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The Prospectus Regulation, which repealed and replaced the Prospectus Directive, became fully and directly applicable in all Member States on 21 July 2019. The use of a regulation was intended to ensure a consistent approach across Member States. Present indications are that some progress has been made in this regard, although completion of this objective is yet to be fully achieved.
Utilisation by many issuers of the Regulation’s grandfathering provisions for MTN programmes means that many new debt issuances will continue to be governed by the previous prospectus regime, with the new regime unlikely to bed down fully until mid-2020. While practice continues to evolve however, clear trends are already emerging in connection with the approval process, raising matters which should be considered before the prospectus review is initiated, to ensure that the process is as smooth as possible.
First, the Prospectus Regulation introduced detailed provisions governing risk factor disclosure in the Level 1 text, with additional detail supplied by ESMA Guidelines. Risk factors are required to be specific to the issuer and/or the securities, material to investors and corroborated by the prospectus. Risk factors should be as concise as possible and presented across a limited number of categories, with the most material factors in each category presented first. Materiality is to be assessed by determining the probability of occurrence and expected magnitude of negative impact. The Guidelines strongly encourage competent authorities to challenge non-compliant risk factor disclosure. Market participant feedback on risk factor review under the Prospectus Regulation has been mixed, but in the vanilla debt space at least, where issuers have taken time to review and update their risk factors in compliance with the Guidelines, disruption to the prospectus review process has been limited.
Next, while the general disclosure test is broadly similar to the test under the previous prospectus regime, there are several new required disclosure items which could surprise the unwary issuer. These range from the requirement to specify the use of, and estimated net amount of, proceeds previously applicable to equity and retail non-equity securities, the requirement now extends to wholesale non-equity securities), to the requirement
to include the legal entity identifier of the issuer (while existing issuers are likely to have a legal entity identifier, debut issuers may not).
In addition, the prospectus must include hyperlinks to all documents incorporated by reference, which must remain functional for ten years. Approved prospectuses must also remain available on prescribed sites on the internet, for at least ten years. It is incumbent on the issuer to ensure that these requirements are satisfied.
Finally, scheduled to take effect later this year, is the requirement under the Prospectus Regulation for competent authorities to provide data to ESMA so that ESMA can create a centralised, searchable, free to access storage mechanism for prospectuses. It is widely anticipated that competent authorities will push this obligation onto issuers and, indeed, at least one competent authority has confirmed its intention to do so.
For more detail, visit our EU Prospectus Regulation page and in particular our one-page summary: The Prospectus Regulation at a glance – Wholesale debt.
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