Proposal for a Regulation to revise the European Prospectus regime

February 19, 2016

NSA position on the Proposal for a Regulation to revise the European Prospectus Regime

The Nordic Securities Association (hereafter named the “NSA”) has the following comments on the EU Commission’s proposal for a new Prospectus Regulation (2015/0268 (COD)): 

Key Points

The Commission proposal for a Prospectus Regulation is one of the key initiatives in the Capital Markets Union (CMU) action plan. The goal of the CMU is to widen the sources of financing to European companies and to reduce the costs related to raising capital. The NSA supports the CMU project and welcomes the Prospectus review. In order to fully achieve the goal, the NSA recommends taking into account following comments:

 1. Impact of new rules on European wholesale bond markets  

The overarching goal of the Prospectus review is to reduce the costs and administrative burden of the issuance of securities. In this respect, the NSA notes that this goal may not materialise in the context of wholesale bond markets, which are vital for the European economy. The NSA is concerned that the new proposal will complicate and increase the costs of issuance to qualified investors. For instance, removal of the minimum denomination exemption, obligation to draw up prospectus summary to qualified investors, and the removal of the split between wholesale and retail annexes are likely to increase costs of capital raising for European companies.

2. Categorisation of risk factors may prove to be counterproductive

The NSA considers it problematic that the proposal calls for the categorisation of risks, also due to the possibility of the risks appearing. Such categorisation would involve great uncertainty and would hardly be of any value to the investors.

Detailed comments

Non-equity and right to choose the National Competent Authority  (Article 2(m))

The NSA welcomes the fact that in the context of issuance of non-equity securities, the Proposal maintains a model which allows the issuer to choose which National Competent Authority should approve the prospectus.

However, the free choice only applies to issuances denominated at 1,000 euros or more. There is no need to sustain this denomination, especially in light of the fact that debt issuers could be of even lower denominations. Hence the NSA recommends that the requirement for a minimum denomination should be removed. The minimum denomination should not be decisive for which Competent Authority the issuer can choose.

Voluntary prospectus (Article 4)

Article 4 gives the opportunity to make so called voluntary prospectuses. However, it is unclear whether these voluntary prospectuses must be approved or not. This should be further clarified in the Regulation.

Compared to current supervisory practice of certain regulators, only prospectuses approved by this Competent Authority can be designated prospectuses. If voluntary prospectuses do not require approval, the Article should specify that only approved prospectuses may be designated “prospectus”. Otherwise the investor could be led to believe that the document is approved by an authority and thereby compliant with the regulation, even though this might not be the case. This is especially relevant when the draft proposal states that it is possible to issue non-equities up to the amount of 10 million euros without it being covered by the prospectus regulation, but rather regulated by national law. As a result of this, it would probably still be necessary to produce some sort of offer documents, and this is why it is important to know whether these offer documents can be designated “prospectus” when they have not been approved by the competent authority.

Subsequent resale of securities (Article 5)

This article should specify that the prospectus rules will not cover the resale of securities that are not covered by the prospectus obligation (e.g. because resale is covered by a rule of exemption), even if the securities are traded in another Member State.

The Prospectus summary (Article 7)

In the draft regulation, the exemption to the obligation to produce a summary in regard to prospectus and subsequent  issuance of ”non-equities” above the amount of 100,000 euros (denomination value) has been removed. The NSA finds this regrettable as admitting securities to trading on a regulated market or issuing to professional investors through the base prospectuses on regular basis will lead to additional costs for the issuers.

According to the Commission Proposal there is no longer an exemption to the obligation to prepare a summary in relation to the prospectus and following issuances of non-equities above the amount of 100,000 euros (denomination value). Consequently, the issuer is obligated to prepare a summary if the non-equities are admitted to trading on a regulated market, unlike today. The NSA finds this very unfortunate, as it will entail extra costs and administrative burdens for the issuers. This applies also when bonds are issued continuously to the professional investors based on the base prospectuses. Another consequence of removing the exemption is the possibility that a prospectus obligation would be triggered in relation to resale of bonds, e.g. when an offer of bonds is exempted from the prospectus obligation, because they are issued at a denomination of 1,000 euros and a minimum investment of 100,000 euros. This would not be the case, if the exemption is maintained.

In the consultation paper on prospectuses (spring 2015) the EU Commission acknowledged that the object of the summary had not been reached. Therefore the NSA finds it unfortunate that prospectuses only aimed at professional investors are subject to the rules regarding summaries.

The base prospectus (Article 8 (5))

The regulations should state that if the issuer has used an approved base prospectus, ‒ i.e. without it having been divided respectively into a registration document, security note, etc. – then the issuer can use parts of this base prospectus that contains the information that needs to be in a “universal registration note”. Otherwise the issuer is required to make a universal registration note for the three following years (Article 9 (3)) before it can be used as a part of a base prospectus. It would be expedient if the issuer could already make use of this possibility if it has had an approved base prospectus for more than three subsequent years before the new rules become effective.

Risk factors (Article 16)

The requirement to categorise risks according to their relative materiality should be removed.

Article 16 (1) requests a presentation of the risk factors in three distinct categories. We strongly disapprove of this idea, as this could potentially mislead the reader of the prospectus, and would be contrary to the targeted investor protection.

The categorisation would also raise the question whether a prospectus supplement is required if the issuer reassesses a specific risk into another category than originally assessed during the validity of the prospectus.

Risk factors are a very important part of a prospectus. Their importance cannot be underestimated. An investor should carefully review and be aware of the risk factors before making an investment decision. It is not expedient for an issuer to utilise a “kitchen sink approach” to risk factors and include all possibilities, irrespective of how remote they are. Having said that, we think that the suggested approach which would restrict the issuer’s freedom to describe the risk factors as it considers appropriate is not the right way to go. We think that the same goes for the proposed requirement to classify the three categories of risk factors based on materiality, probability of occurrence, and expected magnitude of their negative impact. It is not to the benefit of the investors, who may think it enough to assess only certain parts of the risk factors.

It is very important that the investors still have the incentive to assess the entire catalogue of risk factors. From an issuer perspective, it is hard or even impossible to quantify the risks in such a way that makes it appropriate to put them in order as suggested in the Proposal. Together with the quite severe responsibility for the issuers that attach to the prospectus as such, this makes the suggestion unacceptable.

As a general comment, it is very difficult to assess the full effect of the Proposal since the more detailed rules on the requirements relating to the contents of the prospectus will follow from the standards issued by ESMA and the Commission. We consider it problematic that we cannot assess more than the general principles and are not privy to what will constitute the full proposal.

Should the Commission sustain the proposal, we support the suggestion that guidelines on this issue should be developed by ESMA.

Date of application (Article 47)

The new prospectus regime is heavily based on Level II measures. Experience has shown that drafting process of level II in ESMA takes time and therefore it is important to have realistic and coherent date of application of the whole regulatory package. The NSA strongly recommends that there should at least 24 months between entry into force and date of application of both level I and level II legislation.