The free movement of capital across EU borders has long been one of the fundamental ideals of the European Union – if not, as yet, a fully realised one. Here, Neville Carabott, managing director of Heritage International Fund Services (Malta), explains why he thinks plans to address current regulatory shortcomings may begin to bring the free capital movement ideal to fruition – at least for those countries that remain a part of the union.
The creation of a capital markets union was one of the main initiatives undertaken by the current European Commission, which early on saw the bringing together of the bloc’s currently fragmented capital markets, through the removal of the last remaining barriers, as being among its top priorities.
Achieving a deeper integration of Europe’s diverse capital markets, it was thought, would allow businesses to diversify their sources of financing, while at the same time providing savers with a wider range of investment opportunities.
As in most places in the world, any entity in the EU which wants to raise capital through a public offering, or which is seeking to have its securities traded on a regulated market or a multi-lateral trading facility, has to issue a prospectus setting out the main characteristics and risks of the securities involved.
Within the EU, what came to be known as the Prospectus Directive was introduced in 2003, in order to harmonise regulatory requirements relative to the issue of prospectuses, and this was subsequently revised in 2010. However, a recent consultation exercise carried out by the Commission revealed that this directive, even after being revised, had failed to have the desired effect.
The currently-pending proposal for what we will call here the EU’s New Prospectus Regulation, however, seeks to address various identified shortcomings as well as to achieve a more flexible and simple regulatory framework for issuers.
Simplification, Flexibility and Protection
The Commission’s proposal is not a complete recast of the original directive, but rather an improvement.
It remains applicable in the same scenarios, including with respect to closed-ended collective investment schemes. In an effort to allow issuers greater flexibility, the Commission is proposing to increase certain specific threshold and simplifying prospectus requirements.
The current directive already provides for exceptions, or less onerous disclosure requirements, when an issuer is limiting its offer to set amounts. The Commission is seeking to revise these thresholds upwards.
Thus, under the New Prospectus Regulation, no prospectus would be required if an issuer’s offer to the European markets has a value of not more than €500,000, as against the current €100,000. This option only applies to domestic offers which are not seeking to passport into other Member States.
A revised definition of what constitutes a small- and medium-sized enterprise (SME) would see entities seeking as much as €200m in capital from the markets being able to avail themselves of a new, simplified prospectus regime.
The Commission is also proposing to remove the current exemption from the prospectus requirements when an issuer is offering non-equity securities denominated at €100,000 per unit.
Under these proposals, EU member states will be allowed a wider discretion as to when they may exempt issues limited to their domestic market from the requirement to be accompanied by a prospectus.
While the current directive states that this is only possible if the offer does not exceed €10m, the Commission’s proposal would extend the exemption to issuances that don’t exceed €50m, at the discretion of the individual member state.
As regards simplification, the Commission is also proposing a revision of the disclosures required by the current directive. This would impact positively both issuers and investors.
Currently most EU market prospectuses are voluminous documents, written in language that is highly technical and rarely understandable to the average man in the street. What the Commission is proposing is to align prospectus summaries to the Key Information Document (KID) introduced under the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulations.
The Commission is evidently of the view that the shorter and more readable KIDs have shown just how easy it is to provide investors with all the information they require to make informed decisions, in a concise and easily-understood manner.
In an effort to facilitate SME’s access to capital markets, meanwhile, the Commission is proposing a number of alternative, lighter regimes that should considerably reduce the costs associated with production of the prospectus. Thus, an SME that is approaching the capital markets for the very first time is being allowed to draw up an extremely simplified prospectus, which can also take the form of a Questions and Answers document.
Secondary and frequent issuers
Those SMEs that have already been trading on a European market for at least eighteen months, meanwhile, can benefit from a new minimum disclosure requirements regime, which is being proposed for secondary issuances.
Given the scrutiny to which such secondary issuances are normally subject to, due to their status as traded entities, the Commission considers that investors in such cases require only minimal information.
This would include financial information covering the most recent financial year only; the rights attaching to the securities; the reasons for the secondary issuance; and the secondary issuances’ expected impact on the issuer.
Frequent issuers are also being provided for, with the Commission proposing that only a securities note and summary be prepared for each specific new issue, as long as the issuer has kept the Universal Registration Document updated. This would cut costs as well as accelerating the approval process.
The overall effect
In summary, the European Commission’s New Prospectus Regulation presents some innovative thinking relative to issuers’ disclosure requirements.
The exact information that will eventually have to be disclosed will depend on implementing technical standards and guidelines that have yet to be developed by the European Securities and Markets Authority. However, it is possible that the New Prospectus Regulation may yet undergo significant changes while being considered by the European Council and Parliament.
Neville Carabott is the Managing Director of Heritage International Fund Services (Malta). Carabott joined the company in 2014. He holds a doctorate in law from the University of Malta and is a dual-qualified advocate and solicitor admitted to practise law in Malta, England and Wales.