11.01  This chapter is in essence about negatives: when is what not required? It is more intuitive to write about what does need to be done, and when. A light disclosure regime implies that certain information that would otherwise be prescribed to be disclosed by being included in the prospectus now is not. That means omission of content. While important once one gets to actually preparing a prospectus with light disclosure only, laboriously setting out all the items that may be left out (or at least, that are not listed in the relevant annex to the relevant Commission Delegated Regulation¹ supplementing the new Prospectus Regulation²) is perhaps not the most interesting read. A question that precedes the question of content is that of scope. In which circumstances is full disclosure not prescribed, in the sense that (p. 244) certain information is not prescribed to be included in the prospectus? And why would that be? These questions are more interesting to look into. This chapter therefore focuses on the background to the new regime for light disclosure for secondary issuances, and the case for it, and analyses the scope thereof. As for content (what information is not specifically prescribed?), this is described in brief thereafter. The chapter concludes with yet another question, which is whether it can be expected that the regime allowing for light disclosure in case of secondary issuances will be much used in practice.

11.02  In 2003, the Prospectus Directive³ was adopted and published, and it has applied since July 2005. It has been revised several times, including in 2010 when, inter alia, a proportionate disclosure regime was introduced for statutory rights issues.

11.03  The proportionate disclosure regime for statutory rights issues was little used in practice. Statutory pre-emptive rights are often excluded, because companies typically do not know where each and every shareholder is resident. This could be anywhere in the world, including many countries where the company does not want to make or be deemed to be making a public offer of securities, because it does not want to have to comply with the requirements for making a public offer there or because it is not aware of the requirements therefor, and has no intention and no interest offering there. Another reason why the proportionate disclosure regime for statutory rights issues was little used is that underwriters of securities offerings, or the sponsors of admissions to trading, were concerned that the general disclosure standard of Article 5, Prospectus Directive might still be relevant. And last but not least, many larger initial public offerings (IPOs) or securities offerings by European companies have a US tranche under which the securities are offered to US investors. Even if not to retail investors in the US (which would require a Securities and Exchange Commission (SEC) registration, including an SEC-approved prospectus), but to qualified institutional buyers only under Rule 144A, underwriters would expect the disclosure to meet relevant US standards, backed up by so-called 10b-5 letters from US counsel confirming that—in brief—in its view the information in the prospectus is materially correct and not misleading and does not omit anything material for investors. This means that other jurisdictions’ disclosure requirements (in this case, those of the US) are added on to the disclosure requirements under EU law, i.e. the lighter disclosure alone will not be sufficient. As we will see in section VI ‘Conclusion: Use (p. 245) in Practice?’ (para. 11.58), these considerations will likely remain relevant under the new Prospectus Regulation as well.

11.04  Leaving aside the long-standing 10 per cent⁴ exemption under Article 4(2)(a), Prospectus Directive for privately placed secondary issues of securities that needed to be admitted to trading, the 2010 amendment of the Prospectus Directive had brought no alleviation of prospectus requirements for secondary issuances in general, however.

11.05  In September 2015, the European Commission published the final version of its Action Plan on Building a Capital Markets Union (CMU).⁵ In the introduction, the Commission stated that its top priority is to strengthen Europe’s economy and stimulate investment to create jobs, and that to strengthen investment for the long term, Europe needs stronger capital markets. It was observed that while the European economy is as big as the US one, Europe’s equity markets are less than half the size, and its debt markets less than one-third of those of the US. Stronger capital markets should complement Europe’s strong tradition of bank financing.

11.06  A Capital Markets Union was to be delivered through a combination of steps. One of these was to modernize the Prospectus Directive to, inter alia, make it less costly for businesses to raise funds publicly. The Commission wrote that public offers of debt or equity instruments are the principal funding route for mid-sized and large companies seeking to raise in excess of EUR 50 million. Public markets offer access to the widest range of funding providers and provide an exit opportunity for private equity. For firms seeking funds, the ‘gateway’ to public markets, as it is described, is the prospectus, shortly referred to as a legally required document presenting all information about a company needed by investors to make informed decisions about whether to invest or not. But so the Commission observed, prospectuses are costly and onerous to produce and typically run to hundreds of pages, can be complex for investors and excessively detailed, with the information that is critical for investment being hard to discern. The Commission therefore decided to ‘modernize’ the Prospectus Directive.

11.07  In the context of CMU, the Commission ran many consultations, including one on the review of the Prospectus Directive. The consultation document on this was published in February 2015⁶ and the consultation ran until May 2015. The two key objectives underpinning the Prospectus Directive were investor—‘and consumer’—protection and market efficiency. For the first objective, the prospectus should, in (p. 246) an easily analysable and comprehensible form, contain all the information which is necessary to enable investors to make an informed assessment of the issuer and the securities offered or admitted to trading on a regulated market. For the second, the Prospectus Directive aimed to facilitate the widest possible access to capital markets by companies across the EU, through requiring a common form and content of the prospectus and the EU-wide passport, making a prospectus approved by the competent authority of one Member State valid for offers to the public or admission to trading on regulated markets in the entire EU without additional scrutiny by the authorities of other Member States.⁷

11.08  In this consultation document too, the observation was made that the prospectus is the ‘gateway’ for firms seeking funding on the capital markets, and that most firms seeking such funding must produce one. The Commission stressed that ‘it is crucial that it does not act as an unnecessary barrier to the capital markets’, as ‘it should be as straightforward as possible for companies [ . . . ] to raise capital throughout the EU’. The review of the Prospectus Directive was to seek to ensure that a prospectus is only required when it is truly needed and that the information that must be included in prospectuses is useful and not burdensome to produce. The Commission observed several shortcomings of the Prospectus Directive, including that prospectuses had become ‘overly long’ documents, which has brought into question the effectiveness of the Prospectus Directive from an investor protection perspective. The objective of the Prospectus Directive review was stated to be to reform and reshape the prospectus regime in order to make it easier for companies to raise capital throughout the EU and to lower the associated costs, while maintaining effective levels of investor—‘and consumer’—protection.⁸

11.09  In addition to the more formal approval process, the issues identified by the Commission for discussion included the scope of the requirement to prepare—and publish—a prospectus (‘When is a prospectus needed?’) and what information a prospectus should contain: its contents. As for scope, the consultation requested respondents’ views on a possible recalibration of the obligation for issuers to publish a prospectus, including on whether a prospectus should be required for ‘secondary issuances’ (and for the admission of securities to trading on multilateral trading facilities (MTFs)).⁹ As for content, the consultation sought feedback on potential further flexibility, enhancing effectiveness to the benefit of issuers by alleviating administrative burden, while striking an appropriate balance with effective investor protection.¹⁰ This will be looked into further in section V ‘Content—What Information is not Specifically Prescribed?’ (from para. 11.39). We will now first look into the arguments for creating a lighter disclosure regime for certain cases, i.e. the case for that case.

11.10  The term ‘listing’ is being used here as a shorthand for admission to trading on a regulated market. Under the heading, ‘Creating an exemption for “secondary issuances” under certain conditions’,¹¹ the Commission started by observing that a company which already has a class of securities admitted to trading on a regulated market is known to the market through the prospectus it has produced and got approved on that first occasion (acknowledging, in its specific questions, that a long time may have lapsed since, in which case one may query how relevant that prospectus still is). The Commission noted the proportionate disclosure regime that was brought by the 2010 amendment of the Prospectus Directive for rights issues, i.e. where statutory pre-emption rights which allow for the subscription of new shares are granted to existing shareholders. This regime thus only being available for offers addressed to existing shareholders (and little used in practice, as set out in section II.1 ‘The Capital Markets Union’, para. 11.03 above), there was no alleviation of prospectus requirements for secondary issuances in general. ‘It may be argued’, the Commission went on to contemplate, that there is ‘less of a need’ to require a prospectus for secondary issuances because, once the class of securities is admitted to trading on a regulated market, the disclosure regimes under the Transparency Directive¹² and the Market Abuse Regulation¹³ (‘MAR’) provide the necessary information for purchasers. ‘On that basis’—i.e. on the basis that the initial prospectus published for initial admission to trading on a regulated market and subsequent disclosures made as required under the Transparency Directive and MAR together provide potential investors with the information they need—the Commission went on to say that a range of options could be envisaged to alleviate the prospectus burden for subsequent admissions to trading or offers of ‘the same class of fungible securities’.¹⁴

11.11  Before discussing these options further, we make a small sidestep by looking at these ongoing obligations under the Transparency Directive and MAR. As follows from the above, the Commission sees the Prospective Directive (and the Prospectus Regulation), the Transparency Directive, and the MAR as a trinity that provides investors with the information they need.

11.12  The prospectus provides the initial disclosure for the initial offering or admission of securities to trading on a regulated market. Thereafter, in particular when securities have been admitted to trading on a regulated market, investors will require regular information on the financial performance and financial position of the issuer over a given period and on a given date, respectively. This information is included in the financial statements. For most issuers that have securities in issue that have been admitted to trading on a regulated market, the Transparency Directive provides for a reporting regime under which issuers that are subject to it must produce, file, and disclose information on a periodic basis in the form of annual and semi-annual reports. The most comprehensive is obviously the annual report. Its three main elements are the financial statements (including the audit report), the management report, and a responsibility statement. The management report is a narrative of important events that have occurred during the period covered and their effect on the financial position and prospects of the issuer, thus being both backward- and forward-looking. The semi-annual report has a similar structure to the annual report, but instead of the full audited financial statements in the annual report, the semi-annual report only requires a ‘condensed set of financial statements’, which the auditors will typically not have audited but only reviewed, a review being a lower standard than an audit.

11.13  Offers of securities with a denomination of at least EUR 100,000 (in practice referred to as ‘wholesale securities’) were exempt under the Prospectus Directive,¹⁵ and are so under the Prospectus Regulation.¹⁶ Such offers do not require the publication of a prospectus. Admission of wholesale securities to trading on a regulated market is not so exempt, and still required a prospectus under the Prospectus Directive and also requires one under the Prospective Regulation. Securities with a denomination of at least EUR 100,000 are typically non-equity securities. Shares with such a high denomination are not often seen, certainly not if they were intended to be available to the public (in the plain English meaning of ‘retail investors’) by being offered to retail and/or admitted to trading on a regulated market and being available to retail in the secondary market. Share denominations tend to be sufficiently low to enable retail participation, and where the stock price rises to higher levels, stock splits are sometimes seen to bring the price down again. Wholesale securities thus tend to be non-equity securities, for the purpose of this chapter simply referred to as debt securities (acknowledging that this term also evokes questions and debate, but those will not be addressed in this chapter). While thus being exempt from the obligation to publish a prospectus for their offer, wholesale debt securities do require a prospectus for their admission to trading. Under the Transparency Directive, however, issuers that have only debt securities with a denomination of at least EUR 100,000 (i.e. wholesale debt securities) (p. 249) admitted to trading on a regulated market, are exempted from the obligation to publish annual and half-yearly financial reports. Hence while for these securities, if admitted to trading, a prospectus may have been published in the past, given the exemption under the Transparency Directive just mentioned, one may wonder whether the further ‘necessary information’ about them and their issuer, which, the Commission wrote in its Prospectus Directive review consultation, the Transparency Directive (and MAR) disclosure regime provides purchasers with, is in fact there. Having said that, if the EU legislator had deemed annual and semi-annual reports crucial for wholesale debt investors, it would not have included this exemption in the Transparency Directive. By including this exemption, the EU legislator has apparently taken the view that this information is not necessary for wholesale debt investors.

11.14  Leaving aside the periodic disclosure required by the Transparency Directive, if there are new developments affecting the issuer, its business, and its prospects, it may be relevant for those to be brought to the attention of investors. In the regulated market world, disclosure is an ongoing process. Where the prospectus provided a basis for the initial valuation and market price of the securities being admitted to trading, and regular annual and other financial reports (as to which, see section III.2 ‘The Transparency Directive’, para. 11.12 above) provided investors with periodic new financial and narrative information on the position, performance, and prospects of the company that might move the market price, the third type of information that investors require is that on other changes that may have a significant effect on that price. This information is provided under the ad hoc disclosure regime for inside information set out in the MAR. Under the MAR, issuers which have securities in issue that are admitted to trading on a regulated market (or MTF or organized trading facility (OTF)) are required to file and disclose price sensitive information on an ad hoc basis as and when it arises, without delay, so as to ensure that investors can factor this in when making buy-or-sell decisions that will in turn affect the market price.

11.15  Let us revert now to the mainstream of the case for a light disclosure regime for secondary offerings or listings. As noted in section III ‘The Case for a Light Disclosure Regime for Secondary Offerings or Listings’ (para. 11.10), on the basis that the initial prospectus published for initial admission to trading on a regulated market and subsequent disclosures made as required under the Transparency Directive and MAR together provide potential investors with the information they need, the Commission said¹⁷ that a range of options could be envisaged to alleviate the prospectus burden for (p. 250) subsequent admissions to trading or offers of ‘the same class of fungible securities’.¹⁸ According to the Commission, such options could include:

• –  raising the exemption for secondary issues of Article 4(2)(a) from 10 per cent to at least 20 per cent;

• –  granting a prospectus exemption to rights issues (i.e. cases where the issuer has not disapplied the statutory pre-emptive rights);

• –  granting a prospectus exemption to any secondary admission to trading or public offers of securities that are fungible with securities already listed, for which a prospectus has been approved within a certain time frame (e.g. three years).¹⁹

11.16  The Commission also contemplated that in the case of MTFs, a similar kind of exemption could be envisaged for offers to the public of a class of securities which has already been offered to the public over a certain period (e.g. three years). Multilateral trading facilities are not regulated markets. Admission of securities to trading on MTFs was and is outside the scope of the Prospectus Directive and the Prospectus Regulation, and thus does not require a prospectus under the Prospectus Directive or the Prospectus Regulation, and the Transparency Directive does not apply to MTFs, but only to regulated markets (i.e. to issuers having securities admitted to trading thereon). For this reason, the Commission contemplated that a similar exemption for secondary issuances²⁰ of securities admitted to trading on MTFs may need to be conditional on the existence of appropriate market rules (i.e. rules of the relevant MTF) regarding periodic financial reporting by issuers.²¹ As set out above, the Transparency Directive deals with such periodic financial reporting by issuers having securities in issue which are admitted to trading on a regulated market (and as also set out there, the MAR deals with ad hoc disclosure of price-sensitive information by such issuers, applying, other than the Prospectus Directive and the Transparency Directive, also to issuers having securities in issue which are traded on an MTF or OTF). The consultation paper also sought feedback on the need to create a bespoke regime for companies admitted to trading on ‘SME growth markets’, an optional label created by MiFID II²² that may be obtained by MTFs that wish to have this status. In that case, at least 50 per cent of the issuers whose securities are admitted to trading on such MTF would have to be SMEs as defined by MFID II. That the process of preparing a prospectus is perceived as complex, time-consuming, and expensive holds especially for SMEs, the Commission observed. The Prospectus Directive review also aimed to promote SME growth markets, making them attractive for investors and issuers, including by contemplating a bespoke prospectus (p. 251) regime as an incentive for SMEs to access capital market through SME growth markets. Small and medium-sized enterprises will not be specifically addressed in this chapter, save for noting that the light disclosure regime for secondary issuances discussed in this chapter is also available to issuers having securities traded thereon. Recital (49), Prospectus Regulation considers that:

The simplified disclosure regime for secondary issuances should be available for offers to the public by issuers whose securities are traded on SME growth markets, as their operators are required under Directive 2014/65/EU of the European Parliament and of the Council [author’s note: MiFID II] to establish and apply rules ensuring appropriate ongoing disclosure.

11.17  Article 14(1) codifies this in a substantive provision stating that indeed this regime may also be used by issuers or offerors whose securities have been admitted to trading on an SME growth market (when publicly offering such securities or seeking admission to trading on a regulated market—the trading on the SME growth market itself being outside the scope of the Prospectus Regulation).

11.18  It is useful to consider some of the reactions submitted to the Commission by market participants in response to the Commission’s consultation, as appearing in either the relevant feedback itself if published, or as summarized by the Commission in its feedback statement on the public online consultation.²³

11.19  The Commission established²⁴ that a very large majority of respondents agreed that while an IPO of securities requires a full-blown prospectus, the obligation to draw up a prospectus could be mitigated or lifted for any ‘subsequent secondary issuance of the same securities’,²⁵ provided relevant information updates are made available by the issuer. The rationale cited by the Commission is that respondents do not see a need for a full-blown prospectus for secondary issuance of securities listed on a regulated market, if the Transparency Directive and MAR information is published and important information is thus easily accessible to potential investors. The Commission noted that some respondents were of the opinion that no prospectus should be required at all for secondary issuances, or no listing prospectus, while for public offers of secondary issuances a lighter proportionate disclosure regime should be available. However, so the Commission went on to establish, many respondents did not want to lift requirements to disclose ‘the relevant information on the transaction’ (e.g. the offer terms), its impact on the issuer, and ‘the relevant risk factors’, and wanted to retain the requirement to incorporate a reference to recent announcements made by the issuer to the market (think of disclosures made under MAR). Some respondents argued that in a capital increase, the issuer should provide information about the intended use of proceeds and the (p. 252) expense of the offering, as this information cannot be obtained by investors from other sources (such as Transparency Directive and MAR disclosures), specific information about the offer (think of offer terms), the essential characteristics of the securities, and the major risks associated with the investment. Section V ‘Content—What Information is not Specifically Prescribed?’ (from para. 11.39) below briefly discusses where the Commission came out as regards content in its CDR and the Annexes thereto.

11.20  Getting to the Commission’s specific consultation questions related to secondary issuances, questions 8, 9, and 10 of the 2015 consultation are the most relevant. Question 8 was clearly the key one. We will look at question 8 in some more detail in section IV ‘Scope’ (para. 11.25), but first briefly set out here what came out of the consultation of questions 9 and 10.

11.21  Question 9 asked how Article 4(2)(a), Prospectus Directive, containing the long-standing 10 per cent exemption for privately placed secondary issues of securities that needed to be admitted to trading, should be amended to achieve the desired objective (e.g. by raising the 10 per cent threshold to a higher percentage or by applying this exemption to all secondary issuances of fungible securities, regardless of their proportion with respect to those already issued). According to the Commission,²⁶ a majority of respondents was in favour of altering this to broaden the exemption. The preferred option was that the exemption should apply to all secondary issuances of fungible securities, regardless of their proportion to those already issued. Alternatively, respondents argued for raising the threshold, most suggested to 20 per cent. As already noted in section II.1 ‘The Capital Markets Union’ (para. 11.04) above, the latter found its way into the new Prospectus Regulation²⁷ and started applying from 20 July 2017.²⁸

11.22  Question 10 asked whether, if ‘the exemption’ for secondary issuances were to be made conditional on a full-blown prospectus having been approved in the past within a certain period of time, which time frame would be appropriate. As we will see below in section IV ‘Scope’ (para. 11.25), question 8 speaks of ‘mitigated or lifted’. Where lifting would indeed imply an exemption, mitigating would ‘merely’ imply a lighter proportionate disclosure regime. In any case, according to the Commission²⁹ most respondents did not think such time frame requirement necessary. Those in favour of such requirement suggested on average a time frame of 2.5 years. Recital (50), Prospectus Regulation considers that:

The simplified disclosure regime for secondary issuances should only be available for use after a minimum period has elapsed since the initial admission to trading on a regulated market or an SME growth market of a class of securities of an issuer. A delay (p. 253) of 18 months should ensure that the issuer has complied at least once with its obligation to publish an annual financial report under Directive 2004/109/EC [author’s note: the Transparency Directive] or under the rules of the market operator of an SME growth market.

11.23  Article 14(1) codifies this in a substantive provision stating that indeed this regime is available for secondary issuances of securities admitted to trading on a regulated market or an SME growth market continuously for at least the past eighteen months.

11.24  Let us now look at question 8 in some more detail. This brings us to the issue of scope of the light disclosure regime.

11.25  As noted above, as far as the topic of this chapter is concerned, the key question in the Commission’s consultation document on the review of the Prospectus Directive of February 2015 was Question 8. It is worth setting it out in full:

Do you agree that while an initial public offer of securities requires a full-blown prospectus, the obligation to draw up a prospectus could be mitigated or lifted for any subsequent secondary issuance of the same securities, providing [author’s note: presumably this should read ‘provided’] relevant information updates are made available by the issuer?

Various words used in this question raise a number of questions in their own right. These go to the question of scope of the light disclosure regime discussed in this chapter. Making a leap in time, we jump to the relevant substantive provision of the new Prospectus Regulation dealing with this simplified disclosure regime for secondary issuances, Article 14.

11.26  The first thing that strikes is the reference to ‘secondary issuances’, in both the title of Article 14 and the introductory sentence of paragraph 1 thereof. It also appears in the very last sentence of Article 14, the last sentence of its final paragraph 3, which provides that the Commission shall calibrate the reduced information so that it focuses on the information that is relevant for secondary issuances. Oddly perhaps, the term ‘secondary issuance’ is not defined in the Prospectus Regulation. The issuance as such of securities does not trigger a prospectus requirement. It is their public offer or admission to trading on a regulated market that does, not their issue. Also, while limbs (a) and (b) of Article 14(1) refer to issuers, limb (c) refers to offerors. An offeror of securities need not (p. 254) necessarily be the issuer thereof but can also be a third party, offering securities issued by another entity. Like ‘issuer’, ‘offeror’ is a defined term in the Prospectus Regulation, meaning a legal entity or individual which offers securities to the public.

11.27  Question 8 of the Commission’s consultation document on the review of the Prospectus Directive of February 2015 spoke of ‘subsequent secondary issuances’ (of the same securities).³⁰ ‘Subsequent secondary issuance’ is even more puzzling than ‘secondary issuances’ alone. ‘Subsequent secondary’? And subsequent to what? Question 8 as phrased in isolation (cited above) suggests ‘subsequent to an initial public offer of securities’. Viewed in light of the introduction to question, however, it would seem that the Commission meant subsequent to a class of securities having been admitted to trading on a regulated market, and that ‘secondary issuances’ refers to admissions to trading or offers of securities subsequent thereto. Indeed, the introductory sentence of Article 14(1) suggests, in the part after the comma, that the words ‘secondary issuances’ refer to an offer of securities to the public or an admission to trading of securities on a regulated market. This also seems to follow from Recital (48), which starts as follows:

So, we conclude that ‘secondary issuance’ refers to an offer of securities to the public or an admission to trading of securities on a regulated market, in each case subsequent to a class of securities having been so admitted. The next question then is: secondary issuances—offers or admissions to trading on a regulated market—of what sort of securities?

11.28  As noted above, Question 8 of the Commission’s consultation document on the review of the Prospectus Directive of February 2015 spoke of subsequent secondary issuances of ‘the same securities’. It is not likely, however, that this meant to refer to the same securities that had been the object of the initial admission to trading being admitted again. In its introductory remarks leading up to the actual questions, the Commission wrote that a range of options could be envisaged to alleviate the prospectus burden for subsequent admissions to trading or offers of ‘the same class of fungible securities’, (p. 255) option 3 referring to secondary admission to trading or public offers of ‘securities that are fungible with securities already listed’.³¹ Fungibility of securities by necessity implies that they are of the same class. The opposite does not necessarily hold true: securities being of the same class does not necessarily imply fungibility. Plain vanilla bonds, for example, are a class of securities. Where an issuer has issued two series of bonds with identical terms apart from their respective maturity dates, the securities are not fungible. Had the terms been identical in all respects, including as to maturity, instead of being two series the two issues could have formed two tranches of a single series. The second tranche issued would then be fungible with the first one.

11.29  In the Commission’s November 2015 proposal³² for the Prospectus Regulation, Article 14(1)(a) referred to ‘issuers whose securities have been admitted to trading on a regulated market [ . . . ] for at least the last 18 months and who issue more securities of the same class’. So where in its consultation the Commission considered the situation of a class of securities having been admitted to trading on a regulated market and subsequent admissions to trading or offers of ‘the same class of fungible securities’³³ or ‘securities that are fungible with securities already listed’,³⁴ it its actual proposal it only spoke of ‘securities of the same class’—which, as noted above, does not necessarily imply fungibility.

11.30  It is time to look at where the final wording in the Prospectus Regulation came out. As we will see, on the one hand nuance has been added; on the other, the wording is imprecise. Article 14(1) reads as follows:

11.31  As already noted, while nuance has been added, the wording is imprecise, prompting questions and leaving room for interpretation and discussion. That is unhelpful for practice, where issuers, underwriters, advisers, and regulators will have to form a view and reach a conclusion on whether or not in a certain situation the light disclosure regime is available. In case of doubt, parties may opt for the safest route and go for full disclosure. We will come back to this in section VI ‘Conclusion: Use in Practice’.

11.32  The introductory sentence of Article 14(1) suggests that it is about the question who may use the simplified disclosure regime, in the case of an offer of securities to the public or of an admission to trading of securities on a regulated market. At the same time, however, Article 14(1) deals in its limbs (a)–(c) with the question for offerings or listings of what sort of securities the simplified prospectus may be used.

11.33  Starting with limb (a): issuers whose securities have been admitted to trading on a regulated market or an SME growth market continuously for at least the past eighteen months and who issue securities fungible with existing securities which have been previously issued. The first part, ‘issuers whose securities have been admitted to trading on a regulated market’, could be read as meaning that all of its securities must be so admitted, such that none of its securities may be unlisted. There would seem to be no rationale, however, for such strict reading. Still, a more precise way of drafting could have been something along the lines of ‘issuers of which a class of securities has been admitted to trading on a regulated market’, the reference to ‘a class’ being in line with the Commission’s consultation.³⁵

11.34  The following part, ‘and who issue securities fungible with existing securities which have been previously issued’, also raises interpretation questions. As noted earlier, it is not the issue of securities that triggers a prospectus requirement, but their offer or listing. It seems clear that the references here to ‘issue’ and ‘issued’ are not to be read in a company law or contract law sense. The better reading of ‘and who issue’ is ‘and who seek admission to trading on a regulated market of, or offer to the public’. That leaves the question of how to interpret the phrase ‘securities fungible with existing securities which have been previously issued’. Securities can only be fungible if there are existing securities they can be fungible with, and in a company or contract law sense existing securities have by definition been previously issued. On a literal reading, this phrase would capture any issues of any fungible securities, whether or not the existing securities have been admitted to trading or offered to the public. Again, however, it (p. 257) seems clear that the reference to ‘issued’ is not to be read in a company or contract law sense, If ‘issued’ here too means ‘admitted to trading on a regulated market or offered to the public’, that would mean a simplified prospectus can be used for an offer (or admission) of securities fungible with existing securities that are admitted to trading or, while not being admitted to trading, have been publicly offered. In its February 2015 Prospectus Directive review consultation, the Commission mentioned the option of granting a prospectus exemption to any secondary admission to trading or public offers of securities that are fungible with securities already listed, for which a prospectus has been approved within a certain time frame.³⁶ And in its November 2015 proposal for the Prospectus Regulation, the wording used by the Commission (in Article 14(1)(a) as then proposed, not a proposal for an exemption but for a simplified prospectus) was: ‘issuers whose securities have been admitted to trading on a regulated market [ . . . ] for at least the last 18 months and who issue more securities of the same class [author’s note: as those admitted to trading]’. On this basis, I would be inclined to think that limb (a) intends to say that issuers of which a class of securities has been admitted to trading on a regulated market may use a simplified prospectus in the case of an offer to the public or an admission to trading on a regulated market, of securities being of a class of and fungible with securities already admitted to trading on a regulated market, whether equity or debt.

11.35  Limb (b) allows the use of a simplified prospectus by issuers whose ‘equity’ securities have been admitted to trading on a regulated market continuously for at least the past eighteen months and who issue non-equity securities. Note that limb (a) about fungible securities speaks of ‘securities’ that have been admitted to trading on a regulated market, not specifically saying ‘equity securities’. Presumably, the thinking behind limb (b) is that where full equity disclosure has been published in the past in a prospectus (and disclosures required under the Transparency Directive and MAR have been made) and non-equity is issued, reduced disclosure suffices (as we will see below this only relates to the issuer, not to the securities). This does not work the other way around, in that the opposite of (b) is not available—a listed-debt-issuer offering equity securities. Compared to equity, non-equity requires less disclosure under both the Prospectus Directive and the new Prospectus Regulation, the MAR, and the Transparency Directive, certainly for wholesale debt. So, for listed-wholesale-debt-issuers can one say that once ‘a class’ of securities is admitted to trading on a regulated market (which would here be wholesale debt), the disclosure regimes under the Transparency Directive and the MAR provide the necessary information for purchasers? We touched upon this earlier, in section III.2 ‘The Transparency Directive’ (para. 11.13). As argued there, if the EU legislator had deemed annual and semi-annual reports crucial for wholesale debt investors, it would have required those for wholesale debt issuers. By not having the Transparency Directive require this, the EU legislator has apparently taken the view that this information is not necessary for wholesale (p. 258) debt investors. That becomes different if wholesale debt issuers subsequently offer equity, as equity investors require more information, also on the issuer. The issuer would then have to produce a full prospectus, as also noted in paragraph 11.37, where the last paragraph of Article 14(1) is discussed.

11.36  Last but not least, limb (c) allows the use of a simplified prospectus also by offerors (of securities admitted to trading on a regulated market continuously for at least the past eighteen months). As noted earlier, an offeror need not necessarily be the issuer but can also offer securities issued by another entity. A non-issuer offeror may have difficulty preparing a prospectus also describing the issuer. If someone holds listed securities and wishes to offer those to the public (they will be listed already, so no need for applying therefor), presumably the thinking is that where full disclosure has been published by the issuer in a past prospectus (and disclosures required under the Transparency Directive and MAR have been made by the issuer), reduced disclosure suffices. It will be interesting to see whether this will make it easier for non-issuer offerors to produce a prospectus.

11.37  The CDR includes the following Annexes for secondary issuances:³⁷

• –  Annex 3: secondary issuances equity registration document;

• –  Annex 8: secondary issuances non-equity registration document (covering both retail and wholesale);

• –  Annex 12: secondary issuances equity securities note;

• –  Annex 16: secondary issuances non-equity securities note (covering both retail and wholesale).

Based on the last paragraph of Article 14(1) (cited in para. 11.30), a simplified registration document is available for—in short—(a) fungible issues; (b) debt issues by listed-equity issuers; and (c) offerors of listed securities. A simplified securities note is available for—in short and using the same references—(a) fungible issues; and (c) offerors of listed securities, but not (b) debt issues by listed-equity-issuers. So, while a listed-equity-issuer issuing debt may use a simplified registration document (non-equity) to describe itself, for the securities it must disclose information required by a full securities note (for non-equity). That is understandable, given debt securities are of a different nature and class than equity. As noted above, the opposite of limb (b) is not available—a listed-debt-issuer offering equity securities. That must publish not only a full equity securities note (given the different nature of equity securities compared to debt) but also a full equity registration document. This too is understandable, because compared to non-equity, equity requires more and different disclosure on the issuer.

11.38  This brings us to the question of content.

11.39  As for the content question, Recital (48) of the Prospectus Regulation ends as follows:

11.40  Recital (78) considers that, in order to specify the requirements set out in the new Prospectus Regulation, the power to adopt certain acts should be delegated to the Commission in respect of, inter alia and to the extent relevant for the purpose of this chapter, the reduced information to be included in the simplified prospectus in cases of secondary issuances, stressing that the Commission should carry out appropriate consultations during its preparatory work.

11.41  The substantive provisions of the Prospectus Regulation itself dealing with the content of the simplified prospectus are paragraphs (2) and (3) of Article 14. As they set parameters which the Commission is bound to in its CDR, it is worth setting these out in full here. First paragraph 2:

11.42  Article 18 concerns the omission from the prospectus of certain information that would otherwise need to be included therein. Such omission may be authorized by the competent authority in certain circumstances. This also applies for a simplified (p. 260) prospectus. Article 6(1) contains the basic standard of disclosure required by the Prospectus Regulation, providing that the prospectus must contain the necessary information which is material to an investor for making an informed assessment of, in brief, the issuer and the securities, depending on the nature and circumstances of the issuer and the type of securities. Article 14 states that this may be derogated from where a simplified prospectus may be used.

11.43  Paragraph 3, then, reads as follows:

11.44  In February 2017, the Commission gave a formal mandate to the European Securities and Markets Authority (ESMA) to provide technical advice in relation to, amongst other things, the reduced information requirements for secondary issuances. ESMA published consultation papers in July 2017³⁸ and in follow-up thereto, in March 2018 (p. 261) delivered its Final Report with technical advice to the Commission.³⁹ The Commission published its draft CDR in November 2018, including the schedules or annexes, by and large following the ESMA Technical Advice. The Commission did not make the 21 January 2019 deadline, however, adopting its CDR on 14 March 2019. The final CDR was published in the Official Journal of 21 June 2019.

11.45  The CDR includes the following Annexes for secondary issuances:⁴⁰

• –  Annex 3: secondary issuances equity registration document;

• –  Annex 8: secondary issuances non-equity registration document (covering both retail and wholesale);

• –  Annex 12: secondary issuances equity securities note;

• –  Annex 16: secondary issuances non-equity securities note (covering both retail and wholesale).

11.46  Let us have a look now at what alleviations these offer compared to full disclosure. We will not go into every single detail, but flag at a high level where the differences are. Here and there we will refer to the ESMA Technical Advice to the Commission. Given that the disclosure required for equity securities is more encompassing than for debt securities, it is understandable that ESMA has used the disclosure for equity securities as a starting point in terms of meeting the disclosure required, adding alternative requirements to facilitate the issuance of debt securities, both retail and wholesale.

11.47  Compared to a full equity registration document of Annex 1, high-level alleviations allowed by Annex 3 for a secondary issuance equity registration document are the following (referring to sections of Annex 1):

11.48  Section 5 (Business overview) can be a lot shorter, requiring a ‘brief’ description of the ‘key’ principal activities and of any significant changes since the end of the period covered by the latest published audited financial statements. Not required are, for example, a description of the principal markets, strategy, and objectives, the basis for any statements regarding the issuer’s competitive position, information relating to joint ventures and participations, and environmental issues.

(p. 262) 11.49  Section 18 (Financial information) can also be a lot shorter. Compared to Items 18.1 and 18.2 (including their sub-items, which require audited historical financial statements covering the latest three financial years and accounting related information), Item 11.1 of Annex 3 in essence only requires (annual and half-yearly) financial statements covering the twelve months prior to the approval of the prospectus. Where annual financial statements postdate half-yearly ones, only the annual statements are required.

11.50  Where section 9 (Regulatory environment) requires a description of the regulatory environment that the issuer operates in and that may materially affect its business, in Annex 3, Item 5.1 requires only a brief description of material changes in the issuer’s regulatory environment since the period covered by the latest published audited financial statements.

11.51  Sections 6 (Organisational structure), 7 (Operating and Financial Review), 8 (Capital resources), 13 (Remuneration and benefits), 14 (Board practices), and 15 (Employees) are not required. Deletion of these sections had also been proposed by ESMA, ‘being mindful of the general objective that the secondary issuance prospectus be an alleviated one, and taking into account the information that has already been published under the TD and MAR’.⁴¹ In its consultation, ESMA had also proposed deletion of most items of section 19 (Additional information), except for certain selected items (dilution on the existing shares, the rights attached to the existing shares, and poison pills, which ESMA considered central, also the case of a secondary issuance).⁴² In line with ESMA’s Technical Advice (there Annex 18, section 12),⁴³ corresponding section 12 (Additional information) of Annex 3 of the CDR, while requiring information on dilution of the existing shares under convertible securities or warrants, no longer requires anti-takeover provisions in the articles of association⁴⁴ to be included.

11.52  Specifically in relation to the Operating and Financial Review (‘OFR’), ESMA considered in its consultation that, while this information is considered useful for investors to assess the evolution of the issuer’s performance, ESMA proposed its deletion, since Level 1 requires that account be taken of information already published under the Transparency Directive and MAR. It was also noted by ESMA that, given the redrafting of this item in the share registration document, this information could be considered equivalent to the information provided by the management report under the Transparency Directive.⁴⁵ In its Technical Advice to the Commission, ESMA noted that one respondent to its consultation was against the deletion of the OFR.⁴⁶ It seems this respondent was AFME, the Association for Financial Markets in Europe.⁴⁷ AFME (p. 263) considered that the OFR section of a prospectus is one of the most important sections in the prospectus from the point of view of enabling an investor to understand an issuer and its business. It wrote: ‘It is by necessity a sober analysis of an issuer’s financial statements, in contrast to the sometime exuberant and aspirational strengths and strategy section and wider business description.’ The Association for Financial Markets in Europe was therefore disappointed that ESMA proposed not to require a simplified prospectus to include an OFR section at all, and instead to require investors to consult an issuer’s management report, which, AFME noted, would not typically be prepared to a prospectus standard, nor offer the same legal recourse to an issuer if it contained misstatement or omissions.⁴⁸ The response by ESMA, in its Technical Advice, with regard to the OFR, however, was that the secondary issuance prospectus is an alleviation from the full prospectus and that given that the issuer will already have published regulatory information elsewhere, such as under the Transparency Directive and MAR, ESMA considered that the deletion of the OFR from the secondary issuance registration document, was not detrimental to investors.⁴⁹ As we have seen above, Annex 3 to the CDR follows ESMA’s advice by not requiring an OFR section.

11.53  ESMA’s consultation noted that it maintained the information disclosure items required by Article 14(3), Prospectus Regulation. This is understandable, given the Level 1 text, that sets the parameters. As we have seen in section V.1 ‘Level 1 Text’ (para. 11.43) above, limb (c) of Article 14(3) prescribes a concise summary of the relevant information disclosed under the MAR over the twelve months prior to the approval of the prospectus. In its Technical Advice, ESMA remarked that the MAR disclosure summary was seen as problematic by respondents.⁵⁰ According to ESMA, one respondent considered that there should be a statement that the MAR disclosure summary comprised a summary of certain information disclosed by the issuer, but that the full text of the disclosure could be found through the relevant regulatory announcement service. Two respondents said that there should be a statement that MAR and Transparency Directive disclosures do not form part of an issuer’s prospectus (unless explicitly incorporated). ESMA did not accept these comments.⁵¹ Annex 3 to the CDR follows ESMA’s advice. Section 13 of Annex 3 requires a summary of the information disclosed under the MAR over the past twelve months, which is relevant as at the date of the prospectus, providing further that, inter alia, the summary shall not be a replication of information already published under the MAR.

11.54  Retail debt offerings being relatively rare, we do not consider Annex 6 here. Compared to a full, wholesale non-equity registration document of Annex 7, high-level alleviations (p. 264) allowed by Annex 8 for a secondary issuance non-equity registration document are not many, but they include the following (referring to sections of Annex 7). Section 5 (Business overview) can be slightly shorter; for example, the basis for any statements regarding the issuer’s competitive position is not required. Section 11 (Financial information) can also be shorter by not requiring historical financial statements covering the latest two financial years and accounting information but only (annual and half-yearly) financial statements covering the twelve months prior to the approval of the prospectus. Where annual financial statements postdate half-yearly ones, only the annual statements are required. Section 6 (Organisational structure) is not required. As in the case of the secondary issuance equity registration document, Section 11 (Regulatory disclosures) of Annex 8 requires a summary of the information disclosed under the MAR over the past twelve months which is relevant as at the date of the prospectus.

11.55  Compared to a full equity securities note of Annex 11, Annex 12 for a secondary issuance equity securities note does not allow many alleviations, but some items that are not required include (referring to sections of Annex 11) Items 4.2 (governing law of the securities), 4.3 (form of the securities: bearer or registered) and some items that were also no longer required for an equity securities note under the proportionate disclosure regime for statutory rights issues introduced by the 2010 Prospectus Directive amendment, such as 5.2.1 (the various categories of potential investors), 5.2.3 (pre-allotment disclosure), 5.3.4 (any disparity between the public offer price and the effective cash cost to management), 6.5 (stabilisation), 6.6 (over-allotment and ‘green-shoe’), and 7 (details of selling shareholders—apart from lock-up agreements, which still is a disclosable item).

11.56  Retail debt offerings being relatively rare, we do not consider Annex 14 here. Compared to a full, wholesale non-equity securities note of Annex 15, Annex 16 for a secondary issuance non-equity securities note does not allow many alleviations, but some items that are not required include (referring to sections of Annex 15) Items 4.3 (governing law of the securities) and 4.4 (form of the securities: bearer or registered).

11.57  We can conclude that it is primarily for the equity registration document that the light disclosure regime for secondary issuances of Article 14 provides some alleviation. In particular, the OFR section not being prescribed is significant. Will the fact that less information is prescribed to be included in the prospectus for secondary issuances lead to the simplified prospectus being used much in practice? That is the subject of the final section of this chapter.

11.58  It remains to be seen whether this new simplified regime, if available in the circumstances and with the alleviations from Article 6, will be used much in practice. As we saw in section II.1 ‘The Capital Markets Union’ (para. 11.03), the proportionate disclosure regime for statutory rights issues introduced by the 2010 amendment of the Prospectus Directive was little used. One reason for this is that many larger IPOs or securities offerings by European companies have a US tranche under which the securities are offered to US investors. This means that other jurisdictions’ disclosure requirements (in this case those of the US) are added on to the disclosure requirements under EU law, i.e. the lighter disclosure may not be sufficient, even if alone from a strict regulatory perspective.

11.59  Aside from this regulatory securities law angle, there is the practical aspect that most securities offerings are arranged and underwritten by one or more banks. This holds true not only for IPOs or secondary offerings of equity, but also for debt issues. Nowadays many, if not most companies issuing debt securities do so under a debt issuance programme, on the basis of a base prospectus and final terms that supplement the terms and conditions that are included in the base prospectus. Even if a secondary issuance does not need to meet other jurisdictions’ disclosure requirements (e.g. those of the US), it remains to be seen whether underwriters would be agreeable to being involved in a securities offering where a simplified prospectus is used, giving reduced disclosure only. As also noted in section II.1 ‘The Capital Markets Union’ (para. 11.03) above in relation to the proportionate disclosure regime for statutory rights issues, underwriters were concerned that the overall disclosure standard of Article 5, Prospectus Directive might still be relevant. By the same token they may fear that the general disclosure requirement of Article 6 will still be relevant, despite what Article 14 says. At a conceptual level, for investors at some stage more disclosure may make a prospectus difficult to understand, as it may be difficult to discern important facts in a mass of less important detail. The ideal disclosure document is short, clear, and comprehensive in including all information an investor needs to make an informed investment decision. The tension is between short and comprehensive, in the sense of including all necessary information. Prospectus liability is not discussed in this chapter. It is key, however, also in the context of light disclosure regimes such as here, for secondary issuances. Put simply, it is one—easy—thing for a legislator to provide that a simplified prospectus with reduced disclosure may be used, but if that does not go hand in hand with lightened liability for those involved, there is a tension. With stringent liability, the tendency (and preference of underwriters and quite possibly also issuers who are, of course, themselves also at risk of being sued) will be to include information on a ‘just-in-case’ basis, also where it is debatable whether investors would find it necessary. Imagine you are a bank underwriting securities and offering those to investors, risking being sued in case investors argue the prospectus was inaccurate or incomplete. You would probably want full disclosure rather than reduced. In underwriting agreements, underwriters will also ask the issuer (p. 266) to represent that the prospectus is, in brief, accurate, complete, and not misleading, and contains all information necessary to enable investors to make an informed investment decision. This representation is typically backed up by an explicit indemnity.

11.60  Only time will tell whether in case of secondary issuances we will see simplified prospectuses with reduced disclosure only.