The Prospectus Amendment Directive – Facing Up to the New Prospectus Regime
The enactment of Directive 2010/73/EU (the "Prospectus Amendment Directive") has implemented a number of material changes to the European prospectus regime which have impacted heavily on the manner in which prospectuses are drafted and, in certain instances, the structure of issuances. With the anniversary of these amendments approaching many issuers are now experiencing the new regime for the first time.
Directive 2003/71/EC (the "Prospectus Directive") as originally enacted was assessed by the European Commission ("Commission") who decided that a number of amendments should be made to the Prospectus Directive to:
• reduce administrative burdens on companies within the EU to enhance competitiveness;
• provide greater clarity around the application of the Prospectus Directive; and
• assist retail investors in analysing securities more efficiently.
The key amendments implemented include:
• an increase of the retail securities minimum denomination threshold from €50,000 to €100,000;
• the alignment of the definition of "qualified investors" to the definitions of professional clients and eligible counterparties under the Markets in Financial Instruments Directive 2004/39/EC ("MiFID");
• the inclusion of a prescribed form of summary for retail issuances; and
• restrictions on the types of information that may be included in final terms used in conjunction with base prospectuses.
The most problematic of the changes that have been implemented have been the requirements on the format of final terms and the summaries that are required to be included in all prospectuses relating to the issuance of retail securities.
Final terms are not subject to regulatory scrutiny in the same manner as prospectuses and supplements as they are simply filed with the relevant competent authority without any review or approval process.
As a result of a perceived abuse of process (whereby it was deemed that final terms were being used to supplement base prospectuses) the Commission has implemented a more restrictive regime under the Prospectus Amendment Directive regarding final terms.
Commission Regulation (EC) 809/2004, (the "EU Prospectus Regulation") has been amended to categorise all information required to be included in a prospectus into three categories, Category A, Category B and Category C.
Category A information may not be included in final terms. Any changes to such information contained in a prospectus will require a supplement or a new prospectus to be published. Examples include:
• risk factors;
• governing law;
• form and ranking of the securities; and
• credit ratings of the issuer.
Category B information which is unknown at the date of approval of the prospectus but is known at the issue of final terms may be included in such final terms. Examples include:
• interest provisions;
• the pricing methods used to calculate the return on the securities; and
• details of representative of bondholders.
Category C information may be included in final terms. Examples include:
• the reasons for the offer;
• currency of securities; and
• maturity date.
While it is not a new requirement that a prospectus issued in relation to retail securities include a summary, the Prospectus Amendment Directive has prescribed the form and content of summaries.
The purpose of the summary is to provide "key information" to investors in a concise manner and using non-technical language - "key information" is defined as information which is essential to enable investors to understand the transferable securities to which the prospectus relates.
Under the revised prospectus regime, the summary:
• must be no longer than 15 pages or 7% of the length of the prospectus;
• must incorporate all information and follow the order/format (to facilitate comparison of summaries of similar securities) as prescribed under Annex XXII of the EU Prospectus Regulation; and
• cannot cross-reference other parts of the prospectus.
The Prospectus Amendment Directive has also introduced a new requirement that an issue-specific summary must accompany any final terms for retail securities.
Impact of the Changes
The Prospectus Amendment Directive was implemented into Irish law on 1 July 2012. As a result a number of issuers decided to proceed with their annual debt issuance programme updates in advance of this deadline to avoid the need to comply with the new regime. Consequently many issuers will now need to comply with the new requirements for the first time.
The changes will have the greatest impact on issuers of retail securities under debt issuance programmes. The key challenge for such issuers is to draft a single document that will retain as much functionality as possible with the twin challenges of (i) more restrictive final terms; and (ii) a highly prescriptive summary.
While all competent authorities are bound by the new regime, the approach to the application of the new rules by an authority will be important for ease of process for market participants. The recent Irish experience is that the Central Bank of Ireland is engaging on any relevant issues and is willing to speak with arrangers and law firms either through listing agents, such as ourselves, or directly to provide assistance.
GEM – The User-Friendly Alternative
The Global Exchange Market of the Irish Stock Exchange ("GEM") is an exchange regulated market which is a Multilateral Trading Facility, (as defined in MiFID) and a "recognised exchange" for quoted eurobond purposes.
For issuers of wholesale debt, GEM is an attractive alternative for the following reasons:
• GEM is not subject to the Prospectus Directive;
• GEM will allow a "pricing supplement" to be used to issue securities in the same manner as final terms (without the new limitations under the Prospectus Amendment Directive that now apply to final terms); and
• GEM has recently been approved by the European Central Bank (the "ECB") as an acceptable non-regulated market for the Eurosystem’s monetary policy, enabling, securities listed on GEM to be assessed under the eligibility criteria of marketable assets set down by the ECB credit assessment framework.