1 Pursuant to Articles 3(1) and 3(3) of Council Regulation (EU) 2017/1129 on the prospectus to be published when securities are offered to the public or admitted to trading 2017 OJ L168/12 (Prospectus Regulation).
2 Recital (2) of the Commission Delegated Regulation (EU) 2019/980 of 14 March 2019 supplementing Regulation (EU) 2017/1129 of the European Parliament and of the Council as regards the format, content, scrutiny and approval of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Commission Regulation (EC) No. 809/2004 (CDR).
3 As the Commission states in Recital (5), Prospectus Regulation:
4 See J.P. Franx, Prospectusaansprakelijkheid uit onrechtmatige daad en contract (Deventer: Kluwer, 2017) 40–41; B. Bierens et al., Handboek Beursgang (Onderneming en recht, nr. 68) (Deventer: Kluwer, 2017); and others
6 If, for example, an IPO is conducted on the basis of quarterly financial statements, these financial statements would, for the purposes of the IPO, typically be prepared on the same basis as the company’s annual accounts, be reviewed by an auditor, and be published in full in the prospectus. A question the company must ask itself is whether as a consequence of this approach it will be expected to publish quarterly results on this basis going forward, even though under applicable Member State legislation in implementation of the transparency directive (Directive 2013/50/EU of the European Parliament and of the Council), the company may very well not be formally required to publish quarterly financial information.
7 Ernst & Young, ‘Global IPO Trends’, Q2 (2019) 5.
8 For more details, see G. Strampelli, Chapter 8 ‘The Contents of the Prospectus: Rules for Financial Information’, this volume.
9 The Prospectus Regulation and related legislation contain ‘pro forma’ and ‘complex financial history’ provisions providing guidance and setting out the requirements for the presentation of financial information in these situations, if certain thresholds in terms of size and impact of these events are met.
10 This is mainly driven by the so-called 135-day rule derived originally from US auditor requirements. Put simply, in order to be able to obtain comfort from the company’s auditor on the financial information included in the prospectus, which is a key requirement for companies and banks, the most recent audited or reviewed financial statements included in the prospectus may not be older than 135 calendar days.
11 Typically, one or more of the company’s financial advisors will already be involved ahead of formal IPO appointments. Also, additional syndicate members are likely to be appointed later on in the process, depending on size and type of the IPO. These banks, typically awarded a role as joint bookrunner or co-lead manager, may have specific knowledge, contacts, and/or experience in target investor markets or the company’s sector, or particularly strong research capabilities.
12 Across jurisdictions, the formal role and responsibilities in relation to the lead banks’ involvement differ, but it goes beyond the scope of this book to discuss these differences in detail. Nevertheless, these rules will have an impact on how parties approach and fulfil their role in an IPO. For example, in the UK a company applying for a premium listing must appoint a sponsor that has distinct responsibilities towards the company as well as the UK Financial Conduct Authority, the FCA (https://www.fca.org.uk/markets/sponsor-regime/role-and-responsibilities-sponsor), whereas the scope of formal responsibilities in the Netherlands, for example, is (far) less detailed.
13 Publicity guidelines are guidelines that govern the process and procedures for preparation and dissemination of information in the context of a securities offering, particularly into the US. They are of particular relevance in an IPO where the company typically does not have prior experience in dealing with public disclosure. They are prepared at the outset of the IPO execution phase by company’s legal counsel and distributed to all parties involved in the IPO. The key objective is to ensure compliance with all publicity and other disclosure-related aspects of the IPO. Concrete guidance is given on what is allowed in respect of (for example) press releases, interviews, and other communication in the context of the IPO, whilst allowing for day-to-day business to continue. The guidelines set out procedures, including review and approval rounds, for the various documents described in the chapter, such as the IPO prospectus and the early-look, pilot fishing, and roadshow presentation.
14 Other work streams that typically start immediately after the kick-off presentation (with preparation having started earlier already) are the confirmation and implementation of any pre-IPO capital or corporate governance (re)structuring; the further development of the financial model, and confirmation of availability of financial statements and timing of preparation thereof.
15 Such as under Article 6(1), Prospectus Regulation and similar tests under US securities laws, as explained in more detail later on this chapter at section III ‘The IPO Prospectus’ (para. 2.39).
16 Article 22(4), Prospectus Regulation.
17 Following a lengthy consultation process, the FCA introduced updated rules on 1 July 2018. In their view, company information, and not connected analyst research reports (i.e. reports prepared by analysts employed by the syndicate banks), should form the basis on which investors decide whether or not to participate in an IPO. The new rules therefore stipulate that connected analyst research is not permitted to be published until after the publication of an approved registration document. The syndicate banks must also ensure unconnected analysts (i.e. analysts not employed by the syndicate banks) are also provided with the same information as connected analysts, with the aim of encouraging more unconnected research to be published. Despite the new rules, companies in practice still choose to publish a single-format, ‘price range’ prospectus, rather than adding a securities note and summary to the previously approved registration document, although (in accordance with the expressed preference of the FCA) there has been a movement towards using approved price range prospectuses to conduct the IPO roadshow, rather than unapproved ‘pathfinder’ prospectuses which were previously typically used in the UK (other than for IPOs, including a retail offering). The registration document will be silent as to the offering, but otherwise would typically contain the same information about the company as the IPO prospectus. If unconnected analysts are provided with information at the same time as connected analysts, then connected analyst research may be published one day after publication of the registration document. If, however, as has been the case on every UK IPO to date since the new rules came into force (largely due to concerns about minimizing the risk of a leak), unconnected analysts are not provided with information until after publication of the registration document, then connected research may be published seven days after publication of the registration document. The registration document is now typically accompanied by an ‘expected intention to float’ announcement, followed by a ‘confirmed intention to float’ announcement at the date of connected research publication (one or seven days later, depending on which approach has been taken). Following publication of the ‘confirmed intention to float’ announcement, the remainder of the UK IPO timeline is largely unchanged, but the new rules have effectively added a week to the typical IPO process.
18 Also see G. Strampelli, Chapter 8 ‘The Contents of the Prospectus: Rules for Financial Information’, this volume.
19 J. W. Hoevers, ‘Het Due Diligence Onderzoek: Onderzoeksplicht, Disculpatie en Procedure’, in: B. Bierens et al. (eds), Handboek Beursgang, Onderneming en Recht, no. 68 (Deventer: Kluwer, 2017).
20 Also see boxed text ‘US securities laws and European IPOs—144A, 10b-5, and US practices’, para. 2.38 below as well as section III ‘The IPO Prospectus’ (para. 2.39) (on prospectus liability) and section IV ‘IPO Prospectuses and the Prospectus Regulation’ (para. 2.62) (on securities litigation) for more details on prospectus liability and defences.
21 This in particular relates to the information required to be included pursuant to Item 12 of Annex 1 of the CDR.
22 In addition to the auditor’s report that needs to be included in relation to the financial statements included in the prospectus pursuant to the Prospectus Regulation (Item 18 of Annex 1 of the CDR).
23 Practice differs across the European Union. Whereas in certain jurisdictions working capital reports need to be prepared as part of the listing process, in other jurisdictions these reports are only prepared in specific circumstances, for example when the financial position of the company or the nature of its business give rise to a request from the banks for such a report to be prepared.
24 Item 3 (Essential information) of Annex 11 of the CDR: ‘a statement by the issuer that, in its opinion, the working capital is sufficient for the issuer’s present requirements or, if not, how it proposes to provide the additional working capital needed’.
25 Article 6(1), Prospectus Regulation.
26 This approach with different building blocks for different types of securities and offerings has remained unchanged compared to the approach under the old prospectus rules.
27 See boxed text ‘US securities laws in European IPOs—144A, 10b-5, and US practices’, para. 2.38 for the background to this division of roles.
28 See section IV.2 ‘Risk Factors’ (para. 2.63).
29 Even though the customary set-up and order of the equity story in a typical ‘Business’ chapter is based on market practice more than anything else, Annex 1, item 5.4 CDR requires the inclusion of a ‘description of the issuer’s business strategy and objectives, both financial and non-financial (if any)’, whereby ‘This description shall take into account the issuer’s future challenges and prospects.’ The chapter typically starts with a brief overview or introduction to the company’s business, after which the strategy, key strengths, and financial objectives (guidance) are presented. The remainder of the ‘Business’ chapter is typically populated on the basis of the requirements of the Prospectus Regulation, whereby items 5.1–5.7 of Annex 1 to the CDR set out the key pieces of information that must be included, requiring a description of the issuer’s operations and its principal activities, including: main categories of products sold and/or services performed and significant new products and/or services that have been introduced or are under development (5.1); a description of the principal markets, including a breakdown of total revenues by operating segment and geographic market (5.2); important events in the development of the issuer’s business (5.3); summary information regarding the extent to which the issuer is dependent on patents or licenses, contracts or new manufacturing processes (5.5); the basis for any statements made by the issuer regarding its competitive position (5.6); and information on the issuer’s investments (5.7).
30 The ‘Operating and Financial Review’ (OFR) chapter discusses the company’s financial results and condition. Its purpose is to provide investors with the information necessary to interpret the company’s operating results over recent financial periods and financial condition through the eyes of the company’s management. It explains the company’s business as management sees it, separately discussing each operating segment’s performance, as well as the business as a whole. It will also identify and discuss the key performance indicators, or KPIs, that management uses to evaluate the performance and financial health of the business. In accordance with the Annex 1, item 7.1.1 CDR, the company needs:
Information regarding significant factors materially affecting the company’s results must also be included (Item 7.2.1) whereby these factors should come back in the year-on-year descriptions illustrating the extent of their impact and key trends in the company’s business and industry. Other elements in the OFR are a description of key accounting policies and liquidity and capital resources, describing capital structure and cashflows.
31 Based on Article 20 in combination with the definitions of ‘Home Member State’, ‘ “approval” and “competent authority” ’ in Article 2, Prospectus Regulation.
32 See section II.2 ‘Preparing for an IPO’ (i) ‘IPO readiness’ (para. 2.12).
33 While the terms ‘dual listing’ and ‘cross-listing’ are often used interchangeably, they are technically two distinct concepts. A cross-listing occurs where a company’s shares are listed on more than one stock exchange. Arguments for pursuing an additional listing in another jurisdiction typically are (i) improved access to capital; (ii) an increased profile and global presence; (iii) increased liquidity of their shares; or (iv) business-political reasons. An example of a cross-listing is Airbus SE, a Societas Europaea with its corporate seat in the Netherlands and listings in France, Spain, and Germany. Other well-known more general examples are European companies with a separate ADR/GDR listing on a US stock exchange. A dual listing, on the other hand, occurs when two or more companies (shares of which are admitted to trading on separate stock exchanges) combine their operations but have separate ownership structures through two separate holding companies. While this structure is sometimes seen as complicated, arguments for its use are access to capital and potential tax and other financial advantages to both companies and shareholders. Well-known examples of companies that have or had dual listings, include Unilever (Unilever Plc in the UK and Unilever NV in the Netherlands), ABB Group (Sweden and Switzerland), RELX Group (the former ReedElsevier: UK and the Netherlands), Fortis (Belgium and the Netherlands), and Shell (UK and the Netherlands).
34 Articles 8 and 10, Prospectus Regulation.
35 Based on Article 17(2), Prospectus Regulation. The ‘single document, price-range approach’ is typically used in IPOs, for example in the UK, Germany, and the Netherlands, whereas in France the more common approach is to publish an approved registration document early on in the IPO process, supplemented by a securities note, including a summary, at the time of launch of the IPO. See section II.3.iii ‘Analyst presentation and research reports’ (para. 2.25) for recent developments in the UK that had an impact on these practices.
36 The twenty-working-day period applies where the offer to the public involves securities issued by an company (i) that does not have any securities admitted to trading on a regulated market; and (ii) that has not previously offered securities to the public. For secondary issues or admissions, a ten-working-day period applies, see Article 20(2), Prospectus Regulation. In some jurisdictions, such as the UK, the competent authorities as a matter of practice will work with shorter review periods than formally allowed for (e.g. in the UK, on an IPO ten working days for the initial submission and five working days for subsequent submissions, as well as shorter periods on secondary issues or admissions).
37 Article 20(3), Prospectus Regulation.
38 Article 21(1), Prospectus Regulation.
39 Upon the competent authority’s formal approval of the IPO in the past, a printer would print a number of hard copies of the IPO prospectus for distribution to potential investors, but there is a trend towards no longer distributing physical copies, but to have only digital copies available (with hard copies printed and provided only on demand).
40 Article 21(3), Prospectus Regulation.
41 For a detailed overview of all available exemptions, see K. Lieverse, Chapter 7 ‘The Obligation to Publish a Prospectus and Exemptions’, this volume.
42 Recital (25) and Article 1(4)(a), Prospectus Regulation.
43 Market practice in relation to retail offering differs across jurisdictions. For example, they are common in the Netherlands, with a few notable exemptions, such as the June 2018 IPO of Adyen N.V. on Euronext Amsterdam, where shares were only offered to, and subscription was only open for, qualified investors. Nevertheless, approval of the IPO prospectus was sought prior to commencement of the subscription and book-building period, i.e. the offering could have been made to retail investors in the Netherlands. In other jurisdictions, such as the UK, retail offerings are much less common and are typically only included where the nature of the company is such that it would be expected to attract significant attention from retail investors, e.g. in the case of household names, retail businesses, or luxury goods manufacturers.
44 The selling restrictions used in the IPO prospectus will typically contain ‘catch-all’ wording to make clear that any other exemption (e.g. the 150-person limit) may, where relevant, also be relied upon.
45 Articles 1(4)(g) and 1(5)(f), Prospectus Regulation.
46 That requirement meant that in practice, companies would still often choose to prepare a fully fledged prospectus, (i) as it was difficult to assess what exactly was required to achieve ‘equivalence’; or (ii) the parties involved simply opted to go for the ‘seal of approval’ of a normal prospectus approved by a competent authority; and (iii) in some jurisdictions, the ‘equivalence’ test applied was effectively the same as for a prospectus prepared in accordance with the normal regime.
47 Article 1(5)(j), Prospectus Regulation.
48 For more details, see P. Horsten, Chapter 11 ‘ “Light” Disclosure Regimes: Secondary Issuances’, this volume.
49 Recitals (50) and (51), Prospectus Regulation.
50 See nn. 17 and 35 and elsewhere for different approaches.
51 Recently, tech companies Spotify and Slack pursued an IPO on the New York Stock Exchange (NYSE) in deviation from this traditional approach, by pursuing a so-called ‘direct listing’. In short, the direct listing entails that a company’s shareholders sell shares directly to the public without the assistance of intermediary banks. The direct listing does not involve a building of an order book, but focuses on facilitating a purely market-driven ‘supply-and-demand’ approach to price setting. To that effect there is no lock-up period either, so existing shareholders (including employees) can directly sell their shares to the public. The approach also brings along a number of risks, as there is no support or guarantee that sufficient shareholders will sell, or for the opening price or trading liquidity post-IPO, no control over allocation to (long-term) investors, and no defence against any volatility in the share price. The banks are still involved, but as financial advisors rather than coordinators and underwriters. Technically, a direct listing would also be possible in European markets, as parties should be able to find a way to work with regulatory and other formal constraints (e.g. mandatory involvement of sponsors in listing procedures) that would be triggered by a direct listing. Equally as important, however, is the question whether there are many companies that are suitable for a direct listing (not only in Europe, but on a global level, including the US). A successful direct listing seems to require specific conditions and circumstances, most importantly: (i) there is no need for a capital raise; (ii) the company has the valuation (also in order to meet stock exchange requirements), brand name, and reputation, and its business model is easily understandable by the market to allow for leaving out investor education and roadshows; and (iii) there must be enough selling shareholders to ensure a minimum liquidity level for the trade in the company’s shares (also with a view to realistic pricing). Given these specific requirements, it remains to be seen at this stage whether the concept is here to stay and how many companies will be able to benefit from its distinct advantages.
52 See Part III ‘Prospectus Liability and Litigation’ of this volume for more details on liability, including in relation to retail offerings.
53 Article 2(k), Prospectus Regulation.
54 Articles 22(2) and 22(3), Prospectus Regulation.
55 Commission Delegated Regulation (EU) 2019/979 (14 March 2019) supplementing Regulation (EU) 2017/1129 of the European Parliament and of the Council with regard to regulatory technical standards on key financial information in the summary of a prospectus, the publication and classification of prospectuses, advertisements for securities, supplements to a prospectus, and the notification portal, and repealing Commission Delegated Regulation (EU) No. 382/2014 and Commission Delegated Regulation (EU) 2016/301 (CDR II).
56 By way of example, the Dutch competent authority, the Dutch Authority for the Financial Markets (AFM), has issued guidance that in its view, the ‘advertisement’ norms set out in Article 22(4) of the Prospectus Regulation and article 16 CDR II also apply to analyst presentations. Consequently, AFM will request a copy of the (draft) analyst presentation and will review that presentation based on these norms.
57 Article 6, Prospectus Regulation.
58 Recital (54), Prospectus Regulation.
59 As set out in the ESMA’s Final Report: Guidelines on Risk Factors under the Prospectus Regulation dated 29 March 2019 (ESMA RF Final Report)
60 For an extensive discussion of the new risk-factor regime, see R. ten Have, Chapter 12 ‘The Summary and Risk Factors’, this volume.
61 Recital (54) and Article 16(1), Prospectus Regulation.
62 See Section IV (‘Compliance and reporting obligations’) of the ESMA RF Final Report, which includes specific instructions to competent authorities to make every effort to comply with the guidelines and to incorporate them into their supervisory frameworks and consider them when carrying out their scrutiny of a prospectus in accordance with Article 20, Prospectus Regulation.
63 The ESMA RF Final Report does not prescribe the specific categories to be used, but includes examples and suggestions for categorization.
64 Eric Newcomer and Olivia Zaleski, Lyft’s Risk Factors Are the Stuff of Bad IPO Dreams (Bloomberg, 2019). Even though relating to a US IPO, where rules on tailoring and making risk factors specific and concrete have been in place for decades, this illustrates the perception of the general public of risk factors in a prospectus.
65 See Part III ‘Prospectus Liability and Litigation’ of this volume.
66 While this exercise has generally been carried out previously as a matter of practice, the new rules mean that the process is likely to receive more focus and therefore require more time during the IPO process.
67 Recital (33), Prospectus Regulation stipulates that:
68 ESMA Final Report—Technical Advice under the Prospectus Regulation, paragraphs 56 and 359.
69 Articles 38(d) and 38(f), CDR.
70 CDR, Annex 11, section 3.4.
71 Article 7, Prospectus Regulation and CDR II, Chapter I.
72 Recitals (28)–(31), Prospectus Regulation.
73 For more details, see R. ten Have, Chapter 12 ‘The Summary and Risk Factors’, this volume.
74 Also see under section IV.2 ‘IPO Prospectuses and the Prospectus Regulation—Risk Factors’ (para. 2.63).
75 Article 21(3), Prospectus Regulation.
76 Recital (33), Prospectus Regulation.
77 For more details on profit forecasts and profit estimates and the background to the abolishment of this requirement, see G. Strampelli, Chapter 8 ‘The Contents of the Prospectus: Rules for Financial Information’, section V ‘Profit Forecasts and Profit Estimates’ (para. 8.64), this volume.
78 In the UK, for instance, auditors have made clear that in the absence of a regulatory requirement they would not be prepared to give a public opinion, but may be willing to provide some level of private (diligence-based) comfort.