Regulatory Update: Prospectus Regulation and Impact on Fixed Income Issuers
With the application date of the new Prospectus Regulation approaching on 21 July 2019, we explore the potential impacts for fixed income issuers and outline some considerations when choosing a listing venue. We explain how London Stock Exchange’s listing and admission options can help ensure the transition between regimes is as smooth as possible for issuers.
- Changes have an application date of 21 July 2019
- Risk factors: Issuers must now categorise risk factors and present them in order of materiality within each category
- Reduced Disclosure for Secondary Issuance: Simplified prospectus for further issues of securities already admitted to regulated market
- Prospectus Summaries: New summary requirements such as restricting the length of summaries in most cases to a maximum of seven sides of A4
- International Securities Market (ISM) is Exchanged-regulated and therefore outside the prospective regime.
What is the new Prospectus Regulation?
As you are aware, the EU prospectus regime harmonises requirements for the drafting, approval and distribution of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market in an EU Member State. The Prospectus Directive (“PD”) (Directive 2003/71/EC) came into force on 31 December 2003 (implemented in 2005) and was amended in 2010 (implemented in 2012) by Directive 2010/73/EU.
This new Prospectus Regulation (“the PR”, “The Regulation”) (Regulation (EU) 2017/1129) replaces the existing PD and all related technical measures. As an EU Regulation, it will be directly applicable across the EU without the need for transposition into national law.
The PR thus represents a refresh of securities disclosure regulation in Europe and forms a part of the EU’s Capital Markets Union (CMU) initiative.
Note, for a London Stock Exchange listing, a PD compliant prospectus needs to be submitted to the Listing Department of the Financial Conduct Authority (“FCA”) only for admission to the regulated market (“Main Market”) of the London Stock Exchange (“the Exchange”). For admission to ISM, an Admission Document under the ISM Rulebook needs to be submitted to the Exchange’s Primary Markets Regulation team; the process is tailored the nature of the instrument and the issuer. ISM is Exchange-regulated, and although the ISM Rulebook follow’s PD closely, the ISM will not be applying the new PD III rules.
When does PR come into effect?
The Regulation was published in the Official Journal of the European Union on 30 June 2017 and entered into force on 20 July 2017. Despite certain elements of the Regulation becoming effective ahead of time, the majority of the changes have an application date of 21 July 2019.
Although the new rules will not take effect fully until July, competent authorities will be applying the new requirements to any prospectuses under review that are expected to be approved after 21 July 2019. You can find out more about the FCA’s position here.
Additional information regarding applications and their treatment ahead of the 21 July 2019 deadline can also be found here.
The new PR regime will not apply to securities with PD-compliant prospectuses or base prospectuses approved before 21 July 2019. That is, such prospectuses and base prospectuses will continue to be governed by the PD until the earlier of the expiration of their validity period or 12 months after 21 July 2019.
What are some of the key impacts of the PR on issuers on Main Market?
- Prospectus summary: Summary sections are required when issuing retail debt securities. New content and length restrictions will make the summary section more concise. The summary must now be made up of 4 key sections: (1) Introduction – containing warnings; (2) key information on the issuer; (3) key information on the securities; and (4) key information on the offer of securities to the public and/or admission to trading on a regulated market).These sections must not exceed 7 sides of A4 in their entirety, and only a maximum of 15 material risk factors can be included.
- Risk factors: issuers must now categorise risk factors and present them in order of materiality within each category. The European Securities & Markets Authority (“ESMA”) has released guidance for competent authorities on risk factor disclosure in order to help with application of these new rules. This can be found here.
- Simplified prospectus for further issues of securities already admitted to regulated market: A new reduced disclosure regime will apply to secondary issuances by issuers who have had either debt or equity securities listed on a regulated market or SME Growth Market for a minimum of the previous 18 months.
- Growth prospectus: The PR introduces the new concept of an EU Growth Prospectus for certain issues by SMEs, which permits a simplified standard of disclosure in a standardised format and widens the definition of SMEs. These provisions aim to facilitate access to capital markets for smaller companies.
- Publication of prospectuses: The new PR regulations aim to make issuances of securities more transparent and ensure investors have access to all necessary documentation and information in order to make appropriately informed investment decisions. As part of the new requirements, issuers must make available all security documentation, supplements and information incorporated by reference on one acceptable website as defined, for a period of ten years.
Benefits of an International Securities Market (“ISM”) Admission
ISM is an Exchange-regulated MTF market for primary debt issuance and provides issuers of securities targeted at professional investors with the benefits of London’s extensive experience as a global financial centre, whilst offering an efficient and tailored admission process pursuant to its innovative Rulebook.
Issuers who admit their programmes to ISM obtain the following key benefits:
- More flexibility in respect of Risk Factors
An ISM admission can ensure those issuers who wish to maintain consistency with regards to the drafting of Risk Factors for their Eurobond programmes with their global programmes (i.e. for jurisdictions where the new EU PR rules on risk factors do not apply) can choose to do so. For example, an issuer can choose to have the same wording in their US documentation and ISM programmes.
- Enhanced flexibility in respect of inclusion of information in final terms
A big concern for issuers is ensuring that their base prospectuses can effectively be used to issue the full range of structured and complex bonds without the requirement to publish a drawdown prospectus or go through the process of changing their terms and conditions. An ISM admission can help in this regard as issuers are able to include new terms and conditions into final terms in the event that they wish to issue a product with terms previously not covered by the base prospectus rather than having to prepare a new base prospectus as new types of security cannot be added via a supplement under the PD/PR regime. This is especially useful in the cases of structured products, where requirements for terms and conditions can rapidly change depending on new market conventions or demand for new issuance structures.
- Simplified disclosure regime
Whilst the new PR rules allow for simplified prospectuses for secondary issues, the applicability of this for debt issuers may be seen as somewhat limited in practice. The new PR rules also state that issuers wanting to utilise this new regime will need to summarise MAR announcements from the past year in prospectus format, which represents an additional requirement and may be seen as onerous. ISM rules allow issuers to benefit from a simplified disclosure regime utilising reduced disclosure for any issuer with any security (debt or equity) admitted to an EU regulated market, a London Stock Exchange market or any market deemed suitable by the Exchange. In this way, ISM simplified disclosure provisions go further and apply in more instances than the planned PR simplified provisions.
- Enhanced future incorporation by reference provisions
The ISM Rulebook allows for the future incorporation by reference of interim and annual financials, as well as inside information required to be made public under the Market Abuse Regulation, once that information has been published. In this way, ISM rules negate the need for the production and filing of supplementary documents in some instances where this may be required under EU Prospectus Regulation. This allows issuers to reduce blackout periods whilst supplementary prospectuses are going through the approval process and reduce the associated time and costs incurred through drafting such documents.
- Documentation publication
Under the LSE Admission and Disclosure Standards, since October 2018 issuers have the option to upload any documents or links onto the specific security pages of their instruments on the website of the Exchange, one of the accepted locations for the storing of such information under the new regime. This can be arranged upon request at the time of admission and in this way issuers can ensure compliance with the new PR publication requirements.
Dual Admission for Issuers on ISM and Main Market
Issuers can also take advantage of the benefits of an ISM admission whilst utilising work already done on PR-compliant documentation at the time of updating their programme documentation by dual listing the programme on both the main market and the ISM.
- A dual listing is simple, quick and requires minimal additional drafting
- Issuers can dual list at no additional cost compared to a sole Main Market listing.
- Issuers can benefit from full optionality – securities can be admitted to either the Main Market or ISM depending on the specific needs of the transaction under the same programme documentation
Issuers who have recently updated their programme documentation but still wanting to admit their programmes to both the Main Market and ISM can do so by simply wrapping the existing document.
More information on ISM can be found at www.lseg.com/ism. Alternatively, if you would like to discuss this or any other ways ISM could benefit you please contact the team at firstname.lastname@example.org or call us on 0207 797 3921.