When a prospectus is not required - admission to listing on main markets

• Raising the threshold for listed companies. As with the current regime, a company seeking admission of its securities to an EU regulated market (such as the London Stock Exchange's main market) for the first time must publish a prospectus. Previously, with some exceptions, the company had to publish another prospectus if it subsequently planned to issue a further 10 per cent or more of this class of securities within any period of 12 months, even if it did not offer them to the public. The new Regulation gives companies more flexibility by raising this threshold to 20 per cent (although there will usually be other constraints limiting its use, such as institutional investor guidelines on share offerings). This change came into force on 21 July 2017. An equivalent 20 per cent limit applies to the exemption for listing shares resulting from the conversion or exchange of other securities. There is an overall 20 per cent limit for combining these exemptions within any period of 12 months, which takes effect on 21 July 2019.
• Existing exemptions. The above exemptions are in addition to the existing exemptions available for listing securities, including the exemptions for bonus issues, scrip dividends and employee share schemes.
• Takeovers, divisions and mergers. The Regulation also allows a company to issue shares or other securities as part of a takeover, division or merger without having to produce a full prospectus, even if it involves a public offer, or the issue of 20 per cent or more of a listed company's share capital. Instead, the company must make a document available "containing information describing the transaction and its impact on the company". Unlike the current equivalent regime, this document will not require FCA review or approval. ESMA has nevertheless advised the Commission that it should still include much of the same content as a prospectus, and its proposed content is set out in its Final Report on Technical Advice on Minimum Information Content for Prospectus Exemption. However, the scope of the exemption and the required content for the document remain subject to further change as a result of a proposed EU Amending Regulation. This proposes to revise the exemption to include anti-avoidance provisions (so that it is not, for example, available for a reverse takeover by an unlisted company).

If a prospectus is required

In addition to the main Prospectus Regulation, Delegated Regulation (EU) 2019/980 sets out the detailed content for a prospectus. A separate Delegated Regulation ((EU) 2019/979) contains supplementary rules on presenting key financial information, advertisements, publishing prospectuses and related matters. As now, the FCA must approve the content of a prospectus before the company can publish and use it.

• Format of prospectus and universal registration document. As with the current rules, companies can draw up a prospectus as a single document or three separate documents, comprising the summary, the registration document describing the company, and the securities note describing the offer. Alternatively, the new Regulation permits a quoted company to publish a 'universal registration document' (URD) every year, leaving it with only the prospectus summary and the securities note to produce (together with any required supplement to the URD), when carrying out a fundraising in the next 12 months. Although 'shelf registrations' were possible for regular issuers of securities under the previous regime, the new rules now give a company the option of replacing its annual or half-yearly report with a URD. As the need for FCA approval of the document drops away after the company has published two URDs, some companies may see a time and cost saving benefit from taking up this option. A fast-track FCA-approval process then enables the company to use its URD to form the basis of a prospectus.
• Prospectus summary. Despite previous reform efforts, prospectus summaries are still thought to be overly long and unwieldy. The new Regulation restricts their content to seven sides of A4 (eight if there is a guarantor for the securities and six for an EU Growth prospectus). The existing form of summary no longer applies and the Regulation lists the required content. This must include an introduction with investor warnings, together with key information on the company (including key financials in the prescribed form and material risk factors), the securities (including material risk factors), and the offer and admission to listing. The summary can include a maximum of 15 risk factors.
• Risk factors. With the aim of cutting down on the volume of risk factors disclosed in the main body of the document (at present, often 20 pages or more), the Regulation requires companies to limit the risk factors to those that are specific to the company and material for making an informed investment decision. ESMA has issued Guidelines on Risk Factors that companies should follow to ensure risk factors are suitably specific and material enough to pass muster with regulators. Companies should present risk factors in a limited number of specific categories, with the most material ones first. They should include quantitative information to enable investors to evaluate the risks, or if this is not available, qualitative information – for example, by grading them into high, medium or low categories.  Careful thought needs to go into their drafting, given the renewed focus of regulators on this area.
• Advertisements. As now, the rules require that 'advertisements' for a public offer or a listing on a regulated market are, among other things, clearly identified, not misleading or inaccurate and are consistent with the prospectus content. However, companies will need to exercise greater caution under the new regime, as advertisements can now include any communications (written or oral), not just public announcements.
• Smaller companies. The Regulation makes changes to the existing regime that allows certain smaller companies to elect to publish a shorter form prospectus, now referred to as an 'EU Growth prospectus'. This option is now available to a broader range of companies¹ when making a public offer of securities, provided they are not quoted on the London Stock Exchange's main market or another EU regulated market. Key concessions include allowing companies with a sub-€200 million market cap to omit from an EU Growth prospectus a detailed operating and financial review, and capitalisation and indebtedness statements. There are also a number of more minor concessions in relation to the detail, although companies may find they still need to include much of this information in order to satisfy the general standard of disclosure required for a prospectus. However, as with the current regime, unless a company is seeking to raise funds from retail investors, the new EU rules do not require it to publish an FCA-approved prospectus when seeking admission to an SME growth market or other junior markets. This enables companies to continue using the conventional route to AIM of publishing an AIM admission document in conjunction with a fundraising from institutional investors. AIM's approach to the new rulebook is discussed further, below.
• Secondary issues. The Regulation also permits quoted companies to use a shorter form prospectus for secondary issues, such as rights issues. However, unlike the equivalent existing regime, this is not limited to rights issues and other compensatory pro rata offers to existing shareholders. To take advantage of the concession, the company must have been quoted on an EU regulated market or SME growth market such as AIM for the previous 18 months. As now, a secondary issue prospectus need not contain an operating and financial review and the business overview can focus on developments since the last audited financial statements. The document must still, however, include working capital, capitalisation, and indebtedness statements. It must also contain a summary of inside information and managers' dealings published under the EU Market Abuse Regulation in the previous 12 months. Under the proposed Amending Regulation, this simplified prospectus regime may also be available for a company looking to step up to a main market if it has been quoted on an SME growth market such as AIM for at least two years.
• Avoiding the 'kitchen sink' approach. One of the challenges for regulators has been to shift market practice, where 250-page prospectuses have become the norm even for rights issues. This in part reflects rule changes over the last sixteen years, and the need to comply with global offering standards. However, it also stems from concerns over the liability risks for those responsible for a prospectus, including directors, if the document does not meet the general disclosure standard that applies on top of the specific content requirements. In an attempt to address these fears (and cut down on unnecessary content), the general disclosure standard for a secondary issue prospectus focuses instead on the prospects for the company and significant changes since the end of its last financial year, and the reasons for and impact of the share offering. The general disclosure standard for any other prospectus, including an EU Growth prospectus, remains very broad (although there is a new rule requiring all content to be concise).

AIM companies

•  AIM has now published changes to its rulebook to take into account the new Regulation. It will continue to base the content requirements for an AIM admission document on those for an EU prospectus, but with its own preferred modifications. For example, as now, it will not require companies to include an operating and financial review, or capitalisation and indebtedness statements. But it has elected to continue to base its rules on the content requirements for a full prospectus, not those for an EU Growth prospectus. This will keep AIM admission documents closer in content to the current standard, and may be helpful to both companies and investors in ensuring proper disclosure. (As mentioned above, companies may find that the apparent concessions in the detail required for an EU Growth prospectus are overridden by the need to comply with the general disclosure standard for a prospectus.) As now, the revised AIM rules do allow companies to publish an FCA-approved prospectus (including an EU Growth prospectus), instead of an AIM admission document, provided they include the usual additional material that AIM requires, such as a 12-month working capital sufficiency statement. But the cost and time involved in the FCA approval process may still deter many companies from taking up this option, unless they are obliged to because (unusually) the company is seeking to raise funds from the general public.

Applying the new rules in the UK

•  The new Prospectus Regulation, and the EU rules made under it, apply directly in each EU country, so most of the UK legislation and rules that implemented the current regime cease to apply from 21 July 2019. The FCA will replace most of the previous content from the Prospectus Rules, which it will rename the Prospectus Regulation Rules, with relevant extracts from the Prospectus Regulation, together with additional FCA guidance. The Financial Services and Markets Act 2000 will also be amended in line with the new Regulation.
• A prospectus approved by the FCA before 21 July 2019 must still comply with the current regime and will remain valid for up to 12 months. A prospectus sent to the FCA for approval on or after 21 July 2019 must comply with the new regime. More detail on the transitional arrangements and other matters are contained in the ESMA Q&As on the Prospectus Regulation. The revised AIM rulebook comes into force on 21 July 2019 and applies to AIM admission documents published on or after that date.
• If the UK leaves the EU without a withdrawal agreement or transitional period, the new regime will remain part of UK law under the government's Brexit arrangements. However, the ability to 'passport' an approved prospectus between the UK and EU will no longer be available. 

Companies with a domestic or European focus will welcome many of the changes made by the new regime, although some will feel they could go further. However, those with a more international focus may not benefit significantly from the EU Growth and secondary issue prospectus concessions, as these will be overridden by the fuller disclosure requirements for international offerings (such as US Rule 144A fundraisings).

1. These include SMEs (companies that either have had a sub-€200 million average market cap for the past three years or that fall below two of the following three thresholds: an average of 250 staff; €43 million net assets; and €50 million net turnover as shown in their last annual accounts); other companies with a sub-€500 million market cap for the past three years traded or to be traded on an SME growth market such as AIM; and unquoted companies that had on average less than 500 staff in their last financial year and are looking to raise a maximum of €20 million from the public in the EU. Under the proposed Amending Regulation, they will also include companies seeking an initial admission to trading on an SME growth market with a proposed sub-€200 million market cap.