Observations regarding new prospectus Regulation – part 2
Based on the previous regulations and my own experience, I have made some observations regarding the most interesting changes that I wish to share. According to the recitals of the Prospectus Regulation, “the reduced information required to be disclosed in EU Growth prospectuses should be calibrated in a way that focuses on information that is material and relevant when investing in the securities offered, and on the need to ensure proportionality between the size of the company and its fundraising needs, on the one hand, and the cost of producing a prospectus, on the other hand.” After having examined these new regulations, I wish to share my view on this most-welcomed goal and how the new regulations seem to reflect this goal.
WHEN AN EU GROWTH PROSPECTUS CAN BE DRAFTED
First about the quite technical provision when an EU Growth prospectus may be prepared instead of the so-called full-scale prospectus: In accordance with Article 15 of the Prospectus Regulation, the following issuers may choose to draw up an EU Growth prospectus in connection with public offers provided that they have no securities listed on a regulated market:
- small and medium-sized enterprises (“SMEs”);
- issuers other than SMEs, whose securities are (or are to be) traded on an SME growth market, provided that those issuers had an average market capitalisation of less than MEUR 500 on the basis of end-year quotes for the previous three calendar years and;
- issuers other than those referred to in points (1) and (2), where the offer of securities to the public is of a total consideration in the EU that does not exceed MEUR 20 calculated over a period of 12 months, and provided that such issuers have no securities traded on an multilateral trading facility and have an average number of employees during the previous financial year of up to 499.
An SME is a company, which either
- according to its last annual or consolidated accounts, meets at least two of the following three criteria: an average number of employees during the financial year of less than 250, a total balance sheet not exceeding MEUR 43 and an annual net turnover not exceeding MEUR 50,000,000; or
- is a company that had an average market capitalisation of less than MEUR 200 on the basis of end-year quotes for the previous three calendar years.
As said in the first part of my article, First North Finland (and also the same market in other Scandinavian markets) has on 1 September 2019 become an SME growth market and changed its name to “Nasdaq First North Growth Market”. All companies whose securities are now traded on First North Finland Growth Market and have an average market capitalisation of less than MEUR 500 based on end-year quotes for the previous three calendar years, may draft an EU Growth prospectus. This refers to almost (if not all) companies now listed in the First North Finland Growth Market. A typical case to prepare an EU Growth prospectus would be when a share issue of more than MEUR 8 is arranged or a smaller share issue in which shares are listed both in Finland and e.g. Sweden.
SUMMARY OF RELEVANT REGULATIONS
In the following table, I have outlined all applicable regulations and recommendations when drafting an EU Growth prospectus with some comments on which articles or sections are relevant. As you may see, there are quite many regulations to be observed.
1) Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC
(“Prospectus Regulation”)
See article 15 regarding EU Growth prospectus jointly with relevant definitions in article 2 (such as “small and medium-sized enterprises” i.e. “SMEs”).
2) Brussels, 14.3.2019 C(2019) 2020 final – Commission Delegated Regulation (EU) of 14.3.2019 Supplementing Regulation (EU) 2017/1129 of the European Parliament and of the Council as regards the format, content, scrutiny and approval of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Commission Regulation (EC) No 809/2004
(“Delegated Regulation”)
See Chapter IV regarding EU Growth prospectus: in article 32 format of EU Growth Prospectus with references to relevant Annexes, as well as article 33 regulating how to prepare the summary
3) Brussels, 14.3.2019 C(2019) 2020 final ANNEXES 1 to 29 – Annexes to the Delegated Regulation
See Annexes 24 and 26 as set forth to be considered in article 32 of the Delegated Regulation
4) Commission Delegated Regulation (EU) 2019/979 of 14 March 2019 supplementing Regulation (EU) 2017/1129 of the European Parliament and of the Council with regard to regulatory technical standards on key financial information in the summary of a prospectus, the publication and classification of prospectuses, advertisements for securities, supplements to a prospectus, and the notification portal, and repealing Commission Delegated Regulation (EU) No 382/2014 and Commission Delegated Regulation (EU) 2016/301
(“Delegated Regulation 2019/ 979”)
See article 2 and Annex 1 of the Delegated Regulation 2019/969 regulating how and what financial information should be included in the summary (note that there is a division of mandatory and optional information based on if such financial information is disclosed in the main text of the prospectus). Article 10 regulates how to use hyperlinks in the prospectus and articles 13-17 certain issues regarding marketing (also applies to so-called teasers).
5) ESMA31-62-1217 (29 March 2019) i.e. Final Report ESMA Guidelines on risk factors under the Prospectus Regulation with Annexes 1-2
Annex II includes the actual guidelines on how to draft the risk factors (both in summary and main text). Also, illustrative examples in Appendix of Annex II. The main text of the Report includes comments received by ESMA on these guidelines and some responses which should also be examined.
6) ESMA31-62-1239 (12 July 2019) Consultation Paper – Draft Guidelines on disclosure requirements under the Prospectus Regulation
Detailed guidelines of ESMA in Annex II which are still under preparation (i.e., such guidelines still in draft form but in practice applicable regarding several topics).
7) ESMA/2019/ESMA31-62-1258 (version 2 last updates on 12 July 2019) – Questions and Answers on the Prospectus Regulation
(“ESMA New Q&A”)
This Q&A is updated from time to time. Includes miscellaneous questions and answers regarding, e.g., grandfathering/implementation of the Prospectus Regulation, language requirements and passporting.
8) ESMA/2013/319 (20 March 2013) – ESMA update on the CESR recommendations
(“2013 Recommendations”)
Detailed recommendations preceding the above-mentioned regulations of ESMA. According to A2.1 to Q2.1 in the ESMA New Q&A, 2013 recommendations should be applied to prospectuses drawn up under the Prospectus Regulation to the extent they are compatible with the Prospectus Regulation. Hence, 2013 Recommendations are partly applicable and partly obsolete.
9) Nasdaq First North Nordic – Rulebook 1 January 2019
See section 3 which, however, still refers to the Prospectus Directive.
MOST RELEVANT CHANGES
Certain comparisons may be made between an EU Growth prospectus and a prospectus which was prepared earlier under the Prospectus Directive and other applicable regulations under the so-called proportionate disclosure regime by a small and medium-sized company—mainly referring to Annexes III and XXV of the Prospectus Directive and Annexes 24 and 26 of the Delegated Regulation (see item 3) above).
The most relevant changes are that also now the prospectus, including EU Growth prospectus, should be drafted in a standardised form, meaning that the order in which issues are presented in the prospectus have been regulated section by section. The summary of an EU Growth prospectus shall be drawn up as a short document written in a concise manner and of a maximum length of 6 pages of A4-sized paper when printed written in a readable font size (the limit is 7 similar pages for full-scale prospectus). In certain cases, the maximum length is 7–9 A4-sized pages, when e.g. the summary provides information about more than just one security (e.g. if option rights or warrants are issued in connection with the offering). Also, there are now more precise rules how and what financial information should be included in the summary (see above the Delegated Regulation 2019/ 979).
One of the most relevant changes concerns risk factors. The total number of risk factors included in the sections of the summary—in aggregate regarding risks involving the issuer and its business and on the other hand the offering and the securities in questions—shall not exceed 15. No such numeral restriction existed in the previous regulations and it seemed that similar and sometimes even identical risk factors have been presented in prospectuses despite the size of the issuer, their business areas and size of the share issue. ESMA has also provided a separate guideline (see above ESMA31-62-1217) on how to draft the risk factors (both in summary and main text) as well as provided some illustrative examples. Overall the new regulations obviously aim at limiting the number of risk factors presented to investors based on their actual relevance, in terms of the potential damage such risks could cause and mostly also how likely it is for the risks materialise, causing damage or harm to the issuer and its investors.
Another significant change relates to certain financial information which must be provided. The statement of working capital (“käyttöpääomalausunto”) and information about capitalisation and indebtness (“pääomarakenne ja velkaantuneisuus”) are no longer required unless the issuer is issuing shares or other securities entitling to shares and has a market value exceeding MEUR 200. This is how the above-mentioned is defined in the new regulations. However, if the issuer wishes to highlight risks regarding such items, e.g., that the issuer’s working capital is at a risky level, it may still be advisable to present information about working capital to provide supporting information about this risk factor.
Certain items, such as material contracts and information about share capital and share issues, may now be provided for a shorter time period. Quite many items in the formerly applicable Annexes III and XXV of the Prospectus Directive still appear in the new Annexes 24 and 26, some just reformulated.
Considering the number of items in both former and new Annexes, the difference between the former prospectus for the proportionate disclosure regime applicable to SMEs and the new EU Growth prospectus is not that significant. Limiting the number of risk factors, I agree that the EU Growth prospectus focuses on information that is material and relevant but the question is whether it will succeed at its other goal to “ensure proportionality between the size of the company and its fundraising needs, on the one hand, and the cost of producing a prospectus, on the other hand”. The list of information to be included in the EU Growth prospectus is still extensive, and working capital and other similar information which are not mandatory elements still may have to be included to ensure proper information about the risks. Also the actual evaluation of each typical risk factor is more challenging to some degree than the earlier method of presenting all risks that could be foreseeable.
Will we be seeing in prospectus summaries cases where there are less than the maximum 15 risk factors? I would almost bet on no, but the goal to focus on material and relevant information should still be embraced.