Prior to last week a prospectus was required for offers in securities, such as bonds or equities, over €5,000,000 over a period of 12 months. A prospectus is a costly exercise. According to an impact assessment report produced by the Treasury back in April of this year:
“The estimated cost of producing a prospectus ranges from 7 to 12 percent of the funds raised. For an offer of €8 million, preparing a prospectus could cost in the range of to £490,000 to £845,000.”
With the introduction of the Innovative Finance ISA, ShareIn have seen a significant growth in the size and number of bonds offered on our client’s platforms. We welcome the increase in the exemption up to €8 million. Steps such as this should help facilitate more people to take control of their investments and invest directly in their future; another positive step in the democratisation of finance.
UK Exemption raised from €5,000,000 to €8,000,000
Up until 21st July 2018, the Prospectus Directive – the mandatory threshold below which offers of securities to the public have been exempted from the prospectus requirement – has been set at €100,000. Offers of securities to the public below €5 million have been exempt from the scope of the regime. In practice, this gave each Member State the discretion to set their own exemption thresholds at which a prospectus becomes mandatory between €100,000 and €5 million. The UK implemented these changes early and in full, exempting all offers of securities to the public below €5 million from the scope of the prospectus regime.
The UK are exercising the discretion to raise the threshold for an offer of securities to the public within the EU for which a Prospectus is required from €5 million to €8 million.
This change will widen an existing discretionary exemption which the UK exercises in full, and its effect is to lift burdens, as fewer offers will need the production of a prospectus.
Introducing these measures is likely to be beneficial for UK companies. This will reduce the burden and costs imposed on businesses by enabling them to raise greater sums of capital without being required to produce a prospectus to do so.
Background to the Prospectus Regulation
The EU prospectus regime has existed since 2003, when the Prospectus Directive (‘PD’) was adopted, and forms the EU framework for the preparation of prospectuses for public offers of securities where securities are to be admitted to trading on a regulated market.
The objectives were to enhance investor protection and to improve the efficiency of the single market. Its key innovation is that a prospectus approved in one Member State is valid across the EU, giving issuers a ‘passport’ across the EU capital markets.
The PD was implemented in the UK via the Prospectus Regulation 2005, which came into force on 1 July 2005 and amended the Financial Services and Markets Act 2000 (FSMA). The application of the PD was reviewed five years after its entry into force, and an Amending Directive was published that sought to improve and simplify the application of the PD, to reduce administrative burdens on issuers whilst maintaining investor protection and improving legal certainty.
Since the Amending Directive was introduced, the mandatory threshold below which offers of securities to the public have been exempted from the prospectus requirement has been set at €100,000, while offers of securities to the public below €5 million have been exempt from the scope of the regime entirely, giving member states discretion to set their own domestic exemption thresholds between €100,000 and €5 million.
The UK implemented these changes early and in full, exempting all offers of securities to the public below €5 million from the scope of the prospectus regime. In 2015 the European Commission conducted a second consultation which identified further shortcomings in the Prospectus Directive regime, resulting in unnecessary costs and burdens to businesses, especially smaller ones.
On 14 June 2017 the European Parliament and Council adopted Regulation (EU) 2017/1129 (the ‘Prospectus Regulation’, or ‘PR’) on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC (the ‘Prospectus Directive’, or ‘PD’). The Prospectus Regulation entered into force on 20 July 2017, and will apply in full from 21 July 2019.
However, Articles 1(3) and 3(2) will apply from 21 July 2018. These relate to offers of securities to the public with total consideration below a certain threshold.
You can see the changes to the legislation here: