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Corporate Clips

The Prospectus Directive - A New World for Issuers

September 2005

Background

1 July 2005 heralded a change in regulation for issuers (wherever based) wanting to sell to the public or list securities within the EEA. With effect from 1 July, the Prospectus Directive (the “Directive”) came into force as part of a package of measures, introduced by the EU Financial Services Action Plan, with the aim of improving the single market for financial services. The Directive (implemented by the Prospectus Regulations 2005 (“Regulations”)) introduces the concept of a harmonised set of prospectus content standards and provides an EEA wide “passport” to enable issuers, once a prospectus has been approved by a competent authority in the relevant Member State, to be admitted to trading on a regulated market in any EEA jurisdiction.

When will a prospectus be required?

The Directive describes two situations where a prospectus is required:

(i) when an offer of securities is made to the public; and
(ii) when securities are admitted to trading on a regulated market.

Under the Directive, all prospectuses and issues not falling within exemptions laid down in the Regulations will have to be approved by the regulator of the issuer’s home member state under the relevant local legislation. For issuers within the EEA, the “home Member State” is straightforward, being the country in which such issuer has its registered office. For non-EEA issuers, the “home Member State” will be permanently fixed as the Member State in which such issuer makes its first admission to trading or public offer after 31 December 2003.

The regulator in the UK is the Financial Services Authority in its capacity as the UK Listing Authority (“UKLA”), which will regulate all companies with a registered office in the UK even if they are seeking admission to trading or making a public offer in another EEA market. All prospectuses first published by non-EEA issuers in the UK will need to be approved by the UKLA. Once a prospectus has been approved by one competent authority, it will be available for use throughout the EEA.

What constitutes an offer to the public

“Offer to the public” is widely defined in the Directive and covers a “communication to persons in any form by any means, presenting sufficient information on the terms of the offer and securities to be offered, so as to enable an investor to decide to purchase or subscribe to those securities”. Although the breadth of the definition may seem daunting to companies looking to raise money post implementation of the Directive, there are exemptions available. These are wider than the exemptions in place under relevant legislation prior to 1st July 2005 and, accordingly, may reduce compliance costs for companies offering securities to the public.

The following, amongst others, will not constitute an offer to the public for the purposes of the Directive:

(i) an offer solely to “qualified investors”. Authorised or regulated firms will constitute qualified investors for these purposes. Individuals and SMEs may also be qualified investors if they meet certain criteria and agree to entry onto a qualified investor register (resulting in reduced investor protection);
(ii) an offer made to fewer than 100 persons (other than qualified investors) in any Member State;[i]
(iii) an offer where the total consideration for the offer is less than €2.5 million;
(iv) an offer where the minimum subscription commitment per investor is €50,000 or more; and
(v) an offer relating to securities which are not transferable securities. [ii]

The Treasury has stated that it does not propose to legislate to incorporate additional prospectus requirements for offers below €2.5 million at this stage, on the basis that such a regime would not benefit the UK market.

Impact on AIM Companies

AIM offers a flexible regulatory regime, allowing growing companies the benefit of a public quotation without going through the expensive and difficult process that admission to the full list can entail. To preserve this, prior to 1 July, the London Stock Exchange (“LSE”) had changed the regulatory status of the AIM market from an EU regulated market to an exchange regulated market on 12 October 2004. This means that the requirements of the Directive will only apply to AIM companies if an offer of securities is being made to the public. In all other circumstances, a more straightforward AIM admission document will suffice without the need for approval by the UKLA.

With effect from 1 July 2005, the Public Offers of Securities Regulations 1995 (“POS Regs”), which previously laid down the information required for an AIM admission document, were repealed. As a result, the LSE has adopted a new standard based on the Directive, but carving out significant elements deemed inappropriate for AIM. Certain elements of the prospectus rules will be incorporated by reference into the AIM Rules. In effect, the standard of information under such a document will be broadly equivalent to that previously required under the POS Regs. [iii]

It is worth noting that, as a result of the change in regulatory status, companies quoted on AIM are no longer able to fast track onto the full list (as any such move requires the production of a Directive compliant prospectus) and that the exemption in the Directive relating to employee share offers (where the employer or an affiliated undertaking has securities admitted to trading on a regulated exchange) will not apply.

Rights Issues

As a result of the changes referred to above, most companies joining AIM (particularly where the admission is structured as a placing to institutional investors) will not have to issue a Directive compliant prospectus and, although a new regime will apply, there will not be any material changes from the existing rules. However, given the broad definition of “offer to the public”, the Directive will apply to open offers and rights issues (whereas there was previously a more relaxed disclosure regime in such circumstances).

Importantly, the exemption for shares representing an increase of less than 10% of existing issued share capital will only apply on admission to trading on a regulated exchange and will therefore be of no help to companies on a rights issue or open offer. On such issues (if no exemptions apply), the prospectus will require the approval of the UKLA, which will create increased workload and costs.

Conclusion

The aim of the Directive is to harmonise the public offer and listing regimes across the EEA. Two months on, the Directive does not appear to have caused major upheaval in the capital markets and a number of early concerns with the draft legislation have been addressed or put to rest by the UKLA in its non-binding advice. However, given the failure to distinguish between (i) securities offered to the public for the first time; and (ii) rights issues and secondary offers, all companies will be subject to additional disclosure requirements; the impact this will have, in particular on AIM companies, in terms of structuring offers in the medium term remains to be seen.

Further Information

If you have any questions or would like to discuss anything in this article in more detail, please contact Lucy Vernall at Kemp Little LLP on 020 7600 8080.

[i] The Treasury had proposed to implement the 100 person exemption on an aggregated basis calculated over a 12 month period. However, it was decided not to require formal aggregation over such a period for the purpose of the exemption but, instead, to require the FSA to monitor whether successive offers of securities constituted a single offer for the purposes of the exemption.

[ii] There was some debate before the Directive came into force as to whether its provisions would apply to employee share option schemes. The UKLA newsletter published on 28 June 2005 (which constitutes non-binding advice) has made clear that whether the Directive applies to employee share option schemes will depend on whether the option is transferable within the meaning of “transferable securities” as defined by Section 102A of the Financial Servicer and Markets Act 2000. The UKLA will not expect the grant of an option under an employee share option scheme to involve a security which is negotiable on the capital markets and, therefore, subject to the provisions of the Directive. It also considers that it is unlikely that exercising the employee share option would amount to a public offer.

[iii] The LSE has confirmed that, for a limited period, it may be possible to obtain a derogation from the AIM team for the admission document to be prepared under the AIM/POS Regs. regime rather than the new regime.