This client alert provides an overview of the most significant deviations from the old prospectus regime and highlights potential pitfalls deserving specific attention by presupposing basic understanding of the prospectus regime and all previous legal frameworks in connection with the prospectus regime. Please do not hesitate to contact us for any questions related to the legal framework or background understanding.

Scope of application

In general, the Prospectus Regulation applies only to those public offerings in the European Union where total consideration is equal to or greater than EUR 1 million calculated over a period of 12 months. Public offerings that do not meet the EUR 1 million threshold do not fall within the scope of the Prospectus Regulation.

Corporations considering public offerings that do not meet the Prospectus Regulation’s minimum threshold should be aware that other disclosure requirements may apply at a national level in individual Member States.

Exemptions from the obligation to publish a prospectus

Additionally, the Prospective Regulation increased the maximum exemption threshold to EUR 8 million. As a result, security offerings falling below this amount may not require the publication of prospectuses. Ultimately, whether a prospectus is required for offerings between EUR 1 million and up to EUR 8 million is left to national legislation because the Prospectus Regulation’s threshold amount is an “open clause”.

Germany has chosen to apply the Prospectus Regulation’s maximum exemption threshold of EUR 8 million. Thus, the “implementing” provision of the German Securities Trading Act (Wertpapierprospektgesetz, WpPG) does not differentiate between the scope of application and the exemption, generally providing that the obligation to publish a prospectus does not apply to public offerings with a total consideration of less than EUR 8 million (sec. 3 No°2 WpPG).

However, this exemption only applies to public offerings¹,

1. which are issued by credit institutions or by issuers whose shares are already traded on a regulated market, if the total consideration for all securities offered in the European Economic Area does not exceed EUR 8 million, calculated over a period of 12 months, or
2. where total consideration in the European Economic Area does not exceed EUR 8 million calculated over a period of twelve months and only if the offered securities are distributed in the course of investment advice or investment brokerage via a security service provider (Wertpapierdienstleistungsunternehmen), which is obliged to verify specific investment thresholds for non-qualified investors.

Exempted security offerings should not benefit from the so called “European Passport” regime. If issuers wish to benefit from the “European Passport” for cross-border offerings and admissions to trading on a regulated market (Chapter V of the Prospectus Regulation), they have to draw up a voluntary prospectus (Art. 4 of the Prospectus Regulation).

Additional disclosure obligations – more “Information Documents”

The German legislator requires the publication of a “Security-Information-Document” (Wertpapierinformationsblatt, WIB) for offerings exempted as they fall below the EUR 8 million threshold pursuant to sec. 3 N° 2 WpPG. The WIB has to be filed with the German Financial Supervisory Authority (BaFin).

The content of the Security-Information-Document is defined by sec. 3a WpPG and BaFin also published a checklist with further information on their website.²

The table below provides a general overview of disclosure requirements in selected European jurisdictions:

Summary of the prospectus

The prospectus summary is limited to a maximum length of seven sides of A4-sized paper when printed.If the summary covers several securities, which differ only in minor detail, the summary may include additional two sides of A4-sized paper.

Further, if the offered product falls within the scope of the PRIIP³ Regulation ((EU) 1286/2014) and the issuer wants or needs to replace the key information on the securities with the respective information contained in the PRIIP (Art. 8 (3) c) to i) of the PRIIP Regulation), the summary can be extended by three additional sides of A4-sized paper.

In case of a combination, where the summary covers several securities and the responsible person is substituting the key information on the securities with a PRIIP content, the maximum summary length shall be extended by three additional sides of A4-sized paper for each additional security.

No summary is required for non-equity securities traded only on a regulated market, or a specific segment thereof, where only qualified investors have access. The same applies for securities with a denomination per unit of at least EUR 100,000. Under a base prospectus, the issuer must draw a summary only in relation to each individual issue and annex that issue-specific summary to the final terms. It will only be approved where the final terms are included in the base prospectus or in a supplement.

The summary, which must be available in the official language of the country where the security is offered, shall not contain cross-references to other parts of the prospectus or incorporate information by reference. Furthermore, the number of risks which may be addressed in the summary is now limited to only 15. The German legislator also decided to keep the requirement of a German version of the summary if the prospectus is drafted in English.

Securities note – all about risks?

In order to avoid a random accumulation of all hypothetical risks, the risk factors have to be strictly limited to risks being specific to the issuer and/or to the securities and material for taking an informed investment decision. Ideally, the risk points out to an event in the past or present. The responsible person must assess the materiality of the risk factors based on the probability of the occurrence and the negative impact. The assessment can be disclosed by the qualification in “low,” “mid,” or “high.” The risk factors must be presented in a limited number of categories. In each category, the risks must be stated in descending order by degree of materiality. These categories have to be provided with headings indicating the type of risk factors represented in the category of concern.

BaFin intends to apply the ESMA Guidelines on risk factors under the Prospectus Regulation⁴ in it’s administrative practice.⁵

Transitional period – does the early bird benefit?

Specific rules apply to such prospectuses, which were filed with and approved by BaFin before 21 July 2019. In particular, supplements to such prospectuses as well as final terms must also be drafted and filed in accordance with the old prospectus regime. However, registration documents, which were approved before the Prospectus Regulation came into effect on 21 July 2019⁶ cannot be combined with summaries and securities notes under to the Prospectus Regulation.

It is also not possible to file supplements to such registration documents. An issuer can, however, refer to information contained in “old” registration documents in such registration documents or prospectuses, which are drafted in accordance with the Prospectus Regulation. However, adjustments and amendments may be required in order to meet the overall requirements of the new prospectus regime.⁷

Uniform registration document

The Uniform Registration Document (URD) is a new multifunctional registration form, which can be used by issuers whose securities are admitted to a regulated market or an MTF. It differs from the previous registration documents in that it is possible to deposit the URD without prior approval by BaFin so long as the URD was previously submitted for approval and was approved in two consecutive financial years. If the URD is not filed in the following year, the requirement for filing without prior approval shall not apply.

An issuer can obtain the status of a permanent issuer and (subject to compliance with further requirements) benefit from an accelerated approval procedure (5 instead of 10 working days) with a URD.

Subsequent BaFin approval is required if the issuer seeks to use an already filed URD as part of a prospectus.

Simplified disclosure regime (secondary issuances and growth prospectus)

Secondary issuances

The Prospectus Regulation provides for simplified prospectus requirements for securities which have already been admitted to a regulated market or an SME growth market for at least 18 months. SME growth markets are multilateral trading facilities, which are registered as an SME growth market in accordance with Art. 33 of MiFID II, designed to facilitate access to capital by reducing requirements and imposing an appropriate administrative burden for small and medium-sized enterprises (SMEs as defined below).

The simplified prospectus for secondary issuances is justified by the ongoing transparency obligations applicable to these securities: Once a class of securities is admitted to trading on a regulated market, investors are provided with ongoing disclosures by the issuer under the Market Abuse Regulation ((EU) 596/2014) and the Transparency Directive (2004/109/EC).

Growth prospectus

SMEs may choose to draw up an EU Growth prospectus under the proportionate disclosure regime set out in Article 15 of the Prospectus Regulation in the case of a public offering provided that they have no securities admitted to trading on a regulated market.

SMEs within the meaning of the Prospectus Regulation are:

1. companies, which, according to their last annual or consolidated accounts, meet at least two of the following three criteria: an average number of employees during the financial year of less than 250, a total balance sheet not exceeding EUR 43 million and an annual net turnover not exceeding EUR 50 million; or
2. companies that had an average market capitalisation of less than EUR 200 million on the basis of end-year quotes for the previous three calendar years.

Characteristics of an EU Growth prospectus are a shortened content, a shortened summary as well as a standardized format. In contrast to the previous SME regime, the EU Growth prospectus cannot be used for an admission to the regulated market and is only available to those issuers who have not admitted any securities to the regulated market. The EU Growth prospectus contains a specific summary based on Art. 7 of the Prospectus Regulation, a special registration document and a special securities note.

Simplified content of the securities prospectus

A further simplification has been introduced in the Prospectus Regulation concerning the information to be contained in the securities prospectus. It requires only a general warning that the tax law of the Member State of the investor and of the Member State of the issuer may affect the income from the securities.

Cross Border offers and admissions to trading – “European Passport”: a new Rule for ESMA

The European Passport allows issuers to offer or admit their securities to trading in any Member State without multiple approvals. Under this system, issuers need a notification in the other Member State in addition to the approval of the prospectus in the country of origin.

The notification required in order to passport into another jurisdiction is an inter-authority certificate of approval stating that the prospectus has been drawn up in accordance with the Prospectus Regulation. It also includes an electronic copy of the approved prospectus and, if applicable, a translation of the summary in accordance with Art. 27 (4) of the Prospectus Regulation.

Under the new Prospectus Regulation, ESMA shall establish a notification portal into which each competent authority shall upload the certificates of approval and electronic copies. All transfers of those documents between competent authorities will take place through that notification portal.

Challenges and questions

The legislator’s aim to simplify the wording and content of a prospectus and to make it more understandable for (retail) investors, is a worthy goal. In order to enable investors to make an informed investment decision, the content of a prospectus should be sufficient and objective and should be written and presented in an easily analyzable, concise and comprehensible form. However, the strict limitation of risk factors to 15 in the summary and the requirement to weight risk factors according to probability of occurrence and relevance seems to overshoot the mark. A misjudgment on the part of the issuer, the offeror or the person asking for admission to trading on a regulated market could lead to an increased liability risk. Additionally, the (retail) investor could be tempted to pay the greatest attention to the risk factors contained in the summary or assessed as primarily significant and, if necessary, to ignore those risk factors which would also have been crucial for the investment decision without a prejudiced drafting from the issuer.

Furthermore, the shortened summary with a general limitation to seven sides of A4 paper irrespective of the length of the prospectus or the type of security may hinder issuers, especially those of complex products, in drafting a suitable summary containing all the necessary information for (retail) investors.

In context of the very low maximum investment thresholds for retail investors of EUR 1,000 in the basic case and EUR 25,000 in the maximum case, it is to be welcomed that such restrictions do not apply to securities offered to shareholders in the context of a rights issue (Bezugsrechtsemission).

1. List abbreviated.↩
2. Availabe here.↩
3. Regulation on key information documents for packaged retail and insurance-based investment products (PRIIP).↩
4. ESMA Guidelines on risk factors under the Prospectus Regulation, as of 29.03.2019 (ESMA31-62-1217): available here.↩
5. BaFin Q&As “New rules for securities prospectuses according to EU Prospectus Regulation 2017/1129 - Frequently Asked Questions”, as of 29.7.2019: available here.↩
6. Such registration documents are in general valid for up to twelve months.↩
7. See also Q&A 1.2 of ESMA Q&As "On the Prospectus Regulation", as of 27.03.2019 - ESMA/2019/ESMA31-62-1258): available here.↩