Out-Law News 3 min. read

Plans to reduce 'administrative burdens' associated with the offer of shares to the public


Fewer businesses could be required to publish a detailed prospectus when seeking investment in return for a share of equity under proposed reforms to EU laws that are being considered.

The European Commission has launched a consultation on potential changes to the EU's Prospectus Directive (27-page / 119KB PDF). It said its review is aimed at "lowering barriers to accessing capital markets", particularly for SMEs.

"Experience has shown that certain requirements may constitute unnecessary administrative burdens for companies which draw up a prospectus (especially SMEs), despite efforts to establish proportionate disclosure regimes when the Prospectus Directive was reviewed in 2010," the Commission said in a statement. "Simply put, the amount of administrative, human and financial resources needed to draw up prospectuses make it very difficult for SMEs and start-ups to put together the large package necessary to attract the investment they need to grow."

"Given the need to enhance access to financing on capital markets by companies (in particular SMEs) at a time of bank deleveraging, a review of this directive is important in the context of the Commission's objective of building a Capital Markets Union. The review will look at when a prospectus is required, streamlining the approval process, and simplifying the information included in prospectuses," it said.

However, corporate law expert Martin Webster of Pinsent Masons, the law firm behind Out-Law.com, said: "The EU is treading a difficult tightrope here – between easing up on the regulation and red tape on the one hand, and ensuring consumer protection on the other. The latter tends to win out, so I wouldn’t anticipate game-changing reforms from this exercise."

Under the existing Prospectus Directive, public companies seeking investment in return for securities, such as shares in their business, either through an offer of such securities to the public or via a regulated market within the EU are generally required to publish a prospectus. The prospectus must include information that allows prospective investors to allow them to make an informed assessment of the company they would be investing in and the respective risks and benefits of that transaction.

However, a number of exceptions are set out under the Directive where the obligation to publish a prospectus does not apply. This includes where an offer of securities is made "solely to qualified investors", to fewer than 150 people or businesses per EU country who are not qualified investors, where securities are worth at least €100,000 per unit, where each investor acquires securities worth at least €100,000 or where the securities being offered have a total value of less than €5 million.

In its consultation, the Commission said it could proceed with a "possible recalibration of the obligation for issuers to draw up a prospectus", in particular to recognise the rise in investment-based crowdfunding.

"Stakeholders' views would be helpful to assess whether the thresholds are still appropriate today or if any further quantitative adjustment would be desirable and if more harmonisation is required, bearing in mind that member states are currently free to implement national regimes for offers with a total consideration below €5 million," the Commission said. "This is particularly relevant in the context of investment-based crowdfunding, the development of which might be discouraged in those member states where the prospectus requirement applies below the €5m threshold."

The Commission said it is also considering extending the scope of other existing exceptions to prospectus requirements, including in relation to secondary issuances and employee share schemes.

Jonathan Beastall, senior adviser in the corporate practice at Pinsent Masons said: "The proportionate regime was introduced to try to make capital raising less onerous in disclosure terms but that regime did not significantly lessen the burden because it was difficult to take a red pen to the individual requirements in the Prospectus Directive which, in isolation, almost all relate to legitimate matters of concern to investors."

"Given the liabilities that attach to prospectuses, issuers and directors prefer to have clear guidance on what needs to be disclosed than be left to form their own judgment and risk a court judging them to have fallen short against a more general standpoint," he said.

The Commission's consultation paper noted the dual aims of the Prospectus Directive are consumer and investor protection and market efficiency. Beastall said: "By definition, early stage investment is more risky than late stage investment, and SMEs are more risky vehicles in which to invest than their larger counterparts. Onerous disclosure requirements might not be the best way to protect retail investors from the false promise of exciting returns but so far no other regime has been designed to achieve that goal and public policy has veered towards protecting the consumer rather than making it easy to raise capital."

The Commission is also reviewing whether to reduce the amount of information businesses have to include in their prospectuses and to further create "a tailor-made prospectus regime" for 'SME growth markets' specifically.

In its paper, the Commission also said that a new harmonised regulatory scrutiny and approval framework for prospectuses could be implemented across the EU.

Using the responses it receives, which must be submitted to the Commission by 13 May, the Commission will decide whether to formally propose changes to the Prospectus Directive later this year.

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