The Prospectus Directive Review: Not just a facelift

10 May 2016
The Prospectus Directive 2003/71/EC has been in force since 2005. Together with Regulation 809/2004, they lay down the rules governing the prospectus to be made available to the public when a company makes an offer or an admission to trading of transferable securities on a regulated market in the EU. The prospectus has to be approved by a competent authority of a Member State before the beginning of the offer or admission .

In Cyprus, the Prospectus Directive as amended was transposed into Cyprus legislation through the Public Offer and Prospectus Laws of 2005-2015 (L. 114(I)/2005). Regulation 809/2004 is also directly applicable. Together with the Prospectus Law, they provide the legal framework for public offers in transferable securities in Cyprus. The competent authority in charge of approving prospectuses is the Cyprus Securities and Exchange Commission.

There are two key objectives of the prospectus:
  • Investor protection: The prospectus should be a standardized document, written in easily comprehensible language, which will allow the prospective investor to make an informed assessment of the issuer and the securities being offered.
  • Market efficiency: The purpose of the prospectus is to facilitate access to capital markets by companies across the EU. That was why it introduced the concept of the “passport”: a prospectus approved by a competent authority in a member state should be valid in all member states without further scrutiny from other competent authorities.

Although the Prospectus Directive underwent an amendment in 2010, some shortcomings were identified, making another review necessary. One of these is cost. Large companies benefit from the provisions of the Directive and generate capital, by drawing up and publishing a prospectus. The large cost and complexity however, associated with drawing up and getting a prospectus approved means that only the very large companies are able to carry out this process.

Another shortcoming is that prospectuses have become very long documents that contain lengthy financial statements and technical explanations bringing into question the effectiveness of its investor protection provisions.

The European Commission considers the Prospectus Review as crucial to its Capital Markets Union project, launched earlier in 2015, as it should not act as an unnecessary barrier to the capital markets. 
One possible amendment could be to adjust the thresholds so that a larger number of offers can be carried out without the need to prepare a prospectus. Currently, public offers for less than 5 million Euros fall outside the scope of the prospectus Directive (covered under section 3(2)(h) of the Prospectus Law).

There is however strong support (especially amongst smaller member states) for maintaining existing thresholds. Their argument is that existing thresholds strike the right balance between investor protection and alleviating the administrative burden on small issuers and small offers. If the thresholds are increased, a large number of offers for securities in smaller member states (including Cyprus) will fall outside the scope of the Directive and this will have an adverse effect on investor protection.

One solution would be to raise the threshold at the level of the Directive while giving member states flexibility to impose their own national regime regarding offers for securities of a smaller scale.
The European Commission is also considering amending the numerous exemptions allowed in the Directive, making the incorporation by reference mechanism more efficient and reforming the proportionate disclosure regime for SMEs.  

On the 30th November 2015, the European Commission published its proposal for a Prospectus Regulation. The proposal is currently being scrutinized in the European Council and the European Parliament, with the aim of reaching a political agreement between the European co-legislators the soonest.