New Regulation To Make Issuing Securities in Europe Easier

As the European Union moves a step closer to its goal of a single European market in financial services, the old rules on prospectuses for companies issuing or selling securities overseas are out the window.

The Prospectus Directive, a major piece of the Financial Services Action Plan that aims to create a single

European market in financial services, brings common, enhanced standards for issuers of securities across the “European Economic Area,” which is comprised of all the EU member states, Norway, Iceland and Liechtenstein. While it was published in late 2003, the final deadline for implementation was July 1, 2005.

Doherty

“With the Prospectus Directive in place, for the first time, there is a pan-European definition of what constitutes an ‘offer to the public,’” notes Frances Doherty, a senior associate in the London office of Dorsey & Whitney. “This is an important step forward for harmonization of financial services in Europe, which should make securities issues significantly easier, for non-EU issuers in particular.”

One particularly critical area for non-EU issuers under the new regime is the concept of the “Home Member State,” which is defined as the member state in which an issuer makes its first application for admission to trading on the regulated market.

For non-EU issuers, this means that they will be locked into a single national regulator for all future public offers and admissions to trading of equity securities and low denomination debt. Therefore, Doherty says companies need to consider their choice of HMS carefully.

The choice of HMS will be particularly important when another regulation, the Transparency Directive, takes effect. That directive, which must be implemented in EU member states by January 20, 2007, will establish a minimum level of ongoing reporting requirements for issuers, including the publication of financial information.

Upon implementation, member states will be able to impose stricter regulations than those of the Transparency Directive.

“So, in choosing its Home Member State, an issuer needs to take into account the likelihood of that member state introducing more stringent rules over and above the minimum reporting obligations in the Transparency Directive,” advises Doherty. “In particular, it will be necessary to assess a member state’s likely language requirements to ensure that these are not likely to be problematic for an issuer on an ongoing basis.”

Passporting And IFRS

An additional benefit of the Prospective Directive, known to EU cognescenti as “PD,” is that it allows for “passporting” of approved prospectuses throughout the EEA. That means that once a prospectus is approved in one EEA country, a company can use that same prospectus to issue securities in any other EEA country. According to Doherty, passporting should save companies time and reduce their administrative burden.

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.

Source: Dorsey & Whitney, "The Prospectus Directive: A New Regime For Europe"

“The Prospectus Directive takes passporting the prospectus to the next level,” she says. “Before, companies would have had to make sure that there were mutual recognition rules between member states and had to comply with local laws in order for their prospectus to be issued into another member state,” adds Doherty. Under the PD, passporting is automatic.

Under the International Financial Reporting Standards Regulation, all EU companies with debt or equity admitted to a regulated market in the EU must prepare their consolidated accounts in accordance with IFRS for financial years starting on or after Jan.1, 2005.

Doherty notes that the PD is predicated on the requirement for all issuers (both EU and non-EU) to include in any prospectus IFRS accounts or accounts restated or reconciled to IFRS. However, non-EU issuers may submit accounts that are “equivalent” to IFRS.

“We’re in a state of flux at the moment, because the Committee of European Securities Regulators have stipulated the criteria for equivalence to IFRS,” she says. “On the basis of these criteria, it is likely that U.S., Canadian and Japanese GAAP are equivalent to IFRS with some small changes; however, the European Commission has not yet signed off on this.”

However, Doherty adds that, “it is generally felt that the recommendations of CESR will be accepted by the Commission later this year.” For now, Doherty says, “We have received guidance that non-EU issuers can submit non-IFRS financial statements in their prospectuses if they are considered equivalent to IFRS, subject to additional disclosures on specific differences to IFRS.”