of Ministers each approved the Prospectus Directive, ... rules for the Prospectus
Directive are being considered .... (IAS) for purposes of the prospectus rules?
Client Publication
September 2003
The European Union Prospectus Directive Introduction As part of the European Union’s drive to create a single European market for financial services, in March 2000 the Council of Ministers endorsed the Financial Services Action Plan, which is due to be implemented by 2005. An integral part of the Action Plan is to create a single European capital market that issuers will be able to access efficiently and that is better able to compete with the single US capital market. In July 2003 the European Parliament and the Council of Ministers each approved the Prospectus Directive, one of several legislative initiatives to implement the objectives of the Action Plan. Detailed implementing rules for the Prospectus Directive are being considered by the Committee of European Securities Regulators (Cesr). Cesr and member state regulators are meant to consult with each other in the future to facilitate harmonized application and interpretation of the Directive and the implementing rules. The Prospectus Directive and the implementing rules are scheduled to come into force in June 2005. The Prospectus Directive seeks to harmonize the requirements for drafting, approval and distribution of a prospectus in offerings and listings of securities within the EU. A key aim of the Directive is to provide for a prospectus that, having been cleared by one EU competent authority, could be used as a “passport” for offers or listings in all other EU countries without further review or the imposition of further disclosure requirements. This contrasts with the system currently in place for public offers, whereby each regulator generally has the ability to clear the offer in its own country, even though existing directives have contained mutual recognition provisions.
Key Issues for US Issuers Application. In Europe, US issuers have traditionally accessed the European capital markets through institutional debt offerings, such as Eurobonds and Euro MTN programs, typically with a concurrent listing in Luxembourg or London. The Prospectus Directive applies to offerings and listings of securities, but there are several nonexclusive exceptions to its scope, including offerings to qualified investors, offerings targeted at
less than 100 persons per member state and offerings of at least €50,000 per investor. While these exceptions would allow institutional offerings to continue without triggering the prospectus requirements of the Directive, a listing of securities would trigger the Directive requirements. In the past there have been marketing reasons for seeking a listing in a Euro debt offering, but these could be outweighed in the future by the additional constraints imposed under the Directive. Form of Prospectus. For debt securities offered pursuant to an offering program, the prospectus may consist of a base prospectus containing information relating to the issuer and the securities offered or listed, with the final terms for the securities provided for each drawdown. The final terms must be filed with, but are not reviewed by, the appropriate competent authority. They must be provided to investors as soon as practicable and, if possible, in advance of the beginning of the offer. Cesr is currently consulting on which line items may be included in the final terms and its method of publication. Except for debt securities with a minimum denomination of €50,000, every prospectus must also contain a summary conveying in plain English the essential characteristics and risks associated with the issuer, any guarantor and the securities. For other offerings, including offerings of convertibles, which are classified as equity securities under the Directive, the prospectus consists either of one single document or a registration statement (containing information relating to the issuer) and a securities note (containing information on the securities being offered or listed), as well as the summary. Unlike US rules, for these offerings the Directive does not provide for marketing efforts to be conducted using a preliminary prospectus and for sales to be made using a final prospectus containing the price of the securities offered. Instead, if the prospectus does not include the final offer price and amount of securities that will be offered, it must include the criteria according to which they will be determined or, in the case of price, the maximum price. If this information is not provided, then investors have the right to withdraw from the offering during a period of at least two business days after the final offer price and amount of securities have been filed with the competent authority.
2 Prior to the closing of an offering or the start of trading of a listed security, the prospectus for any type of offering must be updated for any significant new factor, material mistake or inaccuracy by publishing a supplement. As further discussed below, any such update (other than to supply the final terms to a base prospectus) would trigger a 7 business day review period by the reviewing authority. Moreover, investors who have agreed to purchase securities prior to publication of a supplement will have the right during a period of at least two business days following its publication to withdraw from an offering. Reviewing Authority. Under the Directive, a prospectus must be approved by the competent authority of the issuer’s “home member state”. For offerings or listings of debt securities or exchangeables with a minimum denomination of €1,000 per unit, US issuers may select a new home country for each offering or listing they conduct. In practice this will mean that for offerings that are listed on Luxemburg or London the reviewing authority will remain either the Luxembourg Stock Exchange or the UKLA, respectively. For offerings or listings of equity securities, including convertibles, although initially non-EU issuers may choose between the country where the securities are intended to be offered to the public for the first time and the country where the first application to list the securities is made, the choice will be binding for all future equity offerings or listings. The positive aspect of this rule for US issuers is that they may choose an “experienced” reviewer for a convertible issue, namely the exchange chosen for listing, unlike European issuers who must use their home jurisdiction. Timing. When planning a transaction, US issuers will need to take into account the length of the approval process for a prospectus. While for issuers returning to the EU capital markets the stated prospectus review period is up to 10 business days, for issuers accessing EU capital markets for the first time the stated prospectus review period is up to 20 business days. In addition, except in the case of final terms for a base prospectus, each submission of a supplement will trigger a further review period of up to 7 business days. In practice the review period may be longer, since an authority’s failure to approve a prospectus within these time limits does not constitute tacit approval. Moreover, if an authority finds that a prospectus is incomplete, the review periods recommence from the date that full documentation is received. Notice of an incomplete prospectus must be given within 10 business days of its submission. Since by definition a comment from an authority that prompts an issuer to include additional information means the prospectus
is incomplete, an authority could use this provision to extend the review period indefinitely. Under the regime currently in place, different authorities have had very different approaches to the time period for review, as well as how substantive the review is, and it would appear that these very different practices would likely continue under the Directive. However, it is possible that a common approach by competent authorities will be agreed in consultation with Cesr at a later stage. Publication. Once a prospectus has been approved, it must be filed with the appropriate home country authority and made available to the public as soon as practicable prior to or at the launch of an offering or listing of securities. Under the Directive, publication of a prospectus can be made: by insertion in a newspaper; by making available hard copies at the office of the exchange upon which the securities are to be listed or at the issuer’s office and those of financial intermediaries; or by posting on the issuer’s and financial intermediaries’ websites or the exchange’s or the home country authority’s website. If an issuer publishes a prospectus using either of the first two methods of publication, then the home country authority may also require the prospectus to be posted on the issuer's website. This requirement could conflict with US securities laws. For example, unrestricted access to an offering document on the website of a US issuer in connection with an offshore offering could well be deemed to be directed selling efforts in violation of Regulation S. Suggestions have been made to Cesr that the implementing rules should permit non-EU issuers to deviate from the publication rules if necessary to comply with the securities laws of nonEU jurisdictions. The Directive is, however, silent on this point. US issuers could manage this situation with regard to their own website by ensuring, for example, that website postings are password protected. It is doubtful, however, that they could ensure that the exchange’s or home country authority’s website is password protected. Language. In practice, the prospectus language regime should not be of great concern to US issuers because the language applicable to the prospectus for a listed institutional offering will be the language accepted by the home country authority where the listing is sought. Since in most institutional offerings of debt or convertible securities by US issuers this is either Luxembourg or London, English should be an acceptable language. Incorporation by Reference. Similar to US practice, the Directive specifies that information may be incorporated by reference into the prospectus that has previously been approved by or filed with the competent authority of a home member state. However, to the extent that US issuers will not have
3 filed their on-going reporting with an EU authority, they will not be permitted to incorporate by reference and will have to prepare a full prospectus. A solution to this problem would be for Cesr to adopt implementing rules that permit US issuers to incorporate by reference documents that have been filed with the SEC and/or for a member state to permit US issuers to file such documents with the competent authority of that member state, which would then permit incorporation by reference into a prospectus. Disclosure; Presentation of Financial Information. Currently, US issuers and other issuers using US Gaap are able to list in Luxembourg or London using US Gaap financial statements. Under the Directive, prospectuses from countries outside the EU may be approved for an offer or listing in the EU if they have been prepared in accordance with international standards set by international securities commissions, including the International Organization of Securities Commissions (Iosco), and if the information requirements, including information of a financial nature, are equivalent to requirements under the Directive. The qualitative disclosure in US prospectuses should meet this international standards requirement as the Cesr disclosure rules for prospectuses are, as proposed, very close to US standards, both being based on Iosco standards. The question is whether and to what extent quantitative disclosure will be deemed to meet international standards. In particular, will US Gaap be considered equivalent to International Accounting Standards (IAS) for purposes of the prospectus rules?
The present proposed Cesr rule does not help. It states: “In the case of issuers incorporated in a nonmember state which are not obliged to draw up their accounts so as to give a true and fair view, but are required to draw them up to an equivalent standard, the latter may be sufficient.” The US Gaap fair presentation standard is different to the IAS true and fair view standard, but is it equivalent and will it be deemed sufficient? A solution to this problem would be for Cesr to adopt implementing rules that permit US issuers (and other issuers using US Gaap) to prepare financial statements under US Gaap and provide a narrative of differences with IAS, the reverse of what many European issuers have done when accessing the US institutional markets. Alternatively, US Gaap issuers could undertake institutional offerings only and not list the securities so offered, thereby avoiding triggering the prospectus rules. In the past there have been marketing reasons for a listing, but these could be outweighed by financial statement requirements. Prospects. With respect to equity securities, including convertibles, Cesr has proposed that issuers be required to disclose in the prospectus an assessment of their “future prospects” for at least the current financial year and the assumptions on which those prospects are based. This assessment must be clearly distinguishable from other information, such as trend information or business strategy. This would be a new requirement for US issuers who, under US rules, may volunteer, but are not required to provide, such information. As a result, US issuers may be concerned that this requirement will heighten liability and trigger a future duty to correct or update the information that they disclose.
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This memorandum is intended only as a general discussion of these issues. It should not be regarded as legal advice. We would be pleased to provide additional details or advice about specific situations if desired. For more information on the topic covered in this issue, please contact: New York Stephen T. Giove Lisa L. Jacobs Joel S. Klaperman Linda C. Quinn Antonia E. Stolper Ottilie L. Jarmel (212) 848-4000
London James M. Bartos David Beveridge Jonathan Coppin Pamela M. Gibson Bonnie Greaves Richard Price Richard B. Vilsoet (44 20) 7655-5000
Hong Kong Matthew D. Bersani Hsiao-Chiung Li (852) 2978-8000
Washington D.C. Abigail Arms Thomas J. Friedmann (202) 508-8000
Paris Manuel Orillac Sami L. Toutounji (33 1) 5389-7000
Tokyo Masahisa Ikeda (81 3) 5251-1601
San Francisco John D. Wilson (415) 616-1100
Frankfurt Stephan Hutter (49 69) 9711-1000
Beijing Lee Edwards (86 10) 6505-3399
Menlo Park Bruce Czachor (650) 838-3600
Rome Michael S. Bosco Robert Ellison (39 06) 697-6791
Toronto Brice T. Voran Leslie McCallum (416) 360-8484
Singapore Oren B. Azar (65) 6230-3800
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