Documents considered by the Committee on 6 January 2016 - European Scrutiny Contents

9   Financial services: requirements for a prospectus

Committee's assessment Legally and politically important
Committee's decisionNot cleared from scrutiny; further information requested
Document detailsProposal for a Regulation on requirements for a prospectus
Legal baseArticle 114 TFEU; ordinary legislative procedure; QMV
DepartmentHM Treasury
Document Numbers(37356), 14890/15 + ADDs 1-3, COM(15) 583

Summary and Committee's conclusions

9.1  The 2003 Prospectus Directive sets out disclosure requirements which apply, in broad terms, whenever an issuer seeks to admit securities to a regulated market in the EU or to offer securities to the public. The aim of the Directive was to make it easier and cheaper for companies of all sizes to raise capital across frontiers in the EU. However, the extent to which it has been successful has been questioned.

9.2  This proposed Prospectus Regulation is intended to replace the Prospectus Directive. The proposal is made in the context of the developing Capital Markets Union, with the objective of making it easier for companies to raise capital throughout the EU, to strengthen the role of market-based finance in the EU economy, to make the prospectus a more relevant disclosure tool for potential investors, especially in SMEs, and to achieve more convergence between the prospectus and other EU disclosure rules.

9.3  The Government tells us that it welcomes the Commission's proposal as a step in the right direction and that it agrees with the policy intentions. It explains for us much of the detail of the proposal noting both those provisions it supports and those it wishes to see improved. It draws our attention to Justice and Home Affairs issue on which it asserts its right to consider an opt-in.

9.4  Before we consider this important proposal further we wish to hear from the Government about the progress it is making in improving the text of the proposed Regulation during its consideration in the Council working group. Meanwhile the document remains under scrutiny.

9.5  In relation to the Justice and Home Affairs issue, the Government implies that it might purport to opt-in to the proposed Regulation, even though it does not have a legal base found in Part Three, Title V TFEU concerning an Area of Freedom Security and Justice. As the Government is well aware, we do not believe that the UK opt-in is engaged in the absence of such a legal base. If the Government wishes Protocol 21 to apply it should seek an additional Title V legal base or have the provision amended. As the proposal stands we consider that proposal would apply in its entirety to the UK.

Full details of the documents: Proposal for a Regulation on the prospectus to be published when securities are offered to the public or admitted to trading: (37356), 14890/15 + ADDs 1-3, COM(15) 583.


9.6  Directive 2003/71/EC, the Prospectus Directive (PD), sets out disclosure requirements which apply, in broad terms, whenever an issuer seeks to admit securities to a regulated market in the EU or to offer securities to the public. The PD is the gateway into capital markets for firms seeking funding and most firms seeking to issue debt or equity on public markets must produce a prospectus. The aim of the PD was to make it easier and cheaper for companies of all sizes to raise capital across frontiers in the EU. However, the extent to which it has been successful has been questioned.

9.7  The Commission has listed a review of the PD as an early and high-priority action at the centre of its Capital Markets Union project.[73]

The document

9.8  This proposed Prospectus Regulation is intended to replace the existing PD. The objective is to make it easier for companies to raise capital throughout the EU, to strengthen the role of market-based finance in the EU economy, to make the prospectus a more relevant disclosure tool for potential investors, especially in SMEs, and to achieve more convergence between the prospectus and other EU disclosure rules.

Scope of the prospectus obligation (Articles 1, 3 and 4)

9.9  Article 1(4) provides that the proposed Regulation would not apply to the admission to trading on a regulated market of securities fungible with securities already admitted to trading on the same regulated market, provided that they represent, over a period of 12 months, less than 20% of the number of securities already admitted to trading on the same regulated market, up from 10% under the PD. Raising the threshold in Article 1(3)(d) below which no prospectus is required from €100,000 (£71,820) to €500,000 (£359,100) acknowledges that the cost of producing a prospectus is disproportionate with regard to the envisaged proceeds where an offer of securities to the public has a consideration below €500,000 (£359,100). In Article 3(2) the maximum threshold up to which Member States have discretion to exempt offers of securities from the harmonised prospectus established by this proposal is to be raised from €5,000,000 (£3,591,000) to €10,000,000 (£7,182,000). This exemption would apply only to domestic offers for which no passport notification to host Member States is sought. Article 1(3)(i) and Article 1(4)(g) would provide for a full exemption of employee-share schemes, provided a document were made available containing information on the number and nature of the securities and the reasons for and details of the offer, to safeguard investor protection. To ensure equal access to employee-share schemes, independently of whether the employer were established in or outside the EU, no equivalence decision of third country markets would be required any longer.

Definitions (Article 2)

9.10  The main change in the area of definitions would be to the definition of SMEs, raising to €200 million (£143.64 million) the €100 million (£71.82 million) threshold that presently defines "companies with reduced market capitalisation". Companies in this category would be eligible to use a proposed lighter disclosure regime.

The prospectus summary (Article 7)

9.11  The proposed summary under Article 7 is closely modelled on the key information document required under the Packaged Retail and Insurance-based Investment Products Regulation and would be subject to a maximum length of six sides of A4 paper when printed with characters of readable size.

The base prospectus (Article 8)

9.12  The proposed Article 8 aims at clarifying the functioning of the base prospectus, which would remain broadly unchanged compared to the PD. However, a base prospectus would now be able to be drawn up for any kind of non-equity securities, not only for those issued under an offering programme or in a continuous and repeated way by credit institutions. Base prospectuses consisting of several documents (the so-called "tripartite prospectus") would now be possible.

The universal registration document (Article 9)

9.13  The proposal includes a new "universal registration document", an optional regime for "frequent issuers" admitted to trading on regulated markets or multilateral trading facilities. This new feature of the prospectus regime is based on the premise that where an issuer makes the effort of drawing up every year a complete registration document (disclosing information about itself), it should be awarded a fast-track approval with the competent authority when a prospectus is later required for a particular issue.

Treatment of non-equity securities of high denomination per unit (Articles 1 and 13)

9.14  The PD grants favourable treatment to non-equity securities with a denomination per unit of €100,000 (£71,820) and above. It also provides for a prospectus exemption for offers of such non-equity securities. This threshold, originally conceived for consumer protection, has led to the unintended consequence that bonds are priced beyond the reach of retail investors, as issuers generally seek the less costly option of making wholesale-type disclosure. As most investment-grade issuers can raise the funds they need from institutional investors, there is little incentive for them to offer bonds in smaller sizes. The Commission therefore proposes removing the incentives to issue debt securities in large denominations for non-equity securities admitted to trading on a regulated market by removing the dual standard of disclosure (retail or wholesale). A unified prospectus template would be defined through delegated acts. In addition, the prospectus exemption of Article 3(2)(d) of the PD for offers of securities with a denomination above €100,000 (£71,820) would be removed. Issuers offering non-equity securities solely to qualified investors or requiring a minimum commitment of €100,000 (£71,820) per investor would still benefit from a prospectus exemption.

Specific disclosure requirements (Articles 14 and 15)

9.15  The proposed specific disclosure rules for secondary issuances and SMEs are to be for optional use. They would replace the "proportionate disclosure regimes" for rights issues and SMEs, introduced by the Directive 2010/73/EU by amending the PD, which have not achieved their objectives and have not been widely used in the UK. The proposed Regulation would provide for an alleviated prospectus for secondary issuances, which account for around 70% of all prospectuses approved in a given year, and for SME growth markets. The secondary issuances regime would apply to offers or admissions concerning securities issued by companies already admitted to trading on a regulated market or an SME growth market for at least 18 months. Such companies would therefore be subject to ongoing disclosure requirements under the Market Abuse Regulation and either the Transparency Directive or the rules of the operator of the SME growth market. The alleviated prospectus would contain minimum financial information covering the last financial year only (which could be incorporated by reference and information on such elements as the terms of the offer, use of proceeds, risk factors, board practices, directors' remuneration, shareholding structure and relating-party transactions). SMEs would likewise be offered the option to draw up a distinct, tailor-made prospectus were they offering securities to the public, focusing on information that was material and relevant for companies of that size. This kind of prospectus would however not be available to SMEs admitted to trading on regulated market to avoid a two-tier disclosure standard on regulated markets. As for all the minimum disclosure requirements under the prospectus regime, delegated acts would be adopted to specify the reduced information which should be included in the simplified registration document and securities note.

Risk factors (Article 16)

9.16  Article 16 would provide that only risk factors which were material and specific to the issuer and its securities should be mentioned in a prospectus. The proposal would require the issuer to allocate risk factors across two or three categories based on materiality. The European Securities and Markets Authority (ESMA), one of the European Supervisory Authorities, would be empowered to develop guidelines in that field.

Incorporation by reference (Article 18)

9.17  The scope of documents for which information could be incorporated by reference in a prospectus would be enlarged, subject to the conditions that the information be published electronically and that it complied with the language regime of proposed Article 25.

Specific rules in relation to issuers established in third countries (Articles 26 to 28)

9.18  Proposed Article 26 would provide that third country issuers drawing up a prospectus under the proposed Regulation should designate a representative among the entities which were carrying out activities regulated and supervised under EU financial service legislation, to serve as a contact point for the purposes of the new Regulation. The representative would, together with the issuer, be responsible for ensuring compliance of the prospectus with the requirements of the new Regulation. The competent authority of a third country issuer could approve a prospectus drawn up in accordance with the national legislation of the third country issuer if that third country legislation is deemed equivalent to the requirements under this Regulation. The Commission may adopt acts establishing general equivalence criteria and, on the basis of the above criteria, the Commission may adopt implementing measures stating that the national regime of a third country is equivalent to this Regulation.

Administrative measures and sanctions (Articles 31 and 36 to 41)

9.19  The proposal contains provisions on sanctions and measures aimed at introducing a harmonised approach to sanctions in order to ensure consistency. The proposal covers only administrative sanctions. However, Member States would have the right to provide criminal sanctions if they so wished. Article 31(1) of the proposal deals with Member States which have laid down criminal sanctions for breaches of some elements of the proposal in place of administrative sanctions. (The UK intends to use administrative sanctions, so this provision would be unlikely to apply to the UK). Those Member States would, as a first step, have to ensure their competent authorities could obtain information from the relevant criminal justice agencies and courts regarding criminal investigations or proceedings in their jurisdiction which concerned breaches of the proposal. Secondly, the Member States would have to ensure their competent authorities could share that information with competent authorities in other Member States and with ESMA. The provisions are very similar to the ones contained in the recent proposal for a Securitisation Regulation.[74]


9.20  The proposal has seven annexes, six of which accompany the deposited document. Annexes I, II and III outline the parameters for delegated acts to be drawn up, regarding the format of the prospectus, the base prospectus and the final terms and the schedules defining the specific information which must be included in a prospectus according to Article 13 of the proposed Regulation. Article 44 of the proposed Regulation would repeal the PD. References to the original PD would be construed as references to the new Regulation and would be read in accordance with the correction table set out in Annex IV. Annex V (not deposited) describes the calculation of the cost for Full Time Equivalent units for the Directorate General in the Commission concerned with the proposed Regulation, so giving the estimated impact on expenditure of the Commission. Annexes VI and VII are the Commission's impact assessment and an executive summary of the assessment. The impact assessment defines and analyses the problem which needs to be addressed, sets out the general legislative objectives that have to be met when considering solutions, outlines the policy options, and analyses costs and benefits of the prospective impacts.

The Government's view

9.21  In her Explanatory Memorandum of 14 December 2015 the Economic Secretary to the Treasury (Harriett Baldwin) says that:

·  the Government is pleased that the Commission has brought forward the review of the PD as a part of its Capital Markets Union project with a view to making it easier for companies to raise capital on the public markets throughout the EU and making the prospectus a more valuable information tool for investors;

·  it sees the PD review as an important opportunity to reduce materially barriers to capital market funding for SMEs and reduce the administrative burden for all issuers, while improving investor protection through appropriate disclosure requirements for prospectuses;

·  it thinks that the Commission's proposal is a step in the right direction and includes several welcome ideas to foster the objectives of the Capital Markets Union; and

·  it agrees with the policy intentions as set out by the Commission and is looking forward to working with its EU partners to ensure that the proposals deliver on these objectives in practice.

9.22  Turning to some of the detail of the proposed Regulation the Minister says that:

·  in particular the Government welcomes the proposals for specific disclosure requirements for secondary offers (Article 14);

·  listed issuers are required to disclose information on an ongoing basis — it should therefore be possible to reduce burdens for secondary issues because investors already have the information they need;

·  the Government aims for a minimal document for secondary issues, given that most relevant information is already in the public sphere — this would remove a material cost factor for issuers of all sizes;

·  the Government is equally supportive of developing a proportionate disclosure regime for SMEs (Article 15);

·  the PD is especially burdensome for SMEs, as the costs for producing a full prospectus are particularly disproportionate for smaller offers;

·  the Government supports the Commission's policy intentions to create an effective proportionate disclosure regime which would make prospectuses much easier and cheaper for SMEs to prepare, while continuing to provide sufficient disclosure to investors;

·  the Government also supports the Commission's proposal to narrow the scope of the prospectus obligation (Articles 1, 3 and 4);

·  raising the exemption threshold up to which Member States have discretion to set out their own national rules to €10,000,000 (£7,182,000) would allow more SMEs to raise capital on the markets;

·  the Government is supportive of raising the threshold below which no prospectus is required to €500,000 (£359,100), which would help to support cross-border crowdfunding in the EU;

·  the proposal for a universal registration document (Article 9) is a welcome idea in principle;

·  however, the Government believes further consultation is required to make sure the proposals would have the intended consequences and that the universal registration document would be genuinely useful for issuers;

·  with regard to the treatment of non-equity securities of high-denomination per unit (Articles 1 and 13) the Government is supportive of the intention to end the two-tier system, but recommends taking more time to consider the potentially adverse consequences of these changes for the EU wholesale debt markets;

·  the Government welcomes that Article 16 would provide that only risk factors which are material and specific to the issuer and its securities should be mentioned in a prospectus;

·  it is not convinced, however, that the allocation of risk factors across two or three categories based on materiality serves this purpose;

·  the Government is not convinced that the benefits of the provision in Article 26 on legal representatives taking responsibility for the compliance of third country issuers with the regulation outweigh the potential adverse effects of this additional barrier; and

·  it will explore this issue further with stakeholders and EU partners.

9.23  Noting that the proposed Article 31(1) of the Regulation is almost identical to Article 19(2) of the proposed Securitisation Regulation, the Minister says that, as the provision requires cooperation involving law enforcement bodies, the Government believes these are incidental Justice and Home Affairs (JHA) obligations and so the Article 114 TFEU legal basis is not appropriate for the provision. She says that the Government will consider an opt-in, explain that:

·  as the proposed Regulation contains incidental JHA obligations, the Government considers, in accordance with Protocol No 21 annexed to the TFEU, that the UK's JHA opt-in applies to these provisions;

·  the deadline for opt-in is three months after publication of the last language version of the proposal and so far only an English version has been published and the Council Services are likely to publish more language versions;

·  the opt-in period cannot expire before 29 February 2016 and the eight week period for us (and the Lords EU Committee) to consider the opt-in decision expires on 8 February 2016;

·  the Government is committed to taking all opt-in decisions on a case-by-case basis, putting the national interest at the heart of the decision making process; and

·  in making the opt-in decision on this proposal, the Government will have particular regard to consistency with previous decisions, costs for businesses (if any), burden on regulators (if any) and adherence to better regulation principles.

9.24  Turning to the provisions of the proposed Regulation conferring powers on the Commission to adopt delegated acts and on ESMA to develop Regulatory Technical Standards, the Minister says that the Government acknowledges the necessity that measures be taken by the Commission on the basis of objectives identified in the Regulation and for a vehicle to update technical provision of the Regulation on an ongoing basis.

9.25  The Minister tells us that the Government has undertaken extensive bilateral and multilateral consultation with regulatory authorities, other Member States, the Commission and industry stakeholders, which will continue throughout negotiations of the proposal. She says that no formal domestic consultation was launched, but the Commission undertook a full public consultation earlier this year, to which the Government has responded and the results of which it has carefully considered. As for the Commission's impact assessment the Minister says that:

·  the Government considers that it provides an appropriate analysis of the issues to be addressed by the Regulation and the potential impact of the policy options developed;

·  the Government agrees with the Commission that the proposed measures will result in a reduction in the administrative burden for issuers, will make access to capital markets for SMEs easier and cheaper and will improve investor protection by improving the appropriateness of the disclosure documents; and

·  those measures should facilitate further integration of capital markets in the EU in the form of more prospectus-based securities being offered across borders with greater transparency and comparability.

9.26  Finally the Minister says that:

·  there would be no direct financial implications of the Commission proposals for the UK Exchequer;

·  the proposal would have budgetary implications for ESMA, which would have to prepare regulatory and implementing technical standards and would have to upgrade its existing prospectus register and to transform it into an online storage mechanism;

·  the estimated impact on expenditure for personnel is €3.884 million (£2.7903 million); and

·  therefore the proposal has implications for the EU budget in the form of the Commission's share of 40% of the financing of ESMA.

Previous Committee Reports


73   (37134), 12263/15 + ADDs 1-2: see Seventh Report HC 342-vii (2015-16), chapter 3 (28 October 2015) and Thirteenth Report HC 342-xiii (2015-16), chapter 13 (9 December 2015). Back

74   (37128) 12601/15 + ADDs 1-2: see Seventh Report HC 342-vii (2015-16), chapter 2 (28 October 2015) and Thirteenth Report HC 342-xiii (2015-16), chapter 13 (9 December 2015). Back

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Prepared 15 January 2016