50 million.
A company with reduced market capitalisation means a company with
securities already listed on a regulated market that over the last
three years has had an average market capitalisation of less than
€100 million. Such companies are referred to below as Main
Market small caps.
Where a prospectus is required in the following circumstances, it
will need to include less information than previously:
- an SME does an IPO on a regulated market, with or without an
offer to the public;
- an SME whose shares are unquoted, or traded on an MTF, offers
its shares to the public;
- an SME whose shares are already traded on a regulated market
issues further shares of the same class and/or offers its shares to
- a Main Market small cap issues further shares of the same class
and/or offers its shares to the public.
If an SME or Main Market small cap does a pre-emptive offer, it
will be able to take advantage of the proportionate disclosure
regime for pre-emptive offers.
A prospectus prepared in accordance with Annex XXV and Annex III
will be shorter than a “full” prospectus in the
following key ways:
- Less financial information will be required. In
- The prospectus need not include historical financial
information for any period (currently, three years of financial
statements must be included).
- The prospectus need not include interim financial information
even if the last annual financial results were published over nine
months before the prospectus.
- Instead, the prospectus must include a statement that the
issuer has published at least two years’ annual results under
IFRS or (for Member State issuers) the GAAP of a Member State or
(for non-Member State issuers) a national GAAP that has been
recognised by the Commission as equivalent to IFRS. Even where the
issuer’s financial results have historically been prepared in
accordance with non-equivalent accounting standards, and the
results have to be restated for the purposes of the prospectus, the
issuer must simply state that it has published restated financial
results. In each case, the prospectus must also state where the
financial information can be obtained.
- Similarly, if the issuer has published half-yearly or quarterly
financial information since the date of its last audited financial
statements, the prospectus must include a statement to that effect
and details of where the information can be obtained.
- Financial information for the previous two financial years does
not need to be restated in accordance with the accounting standards
that will apply to the issuer’s next annual results.
- Even if the issuer has been operating in its current sphere of
activity for less than one year, there is no need to draw up
accounts prepared in accordance with IFRS or any other specified
- However, if the issuer chooses not to include such financial
information in the prospectus, it must instead include an
- Related party transactions: If the issuer already reports its
financial results under IFRS, only related party transactions that
have occurred since the end of the last audited financial period
need be included in the prospectus. Otherwise, details must be
included of any related party transactions that have been entered
into during or since the last two financial years.
- The following types of information will not need to be
- Existing or planned material tangible fixed assets, including
leases and any charges.
- The issuer’s capital resources and cash flows, borrowing
requirements and funding structure.
- The remuneration and benefits of each individual director, if
they have already been publicly disclosed or individual disclosure
is not required in the issuer’s home country.
- Details of the issuer’s significant subsidiaries
(provided that details were included in the issuer’s
Of course, in practice the issuer may need to include some or all
of the above information in order to meet the expectations of its
sponsor and potential investors.
Employee share plans
In practice, many employee share plans can be structured so that
the issuer is exempt from having to publish a prospectus –
for example, because employees are offered free shares or options,
the total consideration is less than €5 million, or the offer
is made to fewer than 150 persons per Member State. However,
it may be necessary to obtain local advice on how the relevant
exemption is interpreted in each Member State where employees are
Where it is not possible to rely on one of these general exemptions
– for example, because 150 or more employees in any Member
State are to be invited to subscribe for shares – it may be
possible to rely on the specific employee share schemes exemption
in Article 4(1)(e) of the Prospectus Directive. This exempts
certain companies from needing to produce a prospectus where
securities are offered to their employees provided that a short
information document is provided to the employees (see
At present, the employee share schemes exemption applies only to
companies that have securities listed on an EEA regulated market.
From 1 July 2012, however, the exemption is being extended so that
it will apply to a company that:
- has its head office or registered office in the EU (or, as a
result of the EEA Agreement, in a non-EU member state of the
- was established outside the EEA but has securities traded on an
EEA regulated market. Non-EEA companies with shares traded on AIM
(or another MTF or non-regulated market) will therefore not be able
to rely on the exemption; or
- was established outside the EU and has securities traded on a
third country market (i.e. a market in a country outside the EEA)
that the European Commission has formally recognised its legal and
supervisory framework as equivalent to EEA regulated markets.
Although it was hoped that, by or shortly after 1 July 2012, the
major non-EEA equity markets (such as the NYSE) would be recognised
as being equivalent, ESMA recently announced that work on
determining the equivalence of third country markets has been
postponed due to the on-going review of the Transparency and Market
Abuse Directives. It is likely to be at least 2014 before any
non-EEA market is recognised as equivalent.
The meaning of “company” in this context is ambiguous.
Although it is probably intended to mean the company whose
securities will be issued (usually the parent company of the
group), it could also be interpreted to mean that the exemption can
be relied upon provided the employing company is an EEA company. To
date, neither the Commission nor ESMA has published any guidance on
this, so the cautious approach is to assume it refers to the issuer
of the securities. However, non-EEA issuers who are unable to rely
on the exemption but have an employing company established in the
EEA may be inclined to favour the second, broader,
Companies which are unable to rely on the extended employee share
schemes exemption will, as before, need to try and structure their
offers to take advantage of one of the other exemptions or, if they
are unable to do so, produce a prospectus.
Where a company relies on the employee share schemes exemption, it
must provide a short “information document” to
employees. The information document must contain certain
information about the terms and conditions of the offer, the rights
attached to the securities and the number of securities for which
employees can apply. In the case of companies falling
within the third bullet point above, the information
document must be in a “language customary in the sphere of
international finance” (i.e. English). Because the issuer
must produce an information document, the employee share schemes
exemption is sometimes referred to as a “qualified”
exemption, and companies tend to rely on one of the general
exemptions if they can.
Currently, all prospectuses must include a summary of no more than
2,500 words. It must “convey the essential characteristics
and risks associated with the issuer and the securities” but,
subject to this, issuers can choose what information is included in
the summary and in what order.
In practice, the summary is a key source of information for
investors, particularly retail investors. In order to make the
summary more useful, and to facilitate comparability between
prospectuses and with other investment products, the summary will
- Have to contain the “key information items”
specified in a new Annex XXII to the PD Regulation. Where an item
is not applicable, the summary will have to say so. The information
must be presented in the order specified in Annex XXII, and will
consist of five “tables”: introduction and warnings;
the issuer and any guarantor; the securities; risks; and the
- Have to be no more than 7% of the length of the prospectus or
15 pages, whichever is the longer.
- Not be permitted to contain cross-references to other parts of
the prospectus. This is because the summary should be capable of
being read as a free-standing document.
Summaries will therefore become significantly longer than they tend
to be at present, and their format and content will become much
In the UK, section 90 FSMA will be amended so that an issuer and
its directors will be liable to pay compensation to investors if
the summary does not include “key information”, as well
as if it is misleading, inaccurate or inconsistent when read
together with the other parts of the prospectus. For this purpose,
key information means information which is essential to enable
investors to understand the securities to which the prospectus
relates and to decide whether to consider the offer further. The
key information must include:
- the essential characteristics of, and risks associated with,
the issuer and any guarantor, including their assets, liabilities
and financial positions;
- the essential characteristics of, and risks associated with,
investment in the securities, including any rights attaching to the
- the general terms of the offer, including an estimate of the
expenses charged to an investor by the issuer and the person
offering the securities to the public, if not the issuer;
- details of the admission to trading; and
- the reasons for the offer and proposed use of the
Consent to use a prospectus in a retail cascade
A retail cascade typically occurs when securities
are sold on to retail investors by intermediaries, rather than
being issued directly by the issuer itself. Usually it is debt
securities that are sold via a retail cascade, but occasionally
similar arrangements are made to distribute equities this way. In
some markets, almost all primary offerings of debt securities
involve an initial sale of securities by the issuer to one or more
large firms, followed by an on-sale by those firms. The sale by the
intermediaries to investors generally takes place over a period of
several weeks to months. During that period, the price at which the
intermediaries offer the securities to their customers will
fluctuate – typically many times a day - in line with
secondary market prices. In such cases there can be multiple offers
by different offerors in accordance with different terms of
There is considerable uncertainty about how the Prospectus
Directive applies to a “retail cascade”. In particular,
it is unclear how the requirement to produce and update a
prospectus, and the provisions on responsibility and liability,
should apply. Under the amended Directive, financial intermediaries
placing or subsequently reselling securities in a retail cascade
will be entitled to rely upon the initial prospectus published by
the issuer (so that no further prospectus will be required)
provided that it is valid and has been duly supplemented and that
the issuer gives written consent to its use. For this purpose,
under a new Annex XXX to the PD Regulation the prospectus will have
to include, among other things:
- Express consent by the issuer to the prospectus being used by
financial intermediaries for the purpose of reselling or placing
- A statement that the issuer prospectus accepts
responsibility for the content of the prospectus with respect to
any subsequent resale or final placement of its securities by any
financial intermediary which has been given consent to use the
- How long such consent lasts (up to a maximum of 12 months), and
the period in which subsequent resales or final placements can be
made by financial intermediaries, and in which Member States.
- Any other conditions attached to the consent.
- A notice in bold informing investors that the financial
intermediary will provide information on the terms and conditions
of any offer made by the financial intermediary at the time such
offer is made.
Where the issuer restricts its consent to the use of the prospectus
to one or more specific financial intermediaries, the prospectus
must also include:
- The names and addresses of the financial intermediaries
entitled to use the prospectus.
- An indication of how any new information with respect to
financial intermediaries unknown at the time of approval of the
prospectus is to be published and where it can be found.
If the issuer chooses to give consent to use the prospectus to all
financial intermediaries, the prospectus must also contain a notice
in bold informing investors that any financial intermediary using
the prospectus must state on its website that it is using the
prospectus in accordance with the consent and the conditions
attached to it.
A supplementary prospectus must be published if, between the time
when the prospectus is approved and the final closing of the offer
to the public or the time when trading on a regulated market
begins, a significant new factor emerges that is capable of
affecting investors’ assessment of the securities being
offered. When a supplement is published, investors who have already
agreed to acquire shares are entitled to withdraw their acceptance.
The Prospectus Directive specifies that this right must be
exercised during a period no shorter than two working days
following the publication of the supplement. Although the UK has
opted for the minimum of two working days, other Member States have
allowed a longer period, which can give rise to uncertainties where
securities are offered in several jurisdictions.
Under the amended Directive, a deadline of two working days for
exercising a right of withdrawal will apply across all Member
States. It will also be made clear that the right of withdrawal
arises only if securities are offered to the public (and not if
they are simply admitted to trading on a regulated market).
Definition of Qualified
No prospectus is required for an offer that is made to
“qualified investors” only. Qualified investor is
defined in the Prospectus Directive. In the UK, it also means an
investor who is on the list of qualified investors kept by the FSA.
Under the Markets in Financial Instruments Directive (2004/39/EC)
(MiFID), however, qualified investor has a different definition.
This can cause administrative problems in practice, particularly
for banks that are involved in an offer, because some investors who
are qualified investors for the purposes of MiFID may not qualify
for Prospectus Directive purposes.
Recognising this problem, the Commission has decided to amend the
definition of qualified investor in the Prospectus Directive to
bring it into line with MiFID. Placing letters, terms of placing
and selling restrictions will need to be amended accordingly. The
FSA register of individuals and SMEs who are qualified investors
will be abolished.
Prospectuses to be published on a
A prospectus will always have to be published on the website of the
issuer or (if relevant) of the financial intermediary placing or
selling the securities.
Annual information update
The requirement for listed companies to announce and file with the
FSA an annual information update will be abolished, as its purpose
is now duplicated by the requirement under the Transparency
Directive to make regulated information publicly available (i.e.
via the National Storage Mechanism).
Implementation of the changes in other
Although Member States are required to implement the changes to the
Prospectus Directive by 1 July 2012 and, because the PD Regulation
has direct effect, amendments to the Regulation take effect
automatically on that date, issuers should not assume that all
national regulators will apply the new rules from that date. Where
an offer has a cross-border element, the issuer should take legal
advice in each relevant Member State and, where necessary, engage
early on with the relevant national regulator, before relying on
the new rules. This applies in particular where:
- A prospectus published in connection with a pre-emptive offer,
or by an SME or Main Market small cap, is to be approved by the FSA
and passported into one or more other Member States.
- A group with an EEA-based parent company that has securities
traded only on an MTF or whose securities are not publicly traded
at all, or a group with a non-EEA-based parent company, proposes to
offer shares to its EEA-based employees.
- Securities are to be resold or placed by intermediaries in a
cross-border retail cascade.
- The issuer is relying on the exemption for offers with a total
consideration of less than €5 million or for offers addressed
to fewer than 150 persons per Member State.
Prospectus Directive (2003/71/EC):
PD Regulation (No 809/2004):
Note that a number of technical amendments have been made to
the Directive and PD Regulation since they came into force: details
can be found on the Prospectus Directive page on the
Amending Directive (2010/73/EU):
Delegated Regulation (No 486/2012) to amend aspects of the PD
Regulation relating to the contents of the summary, what
information must be included in a prospectus published in
connection with a pre-emptive offer or by an SME or Main Market
Delegated Regulation () to amend aspects of the PD Regulation
relating to the retail cascade – draft published on 4 June
As noted above, the Commission has still not published the
final version of the second Delegated Regulation. The final version
is unlikely to be significantly different from the
Prospectus Regulations 2012 (SI 2012/1538) amending FSMA to
implement the changes to the Prospectus Directive:
Instrument amending the FSA’s Prospectus Rules (FSA 2012/29):
The FSA has also said that Appendix 3 of its Prospectus Rules will
be amended to copy out the amendments to the PD