Publish or be damned
25 April 2005
The European Union (EU) Prospectus Directive is expected to be implemented in Ireland in July 2005, by a mixture of ministerial order and primary legislation. A draft of the primary legislation, the Investment Funds, Companies and Miscellaneous Provisions Bill 2005, has recently been published.
The directive's basic principle is that a prospectus complying with a set of formal rules must be published if: an issuer is seeking to have securities traded on a regulated market (with relatively limited exceptions); and if an issuer is seeking to make an offer of securities to the public (with more significant exceptions).
Most of the directive's key terms have been given very technical meanings. In substance, however, 'securities' would include shares and bonds/debentures. It can also be inferred that the directive has application to issues by collective investment undertakings of the closed-end type. It is made clear that it does not, however, apply to money market instruments with a maturity of less than 12 months.
Exceptions where prospectus is not required
If an issuer is seeking to have securities admitted to trading on a regulated market, there are limited exceptions, which most notably apply where there is an admission of shares which represents less than 10 per cent (over 12 months) of shares of the same type already admitted to trading, and where securities are admitted to trading on one market and are being introduced to another. There are also some exceptions relating to takeovers and mergers but these require a document equivalent to a prospectus.
If an issuer is making an offer of securities to the public, there are much more wide-reaching exemptions. Principally, these exceptions will allow an offer of securities where the offer is addressed to qualified investors, plus up to 100 natural or legal persons, in each member state. In the context of public offers made within Ireland, it should be possible for many offers which might currently be regarded as public offers to fall within this.
A number of offers will also be entirely exempt from the directive. The principal exception allows for offers of a maximum of €2.5m (£1.7m) over 12 months. These offers will be subject to the provisions of the Irish primary legislation, which will require certain health warnings to be placed on a document dealing with such an issue. This exception will clarify any doubt which may previously have arisen about BES funding.
There are a number of exceptions to the rules to facilitate bond issuers, particularly high denomination bonds.
As stated above, it will be possible to make a public offer of securities to 'qualified investors' without need for a prospectus. The term qualified investors automatically includes entities which are authorised to operate in the financial markets. In the case of small and medium-sized enterprises (SMEs) and individuals, member states can have a register of such persons. The only qualification for SMEs to register is that they have their registered office in Ireland. The criteria for individuals are quite complex, broadly requiring two of the three criteria: frequent transactions of size in the markets, an investment portfolio of more than €500,000 (£341,000), and working in the financial sector in a professional position which requires knowledge of securities investment.
Contents and format of prospectus
If an issuer is required to publish a prospectus the principal rules are:
- The prospectus has to include a summary normally not exceeding 2,500 words.
- Persons specified by the Irish ministerial order will have to accept responsibility for the document.
- The prospectus must contain all relevant information to enable investors to make an informed decision.
- The EU regulation of 2004, which sets out the specific contents of a document depending on the type of issuer and issue, must be observed.
- Information can be incorporated in a prospectus by reference.
- All prospectuses will have to be pre-cleared by a regulator. There is a timetable of 10 working days for clearance, extended to 20 for a new issuer. Previously in Ireland a public offer where admission to trading was not being sought did not require any clearance from a regulator.
- The directive sets out formal ways in which a prospectus should be published with an emphasis on placing it on a website.
The directive contains detailed requirements regarding the language of the prospectus and how it should be published. In general, the scheme of the directive is to allow prospectuses to be freely issuable within the EU without allowing each member state to impose a requirement that the full prospectus be in their individual language, although the summary will generally require translation. To help make it easy for prospectuses to be issued cross-border, when the home member state has approved a prospectus, the issuer can request it to issue a certificate to the authorities of other member states. This passport will enable the document to form the basis of a public offer or an application for admission to trading in that state.
Implementation and transitional issues
The directive is likely to result in the repeal of a number of existing Irish measures. Most notably it is clear from the implementing legislation recently introduced that most of the provisions in the Companies Act 1963 concerning prospectuses will be repealed. It is also likely that the notoriously complex 1992 regulations which implemented the 1989 European directive on similar issues will be repealed.
Parties in Ireland that are issuing securities which are intended to be traded on a regulated market will not face major change. However, the document they require to draw up is relatively standardised. It will now be much simpler for such issuers to issue their document into other EU jurisdictions and to seek admission to trading on those markets.
However, parties that propose to offer securities to the public may be affected radically by the directive. In particular, if they can confine their issues to qualified investors, plus fewer than 100 others, they should be able to avoid having to prepare a formal prospectus. If their issue is of less than €2.5m, they will also be outside the ambit of the directive, although Irish legislation will require certain health warnings.
Brendan Heneghan is a corporate partner at William Fry