On 1 July 2005, Irish securities law underwent a radical change through the implementation of the EU Prospectus Directive (PD). The changes had been widely anticipated by the Irish and European capital markets since the PD was adopted by the European Parliament and Council in November 2003. Now that it is up and running, it is timely to consider the purpose and scope of this new regime and what it means for Ireland’s position in the debt capital markets industry.
The prospect of a single pan-European system for the issuing of prospectuses had been highlighted as far back as 2001, when the so-called ‘committee of wise men’ produced its final report outlining the priorities for a European Financial Services Action Plan. Included in this plan was the proposal to introduce a single European standard for the issuing of securities (both debt and equity) and to allow the “passporting” of approved prospectuses throughout Europe.
The PD was implemented in Ireland on 1 July 2005 by a combination of the Investment Funds, Companies and Miscellaneous Provisions Act 2005 (the 2005 act) and the Prospectus (Directive 2003/71/EC) Regulations. In addition, the new regime is governed by a European Commission regulation (809/2004) (the Prospectus Regulation), which took direct effect in all EU member states on 1 July 2005. In addition to the implementation of the PD, the Irish legislature also took the opportunity in the 2005 act to revoke the existing Irish securities law regime, which contained many archaic and anomalous provisions. The removal of the ‘four-day rule’ and the ‘six-week rule’, which imposed arbitrary delays and deadlines on securities offerings by Irish debt issuers, was particularly welcomed by the capital markets.
The purpose of the Prospectus Directive
The Irish Minister for Trade and Commerce noted in a press release on the day the new regime was introduced that the objective was “to enhance investor protection through the production of high-quality prospectuses and to improve the efficiency of raising capital”. The dual aims of investor protection and market efficiency are not necessarily seen as mutually exclusive. Indeed, central to the PD is the idea that only informed and confident investors can contribute to any functioning market and that, in turn, only a functioning market offers a choice of investments and easy access to such investments.
Among the key principles of the PD is that, if an issuer is seeking to list its securities on a regulated market, or if it wishes to offer its securities to the public, it must publish a prospectus and have it approved by a “competent authority” of any EU member state. For Irish purposes, the competent authority is the Irish Financial Services Regulatory Authority (now known as the Financial Regulator), although in practice it has delegated the review of prospectuses to the Irish Stock Exchange (ISE). This has enabled Ireland to take advantage of the existing expertise of the ISE in reviewing prospectuses, particularly as the listing rules of the ISE prior to the implementation of the PD largely mirrored the contents requirements of the Prospectus Regulation.
Once a prospectus is approved in one EU member state (called the “home member state”) the issuer can make further offerings or seek admissions to trading in other EU member states (the “host member state”) without having to seek further approval of the prospectus in those member states. This is what is meant by “passporting”.
The application of the Prospectus Directive
In general, the new regime applies where issuers offer securities to the public or where they seek to have securities traded on a regulated market. The definition given to “offer of securities to the public” in the PD is extremely broad – it could conceivably cover any communication in any form and by any means presenting sufficient information on the terms of an offer to enable an investor to decide whether or not to purchase the securities. However, the PD also contains many exemptions from the requirement to publish a prospectus. In the context of debt issuers, the exemptions of most practical relevance are those applying to offers with a minimum denomination of €50,000 (£33,900) and offers to less than 100 individuals in each member state. In those circumstances, an issuer can offer its debt securities without being required to publish a prospectus. If the issuer seeks to have its securities admitted to trading, however, a prospectus must be published in connection with the application for listing. The application for listing can take place prior to the securities offering or after the offer is complete, depending on the issuer’s timing considerations.
The PD is a ‘maximum harmonisation’ directive. This means that EU member states were given very little discretion when implementing the PD into their domestic law. As a consequence, they cannot impose more onerous requirements as to the form and content of a prospectus than those outlined in the PD.
The new regime also introduces enhanced disclosure standards in line with the international standards laid down by the International Organisation of Securities Commissions (Iosco) for public offers of securities and admissions to trading. The intention is that this should also make it easier for EU issuers to offer their securities in non-EU countries, most notably the US.
The consequences for issuers
While the implementation of the PD has involved significant additional costs for issuers adapting to the new regime, in the future issuers seeking to engage in a cross-border offering of securities within the EU can expect lower costs of entry to foreign markets, as the costs in bringing a prospectus into compliance with foreign law requirements and any related translation costs will be reduced significantly. The predictability as to the form and content of a prospectus should also give issuers easier access to investors on an EU-wide basis.
The opportunities for Ireland
Of course, despite the stated aim of a pan-European prospectus regime, the tardiness of other member states in implementing the PD means that Irish issuers are not yet able to take advantage of the capital-raising possibilities of the PD passport. However, in a debt issuance context, the timely implementation of the PD, together with the existing expertise of the ISE and Irish legal, accounting and listing professionals, have given Ireland a considerable competitive advantage as a location for the establishment and listing of special purpose companies. In a maximum harmonisation environment, the jurisdiction that can provide the most efficient and professional service will attract the most business, and Ireland is well positioned to be that jurisdiction.
Tara Doyle is apartner in the banking and financial services department at Matheson Ormsby Prentice. She was assisted on this article by associate Gary Ferguson.