20 September 2004
Under the EU Prospectus Directive, issuers need to positively elect a home member state, and there are good reasons for them to select Ireland.
The directive was published on 31 December 2003, and although the majority of its provisions will not come into force until the middle of next year, important provisions relating to non-EU issuers are already applicable. Generally, the directive will result in the streamlining of, and create some significant improvements to, the EU market. The main features are an EU-wide definition of public offers, uniform offering documents prepared by EU issuers and a more consistent approach to the approval process for documentation required for listing.
The directive has, however, also thrown up a number of difficult issues, primarily as regards where an issuer’s “home member state” is to be. All regular issuers of debt securities into the European markets need to consider this key issue. Non-EU issuers need to pay particular attention, as the provisions of the directive regarding the selection of an entity’s home member state are now applicable; and once a home member state has been chosen, it is very difficult to change. It is therefore extremely important to select a jurisdiction with a competent authority with which the issuer is comfortable.
Ireland offers many competitive advantages in this regard.
So how does an issuer choose a home member state? The directive provides that a prospectus cannot be published until it has been approved by the competent authority of a home member state. A prospectus will – subject to a number of exemptions – be required if there is an offer or sale in the EU of equity or debt with a denomination of less than €50,000 (£34,000), or the first application for admission to trading on a regulated market has been made. The identity of the home member state depends on a number of factors, including whether the securities to be issued are debt or equity; and, if debt securities, whether they exceed the minimum denomination of €1,000 (£682). Generally speaking, for non-equity securities with a minimum denomination of at least €1,000, issuers have a degree of control over the identity of their home member state either by making an offer there, or seeking an admission to trading there.
For non-EU issuers, there is one key difference. In circumstances where a non-EU issuer has made an issue of non-equity securities with a denomination of less than €1,000, and these have been issued to the public for the first time or a first application for admission to trading is made in an EU member state, then that EU member state will be the issuer’s home member state for that issue and for all future issues of such securities. This fact may have serious implications as, although the intention of the directive is that the standards of prospectuses and the review process should be consistent in all member states, there is no question that some member states have significantly greater experience in this area and, more importantly, are more issuer-friendly and responsive. And because the definition of offer to the public in the directive is very broad, it is conceivable that accidental offers to the public in unintended jurisdictions could be made, resulting in the selection of a home member state in an unsuitable jurisdiction. There is, for example, a possibility that the offering of stock options to employees might constitute an offer to the public which would automatically trigger an election.
Once an issuer has decided which home member state it wishes to select, it should make a positive election in this regard. In choosing a home member state, an issuer should elect a member state with which it believes it will be comfortable going forward, as the competent authority of that home member state will be responsible for approving prospectuses for all equity securities and non-equity securities with a denomination of less than €1,000.
In Ireland, the competent authority is the relatively newly-established Irish Financial Services Regulatory Authority (IFSRA). IFSRA has delegated the process of reviewing and approving prospectuses to the Irish Stock Exchange (ISE). In recent years, the ISE has become a leading exchange for the listing of specialist debt securities, has produced specific rule books for listings of these securities and has put in place a dedicated process for prospectus review. It has become the number one choice in Europe for listing certain classes of asset-backed securities (ABSs).
More recently, the ISE has been using its experience in ABSs to become a leading stock exchange for the listing of corporate bonds, and the directive is likely to accelerate this progress. The fact that responsibility for approving prospectuses has been delegated specifically to the ISE by the IFSRA is a significant advantage – in many other jurisdictions the competent authority function will be carried out by a quasi-governmental authority as opposed to an exchange.
As the delegated authority in Ireland, the ISE offers issuers the following competitive advantages:
- Guaranteed turnaround time of three business days for the first draft of the prospectus and two business days for each further submission.
- A willingness to exercise discretion as regards the issue of IAS accounting requirements – other exchanges are demonstrating a lot less flexibility in this regard.
- A distinct set of listing rules which allows for consistency between issuers and products.
- A pro-business culture and a willingness to facilitate issuers.
- A very transparent listing process – unlike many other EU exchanges, readers and senior executives at the stock exchange are available to discuss transactions directly with issuers and managers.
- Familiarity with the new regime – the exchange has been responsible for drafting the specific rules for wholesale debt and specialist debt securities, which will form part of the directive.
While some issuers are currently avoiding the home member state election issue by issuing only non-equity securities with a denomination of greater than €1,000, eventually all issuers are likely to have to address this point. The longer an issuer delays, the higher the risk of inadvertently making a public offer in a jurisdiction which is not a jurisdiction of choice, and which the issuer will subsequently be unable to change.
Non-EU issuers particularly need to consider this issue as a matter of priority. Ireland, with the ISE as its competent authority, offers a very viable option as a home member state. A number of high-profile, non-EU issuing companies have already decided to elect Ireland as their home member state.
Cormac Kissane and John Matson are partners at Arthur Cox
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