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Part II The New EU Prospectus Rules, 15 Omission of Information, Incorporation by Reference, Publication, and Language of the Prospectus

Paola Leocani

From: Prospectus Regulation and Prospectus Liability

Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 07 June 2023

Prospectus — Financial regulation — Monetary union

(p. 333) 15  Omission of Information, Incorporation by Reference, Publication, and Language of the Prospectus

I.  Review of the Prospectus Directive and the Purpose of the Prospectus Regulation

15.01  The review of the Prospectus Directive (2003/71) regime1 has been a crucial task of the Commission’s action plan for a Capital Markets Union,2 singled out as one of its early (p. 334) and high-priority actions. The reason was simple: the prospectus is the gateway into capital markets for firms seeking funding (most of those wishing to issue debt or equity must produce one), and it is crucial that this requirement does not act as an unnecessary barrier to the goal of accessing capital markets. It should be as straightforward as possible for companies (including small and medium-sized enterprises (SMEs)) to raise capital throughout the EU, whereas today it is seen by some as burdensome and ineffective at facilitating access to capital markets, in particular for SMEs and companies with lower market capitalization. At the same time, it is seen by some as inadequate in providing the information investors need.3

15.02  As a legal intervention into capital market framework, bundled into a single instrument, and a regulation instead of a directive, the reform of the Prospectus Directive regime had to guarantee, pursue, and balance accessibility to capital-raising markets as an alternative to the banking system along with adequate protection for investors, while also safeguarding the market’s stability. Its main objectives are, in summary, (i) to reduce the administrative burden of the drawing up of a prospectus for all issuers, in particular for SMEs, frequent issuers of securities, and secondary issuances; (ii) to make the prospectus a more relevant disclosure tool for potential investors, especially those in SMEs; and (iii) to achieve more convergence between the EU prospectus and other EU disclosure rules.

15.03  With this aim, the legislative work preparing the New Prospectus Regulation (thus the review of the Prospectus Directive regime) (the ‘New Prospectus Regulation’ 2017/1129, or NPR) carefully considered the needs of market users with regard to prospectuses not only in relation to their scope, form, content, comparability, approval process, liability, and sanctions, but also in relation to some practical aspects that could unduly hinder access to capital markets for issuers, and which, if amended, could significantly reduce administrative burdens without undermining investor protection.4

15.04  In this context, amending the provisions governing incorporation by reference, publication, and languages of the prospectuses and, to a certain extent, omission of information (including on price and quantity of the relevant securities) could facilitate the procedure of accessing the markets by lowering the costs for issuers to draw and publish (p. 335) a prospectus, without lowering investor protection, and, at the same time, resulting in a more efficient coordination of the prospectus regime with other aspects of the legal framework for capital markets and duties of issuers under it, such as the Market Abuse Regulation (MAR, Regulation EU 596/2014) and the Transparency Directive (2004/109, revised by Directive 2013/50/EU), combining in such a way, once again, the three main goals of any legal intervention in this area.

II.  The Scope of the Prospectus and Different Types of ‘Omission’ of Material Information Allowed

15.05  A prospectus is a legal document, which must contain the information an investor needs in order to make a decision to invest in a company’s securities, typically relating to (i) the assets and liabilities, profits and losses, financial position, and prospects of the issuer and of any guarantor; (ii) the rights attaching to the securities; and (iii) the reasons for the issuance and its impact on the issuer (Art. 6(1), NPR).5

15.06  To this end, persons responsible for a prospectus must declare that, to the best of their knowledge, the information contained in the prospectus is in accordance with the facts and that the prospectus makes no omission likely to affect its import (Art. 11(1), NPR).

15.07  The NPR allows, however, certain types of legitimate omissions, which would thus not trigger any liability, establishing specific requirements to guarantee investor protections but, at the same time, taking into account the issuer’s interest in omitting certain information.6

  1. (a)  The first type of ‘legitimate omission’ is the incorporation by reference, where the relevant information is not expressly disclosed but incorporated by reference to one or more documents having certain characteristics (Art. 19, NPR). In such a case, therefore, there is not an actual omission, since the relevant required information is indeed included in the prospectus, but only by reference. As indicated in Recital (58), NPR, this mechanism should be used by issuers without endangering investor protection, nor to the detriment of other interests the prospectus is meant to protect, including the accessibility of the information. For example, the language used for information incorporated by reference should follow the language regime applying to prospectuses, and information incorporated by reference should be able to refer to available historical data. Where such information is no longer relevant due to material changes, that should be (p. 336) clearly stated in the prospectus, and the updated information should then also be provided.

  2. (b)  Furthermore, the prospectus can omit the final number or price of the securities to be offered, which can be disclosed through an announcement to be published and submitted to the relevant competent authority after the publication of the prospectus or relevant final terms. The protection is granted to investors through a right of withdrawal once the final offer price or amount of securities is known, or, alternatively, by making it possible for investors to assess the ‘worst-case scenario’, disclosing the maximum price investors might have to pay for the securities, or the maximum amount of securities they might have to buy, or the valuation methods and criteria, and/or conditions, used for its determination (Art. 8(1), Prospectus Directive and Art. 17, NPR).

  3. (c)  Finally, the prospectus can omit sensitive information in certain circumstances on a case-by-case basis by means of a specific derogation granted by the competent authority in order to avoid detrimental situations for an issuer (Art. 18, NPR).

III.  Incorporation by Reference

1.  Incorporation by Reference under the Prospectus Directive: Prevalence of the Prospectus Directive Principles of Completeness, Accessibility, and Comprehensibility

15.08  The Prospectus Directive regime had eventually permitted—to a limited extent, and under certain conditions—the incorporation by reference mechanism, which allows the issuer/offeror to disclose relevant information by referring in the prospectus to other documents already published. Nonetheless, before the adoption of the Prospectus Directive regime at the EU level, the procedures for incorporation by reference, its availability for companies (in particular, those active on a cross-border basis), and the specific circumstances in which it could be used varied from one country to another, and were based on the Listing Particulars Directive (80/390).7

(p. 337) 15.09  In terms of other securities law experiences (outside the EU), most countries permit information that is required to be disclosed in a document to be incorporated into that document by reference to another, previously filed with the supervisory authority or made available to market participants. In some cases, companies also may be permitted to incorporate information in ‘shelf’-offering documents on an ongoing basis, by reference to documents to be filed/published/approved/furnished in the future.8

15.10  For instance, in the US, the Securities and Exchange Commission (SEC) has progressively integrated the disclosure requirements under the Securities Act of 19339 (which primarily relates to primary market transactions, e.g. prospectuses and initial public offerings (IPOs)) and the Securities Exchange Act of 193410 (relating more to secondary market activities, including public reporting by listed issuers), showing confidence in the ‘efficient market hypothesis’, i.e. in the idea that publicly disclosed information, even when not checked and approved by the supervisory authority, are reliable as evaluated by market participants. Therefore, certain issuers subject to the public reporting requirements of the Securities Exchange Act are allowed to incorporate by reference the documents disclosed pursuant to those reporting obligations, such as annual and current reports, in their Securities Act filings such as prospectuses for new issuances, which thereby imposes liability on the relevant parties (including the issuer, underwriters, experts, directors, and accountants) under paragraphs 11 and 12 of the Securities Act, and this creates strong incentives to check disclosures of the incorporated information.11 This system has permitted streamlining of the process and (p. 338) reduced time and costs for the issuer.12 However, certain issuers can also rely on the ‘forward’ incorporation by reference (i.e. documents filed with the SEC after the registration is effective), also through the ‘shelf-registration’ system (i.e. registration of securities for future or continuous sales).

15.11  In its technical advice13 on the Prospectus Directive, the European Securities and Markets Authority’s (ESMA’s) predecessor (the Committee of European Securities Regulators (CESR)), while acknowledging that the aim of the Prospectus Directive was to simplify procedures and reduce costs for issuers, noted, as emphasized also in the Prospectus Directive recitals, that such aims should not be achieved to the detriment of the other interests the prospectus is meant to protect. In fact, the cardinal purpose of a prospectus is to contain ‘all the information necessary’ to enable investors to make an informed assessment of the assets and liabilities, financial position, profit and losses, as well as other material information regarding the prospects of the issuer and of any guarantor and of the rights attaching to such securities. To this end, when evaluating whether documents may or may not be incorporated by reference, any specific simplifications for issuers should be weighed against the fact that the natural location of the information required is the prospectus, and that, as clearly required by the Prospectus Directive, the information should be presented in an easily analysable and comprehensible form.14

15.12  Article 11, Prospectus Directive stipulated the requirements for issuers, offerors, and persons asking for admission to trading to comply with when incorporating information into a prospectus by reference. It also contained a mandate (para. 3) for the Commission to adopt implementing measures concerning the information to be incorporated by reference by 1 July 2004. The Commission fulfilled this mandate with Article 28 of Commission Regulation (EC) 809/2004 (Prospectus Regulation), which also contains a non-exhaustive list of documents that can be incorporated.15

(p. 339) 15.13  Article 11 was amended by the Directive 2010/73/EU (the Amending Directive) to better align its requirements with those of the Transparency Directive noted in paragraph 15.04 above. But incorporation by reference was only allowed for information that had already been published and previously or simultaneously approved or filed with the relevant authority in accordance with the Prospectus or Transparency Directives.16 This effectively limited the types of documentation that could be incorporated by reference. Moreover, no forward incorporation by reference was allowed, and as this is a maximum harmonization Directive, that meant forward incorporation was no longer allowed, even in Member States that used to permit forms of ‘shelf registration’).17

2.  Making the Incorporation by Reference Mechanism More Flexible and Assessing the Need for Supplements in Case of Parallel Disclosure of Inside Information

15.14  The enhancement of the incorporation by reference is generally considered as a valuable instrument to reduce costs and the administrative burden without affecting investors’ protection.18

15.15  As mentioned, the main objectives of the NPR have been in fact (i) to reduce the administrative and paperwork burdens of drawing up of prospectus for all issuers; (ii) to make the prospectus a more relevant disclosure tool for potential investors; and (iii) to achieve more convergence between the EU prospectus and other EU disclosure rules.

(p. 340) 15.16  Further alignment of the prospectus rules with other EU disclosure rules (e.g. the Transparency Directive) and the Regulation on key information documents for packaged retail and insurance-based investment products (PRIIPs)19 could enhance the efficiency of the prospectus as a tool to bolster capital markets. By ensuring harmonized minimum investor protections by guaranteeing that all prospectuses, wherever they are published, provide clear, comprehensive, and standardized information investors need to make informed investment decisions, the prospectus regime is, indeed, complementary to the ongoing and ad hoc reporting obligations laid down in the above- mentioned Transparency Directive and MAR. In particular, MAR obliges issuers with securities listed on a regulated market (or admitted to trading on a multilateral trading facility (MTF)) to inform the market on inside information which might have an impact on the price of the relevant securities and pertaining inter alia to such issuers (or the securities), so that investors can assess significant events having an impact on such issuers and, in turn, on their investment. The Transparency Directive requires the same issuers to regularly disclose to the public certain information (e.g. financial reports, major changes in the holding of voting rights, ad hoc inside information potentially affecting the price of securities).

15.17  The complementary natures of the Prospectus Directive, the Transparency Directive, and MAR stem from the fact that any prospectus regime in principle only concerns initial disclosure requirements for public offerings or listings on a regulated market, while the other measures govern the disclosure regime to protect investors already holding such securities. However, in case of issuers with securities listed/admitted to trading, it cannot be underestimated that information contained in a prospectus and not also properly disseminated also under the Transparency Directive and MAR might have an impact on existing investors and that, conversely, a set of information may be already available—through the Transparency Directive and MAR disclosures to the market and the public—and thus also to potential primary market investors.

15.18  This mechanism has been reviewed in order to assess whether it needs to be recalibrated in order to achieve more flexibility. A first issue is determining the merit in enlarging the type of documents allowed to be incorporated by reference, potentially extending that option to other types of regulated information. Second, particular attention has been given to the possible streamlining of the interaction between the disclosures required under the prospectus regime, MAR, and the Transparency Directive by allowing a ‘pure and automatic dynamic incorporation by reference’ of documents filed with any national competent authority (NCA), so that documents published/filed or to be published/filed under other regimes would no longer be subject to incorporation by reference in the prospectus (neither through supplements).20

(p. 341) 15.19  Such a mechanism could be given that issuers having securities admitted to a regulated market are already required to file and disclose information on a periodic basis (under the Transparency Directive) and on an ad hoc basis (under MAR). Since information has been prepared and disclosed in compliance with the relevant EU securities law and as such is available to the public (even if not approved by the NCA), there is no need for it also to be included in a prospectus. Accordingly, taking this reasoning to its logical conclusion, any issuer required by securities law provisions—such as the Transparency Directive and MAR—to disclose to the market certain information regarding the issuer that would also have to be included in a prospectus, should be authorized to produce a very short prospectus, for example outlining the specific offer/listing such as the terms of the issue, the use of proceeds, without incorporating instead anything else into the prospectus by reference, considering that the remaining information is already available to the market (including the potential recipients of the prospectus and addressees of the relevant offer).

15.20  Under this radical approach, neither a substantial repetition of substance nor a reference to the document would need to be included in the prospectus (nor would it need to be supplemented or updated), as it should be assumed that potential investors already and independently have access and thus knowledge of the content of these documents (which, unlike prospectuses, are not normally subject to approval by the NCA).

15.21  As a consequence, the regime governing disclosure obligations to the market would overwrite the requirement under the prospectus regime to publish supplements or to annually update base prospectuses. More generally, this would affect primary market investors’ protection, which is based on the disclosure contained in the prospectus, its scrutiny and approval, its accessibility, and withdrawal rights deriving from (the publication of supplements which disclose) new and material facts not taken into account when they made their investment decision, as well as in terms of the regime governing prospectus liability.21

15.22  Nonetheless, by looking at the US experience noted previously in paragraph 15.10, an alternative and less radical route could be pursued: amending the Prospectus Directive regime so as to enable incorporation by reference of specified future information which could limit the need for the publication of several (base prospectus) supplements by incorporating, for example, interim financial information. This would improve market efficiency and reduce costs without affecting investor protection, nor the obligation to update base prospectuses in order to keep them easily accessible. It would place more reliance on regulated information disclosed under the Market Abuse Directive (MAD) and the Transparency Directive, while at the same time maintaining the protections conceived under the prospectus rules and permitting future specified information to (p. 342) be incorporated by reference. In such a framework, the prospectus ought to clearly indicate the future regulated information that will be included by reference (such as, quarterly/semi-annual/annual financial statements and also, possibly, other ‘regulated information’ disclosed under MAD or the Transparency Directive). From a practical perspective, where information is to be only partially incorporated into the prospectus, that too can be clearly indicated.22

15.23  This forward-incorporation by reference would not alter the prospectus liability regime, as such incorporated information remains part of the prospectus, is of the same nature, and must comply with the same principles. Anyway, primary and secondary market investors would be able to rely on a different level of protection arising from the incompleteness or omission of such information due to national rules implementing the provisions on liability under the prospectus and under-regulated information (for which, in addition, there is a minimum—instead of maximum—harmonization). These might significantly diverge, as happens in the US.23

15.24  Furthermore, withdrawal rights and ‘future’ incorporation by reference are not incompatible. Currently, whenever a prospectus supplement is published during the relevant statutory period, a ‘walk-away’ right or ‘withdrawal right’ is triggered (Art. 16(2), Prospectus Directive).24 The concept of investor withdrawal rights is compatible with the incorporation of certain specified future information. The easiest solution would be to require issuers to publish announcements/supplements informing investors that such regulated information relating to a significant (negative) new factor has been published and that a withdrawal right has been triggered in respect of ongoing non-exempt offer(s).

15.25  Needless to say, even were forward incorporation by reference to be adopted, prospectus supplements should be published in any event in connection with (i) any future ‘regulated information’ that an issuer wishes to include by reference and that has not been specified in the prospectus that would have been included therein in the future; (p. 343) (ii) ‘non-regulated’ information (that is, not disclosed under MAR or the Transparency Directive) that the issuer wishes to incorporate by reference; (iii) changes to securities note information; and/or (iv) changes to other aspects of the prospectus (including ‘non-significant’ aspects, such as a change to the paying agent).

15.26  It is true that this lighter approach does not abolish the need for a base prospectus to be updated annually. But it is also true that it would significantly reduce the need for base prospectuses to be supplemented during the year, thus reducing additional burdens and costs for issuers, all while aligning the interaction between the Prospectus Directive, MAR, and the Transparency Directive and maintaining investor protections regarding accessibility of information, prospectus liability, and withdrawal rights.

3.  Incorporation by Reference under Article 19, Prospectus Regulation

15.27  Even if during the process of the reform the shared position seemed to emphasize the need for coordination of the disclosures required under the Prospectus regime, MAR, the Transparency Directive, and the definition of the actual standards to be adopted and the approaches suggested by the relevant market players resulted in expressions of sometimes very different views.25 Probably, as mentioned, a simple change to the incorporation by reference regime to allow for incorporation of pre-specified future information, notably interim financial data, would significantly limit the need for so many base prospectus supplements to be produced after an investment decision has been made, thus reducing costs and thereby improving market efficiency. Instead, the (p. 344) current law arguably grants withdrawal rights to investors regardless of the information conveyed in such interim financials, thus making issuers hostage to investors, who can use the trigger of the publication of a supplement to withdraw from their commitment even if the new information is immaterial or reflects positive developments for the issuer.

15.28  As things stand, the NPR will not permit incorporation of future documents, even if pre-identified and made public in accordance with other EU provisions.

15.29  Nevertheless, the scope of documents whose information may be incorporated by reference in a prospectus has been enlarged, subject to the condition that the information is published electronically, complies with the language regime of Article 27, and is the most recent available to the issuer (Art. 19).26

15.30  Due to their nature and scope, as in the previous regime, summaries cannot include information incorporated by reference.

15.31  Where only certain parts of a document are incorporated by reference, a statement shall be included in the prospectus that the non-incorporated parts are either not relevant for the investor or covered elsewhere in the prospectus. When incorporating information by reference, issuers, offerors, or persons asking for admission to trading on a regulated market shall ensure accessibility of the information. In particular, a cross-reference list shall be provided in the prospectus in order to enable investors to identify easily specified items of information, and the prospectus shall contain hyperlinks to all documents containing information which is incorporated by reference.

15.32  More specifically, issuers have the option not to explicitly include required disclosure in the body of the prospectus and to incorporate by reference into their prospectus documents which have been approved or filed with an NCA in accordance with the Prospectus Directive or the Transparency Directive and have been published previously or are being published at the same time as the prospectus.

15.33  Article 19, NPR expanded the list of such documents to include certain documents (such as regulated information, management reports—as referred to in the Accounting Directive—corporate governance statements and the issuer’s memorandum and articles of association), whether or not they have been approved by or filed with any NCA. (p. 345) The European Commission provided ESMA with the opportunity to further expand this list of documents (Art. 16(4), NPR), but ESMA declined to do so in its March 2018 Technical Advice, considering the current list in Article 19, NPR sufficiently comprehensive.27

15.34  The list covers documents filed or approved by the competent authority of the home Member State in accordance with the Regulation as well as regulated information. However, it also permits companies which are not under the scope of the Transparency Directive (e.g. companies whose securities are traded on an MTF) or which are exempted from some of its requirements (e.g. issuers exclusively of debt securities admitted to trading on a regulated market, the denomination per unit of which is at least EUR 100,000) to incorporate by reference all or parts of their annual and interim financial information and management reports.

15.35  As pointed out by ESMA during the consultation process and confirmed by Article 19, there are three conditions for incorporating information into a prospectus by reference:

  1. (a)  the document(s) containing the information have been approved or filed with the home competent authority in accordance with the NPR; or

  2. (b)  the document(s) containing the information have been filed with the home competent authority in accordance with the Transparency Directive or the regulated information;

  3. (c)  in both of the above cases, such documents must be previously or simultaneously published electronically.

15.36  Note that, regarding the condition that information incorporated by reference must be contained in document(s) approved or filed with the competent authority of the home Member State under the Prospectus Directive, ‘approved’ and ‘filed’ can be distinguished as two separate stages of the treatment of the same document.

15.37  Since there is a difference between the two processes (i.e. there may be a period of delay between approval and filing of a document), a document can be approved but not yet filed (e.g. a prospectus); filed but not approved (this would be the case for documents not subject to approval); or both approved and filed. However, only certain documents can be approved by an NCA in accordance with the Prospectus Directive: prospectuses/base prospectuses, registration documents, securities notes, summaries, and supplements.

15.38  On the other hand, the meaning of ‘filed’ is less straightforward, as there is no definition of this term under the prospectus regime, nor in the context of other securities law. However, as the word ‘filed’ was used in a number of places in the Prospectus Directive, as now in the NPR, ESMA suggested that ‘documents filed in accordance with the PD’ (p. 346) is to be understood only as documents in connection with which the word ‘filed’ is used in the Prospectus Directive.28 Therefore, documents made ‘available’ (see Art. 4, Prospective Directive) or documents provided to an NCA (following a request under Art. 21) should not be considered ‘filed’. Furthermore, registration documents filed without approval under Article 12(3), Prospective Directive cannot be incorporated by reference, as they are not published.29

15.39  However, under the EU prospectus law, the term ‘filed’ does not have any technical definition ascribed to it and can be interpreted as ‘transmitted’ or ‘deposited’ to or with a supervisory authority. In contrast, US federal securities laws distinguish between information that is ‘filed’ with the SEC, and information ‘furnished’, for example current reports of foreign issuers with securities listed on US exchanges, with different liability implications for each case.30

15.40  Regarding the second condition for incorporation by reference—that documents are filed in accordance with the Transparency Directive—Article 19 expressly requires only regulated information to be filed with the NCA of the home Member State. According to Article 2(1)(k), Transparency Directive:

‘regulated information’ means all information which the issuer, or any other person who has applied for the admission of securities to trading on a regulated market without the issuer’s consent, is required to disclose under this Directive, under Article 6 of Directive 2003/6/EC [ . . . ], or under the laws, regulations or administrative provisions of a Member State under Article 3(1) of this Directive.

15.41  Finally, Article 3(1), Transparency Directive specifies that:

the home Member State may make an issuer subject to requirements more stringent than those laid down in this Directive except that it may not require issuers to publish periodic financial information on a more frequent basis than the annual (p. 347) financial reports referred to in Article 4 and the half-yearly financial reports referred to in Article 5.

15.42  Additionally, regulated information covers information which the issuer, or any other person who has applied for admission to trading of securities without the issuer’s consent, is required to disclose under provisions enacted in connection with national transposition of Article 3(1), Transparency Directive. If additional information is required to be filed under national provisions enacted under the Transparency Directive, such information would fall under the definition of regulated information and be eligible for incorporation by reference.

15.43  The third condition expressed is that documents must be previously or simultaneously published to be eligible for incorporation by reference. Arguably, this must be taken to mean that documents approved or filed in accordance with the Regulation have to be published in accordance with its publication requirements, while documents filed in accordance with the Transparency Directive have to be published in accordance with the Transparency Directive’s publication requirements. As such publication requirements are defined, in Article 14 for the Prospectus Regulation and Article 21 for the Transparency Directive, respectively, the meaning of the term ‘previously published’ seems quite clear: any information approved or filed in accordance with the Regulation and published in accordance with Article 14 and any information filed in accordance with the Transparency Directive and published in accordance with Article 21 may be incorporated into a prospectus by reference.31

15.44  The expression ‘simultaneously published’, instead, appears less straightforward, since it is not clear which information could be published exactly at the same time as the publication of the prospectus into which the information is being incorporated by reference. However, certain provisions of the Prospectus Regulation clarify that the concept of ‘simultaneously published’ refers to situations in which, for instance, an issuer, offeror, or person asking for admission has had a registration document approved by the NCA but has not yet filed or published this document and decides to draw up a base prospectus (see Art. 26(4), Prospectus Regulation). Since the persons asking for admission to trading are required to incorporate the registration document into the base prospectus by reference, but that registration document has not yet been published, we need a simultaneous publication to allow the incorporation of the registration document. This stands even when many prospectuses are published at the same time: they may equally incorporate information from such simultaneously published prospectuses.

15.45  Finally, the presence of a list does not imply that NCAs are always obliged to accept the incorporation by reference of any information included in such list. National (p. 348) Competent Authorities have to consider the incorporation by reference of any information in conjunction with the conditions set out by the Prospectus Directive and the Prospectus Regulation. Therefore, NCAs are allowed to reject, on a case-by-case basis, the incorporation by reference of any information when such information, in their opinion, is not the most recent available to the issuer; is not presented in an easily analysable and comprehensible form; is not easily accessible; or is not compliant with the language requirements.32

4.  Incorporation by Reference and ‘Draw-Down’ Prospectus

15.46  The incorporation by reference technique turns out to be particularly important in the context of issuance programmes. As we know, and as was emphasized in Recital (36), NPR, once a base prospectus is approved, neither the final terms nor a supplement can be used to include a type of security not already described in the base prospectus. Accordingly, in connection with offers and/or listing of securities having (certain) characteristics not contemplated in the programme, a specific transaction under a programme (a so-called ‘draw-down’ or DD) that had to be done via final terms (FT) is both documented vis-a-vis the prospectus which incorporates by reference the original programme base prospectus and issued under ancillary documentation upon issuance (provided that the programme itself contemplates such possibility to use a DD prospectus in lieu of FTs). In fact, as we know, a prospectus must conform to one of the following formats: (i) a base prospectus, utilized in connection with programmes, and subsequent Final Terms; or (ii) a single, stand-alone document utilized for a determined transaction.33 A draw-down prospectus is actually a single, stand-alone document, which incorporates by reference all or parts of a base prospectus.

15.47  However, certain national authorities seem to consider the draw-down prospectus as a separate type of prospectus. The Central Bank of Ireland (CBI) has expressly recognized the draw-down prospectus in its Handbook,34 and the Commission de Surveillance du Secteur Financier (CSSF) of Luxembourg has required so far the indication of ‘draw-down prospectus’ in the prospectus cover-page. However, a draw-down prospectus is not a particular type of format contemplated under the NPR and its peculiarity solely derives from the link to an existing programme established and/or renewed through (p. 349) an already approved and published base prospectus. In other terms, it is characterized by the sweeping use of the incorporation by reference and by the fact that the relevant issue is made under the issuance documents of the original base prospectus to which it is linked.35

15.48  As regards the requirements of the draw-down prospectus, like all prospectuses it must contain all information which, according to the particular nature of the issuer and of the securities offered and/or admitted to trading, is necessary to enable investors to make an informed assessment of:

  1. (a)  the issuer: the assets and liabilities, financial position, profit and losses, and prospects of the issuer and of any guarantor, so that most of the information already contained in the original base prospectus may be incorporated by reference. Also, when the draw-down prospectus is used to make a retail offer/listing under a wholesale programme, incorporation by reference must be very useful, as the information relating to the issuer and applicable to wholesales deal, and if it is to be included in connection to a retail deal, it must not present any significant differences;

  2. (b)  the rights attaching to such securities. In particular as regards the terms and conditions, the drawn-down prospectus shall contain the information items normally provided in the final terms without including the full set of terms and conditions. As expressly said in the relevant section of the prospectus, the terms and conditions of the notes will consist of the ‘General Note Conditions’ (or equivalent expression) set out in the base prospectus which is incorporated by reference in the draw-down prospectus, as amended and completed by the Terms of the Notes set out therein. Thus, References in the General Note Conditions to ‘Final Terms’ will be deemed to refer to the information set out under the heading ‘Terms of the Notes’.

15.49  It should be assessed whether—as suggested by the third informal meeting36 and in accordance with the accessibility principle set out in the NPR—risk factors pertaining to the issuer can be incorporated by reference and whether the market practice developed thus far of allowing issuers to do so will be continued.37

(p. 350) IV.  Omission of Information

1.  Overview: Article 18, NPR

15.50  Investors protection remains pivotal in the NPR. However, the combined reading of Recitals (7), (55), and Articles 17 and 18 makes it clear that is necessary to achieve a balance between investor protection and the issuer’s rights.

15.51  Under Article 18, the competent authority may authorize the issuer to omit certain information required to be disclosed under the NPR, provided that:

  1. (a)  disclosure of such information would be contrary to the public interest;

  2. (b)  disclosure of such information would be seriously detrimental to the issuer and its omission would not be misleading to the public;

  3. (c)  such information is of minor importance for a specific offer or admission to trading and will not influence investors’ assessments.

15.52  This rule assigns to the competent authority a relevant and difficult task, that of balancing the different interests involved. Competent authorities might show different approaches and interpretations of the conditions for omission, considering the flexibility of the terms ‘public interest’ and ‘detrimental to the issuer’ (notably as information detrimental to the issuer tends to be always relevant and its omission potentially misleading).38 Competent authorities will be required to submit an annual report to ESMA regarding the information whose omission it has authorized.

15.53  ESMA may (or will, if requested to do so by the Commission) develop draft regulatory technical standards to specify the cases where information may be omitted, taking into account the reports of competent authorities to ESMA (Art. 18(4)).

15.54  A similar delicate role is assigned to the SEC in the US in the context of the confidential treatment in connection with registration statements (Rules 406 and 24b-2). In fact, under the disclosure requirements applicable to public offerings of securities in the US, issuers must generally also include certain agreements deemed material as exhibits to the registration statement filed with the SEC. However, they can apply for confidential treatment with a request which has to be drawn narrowly (limiting the confidential parts), motivated, and subject to careful scrutiny.39 Nonetheless, the SEC has recently revised its rules (in particular, Regulation S-K, Item 601(b)) to permit registrants to file redacted (commercially sensitive) contracts without applying for confidential treatment provided that the redacted information: (i) is not material; and (ii) would be competitively harmful if publicly disclosed; and (iii) respects certain procedural rules.40

(p. 351) 2.  Omission of Information—Offer Price, Yield, Amount of the Securities (Art. 17, NPR)

15.55  The market practice whereby an approved prospectus (including a base prospectus and related final terms) does not include the final offer price or the amount of securities to be offered to the public, whether expressed in number of securities or as an aggregate nominal amount, is accepted under the NPR when their final offer price and/or amount is as a matter of fact not available (either unknown, or when there is no established and/or liquid market for the shares)41 at the time when the prospectus has to be submitted and, therefore unable to be included in the prospectus (or final terms). The same applies, in the case of debt securities, to elements that can be considered in such a context as ‘price’ and pertaining to the relevant yield, such as interests, coupon, strike price, etc.42

15.56  Nonetheless, the NPR does set out some rules in order to protect investors. In fact, the prospectus shall disclose either (i) the valuation methods and criteria, and/or conditions, in accordance with which the price of the securities is to be determined, as well as an explanation of any valuation methods used (e.g. the discounted cash flow method, a peer group analysis, or any other commonly accepted valuation methods); or (ii) the maximum price investors might have to pay for the securities, or the maximum amount of securities they might have to buy. If such pieces of information have been omitted, investors have a right of withdrawal once the final price or amount is disclosed.

15.57  As clarified by ESMA,43 the valuation methods and criteria should be precise enough to make the price predictable and ensure a level of investor protection that is similar to the disclosure of the maximum price of the offer. This would also allow investors to check whether the final price has been calculated properly by the issuer or the financial intermediaries acting on behalf of the issuer. In that respect, a mere reference to the bookbuilding method would not be acceptable as a valuation method or criterion where no maximum price is included in the prospectus. The information on the final number and price of a security offer may comprise, for example, the share subscription price in the offer, the number of shares, or the final size of the bond issue. According to a traditional interpretation, the participation rate used for calculating the bond index return may also be compared to them.

15.58  On the basis of Article 17, NPR, the publication of the final offer terms does not require a supplement to the prospectus, nor, therefore an approval decision, and an (p. 352) announcement or notice—that will form part of the prospectus—will be sufficient. As mentioned, this represents an exception to the requirements that the prospectus (in the case of a programme, a base prospectus and related final terms) published in connection with a specific transaction must contain all the information items required under the NPR and the relevant applicable ‘scheme’. Accordingly, it is important that the prospectus (or the relevant final terms) contains information on when and how the final offer terms will be published, and that the final number or price shall be published and submitted to the relevant competent authority without undue delay after the decision has been made.

15.59  As already mentioned in paragraph 15.07, if the criteria for determining the number and price (or yield) of the securities, or the maximum price (or minimum coupon) has not been published in the prospectus, the investors shall have the right to withdraw their security subscriptions or purchase decisions and the prospectus should provide information on this right. Obviously, the right to withdraw also applies in a situation where a preliminary price range has been provided in the prospectus and the final price falls outside this range.

15.60  Article 8(1), Prospectus Directive required the issuer to file the final offer price and amount of securities with the competent authority of the home Member State as well as make it available to the public, but ESMA clarified that the issuer is expected also to provide the host competent authorities with the above-mentioned information.44 Now, Article 17(2), NPR requires the issuer to file ‘[t]he final offer price and amount of securities [ . . . ] with the competent authority of the home Member State and [make it] available to the public in accordance with the arrangements set out in Article 21(2)’ (about the publication of the prospectus) and therefore through the publication on certain websites.

V.  Publication of the Prospectus (Art. 21, NPR)

15.61  According to Article 21, NPR, and as under the Prospectus Directive regime, the prospectus, once approved, must be made available to the public by the issuer or offeror or person asking for admission to trading on a regulated market at a reasonable time in advance of, and at the latest at the beginning of, the offer to the public or the admission to trading of the securities involved.

15.62  The responsibility of publishing the prospectus lies with the issuer, the offeror, or the person asking for admission to trading, as under the Prospectus Directive. However, the new regime provides that the prospectus shall be deemed available to the public (p. 353) when published in electronic form on any of the following websites: (i) the website of the issuer, the offeror, or the person asking for admission to trading on a regulated market; (ii) the website of the financial intermediaries placing or selling the securities, including paying agents; (iii) the website of the regulated market where admission to trading is sought or, where no admission to trading on a regulated market is sought, the website of the operator of the MTF (Art. 21(2), NPR).45

15.63  In addition to the requirement that the prospectus be published on a dedicated section of a specified website, Article 21(3), NPR provides that the prospectus be easily accessible when entering that website: it shall be downloadable, printable, and in searchable electronic form, and access shall not be subject to the completion of a registration process. Moreover, it shall not entail the acceptance of a disclaimer limiting legal liability or the payment of a fee, both requirements under the existing regime (see also Art. 6, Omnibus II46). In this respect, the new regime clarifies that warnings specifying the jurisdiction(s) in which an offer or an admission to trading is being made shall not be considered to be disclaimers limiting legal liability.

15.64  Again, according to Article 21(3), NPR, the documents containing information incorporated by reference in the prospectus, the supplementary prospectus, or the final terms, and a separate copy of the summary must be accessible under the same section of the website as the prospectus, including by hyperlinks where necessary. In fact, when the prospectus is composed of several documents and/or incorporating information by reference, the documents, and information that constitute the prospectus may be published and distributed separately provided that those documents are made available to the public in accordance with the general publication rules of paragraph 2 (Art. 21(9), NPR).

15.65  As under the Prospective Directive regime, the competent authority of the home Member State must publish on its website the prospectuses approved, or a list of prospectuses approved, including a hyperlink to the website where they are published (Art. 21(2), NPR). Under the new regime, the list, including the hyperlinks, shall be kept up to date (i.e. the hyperlinks must remain functional), and each item must remain on the website for at least ten years (Art. 21(5) and (7), NPR). Passporting notifications shall also be published on the website of the competent authority of the host Member State (Art. 21(5), NPR).

15.66  Prospectuses will also be transmitted and published on ESMA’s website via a searchable storage mechanism (Art. 21(6), NPR). In this respect, the electronic publication of (p. 354) the prospectus, through a centralized storage mechanism at ESMA, would constitute a single access point which is expected to facilitate research, enforcement, and to increase the efficiency of prospectus passporting.47

15.67  An approved prospectus must contain a prominent warning stating when the validity of the prospectus will expire and that the obligation to supplement a prospectus in the event of significant new factors, material mistakes, or material inaccuracies does not apply when the prospectus is no longer valid (Art. 21(8), NPR).

15.68  The Prospectus Directive regime also provided for the prospectus to be deemed available to the public if published in a newspaper or in printed form, but where one of these options was taken, the prospectus also had to be published in electronic form on the website of the issuer or financial intermediaries. Under the new regime, the prospectus, as mentioned, is published in an electronic form, but a potential investor can request a copy of the prospectus on paper or another durable medium. The issuer (or the relevant person asking for the admission to trading of the securities) must deliver such copy free of charge and upon request, provided that the delivery is to jurisdictions in which the offer of securities to the public is made or where the admission to trading on a regulated market is taking place under the NPR (Art. 21(11) and Recital (63), NPR).48

15.69  ESMA has been mandated to develop regulatory technical standards to specify further the requirements relating to the publication of the prospectus, in particular, the data necessary for the classification of prospectuses referred to in Article 21(5), NPR and the practical arrangements to ensure that such data, including the International Securities Identification Numbers (ISINs) of the securities and the Legal Entity Identifiers (LEIs) of the issuers, offerors, and guarantors, is machine-readable according to Article 21(13), NPR.49

(p. 355) VI.  Language (Art. 27, NPR)

15.70  The prospectus language is an extremely important issue for both issuers/offerors (who can face significant costs in case of need of multiple translations) and investors (who, in principle, need to understand it to ground their investment decisions). The Prospectus Directive/NPR regime follows the efforts to facilitate the passporting of the prospectus and limiting issuers’ costs, mostly relying on the issuer’s choice of language.50 Nonetheless, this does not necessarily go hand in hand with investor protection and prospectus accessibility.51

15.71  Article 27, NPR, in setting language requirements for the prospectus, distinguishes different cases, based on the countries involved.

In fact, ‘where an offer of securities to the public is made or admission to trading on a regulated market is sought only in the home Member State, the prospectus shall be drawn up in a language accepted by the competent authority of the home Member State’ (Art. 27(1), NPR).

15.72  Where instead the offer or admission to trading is sought in one or more Member States excluding the home Member State, the prospectus shall be drawn up either in a language accepted by the competent authorities of those Member States or in a language customary in the sphere of international finance, at the choice of the issuer, the offeror, or the person asking for admission to trading on a regulated market. For the purpose of the scrutiny and approval by the competent authority of the home Member State, the prospectus shall be drawn up either in a language accepted by that authority or in a language customary in the sphere of international finance, again at the choice of the issuer, the offeror, or the person asking for admission to trading on a regulated market (Art. 27(2), NPR).

15.73  Therefore, where the offer is not made in the home state, these rules create an incentive to use the language ‘customary in the sphere of international finance’, since the same can be used for both home and host state purposes.52 English has always been considered a customary language in this regard, but the decision about the customary nature of a language rests with the competent authority (also German might be considered as such for offers in Central Europe, even if the securities in question then circulate in other Member States).53

15.74  The competent authority of each host Member State cannot require the translation of any part of the prospectus, except for the summary, which shall be available in the (p. 356) official language of each host country, or at least one of its official languages, or in another language accepted by the same.

15.75  Instead, where the offer or admission to listing is to take place in two or more Member States, including the home state, then the prospectus must be produced in a language acceptable to the home competent authority and, in addition, in either a language acceptable to each host state or a language customary in the sphere of international finance (Art. 27(3), NPR).

15.76  In line with the home-country-control principle, the competent authority of the home country is responsible for approving the prospectus, even when the capital raising is not taking place on its territory. Nonetheless, when the offer also takes place in the home country, the authority retains full discretion in setting language requirements, even when the capital raising also takes place in other Member States. Instead, when no capital raising takes place in the home country, the authority’s discretion is limited and it also has to accept a prospectus prepared in a language customary in international finance.54

15.77  Finally, special rules exist for certain non-equity securities. In the case of admission to trading of heavy-weight debt securities (i.e. those denominated in amounts of EUR 100,000 or more), the issuer, the offeror, or the person asking for admission to trading on a regulated market can only choose between using a customary language in the sphere of international finance (even where admission occurs in the home state) or a language acceptable to both home and host competent authorities. The issuer is therefore free to choose between these alternatives, but the competent authorities can always ask for a summary to be prepared in their official languages, provided that this possibility is entailed under their national laws.55

15.78  In case of an individual issue, the final terms and the summary shall be drawn up in the same language as the language of the approved base prospectus (Art. 27(4), NPR). Moreover, when the final terms are communicated to the competent authority of the host Member State or, if there is more than one host Member State, to the competent authorities of the host Member States, then: (i) the summary of the individual issue annexed to the final terms shall be available in the official language, or at least one of the official languages of the host Member State, or in another language accepted by the competent authority of the host Member State in accordance with the second (p. 357) subparagraph of Article 27(2) or the second subparagraph of Article 27(3), depending on the circumstances; and (ii) where the base prospectus is to be translated pursuant to the above-mentioned rules, the final terms and the summary of the individual issue annexed thereto shall be subject to the same translation requirements as the base prospectus.

15.79  ESMA has clarified that the issuer can incorporate by reference documents in a different language than the one of the prospectus, respecting the ordinary language rules. Therefore, the issuer can passport the prospectus only in member countries where such language is accepted by the host authority.56

15.80  As regards translations, the person responsible for the prospectus is considered by ESMA also responsible for ensuring the quality of the translation.57 Since no civil liability can derive solely from the summary unless it is misleading, inaccurate, or inconsistent with the relevant parts of the prospectus, or where it does not provide key information, the same applies to the translation of the summary, and a warning in this regard should be included in the same (Art. 11 (2) and Recital (33), NPR).

15.81  Furthermore, the NCA of the host state cannot stop the offer after finding inaccuracies in the prospectus translation, but can only refer its findings to the home state NCA.58(p. 358)


1  As set forth under Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC (OJL 345, 31 December 2003, 64), as amended by Directive 2010/73/EU (the Amending Directive), and its implementing Regulation (EC) 809/2004 (Prospectus Directive).

2  The revision of the Prospectus Directive is an important step in the construction of the Capital Markets Union. The harmonized EU prospectus is the ‘gateway’ for issuers in need of external finance to gain access to European capital markets. A reform of the prospectus rules was announced in the Investment Plan for Europe as part of the third pillar for improving the business environment, was featured in the Commission Work Programme for 2015—as part of the Regulatory Fitness and Performance Programme (REFIT)—and represents a key element of the Capital Markets Union (CMU). The CMU Action Plan presents a comprehensive and ambitious programme of measures to strengthen the role of market-based finance in the European economy. A key objective of the CMU is, notably, to facilitate raising funds on capital markets. Capital markets offer access to a wide set of funding providers and provide a cyclical exit opportunity for private equity and business angels, which invest in companies at an earlier stage of their development (see Commission, ‘Action Plan on Building a Capital Markets Union’, Communication COM(2015) 468/2; Commission, ‘Mid-Term Review of the Capital Markets Union Action Plan’, Communication COM(2017) 292 final; Commission, ‘Staff Working Document Accompanying the Communication on the Mid-Term Review of the Capital Markets Union Action Plan’, SWD(2017) 225 final). About the CMU plan, see D. Busch, E. Avgouleas, and G. Ferrarini (eds), Capital Markets Union in Europe, (Oxford: OUP, 2018).

3  See European Commission, ‘Review of the Prospective Directive—Consultation Document’, 18 February 2015 (European Commission, Review of the Prospectus Directive); European Commission, ‘Proposal for a Regulation of the European Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading’, COM(2015) 583 final (European Commission, Final Proposal for a Regulation on the Prospectus); N. Moloney, How to Protect Investors: Lessons from the EC and the UK (Cambridge: CUP, 2010), 291–6; W. Schaeken Willemaers, The EU Issuer-Disclosure Regime. Objectives and Proposals for Reform (Alphen aan den Rijn: Wolter Kluwer, 2011); J. Armour et al., Principles of Financial Regulation, (Oxford: OUP, 2016), 162–3; B. de Jong and T. Arons, ‘Modernizing the Prospectus Directive’, in: Busch, Avgouleas, and Ferrarini (n. 2).

4  About the NPR, see de Jong and Arons (n. 3); G. Morse, Palmer’s Company Law (London, 2019), vol. 4, chapter 16.1.

5  Surprisingly, Article 6 does not refer to the main three areas of information traditionally included in the prospectus (i.e. issuer, securities, offer/listing), avoiding explicitly mentioning the relevant offer and/or listing, as well as related risks. It is clear from the NPR, however, that the prospectus must disclose such details, as always, as the prospectus per se must be published only when the issuer or offeror is contemplating such a listing/offer and investors need to know their terms and risks in order to decide whether to subscribe to them.

6  See P. Schammo, EU Prospectus Law: New Perspectives on Regulatory Competition in Securities (Cambridge: CUP, 2011), 108.

7  There were basically three systems in operation, all grounded in the Listing Particulars Directive, but two of them are not strictly forms of incorporation by reference: (i) Under Art. 6(1) of the Listing Particulars Directive, the supervisory authorities in Germany, Italy, Luxembourg, Spain, and the UK allow a company issuing securities in certain circumstances to circulate a document published within the previous twelve months and approved by that authority in lieu of a new document, providing a note is attached to the earlier document describing the characteristics of the issue and containing any updates as necessary (any material changes, accounts for the latest financial year, interim financial statements). (ii) In Belgium, France, and Spain, this article forms the basis for a ‘shelf registration’ system whereby a ‘shelf document’ containing general information on the company and financial statements is submitted to and approved by the supervisory authority on an annual basis. When an issue is made, an ‘issue document’ is published which contains the characteristics of the offering and any applicable updating of the shelf document and which must be approved by the supervisory authority. (iii) Finally, two countries permit a true incorporation by reference, notably Luxembourg (for Eurobonds only, under Art. 10 of the Listing Particulars Directive) and the Netherlands. See IOSCO, ‘International Disclosure Standards for Cross-Border Offerings and Initial Listings by Foreign Issuers’, 1998, https://www.iosco.org/library/pubdocs/pdf/IOSCOPD81.pdf.

8  In Australia, the Corporations Law enables documents to be incorporated by reference in a prospectus if they are required to be lodged with the Australia Securities and Investments Commission (ASIC) and the prospectus includes a ‘summary’ of the document. The requirements are set forth in s1024F(1) of the Corporations Law. For the purposes of s1024F, the ASIC accepts as a ‘summary’ of a document a description which is accurate and sufficient to indicate whether a person needs to obtain a copy of the document, or part of it, being incorporated by reference. Further, the ASIC is prepared to allow incorporation into a prospectus of a document lodged at the same time as the prospectus. The document must exist when the prospectus is signed, must be lodged no later than the prospectus, and must have been lodged as required or allowed by another provision of the Corporations Law. In Japan, a company is able to incorporate by reference under the Securities and Exchange Law Section 5–3, and the Ministerial Ordinance regarding the Disclosure of the Company, Section 9–3. Ontario has a prompt offering qualification system (the ‘POP system’) for the distribution of securities of eligible issuers, which was designed to shorten the time period and to streamline the procedures by which these issuers and their selling security holders could obtain access to the Canadian capital markets through a prospectus offering. The POP system permits the incorporation of certain information by reference. The requirements are set forth in National Policy No. 47—Prompt Offering Qualification System, and National Policy No. 44—Rules for Shelf Prospectus Offerings and for Pricing Offerings After the Final Prospectus is Receipted. In Switzerland, incorporation by reference is possible if equity securities of the issuer are already listed and the new equity securities are offered to holders of equity securities on the basis of ordinary or preferential subscription rights either with or without payment, or have been made available for the servicing of convertible debt securities or warrants. In such cases, all information which is specially marked in Annex I of the Listing Rules may be omitted from the listing particulars, provided such information was included in the last annual report or the last interim report and there have been no material changes since. In the latter case, the documents in question to which reference is made in the listing particulars are an integral part of the listing particulars and must be provided with them. Furthermore, incorporation by reference is also permitted with respect to earlier listing particulars, provided such earlier listing particulars are, as of the date of the publication, not older than three months. However, in all cases of incorporation by reference, the principle of up-to-date information remains valid. For the hereby presented comparative analysis, see again IOSCO (n. 7), 5 ff.

9  Securities Act of 1933, CFR 17, para. 230.

10  Securities Exchange Act of 1934, CFR 17, para. 240.

11  In order to partially protect issuers from aggravated liability in case of incorporation by reference, the SEC has started considering certain information not ‘filed’ (but ‘furnished’) for certain purposes (including incorporation by reference in a registration statement): D. B. H. Martin and G. Robinson, ‘Securities Disclosure. To Be or Not to Be Filed?’, Insight (2003) 17(9).

12  The registration statements that permit incorporation by reference are Forms S-1 (un-seasoned issuers) and S-3 (seasoned issuers). See J. C. Coffee Jr, J. Seligman, and H. A. Sale, Securities Regulation. Cases and Materials, 10th edn (New York, 2007), 136ff, 141.

13  CESR, ‘Advice on Level 2 Implementing Measures for the Prospectus Directive’, CESR/03-208, http://www.esma.europa.eu/system/files/83.pdf.

14  This is further corroborated by Recital (29), Prospectus Directive, which states that the opportunity of allowing issuers to incorporate by reference documents containing the information to be disclosed in a prospectus—provided that the documents incorporated by reference have been previously filed with or accepted by the competent authority—should facilitate the procedure of drawing up a prospectus and lower the costs for the issuers without endangering investor protection.

15  The Commission enacted its mandate providing the following principles for documents containing information incorporated by reference: (a) the documents may be more than one; (b) the documents must have been previously or simultaneously published; (c) the documents must have been approved by the competent authority of the home Member State or filed with it; (d) the abovementioned approval or filing must have been in accordance with the Prospectus Directive, in particular pursuant to Article 10, or with Titles IV and V of Directive 2001/34/EC (‘CARD’); and (e) the information shall be the latest available to the issuer. To assist the development of the implementing measures which the Commission was mandated to adopt on incorporation by reference, in 2002 it requested CESR to provide technical advice on possible draft rules concerning the documents that could be incorporated by reference in a prospectus. The request for advice specifically referred to memoranda of association, annual and interim accounts, and press releases as examples of the type of documents from which information could be incorporated by reference. In the advice (which was ultimately taken on board by the Commission), CESR suggested that, assuming that certain recommendations in its advice were taken on board and the requirements set by the Prospectus Directive were met, information contained in the documents listed below could be incorporated by reference in a prospectus: (a) annual and interim financial information; (b) documents prepared on occasion of a specific transaction such as a merger or de-merger; (c) audit report and financial statements; (d) memorandum and articles of association; (e) earlier approved and published prospectuses; (f) regulated information; and (g) circulars to security holders. The abovementioned non-exhaustive list of documents corresponds to the list contained in Article 28(1) of the Regulation 809/2014: ESMA, ‘Consultation Paper—Draft Regulatory Technical Standards on prospectus related issues under the Omnibus II Directive’, 25 September 2014, ESMA/2014/1186, 7 ff., https://www.esma.europa.eu/sites/default/files/library/2015/11/2014-1186_consultation_paper_on_omnibus_ii_rts.pdf (ESMA Consultation Paper—Omnibus II) Schammo (n. 6), 106ff.

16  The original Article 10, Prospectus Directive also required issuers admitted to trading on regulated markets to provide a document containing all regulated information made available to the public in the previous twelve months. Such article was deleted in the 2010 revision, since the requirement appeared redundant in the light of the approval of the Transparency Directive: N. Moloney, EU Securities and Financial Markets Regulation, (Oxford: OUP, 2014), 108. The Amending Directive also changed the Commission’s mandate, conferring on the Commission the obligation to adopt measures concerning the information to be incorporated by reference by means of delegated acts. The new mandate did not set a deadline for such delegated acts and the Commission did not utilize the mandate. Article 1(2), Omnibus II changed the mandate in Article 11(3), Prospectus Directive once again by providing the empowerment to ESMA to deliver draft RTS to the Commission: ESMA (Consultation Paper—Omnibus II); Moloney, EU Securities (above); D. Fischer-Appelt, ‘Amendments to the EU Prospectus Directive Regime’, Business Law International (2014) 15(2), 95.

17  Schammo (n. 6) 107.

18  I. Ramsay, ‘Incorporation by Reference into Prospectuses: What Are the Rationales?’, Company and Securities Law Journal (1994) 12(5).

19  Regulation (EU) 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (OJ L352, 9 December 2014, 1) (PRIIPs).

20  See International Capital Markets Association (ICMA), ‘European Commission Review of the Prospectus Directive—Consultation Document Responses’, 1 May 2015, 53 ff., https://www.icmagroup.org/assets/documents/Regulatory/Prospectuses-Offerings-and-Listings/ICMA-response-to-EC-PD-consultation---FINAL---1-May-2015.pdf.

21  ibid.

22  ibid.

23  In the US, the liability for misstatements or omissions under section 11, Securities Act is strict, while the liability regime under section 10(b), Securities Exchange Act of 1934 is grounded on due diligence and with more difficult burden of proof (also compared with the due diligence liability under section 12(a)(2), Securities Act). The incorporation by reference, therefore, allows investors to benefit from a more favourable regime: see T. Rodriguez and E. Tyson Marshall, ‘Incorporating Caution into Incorporating by Reference’, Securities Litigation Journal (2009), 22; Martin and Robinson (n. 11).

24  The withdrawal right is also triggered by a negative event occurring after the publication—therefore unknown when investors made their investment decision—so that investors are given the opportunity to re-assess the proposed investment and, apparently, even when such information is not ‘significant’ (that for debt securities means circumstances where the issuer’s ability to repay or its creditworthiness might be impacted by the new factor): ICMA (n. 20). However, CESR’s specifications and the 2010 review introduced time limits to exercise the right and clarifications that the negative event triggering the supplement had to be significant and take place before the closing date and delivery of securities: ESMA, ‘Draft Regulatory Technical Standards on specific situations that require the publication of a supplement to the prospectus’, 15 March 2013, ESMA/2013/1537 (ESMA Technical Standards) (containing a list of possible triggering events); ESMA, ‘Final Report’, 17 December 2013, ESMA/2013/1970 (ESMA Final Report); Moloney, EU Securities (n. 16), 104; Fischer-Appelt (n. 16), 106–7; Schammo (n. 6), 104–5; G. Walker and R. Purves, Financial Services Law, 3rd edn (Oxford: OUP, 2014), 378–9. See also the new Article 23(2)–(5), NPR, containing several conditions and specifications.

25  Regulatory and Supervisory authorities: the vast majority of authorities are in favour of making the incorporation by reference mechanism more flexible, as this would reduce the costs of prospectuses without lowering the investor protection. However, a small group of respondents does not feel comfortable with granting the incorporation of documents filed voluntarily with the authorities as they would prefer the reference only to documents that have been previously or simultaneously approved and filed. Crowdfunding organizations: this issue is hardly addressed by crowdfunding organizations. Non-governmental organizations: few associations express a view on this specific topic, but they generally support an extension of the incorporation by reference, specifying that the incorporated documents should be accessible at the same location of the prospectus and subject to a storage period aligned with the limitation period for the liability claims. Stock exchanges: a slight majority of respondents favours the extension of the incorporation by reference mechanism, particularly concerning the information published under the Transparency Directive and MAR, while further incorporation by reference is considered cautiously. To this end, ESMA should develop appropriate RTS. Investors’ associations: only a handful of associations replied to this question, and they generally expressed support. However, one respondent is reluctant to allow information disclosed under the Transparency Directive to be eligible for incorporation by reference in a prospectus. Consultancies and law firms: a significant majority of stakeholders supports making incorporation by reference more flexible, drawing up an exhaustive list based on existing EU legislation or on a principle-based approach. The basic thesis is that as information is already available to the market, there is no need to duplicate it. Companies, SMEs, micro-enterprises, sole traders: the majority of respondents supports the enhancement of the incorporation by reference mechanism (only two prefer the status quo), in particular via the streamlining of the disclosure provided under the Prospectus Directive, the Transparency Directive, and MAR. Financial industry: a vast majority of stakeholders supports a more flexible use of the incorporation by reference, drawing up an exhaustive list of disclosure items based on the existing EU legislation. All information published under the legislation on MAR and the Transparency Directive should be allowed to be implicitly incorporated (only one stakeholder disagreed on this point). See European Commission, ‘Consultation on the Review of the Prospectus Directive—Feedback Statement on the Public Online Consultation’, 2015, 16 ff., http://ec.europa.eu/finance/consultations/2015/prospectus-directive/docs/summary-of-responses_en.pdf (European Commission, Feedback Statement).

26  Information may be incorporated by reference in a prospectus where it has been previously or simultaneously published electronically, drawn up in a language fulfilling the requirements of Article 27, and where it is contained in one of the following documents: (i) documents which have been approved by a competent authority, or filed with it, in accordance with this Regulation or Directive 2003/71/EC; (ii) documents referred to in points (f)–(i) of Article 1(4) and points (e)–(h) and point (j)(v) of the first subparagraph of Article 1(5);(iii) regulated information; (iv) annual and interim financial information; (v) audit reports and financial statements;(vi) management reports as referred to in Chapter 5 of Directive 2013/34/EU of the European Parliament and of the Council (22); (vii) corporate governance statements as referred to in Article 20, Directive 2013/34/EU; (viii) reports on the determination of the value of an asset or a company; (ix) remuneration reports as referred to in Article 9b, Directive 2007/36/EC of the European Parliament and of the Council (23); (x) annual reports or any disclosure of information required under Articles 22 and 23, Directive 2011/61/EU of the European Parliament and of the Council (24); (xi) memorandum and articles of association.

27  ESMA, ‘Technical Advice under the Prospectus Regulation—Final Report’, 28 March 2018, 142, https://www.esma.europa.eu/sites/default/files/library/esma31-62-800_final_report_on_technical_advice_under_the_pr.pdf (ESMA, Technical Advice—Final Report).

28  This is the case for the prospectus (Art. 13(1), Prospectus Directive), the final offer price and amount of securities (Art. 8(1), second subpara., Prospective Directive), and final terms (Art. 5(4), Prospective Directive).

29  ESMA Consultation Paper—Omnibus II, 21. The goal of ESMA has been to ensure consistent application and harmonization when it comes to incorporation by reference, providing a level playing field and limiting the risk of regulatory arbitrage. The practice of ‘voluntary filings’ of documents facilitated by certain NCAs (such as circulars sent to shareholders, financial statements not filed in accordance with the Transparency Directive, documents prepared in connection with a merger/takeover when such is not required under national provisions under the Transparency Directive), while likely seen as reducing the administrative burden on issuers offerors and persons asking for admission to trading, is, in ESMA’s opinion, not in line with the wording of Article 11, Prospectus Directive. If the co-legislators intended to facilitate incorporation of documents submitted on a voluntary basis, they would not have included the explicit requirement that filing be done in accordance with the Prospective Directive. In many cases, the facilitation of such filings by competent authorities (possible prior to 2007 but under CARD, rather than the Prospective Directive), has continued despite legislative change, and has led to a vastly different application of incorporation by reference across Member States, and this runs counter to the goal of a single rule book and may endanger the objective of investor protection: ESMA Consultation Paper—Omnibus II, 21.

30  However, these differences in liability essentially disappear once the information that is ‘furnished’ is incorporated by reference into a document (such as a prospectus or registration statement, which have their specific liability regime attached to their disclosure, i.e. to all information included therein, regardless whether expressly or by reference) that is ‘filed’ with the SEC. See Martin and Robinson (n. 11); J. Morlend, ‘Filed v. Furnished, What’s the Difference?’, 18 September 2017, https://blog.sullivanlaw.com/inhousego2/filed-v.-furnished-whats-the-difference.

31  ESMA Consultation Paper—Omnibus II, 25.

32  ibid.

33  See also ESMA, ‘Format of the Base Prospectus and Consistent Application of Article 26(4) of the Prospectus Regulation’ (Opinion), 17 December 2013, ESMA/2013/1944, https://www.esma.europa.eu/sites/default/files/library/2015/11/2013-1944_opinion_on_tripartite_base_prospectuses.pdf (ESMA, Format of the Base Prospectus (Opinion)).

34  Central Bank of Ireland (CBI), ‘Prospectus Handbook—A Guide to Prospectus Approval in Ireland’, 19 November 2018, https://www.centralbank.ie/docs/default-source/regulation/industry-market-sectors/securities-markets/prospectus-regulation/prospectus-handbook/prospectus-handbook.pdf?sfvrsn=10.

35  About draw-down prospectus and national practices, see CESR, ‘Report on the Supervisory Functioning of the Prospectus Directive and Regulation’, 2007, CESR/07-225, 26, http://www.cesr-eu.org/data/document/07_225.pdf.

36  European Commission, ‘3rd Informal Meeting on Prospectus Transposition’, 26 January 2005, MARKT/G3/WG D(2005) (European Commission, 3rd Informal Meeting on Prospectus Transposition).

37  The CBI handbook provides that the prospectus prepared as a draw-down prospectus must contain the following parts in the following order:

  1. (i)  a clear and detailed table of contents;

  2. (ii)  a summary;

  3. (iii)  the risk factors linked to the issuer and the type of security or securities covered by the issue(s); and

  4. (iv)  the other information items included in the relevant annexes to the Prospectus Regulation according to which the draw-down prospectus is drawn up. See CBI (n. 34), 7–8.

38  K. Sergakis, The Law of Capital Markets in the EU (London: 2018), 61.

39  Separately by the examiner, the Special Counsel and Assistant director: Coffee Jr et al. (n. 12), 176.

40  SEC, ‘New Rules and Procedures for Exhibits Containing Immaterial, Competitively Harmful Information’, 1 April 2019, https://www.sec.gov/corpfin/announcement/new-rules-and-procedures-exhibits-containing-immaterial; L. D. Richman et al., ‘SEC Adopts Rules to Modernize and Simplify Disclosure’, 27 March 2009, Mayer & Brown Legal Update, https://www.mayerbrown.com/-/media/files/perspectives-events/publications/2019/03/skmodernizationadopted.pdf.

41  ESMA, ‘Questions and Answers—Prospectuses’, April 2019, ESMA/2019/31-62-780, 49 (ESMA, Q&A Prospectus).

42  cf. Recital (36), NPR and ESMA, Technical Advice—Final Report, Article H and Annexe 5, 4.8 and 4.10 (listing as information that can be inserted in the final terms when not known at the time of the Base Prospectus publication in case of debt securities: interest payable, yield).

43  ESMA, Q&A Prospectus, 50.

44  ESMA, Q&A Prospectus, 11. The 2014 amendment required the home country NCA to communicate to the host competent authority the final terms, in relation to a base prospectus (Art. 5(4) final sub-para, Prospectus Directive) but missed the opportunity to clarify the same aspect within to the omission of information context: Schammo (n. 6), 109.

45  Two of the options provided under the Prospectus Directive for publishing an approved prospectus, namely the insertion in a newspaper and the printed prospectus available at the offices of the issuer, have been removed as they were considered largely outdated. However, the obligation to provide a free paper copy to anyone who requests it is maintained under Article 21(11), NPR.

46  Commission Delegated Regulation (EU) 2016/301 of 30 November 2015 supplementing Directive 2003/71/EC with regard to regulatory technical standards for approval and publication of the prospectus and dissemination of advertisements and amending Regulation (EC) 809/2004 (Omnibus II).

47  The European Commission, in the context of the Consultation on the Review on the Prospectus Directive, promoted the creation of a single, centralized, EU database for prospectuses in view of the example of the Transparency Directive. According to the Commission, such a database could operate as a unique entry point for both investors and persons producing and filing prospectuses across the twenty-eight Member States and could facilitate effective cross-border access to information. Depending on its design, it could even help streamlining the process of prospectus filing by issuers. Most of the respondents to the question were in favour of this suggestion. Arguments in favour were lower costs for issuers, easier and speedier submissions and approval processes, and greater transparency. According to the respondents, an integrated system should also facilitate harmonization and the spread of best practices which, in turn, should enhance investor protection. A one-stop-shop for all relevant information (Prospectus Directive, Transparency Directive, MAR/Directive) would avoid the need for duplication of information provision, would be a natural part of the Capital Market Union, and would improve the global competitiveness of EU markets. Investors would benefit from easier access and comparison of documents and wider choice across borders. Supervisors could enhance their monitoring of the passporting of prospectuses and benefit from cooperation/best practices. In the end, separate national databases in all Member States would be more expensive: European Commission, 3rd Informal Meeting on Prospectus Transposition, 27.

48  However, that does not require the issuer, the offeror, the person asking for admission to trading on a regulated market, or the financial intermediary to keep in reserve printed copies of the prospectus to satisfy such potential requests (Recital (63)).

49  See ESMA, ‘Draft Regulatory Technical Standards under the Prospectus Regulation—Final Report’, 17 July 2018, ESMA/2018/31-62-1002 (ESMA, Draft Regulatory Technical Standards—Final Report) in particular Articles 17–20 about the publication of the prospectus and technical arrangements for the notification portal.

51  P. Mattil and F. Möslein, The Language of the Prospectus: Europeanisation and Investor Protection’, Journal of International Banking and Financial Law (2008) 23(1), 28; Sergakis (n. 38), 68.

52  Morse (n. 4).

53  See European Commission, 3rd Informal Meeting on Prospectus Transposition, 10; Schammo (n. 6), 113; Mattil and Möslein (n. 51), 29 ff.

54  Schammo (n. 6), 113–15.

55  See Article 27(5), NPR:

where a prospectus relates to the admission to trading on a regulated market of non-equity securities and admission to trading on a regulated market is sought in one or more Member States, the prospectus shall be drawn up either in a language accepted by the competent authorities of the home and host Member States or in a language customary in the sphere of international finance, at the choice of the issuer, the offeror or the person asking for admission to trading on a regulated market, provided that either: (a) such securities are to be traded only on a regulated market, or a specific segment thereof, to which only qualified investors can have access for the purposes of trading such securities; or (b) such securities have a denomination per unit of at least EUR 100 000.

56  ESMA , Consultation Paper—Omnibus II, 14.

57  ibid., 31.

58  ibid., 31; Schammo (n. 6), 115.