As a result of amendments to the Prospectus Directive that took
effect at the end of 2010, UK rules are likely to be relaxed in the
near future so that no prospectus will be required where securities
are offered to less than 150 persons in the UK or where the total
consideration for securities included in an offer is less than
€5 million. Currently the limits are 100 persons and
€2.5 million respectively. Fundraisings of up to
€5 million will therefore be cheaper and easier, and the
ability to invite investment from up to 149 people (not counting
qualified investors) may encourage AIM companies and unquoted
companies, in particular, to include a retail element in their
fundraisings.
In the longer term, prospectuses published in connection with a
rights issue or open offer by a Main Market or AIM company, or with
an equity fundraising by an SME, will be shorter and cheaper to
produce as less information will be needed.
In addition, more companies will be able to offer shares to their
EU-based employees without having to produce a prospectus at
all.
To view the article in full, please see below:
Full Article
As a result of amendments to the Prospectus Directive that took
effect at the end of 2010, UK rules are likely to be relaxed in the
near future so that no prospectus will be required where securities
are offered to less than 150 persons in the UK or where the total
consideration for securities included in an offer is less than
€5 million. Currently the limits are 100 persons and
€2.5 million respectively. Fundraisings of up to
€5 million will therefore be cheaper and easier, and the
ability to invite investment from up to 149 people (not counting
qualified investors) may encourage AIM companies and unquoted
companies, in particular, to include a retail element in their
fundraisings.
In the longer term, prospectuses published in connection with a
rights issue or open offer by a Main Market or AIM company, or with
an equity fundraising by an SME, will be shorter and cheaper to
produce as less information will be needed.
In addition, more companies will be able to offer shares to their
EU-based employees without having to produce a prospectus at
all.
Background
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. Following a review by the European Commission of how well the Prospectus Directive has 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. 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.
UK implementation
Member States have until 1 July 2012 to amend their national
laws to implement the amendments. In the UK, this will entail
changes being made to parts of FSMA (particularly as to when a
prospectus need not be published) and to the FSA's Prospectus
Rules. The Government has announced that it intends to implement
early two changes which will mean that no prospectus will be needed
where:
- the total consideration for securities included in an offer is less than €5 million (currently the limit is €2.5 million), calculated on an EU-wide basis (currently it is not clear whether it should be calculated on this basis or a country-by-country basis); or
- an offer is made to fewer than 150 natural or legal persons per Member State, not counting qualified investors (currently the limit is 99 persons).
We understand that the Government intends to consult later this
month on introducing these two changes, with a view to them being
introduced as soon as possible after the consultation closes.
As yet there is no indication as to when the other changes will be
implemented: hopefully the Government will accept that there are
compelling reasons to implement them before the deadline of 1 July
2012, although the "light touch" regime described below
for rights issue and open offer prospectuses, and prospectuses
published by SMEs, will depend on the Commission first publishing
appropriate second-tier implementing legislation. The amending
Directive also helpfully allows the Commission, by means of a
streamlined legislative process, to raise the €5 million
and 150 person limits in future.
Mini-prospectuses for rights issues and open offers?
Under a new proportionate disclosure regime, less information
will have to be included in a prospectus published in connection
with a rights issue or open offer carried out by a company with
shares already admitted to trading on a regulated market (e.g. the
UK Main Market) or certain multilateral trading facilities (MTFs),
including AIM. However, the "light touch" regime will
apply only where the offer is made in compliance with the mechanism
set out in the Companies Act 2006 (or other national legislation
applying to the issuer) for new shares to be offered first to
existing shareholders in proportion to their holdings (the
statutory pre-emption mechanism). In the UK, such an offer is
sometimes known as a "Gazette route" offer, as it is
extended to certain overseas shareholders by means of a notice
published in the Gazette.
To date, UK practice has generally been for the statutory
pre-emption mechanism to be disapplied on a rights issue or open
offer for various reasons (including affording the company the
flexibility to deal with fractional entitlements of shareholders
that arise on pre-emptive offers of shares, and enabling the
company to avoid extending the offer to shareholders resident in
jurisdictions where the local securities laws would otherwise
prohibit or make the offer considerably more difficult and costly
to implement). The new light touch regime for Gazette route offers
is likely to mean that they become more popular. But issuers that
cannot comply with the statutory pre-emption mechanism - e.g.
because they have convertibles or warrants in issue whose terms
require new shares to be offered to the holders of those securities
as if they were shareholders - will not be eligible for the light
touch regime and will need to produce a full length
prospectus.
Exactly what information will have to be included in a light touch
prospectus published in connection with a pre-emptive offer will be
clear only when the European Commission adopts suitable
implementing legislation. In setting the contents requirements, the
Commission will be guided by the European Securities and Markets
Authority (ESMA) (formerly the Committee of European Securities
Regulators (CESR)). For rights issues, and perhaps open offers, the
UK Government will hopefully lobby for the prospectus content
requirements to be limited to those proposed by the UK's Rights
Issue Review Group in its November 2008 report. In particular, the
Review Group recommended that a rights issue prospectus should not
have to include:
- historical financial information about the issuer, an overview of the issuer's business and activities, or details of the issuer's capital resources;
- details about the issuer's senior management and their remuneration, and board practices; or
- a summary of the key provisions of the issuer's articles of association, and key takeover rules.
Shorter prospectuses for SMEs and companies with a market capitalisation of less than €100 million
A similar "proportionate disclosure regime" will apply where a prospectus is published by:
- an SME – i.e. a 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; or
- a company with securities listed on a regulated market that over the last three years has had an average market capitalisation of less than €100 million.
Again, the precise scope of the information that will be required will be specified in second-tier implementing legislation that has yet to be adopted by the European Commission.
Impact of the amendments on employee share plans
As a result of amendments to the existing exemption for employee offers, more companies will be able to offer shares to their EU-based employees without having to produce a prospectus at all. The amendments will particularly benefit:
- European companies that have securities traded only on an MTF such as AIM, or that do not have securities traded on any market, that want to run substantial employee share purchase plans (such as HMRC-approved share incentive plans) across the EEA.
- a number of non-EU companies with securities quoted on a non-EU market recognised by the Commission as equivalent to an EU regulated market that have a large number of employees across Europe but are unable to use one or more of the other exemptions - e.g. for free shares or options, offers below €2.5 million (to become €5 million), or offers made to fewer than 100 (to become 150) persons per Member State.
Once Member States have implemented the changes to the employee
offers exemption, such European companies will be able to invite
all their European employees to participate in an employee share
scheme if they simply produce an employee information document
containing 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. But before a non-EU
company with securities quoted on a non-EU market can take
advantage of the wider exemption and simply publish an employee
information document, the Commission must, in addition, and
following a request by one or more Member States, formally have
recognised the market on which the company's securities are
traded as being equivalent to an EU regulated market. This is
unlikely to happen for many months.
For further details see our
Law-Now article published on 16 June 2010.
Other changes:
- Financial intermediaries placing or subsequently reselling securities (in a so-called "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 (i) it is valid and has been duly supplemented; and (ii) the issuer consents to its use.
- A deadline of two working days for exercising a right of withdrawal will apply across all member states. Currently, the right to withdraw must be "exercisable within a time limit which shall not be shorter than two working days". 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.
- A prospectus will always have to be published on a website.
- The definition of "qualified investor" will be amended to extend the scope of the persons to be treated as qualified investors in order to encompass also those natural and legal persons who request to be treated as professional clients under MiFID. This change is designed to make it easier for firms that act as intermediaries to offer securities to their professional clients, as they will no longer have to check that those clients also fall within the definition of qualified investor in the Prospectus Directive.
- Article 10 of the Prospectus Directive, which broadly requires issuers with securities admitted to trading on a regulated market to file with the competent authorities a document containing or referring to all information they have published or made public in the course of the last 12 months in accordance with legal requirements (which was implemented in the UK through the requirement in PR 5.2 to produce an annual information update) will be deleted.
For background on these issues see our Law-Now article published on 27 February 2009.
Amending Directive
The text of the amending Directive can be found here.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 17/01/2011.
