Capital Markets Union – amending the Prospectus Directive | Fieldfisher
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Capital Markets Union – amending the Prospectus Directive


United Kingdom

The EU Commission's Action Plan on Capital Markets Union includes modernising the Prospectus Directive. This is key to enabling growth companies to access finance across Europe.

The EU Commission's Action Plan on Capital Markets Union, published on 30 September 2015, seeks (amongst other things) to modernise and simplify the Prospectus Directive.  This would appear to be key to breaking the barriers faced by growth companies in accessing finance across Europe.

A report, published on 16 October 2015 by lobbying group TheCityUK in conjunction with professional services firm EY, identified that long term financial stability in Europe is at risk as a result of growth companies' lack of awareness of alternative sources of finance.  The report found that companies were, due to a lack of knowledge or a perception of the likely costs and administrative burden, unwilling to explore alternative sources of finance.  Many were relying solely on bank finance, to their detriment where this was either not available to them or not available to a sufficient level. 

The CityUK has also conducted a review of the European listings regime and issued a report on 16 July 2015 with its findings.  The report identified that small and medium-sized enterprises account, on a global basis, for more than 90% of businesses and provide over 60% of worldwide employment.  In order to survive and grow, these enterprises need to access funding at all stages of their development.  This report also found that the majority of small and medium-sized enterprises do not look beyond their bank for financing. 

TheCityUK recommended that small and medium-sized enterprises should be better educated as to the available options for alternative sources of finance and as to how to prepare for the fundraising process.  In order to encourage cross border investment, potential investors should have access to information for small and medium-sized enterprises and TheCityUK therefore also recommended that national credit registers be established to allow investors across the EU to access this information.  It was also noted that incentives, such as tax incentives, should be made available by member states to encourage investors to invest in small and medium-sized enterprises. 

In relation to the prospectus regime, TheCityUK addressed issues raised by the EU Commission consultation on the Prospectus Directive launched in February 2015.  This focussed on three areas:

  • whether there should be an increase in the thresholds or other changes to the circumstances triggering a requirement for a prospectus;
  • what information should be included in a prospectus and whether the disclosure requirements should be less onerous in certain circumstances; and
  • the process for the approval of a prospectus. 

TheCityUK report suggested that the admission of securities to a multi-lateral trading facility, such as AIM, should not require the preparation of a prospectus as this would increase the barriers for small to medium-sized enterprises to access capital on these platforms by making the process more costly and less flexible.

In relation to the exemptions from the definition of an "offer to the public", TheCityUK recommended some modification.  Currently, a prospectus is not required where an offer of securities is made to less than 150 persons; where it is addressed solely to qualified investors; where it is for an amount of less than 5 million euros; or where it relates to securities denominated in amounts of at least 100,000 euros.  The EU Commission consultation suggested these thresholds may no longer be relevant in the current market, in particular with respect to facilitating fundraisings in the context of investment-based crowdfunding. 

In its report, TheCityUK acknowledged that, whilst it would be tempting to recommend a significant increase in these thresholds, there would still need to be some limits on the ability to raise funds without a prospectus in order to protect investors. 

TheCityUK indicated the 5 million euros cap on the offer amount seemed inadequate, given the overall position of the market in 2015, and suggested this could be significantly raised.  Its report highlighted that the US has now, by comparison, introduced its RegA+ regime, which in certain circumstances enables an issuer to publish a simple offering document for fundraisings up to USD 50 million without the need for a full prospectus.  It proposed an increase in this threshold to a level similar to the USD 50 million threshold.

TheCityUK considered the 150 person threshold would now be inconsistent with the EU Commission's Action Plan for Capital Markets Union, given that one of the objectives would be to stimulate pan European investment with the EU as a whole being viewed as a single marketplace. 

The EU Commission consultation on the Prospectus Directive also considers whether better use should be made of the tripartite prospectus regime, where a prospectus is split into a registration document, securities note and summary.  TheCityUK notes that prospectuses (except in France) continue to be published as a single document, largely as a result of prior market practice.

TheCityUK recommends in its report that a prospectus should be split into a core registration statement containing information on the issuer, which would be published before analyst research and marketing, and a much shorter securities note setting out the securities being offered.  This suggestion was made with the objective of shortening the timetable for initial public offerings (IPOs), enabling investors to have access to information on the issuer earlier to consider their investment strategies and ultimately to reduce IPO related costs. 

In the same vein, theCityUK also recommends that a prospectus should be more focussed and relevant and not overly long, and that the summary section should no longer be in a prescribed format, prone to the inclusion of irrelevant information, but should be limited to 3000 or 4000 words.  There should be reduced disclosure requirements for all forms of secondary offerings.

The relative costs of an IPO in comparison to the overall value of funds raised can be a concern for issuers.  The European IPO Taskforce noted, in a report published on 23 March 2015, the Federation of European Securities Exchanges estimate that the costs of an IPO are now approximately 10-15% of the offering where this is less than 6 million euros, 6-10% for an offering less than 50 million euros, 5-8% for an offering between 50 and 100 million euros and 3 to 7.5% for an offering in excess of 100million euros.  On these findings, the costs of raising capital for small and medium-sized enterprises would appear to be disproportional to that for larger fundraisings. 

TheCityUK also addressed this as an area of concern in their report and recommended that the UK Government should follow the example set by 19 other EU member states in having some form of tax relief for the costs of raising equity. 

In summary, the EU Commission has, through the Action Plan for Capital Markets Union, identified the need to grow and develop the pan European market for the provision of alternative sources of finance to enterprises.  It recognises that this should encompass the full spectrum of financing options from investment-based crowdfunding platforms to equities and debt offerings by issuers.  The EU Commission's consultation on the Prospectus Directive indicates that it is prepared to take on board the views of industry led bodies, such as TheCityUK; and understands the need for regulation to be fit for purpose, competitive and cost effective for companies seeking to raise capital, to provide flexibility and speed in terms of enabling finance to be secured quickly and effectively, and to enable and support pan European fundraisings.