Making things easier for issuers on capital markets: Turning points in prospectus rules
To facilitate company access to financial markets, the European Commission completed its action plan for a gradual building of the capital markets union in 2019. Most actions focused on breaking down barriers blocking cross-border investments. As part of these measures, starting mid-2019, new rules governing prospectus drafting became effective. Among others, the new paradigm lays the groundwork for easier access for issuers and improved investor protection.
For 15 years, transactions involving offerings of securities to the public or admission to trading on EU securities markets were carried out in line with EU Directive 71/2003 on the prospectus to be published when securities are offered to the public or admitted to trading ("Prospectus Directive") and EU Regulation 809/2004 implementing EU Directive 71/2003 regarding information, format, incorporation by reference and publication of prospectuses and dissemination of advertisements ("Initial Prospectus Regulation").
The varied practice created in those years by transactions under the EU prospectus regime revealed many areas where legal flexibility was needed or more complex rules required to clarify or amend how such transactions were conducted.
As detailed in this legal insight from our capital markets team in 2017, the European legislator enacted EU Regulation 1129/2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market ("New Prospectus Regulation"). This new EU prospectus regime was created to further standardise the preparation, format and content of prospectuses.
The EU legislator also published two delegated regulations in 2019 supplementing the New Prospectus Regulation, i.e. EU Regulation 980/2019 and EU Regulation 979/2019 ("Supplementing Regulations"). These bring helpful technical standards to be observed when drafting a prospectus.
While certain provisions of the New Prospectus Regulation came into effect in 2017 or 2018, most entered into force on 21 July 2019, as did the Supplementing Regulations. On that date, the Prospectus Directive and the Initial Prospectus Regulation were fully repealed.
All provisions of the new EU prospectus regime are directly applicable in all EU Member States, with no need for implementing legislation.
Introducing the universal registration document
The main changes introduced last year are related to prospectus summaries, risk factors and new prospectus formats to be used for secondary issuances or by issuers which are small and medium-sized enterprises.
Of all the novelties under the new EU prospectus regime, one seems to be the most issuer-favourable. Issuers whose securities are admitted to trading on a regulated market or a multilateral trading facility may every year prepare a universal registration document ("Universal RD") describing the issuers' organisation, business, financial position, governance and shareholding structure.
An issuer that chooses to prepare a Universal RD every financial year will have to submit it for approval to its home state competent authority. After having a Universal RD approved by the competent authority for two consecutive financial years, the issuer can file subsequent Universal RDs without prior approval.
Justifiably, the EU legislator considered it reasonable to assume that after two consecutive years an issuer becomes well-known to the competent authority. Thus, it would also be reasonable to assume that subsequent Universal RDs or any amendments should be allowed to be filed without prior approval and should be reviewed only ex-post if the competent authority considers it necessary.
This new regime readjusts and extends the legal regime of debt issuers which have bond programmes in base prospectus format and where, when needed, only final forms are additionally issued for each issuance under the programme.
Why would an issuer choose to use a Universal RD?
First, this Universal RD regime should speed up the process of preparing a prospectus and should lower the economic burden of issuers by facilitating access to capital markets in a cost-effective way. Thus, issuers can prepare a Universal RD without the pressure of drafting a prospectus in a very limited timeframe for a specific transaction where the issuer incurs considerable costs for third-party advisors.
In case of a Universal RD, the issuer may take its time during the year to prepare such a document. Only if it decides to carry out a transaction will it then acquire resources for the additional workload, which will be fewer, since it already has the Universal RD prepared. Thus, the issuer can keep relevant information up-to-date and can have the whole documentation readily available when market conditions become favourable for an offer or an admission to trading just by adding a securities' note and a summary to the Universal RD.
Also, issuers who prepare a Universal RD are expected to benefit (at least in theory) from a faster approval process, since a substantial part of a prospectus has either already been approved or is already available for review by the competent authority in the form of a Universal RD.
In addition, the Universal RD should act as a valuable reference source on the issuer, because it would offer investors additional information to make an informed judgment on the respective issuer's situation. This additional current disclosure will also be attractive to analysts, thus giving the issuer an upper hand in valuation and market image.
The issuers' view
"The universal registration document saves time and money. If the issuer has in place a universal registration document, it means that 80% of a rights' issue legal documentation is prepared upfront and ready to use when needed. Consequently it is easier for an issuer to make use of the capital markets opportunities. " – said Mihai Marcu, the founder and CEO of MedLife, Romania's largest private healthcare services provider. MedLife shares have been listed on the Bucharest Stock Exchange ("BVB") since 2016, when the company carried out the biggest IPO of a private company on the BVB to date.