In order for a security to fall within the Prospectus Directive regime, it must be a “transferable security”57. The key consideration in determining whether a security is a “transferable security” for these purposes is whether it is negotiable on a capital market. ESMA and the FCA have taken the view that most options granted under employee benefit schemes will not be “transferable securities” and that no offer to the public within the meaning of the Prospectus Directive58 occurs at the time of exercise or conversion of such options. In addition, the current view is that loan notes issued on takeovers will generally not be caught by the regime, as long as the terms of the loan notes state that they are not transferable (or limit transfer rights to family members and trusts).
Note also that securities included in an offer where the total consideration under the offer is less than €5.0 million59 (when aggregated with any previous offers of the same security in the previous 12 months) fall outside the scope of the “offer to the public” regime, so no prospectus will be required in the context of such an offer60. This exclusion applies separately to offers of different kinds of securities within a 12-month period—for example, if an issuer offers shares with a total consideration of €3 million and debt with a total consideration of €3 million in the same 12-month period, both offers would fall within the exemption61. Offers during the 12-month period where a prospectus has been required or where other exemptions have been applicable (e.g., offers to qualified investors) should not be included for the calculation of the limit. This exemption is not relevant where a prospectus is required because a company’s securities are to be admitted to trading on a regulated market.
A prospectus will be required in the event of either an offer to the public or admission to a regulated market. Each limb has its own set of exemptions, and whilst there is a certain degree of overlap, the availability of an exemption under one limb will not necessarily mean that the issue is also exempt under the other.
The Proposed Prospectus Regulation introduces significant changes to the existing requirements for a prospectus when issuing further securities. In its Explanatory Memorandum to the draft Proposed Prospectus Regulation, the European Commission acknowledges that issuers whose securities are already listed on a regulated market or the future SME growth market should enjoy the benefit of an alleviated prospectus for their secondary issuances. The proposed measures are therefore expected to reduce the cost of drawing up prospectuses and to make the resulting disclosure more relevant for potential investors. Details of the proposed changes under the Proposed Prospectus Regulation are discussed throughout this chapter.
The width of the definition of “offer to the public” initially led to concerns that normal secondary-market communications, such as the posting of prices by traders on electronic dealing systems, could amount to an “offer of securities to the public”. In response to market concerns, in implementing the Prospectus Directive, the UK regulations clarified that a communication in connection with trading on a regulated market and certain other markets will not amount to a public offer that requires publication of a prospectus (section 102B(5) of FSMA).
The definition of “offer” for these purposes does not expressly refer to “acceptance” of the offer, which would give rise to a “contract” for the issue of the securities in question. Whilst in theory this definition could therefore encompass a broad range of related communications (e.g., newspaper articles or analyst reports), the Treasury clarified that it does not regard information presented by journalists only for illustrative or informative purposes as constituting an offer.
The Prospectus Directive provides that the obligation to publish a prospectus does not apply to shares offered, allotted or to be allotted free of charge to existing shareholders. ESMA has clarified62 that if securities are allocated with no element of choice or right to repudiate for the recipient63 (this allocation would almost invariably be free of charge), there is no offer of securities to the public. This is on the basis that the definition of “offer to the public” refers to information to enable an investor to decide to purchase or subscribe for securities, and if there is no decision to be made, there can be no offer to the public.
This concept is acknowledged in the Proposed Prospectus Regulation which states that no "offer of securities to the public" will have taken place in circumstances in which the investor has had no individual decision to invest.
Offers of free shares that involve the recipient’s decision whether or not to accept are treated as an offer for no consideration and as such would not, in ESMA’s view, ordinarily require a prospectus64. In addition, the offer of rights in connection with a rights issue to existing shareholders should be considered as an offer of the underlying shares rather than a free offer (on the basis that the rights can almost immediately be exercised)65.
The Amending Directive currently removes this exemption on the basis that it is redundant, as all such free offers fall within the exemption that applies for any offer with a total consideration of less than €100,000.
The FCA allows prospective qualified investors to self-certify their status.
“Qualified investors” fall into three main categories:
(A) legal entities that are authorised or regulated to operate in the financial markets (such as investment firms, financial institutions, insurance companies, collective investment schemes and pension funds); entities whose corporate purpose is solely to invest in securities, national and regional governments, central banks and similar institutions; and other legal enterprises that are not small and medium-sized enterprises (“SMEs”);
(B) individuals resident in the UK and SMEs with registered offices in the UK that are registered by the FCA on its register of qualified investors67; and
(C) investors authorised as qualified investors by any other EEA State for the purposes of the Prospectus Directive.
In addition to being resident in the UK, an individual wishing to register on the FCA’s register of qualified investors must meet at least two of the following criteria:
(A) he has carried out transactions of a significant size (at least €1,000) on securities markets at an average frequency of at least 10 per quarter over the previous four quarters;
(B) his securities portfolio exceeds €500,000; and
(C) he works or has worked for at least one year in the financial sector in a professional position that requires knowledge of securities investment.
The Amending Directive widens the definition of “qualified investors” to include those persons or entities described in points 1 to 4 of section 1 of Annex II to Directive 2004/39/EC and other persons or entities treated as professional clients. The Amending Directive also dispenses with the separate regime for maintaining registers of qualified investors.
An offer of securities made to or directed at fewer than 150 persons, other than qualified investors, per EEA State68.
This is one of the most commonly used exemptions and allows an issuer to make an offer to 149 nonqualified investors in each EEA State (or to any number outside the EEA) (which may be in addition to qualified investors) without requiring a prospectus.
Note that the 150-person exemption is not aggregated over a 12-month period—the issue of whether successive offers of securities constitute a single offer for the purposes of this exemption has been left to be determined on a case-by-case basis, and it is for the FCA to ensure that any potential ambiguity in the regulations is not abused.
This exemption has been the subject of much debate in the context of discretionary private-client brokers. Many AIM offerings in particular involve placings to discretionary private-client brokers who have the ability to make an investment decision on behalf of their underlying clients without reference to them. To the surprise of the industry, the FCA’s initial view was that if shares were placed with discretionary private-client brokers, their clients would count towards the 150-person threshold.
However, in response to industry concerns, the regulations implemented by the Treasury expressly clarify that an offer to a discretionary private-client broker who:
is deemed to be an offer to the relevant broker and not the underlying clients.
Note that a nominee shareholder will not fall within this “safe harbour”, and neither will a broker that has an advisory or execution-only relationship with its underlying client, as it will be the clients that make the ultimate investment decision and hence count towards the 150-person threshold.
A member state may also choose to exempt offers of securities to the public from the prospectus obligation in the Proposed Prospectus Regulation, provided that the offer is only made to domestic investors in that sole member state and the total consideration of the offer over a period of 12 months is between €500,000 and up to a maximum €10,000,000.
The FCA has indicated that it will require the“equivalent” document to be identical to a prospectus and will vet this document to ascertain whether it would be prospectus-equivalent. Effectively, this allows bidders to choose whether to prepare a prospectus or “equivalent” document. A prospectus has the advantage of being capable of being “passported” into other EEA States (which would be particularly useful if the target had significant numbers of shareholders in other member states). An “equivalent” document, on the other hand, does not automatically give rise to withdrawal rights in the context of a supplementary document69 and so may be preferred. However, it is possible that, if a supplementary document is released during the course of an offer to correct information contained in the equivalent documents which was erroneous or misleading in a material respect, the Takeover Panel will require the bidder to allow target shareholders who have already accepted the offer a limited period within which to withdraw their acceptances.
Bidders intending to issue a prospectus in relation to a securities exchange offer should consider the consequences of such withdrawal rights arising and may wish to consider adding a further condition or term to their offers. The Takeover Panel will be concerned to ensure that offers will not continue to be unconditional as to acceptances in the event that the bidders have no longer achieved the minimum 50 percent acceptance threshold. Bidders who might need to include such a provision are encouraged to consult the Takeover Panel in advance. In addition, bidders may want to take steps to prevent an offer from becoming or being declared unconditional as to acceptances when a statutory withdrawal period is running or in circumstances where a supplementary prospectus may subsequently have to be published. Bidders may also wish to consider organising their offers so that they become or are declared unconditional as to acceptances and wholly unconditional at the same time.
Schemes of arrangement (including those implementing takeovers) are generally not regarded as constituting “offers” for this purpose and so will not require publication of this “equivalent” document. The FCA, however, has expressed the view that a securities exchange offer which involves alternative forms of consideration (e.g., a cash alternative/mix-and-match facility) requiring the target shareholders to make an investment decision as to which form of consideration to accept will constitute an “offer to the public” absent another exemption applying.
The key exemptions from the obligation to publish a prospectus in the context of an “admission to a regulated market” are set out below. It should be emphasised that these are exemptions only from the obligation to publish a prospectus in connection with an admission to trading. One of the following issues of securities could nevertheless still qualify as an offer of securities to the public and require a prospectus for that reason. For instance, a rights issue or open offer may not require a prospectus because it falls within the 10 percent exemption, but it may nevertheless constitute an offer to the public.
Listed companies are (subject to the availability of a suitable “offer to the public” exemption) able to issue 10 percent of their issued share capital without triggering the prospectus requirements.
The FCA has stated that in calculating the 10 percent limit, issuers should include in the numerator any shares that have benefited from this exemption during the previous 12 months but should exclude shares admitted without the publication of a prospectus due to other types of exemptions. Note, however, that such shares will be taken into account in calculating the issued share capital of the company to which the 10 percent threshold applies.
Under the Proposed Prospectus Regulation, this exemption will apply to all issuers of fungible securities (including GDR issuers) and allow them to issue over a period of 12 months up to 20 percent of the same class of securities that are already admitted to the same regulated market.
As mentioned above, the FCA has indicated that it will require the “equivalent” document to be identical to a prospectus and will vet this document to ascertain whether it would be prospectus-equivalent. This “equivalent” document will not benefit from the passport that would be available to an approved prospectus; however, it will prevent the triggering of statutory withdrawal rights in the event of a supplement. Unlike the equivalent provision under the “offer to the public” rules, a takeover undertaken by way of a scheme of arrangement involving the issue of listed securities will not necessarily be exempt (even if target shareholders are not required to make an investment decision with respect to alternative forms of consideration).
ESMA has clarified71 that the exemption does not apply to cases of nontransferable securities converted into shares on the basis that the Prospectus Directive specifically defines “securities” as “transferable securities”.
Under the Proposed Prospectus Regulation, this limit will be capped at 20 percent of the same class of shares.
The FCA has clarified that it is up to the issuer seeking to use this exemption to decide (on the basis of its own legal advice) whether it meets the conditions set out in the exemption, and the FCA will generally not express a view (save to challenge in specific cases). Whilst the FCA will not formally approve the content of a summary document, it may conduct a review in order to determine the issuer’s general compliance with the content requirements set out in PR 1.2.3(8) and, where the issuer also seeks a listing on the Main Market, the various eligibility conditions contained in the Listing Rules. The FCA is also concerned to ensure that there are no issues that may cause it to consider refusing a listing on the basis that it would be detrimental to the interests of investors in accordance with section 75(5) of FSMA.
Placings in excess of the 10 percent limit referred to above will require a prospectus even though they will not constitute an “offer to the public”.
In respect of certain secondary issues, under the proportionate disclosure regime, a full prospectus is not required for rights issues or statutorily pre-emptive open offers in respect of shares which are already admitted to trading on a regulated market or a multilateral trading facility that meets certain ongoing disclosure requirements and rules on market abuse (which includes AIM). Where statutory pre-emptive rights have been disapplied by issuers, the proportionate disclosure regime would apply, not requiring the publication of a prospectus, if the disapplied statutory pre-emptive rights have been replaced with “near identical rights”. Given the criteria for “near identical rights”, where statutory pre-emption rights have been disapplied, the proportionate disclosure regime is likely to be available only for rights issues or compensatory open offers (and not open offers with no compensatory element, as the “near identical rights” criteria would be unlikely to be met).
For pre-emptive secondary issues, a proportionate prospectus is required, the minimum disclosure requirements for which are set out in Annexes XXIII and XXIV of the Prospectus Regulation (as implemented by the Prospectus Rules) rather than in Annexes I and III. The key disclosure differences for a proportionate prospectus produced under these proportionate disclosure schedules are (amongst others):
See further Appendix III, which sets out the disclosure requirements for proportionate prospectuses on pre-emptive secondary issues.
In respect of proportionate prospectuses drawn up under the proportionate disclosure regime for pre-emptive secondary issues, the beginning of the prospectus must contain a statement to indicate clearly that:
SMEs and issuers with reduced market capitalisation may also elect to prepare a prospectus in connection with either: (i) an offer of securities to the public; or (ii) admission to trading on a regulated market, in accordance with the requirements of the proportionate disclosure schedules set out in Annexes XXV to XXVIII to the Prospectus Regulation (as implemented by the Prospectus Rules). The key disclosure differences for a proportionate prospectus produced under these proportionate disclosure schedules are (amongst others):
See further Appendix III, which sets out the disclosure requirements for proportionate prospectuses for SMEs and issuers with reduced market capitalisation.
SMEs and issuers with reduced market capitalisation, however, may still elect to draw up a prospectus in accordance with the full disclosure schedules in Annexes I to XVII and XX to XXIV of the Prospectus Regulation.
The European Commission has noted that the Amending Directive did not go far enough to alleviate secondary issuers of unnecessary disclosure obligations. Under the Proposed Prospectus Regulation, issuers of any securities (including GDR issuers and debt securities) that have been admitted to trading on a regulated market or an SME growth market for at least 18 months and who issue more securities of the same class are able to publish a "alleviated disclosure" prospectus. This alleviated disclosure prospectus will contain minimum financial information covering the last financial year only (which may be incorporated by reference).
Under the Proposed Prospectus Regulation, SMEs will further benefit from being able to draw up a distinct prospectus in case of an offer of securities to the public, provided they have no securities admitted to trading on a regulated market. For such companies, the European Commission states that it intends to take a "bottom-up" approach to build the new information schedule, including only information that is strictly necessary74.
The Proposed Prospectus Regulation also introduces an optional format for the prospectus for SMEs. Under the proposed regime, SMEs can choose a questionnaire format for disclosure. It is intended that ESMA will be empowered to develop guidelines to help SMEs draw up a prospectus under this format.
However, there are a number of alternatives available to AIM companies wishing to raise further funds without the publication of a prospectus:
The Statement of Principles is aimed at companies with a Main Market listing, and whilst AIM companies are encouraged to comply, there is an express recognition that greater flexibility may be justified for AIM companies. Accordingly, we are seeing a more flexible approach being taken by AIM companies in respect to the disapplication of pre-emption rights, which would further facilitate larger placings.
As a result of this practice, the National Association of Pension Funds suggests that whilst the threshold in relation to AIM companies should remain 5 percent of issued share capital, flexibility should be granted to AIM companies up to a threshold of 10 percent (above which particularly cogent justification will be required)76.
Under the Proposed Prospectus Regulation, the existing requirement to produce a prospectus (or equivalent document) for securities offered in connection with a takeover by means of an exchange offer, a merger or division will be replaced with a requirement to make a document available containing information describing the transaction and its impact on the issuer.
The European Commission considers that, as the main constituent part of the prospectus has either already been approved or is already available for review by the competent authority, the competent authority should be able to scrutinise the remaining documents within five, rather than ten, working days.
However, frequent issuers will need to inform the competent authority at least five working days before the date they envisage submitting an application for approval. An issuer that has filed and received approval for a URD for three consecutive years77 is considered to be well-known to the competent authority. All subsequent URDs can therefore be filed without prior approval and reviewed on an ex-post basis by the competent authority, where that competent authority deems it necessary. Where the issuer subsequently fails to file a URD for one financial year, the benefit of filing without approval would be lost and all subsequent URDs would need to be submitted to the competent authority for approval until the condition of approval for three consecutive years has been met once more.