July 1 represented the final deadline for the implementation of the Prospectus Directive in the member states of the European Union (EU) and the other countries of the EEA[1].  The Directive, which represents just part of the EU’s Financial Services Action Plan, seeks to create a harmonized approach to the preparation of prospectuses for securities offerings throughout the EEA.  Issuers considering making offerings of securities in Europe or to Europeans need to be aware of these new regulations and consider carefully how they might apply to their plans.

Key Features
The key features of the Directive include:

  • Approval: the Directive provides a ‘single passport’ system of recognition under which a prospectus approved in one member state may be used in any other member state without the need for further approvals.
  • Filing: the Directive harmonizes the principal conditions for offering securities to the public and for admission to trading, including key definitions and exemptions.
  • Content: the Directive harmonizes the principal standards of disclosure in line with the standards of the International Organization of Securities Commissions (IOSCO).
  • Format: the Directive allows the issuer to choose the format of the prospectus, either as a single document or as separate documents (comprising a registration document, a securities note and a summary note), thereby allowing for future fast-track shelf offerings.

When Does it Apply?
Broadly speaking, going forward a prospectus is required to be filed where either:

  1. an offer of securities is made to the public in the EU (‘offer of securities to the public’ is defined in the Directive as “a communication to persons in any form and by any means, presenting sufficient information on the terms of the offer and the securities to be offered, so as to enable an investor to decide to purchase or subscribe to these securities”), or
  2. an application is made for securities to be admitted to trading on an EU regulated market.
There are certain exemptions to this general rule, including offers to ‘qualified investors’ (which includes authorised or regulated financial institutions, governments and central banks), private placements to fewer than 100 people in each member state, offers where the minimum total consideration per investor or the minimum denomination per unit is €50,000 or more and offers with a total consideration of less than €100,000 in any 12-month period.  There are also exemptions in respect of certain types of securities, including shares resulting from the conversion or exchange of other securities, shares offered in connection with takeovers or mergers, shares allotted free of charge or issued as dividends and certain shares offered to existing employees or directors.  There also exists a special regime in respect of small and medium-sized corporate issuers if the total size of the offer is less than €2.5 million in a 12-month period.

‘Home Member State’ Requirement
One of the major provisions of the Directive is the ‘Home Member State’ requirement.  This provision requires that, once a non-EU issuer has chosen its ‘Home Member State’ by making its first public offer in the EU, the prospectuses of all future EU public offers must be approved by the regulatory authority of that member state.  Notably, when an issuer makes an offering of debt securities in denominations equal to, or greater than, €1,000 or its near equivalent (which means that a denomination of US$1,000 may not be sufficient under prevailing exchange rates), that offering will not be considered an election of the ‘Home Member State’.

The ‘Home Member State’ requirement places great importance on the choice of ‘Home Member State’ by an issuer.  Issuers will need to be mindful of the implications that the choice will have in terms of the reporting, disclosure and compliance requirements by which it will be bound in the future.

IFRS and US GAAP Equivalence
An important implication of the Directive, particularly for non-EU issuers, relates to the requirement for all relevant prospectuses to contain financial statements prepared in accordance with either International Financial Reporting Standards (IFRS) or accounting standards determined to be equivalent to IFRS by the European Commission.  The decision by the Commission in respect of the equivalence of US GAAP is expected later this year.  However, if the advice of the Committee of European Securities Regulators (CESR) issued on 5 July 2005 is followed by the Commission, US GAAP will be recognised as ‘equivalent’ for the purposes of the Directive, with the important proviso that the issuer must make additional disclosures (or ‘remedies’) in respect of ‘significant’ differences between IFRS and US GAAP.

[1]The European Economic Area (EEA) consists of all the EU member states, Norway, Iceland and Liechtenstein.