Prospectus Regulation and Prospectus Liability 0198846525, 9780198846529

Table of contents :
United Kingdom
Table of Cases
Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx
From: Prospectus Regulation and Prospectus Liability
Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx
European Union
Othernational Jurisdictions
France
Germany
Italy
Luxembourg
Netherlands
Spain
United States
(p. xix) United Kingdom
Statutes
Table of Legislation
Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx
From: Prospectus Regulation and Prospectus Liability
Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx
Subordinate Legislation
European Union Legislation
Treaties
Brexit-relatedAgreements
Directives
Regulations
Commission Delegated Directives
Commission Delegated Regulations
Other National Legislation
Australia
France
Germany
Italy
Japan
(p. xxxiv) Luxembourg
Netherlands
Spain
United States
List of Contributors
Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx
From: Prospectus Regulation and Prospectus Liability
Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx
Part I General Aspects, 1 Introduction
Danny Busch, Guido Ferrarini, Jan Paul Franx
From: Prospectus Regulation and Prospectus Liability
Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx
(p. 3) 1  Introduction
I.  The Capital Markets Union Action Plan
II.  Brexit
III.  The New EU Prospectus Regime
IV.  Structure of the Book
(p. 7) 1.  General Aspects
2.  The New EU Prospectus Rules
(p. 15) 3.  Prospectus Liability and Litigation
Footnotes:
Part I General Aspects, 2 The IPO Process, IPO Disclosure, and the Prospectus Regulation
Han Teerink
From: Prospectus Regulation and Prospectus Liability
Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx
(p. 19) 2  The IPO Process, IPO Disclosure, and the Prospectus Regulation
I.  Introduction
II.  Key IPO Considerations
1.  Reasons for an IPO
2.  Preparing for an IPO
(i)  IPO readiness
3.  Execution of the IPO and Disclosure
(i)  Management presentation
(ii)  Early-look and pilot fishing meeting
(iii)  Analyst presentation and research reports
(iv)  Due diligence
US securities laws and European IPOs—144A, 10b-5, and US practices
III.  The IPO Prospectus
1.  Drafting the Prospectus
2.  Drafting Sessions
3.  Review and Approval of the IPO Prospectus
4.  Format of the IPO Prospectus
(p. 36) 5.  Review Period
6.  Publication and Reading Time
7.  Exemptions
(i)  Completing the IPO—some final disclosure considerations
IV.  IPO Prospectuses and the Prospectus Regulation
1.  Introduction
2.  Risk Factors
(i)  Implications of changes for IPOs
3.  Use of Proceeds
(i)  Implications of changes for IPOs
4.  Summary in the IPO Prospectus
(i)  Implications of changes for IPOs
5.  Profit Forecasts and Profit Estimates
(i)  Implications of changes for IPOs
V.  Concluding Remarks
Footnotes:
Part I General Aspects, 5 The Disclosure Paradigm: Conventional Understandings and Modern Divergences
Henry T. C. Hu
From: Prospectus Regulation and Prospectus Liability
Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx
(p. 99) 5  The Disclosure Paradigm
Conventional Understandings and Modern Divergences
I.  Introduction
(p. 102) II.  The Disclosure Paradigm: Conventional Understandings
1.  Overview
(p. 103) 2.  The SEC’s Basic Approach to Information: The ‘Descriptive Mode’ and ‘Intermediary Depictions’
III.  The Impact of Financial Innovation on Conventional Understandings
1.  Complexity and the Need for a Portfolio of Modes of Information
(i)  The limitations of the descriptive mode
(ii)  The ‘transfer mode’, the ‘hybrid mode’, and the portfolio approach to information
(p. 108) (iii)  Asset-backed securities and pure information: loan-level data and downloadable waterfall codes
(iv)  Alternative data: the portfolio approach and original third-party company-specific information
2.  The Exchange-Traded Fund: A Traded Security without Disclosure’s Heart and Soul
3.  Decoupling and New Extra-Company Informational Asymmetries
(i)  Overview
(ii)  Credit default swaps and the empty creditor with negative economic exposure issue
IV.  The Regulatory Ends of Disclosure and the Emergence of a Parallel Disclosure Universe
1.  Changing Regulatory Ends and the SEC
2.  Systemic Risk: The SEC and the New Bank Regulator Disclosure Universe
(i)  The global financial crisis, the SEC, and the call for a change in the SEC’s statutory mandate
(p. 122) (ii)  The bank regulator public disclosure system
(p. 125) V.  Conclusion
Footnotes:
Part II The New EU Prospectus Rules, 6 Transferable Securities and the Scope of the Prospectus Regulation: The Case of ICOs
Guido Ferrarini, Paolo Giudici
From: Prospectus Regulation and Prospectus Liability
Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx
(p. 129) 6  Transferable Securities and the Scope of the Prospectus Regulation
The Case of ICOs
I.  Introduction
II.  Financial Instruments and Transferable Securities in MiFID II
III.  Transferable Securities in the Prospectus Regulation
(p. 134) IV.  The Rise of ICOs
1.  Legal Issues
2.  Token Categories
V.  ICOs and US Securities Regulation
VI.  ICOs and EU Securities Regulation
1.  Current Approaches
2.  Risk-Based Approach
3.  Purposive Techniques
VII.  Conclusions
Footnotes:
Part II The New EU Prospectus Rules, 8 The Contents of the Prospectus: Rules for Financial Information
Giovanni Strampelli
From: Prospectus Regulation and Prospectus Liability
Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx
(p. 167) 8  The Contents of the Prospectus
Rules for Financial Information
I.  Introduction
II.  The Legal Background: Prospectus Regulation, Delegated Regulation, ESMA Recommendations, and Q&A
III.  Historical Financial Information
1.  Annual and Interim Financial Reports to be Included in the Prospectus
(p. 174) 2.  Accounting Standards
(p. 175) 3.  The Change of Accounting Framework and the Impact of IAS 8 on Historical Financial Information
4.  Incorporation by Reference
(p. 177) 5.  The Alignment of the Operating and Financial Review Requirement with the Management Reports Required under the Accounting Directive
6.  The Removal of the Requirement for Issuers of Equity and Retail Non-Equity to Include Selected Financial Information in the Prospectus
IV.  Pro Forma Financial Information
(p. 179) 1.  Issuers Required to Provide Additional Financial Information
2.  The Additional Information Relating to an Entity Other than the Issuer
3.  Preparation and Presentation of Pro Forma Financial Information
4.  Pro Forma Adjustments to Historical Accounting
5.  Audit Requirement
V.  Profit Forecasts and Profit Estimates
1.  The Relevance of Profit Forecast and Profit Estimates: Equity vs Non-Equity Issuance
2.  Definition
3.  Disclosure Requirements
4.  The Deletion of Audit Requirements on Profit Forecasts and Estimates
VI.  Conclusions
Footnotes:
Part II The New EU Prospectus Rules, 10 ‘Light’ Disclosure Regimes: The EU Growth Prospectus
Andrea Perrone
From: Prospectus Regulation and Prospectus Liability
Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx
(p. 229) 10  ‘Light’ Disclosure Regimes
The EU Growth Prospectus
I.  Introduction
II.  The Problems of SME Market-Based Finance
(p. 233) III.  The EU Growth Prospectus
1.  The Logic of the EU Growth Prospectus Regulation
2.  The Perimeter of Regime
(p. 236) 3.  The Content of the EU Growth Prospectus
IV.  A Critical Evaluation
V.  An Alternative View
VI.  Conclusion
Footnotes:
Part II The New EU Prospectus Rules, 11 ‘Light’ Disclosure Regimes: Secondary Issuances
Pim Horsten
From: Prospectus Regulation and Prospectus Liability
Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx
(p. 243) 11  ‘Light’ Disclosure Regimes
Secondary Issuances
I.  Introduction
II.  Background
1.  The Capital Markets Union
2.  The Prospectus Directive Review Consultation
(p. 247) III.  The Case for a Light Disclosure Regime for Secondary Offerings or Listings
1.  Introduction
(p. 248) 2.  The Transparency Directive
3.  The Market Abuse Regulation
4.  Options for a Light Disclosure Regime
IV.  Scope
1.  Introduction
2.  Secondary Issuances: What are These, and by Whom?
3.  Offers or Admissions of What Securities? The Same? Same Class? Fungible?
(p. 259) V.  Content—What Information is not Specifically Prescribed?
1.  Level 1 Text
2.  Level 2: Commission Delegated Regulation and ESMA Advice
(i)  Equity registration document
(ii)  Debt registration document
(iii)  Equity securities note
(iv)  Debt securities note
3.  Conclusion on Content
(p. 265) VI.  Conclusion: Use in Practice?
Footnotes:
Part II The New EU Prospectus Rules, 12 The Summary and Risk Factors
Robert ten Have
From: Prospectus Regulation and Prospectus Liability
Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx
(p. 267) 12  The Summary and Risk Factors
I.  Introduction
II.  Purpose of the Summary and Risk Factors
1.  Purpose of the Summary
2.  Purpose of the Risk Factors
III.  The Summary and Risk Factors in the Single-Document Prospectus
1.  The Summary
(i)  General requirements for the summary
(ii)  Prescribed format of the summary
(iii)  Risk factors included in the summary
(iv)  Key financial information regarding the issuer and guarantor
(v)  Relationship with PRIIPs regulation
(vi)  Length of the summary
2.  The Risk Factors
IV.  The Summary and Risk Factors in Other Prospectus Types
1.  Non-Retail, Non-Equity Prospectus
(p. 284) 2.  Base Prospectus
(p. 286) 3.  Prospectus Consisting of Separate Documents
4.  Universal Registration Document
(p. 288) 5.  Simplified Disclosure Regime for Secondary Issuances
6.  EU Growth Prospectus
V.  Competent Authority’s Discretionary Powers
VI.  Responsibility for the Summary
VII.  Use of Language
VIII.  Conclusion
Table 12.1  Required summary format and content per Article 7, Prospectus Regulation
Footnotes:
Part II The New EU Prospectus Rules, 13 Prospectus Formats and Shelf Registration
Dorothee Fischer-Appelt
From: Prospectus Regulation and Prospectus Liability
Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx
(p. 295) 13  Prospectus Formats and Shelf Registration
I.  Introduction
II.  New Regulation and Delegated Acts
III.  Prospectus Formats and their Use in Practice
1.  Overview
2.  Stand-alone Prospectuses
3.  Tri-Partite Prospectuses and the ‘Old’ Shelf Registration
4.  Base Prospectuses and Final Terms/Supplements
5.  New Summary Requirements
IV.  New Prospectus Formats
(p. 301) 1.  Simplified Prospectus for Secondary Issuances
2.  Introduction of the EU Growth Prospectus
3.  The New Universal Registration Document (URD)
(i)  Overview
(ii)  ‘Well-known’ issuers
(iii)  Approval process and passporting
(iv)  Amendments to URDs
(a)  Amendments to URDs where the URD is not in use as a constituent part of a prospectus
(b) Where the URD is in use as a constituent part of a prospectus
(v)  URD and other registration documents and annual reports
(vi)  Content of the URD
(vii)  URD and incorporation by reference
V.  Discussion of URD and Simplified Prospectus
VI.  US Shelf Registration
1.  Overview and Evolution
2.  Timing of Filings in US Practice
3.  Comparison with URD
VII.  Conclusion
Footnotes:
Part II The New EU Prospectus Rules, 14 The New Advertisement RegimeWhat a Difference a Word Makes?
Gerard Kastelein, Tom Reutelingsperger
From: Prospectus Regulation and Prospectus Liability
Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx
(p. 319) 14  The New Advertisement RegimeWhat a Difference a Word Makes?
I.  Introduction
II.  Background
III.  The Prospectus Regulation
1.  General
2.  From ‘Announcement’ to ‘Communication’
3.  Level 1 Requirements to Advertisements
(p. 325) IV.  The Delegated Regulation
1.  Identification of (and Reference to) the Prospectus in any Advertisement
2.  Specific Content to be Included in any Advertisement (Retail Only)
3.  Requirements as to Amendments to Advertisements in Case a Supplement is Published
4.  General Requirement to Align Information Concerning Offers of Securities
V.  Supervision of the Advertisement Regime—Risk of Conflicting Views of Authorities?
1.  Procedure for the Cooperation between Competent Authorities
(p. 331) 2.  What is Next?
VI.  No Grandfathering
VII.  Conclusion
Footnotes:
Part II The New EU Prospectus Rules, 15 Omission of Information, Incorporation by Reference, Publication, and Language of the Prospectus
Paola Leocani
From: Prospectus Regulation and Prospectus Liability
Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx
(p. 333) 15  Omission of Information, Incorporation by Reference, Publication, and Language of the Prospectus
I.  Review of the Prospectus Directive and the Purpose of the Prospectus Regulation
II.  The Scope of the Prospectus and Different Types of ‘Omission’ of Material Information Allowed
III.  Incorporation by Reference
1.  Incorporation by Reference under the Prospectus Directive: Prevalence of the Prospectus Directive Principles of Completeness, Accessibility, and Comprehensibility
2.  Making the Incorporation by Reference Mechanism More Flexible and Assessing the Need for Supplements in Case of Parallel Disclosure of Inside Information
3.  Incorporation by Reference under Article 19, Prospectus Regulation
4.  Incorporation by Reference and ‘Draw-Down’ Prospectus
(p. 350) IV.  Omission of Information
1.  Overview: Article 18, NPR
(p. 351) 2.  Omission of Information—Offer Price, Yield, Amount of the Securities (Art. 17, NPR)
V.  Publication of the Prospectus (Art. 21, NPR)
(p. 355) VI.  Language (Art. 27, NPR)
Footnotes:
Part II The New EU Prospectus Rules, 16 The Approval of Prospectus: Competent Authorities, Notifications, and Sanctions
Carmine Di Noia, Matteo Gargantini
From: Prospectus Regulation and Prospectus Liability
Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx
(p. 359) 16  The Approval of Prospectus
Competent Authorities, Notifications, and Sanctions
I.  Introduction
II.  Prospectus Approval and the Role of National Competent Authorities
1.  The Transfer of Approval of the Prospectus
2.  Prospectus Approval: Definitions
3.  The Scrutiny
(i)  Completeness
(ii)  Consistency
(iii)  Comprehensibility
(iv)  Stocktaking
4.  Timing and Procedure of Prospectus Approval
III.  Geographical Validity of Prospectus
IV.  Linguistic Regime
V.  Sanctioning Regime
1.  Criminal and Administrative Sanctions
(p. 374) 2.  The Menu of Sanctions and the Due Process
3.  Publication of Decisions
VI.  Remaining Spaces for Arbitrage in the Prospectus Regime
VII.  Identifying the National Competent Authority
VIII.  A Focus on Equity Securities
(p. 381) 1.  Tying Prospectus Regime to Company Law
2.  Regulatory Arbitrage Techniques in Equity Markets
3.  Alternative Connecting Factors
IX.  Competition versus Centralization: A Trade-Off?
X.  Conclusion
Footnotes:
Part II The New EU Prospectus Rules, 17 The Prospectus Regime and Brexit
Simon Gleeson
From: Prospectus Regulation and Prospectus Liability
Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx
(p. 391) 17  The Prospectus Regime and Brexit
I.  Introduction
(p. 393) II.  Brexit and Listing—The UK Position
III.  How Will Transition Work?
IV.  Enacting Transition
V.  Listing Documents and Prospectuses
VI.  When is a Prospectus Required?
(p. 398) VII.  A Security
VIII.  Public Offer
IX.  Listing Particulars
X.  Home Member State
XI.  Reoffers and Cascades
XII.  Offer Document Content
1.  The Summary
2.  The Base Prospectus
XIII.  Language
XIV.  Conclusion
Footnotes:
Part III Prospectus Liability and Litigation, 18 The Influence of the EU Prospectus Rules on Private Law
Danny Busch
From: Prospectus Regulation and Prospectus Liability
Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx
(p. 409) 18  The Influence of the EU Prospectus Rules on Private Law
I.  Introduction
II.  Prospectus Regulation and Civil Liability
1.  Liability of the Persons Responsible for the Prospectus
(i)  General
(ii)  Does responsibility rest with the issuer or with the administrative, supervisory, or management body?
(p. 412) (iii)  Offeror of the securities
(iv)  Person asking for admission to trading on a regulated market
(v)  Guarantor
(vi)  Minimum harmonization
(vii)  Provisions of national law governing civil liability
2.  Liability for the Summary
(p. 415) III.  Information Obligations under the EU Prospectus Rules
1.  The Basic Principle
2.  Elaboration of the Basic Principle
(p. 417) 3.  Risk Factors
4.  Summary
IV.  Unlawfulness and Imputability
1.  May Civil Courts be More Flexible than the EU Prospectus Rules?
(i)  General
(ii) European principle of effectiveness
(iii)  Materiality criterion?
(iv)  Grounds of justification
(v)  Soft law
(vi)  Imputability
2.  May Civil Courts be Stricter than the EU Prospectus Rules?
(i)  Immofinanz and Genil v Bankinter
(ii)  Nationale-Nederlanden v Van Leeuwen
(a)  Legal framework
(b)  Questions referred for a preliminary ruling
(c)  Duties to furnish additional information on the basis of reasonableness and fairness?
(iii)  Consequences of Nationale-Nederlanden v Van Leeuwen
(p. 428) (iv)  Article 6(1), Prospectus Regulation and Delegated Regulation (EU) 2019/980
(v)  The operation of the prospectus as a European passport
(p. 430) (vi)  Example 1
(vii)  Example 2
(viii)  Securities not covered by the Annexes to Delegated Regulation (EU) 2019/980
(ix)  Investor protection and a European capital market
(x)  Differentiation between retail and wholesale investors?
(p. 432) (xi)  Use of language
(xii)  Inclusion of non-material information
V.  The Influence of the EU Prospectus Rules on the Relativity Requirement
VI.  The Influence of the EU Prospectus Rules on the Proof of Causal Link
(p. 435) VII.  The Influence of the EU Prospectus Rules on Determination of the Extent of the Loss or Damage
(p. 436) VIII.  The Influence of the EU Prospectus Rules on a Limitation or Exclusion of Liability
(p. 437) IX.  Assessment by National Courts of their own Motion of Compliance with the EU Prospectus Rules in Cases Involving Private Investors
X.  The EU Prospectus Rules and Liability of Financial Regulators
1.  Assessment by the Regulator
2.  Italy
3.  Nikolay Kantarev v Balgarska Narodna Banka
4.  Article 20(9), Prospectus Regulation
XI.  Conclusion
Footnotes:
Part III Prospectus Liability and Litigation, 19 Prospectus Liability: Competent Courts of Jurisdiction and Applicable Law
Matteo Gargantini
From: Prospectus Regulation and Prospectus Liability
Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx
(p. 441) 19  Prospectus Liability
Competent Courts of Jurisdiction and Applicable Law
I.  Why do Jurisdiction and Applicable Law Matter? An Introduction
II.  The Default Jurisdictional Regime for Prospectus Liability
1.  Cross-Border Prospectus Liability and the Brussels I-bis Regime
2.  An Overview of the European Court of Justice Case Law
(p. 452) III.  The Default Regime on Applicable Law for Prospectus Liability
IV.  Taking Stock of Default Rules: A System in Need of Reform
V.  Deviating from Default Rules: The Issuer Choice Regime
1.  Jurisdictional Agreements in Securities Litigation
2.  Remaining Issues in Issuer Choice Regime
VI.  Conclusion
Footnotes:
Part III Prospectus Liability and Litigation, 21 France
Thierry Bonneau
From: Prospectus Regulation and Prospectus Liability
Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx
(p. 493) 21  France
I.  Introduction
II.  The Legal Basis for Prospectus Liability
III.  Definition of ‘Prospectus’
IV.  Persons Responsible for the Prospectus
V.  Persons Liable for Misleading Prospectus Information
VI.  Persons Who Can Sue for Damages Caused by a Misleading Prospectus
VII.  Defectiveness of Prospectus Information
VIII.  Fault of the Party Who is Sued
IX.  Causation and Damages
X.  Evidence
XI.  Disclaimers
XII.  Prospectus Summary
XIII.  Directors’ Liability
Footnotes:
Part III Prospectus Liability and Litigation, 22 Italy
Paolo Giudici
From: Prospectus Regulation and Prospectus Liability
Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx
(p. 505) 22  Italy
I.  Introduction
(p. 506) II.  The Legal Basis for Prospectus Liability
III.  Definition of ‘Prospectus’
IV.  Persons Responsible for the Prospectus
V.  Persons Liable for Misleading Prospectus Information
VI.  Persons Who Can Sue for Damages Caused by a Misleading Prospectus
VII.  Defectiveness of Prospectus Information
(p. 513) VIII.  Fault of the Party Who is Sued
IX.  Causation and Damages
X.  Evidence
XI.  Disclaimers
XII.  Prospectus Summary
XIII.  Directors’ Liability
Footnotes:
Part III Prospectus Liability and Litigation, 23 Spain
Javier Redonet Sánchez del Campo
From: Prospectus Regulation and Prospectus Liability
Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx
(p. 517) 23  Spain
I.  Introduction
II.  The Legal Basis for Prospectus Liability
1.  Statutory Provisions on Prospectus Liability
2.  The Nature of Prospectus Liability
III.  Definition of ‘Prospectus’
IV.  Persons Responsible for the Prospectus
V.  Persons Liable for Misleading Prospectus Information
1.  The Issuer of the Securities
2.  The Seller of the Securities
3.  The Person Seeking Admission to Listing of the Securities
4.  The Directors of the Issuer, the Seller of the Securities, or the Person Seeking Admission to Listing
5.  The Guarantor of the Securities
6.  The Lead Managers of the Placement of the Securities
(p. 527) 7.  The Persons Accepting Liability on the Prospectus or any Portion Thereof
8.  The Persons Who Have Authorized the Prospectus
9.  Identification of Persons Responsible for the Prospectus
10.  Joint and Several Nature of the Liability of the Parties Responsible for the Content of the Prospectus
VI.  Persons Who Can Sue for Damages Caused by a Misleading Prospectus
VII.  Defectiveness of Prospectus Information
VIII.  Fault of the Party Who is Sued
IX.  Causation and Damages
(p. 533) X.  Evidence
(p. 534) XI.  Disclaimers
XII.  Prospectus Summary
XIII.  Directors’ Liability
Footnotes:
Part III Prospectus Liability and Litigation, 24 The Netherlands
Jan Paul Franx
From: Prospectus Regulation and Prospectus Liability
Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx
(p. 537) 24  The Netherlands
I.  Introduction
II.  The Legal Basis for Prospectus Liability
III.  Definition of ‘Prospectus’
IV.  Persons Responsible for the Prospectus
V.  Persons Liable for Misleading Prospectus Information
1.  The Issuer
2.  The Lead Manager
3.  The Co-Managers
4.  The Selling Shareholder
(p. 546) 5.  The Issuer’s Auditor
6.  Joint and Several Liability?
VI.  Persons Who Can Sue for Damages Caused by a Misleading Prospectus
VII.  Defectiveness of Prospectus Information
(p. 549) VIII.  Fault of the Party Who is Sued
IX.  Causation and Damages
(p. 550) X.  Evidence
XI.  Disclaimers
XII.  Prospectus Summary
XIII.  Directors’ Liability
Footnotes:
Part III Prospectus Liability and Litigation, 25 Luxembourg
Veronique Hoffeld
From: Prospectus Regulation and Prospectus Liability
Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx
(p. 553) 25  Luxembourg
I.  Introduction
II.  The Legal Basis for Prospectus Liability
III.  Definition of ‘Prospectus’
IV.  Persons Responsible for the Prospectus
V.  Persons Liable for Misleading Prospectus Information
VI.  Persons Who Can Sue for Damages Caused by a Misleading Prospectus
VII.  Defectiveness of Prospectus Information
VIII.  Fault of the Party Who is Sued
IX.  Causation and Damages
X.  Evidence
(p. 568) XI.  Disclaimers
XII.  Prospectus Summary
XIII.  Directors’ Liability
Footnotes:
Part III Prospectus Liability and Litigation, 26 United Kingdom
Gerard McMeel
From: Prospectus Regulation and Prospectus Liability
Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx
(p. 571) 26  United Kingdom
I.  Introduction: The Prospectus Regulation and ‘Brexit’
1.  The Scenarios
(i)  Scenario (1): ‘no deal’
(ii)  Scenario (2): a ‘withdrawal agreement’
(p. 575) (iii)  Scenario (3): no Brexit
2.  The Withdrawal Act
3.  UK Financial Services Legislation
4.  The Role of the Financial Services Authority/Financial Conduct Authority
II.  The Legal Basis for Prospectus Liability
1.  An Historical Excursus
2.  Civil Liability under the Prospectus Directive in the UK
(p. 580) 3.  Civil Liability under the Prospectus Regulation in the UK
4.  The Tiers of Provisions
5.  Statutory Rule-Making Powers
6.  The Consultation Process
7.  The Principal Changes from Directive to Prospectus
8.  The New Financial Conduct Authority Rules
9.  The Statutory Base
10.  The Threshold Cause of Action
(p. 584) 11.  The Principal Provision: Section 90 of the Financial Services and Markets Act 2000
III.  Definition of ‘Prospectus’
(p. 586) IV.  Persons Responsible for the Prospectus
V.  Persons Liable for Misleading Prospectus Information
VI.  Persons Who Can Sue for Damages Caused by a Misleading Prospectus
VII.  Defectiveness of Prospectus Information
VIII.  Fault of the Party Who is Sued
IX.  Causation and Damages
1.  Causation
2.  Measure of Compensation
3.  Other Forms of Liability
X.  Evidence
XI.  Disclaimers
XII.  Prospectus Summary
XIII.  Directors’ Liability
1.  The Royal Bank of Scotland Rights Litigation
2.  The Brexit Scenarios Revisited
(i)  Scenarios (1): ‘no deal’
(ii)  Scenario (2): a ‘withdrawal agreement’
(iii)  Scenario (3): no Brexit
3.  The Future UK Financial Regulatory Framework
Footnotes:
(p. 599) Index
Index
Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx
From: Prospectus Regulation and Prospectus Liability
Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx

Citation preview

Preface Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

As part of the 2015 Capital Markets Union (CMU) Action Plan, the European Commission proposed to replace the Prospectus Directive by a Prospectus Regulation. And with success, since the bulk of the new EU prospectus rules has become binding as of 21 July 2019. The new EU prospectus rules will have an important impact on both theory and practice. The most important rules, changes, and innovations are thoroughly discussed in this book. As most of the authors are academics with broad practical experience and leading practitioners in the field, the book will offer high-quality analysis of a theoretical and practical nature. The book consists of three parts: (I) General Aspects; (II) The New EU Prospectus Rules; (III) Prospectus Liability and Litigation. Apart from the Introduction, Part I of the book features chapters on the general process of an IPO; on stabilization and underpricing in IPOs; on how the scope and application of the Prospectus Regulation is affected by other EU laws; and on the disclosure paradigm. Part II analyses and discusses various aspects of the new EU prospectus rules. This part includes chapters on the concept of transferable security in the Prospectus Regulation with reference to Initial Coin Offerings (ICOs); on the obligation to publish a prospectus, including the available exemptions; on the financial and non-financial information to be included in a prospectus; on the ‘light’ disclosure regimes for SMEs and secondary issuances; on the prospectus summary and risk factors; on prospectus formats and shelf registration; on advertisements; on the topics of omission of information, incorporation by reference, publication, and language of the prospectus; on the rules regarding competent authorities, approval of the prospectus, notification, and sanctions; and on the third-country regime against the backdrop of Brexit.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Part III of the book deals with prospectus liability and litigation. The civil liability for a misleading prospectus is (virtually) not covered by the new Prospectus Regulation. This part features chapters on the extent to which the civil courts are bound under EU law by the EU prospectus rules when judging issues of liability; and on international competence and conflict of law issues under the Brussels I Regulation, and the Rome I and II Regulations. The rules on prospectus liability not being harmonized, the remainder of Part III features chapters providing analysis of prospectus liability under domestic law in key capital markets jurisdictions in Europe, including Germany, France, Italy, Spain, the Netherlands, Luxembourg, and the UK. It transpires from these chapters that the (p. vi) national prospectus liability regimes diverge to a considerable extent. EU legislation on prospectus liability would be the best solution to eliminate divergences between national prospectus liability regimes, not only for reasons of legal certainty but also for the sake of uniform investor protection and a truly level playing field in Europe. However, in the current political climate (less rather than more Europe), that is likely to be a non-starter for the time being. The volume was preceded by a meeting on 24 and 25 January 2019 of the International Working Group on Prospectus Regulation and Prospectus Liability, established as a joint initiative of the Institute for Financial Law within the Business & Law Research Centre of Radboud University, Nijmegen, the Netherlands, the Genoa Centre for Law and Finance, University of Genoa, Italy, and the Groningen Centre for European Financial Services Law, University of Groningen, the Netherlands. We thank the Business & Law Research Centre of Radboud University, Nijmegen for its sponsorship. We also thank Allen & Overy Amsterdam for hosting the meeting. We are grateful to the distinguished members of the Working Group for their dedication to the project and, in particular, for their contributions to this book as authors. We also thank the invitees to the meeting for providing the members of the Working Group with invaluable comments on their draft chapters. Last, but not least, we acknowledge our gratitude to the editorial team at Oxford University Press, who successfully brought a lengthy and complex project to completion. The law is stated as of 31 August 2019. Danny Busch Nijmegen, the Netherlands Guido Ferrarini Genoa, Italy Jan Paul Franx Groningen, the Netherlands

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Overview of Chapters Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

Table of Cases xv Table of Legislation xix List of Contributors xxxvii List of Abbreviations xlvii I  General Aspects 1  Introduction Danny Busch, Guido Ferrarini, and Jan Paul Franx I.  The Capital Markets Union Action Plan 1.01 II.  Brexit 1.02 III.  The New EU Prospectus Regime 1.03 IV.  Structure of the Book 1.13 2  The IPO Process, IPO Disclosure, and the Prospectus Regulation Han Teerink I.  Introduction 2.01 II.  Key IPO Considerations 2.08 III.  The IPO Prospectus 2.39 IV.  IPO Prospectuses and the Prospectus Regulation 2.62

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

V.  Concluding Remarks 2.74 3  Stabilization and Underpricing in IPOs Stefano Lombardo I.  Introduction 3.01 II.  The Economics of IPOs 3.04 III.  The US Regulatory Regime 3.11 IV.  The European Regulatory Regime 3.17 V.  Conclusion 3.54 4  The Prospectus Regulation and Other EU Legislation: The Wider Context for Prospectuses Marieke Driessen I.  Introduction 4.01 II.  References in the Prospectus Regulation to Other EU Laws and their Legal Implications 4.06 III.  Contents of Prospectuses beyond the Prospectus Regulation 4.31 IV.  Prospectuses in the Context of Brexit Legislation 4.78 V.  Conclusion 4.84 (p. viii) 5  The Disclosure Paradigm: Conventional Understandings and Modern Divergences Henry T. C. Hu I.  Introduction 5.01 II.  The Disclosure Paradigm: Conventional Understandings 5.10 III.  The Impact of Financial Innovation on Conventional Understandings 5.19 IV.  The Regulatory Ends of Disclosure and the Emergence of a Parallel Disclosure Universe 5.78 V.  Conclusion 5.110 II  The New EU Prospectus Rules 6  Transferable Securities and the Scope of the Prospectus Regulation: The Case of ICOs Guido Ferrariniand Paolo Giudici I.  Introduction 6.01 II.  Financial Instruments and Transferable Securities in MiFID II 6.04 III.  Transferable Securities in the Prospectus Regulation 6.11 IV.  The Rise of ICOs 6.14 V.  ICOs and US Securities Regulation 6.21

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

VI.  ICOs and EU Securities Regulation 6.25 VII.  Conclusions 6.41 7  The Obligation to Publish a Prospectus and Exemptions Kitty Lieverse I.  Introduction 7.01 II.  Trigger No. 1: An Offer of Securities to the Public 7.05 III.  Trigger No. 2: An Admittance to Trading on a Regulated Market 7.12 IV.  The Geographical Demarcation 7.16 V.  Exemptions to the Obligation to Publish a Prospectus—General Comments 7.18 VI.  Exemption Type No. 1: The Type of Security 7.20 VII.  Exemption Type No. 2: Small Offerings 7.25 VIII.  Exemption Type No. 3: Exemptions Specific to an Offer to the Public 7.28 IX.  Exemption Type No. 4: Exemptions Specific to an Admittance to Trading on a Regulated Market 7.38 X.  Combination of Exemptions 7.47 XI.  A Voluntary Prospectus 7.48 XII.  The Prospectus Requirement for Investment Institutions (as a Special Type of Issuer) 7.50 XIII.  Subsequent Resale if an Exemption Has Been Used 7.55 XIV.  Conclusion 7.58 8  The Contents of the Prospectus: Rules for Financial Information Giovanni Strampelli I.  Introduction 8.01 II.  The Legal Background: Prospectus Regulation, Delegated Regulation, ESMA Recommendations, and Q&A 8.08 III.  Historical Financial Information 8.14 IV.  Pro Forma Financial Information 8.34 (p. ix) V.  Profit Forecasts and Profit Estimates 8.64 VI.  Conclusions 8.85 9  The Contents of the Prospectus: Non-Financial Information and Materiality Victor de Serière I.  Introduction 9.01 II.  Principal Rule 9.03 III.  Objective versus Subjective Materiality 9.06

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

IV.  The Scope of Article 6(1), Prospectus Regulation 9.10 V.  The Materiality Test Generally 9.13 VI.  Materiality in the Context of Prospectus Liability 9.14 VII.  ‘Materiality’ not Defined in the Prospectus Regulation or in Delegated Regulations 9.18 VIII.  The Average Investor 9.22 IX.  Materiality in the Context of the Prospectus Summary 9.25 X.  Materiality in Relation to Risk Factors 9.26 XI.  Materiality Thresholds as Applied by External Auditors 9.30 XII.  Materiality as a Concept in Various Jurisdictions: A High-Level Overview 9.32 XIII.  Accommodating Funding Needs 9.39 XIV.  Possibilities for Omitting Sensitive Information 9.42 XV.  Exculpations 9.53 XVI.  Applicable Law and Jurisdiction 9.62 XVII.  Concluding Remarks 9.72 10  ‘Light’ Disclosure Regimes: The EU Growth Prospectus Andrea Perrone I.  Introduction 10.01 II.  The Problems of SME Market-Based Finance 10.07 III.  The EU Growth Prospectus 10.12 IV.  A Critical Evaluation 10.26 V.  An Alternative View 10.31 VI.  Conclusion 10.35 11  ‘Light’ Disclosure Regimes: Secondary Issuances Pim Horsten I.  Introduction 11.01 II.  Background 11.02 III.  The Case for a Light Disclosure Regime for Secondary Offerings or Listings 11.10 IV.  Scope 11.25 V.  Content—What Information is not Specifically Prescribed? 11.39 VI.  Conclusion: Use in Practice? 11.58 12  The Summary and Risk Factors Robert ten Have I.  Introduction 12.01

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

II.  Purpose of the Summary and Risk Factors 12.04 III.  The Summary and Risk Factors in the Single-Document Prospectus 12.09 (p. x) IV.  The Summary and Risk Factors in Other Prospectus Types 12.44 V.  Competent Authority’s Discretionary Powers 12.71 VI.  Responsibility for the Summary 12.75 VII.  Use of Language 12.77 VIII.  Conclusion 12.81 13  Prospectus Formats and Shelf Registration Dorothee Fischer-Appelt I.  Introduction 13.01 II.  New Regulation and Delegated Acts 13.03 III.  Prospectus Formats and their Use in Practice 13.07 IV.  New Prospectus Formats 13.18 V.  Discussion of URD and Simplified Prospectus 13.62 VI.  US Shelf Registration 13.67 VII.  Conclusion 13.80 14  The New Advertisement Regime: What a Difference a Word Makes? Gerard Kasteleinand Tom Reutelingsperger I.  Introdution 14.01 II.  Background 14.03 III.  The Prospectus Regulation 14.08 IV.  The Delegated Regulation 14.21 V.  Supervision of the Advertisement Regime—Risk of Conflicting Views of Authorities? 14.46 VI.  No Grandfathering 14.54 VII.  Conclusion 14.55 15  Omission of Information, Incorporation by Reference, Publication, and Language of the Prospectus Paola Leocani I.  Review of the Prospectus Directive and the Purpose of the Prospectus Regulation 15.01 II.  The Scope of the Prospectus and Different Types of ‘Omission’ of Material Information Allowed 15.05 III.  Incorporation by Reference 15.08 IV.  Omission of Information 15.50 V.  Publication of the Prospectus (Art. 21, NPR) 15.61

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

VI.  Language (Art. 27, NPR) 15.70 16  The Approval of Prospectus: Competent Authorities, Notifications, and Sanctions Carmine Di Noiaand Matteo Gargantini I.  Introduction 16.01 II.  Prospectus Approval and the Role of National Competent Authorities 16.04 III.  Geographical Validity of Prospectus 16.47 IV.  Linguistic Regime 16.54 V.  Sanctioning Regime 16.66 VI.  Remaining Spaces for Arbitrage in the Prospectus Regime 16.85 VII.  Identifying the National Competent Authority 16.90 (p. xi) VIII.  A Focus on Equity Securities 16.97 IX.  Competition versus Centralization: A Trade-Off? 16.115 X.  Conclusion 16.124 17  The Prospectus Regime and Brexit Simon Gleeson I.  Introduction 17.01 II.  Brexit and Listing—The UK Position 17.05 III.  How Will Transition Work? 17.07 IV.  Enacting Transition 17.12 V.  Listing Documents and Prospectuses 17.23 VI.  When is a Prospectus Required? 17.27 VII.  A Security 17.28 VIII.  Public Offer 17.29 IX.  Listing Particulars 17.33 X.  Home Member State 17.36 XI.  Reoffers and Cascades 17.38 XII.  Offer Document Content 17.43 XIII.  Language 17.52 XIV.  Conclusion 17.53 III  Prospectus Liability and Litigation 18  The Influence of the EU Prospectus Rules on Private Law Danny Busch I.  Introduction 18.01 II.  Prospectus Regulation and Civil Liability 18.03

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

III.  Information Obligations under the EU Prospectus Rules 18.18 IV.  Unlawfulness and Imputability 18.28 V.  The Influence of the EU Prospectus Rules on the Relativity Requirement 18.68 VI.  The Influence of the EU Prospectus Rules on the Proof of Causal Link 18.71 VII.  The Influence of the EU Prospectus Rules on Determination of the Extent of the Loss or Damage 18.76 VIII.  The Influence of the EU Prospectus Rules on a Limitation or Exclusion of Liability 18.80 IX.  Assessment by National Courts of their own Motion of Compliance with the EU Prospectus Rules in Cases Involving Private Investors 18.81 X.  The EU Prospectus Rules and Liability of Financial Regulators 18.83 XI.  Conclusion 18.89 19  Prospectus Liability: Competent Courts of Jurisdiction and Applicable Law Matteo Gargantini I.  Why do Jurisdiction and Applicable Law Matter? An Introduction 19.01 II.  The Default Jurisdictional Regime for Prospectus Liability 19.10 III.  The Default Regime on Applicable Law for Prospectus Liability 19.30 IV.  Taking Stock of Default Rules: A System in Need of Reform 19.39 V.  Deviating from Default Rules: The Issuer Choice Regime 19.50 VI.  Conclusion 19.66 (p. xii) 20  Germany Sebastian Mock I.  Introduction 20.01 II.  The Legal Basis for Prospectus Liability 20.02 III.  Definition of ‘Prospectus’ 20.06 IV.  Persons Responsible for the Prospectus 20.11 V.  Persons Liable for Misleading Prospectus Information 20.12 VI.  Persons Who Can Sue for Damages Caused by a Misleading Prospectus 20.27 VII.  Defectiveness of Prospectus Information 20.33 VIII.  Fault of the Party Who is Sued 20.41 IX.  Causation and Damages 20.46 X.  Evidence 20.62 XI.  Disclaimers 20.63

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

XII.  Prospectus Summary 20.64 XIII.  Directors’ Liability 20.65 XIV.  Annex—Sections 21–5, German Securities Prospectus Act (Wertpapierprospektgestz—WpPG) 490 21  France Thierry Bonneau I.  Introduction 21.01 II.  The Legal Basis for Prospectus Liability 21.05 III.  Definition of ‘Prospectus’ 21.11 IV.  Persons Responsible for the Prospectus 21.12 V.  Persons Liable for Misleading Prospectus Information 21.19 VI.  Persons Who Can Sue for Damages Caused by a Misleading Prospectus 21.24 VII.  Defectiveness of Prospectus Information 21.26 VIII.  Fault of the Party Who is Sued 21.30 IX.  Causation and Damages 21.33 X.  Evidence 21.38 XI.  Disclaimers 21.39 XII.  Prospectus Summary 21.42 XIII.  Directors’ Liability 21.43 22  Italy Paolo Giudici I.  Introduction 22.01 II.  The Legal Basis for Prospectus Liability 22.03 III.  Definition of ‘Prospectus’ 22.12 IV.  Persons Responsible for the Prospectus 22.15 V.  Persons Liable for Misleading Prospectus Information 22.16 VI.  Persons Who Can Sue for Damages Caused by a Misleading Prospectus 22.22 VII.  Defectiveness of Prospectus Information 22.24 VIII.  Fault of the Party Who is Sued 22.26 IX.  Causation and Damages 22.27 X.  Evidence 22.33 XI.  Disclaimers 22.34 XII.  Prospectus Summary 22.35 XIII.  Directors’ Liability 22.36 (p. xiii) 23  Spain

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Javier Redonet Sánchez del Campo I.  Introduction 23.01 II.  The Legal Basis for Prospectus Liability 23.06 III.  Definition of ‘Prospectus’ 23.14 IV.  Persons Responsible for the Prospectus 23.16 V.  Persons Liable for Misleading Prospectus Information 23.21 VI.  Persons Who Can Sue for Damages Caused by a Misleading Prospectus 23.38 VII.  Defectiveness of Prospectus Information 23.42 VIII.  Fault of the Party Who is Sued 23.47 IX.  Causation and Damages 23.50 X.  Evidence 23.52 XI.  Disclaimers 23.54 XII.  Prospectus Summary 23.56 XIII.  Directors’ Liability 23.58 24  The Netherlands Jan Paul Franx I.  Introduction 24.01 II.  The Legal Basis for Prospectus Liability 24.06 III.  Definition of ‘Prospectus’ 24.09 IV.  Persons Responsible for the Prospectus 24.11 V.  Persons Liable for Misleading Prospectus Information 24.19 VI.  Persons Who Can Sue for Damages Caused by a Misleading Prospectus 24.29 VII.  Defectiveness of Prospectus Information 24.31 VIII.  Fault of the Party Who is Sued 24.33 IX.  Causation and Damages 24.34 X.  Evidence 24.36 XI.  Disclaimers 24.37 XII.  Prospectus Summary 24.39 XIII.  Directors’ Liability 24.40 25  Luxembourg Veronique Hoffeld I.  Introduction 25.01 II.  The Legal Basis for Prospectus Liability 25.08 III.  Definition of ‘Prospectus’ 25.29

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

IV.  Persons Responsible for the Prospectus 25.30 V.  Persons Liable for Misleading Prospectus Information 25.37 VI.  Persons Who Can Sue for Damages Caused by a Misleading Prospectus 25.56 VII.  Defectiveness of Prospectus Information 25.64 VIII.  Fault of the Party Who is Sued 25.67 IX.  Causation and Damages 25.70 X.  Evidence 25.76 XI.  Disclaimers 25.77 XII.  Prospectus Summary 25.78 XIII.  Directors’ Liability 25.79 (p. xiv) 26  United Kingdom Gerard McMeel I.  Introduction: The Prospectus Regulation and ‘Brexit’ 26.01 II.  The Legal Basis for Prospectus Liability 26.15 III.  Definition of ‘Prospectus’ 26.36 IV.  Persons Responsible for the Prospectus 26.37 V.  Persons Liable for Misleading Prospectus Information 26.44 VI.  Persons Who Can Sue for Damages Caused by a Misleading Prospectus 26.45 VII.  Defectiveness of Prospectus Information 26.48 VIII.  Fault of the Party Who is Sued 26.49 IX.  Causation and Damages 26.51 X.  Evidence 26.56 XI.  Disclaimers 26.57 XII.  Prospectus Summary 26.58 XIII.  Directors’ Liability 26.59 Index 599

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Table of Cases Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

United Kingdom Al-Nakib Investments Ltd v Longcroft [1990] 1 WLR 1390 26.46n Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch) (2019) 183 Con LR 167 26.01n, 26.02n Clark v Urquhart [1930] AC 28 26.52–26.53 Derry v Peek (1889) 14 App Cas 337 26.15–26.16, 26.38 Greenwood v Goodwin [2014] EWHC 227 (Ch) 26.60, 26.61 First Tower Trustees Ltd v CDS (Superstores International) Ltd [2018] EWCA Civ 1396, [2019] 1 WLR 637 26.57 Hall v Cable and Wireless plc [2009] EWHC 1793 (Comm), [2010] 1 BCLC 95 26.35n Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 26.15 McGraw Hill International (UK) Ltd v Deutsche Apotheker und Arztebank eG [2014] EWHC 2436 19.04n Possfund Custodian Trustees Ltd v Diamond [1996] 1 WLR 1351 26.46n R (on the application of Miller) v Secretary of State for Exiting the European Union [2017] UKSC 5, [2017] AC 61 26.03 RBS Rights Litigation, In Re 26.38, 26.60–26.61

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

RBS Rights Litigation, In Re [2017] EWHC 463 (Ch), [2017] 1 WLR 3539 (disclosure of funders) 26.61n RBS Rights Litigation, In Re [2017] EWHC 1217 (Ch), [2017] 1 WLR 4635 (security for costs) 26.61 RBS Rights Litigation, In Re [2016] EWHC (Ch), [2017] 1 WLR 1991(disclosure and legal professional privilege) 26.61 RBS Rights litigation, In Re, [2015] EWHC 3433 (Ch) (expert evidence) 26.61 Royscot Trust Ltd v Rogerson [1991] 2 QB 297 26.54n Smith New Court Securities Ltd v Citibank NA (on appeal from Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd) [1997] AC 2 26.54n Taberna Europe CDOII plc v Selskabet AF1 (formerly Roskilde Bank A/S) [2016] EWCA Civ 1262, [2017] QB 633 26.55n Wightman v Secretary of State for Exiting the European Union, Case C-261/18, [2019] 1 QB 199 26.03n

European Union CJEU, 4 October 2018 (Ars Aequi Maandblad) 18.86 C-304/17, Court of Justice, 12 September 2018 (Helga Löber) 9.63, 19.28–19.2919.39, 19.40, 19.42, 19.43, 23.32n C-498/16, Court of Justice, 25 January 2018 (Schrems II) 19.49n C-168/15, CJEU, 28 July 2016 18.81n C-12/15, Court of Justice, 16 June 2016 (Universal Music) 9.63, 19.15n, 19.25–19.27, 19.40 C-497/13, CJEU, 4 June 2014 18.81n C-410/13, Court of Justice, 3 September 2014 (Baltlanta) 16.88n C-375/13, Court of Justice, 28 January 2015 (Kolassa) 9.63, 19.07n, 19.15n, 19.22– 19.24, 19.26–19.28, 19.40, 19.42, 19.43, 19.54n, 19.56n, 19.57, 19.61, 23.32n, 25.04 (p. xvi) C-366/13, Court of Justice, 23 April 2015 (Profit SIM v Ossi) 9.66–9.69, 19.07n, 19.57n, 19.58, 19.59, 19.62 C-51/13, CJEU, 29 April 2015 (Nationale Nederlanden v Van Leeuwen) 18.43–18.56 C-452/12, Court of Justice, 25 October 2012 (Nipponkoa Insurance Co) 19.04n C-441/12, Court of Justice, 17th September 2014 7.08 C-360/12, Court of Justice, 5 June 2014 (Coty Germany) 19.15n

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

C-174/12, CJEU, 19 December 2013 (Alfred Hirmann v Immofinanz AG) 18.30, 18.42, 18.54, 18.68n, 18.77n C-32/12, CJEU, 3 October 2013 18.81n CJEU, 30 May 2013, NJ 2013/487 18.81n C-604/11, Court of Justice, 30 May 2013, JOR 2013/274 (Genil48/Bankinter) 9.57, 18.31, 18.42, 18.54 C-228/11, Court of Justice, 16 May 2013 (Melzer) 19.15n C-133/11, Court of Justice, 25 October 2012 (Folien Fischer and Fofitec) 19.04n CJEU 24 November 2011, (Commission v Italy) 18.86n C-591/10, Court of Justice, (Littlewoods Retail and Others) 18.31 C-378/10, Court of Justice (Vale) 16.103 C-243/08, CJEU, 4 June 2009 18.81n C-40/08, CJEU, 6 October 2009 18.81n C-159/97, Court of Justice, 16 March 1999 (Castelletti) 19.65n CJEU 13 May 2006, (Traghetti) 18.86 C-210/06, Court of Justice, (Cartesio) 16.104n Case 430/05,Court of Justice (First Chamber), 5 July 2007 (Re Ntionik andPikoulas/ CMC) 23.18, 24.15, 24.18 C-168/05, CJEU 26 October 2006 18.81n C-356/04, Court of Justice, 19 September 2006 9.22n C-168/02, Court of Justice, 10 June 2004 (Kronhofer v Maier) 19.19–19.21, 19.24, 19.43 C-116/02, Court of Justice, 9 December 2003 (Gasser) 19.04n C-207/01, Court of Justice, 11 September 2003 (Altair Chimica) 16.88n C-334/00, Court of Justice, 17 September 2002 (Tacconi) 19.14n C-167/00, Court of Justice, 1 October 2002 (Henkel) 19.15n C-453/99, Court of Justice, 20 September 2001 (Courage/Crehan) 9.57 C-210/96, Court of Justice, 16 July 1998 (Gut Springenheide) 9.22, 24.05, 24.31 C-106/95, Court of Justice, 20 February 1997 (Mainschiffharts-Genossenschaft eG (MSG)) 19.65n C-364/93, Court of Justice, 19 September 1995 (Marinari) 19.16n

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

C-406/92, Court of Justice, 6 December 1984 (Tatry) 19.04n C-214/89, Court of Justice, 10 March 1992 (Powell Duffryn) 19.55 C-322/88, Court of Justice, 13 December 1989 (Grimaldi) 16.88n C-220/88, Court of Justice, 1 January 1999 (Dumez) 19.16n C-144/86, ECJ, 8 December 1987 (Gubisch) 19.04n C-71/83, Court of Justice, 19 June 1984 (Tilly Russ) 19.64 C-34/82, Court of Justice, 22 March 1983 (Martin Peters) 19.55n C-150/80, Court of Justice, 24 June 1981 (Elefanten) 19.56n C-33/76, Court of Justice, 16 December 1976(Rewe) 9.57 C-21/76, Court of Justice, 30 November 1976 (Mines de Potasse d’Alsace) 19.15n

Othernational Jurisdictions France Criminal Chamber of the French Supreme Court (Cass. Com. (5 April 2018)) 21.21n Cass. Com. (20 September 2017), No. 15–29.144, Revue Sociétés (June 2018), 383 21.02 Cass. Com. (20 May 2003), Bulletin of Joly Sociétés (2003) para. 167 21.21 BRDA (19 November 2008)—Cass. Crim. (18 November 2009), No. 08– 88.078 21.37n (p. xvii) Flammarion (T. G. I. Paris, 5e Ch. 2e section 15 (15 November 2001) No. 2000/18125, Flammarion, unpublished; C. A. Paris, 25e Ch. section B (26 September 2003) No. 2001/21885, Flammarion; C. A. Paris, 25e Ch. section B (26 September 2003) No. 2001/21885, Flammarion, JurisData No. 2003–224156 21.37 Gaudriot (Cass. Com. (9 March 2010), Nos 08–21.547 and 08–21.793; Gaudriot, Bulletin Civil IV, No. 48, JurisData No. 2010–001500) 21.37 Marionnaud (Cass. Com. (6 May 2014) 13–17632 and 13–18473, Société Marionnaud parfumeries et autres c/Société AFI ESCA, JurisData No. 2014–009959) 21.37 Sidel (T. corr Paris, 11e ch. 1, section 12 (September 2006) No. 0018992026; Sidel, Bulletin of Joly Sociétés (2007) 1, 119 21.37

Germany Federal Court of Justice as of 21 November 2018, VII ZR 232/17, NJW-RR 2019, 345 20.18n Federal Court of Justice as of 22 November 2016, XI ZB 9/13, BGHZ 213, 65 = NZG 2017, 378 20.38n

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Federal Court of Justice as of 21 October 2014, XI ZB 12/12, BGHZ 203, 1 = NJW 2015, 236 20.37n, 20.38n Federal Court of Justice as of 24 April 2014, III ZR 156/13, NJW 2014, 2345 20.19 Federal Court of Justice as of 18 September 2012, XI ZR 344/11, BGHZ 195, 1, = NJW 2013, 539 20.22n, 20.23n, 20.34n, 20.35n, 20.36n, 20.38n Federal Court of Justice as of 23 April 2012, II ZR 75/10, NJW-RR 2012, 1312 20.35n, 20.37n Federal Court of Justice as of 13 December 2011, II ZB 6/09, NJW-RR 2012, 491 20.35n Federal Court of Justice as of 11 November 2011, III ZR 103/10, BGHZ 191, 310— NJW 2012, 758 20.09n, 20.10, 20.18n Federal Court of Justice as of 6 March 2008, III ZR 298/05, NJW-RR 2008, 1365 20.35n Federal Court of Justice as of 6 February 2006, II ZR 329/04, NJW 2006, 2042 20.35n Federal Court of Justice as of 1 December 1995, III ZR 93/93, NJW 1995, 1025 20.18n Federal Court of Justice as of 12 July 1982, II ZR 175/81, NJW 1982, 2823 20.37n, 20.39n Federal Court of Justice as of 12 July 1982, II ZR 172/81, NJW 1982, 2827 20.34n Federal Court of Justice as of 31 May 1990, VII ZR 340/88, BGHZ 111, 314, 319 ff. = NJW 1990, 2461 20.18n Federal Court of Justice as of 22 May 1980, II ZR 209/79, BGHZ 77, 172, 176 ff. = NJW 1980, 1840 20.18n Higher Regional Court of Bremen as of 21 May 1997, 1 U 132/96, AG 1997, 420 20.50n Higher Regional Court of Duesseldorf as of 5 April 1984, 6 U 239/82, AG 1984, 188 20.34n, 20.37n, 20.50n Higher Regional Court of Frankfurt as of 21 June 2011—5 U 103/10, AG 2011, 920 20.35n, 20.36n Higher Regional Court of Frankfurt as of 28 May 2008, 23 U 63/07 20.35n Higher Regional Court of Frankfurt as of 15 December 2005—I U 129/05, AG 2005, 377 20.21n Higher Regional Court of Frankfurt as of 6 July 2004, 5 U 122/03, AG 2004, 510 20.34n Regional Court of Frankfurt as of 3 September 2003, 2/4 O 435/02, WM 2004, 2155 20.21n

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Higher Regional Court of Frankfurt as of 17 March 1999, 21 U 260/97, AG 1999, 325 20.34n Higher Regional Court of Frankfurt as of 1 February 1994, 5 U 213/92, AG 1994, 182 20.34n, 20.37n, 20.39n Higher Regional Court of Munich as of 2 November 2011, 20 U 2289/11 20.40n, 20.45n Regional Court of Frankfurt as of 7 October 1997, 3/11 O 44/96, AG 1998, 488 20.42n

Italy Court of Cassation, 12 July 2016, No. 14188 22.08 Court of Cassation, Section I Civ., 23418, 18 May 2016 16.88n Court of Cassation , 11 June 2010, No. 14056 22.08, 22.25n, 22.28n Cassation Court (Joint Sections), 19 December 2007, Nos 26724 and 26725 22.14n Court of Cassation, 29 September 2005, No. 19024 22.05n(p. xviii) Court of Cassation, 3 March 2001, 3132 16.88n, 18.85, 22.19 Court of Cassation, 28 February 1998, No. 2251 22.36n Milan Court of Appeal, 15 January 2014 22.29n Milan Court of Appeal, 21 October 2003, 127 Il Foro Italiano 583 (2004)) 16.88n Milan Court of Appeal, 2 February 1990, II Giur. comm. 755 22.08n, 22.27n Florence Tribunal, 15 July 2014, Foro it., 2015, I, 2782 22.22n Milan Tribunal, 9 November 2019, Saipem 22.33 Milan Tribunal, 17 January 2014, Le Società, 2015, 849 22.31n Milan Tribunal, 22 July 2010, Italease, Giurisprudenza italiana, 2011, 1079 22.27n Milan Tribunal, 25 July 2008, Freedomland 22.27n, 22.31n Milan Tribunal, 21 October 1999, FIN.GE.M. v Price Waterhouse and Others, Giur. it., 2000, 554 22.27n, 22.32 Milan Tribunal, 11 January 1988, II Giur. comm. 585 22.08n, 22.27n

Luxembourg Cour d’appel (référé commercial), 13 June 2007, Book 34 (2008–2010), 30 25.27n Cour d’appel, 02 February 2011, Bulletin d’Information sur la Jurisprudence, 6/201127, September 2011 25.28n Cour d’appel, 12 January 2007, 29446 du role 25.73n

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Cour d’appel, 8 June 2005, 28667 du role 25.62n Cass. 26 June 1975, Pas. 25, 116 25.45n

Netherlands CoopAG, HR 2 December 1994, NJ 1996/246 1.37, 9.59, 18.80n, 24.33, 24.37 De Boer c.s./TMF Financial Services, Supreme Court, 30 May 2008, NJ 2010, 622; JOR 2008/209 24.31, 24.32 Scor Holdings AG (f/k/a Converium HoldingsAG), Amsterdam Court of Appeal, 12 November 2010, NJ 2010/683, LJN: BO3908 and 17 January 2012, LJN: BV1026.20 19.48 Shell Petroleum N.V. v Dexia Bank Nederland N.V, Amsterdam Court of Appeal, 29 May 2009, NJ 2009, 506 19.48 World Online, 27 November 2009, NJ 2014/201 9.16, 9.18, 9.22n, 9.33, 9.34n, 9.36, 9.59, 18.71–18.75, 24.05, 24.07, 24.16–24.18, 24.31, 24.34 Court of Appeals Amsterdam, 7 October 2004, JOR 2004/329 (Stichting Lipstick Effect e.a./ABN AMRO) 24.07n District Court Amsterdam, 7 May 2003, JOR 2003/174 (Stichting Lipstick Effect/ABN AMRO) 24.07n

Spain Banco PopularEspañol 23.05, 23.46 Bankia 23.05, 23.46, 23.53 First Chamber (Civil Jurisdiction) of the Spanish Supreme Court dated 3 February 2016 (24/2016) 23.50n, 23.53n

United States Basic Inc. v. Levinson, 485 US, 224 (1988) 9.26n, 9.35 National Ass’n of Mfrs v S.E.C., 800 F.3d 518 (D.C. Cir. 2015) 5.81 SEC v W. J. Howey Co., 328 U.S. 293 6.22 TSC Industries, Inc. v Northway, Inc., 426 US 438 (1976) 9.29, 9.34

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Table of Legislation Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

(p. xix) United Kingdom Statutes Banking Act 2010 26.12 Civil Liability (Contribution) Act 1978 26.44 Companies Act 2006 s 474(1) 17.45 Companies Act 1985 s 67 26.46n Companies (Consolidation) Act 1908 s 84 26.52 Constitutional Reform and Governance Act 2010 17.11 Consumer Rights Act 2015 Pt 2 1.37, 18.80n, 26.57 Directors’ Liability Act 1890 26.15, 26.16 European Communities Act 1972 (ECA) 17.12, 17.14, 26.02, 26.03, 26.09 s 2 17.13, 26.10

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

s 2(1) 26.11 European Union (Notification of Withdrawal) Act 2017 17.05, 26.03 European Union Referendum Act 2015 26.02 European Union (Withdrawal) Act 2019 26.05, 26.10 European Union (Withdrawal) Act 2018 4.81, 17.05, 17.12, 17.14, 17.16–17.19, 17.21, 26.03, 26.05, 26.11, 26.62 s 1 26.03n, 26.09 s 2 26.10 s 3 26.10, 26.11, 26.29 s 3(1) 26.10, 26.11 s 3(2) 26.10 s 4 26.11 s 6 26.66 s 6(1)(a) 26.11 s 6(1)(b) 26.11 s 6(7) 26.09n s 8 26.11 s 8(1) 26.63 s 13 26.11 s 20(1) 26.09 s 20(2) 26.09 s 20(4) 26.09 Sch 7, para 21 26.63 Financial Services (Banking Reform) Act 2013 26.12 Financial Services Act 2012 26.12, 26.13 s 6(1) 26.13n Financial Services Act 2010 26.12 s 121 26.12n Financial Services Act 1986 26.14 ss 150, 151, 154A 26.16, 26.17 ss 156A and 156B 26.16

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Pt IV 26.14, 26.16 Financial Services and Markets Act (FSMA) 2000 17.21, 26.12, 26.31 s 1A(1) 26.13n s 3A(2) 26.13n s 73A 26.14n, 26.29n s 73A(1) 26.23 s 73A(5) 26.23 s 80 17.43n s 84 26.23 s 84(6) 17.22n s 85 26.32n s 85(1) 26.32 s 85(2) 26.32 s 85(4) 26.32 s 86(1)(e) 26.28n s 90 26.16, 26.20, 26.21, 26.34–26.35, 26.37, 26.46n, 26.49, 26.51, 26.52, 26.59 s 90(11) 26.35 s 90(1)(a) 26.45, 26.46n s 90(1)(b) 26.46 s 90(3) 26.48 s 90(4)(a) 26.46n s 90(6) 26.55 s 90(7) 26.46n s 102B(5)(b) 17.42n s 103 26.23, 26.36 s 137A 26.29n s 138D(2) 26.33, 26.45, 26.49 s 150 26.33 s 430(1) 26.12n

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Pt 6 26.14, 26.19, 26.21, 26.22(p. xx) Sch 10 26.49, 26.51, 26.52, 26.56 para 1(2) and (3) 26.50n, 26.56n paras 2, 3, 4 and 8 26.51n para 5 26.51n para 6 26.51n, 26.56n Financial Services (Implementation of Legislation) Act 2019 17.21 Law Reform (Contributory Negligence) Act 1945 26.33 Misrepresentation Act 1967 26.57 s 2(1) 26.54n, 26.55 s 3(1) 1.37, 18.80n, 26.57 Unfair Contract Terms Act 1977 1.37, 18.80n Withdrawal Agreement (Implementation) Bill 17.05, 17.06, 17.14, 17.18–17.19

Subordinate Legislation European Union (Withdrawal) Act 2018 (Exit Day) (Amendment) (No. 2) Regulations 2019, SI 2019/859 26.05n, 26.09n Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019, SI 2019/632 26.62n Financial Services and Markets Act 2000 (Prospectus) Regulations 2019, SI 2019/1043, 24 June 2019 26.05, 26.19, 26.22 reg 2 26.24 reg 2(23) 17.32n reg 3 17.43n regs 4 and 5 26.23n, 26.29n reg 6 26.32n reg 25 26.34n reg 32(b) 26.36n reg 40 26.23 Financial Services and Markets Act 2000 (Prospectus and Markets in Financial Instruments) Regulations 2018, SI 2018/786 reg 2(2) 26.28n

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001, SI 2001/2256 reg 3(1) 26.33n, 26.45n Official Listing of Securities (Change of Competent Authority) Regulations 2000, SI 2000/968 26.14n Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019, SI 2019/707 17.21, 26.63 reg 1(2) 26.63n reg 73 26.63n Sch 2 26.63n Public Offer of Securities Regulations 1995, SI 1995/1537 26.17n

European Union Legislation Treaties Treaty on European Union 26.02 Art 50 17.05, 17.06, 17.12, 26.02, 26.03, 26.05, 26.11, 26.63 Art 50(2) 26.02, 26.03, 26.07, 26.08, 26.65, 26.69 Art 50(3) 26.02, 26.03, 26.06, 26.08, 26.62, 26.69 Treaty on the Functioning of the European Union (TFEU) 26.02 Art 267 9.13, 26.66

Brexit-relatedAgreements Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community, as endorsed by leaders at a special meeting of the European Council on 25 November 2018 26.05 Political Declarationsetting out the framework for the future relationship between the European Union and the United Kingdom of 25 November 2018 26.05n, 26.67

Directives Accounting Directive (European Parliament and Council Directive 2013/34/EU of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/ EEC and 83/349/EEC, [2013] OJ L182/19) 8.29, 8.30, 8.85, 13.58, 17.44n Art 19 8.30, 8.31, 8.33n Art 20 16.98n Art 29 8.30, 8.31, 8.33n

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Alternative Investment Fund Managers Directive (AIFMD) (Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Manager) 1.19, 7.52, 7.53, 7.58, 17.28 Art 4(1)(a) 4.68n, 7.52(p. xxi) Article 4(1)(aa) 4.68n Art 23 7.52 Art 23(3) 7.52 AML Directive (Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC (OJ L 141, 5.6.2015) 12.38 Bank Recovery and Resolution Directive (BRRD) (Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU, and 2013/36/and Regulations (EU) 1093/2010 and (EU) 648/2012, of the European Parliament and of the Council, as amended or replaced from time to time, including, without limitation, by Directive (EU) 2017/2399 of the European Parliament and of the Council of 12 December 2017 on the ranking of unsecured debt instruments in insolvency hierarchy) 1.16, 4.14, 4.74–4.4.77, 12.43, 17.33 Recital 81 4.75 Art 53(2) 4.14, 7.45 Art 53(2)(c) 4.15 Art 53(2)(d) 4.15, 4.16 Art 55 4.76 Art 59(2) 4.14, 7.45 Art 63(1) 4.14, 7.45 Art 63(2) 4.14, 4.15, 7.45 Capital Requirements Directive (CRD)(Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, as amended or replaced from time to time) 1.16, 4.14, 4.20, 4.67–4.69 Art 9(1) 4.20 Council Directive 88/627/EEC of 12 December1988 on the information to be published when a major holding in a listed company is acquired or disposed of 17.01n

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Council Directive 82/121/EEC of 15 February 1982 on information to be published on a regular basis by companies the shares of which have been admitted to official stockexchange listing 17.01n Council Directive 80/390/EEC of 17 March 1980 coordinating the requirements for the drawing up, scrutiny, and distribution of the listing particulars to be published for the admission of securities to official stock exchange listing 7.46, 17.01n Council Directive 79/279/EEC of 5 March 1979 coordinating the conditions for the admission of securities to official stock exchange listing 17.01n Directive (EU) 2015/849 see AML Directive (Directive (EU) 2015/849) Directive 2014/65/EU see MiFID II (Markets in Financial Instruments Directive II) (Directive 2014/65/EU) Directive 2014/59/EU see Bank Recovery and Resolution Directive (BRRD) (Directive 2014/59/EU) Directive 2014/57/EU 16.68 Directive 2013/36/EU see Capital Requirements Directive (CRD) (Directive 2013/36/ EU) Directive 2011/61/EU see Alternative Investment Fund Managers Directive (AIFMD) (Directive 2011/61/EU) Directive 2010/73/EU of the European Parliament and of the Council of 24 November 2010 amending Directives 2003/71/EC 13.15, 13.20, 14.01, 15.01, 15.13, 16.112 Recital (10) 25.51 Directive 2009/138/EC Ch VI, ss 3, 4 and 5 7.41 Directive 2009/65/EC see UCITS Directive (Directive 2009/65/EC) Directive 2006/114/EC on misleading advertising 20.30, 20.31–20.32 Directive 2005/29/EC see Unfair Commercial Practices Directive (CPD) (Directive 2005/29/EC) Directive 2004/25/EC see Take-over Bid Directive (Directive 2004/25/EC)(p. xxii) Directive 2003/71/EC see Prospectus Directive (Directive 2003/71/EC) Directive 2003/6/EC see Market Abuse Directive (MAD)(Directive 2003/6/EC) Directive 2002/47/EC on financial collaterals Art 9(1) 19.40 Directive 2001/34/EC see Listing Directive (Directive 2001/34/EC) Directive 98/26/EC on settlement finality Art 9(2) 19.44n Directive 93/13/EEC 18.81

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Directive 92/96/EEC see Third Life Assurance Directive (Directive 92/96/EEC) Directive 89/298/EEC see Public Offers Directive (Directive 89/298/EEC) Directive 84/450/ECof 10 September 1984 relating to the approximation of the laws, regulations and administrative provisions of the Member States concerning misleading advertising) 20.31, 21.25, 24.02, 26.47 European Parliament and Council Directive 2013/34/EU see Accounting Directive (European Parliament and Council Directive 2013/34/EU) European Parliament and Council Directive 2004/109/EC see Transparency Directive (European Parliament and Council Directive 2004/109/EC) Listing Directive (Directive 2001/34/EC of the European Parliament and of the Council of 28 May 2001 on the admission of securities to official stock exchange listing and on information to be published on those securities) 16.110, 17.01n, 17.02n Art 5 17.24n Art 20 16.110 Art 37 16.110 Art 38(5) 16.111 Art 64 17.23n Listing Particulars Directive (80/390) 15.08 Art 6(1) 15.08n Art 10 15.08n Market Abuse Directive (MAD)(Directive II) (Directive 2014/57/EU) 16.68 Market Abuse Directive (MAD)(Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation, 2003, L96/16 3.19, 15.22 Art 8 3.02 MiFID II (Markets in Financial Instruments Directive II)(Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (2014) OJ L173/349) 1.16, 1.18, 3.29, 4.07–4.09, 4.11, 4.13, 4.20, 4.32–4.38, 6.02, 6.04–6.10, 6.36, 7.13, 9.56, 10.18, 10.19, 11.16, 12.63, 14.29, 14.33, 17.28, 18.31, 22.14, 23.15 Recital 4 6.04 Art 1(1) 6.07n Art 1(2) 6.07n Art 1(3) 6.07n Art 2(1)(44) 16.93, 16.106

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Art 4(1) 4.22n, 6.06 Art 4(1)(13) 10.18n Art 4(1)(15) 6.05n Art 4(1)(18) 6.25 Art 4(1)(21) 7.13, 17.25 Art 4(1)(44) 6.08, 6.25, 6.30, 6.31 Art 4(2) 6.06 Art 4(22) 7.15n Art 16(3) 4.35, 4.36 Art 24(4) 22.14 Art 25(4)(a) 14.33n Art 30 7.29, 17.30n Art 33 10.12n Art 51 7.14 Art 56 7.13n, Annex I s A 6.06 s C 6.05, 6.06, 6.08 Annex II s I, points 1–4 4.18, 7.29, 17.30n s II 7.29 Prospectus Directive (Directive 2003/71/EC of the European Parliament and the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC, OJ 2003, L345/64) 1.03, 1.19, 1.23, 1.28, 2.48, 2.63, 4.09, 4.11, 4.19–4.20, 4.65–4.67, 4.82, 7.02, 7.04, 7.27, 7.34–7.35, 7.37–7.40, 7.46, 10.13, 10.18, 10.30, 11.02–11.04, 11.06–11.09, 11.13, 11.16, 11.25, 11.27–11.28, 11.34–11.35, 11.55, 11.58, 13.01, 13.03, 13.05, 13.14–13.15, 13.19–13.20, 13.31, 13.32, 13.36, 13.42, 13.48, 13.57– 13.58, 13.62, 13.67, 14.01–14.02, 14.05, 14.07, 14.09–14.10, 14.13–14.14, 14.20, 15.01–15.04, 15.08, 15.11, 15.13, 15.17, 15.22, 15.26, 15.27n, 15.32, 15.36–15.38, 15.45, 15.61–15.62, 15.68, 15.70, 16.02, 16.05n, 16.06, 16.08, 16.12–16.13, 16.16, 16.20, 16.23, 16.37, 16.39, 16.42, 16.47, 16.66, 16.74, 16.106, 16.112–16.114, (p. xxiii) 16.116, 16.124, 17.02, 17.32, 17.39, 17.52, 18.02, 18.07, 18.30, 18.32, 18.58, 18.72, 20.36, 21.25, 23.01, 23.14, 24.09, 24.10, 24.14n, 26.17–26.20, 19.22, 23.01, 23.03, 24.09, 24.10, 25.09, 25.12–25.13, 25.24, 26.18–26.20, 26.31, 26.43, 26.64 Recital (5) 7.10

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Recital (12) 16.106 Recital (19) 6.13 Recital (29) 15.11n Art 1(1) 18.08n Art 1(2)(f) 7.24 Art 1(2)(h) 7.25n, 7.27n Art 1(2)(i) 7.24 Art 1(2)(j) 7.36n Art 2(d) 16.108n Art 2(i)(f) 10.18n Art 2(r) 21.11 Art 2(s) 16.20n Art 3(2)(c) 11.13n Art 3(2)(d) 11.13n Art 3(2)(e) 7.27n Art 4 15.38 Art 4(1)(c) 16.108n Art 4(2)(a) 11.04, 11.21 Art 5 1.23, 9.05, 11.59 Art 5(1) 18.18n, 18.19n Art 5(1)(2) 20.36 Art 5(2) 18.27n Art 5(4) 19.22n Art 6 1.23, 22.09, 23.02, 23.03, 22.06, 23.56, 24.12n, 21.16, 22.09, 23.02, 23.03, 23.56, 24.12, 26.20 Art 6(1) 18.03n Art 6(2) 18.04n, 18.17n, 24.16n, 24.34, 24.16n, 24.34 Art 7(1) 18.22n Art 7(2)(e) 10.13n Art 7(3) 18.23n

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Art 8 3.06n Art 8(1) 15.07, 15.60 Art 8(2)(b) and (c) 18.34n Art 10 15.13n Art 11 15.12, 15.13, 15.38n Art 11(3) 15.13n Art 12(3) 15.38 Art 13(1) 15.38n Art 13(5) 16.13 Art 13(6) 18.87n Art 14 1.23 Art 15 14.05n Art 16(2) 15.24 Art 21 15.38 Art 21(2) 16.08n Art 25 16.66n Public Offers Directive (Directive 89/298/EEC) 16.110 Art 20 16.110 Art 21(4) 16.111 Take-over Bid Directive (Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids) 1.16, 4.63–4.66 Art 3(1)(b) 4.63 Art 6 4.66 Art 6(3) 4.65n Third Life Assurance Directive (Directive 92/96/EEC) Recital (23) 18.51 Art 31 18.44 Art 31(3) 18.45, 18.49, 18.51, 18.53 Annex II 18.45, 18.51, 18.53 Transparency Directive (European Parliament and Council Directive 2004/109/EC of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market, [2004] OJ L390 as amended by Directive 2013/50/EU, [2013] OJ L294/13) 1.04, 1.16, 1.25, 1.27, 11.10–11.16, 11.19, 11.22, 11.27, 11.35–11.36, 11.39, 11.41, From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

11.43, 11.52–11.53, 13.41, 13.52–13.53, 13.58–13.61, 13.65, 13.78, 13.80–13.81, 15.04, 15.13, 15.16–15.19, 15.22, 15.25, 15.26–15.27, 15.27n, 15.32, 15.34–15.35, 15.38n, 15.40, 15.43, 15.66n, 16.19, 16.37, 18.30 Art 2(1) 4.26 Art 2(1)(d) 16.107 Art 2(1)(i) 16.98n Art 2(1)(i)(iii) 16.95n Art 2(1)(k) 15.40 Art 3(1) 15.41, 15.42 Art 3(1a) 4.43 Art 4 4.41, 8.15, 16.98n, 20.09 Art 5 4.41, 4.43 Art 21 15.43 Art 28(1) 18.30 UCITS Directive (Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities) 6.12, 7.52, 14.33, 17.28, 22.10 Art 1(2) 4.68n, 7.52n(p. xxiv) Art 98–ter (3) 22.10 Ch X, Pt I 7.52n Unfair Commercial Practices Directive (CPD)(Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-toconsumer commercial practices in the internal market and amending Council Directive 84/450/EEC, Directives 97/7/EC,98/27/ECand 2002/65/ECof theEuropean Parliament and of the Council and Regulation (EC) 2006/2004 of the European Parliament and of the Council, [2005] OJ L149/22) 7.19n, 9.19–9.23, 9.37, 9.55, 20.30, 20.32, 21.25, 24.04, 24.19, 24.25, 26.47 Art 2 9.19n Art 5 9.19n Art 7(5) 20.32, 23.41 Art 12 20.32, 20.62n Annex II 23.41

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Regulations Benchmarks Regulation (BMR) (Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds 4.49, 4.51–4.55 Art 3 4.53n Art 3(1)(1) 4.53n Art 29(2) 4.50 Art 34 4.55n Art 36 4.50, 4.55 Art 52 4.50 Brussels I Regulation (Regulation (EU) 1215/2012, OJ EU [2012] L351/1) 1.32, 9.63, 19.30, 19.32, 19.48, 19.61 Recital (22) 19.52 Art 4 19.11, 19.12 Art 4(1) 19.48, 19.49 Art 7(1) 19.56 Art 7(2) 19.13, 19.23, 19.25, 19.26, 19.29, 19.39 Art 8(1) 19.25n, 19.48, 19.49 Art 17 19.49, 19.54, 19.57 Art 18 19.49 Art 19 19.54 Art 19(1) 19.53 Art 25 9.70, 19.52, 19.53, 19.55, 19.58 Art 25(1)(a) 19.56, 19.58, 19.59 Art 25(1)(b) 19.56n Art 25(1)(c) 19.56, 19.58, 19.60 Art 29 19.03 Art 31(2) 19.52 Art 31(3) 19.52 Art 45(1)(c) 19.04 Art 63 19.12

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Capital Requirements Regulation (CRR)(Regulation (EU) 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) 648/2012, as amended or replaced from time to time) 1.16, 4.14, 4.20, 4.67–4.69 Art 4 4.20 Art 4(1)(3) 4.20n, 7.41 Art 4(7) 4.68n Art 26 7.41 Art 54(1)(a) 7.41 Art 132(3)(b) 4.68n Art 349 4.68n CRA Regulation (Regulation (EU) 462/2013 of the European Parliament and of the Council of 21 May 2013 amending Regulation (EC) 1060/2009 on credit rating agencies 4.57–4.58 Art 4(1) 4.57, 4.58 Art 8c 4.57 ESMA Regulation (Regulation (EU) 1095/2010 [2010] OJ EU L331/84 16.25 Art 16(3) 18.23n Art 19 16.53 IAS Regulation (European Parliament and Council Regulation (EC) 1606/2002 of 19 July 2002 on the application of international accounting standards, [2002] OJ L243/1) 8.21–8.27, 17.44n Art 4 8.21 Market Abuse Regulation (MAR) (Regulation (EU) 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuseand repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directive 2003/124/EC, 2003/125, and 2004/72/EC, 2014, OJ L173/1) 1.15, 1.16, 1.27, 3.02–3.03, 3.52, 4.22, 4.23, 4.47, 6.37, 9.46–9.47, 9.50, 11.10–11.11, 11.13–11.16, 11.19, 11.27, 11.35–11.36, 11.39, 11.41, 11.43, 11.51–11.54, 12.38, 12.63, 13.21, 13.41, (p. xxv) 13.58–13.59, 13.78, 15.16–15.19, 15.25, 15.27, 15.66n, 16.19, 16.37 Recital (8) 4.23n Recital (11) 3.23 Recital (12) 3.20, 3.34, 3.42, 3.54 Art 2(1) 3.02, 3.52 Art 3(1) 4.22n Art 3(2)(a) 3.21n

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Art 3(2)(c) 3.22 Art 3(2)(d) 3.21, 3.21n Art 5 3.02, 3.17, 3.20, 3.34 Art 5(4)(a) 3.34 Art 5(4)(b) 3.44 Art 5(4)(c) 3.42 Art 5(4) 3.21n Art 5(5) 3.44 Art 5(6) 3.02 Art 7 3.18 Art 7(1)(a) 4.45 Art 8 3.18 Art 10 3.18 Art 11 4.48, 12.38 Art 11(1) 4.47, 4.48 Art 11(2) 4.47n Art 11(3) 4.47 Art 12 3.19 Art 12(a) 3.19 Art 12(b) 3.19 Art 12(c) 3.19 Art 12(d) 3.19 Art 12(1)(a) 3.21 Art 12(1)(b) 3.21 Art 13 3.20 Art 14 3.02, 3.17, 3.18 Art 14(a) 3.20 Art 14(b) 3.20 Art 15 3.02, 3.17, 3.19

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Art 17 3.18, 3.52, 4.41, 4.43, 4.45, 4.48, 9.49, 12.38, 20.09, 20.60 Art 17(4)(a) 9.46 Art 17(4)(b) 9.48 Art 17(5) 9.43n MiFIR Regulation (Regulation (EU) 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) 648/2012 4.07n, 4.32–4.38, 17.20, 17.28 PRIIPs Regulation (Regulation (EU) 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products [2014] OJ EU L352/1) 1.04, 1.06, 1.16, 1.19, 1.24, 4.28–4.30, 7.19n, 7.54, 7.58, 10.21, 12.07, 12.21–12.26, 12.29, 12.31, 12.55, 12.69, 12.81, 14.33, 15.16, 17.46, 17.47 Recital (18) 14.33 Art 3 7.54 Art 7(12) 4.29 Art 8(3) 12.22 Art 8(3)(b) 18.27n Art 8(3)(c)-(i) 12.23, 12.24, 12.55n Art 13 12.25 Art 14 12.25 Art 32 7.54n Prospectus Regulation (Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 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/CE, 2017, L168/12) 1.03–1.09, 1.16, 1.18–1.19, 1.21, 1.24–1.28, 1.30, 2.01, 2.03, 2.05–2.06, 2.16, 2.34, 2.47, 2.50, 2.52–2.53, 2.56–2.57, 2.60, 2.62– 2.63, 2.66, 2.70–2.71, 2.76, 3.01, 3.47, 3.52, 4.01–4.07, 4.11–4.14, 4.20, 4.23, 4.24– 4.26, 4.28, 4.39, 4.46, 4.51, 4.57–4.58, 4.61, 4.65–4.66, 4.77n, 4.79, 6.36, 6.37, 7.01– 7.04, 7.10–7.11, 7.16, 7.19–7.58, 8.01–8.02, 8.08–8.09, 9.03, 9.13, 9.22, 9.32, 9.39, 9.46–9.47, 9.49, 9.61, 9.72–9.74, 10.03–10.05, 10.12, 10.14–10.15, 10.17–10.19, 10.21–10.22, 10.26, 10.28, 10.35, 11.01, 11.03, 11.11, 11.13, 11.16–11.17, 11.21, 11.25, 11.29–11.30, 12.02–12.03, 12.06–12.16, 12.21–12.23, 12.25, 12.33, 12.35– 12.36, 12.38–12.41, 12.43, 12.45–12.46, 12.70, 12.81–12.82, 13.01, 13.03, 13.19, 13.29, 13.30, 13.56–13.59, 13.61, 13.72, 13.75–13.76, 13.78–13.81, 14.01–14.02, 14.07–14.20, 14.36, 14.46, 14.48, 14.51–14.52, 14.54–14.55, 15.03, 15.07, 15.15, 15.28, 15.38, 15.44–15.47, 15.49, 16.02, 16.06, 16.15–16.16, 16.20, 16.22–16.23, 16.37, 16.45, 16.47, 16.66–16.70, 16.74, 16.77–16.80, 16.85, 16.97, 16.106, 16.120, 16.124, 17.01, 17.21, 17.30, 17.36, 18.02–18.29, 18.32, 18.37, 18.76, 18.80, 20.37,

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

23.01, 23.03, 23.54, 24.09, 24.10, 25.01, 25.08–25.10, 25.13, 26.01, 26.04–26.05, 26.11, 26.14, 26.19–26.21, 26.24–26.26, 26.29–26.31, 26.34, 26.36–26.37, 26.48 Recital (1) 18.62n Recital (3) 10.28n, 18.69n, 18.82n, 19.38(p. xxvi) Recital (4) 18.62, 19.38 Recital (5) 2.05n, 18.32n, 18.58 Recital (7) 10.14n, 15.50 Recital (9) 2.61n, 7.22n Recital (10) 2.61n, 16.106 Recital (11) 2.61n Recital (12) 7.25n Recital (13) 4.22n Recital (14) 4.24n, 6.02n, 7.05n, 7.15n, 17.42n Recital (20) 7.47n Recital (21) 12.46n Recital (22) 7.06 Recital (24) 9.04n Recital (25) 2.54n Recital (27) 9.14, 14.09n, 18.20, 18.21, 18.57, 18.58n, 18.66, 18.67 Recital (28) 2.70, 10.21n, 12.06n Recital (29) 2.70n, 12.08n, 12.33 Recital (30) 2.70n, 12.06n Recital (31) 2.70n, 9.04, 10.21n, 12.06n Recital (32) 10.21n, 12.07n Recital (33) 2.66n, 2.71n, 15.80 Recital (34) 9.18n Recital (36) 12.52n, 15.46, 15.55n Recital (37) 12.49n, 12.52n Recital (39) 12.59n Recital (42) 12.61n

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Recital (43) 12.61n Recital (48) 11.39, 12.63n Recital (49) 11.16, 12.63n Recital (50) 2.57n, 11.22 Recital (51) 2.57n, 10.03n, 10.04n, 10.10n, 10.13n, 10.16n, 10.18n, 12.65n Recital (53) 10.15n, 10.16n, 12.65n Recital (54) 2.63n, 12.08n, 12.33, 12.57n Recital (55) 3.36, 15.50 Recital (58) 8.28n, 15.07 Recital (60) 16.24, 18.58n Recital (63) 15.68 Recital (64) 14.08n Recital (68) 17.52n Recital (71) 16.07 Recital (74) 9.13, 16.68 Recital (76) 16.69 Recital (78) 11.40 Recital (83) 10.14n Art 1(1) 6.01, 7.02, 7.16, 12.47n, 18.08n Art 1(2) 6.12, 7.20 Art 1(2)(a) 7.21n Art 1(2)(b) 7.22n Art 1(2)(c) 7.22n Art 1(2)(d) 7.22n Art 1(2)(e) 7.22n Art 1(2)(f) 7.23n Art 1(3) 6.02, 7.03n, 7.25, 7.27, 7.48, 7.52n, 10.17n Art 1(3)(2) 7.25 Art 1(4) 6.02, 7.48, 12.47n, 19.56n

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Art 1(4)(a) 2.54n, 4.17, 7.29n, 7.57, 10.04n, 10.17n Art 1(4)(b) 7.30n, 7.57, 10.17n Art 1(4)(c) 7.31n, 7.57, 10.17n, 11.13n Art 1(4)(d) 7.31n, 7.57, 10.17n Art 1(4)(e) 7.33n Art 1(4)(f) 4.64n, 7.33n Art 1(4)(g) 2.55n, 7.33n, 16.108 Art 1(4)(h) 7.33n Art 1(4)(i) 7.35n Art 1(4)(j) 7.36n Art 1(5) 7.03n, 7.12, 7.41, 7.48, 20.08 Art 1(5)(a) 7.03n, 7.39n, 11.21n Art 1(5)(b) 7.03n Art 1(5)(c) 4.16, 7.03n, 7.45n Art 1(5)(d) 7.43n Art 1(5)(e) 4.64n, 7.43n, 20.08 Art 1(5)(f) 2.55n, 7.43n, 16.108, 20.08 Art 1(5)(g) 7.43n Art 1(5)(h) 7.44n Art 1(5)(i) 7.45n Art 1(5)(j) 2.56n, 4.14, 7.46n Art 1(6) 7.42n, 7.47n Art 2 2.46n, 12.45n, 22.12 Art 2(a) 4.08, 6.11, 6.12 Art 2(d) 3.22n, 6.02, 7.05, 7.07, 7.55n Art 2(e) 7.29, 9.55, 19.56n Art 2(f)(i) 10.18n Art 2(f)(ii) 10.18n Art 2(j) 7.13

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Art 2(k) 2.60n, 14.11n Art 2(m) 7.17n, 7.49, 16.04, 19.38 Art 2(m)(i) 16.90, 16.95 Art 2(m)(ii) 16.91–16.94, 16.96 Art 2(m)(iii) 16.95–16.96 Art 2(n) 7.17n Art 2(p) 7.51 Art 2(q) 7.51n Art 2(r) 16.20, 16.37n Art 2(s) 21.11 Art 3 4.25, 7.54, 16.70n, 20.19 Art 3(1) 2.01n, 17.24n Art 3(2) 7.03n, 7.26, 7.27, 7.48, 17.30n Art 3(2)(b) 10.17n Art 3(3) 2.01n, 4.21 Art 4 4.25, 17.34n, 20.07 Art 4(1) 7.48n Art 4(2) 7.49n Art 5 4.41n, 16.70n, 19.62(p. xxvii) Art 5(1) 7.55, 7.57, 17.38 Art 5(2) 7.56 Art 5(c) 4.14 Art 6 2.62n, 8.65, 9.18, 9.44, 13.07, 15.05n, 16.70n, 20.18, 23.45n, 26.48 Art 6(1) 1.21, 2.22, 2.39n, 4.40, 8.01, 9.03, 9.03n, 9.04–9.06, 9.10–9.14, 9.16, 9.26, 9.29, 9.50, 9.72, 11.42, 15.05, 18.18, 18.20, 18.22, 18.33, 18.56, 18.66, 20.07 Art 6(1)(d) 23.45n Art 6(2) 18.19, 18.20, 18.57, 18.65, 18.66, 18.67, 18.72 Art 6(3) 10.20n, 12.56n, 13.07

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Art 7 1.05, 2.47n, 2.70n, 4.17, 7.46, 9.25, 12.14–12.16, 12.53, 12.55, 12.56, 12.64, 12.66, 12.67, 12.70, 12.75, 12.78, 13.07, 13.17, 16.33, 18.27n, 23.54n, 24.39 Art 7(1) 12.09n, 12.44, 12.47, 17.46n, 18.25 Art 7(1)-(11) 16.70n Art 7(2) 12.10n, 18.26, 20.36 Art 7(3) 1.06, 4.29, 7.46, 12.10n, 12.27n, 12.55, 12.74, 17.46n, 18.26 Art 7(3)(b) 17.46n Art 7(4) 17.46, 18.27 Art 7(4)-(13) 17.46 Art 7(5)(e) 12.75n, 24.39 Art 7(6) 12.16 Art 7(7) 4.29, 12.23, 12.26n, 12.29n, 12.55, 17.46n Art 7(7)(a)(iv) 4.77 Art 7(7)(c) 12.30 Art 7(7)(d) 17.46n Art 7(9) 12.13n Art 7(10) 4.30, 12.15n, 12.74, 18.27 Art 7(11) 12.10n Art 7(12) 12.25n, 12.26n Art 7(13) 12.16, 18.27 Art 8 12.49–12.50, 13.07, 13.15, 16.70n, 20.07 Art 8(1) 12.48n, 17.50n Art 8(2) 12.52n, 18.36n Art 8(2)(a) 18.36n Art 8(3) 12.52n Art 8(4) 12.48n Art 8(5) 12.51n Art 8(8) 12.49n, 13.16 Art 8(9) 12.50n, 12.53n, 12.54

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Art 9 13.01, 13.07, 16.70n Art 9(2) 12.60n, 13.45 Art 9(3) 13.45 Art 9(7) 13.43 Art 9(8) 13.34, 13.45, 13.48 Art 9(9) 13.43, 13.45 Art 9(11) 12.61n, 16.41 Art 9(11)(a) 13.41 Art 9(12) 13.52 Art 9(13) 13.52 Art 10 2.47n, 12.58, 12.62, 13.07, 16.70n Art 10(3) 12.62n, 13.37n, 13.43, 13.44 Art 11 9.14, 9.53, 19.05, 21.16, 23.03, 23.56, 24.13 Art 11(1) 7.04n, 15.06, 16.70n, 18.03, 18.07, 18.09, 18.12, 18.13, 18.14, 18.38, 19.08, 20.12, 20.54, 24.11, 21.14, 26.37 Art 11(2) 1.31, 7.04n, 9.54, 12.75, 15.80, 16.70n, 18.04, 18.07, 18.09, 18.12, 18.14, 18.15, 18.16, 18.25, 18.29, 19.38, 20.12, 20.54, 24.12, 24.16n, 24.34, 24.37, 26.21 Art 11(2)(a) and (b) 18.16 Art 11(3) 16.70n, 18.16n Art 12 7.55n Art 12(1) 23.39 Art 13 8.09, 8.10 Art 13(1) 18.22, 18.56 Art 13(1)(3) 8.10 Art 13(2) 8.30n Art 13(3) 18.23 Art 14 1.05, 9.39, 11.25, 11.42, 12.63, 13.08, 15.43 Art 14(1) 11.26, 11.30–11.32, 11.37, 12.64n, 16.70n Art 14(1)(a) 11.26, 11.30, 11.32, 11.33–11.34, 11.37 Art 14(1)(b) 11.26, 11.30, 11.32, 11.35, 11.37

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Art 14(1)(c) 11.26, 11.30, 11.32, 11.36, 11.37 Art 14(2) 9.03n, 11.41, 16.70n, 20.07, 26.48 Art 14(3) 11.41, 11.43, 11.53, 12.64 Art 14(3)(c) 11.53 Art 14(3)(d) 12.64 Art 15 1.05, 9.03n, 9.39, 13.01, 13.08 Art 15(1) 10.03n, 10.15n, 10.17n, 10.19n, 10.20n, 12.65, 12.66n, 12.75, 16.70n Art 15(1)(b) 10.19n Art 15(1)(c) 10.19n Art 15(1)(d) 10.19n Art 15(2) 10.03n, 10.20n, 10.21n, 12.66, 12.67n Art 15(2)(3)(b) 10.15n Art 15(2)(3)(c) 10.15n Art 15(2)(4)(b) 10.13n Art 16 1.07, 9.26, 9.29, 16.89 Art 16(1) 2.63n, 12.33n, 16.70n, 16.88, 18.24, 18.59, 18.84 Art 16(2) 4.77, 12.43n, 16.70n Art 16(3) 12.43n, 16.70n Art 16(4) 12.39n, 15.33 Art 16(5) 12.39n(p. xxviii) Art 17 3.06n, 3.36, 3.38, 8.28, 15.07, 15.50, 15.55–15.60, 16.70n Art 17(1)(a) 3.32n Art 17(2) 2.47n, 15.60 Art 18 9.43–9.44, 9.49, 9.50, 11.42, 15.07, 15.50–15.54, 16.70n, 20.07, 23.44n, 26.48 Art 18(1) 18.34, 18.36 Art 18(1)(a) 18.36 Art 18(1)(b) 9.45, 18.34, 18.35 Art 18(1)(c) 18.34, 18.35 Art 18(2) 9.51

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Art 18(4) 15.53 Art 19 1.07, 8.04n, 8.30, 15.07, 15.28, 15.33, 15.35, 15.40 Art 19(1) 16.70n Art 19(2) 8.29n, 16.70n Art 19(3) 16.70n Art 20 2.46n, 7.17n, 9.13, 9.49, 9.62, 14.20, 16.04n, 16.39 Art 20(1) 16.04, 16.70n Art 20(2) 2.48n, 16.42, 16.75 Art 20(3) 2.48, 2.49n, 16.75 Art 20(4) 16.35, 16.37n, 16.87 Art 20(6) 16.75 Art 20(7) 16.25 Art 20(8) 16.04n, 16.10, 16.15 Art 20(9) 16.88, 18.87–18.88, 19.08n Art 20(11) 16.37n, 18.83n Art 20(12) 18.83n Art 21 15.61–15.69, 19.63 Art 21(1) 16.70n Art 21(2) 2.51n, 3.37, 4.24n, 4.64n, 7.33, 7.43, 7.46, 15.62, 15.65, 16.70n Art 21(3) 2.52n, 2.71n, 15.63, 15.64, 16.70n Art 21(4) 16.70n Art 21(5) 15.65, 15.69 Art 21(6) 15.66 Art 21(7) 15.65, 16.70n Art 21(8) 15.67, 16.70n Art 21(9) 15.64, 16.70n Art 21(10) 16.70n Art 21(11) 15.68, 16.70n Art 21(130 15.69

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Art 22 14.01, 14.48n, 20.09 Art 22(2) 2.61n, 16.70n Art 22(3) 2.61n, 16.70n Art 22(4) 2.22, 16.70n Art 22(5) 16.70n Art 22(6) 14.47n Art 23 3.52, 13.48, 14.38n, 16.38, 20.39, 26.48 Art 23(1) 16.70n, 23.39n Art 23(2) 15.24n, 16.70n Art 22(3) 15.24n, 16.70n Art 22(4) 15.24n Art 23(5) 15.24n, 16.70n Art 24 16.48, 20.36 Art 25 16.48 Art 25(5) 16.49 Art 26(3) 13.49 Art 23(4) 7.35n Art 24 18.01n Art 25 7.26n, 13.39 Art 25(4) 12.80n Art 26 13.39 Art 26(2) 13.39, 13.44 Art 26(4) 15.44 Art 27 4.17, 8.04n, 8.28, 12.77, 15.28, 15.70–15.81, 16.54, 16.70n Art 27(1) 15.71 Art 27(2) 12.78n, 12.80, 15.72, 15.78 Art 27(3) 12.79n, 12.80, 15.75, 15.78 Art 27(4) 12.79n, 12.80n, 15.78 Art 27(5) 15.77n

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Art 30 16.72 Art 31 7.04n, 7.17n, 16.04n Art 31(2) 16.09 Art 32 7.04n, 7.17n, 12.71, 14.48n, 16.70 Art 32(a) 16.37n Art 32(b) 16.37n Art 32(c) 16.37n Art 32(1)(a) 12.72, 12.74 Art 37 16.50 Art 38 16.70, 16.82 Art 38(1) 16.83 Art 38(3) 16.72 Art 39(3) 16.74 Art 40(2) 16.88 Art 42 16.76 Art 44 8.09, 12.64, 12.66 Art 46(1) 7.03n Art 49 7.03n, 17.21 Art 49(2) 7.26n, 11.21n, 26.01n Annexes I-XVII 17.43 Annex I 8.32, 18.23, 20.18, 20.19 ss 14 and 17 16.98 Annex II 18.23 s 4 16.98 Annex III 18.23 s 3 12.64 Annex IV 10.22n Annex V 10.22n Annex XII, s 2 12.64 Annexes XX-XXX 17.43

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Ch 2 26.20 Ch 3 26.20 Regulation (EU) 2017/2402 see Securitization Regulation (Regulation (EU) 2017/2402)(p. xxix) Regulation (EU) 2017/1129 see Prospectus Regulation (Regulation (EU) 2017/1129) Regulation (EU) 2016/1011 see Benchmarks Regulation (BMR) (Regulation (EU) 2016/1011) Regulation (EU) 1215/2012 see Brussels I Regulation (Regulation (EU) 1215/2012) Regulation (EU) 2015/760 of 29 April 2015 on European long- term investment funds. 10.12n Regulation (EU) 1286/2014 see PRIIPs Regulation (Regulation (EU) 1286/2014) Regulation (EU) 600/2014 see MiFIR Regulation (Regulation (EU) 600/2014) Regulation (EU) 596/2014 see Market Abuse Regulation (MAR) (Regulation (EU) 596/2014) Regulation (EU) 575/2013 see Capital Requirements Regulation (CRR) (Regulation (EU) 575/2013) Regulation (EU) 462/2013 see CRA Regulation (Regulation (EU) 462/2013) Regulation (EU) 1095/2010 see ESMA Regulation (Regulation (EU) 1095/2010) Regulation (EC) 593/2008 see Rome I Regulation (Regulation (EC) 593/2008) Regulation (EC) 864/2007 see Rome II Regulation (Regulation (EC) 864/2007) Regulation (EC) 1606/2002 see IAS Regulation (European Parliament and Council Regulation (EC) 1606/2002) Regulation (EC) 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters Art 5(3) 25.04 Art 23 9.70 Rome I Regulation (Regulation (EC) 593/2008, OJ EU [2008] L177/6) 1.32, 9.62, 19.07n, 19.30 Art 1(2)(d) 19.07n Art 1(2)(i) 19.30 Art3 9.64, 9.70 Art 4(1)(h) 19.07 Art 6(4)(d) 19.07

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Rome II Regulation (Regulation (EC) 864/2007, OJ EU [2007] L199/40) 1.32, 9.62, 19.30, 19.35 Recital (7) 19.32 Recital (30) 19.14n, 19.36 Recital (34) 19.37 Recital 35(2) 19.38 Art 4(1) 19.31, 19.39, 25.03 Art 4(3) 19.35 Art 12 19.14n, 19.30, 19.36 Art 14 19.51 Art 14(1) 9.64 Art 17 19.37 Art 27 19.38 Securitization Regulation (Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, and amending Directives 2009/65/EC, 2009/138/EC, and 2011/61/EU and Regulations (EC) 1060/2009 and (EU) 648/2012 4.59–4.62, 4.70 Art 7 4.61

Commission Delegated Directives Commission Delegated Directive (EU) 2017/593 of 7 April 2016 4.38 Recital 15 4.33n

Commission Delegated Regulations CDR/CPDR/Delegated Act (Commission Delegated Regulation (EU) 2019/980 of 14 March 2019 supplementing Regulation (EU) 2017/1129 of the European Parliament and of the Council as regards the format, content, scrutiny and approval of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Commission Regulation (EC) No. 809/2004 [2019] OJ EU L166/26 1.03n, 1.21, 2.04, 2.31, 2.50, 2.68, 8.08–8.09, 8.11– 8.12, 8.30–8.31, 8.59, 8.63, 11.01, 11.19, 11.37, 11.41, 11.44, 11.45, 12.16, 12.20, 12.64, 12.66, 12.68–12.69, 13.03–13.06, 13.09, 13.11, 13.21, 13.24, 13.56, 16.22, 16.28, 16.35, 17.02n, 18.23, 18.37, 18.56, 18.58, 18.61, 18.63–18.64, 18.73, 18.84 Recital (2) 2.04n, 18.56 Recital (7) 18.63 Recital (9) 8.34n Recital (18) 10.25n, 13.28n(p. xxx)

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Recital (24) 18.61 Art 1 8.70 Art 1(c) 8.68 Art 1(d) 8.68 Art 1(e) 8.47 Art 2 8.11n Art 14(2) 13.21 Art 17 8.05n Art 17(3) 8.39 Art 18 8.34n, 8.45 Art 18(1) 8.35, 8.41 Art 18(2) 8.35, 8.42, 8.44, 8.45 Art 18(4) 8.37 Art 20(2) 13.14 Art 20(6) 13.14 Arts 23–27 10.20n Art 24(1) 13.09n Art 24(1)(2) 13.09n Art 24(2) 13.11n Art 24(3) 13.56n Art 25(1) 13.15n Art 25(2) 13.15n Art 25(4) 13.56n Art 26 13.15n Arts 28–33 10.20n Arts 28–34 13.24 Art 28 10.22n, 13.24 Art 29 10.22n, 13.24 Art 30 10.22n, 13.24

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Art 31 10.22n, 13.24 Art 32 13.24 Art 32(1) 10.20n Art 32(3) 10.20n Art 32(4) 10.25n Art 33 10.21n, 12.69, 13.24, 13.27 Art 33(1) 10.21n Art 34 13.24 Art 35 16.26 Art 36 8.44, 9.13n, 9.49n, 13.45n, 16.27 Art 37 13.45n, 16.31 Art 38 13.45n, 16.29 Art 38(d) 2.68n Art 38(f) 2.68n Art 40 13.45n, 16.36 Art 42 13.37 Art 42(2)(h) 13.41 Art 42(4) 13.41n Art 44 13.41n Ch II 25.23n Ch III 25.23n Ch IV 13.24 Ch V 13.45, 18.83 Annex 1 8.35, 8.42, 8.45, 11.47, 13.54 s 2 19.08 s 5 11.48 s 6 11.51 s 7 11.51 s 8 11.51

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

s 9 11.50 s 13 11.51 s 14 11.51 s 15 11.51 s 18 11.49 s 19 11.51 item 3 8.32n item 5.1–5.7 2.43n item 5.4 2.43n item 7.1.1 2.43n item 7.1.2 8.30 item 7.2.1 2.43n item 10 8.73 item 11.1 8.06n, 8.66n item 11.2 8.75, 8.81 item 12 2.34n item 18 2.36n, 8.02, 8.14 item 18.1 8.15, 11.49 item 18.1.1 8.14n, 8.19n item 18.1.2 8.14n item 18.1.3 8.20n, 8.21 item 18.1.4 8.24, 8.26 item 18.1.6 8.21 item 18.1.7 8.15 item 18.2 8.04, 11.49 item 18.2.1 8.16–18.18, 8.19n item 18.3.1 8.19n item 18.4 8.46 item 18.4.1 8.49, 8.50n, 8.51, 8.63n

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Annex 2 13.54 item 3 2.36n item 3.4 2.68n Annex 3 11.45, 11.47–11.53, 13.19n s 3 12.64 s 12 11.51 s 13 11.53 item 5.1 11.50 item 11.1 11.49 Annex 6 item 8.1 8.06n item 11.1.1 8.14n item 11.2 8.04 Annex 8 11.45, 13.19n Annex 12 11.45, 13.19n s 2 12.64 Annex 13 item 3.1–3.4 4.62 Annex 14 13.19n Annex 15 13.19n Annex 16 11.45(p. xxxi) Annex 18 s 12 11.51 Annex 19 8.43 Annex 20 8.35, 8.42, 8.45, 8.50 item 1.1 8.50, 8.51n, 8.59n item 2.1 8.57 item 2.2 8.52n item 2.3 8.58, 8.61, 8.62 Annex 21 23.27 Annex 23 10.21n, 12.68, 13.24

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Annex 24 10.22n, 13.24 s 2, item 2.7.1 10.23n s 3 12.66 item 3.1 10.23n, 10.25n s 4 10.23n s 5 10.23n s 6 10.23n Annex 25 10.22n, 10.23n, 13.24 s 2 10.23n s 3 12.66 item 3.1 10.23n, 10.25n s 5 10.23n s 6 10.23n Annex 26 10.22n, 13.24, 13.27 s 2 10.24n s 3 12.66 item 3.1 10.24n, 10.25n s 4 10.24n s 5 10.24n Annex 27 10.22n, 13.24 s 2 12.66 item 2.1 10.24n item 3.1 10.25n s 3 10.24n s 4 10.24n s 5 10.24n

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

CDRII/RTS Regulation/Delegated Regulation (Commission Delegated Regulation (EU) 2019/979 (14 March 2019) supplementing Regulation (EU) 2017/1129 of the European Parliament and of the Council with regard to regulatory technical standards on key financial information in the summary of a prospectus, the publication and classification of prospectuses, advertisements for securities, supplements to a prospectus, and the notification portal, and repealing Commission Delegated Regulation (EU) No. 382/2014 and Commission Delegated Regulation (EU) 2016/301 1.03n, 2.61, 9.25n, 12.18, 12.20, 14.01, 14.20–14.45 Art 6(1) 8.35, 8.42, 8.45 Art 13 14.23n, 23.39n Art 14 14.29n Art 14(2) 8.35, 8.42, 8.45 Art 15 14.37 Art 16 14.44n Art 17 14.49n Ch I 2.70n Ch IV 2.61n Commission Delegated Regulation (EU) 2018/65 of 29 September 2017 4.53n Commission Delegated Regulation (EU) 2017/568 of 24 May 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards for the admission of financial instruments to trading on regulated markets, [2017] OJ L87/117 7.14n Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive (2017) OJ L87/1 3.39 Recital 57 3.39, 3.39n Recital 58 3.39, 3.39n Recital 59 3.39, 3.39n Art 38 3.39 Art 39 3.40 Art 39.2 3.40, 3.40n Art 40 3.40 Art 41–43 3.41 Arts 77–79 10.12n

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Commission Delegated Regulation (EU) 2016/1052 of 8 March 2016 supplementing Regulation (EU) 596/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the conditions applicable to buy-back programmes and stabilization measures, 2016, L173/34 1.15, 3.02, 3.03, 3.20, 3.22n, 3.28n, 3.29n, 3.34 Recital 6 3.23–3.26 Recital 7 3.35 Recital 8 3.44, 3.44n Recital 10 3.27 Recital 11 3.42 Art 1(b) 3.44n(p. xxxii) Art 1(c) 3.29 Art 1(d) 3.31, 3.52n Art 1(e) 3.27 Art 1(f) 3.28 Art 1(g) 3.33 Art 5 3.34 Art 5(3) 3.34n Art 5.1(b) 3.06n Art 6 3.44 Art 6(4) 3.50 Art 6(5) 3.45, 3.50 Art 7(1) 3.42 Art 7(2) 3.42n Art 8 3.43 Commission Delegated Regulation (EU) 2016/301 see Omnibus II Regulation (Commission Delegated Regulation (EU) 2016/301) Commission Delegated Regulation (EU) 311/2012 of 21 December 2011 amending Regulation (EC) 809/2004 implementing Directive 2003/71/EC of the European Parliament and of the Council as regards elements related to prospectuses and advertisements, [2012] OJ L103/13 8.22n Commission Delegated Regulation (EC) 1289/2008 of 12 December 2008 amending Commission Regulation (EC) 809/2004 implementing Directive 2003/71/EC of the

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

European Parliament and of the Council as regards elements related to prospectuses and advertisements, [2008] OJ L340/17 8.22n Commission Regulation (EC) 1569/2007 of 21 December 2007 establishing a mechanism for the determination of equivalence of accounting standards applied by third country issuers of securities pursuant to Directives 2003/71/EC and 2004/109/ EC of the European Parliament and of the Council, [2007] L340/66 8.22n Commission Regulation (EC) 809/2004 see Prospectus Directive Regulation (Commission Regulation (EC) 809/2004) Commission Regulation (EC) 2273/2003 of 22 December 2003 implementing Directive 2003/6/EC of the European Parliament and of the Council as regards exemptions for buy-back programmes and stabilization of financial instruments, 2003, L336/33 3.02n, 3.22n Delegated Act see CDR/CPDR/Delegated Act (Commission Delegated Regulation (EU) 2019/980) Omnibus II Regulation (Commission Delegated Regulation (EU) 2016/301 of 30 November 2015 supplementing Directive 2003/71/EC of the European Parliament and of the Council with regard to regulatory technical standards for approval and publication of the prospectus and dissemination of advertisements and amending Commission Regulation (EC) 809/200 14.07, 14.10, 14.45, 15.63 Art 1(2) 15.13n Art 6 15.63 Prospectus Directive Regulation (Commission Regulation (EC) 809/2004 of 29 April 2004 implementing Directive 2003/71/EC of the European Parliament and of the Council as regards information contained in prospectuses as well as the format, incorporation by reference and publication of such prospectuses and dissemination of advertisements 3.47n, 8.12, 8.44, 8.78, 8.80, 26.19 Art 2(9) 14.03n Art 4a 8.43 Art 4a, para 1 8.44n Art 28 15.12 Art 34 14.04 Annex 1, para 13.2 8.79m RTS Regulation see CDRII/RTS Regulation/Delegated Regulation (Commission Delegated Regulation (EU) 2019/979)

Other National Legislation

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Australia Corporations Law s 1024F(1) 15.09n

France Civil Code Art 1217 21.07n Art 1231–1 21.07n Art 1240 21.07n Commercial Code Art L 225–251 21.20 Consumer Code Art L 121–2–L 121–7 21.25 Financial and Monetary Code Art L412–1 21.05, 21.11(p. xxxiii) Réglement general de l’Autorité des marches financiers (RG AMF) (AMF General Regulation) 21.11, 21.12, 21.18 Art 212–14 21.13 Art 212–15 21.14 Art 212–16 21.15 Art 212–32 21.11 Art 223– 1 21.02n

Germany BGB (Civil Code) s 254 20.57 s 280, subs 1 20.02 s 311, subs 3 20.02 s 793 19.22 s 823 18.68n s 826 20.65 Investment Products Act (Vermögensanlagengesetz) 20.05 s 20 20.03

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

s 20(1)(1) 20.28 s 20(6)(2) 20.04 Law for the Further Development of the German Capital Markets (Gesetz zur weiteren Fortentwicklung des Finanzplatzes Deutschland [Drittes Finanzmarktförderungsgesetz]) 1998 20.28 Prospectus law implementing the Prospectus Regulation (Gesetz zur weiteren Ausführung der EU- Prospektverordnung und zur Änderung von Finanzmarktgesetzen, 214/19), entered into force on 21 July 2019 (https:// www.bundesrat.de) and in line with previous law (Art. 19, Prospectus Law, https:// www.gesetze-im-internet.de/wppg) Art 21 16.60n Securities Prospectus Act (Wertpapierprospektgesetz) 20.05 s 2 20.15n s 5 20.07 s5(3)(1) 20.11 s5(3)(2) 20.11 s 5(4) 20.14 s 5(4)(3) 20.15 s5(4)(1) 20.11 s 6 20.07 s 7 20.07 s 8(2) 20.07 s 21 20.07, 20.09 s 21(1)(1) 20.27–20.30, 20.33, 20.53–20.54 s 21(1)(1) No. 1 20.07, 20.13–20.21, 20.22 s 21(1)(1) No. 2 20.22–20.25 s 21(2) 20.56 s 21(3) 20.29 s 21(4) 20.08 s 23 20.62 s23(1) 20.41, 20.41 s 23(2) 20.59

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

s 23(2)No 1 20.47–20.50 s 23(2)No 2 20.47, 20.51, 20.65 s 23(2)No 3 20.59 s 23(2)No 4 20.60 s 23(2) No 5 20.61, 20.64 s 24 20.40, 20.45 s 24(1)(1) 20.26 s 25(1) 20.63 s 25(2) 20.04 Stock Corporation Act s 93 20.65 Stock Exchange Act (Börsengesetz) 20.02 s 43 2.02 German Securities Prospectus Act (Wertpapierprospektgesetz (WpPG)) s 21 18.78, 18.80

Italy Budget Act 2017, Act of 11 December 2016 10.33 Art 1(88)–(114) 10.33n Civil Code Art 2043 22.06 Art 2339(1) No. 3 22.04 Art 2395 22.36 Civil Procedure Code 22.23 Consolidated Financial Services Act (CFSA) 22.09 Art 94(6) 22.12 Art 94(8) 22.09 Art 94(9) 22.10, 22.16 Art 113 22.09 Art 143 22.13n Art 143(3) 22.13n

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Art 144 22.13n Consumer Code Art 140–bis 22.22n Law No. 262, 2005 Art 24 22.19n Legislative Decree No. 14, 2019 (Insolvency Law) Art 220 22.01 Legislative Decree No. 51 of 2007 22.09

Japan Ministerial Ordinance regarding Disclosure of the Company s 9–3 15.09n Securities and Exchange Law s 5–3 15.09n

(p. xxxiv) Luxembourg Civil Code 25.06, 25.17 Art 1382 25.19, 25.20, 25.22, 25.52, 25.67, 25.68, 25.81 Art 1383 25.19, 25.21, 25.22, 25.52, 25.67, 25.68, 25.81 Civil Procedure Code Art 50 25.58 Consumer Code 25.25 Art L-122.3 25.23n Art R-121–1(9) and (10 25.23n Financial Market Supervision law (Wet op het financieel toezicht) Article 5:19 16.65n Financial Sector Law dated 5 April 1993 25.24 Art 37–3(2) 25.24n Law of 10 July 2005 (Luxembourg Prospectus Law) 25.09, 25.12, 25.13, 25.17, 25.18, 25.29, 25.32, 25.37–25.38, 25.43, 25.52, 25.56, 25.60–25.61, 25.66–25.67, 25.70, 25.77 Art 8 25.23n Art 8(1) 25.65 Art 9 25.14, 25.16, 25.18, 25.30, 25.32–25.34, 25.37, 25.65, 25.78

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Art 10 25.23n Law of 23 December 1998 establishing the CSSF 25.52 Art 20(2) 25.53 Law of 10 August 1915(Company Law) 25.81

Netherlands Companies Act 1928 24.01, 24.03 Dutch Act on Collective Settlements (WCAM) 19.48 Dutch Act on financial supervision (Wet op het financieel toezicht) Explanatory Memorandum 18.70 Art 5:1 (a) 7.10 Art 5:19a 7.52n Dutch Civil Code (Burgerlijk Wetboek) 24.01, 24.03, 24.19 Art 6:99 24.27n Art 101 24.27n Art 102 24.27n Art 6 24.19 Art 6:162 18.33n, 18.37, 24.06, 24.30, 24.40 Art 6:163 18.68n Art 6:166 24.28n Art 6:193a 9.19n, 24.04, 24.10, 24.19, 24.21–24.25, 24.29, 24.30, 24.36, 24.40, 24.41 Art 6:193j 24.06n Art 6:193j(3) 24.07 Art 6:194 9.19n, 24.04, 24.10, 24.19, 24.21–24.25, 24.29, 24.30, 24.36, 24.40, 24.41 Art 6:195 24.06n Art 6:2 18.50–18.53 Art 6:217 (1) 7.11 Art 6:248 18.50 Dutch Decree on ‘uitvoering EU- Verordeningen financiële markten’ Art 13 7.52n

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Regulation on the Furnishing of Information to Policyholders 1998 18.46, 18.50, 18.52 Art 2 18.45, 18.53 Art 2(2)(q) and (r) 18.46, 18.49

Spain Civil Code 23.04, 23.05, 23.08, 23.09 General Law for the Defence of Consumers and Users, approved by Royal Legislative Decree 1/2007, of 16 November Art 19(4) 23.41 Law 40/2015 on the Legal Regime of the Public Sector 23.35 Law 5/2015, of 11 March 22.02 Art 28 22.02 Law 3/1991, of 10 January, on Unfair Competition Art 19(2) 23.41 Law 24/1988, dated 28 July (Repealed Securities Market Act) 23.02, 23.03 Art 28 23.15 Royal Decree 1310/2005 of 4 November 1.37, 18.80n, 22.03, 23.04, 23.08, 23.09, 23.29, 23.40, 23.55 Art 23(1) 16.61n Art 24(1) 23.35 Art 32 23.16 Art 33 23.58 Art 33(2) 23.24, 23.34, 23.35 Art 33(3) 23.22, 23.23, 23.39 Art 33(4) 23.17 Art 34 23.27 Art 35 23.30, 23.42 Art 35(1) 23.31 Art 36 23.38, 23.39 Art 37 23.47, 23.49 Art 37(9) 23.47

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Royal Decree 291/1992, of 27 March, on issues and public offerings of securities 23.29n Art 18(3) 23.29n Royal Legislative Decree 4/2015 dated 23 October 22.03(p. xxxv) Securities Market Act and Royal Decree 1.37, 18.80n, 22.03, 23.04, 23.08, 23.09, 23.40, 25.55 Article 23(1) 16.61n Art 38 23.06, 23.07, 23.14, 23.19, 23.42, 23.47, 23.48, 23.58 Art 38(1) 23.16, 23.37 Art 38(1)(a) 23.27 Art 38(2) 23.36 Art 38(3) 23.37, 23.38 Art 38(4) 23.56 Spanish Capital Companies Act approved by Royal Legislative Decree 1/2010, dated 2 July 23.60n Art 236 23.60 Art 237 23.60

United States Dodd-Frank Dodd- Frank Wall Street Reform and Consumer Protection Act, section 1502, Pub. Law 111– 203, 124 Stat. 1376, 21 July 2010 5.80–5.83, 5.95 S 953(b) 5.82n s 1502(d)(2)(A) 5.80n Investment Company Act of 1940 5.54 Jumpstart Our Business Startups Act, Public Law 112–106, 126 Stat. 306 (2012) 13.29 Securities Act 1933 5.12, 5.18, 5.37, 5.54, 5.108, 13.67–13.69, 15.10, 26.16 s 2(a)(1) 6.22 s 2(a)(19) 13.29n s 11 9.34, 15.10, 15.23n, 20.28 s 12 15.10 s 12(a)(2) 15.23n Rule 10–b5 9.34 Rule 415 13.67

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Rule 419 13.67 Rule 424(b) 13.78 Securities Exchange Act of 1934 5.12, 5.18, 5.37, 5.54, 5.108, 13.60, 13.68–13.70, 15.10 s 3(a)(10) 6.22 s 10(b) 15.23n (p. xxxvi)

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

List of Contributors Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

Thierry Bonneau is full Professor at Paris II Panthéon-Assas University, teaching Banking Law, Financial Market Law, Banking and Financial European and International Regulation. He is Director of the Doctoral School of Private Law and in charge of the administrative service “Quality/Assessment”. He is also vice-president of the Department of Private Law. He is the author of several books and numerous articles on these subjects, and provides columns for several law journals. Thierry is a panel member in several law magazines (Bulletin Joly Bourse, Banque et Droit, Corporate Finance and Capital Markets Law Review, and the Journal of Financial Regulation), co-director of one of them (Revue de Droit Bancaire et Financier), the chairman of the Scientific Council of the International Review of Financial Services (IRFS) and a board member of the European Society for Banking and Financial Law. He also contributes to the European Banking Institute (EBI). He acts as legal consultant for law firms and financial institutions in Paris, London, Canada, and the USA. Danny Busch is full Professor (Chair) of Financial Law and the founding Director of the Institute for Financial Law, at Radboud University Nijmegen. He is a Research Fellow of Harris Manchester College and a Fellow of the Commercial Law Centre, University of Oxford. He is also Visiting Professor at Université de Nice Côte d’Azur, Università Cattolica del Sacro Cuore di Milano and Università degli Studi di Genova, Member of the Dutch Banking Disciplinary Committee (Tuchtcommissie Banken), and Member of the Appeal Committee of the Dutch Complaint Institute Financial Services (Klachteninstituut Financiële Dienstverlening or KiFiD, an ADR body). He sits on the Editorial Board of the Capital Markets Law Journal. He is author of many articles in the field of financial and commercial law, and author and editor of several books, including European Banking Union (with G. Ferrarini), OUP 2020 (2nd edn); Capital Markets Union in Europe (with E. Avgouleas and G. Ferrarini), OUP 2018; Regulation of the EU Financial Markets–MiFID II and MiFIR (with G. Ferrarini), OUP 2017;

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Agency Law in Commercial Practice (with L. J. Macgregor and P. Watts), OUP 2016; Alternative Investment Funds in (p. xxxviii) Europe (with L. D. van Setten), OUP 2014; Liability of Asset Managers (with D. A. DeMott), OUP 2012. After graduating with highest honours in Dutch law from Utrecht University in 1997, he was awarded the degree of Magister Juris in European and Comparative Law by the University of Oxford (St. John’s College) in 1998. From 1998 until 2001 he held the position of lecturer and re-searcher at the Molengraaff Institute of Private Law in Utrecht. In 2002 he defended his PhD in Utrecht (Indirect Representation in European Contract Law (Kluwer Law International, 2005)). From 2002 until 2010 he was an attorney-atlaw (advocaat) with the leading Dutch international law firm De Brauw Blackstone Westbroek in Amsterdam where he practised banking and securities law (both the private law and regulatory aspects). He is extensively engaged in the provision of training to attorneys-at-law, financial regulators, and financial professionals in the Netherlands. Javier Redonet Sánchez del Campo is a partner with Uría Menéndez. Having graduated from Comillas Pontifical University in Madrid, he was admitted to the Madrid Bar and joined the firm in 1997. Javier currently heads the Capital Markets Practice Group. He specializes in company, finance, and securities law. He advises on initial public offerings, issues and offers of shares, issues of bonds, equity-linked and hybrid securities, as well as on tender offers and mergers and acquisitions. He regularly assists clients with general cor-porate and commercial law matters, regulatory issues concerning securities law, as well as listed companies on corporate governance issues. Carmine Di Noia is Commissioner at the Italian Securities and Exchange Commission (CONSOB), since 2016. He is an alternate member of the Board of Supervisors at the European Securities and Markets Authority (ESMA), chair of the Committee of Economic and Markets Analysis (CEMA) and of the Post-Trading Standing Committee at ESMA, and vice chair of the Corporate Governance Committee at OECD. Previously, Carmine Di Noia was Deputy Director General and Head of Capital Markets and Listed Companies at Assonime (the Association of the Italian Corporations), and served for two tenures as member of the Securities and Markets Stakeholders Group at ESMA. He was also member of the board of directors of the Italian Stock Exchange. He was chairman of the Policy Committee of European Issuers and head of the technical secretariat of the Italian Corporate Governance Committee. He was a member of various working groups at the European Commission. He teaches Financial Market Law and Regulation at LUISS University in Rome. He holds a Ph.D. in Economics at the University of Pennsylvania. He has been published extensively in academic journals and books. Marieke Driessen is a partner in the financial markets group, based in Amsterdam, and member of the Board of Simmons & Simmons LLP. She specializes in advising on finan-cial transactions in the fields of capital markets, structured finance and banking. She has broad experience in managing international primary and secondary securities offerings, securitizations, repackagings, and credit facilities. She represents large international corporations and financial in-stitutions. Marieke obtained her master’s degree in law from Maastricht University in 1996 and her M.Jur. degree in European and comparative law from Oxford University in 1997. She also obtained an LL.M. degree from Columbia University in New York in 2001. She has been admitted to the Bar in the Netherlands since 1997 and is also admitted to the Bar in New York and England. Marieke is the author of various legal publications and speaks regularly on her areas of expertise, including PRIIPs, MAR, regulatory capital, sustainable finance, and benchmark reform. Marieke co-authored a legal From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

reaction to the consultation by the Dutch Minister of Finance on a legislative proposal for senior non-preferred debt in the Netherlands. Guido Ferrarini is Emeritus Professor of Business Law and Capital Markets Law at the University of Genoa, Department of Law, and Director of the Centre for Law and Finance. He also is Visiting Professor at Radboud University Nijmegen He holds a J. D. (University (p. xxxix) of Genoa, 1972), an LL.M. (Yale Law School, 1978), and a Dr. jur. (h.c., Ghent University, 2009). He is founder and fellow of the European Corporate Governance Institute (ECGI), Brussels. He was a member of the Board of Trustees, International Accounting Standards Committee (IASC), and an independent director at several Italian blue-chip companies. He was an advisor to the Draghi Commission on Financial Markets Law Reform, to Consob (the Italian Securities Commission), and to the Corporate Governance Committee of the Italian Stock Exchange. He has held Visiting Professor positions at several universities in Europe (Bonn, Frankfurt, Ghent, Hamburg, LSE, UCL, Tilburg, and Duisenberg) and the US (Columbia, NYU, and Stanford), teaching courses on comparative corporate governance and financial regulation. He is author of many articles in the fields of financial law, corporate law, and business law, and editor of several books. Dorothee Fischer-Appelt is a New York and English-qualified shareholder/partner of U.S. law firm Greenberg Traurig, LLP with 23 years’ experience in international capital markets transactions. Since she started practising, she has written numerous articles on U.S. and EU securities regulation, including publishing one of the first articles on the Prospectus Directive in 2004 (comparative to U.S. securities laws), subsequent PD amendments, the Transparency Directive (in the Capital Markets Law Journal) and more recently, on the new EU Prospectus Regulation. She has also published on the implications of the Market Abuse Regulation, the PRIIPs Regulation and MiFID II on debt capital markets offerings. She is a frequent speaker at conferences and has lectured on capital markets regulation at King’s College, London and on European Banking regulation in the LL.M. program of the University of Zurich. She has also lectured at the University of St. Gallen, Switzerland. Dorothee co-chaired the international securities committee of the American Bar Association, Section of International Law (2010–2013) and has been co-chairing all of the joint ABA International/Law Society “Capital Markets in the 21st Century” conferences in London since 2012. In addition, she served on the Securities Law Committee of the International Bar Association. Jan Paul Franx is Professor of Securities Law at the University of Groningen, the Netherlands and attorney/partner and co-founder of FG Lawyers, a boutique law firm specializing in corporate law and (alternative) finance based in Amsterdam. In 1985 he worked as a foreign associate at Linklaters and in chambers at Middle Temple in London. In 1993 he worked as a foreign associate with Simpson Thacher & Bartlett in New York. From 1986 to 2011 he worked as an attorney with NautaDutilh N.V., from 1994 as a partner, specializing in corpo-rate and securities law and advising on IPO’s, secondary issues, bond and commercial paper programmes, regulatory and prospectus liability matters. He is the author of numerous publications on capital markets-related subjects. From 2004 to 2006 he was a member of the Expert Group advising the Dutch Authority for the Financial Markets (AFM) on the super-vision of securities issues in connection with new legislation implementing the Prospectus Directive. In September 2017 he defended his PhD thesis (dissertation, in Dutch language) ‘Prospectus Liability in Tort and Contract’ at the Erasmus University of

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Rotterdam, the Netherlands. The thesis has been published by Wolters Kluwer in its series Recht en Praktijk—Financieel Recht (Law and Practice—Financial Law).(p. xl) Matteo Gargantini is Assistant Professor of European Economic Law at the University of Utrecht. Previously, Matteo worked at Consob, the Italian Securities and Exchange Commission, and at the Max Planck Institute Luxembourg for Procedural Law (as a Senior Research Fellow). He also worked in the Capital Markets and Listed Companies Unit of Assonime, the Association of the Italian joint-stock companies. Matteo holds a PhD in Law and Economics (Banking and Financial Markets Law) from the University of Siena, and in 2013 he received the Italian National Academic Qualification as Associate Professor (Law and Economics and Financial Markets Law). His main fields of research are capital markets, banking, and company law. Paolo Giudici is professor of business law at the School of Economics and Management of the University of Bozen-Bolzano. He is an ECGI Research Associate and professorial fellow at Tilburg University. His research started with antitrust, and then he moved to capital markets law and company law, with a key interest in civil liability and private enforcement. Currently he is working on venture capital and blockchain startups. Before starting his academic career he was a practicing business lawyer for fifteen years. In the continental Europe tradition, he continues to serve as legal counsel and advocate in matters concerning his areas of academic expertise. Simon Gleeson joined Clifford Chance in 2007 as a partner in the firm’s Financial Regulation group, where he specialises in financial markets law and regulation. He has advised Governments, regulators and public bodies as well as banks, investment firms, fund man-agers and other financial institutions on a wide range of regulatory issues., and has worked with regulators and governments around the world on the establishment of regulatory re-gimes. He has been a member of the Financial Markets Law Committee, chairs the Institute of International Finance’s Committee on CrossBorder Bank Resolution, has written numerous books and articles on financial regulation, and is the author of International Regulation of Banking and Bank Resolution and Crisis Management, both published by Oxford University Press. He was a visiting Professor at Edinburgh University and a visiting fellow of All Souls College, Oxford. Robert ten Have graduated in Dutch law from Leiden University in 1992. From 1992 until 2019 he was an attorney-at-law (advocaat), and from 2000 onwards a partner, with NautaDutilh (1992–2005), Freshfields Bruckhaus Deringer (2005–2014), and Rutgers & Posch (2014–2019). During his entire career as an attorney-at-law, Robert advised on Corporate law, focusing on transactions (Equity Capital Markets and M&A), corporate and financial (regulatory) law, and corporate governance. Veronique Hoffeld is a partner, is a member of the Management Committee of Loyens & Loeff Luxembourg and heads the Litigation & Risk Management Practice Group. Véronique has experience in advising on complex, high value multijurisdictional litigation and arbitration cases, as well as in proceedings before the civil courts and arbitration tribunals. She focuses in particular on commercial disputes in financial and corporate litigation. Together with her team, Véronique has been rewarded by various high profile arbitration cases related to the recognition and enforcement of ICC arbitral awards. She advises on all aspects of real (p. xli) estate law, including the negotiation of contracts and litigation. Véronique is the former president of the National Research Fund (FNR) of Luxembourg. As per 1 January

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

2020, she has been appointed president of the Board of Directors of the Luxembourg Institute of Socio-Economic Research (LISER). Pim Horsten is a Dutch and English qualified partner in the Capital Markets department of Linklaters LLP in Amsterdam. He studied law at the University of Leiden and business administration (finance) at Erasmus University in Rotterdam, with an exchange term at The Wharton School of the University of Pennsylvania. He worked for five years in a commercial role in investment banking/corporate finance with Dutch merchant bank MeesPierson, before starting to practise law in 1994. He is the editor-in-chief of the Dutch Financial Law Review (Tijdschrift voor Financieel Recht). Henry T. C. Hu holds the Allan Shivers Chair in the Law of Banking and Finance at the University of Texas Law School, teaching corporate law, modern finance and governance, and securities regulation. He has also taught at Harvard Law School. Hu’s writings and public service center on the law and economics of capital markets and corporate governance. He has written for law reviews (Columbia Law Review, University of Pennsylvania Law Review, and Yale Law Journal), finance and specialist journals (Annual Review of Financial Economics, European Financial Management, and Risk), and newspapers (Financial Times, New York Times, and Wall Street Journal). Hu was the founding Director of the U.S. Securities and Exchange Commission’s Division of Economic and Risk Analysis (2009–2011). He holds a B.S. (Molecular Biophysics and Biochemistry), M.A. (Economics), and J.D., all from Yale. Gerard Kastelein is an attorney-at-law in the International Capital Markets practice group at Allen & Overy LLP, Amsterdam, where he also heads the Financial Markets Regulation practice. He is a finance lawyer specialising in complex capital management and debt securities transactions such as covered bonds, CDOs, securitisations, portfolio transfers, alternative financing structures, swaps and derivatives. Furthermore he advises on international regulatory reforms and recovery and resolution of financial institutions. Gerard studied at the University of Leiden and obtained an LL.M degree at the University of London. He has lectured at the Grotius Academy, the University of Utrecht, and the University of Leiden, The Netherlands. Paola Leocani heads the Italian Debt Capital Markets group in the Milan office of Simmons and Simmons, having previously been a partner with White and Case. She has more than 20 years’ experience in advising Italian and international clients, corporate, financial institutions and banks, sovereign and supranational entities, on securities transactions and regulatory matters related to debt issuances. Her practice covers a wide range of areas with a focus on DCM transactions. Paola was listed as one of the top 10 innovative individuals in Europe in the Financial Times Innovative Lawyers report 2018. She also received the “Special Jury Prize Award for Innovation” by Legalcommunity.it. She is often quoted as a securities law expert in the International and financial press. Paola got her Ph.D. at the Catholic University of Milan where she is a lecturer on Civil Law, Tort and Contractual Liability, with a focus on Prospectus Liability. (p. xlii) Kitty Lieverse is a member of the Banking & Finance practice group at Loyens & Loeff. She specialises in the law and regulations regarding supervision of financial markets. She has been seconded at Paul Hastings Janofsky & Walker in Los Angeles, Washington DC and New York (1994). Kitty Lieverse is a member of the firm`s Opinion Committee, senior lec-turer of the Grotius specialization course in securities law, and an editorial board member of ‘Toezicht Financiële Markten’, ‘Ondernemingsrecht/FinancieelRecht’ and ‘JOR’. Kitty is (p. xliii) a professor financial

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

supervision laws at the Radboud University of Nijmegen. She is also deputy judge at the Court of Appeal in The Hague. She frequently lectures and writes about the law and regulations regarding financial markets supervision. Stefano Lombardo is Associate Professor of Economic Law at the Faculty of Economics and Management of the Free University of Bolzano since January 2015 (Assistant Professor at the same Faculty from October 2004 to December 2014). He holds a Ph.D. with focus on Economic Analysis of Law from the Graduate College in Law and Economics at the University of Hamburg (October 1998–April 2002) financed by a scholarship of the Deutsche Forschungsgemeinschaft. He has been a Visiting Scholar at Yale Law School (August 2000-July 2001, invitation by Prof. Roberta Romano), post-doc Researcher at the Institute of Law and Economics of the University of Hamburg (April 2002–September 2003), Visiting Fellow at the Max Planck Institute for Comparative and International Private Law, Hamburg (September 2002– September 2003, invitation by Prof. Dr. Klaus Hopt) and Visiting Fellow at the Department of Law of the London School of Economics (October 2010–June 2011, invitation by Prof. Niamh Moloney). He is author of several articles in the field of financial and commercial law as well as of two monographs. Gerard McMeel is the Professor of Commercial and Financial Law at the University of Reading, having previously been the Professor of Commercial Law at the University of Manchester and a Professor of Law at the University of Bristol. He has held visiting positions at Duke University, the University of South Carolina, Tel-Aviv University, Hong Kong University and Singapore Management University. He was called to the English Bar in 1993, and is a Door Tenant at Quadrant Chambers, London. He was appointed Queen’s Counsel in 2020. As a Barrister he practises in the commercial and financial spheres, with a particular focus on banking and financial services litigation. Gerard is the author of McMeel on the Construction of Contracts–Interpretation, Implication and Rectification (OUP, 2017) which has been cited by courts in England, Ireland, Australia, New Zealand, Canada, Singapore and Jersey. He also writes widely in law journals and has co-authored McMeel and Virgo on Financial Advice and Financial Products (OUP, 2014). Sebastian Mock is a full Professor (Chair) of Law at the Vienna University of Economics and Business in Austria. He teaches Civil Law, Corporate Law, Securities Regulation, (p. xliv) Commercial and Bankruptcy Law. He is author of many articles in the field o f interna-tional company law and securities regulation and editor of several books, including Market Abuse Regulation–Commentary and Annotated Guide, OUP 2017 (with M Ventoruzzo). After studying at the Universities of Jena and Hamburg (Germany), Montpellier (France), and the New York University School of Law, Sebastian obtained a PhD in Law from the University of Hamburg in 2007 and finished his Habilitation in 2012. In addition to teaching in Austria and Germany, Sebastian has also taught corporate and bankruptcy law in China, Russia, a nd Italy. Andrea Perrone is full Professor of Corporate Law & Securities Regulation at the Università Cattolica del Sacro Cuore (UCSC) in Milan, Italy. He has taught at the Università di Ferrara and has been Visiting Professor at the Hebrew University of Jerusalem, Paris Nanterre University, and the University of Warsaw. He is the Director of the Master in Family Banking at UCSC. He has published extensively in the field of securities regulation, corporate law, contracts, and non-profit organizations, is a member of the editorial board of two leading Italian law journals, and regularly acts as a referee for academic law journals and Ph.D. dissertations. Andrea is name partner at a boutique law firm in Milan, Italy, specializing in securities regulation, banking law, and corporate law, and also serves as an independent director in both

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

financial and industrial companies. Since 2000 he has spent a summer research period at the University of Chicago Law School. Tom Reutelingsperger is an attorney-at-law in the International Capital Markets practice group at Allen & Overy LLP, Amsterdam. He advises on a wide range of debt capital market transactions, including securitisations, debt programmes and drawdowns, stand-alone bond issuances and covered bonds. Victor de Serière is professor of securities law (civil law aspects) at Radboud University, Nijmegen, where he is also a member of the Institute for Financial Law. He sits on the editorial board of two series on financial law. He is the author of the Asser Series definitive volume on Dutch securities law, has contributed to a number of handbooks on Dutch and European financial law, and published numerous papers on that subject. In addition to his academic credentials, he is senior counsel at the Amsterdam offices of Allen & Overy, where he advises financial institutions and government agencies on regulatory matters. He has been a partner in the Dutch offices of Allen & Overy and its predecessor offices for some 30 years. He is also a supervisory director of IMC BV and a director on the board of Vereniging Aegon. (p. xlv) Giovanni Strampelli is full professor of Business Law and director of the PhD in legal studies at Bocconi University, Milan. He teaches and writes in the areas of corporate law, accounting law, IAS/IFRS, bankruptcy law and securities regulation. He is author of three books in the fields of company and accounting law, and more than 100 articles and book chapters. His scholarship has been published in US, European and Italian general and business law journals including, among others, the Journal of Corporation Law, Virginia Law & Business Review, San Diego Law Review, European Business Organization Law Review, European Company and Financial Law Review, and Rivista delle Società. His scholarship has been featured by the Financial Times, Morningstar, the Columbia Law School Blue Sky Blog, the Oxford Business Law Blog, and Il Sole 24 Ore. He has been a visiting scholar in many research institutes and universities. Han Teerink is a Dutch qualified counsel in the Corporate & Capital Markets department of Clifford Chance LLP in Amsterdam, focusing on equity capital markets transactions, advising listed corporates and public M&A. He started practicing law in 2003. Han holds master’s degrees in law and business administration from Groningen University (Rijksuniversiteit Groningen) and has participated in post-graduate programmes at the University of California in Berkeley and at INSEAD, Fontainebleau.(p. xlvi)

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

List of Abbreviations Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

AFME Association for Financial Markets in Europe AIF alternative investment fund AIFMD Alternative Investment Fund Managers Directive AMF Autorité des Marchés Financiers AML Directive Anti Money Laundering Directive APM alternative performance measure ASIC Australia Securities and Investments Commission BaFin Bundesanstalt für Finanzdienstleistungsaufsicht (Federal Financial Supervisory Authority)

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

BRRD Bank Recovery and Resolution Directive CBI Central Bank of Ireland CDS credit default swap CEO chief executive officer CESR Committee of European Securities Regulators CFA chartered financial analyst CFSA Consolidated Financial Services Act CIO chief investment office CIU collective investment units CJEU Court of Justice of the European Union CMC Capital Market Commission CMU Capital Markets Union CNMV Comisión National del Mercato de Valores (Spanish National Securities Markets Committee) COBS Conduct of Business Sourcebook CPDR Commission Prospectus Delegated Regulation CRD/CRR Capital Requirements Directive/Regulation

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

CRSP Centre for Research in Security Prices CRYPT crypterium CSD central securities depository CSSF Commission de Surveillance du Secteur Financier DAD decentralized autonomous organization DCC Dutch Civil Code DCR Delegated Commission Regulations DD draw-down DOGE Dogecoin DOJ Department of Justice DTR Disclosure and Transparency Rules (p. xlviii) EBOR European Business Organization Law Review EIBTDA earnings before interest, taxes, depreciation, and amortization EBU European Banking Union EC European Commission ECA European Communities Act 1972 ECB

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

European Central Bank ECFR European Council on Foreign Relations ECGI European Corporate Governance Institute ECJ European Court of Justice ECSP European Crowdfunding Service Providers EEA European Economic Area EGC emerging growth company ELTIF European long-term investment fund ESA European supervisory authority ESBG European Savings and Retail Banking Group ESG environmental, social, and governance ESMA European Securities and Markets Authority ETFs exchange-traded funds EU European Union FASB Financial Accounting Standards Board FCA Financial Conduct Authority FinHub Strategic Hub for Innovation and Financial Technology

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

FOTM fraud-on-the-market theory FSOC Financial Stability Oversight Council FSMA Financial Services and Markets Act 2000 FT final terms GAAP generally accepted accounting principles GFC global financial crisis GLO group litigation order IAS international accounting standard IASC International Accounting Standards Committee ICAEW Institute of Chartered Accountants in Wales ICMA International Capital Markets Association ICO initial coin offering ICMA International Capital Market Association ICSD international central securities depository IFAC International Federation of Accountants IFRS international financial reporting standards IOSCO

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

International Organization of Securities Commissions IPO initial public offering ISIN international securities identification number ISRE international standard on review engagements JPM JP Morgan Chase (p. xlix) KFI key financial information KID key information document KYC know your customer LEI legal entity identifier LSE London School of Economics LTC LiteCoin MAR Market Abuse Regulation MD&A management discussion and analysis MDFP management’s discussion of fund performance MiFID Markets in Financial Instruments Directive MTF multilateral trading facility NCA national competent authority

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

NIRP negative interest rate policy NOMAD nominated advisor NPR New Prospectus Regulation NYU New York University OECD Organization for Economic Cooperation and Development OFR operating and financial review OTC over the counter PCAOB Public Company Accounting Oversight Board PPM private placement memorandum PRA Prudential Regulation Authority PRACA place of the relevant account approach PRIIPs packaged retail and insurance-based investment products PRIMA place of the relevant intermediary approach QIB qualified institutional buyer RCS risk capital standard REFIT Regulatory Fitness and Performance Programme RG AMF

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Réglement general de l’Autorité des Marchés Financiers RTS regulatory technical standard SAFT simple agreements of token sales SEC US Securities and Exchange Commission SIFIs systematically important financial institutions SME small and medium-sized enterprises SMSG Securities and Markets Stakeholders’ Group SPV special provision vehicle SSM single supervisory mechanism STS simple, transparent, and standardized TEU Treaty on the European Union TFEU Treaty on the Functioning of the European Union UCITS Undertakings for Collective Investment in Transferable Securities Directive 2009 UCL University College London (p. l) UCP unfair commercial practices URD universal registration document VaR value at risk

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

WAIB Withdrawal Agreement Implementation Bill WCAM Dutch Act on Collective Settlements Wft Wet op het financieel toezicht (Dutch Financial Supervision Act) WKSIs well-known seasoned issuers WpPG Westpapierprospektgesetz (German Securities Prospectus Act) WSBI World Savings Bank Institute XML eXtensive Markup Language

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Part I General Aspects, 1 Introduction Danny Busch, Guido Ferrarini, Jan Paul Franx From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

Subject(s): Prospectus — Monetary union

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 3) 1  Introduction I.  The Capital Markets Union Action Plan 1.01 II.  Brexit 1.02 III.  The New EU Prospectus Regime 1.03 IV.  Structure of the Book 1.13 1.  General Aspects 1.14 2.  The New EU Prospectus Rules 1.18 3.  Prospectus Liability and Litigation 1.30

I.  The Capital Markets Union Action Plan 1.01  On 30 September 2015 the European Commission launched an Action Plan on Building a Capital Markets Union (CMU).1 The CMU Action Plan was designed to make it easier for providers and receivers of funds to come into contact with one another within Europe, especially across borders. This is regardless of whether raising capital occurs through the intermediation of banks, through the capital markets, or through alternative channels such as crowdfunding. In addition, more non-bank funding will help to lessen dependence on the traditional banking industry and enhance the ability of the system to cope with economic shocks.2

II.  Brexit 1.02  And then there was Brexit. In the referendum of 23 June 2016, the United Kingdom signalled its intention to leave the European Union. The news came as a bombshell worldwide. The referendum result was particularly sobering for the European Commission. British Commissioner for Financial Services Jonathan Hill,3 who had been the driving force behind the CMU, immediately resigned and was succeeded by Valdis (p. 4) Dombrovskis from Lithuania. In the light of this development, the obvious question was—and still is— whether the CMU Action Plan is still realistic if London, Europe’s financial heart, no longer participates. The Commission clearly considers that it is. This was already apparent from its communication of 14 September 2016 entitled ‘Capital Markets Union – Accelerating Reform’.4

III.  The New EU Prospectus Regime 1.03  Whether or not the CMU Action Plan is still realistic in the light of Brexit, it is beyond any doubt that the information document relating to the offering of securities to the public (the prospectus) forms an essential part of the CMU. It provides companies with access to the European capital markets. As part of the CMU, the Commission proposed to replace the Prospectus Directive by a Prospectus Regulation. And with success, since the bulk of the new EU prospectus rules has become binding as of 21 July 2019.5 1.04  The new Prospectus Regulation has three main objectives : (i) to reduce the administrative burden of drawing up of a prospectus for all issuers, in particular for small and medium-sized enterprises (SMEs), frequent issuers of securities and secondary issuances; (ii) to make the prospectus a more relevant disclosure tool for potential investors, especially in SMEs; and (iii) to achieve more convergence between the EU prospectus and other EU disclosure rules (such as the Transparency Directive and PRIIPs6).

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

1.05  To achieve objective (i), the Prospectus Regulation provides for an optional ‘light regime’ geared to the needs of the SMEs and their investors so that they can draw up a relatively concise, and therefore cheaper, prospectus. This option in fact exists only if the SME does not have a stock exchange listing. This light regime is intended for a listing on a so-called SME growth market (this is not a regulated market, but a multilateral trading facility or MTF).7 Companies which already have a listing on a regulated market or an SME growth market and wish to issue additional shares or bonds are now (p. 5) able to issue a new, simplified prospectus (Arts 7 and 14). This should give more flexibility and less paperwork for repeat players. At present, 70 per cent of the approved prospectuses are follow-up issues by companies that already have a listing.8 1.06  To achieve objective (ii), it is desired to make the prospectus more concise and a better source of information. At present, even the summary is often very long and couched in complicated legalese not readily intelligible to most investors. The prospectus published on the occasion of ABN AMRO’s initial public offering (IPO) on 10 November 2015 consisted of no fewer than 729 closely printed pages.9 This creates additional costs for issuing institutions, without providing clear benefits for investors. The new EU prospectus regime aims to ensure that prospectuses are shorter and more accessible by indicating what information is necessary. The prospectus summary is modelled as much as possible after the consumer-tested key information document (KID) required under the PRIIPs Regulation. This can then also help to achieve objective (iii). Whatever the case, summaries which can presently quite easily take up fifteen pages or more (thirty-four closely printed pages in the case of ABN AMRO) are now limited to a maximum of seven pages, ‘using characters of readable size’ (Art. 7(3)). 1.07  Furthermore, prospectuses often contain such a veritable flood of ‘risk factors’ that identifying those that are really pertinent becomes very difficult. In the case of ABN AMRO, the risk factors took up fifty-five closely printed pages. This market practice is intended to protect issuing institutions and their advisers from civil liability but is prejudicial to investor protection. Under the new EU prospectus rules, only risk factors that are material and specific to the issuing institution and the securities may be included in the prospectus. The issuing institution is required to allocate risk factors across a limited number of categories by reference to their relative materiality, based on its assessment of the probability of their occurrence and the expected magnitude of their negative impact. ESMA develops guidelines for this purpose. This should enable investors to gain a better understanding of the potential risks of their investment decisions. In addition, only the most important risk factors may be mentioned in the summary (Art. 16). However, the possibility of incorporation by reference is expanded (Art. 19). 1.08  Whether all of this will make prospectuses a more useful information document (through being more readable and, hopefully, more concise) remains to be seen. The information paradigm continues to be the deciding factor. The key to investor protection therefore remains ensuring that investors are properly informed and can thus make wellconsidered investment decisions. And this is despite the fact that many people doubt whether all the different information available to the investor really helps in making an informed and considered decision.10 (p. 6) 1.09  Finally, the fact that the prospectus rules are now all set out in an EU regulation that is directly applicable will undoubtedly result in a higher degree of harmonization. Nonetheless, a supervisory authority in one Member State may be more flexible and grant approval more easily than its counterpart in another Member State. Such a situation could be countered by working on a harmonized supervisory culture, or more

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

supervisory convergence. Supervisory convergence has been high on the CMU agenda ever since the Brexit referendum. 1.10  But whether this will prove effective remains to be seen. Alternatively, ESMA could also be given exclusive competence for approving prospectuses. Another possibility, in line with the European Banking Union (EBU), would be to divide responsibilities between ESMA and the national supervisory authorities. ESMA could then be responsible for larger issues and the competent national authorities for smaller ones.11 Within the framework of its CMU plans, the Commission had proposed to give ESMA exclusive competence for the approval of at least certain prospectuses.12 1.11  However, these plans did not reach the finish line.13 Why not? More supervisory powers for ESMA are at the expense of the influence of national supervisors and therefore of the Member States. 1.12  But whatever one may think of the new EU prospectus rules, one thing is certain: they will have an important impact on both theory and practice. The most important rules, changes, and innovations are thoroughly discussed in this book. As most of the authors are academics with broad practical experience and leading practitioners in the field, the book will offer high-quality analysis of a theoretical and practical nature.

IV.  Structure of the Book 1.13  The book consists of three parts: (I) General Aspects; (II) The New EU Prospectus Rules; (III) Prospectus Liability and Litigation.

(p. 7) 1.  General Aspects 1.14  Apart from this Introduction (Chapter 1), Part I of the book features a chapter by Han Teerink setting out the process of an IPO (Chapter 2). Chapter 2 offers insight into a typical IPO process, highlighting key practical and legal considerations around disclosure, through the IPO prospectus and otherwise. It summarizes the different phases in an IPO process and the most important documents and parties involved, focusing on the central role of the IPO prospectus. A number of changes resulting from the enactment of the Prospectus Regulation are likely to be of particular relevance to IPO processes. The expected impact of these changes is therefore also discussed in this chapter. 1.15  In Chapter 3, Stefano Lombardo zooms in on stabilization and underpricing in IPOs. The Market Abuse Regulation (MAR) provides an exemption from the prohibitions of insider dealing and of market manipulation for the stabilization of securities, which is usually realized in the case of an IPO and is regulated in detail by Commission Delegated Regulation 2016/1052. Chapter 3 introduces the economic theory of IPOs, analysing in particular the underpricing phenomenon (and its opposite, the overpricing). After a comparative and useful description of the US system of IPO stabilization activity, the chapter focuses on a detailed analysis of the European regime under MAR and Regulation 2016/1052. 1.16  In Chapter 4, Marieke Driessen provides an overview of how the scope and application of the Prospectus Regulation is affected by other EU laws, for example due to references in definitions to the Markets in Financial Instruments Directive II (MiFID II), the Bank Recovery and Resolution Directive (BRRD), the Capital Requirements Directive/ Capital Requirements Regulation (CRD/CRR), MAR, the Transparency Directive and PRIIPs. Driessen concludes that the content and format of prospectuses is subject not only to the Prospectus Regulation, but also to other EU laws and policy that leave their imprint on prospectuses, including MiFID II, regulatory capital requirements under CRD/CRR, bail-in under BRRD, ESMA guidelines on alternative performance measures (APMs), as well as EU regulations on market abuse, benchmarks, credit rating agencies, and securitization. Also, the Take-over Bid Directive and the European Central Bank (ECB) monetary policy for the

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Eurosystem drive disclosure in prospectuses. With the prospect of a hard Brexit hanging over the international capital markets for much of 2019, this chapter also briefly discusses approaches in the EU27 and the UK to prospectus regulation post-Brexit. Whereas currently an approved prospectus benefits from passporting rights to all other EU jurisdictions, in the case of a hard Brexit the EU capital markets will become fractured, with securities offerings and listings in both the EU27 and in the UK requiring their own prospectus approvals, unless a Brexit deal is reached whereby the Prospectus Regulation would continue to apply to the United Kingdom. 1.17  Part I of the book concludes with a chapter on the US disclosure paradigm by Henry Hu (Chapter 5). The chapter offers useful insights for Europe as well. Hu explains that (p. 8) the disclosure paradigm contemplates a unique regulatory role for the US Securities and Exchange Commission (SEC). The author concludes that the fulfilment of its core mission is essential not only for investor protection and market efficiency, but for a wide variety of transparency-dependent corporate governance mechanisms. Financial innovation is contributing to a ‘too-complex-to-depict’ problem that brings into question the sufficiency of the core approach to information that the SEC has used since its creation. Moreover, particular financial innovations, including asset-backed securities (ABS), exchange-traded funds (ETFs), and credit default swap (CDS), pose product-specific challenges to the fulfilment of the SEC’s mission. Additionally, changing conceptions of the ends to be achieved by public disclosure, within the SEC disclosure system itself and pursuant to a new disclosure system driven by regulators with far different mindsets, raises new issues. It is now demonstrable that the new modes of information and the alternative data made possible by technological innovation can help address some of the disclosure challenges posed by financial innovation. At the same time, these new modes and alternative data introduce regulatory complexities. Hu concludes that modern divergences are making life interesting for regulators, practitioners, and academics alike.

2.  The New EU Prospectus Rules 1.18  Part II analyses and discusses various aspects of the new EU prospectus rules. In Chapter 6, Guido Ferrarini and Paolo Giudici analyse the concept of transferable security in the Prospectus Regulation and test the flexibility and latitude of this concept with reference to the recent phenomenon of Initial Coin Offerings (ICOs). The chapter first examines MiFID II’s definitions of financial instrument and transferable security, and then focuses on the latter, with special regard to the Prospectus Regulation. The authors subsequently introduce the ICO phenomenon and the categories of tokens that are issued through blockchain in practice. They go on to consider the treatment of ICOs under US securities regulation and then focus on whether tokens issued in ICOs qualify as transferable securities under the EU Prospectus Regulation. The authors give a positive answer not only with respect to investment tokens, but also to hybrid tokens which present an investment functionality. They conclude that in given circumstances also utility tokens could qualify as securities, as in the ICO of Filecoin which took place under US securities regulation. 1.19  Chapter 7, written by Kitty Lieverse, offers a comprehensive treatment of the obligation to publish a prospectus, including the available exemptions. The Prospectus Regulation provides for an update of the prospectus obligation and the exemptions thereto, compared to the Prospectus Directive 2003. However, the provisions that determine the requirement to publish an approved prospectus (the offer of securities to the public, the admittance of securities to listing on a regulated market) have remained unaltered. In addition, the exemptions to have a prospectus available compliant with the Prospectus (p. 9) Regulation have largely remained the same. There have been some changes, though, when it comes to exemptions. Notably, the regime for small-size offerings has changed. The result of these changes is that national regimes may apply for offerings up to EUR 8,000,000, and the starting threshold for full application of the Prospectus Regulation may vary per Member State between EUR 1,000,000 and EUR 8,000,000. On this point, Lieverse From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

concludes that the goal of the European legislator to enhance harmonization between the Member States by including the prospectus regime in a regulation, has not been achieved for these small-size offerings. In addition, some exemptions for the prospectus requirement in the event of a listing have either been extended or restricted. An extension has been provided for the listing of securities of a type that is already admitted to listing; the application of this exemption has been extended from shares to all securities and the threshold has been raised from 10 to 20 per cent. A restriction has been introduced for the listing of shares that result from a conversion, by imposing a 20 per cent limit thereto (on a twelve-month basis). Finally, the author notes that the disclosure regime as such, as provided by a prospectus under the Prospectus Regulation, has not been truly reconsidered, in the context also of concurrence with other disclosure regimes, such as provided by the Alternative Investment Fund Managers Directive (AIFMD) and the PRIIPs Regulation. On this topic, Lieverse notes that managers of alternative investment funds (AIFs), if they enter into the retail market, have to comply with both the prospectus requirement (under the Prospectus Regulation or the AIFMD) and the KID requirement under the PRIIPs Regulation. 1.20  In Chapter 8, Giovanni Strampelli focuses on the financial information to be included in a prospectus. The author argues that as far as financial information is concerned, the new EU prospectus regime is in line with the objectives of the European Commission to reduce the administrative burden for issuers when drawing up a prospectus, and to make the prospectus a more relevant disclosure tool for potential investors. For example, the removal of the requirement for issuers of equity and retail non-equity to include selected financial information in the prospectus and the alignment of the Operating and Financial Review requirement with the management reports required under the Accounting Directive clearly go in this direction. Nevertheless, in spite of such simplifications, it remains that financial information is one of the most technical elements of the prospectus contents and, as such, is primarily addressed to sophisticated investors. In particular, pro forma financial information and profit estimates and forecast are deemed to be of limited usefulness for unsophisticated investors. Therefore, in this regard, it is particularly important that (as recommended by the European Commission) the information included in the prospectus summary and primarily addressed to retail investors should not be a mere compilation of excerpts from the prospectus. 1.21  In Chapter 9, Victor de Serière addresses the non-financial information to be included in a prospectus, alongside an analysis of the fundamental concept of materiality. This chapter examines some issues relating to non-financial information to be included in a prospectus under the new EU prospectus regime. The decision whether certain (p. 10) information is required to be included in a prospectus is determined not only by specific inclusion requirements as contained in the Prospectus Regulation and Delegated Regulation (EU) 2019/980, but also, and more generally, by the application of Article 6(1) Prospectus Regulation: the materiality test. Whether or not this test is met, is a matter of EU law. Whether or not a failure to include certain required information leads to prospectus liability will also—in most if not all Member States—be dependent on whether that information is material. However, this latter materiality test concerns a criterion under the applicable national law rather than under EU law. If this analysis is correct, it entails that the new EU prospectus regime falls short of achieving a unified prospectus liability regime across the EU, simply because the national laws of the Member States concerned have not been harmonized. This not only relates to the application of the materiality test, but also to other civil and common law aspects of the law of tort, such as causality requirements. A level playing field in terms of uniform investor protection within the EU accordingly has regrettably not been achieved. This chapter argues that the Prospectus Regulation could have achieved more by requiring Member States to impose certain uniform tort law requirements in their national prospectus liability regimes. This is perhaps something to be

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

considered for a forthcoming Prospectus Regulation 2. Another topic addressed in this chapter relates to the possibility for offerors of securities to obtain liability protection by including exoneration clauses in prospectuses. The Prospectus Regulation does not regulate this topic, but the analysis in this chapter shows that the possibilities appear to be severely limited; practice in any event shows that exoneration is seldom (if ever) stipulated. The same applies with regard to efforts of offerors of securities to seek some protection by stipulating exclusive choice-of-law and forum clauses. The author concludes that all this appears to be relatively good news in terms of investor protection generally, but the lack of harmonization stands in the way of a unified EU CMU, where prospectus liability risks for offerors of securities should ideally be transparent and measurable across the EU borders. Although the (negative) effects on access to the EU capital markets by issuers are rather difficult to quantify, it is certain that a more comprehensive level playing field should enhance such access in significant ways. 1.22  Next, Andrea Perrone zooms in on the ‘light’ disclosure regime for SMEs (Chapter 10). Perrone concludes that SME financing through capital markets is no easy task. On the supply side, adverse selection and lack of liquid secondary markets hamper the access of both retail and professional investors. On the demand side, lack of financial literacy, costs of compliance, and the possibility for the owners to lose control of the firm discourage SMEs from turning to capital markets for funds. For both reasons, it is therefore understandable why SMEs are typically financed through banking and banks maintain a ‘monopolistic’ power over SMEs. In this context, the ‘light’ disclosure regime introduced by the Prospectus Regulation is mostly toothless. Still shaped by the ‘myth of the informed layman’ and of little use to institutional investors, the EU Growth Prospectus does reduce compliance costs for issuers but suffers the lack of a EU-based ‘eco-system’ fully supporting SMEs seeking finance. The (p. 11) picture of SME market-based finance is complicated. Perrone’s chapter is an attempt to add a few pieces to the puzzle. 1.23  Pim Horsten analyses and discusses the ‘light’ disclosure regime available for secondary issuances (Chapter 11). Horsten submits that it remains to be seen whether this new simplified regime, if available in the circumstances and with the alleviations from Article 6, will be used much in practice. The proportionate disclosure regime for statutory rights issues introduced by the 2010 amendment of the Prospectus Directive was little used. One reason for this is that many larger IPOs or securities offerings by European companies have a US tranche under which the securities are offered to US investors. This means that other jurisdictions’ disclosure requirements (in this case, those of the US) are added on to the disclosure requirements under EU law, i.e. the lighter disclosure may not be sufficient even if alone from a strict regulatory perspective. Aside from this regulatory securities law angle, there is the practical aspect that most securities offerings will be arranged and underwritten by one or more banks. This holds true not only for IPOs or secondary offerings of equity, but also for debt issues. Nowadays many, if not most companies issuing debt securities do so under a debt issuance programme, on the basis of a base prospectus and final terms that supplement the terms and conditions that are included in the prospectus. Even if a secondary issuance does not need to meet other jurisdictions’ (e.g. US) disclosure requirements, it remains to be seen whether underwriters would be agreeable to being involved in a securities offering where a simplified prospectus is used giving reduced disclosure only. Underwriters were concerned that the overall disclosure standard of Article 5 of the Prospectus Directive might still be relevant. By the same token, they may fear that the general disclosure requirement of Article 6 will still be relevant despite what Article 14 says. At a conceptual level, the author submits that not many would disagree that for investors at some stage more disclosure makes a prospectus difficult to understand, as it may be difficult to discern important facts in a mass of less important detail. The ideal disclosure document is short, clear, and comprehensive in including all information an investor needs to make an informed investment decision. The tension is between short and

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

comprehensive, in the sense of including all necessary information. Prospectus liability is not discussed in this chapter. It is key, however, also in the context of light disclosure regimes such as here, for secondary issuances. Put simply, it is one—easy—thing for a legislator to provide that a simplified prospectus with reduced disclosure may be used, but if that does not go hand in hand with lightened liability for those involved, there is a tension. With stringent liability, the tendency (and preference of underwriters and quite possibly also issuers who are, of course, themselves also at risk of being sued) will be to include information on a ‘just-in-case’ basis, also where it is debatable whether investors would find it necessary. Horsten concludes that time will tell whether in case of secondary issuances we will see simplified prospectuses with reduced disclosure only. 1.24  The topic of the prospectus summary and risk factors is addressed by Robert ten Have (Chapter 12). Based on the aim of the new Prospectus Regulation to further harmonize prospectuses across Member States, the new format for the summary is highly (p. 12) prescriptive and standardized, with a strong focus on accessibility. The summary format includes the entitlement of the sub-sections in the form of questions, modelled on the ‘key information document’ as required under the PRIIPs regulation. A separate Commission delegated regulation contains regulatory technical standards to specify the content and format of presentation of the key financial information to be included in the summary. From an issuer’s perspective, when drawing up the prospectus, there may be a tension between, on the one hand, the (new) requirement that the summary shall be ‘accurate, fair and not misleading’, and on the other that the summary needs to be ‘concise’ and is bound to a maximum length. In addition, the new Prospectus Regulation applies an overall cap of fifteen for the number of risk factors that may be included in the summary. In view of the maximum length requirement and the capped number of risk factors, issuers and their advisers will need to make choices what to include or not include in the summary, which may bring concerns about ensuing liability. 1.25  Dorothee Fischer-Appelt discusses prospectus formats and shelf registration (Chapter 13). The author concludes that the new EU prospectus rules introduce more flexibility and efficiency in the use of different prospectus formats. Different options for formats overlap even more than in the past and their use will depend on the frequency of issuances and instruments issued. The overlap between the uniform registration document (URD) and simplified prospectus will leave issuers to choose what best suits their needs, depending on how often, through which instruments, and from which investors issuers seeks to raise capital in future and the timing of financial disclosures. The cost of keeping an URD up to date for more frequent issuers and issuers requiring both equity and debt must be balanced with the utility of having different equity and debt securities registered. The option of filing annual and half-yearly reports under the Transparency Directive in the form of a URD may reduce costs for certain issuers. According to Fischer-Appelt, the ‘frequent issuer status’ may in practice not offer much improvement on the service already provided by certain competent authorities (see the French example), also considering the advance notice requirement. The author concludes that there is room for improving the URD system in future, as follows: (i) extending the life of the URD from one to three (or at least two) years for well-known issuers; (ii) making approval of supplements unnecessary; (iii) creating a true system of integrated disclosure in Europe by further aligning the disclosures required under the Transparency Directive with the Prospectus Regulation; (iv) involving competent authorities in the regular review of disclosures made in periodic reports on a consistent basis throughout the European Economic Area (EEA); (v) amending the Prospectus Regulation at the next review to allow for future incorporation by reference; (vi) allowing incorporation by reference of reports filed in jurisdictions that are deemed equivalent; (vii) removing competent authorities’ ability to review a URD when it is already included in a

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

prospectus; and (viii) removing the need for the approval of prospectuses of frequent issuers making use of URDs altogether. (p. 13) 1.26  Gerard Kastelein and Tom Reutelingsperger focus in Chapter 14 on advertisements. The authors conclude that the advertisement regime under the new EU prospectus rules will not have a huge impact on the EU capital markets. The regime remains substantially the same. The good news is that discrepancies between local laws will disappear with the introduction of a Regulation. As a result of the Prospectus Regulation there will be one set of rules which apply equally throughout the EU, although as of yet supervision will remain decentralized, with the risk of diverging interpretations. The authors expect a market practice to develop as to which type of communications will be (deemed) in scope for the definition of advertisements and which type of communications will be (deemed) out of scope, which market practice will, where applicable, be supported and/or developed by ESMA’s Q&As. This is based on the authors’ assumption that the change in the definition of the word ‘announcement’ to ‘communication’ in the Prospectus Regulation does not significantly alter the scope of the advertisements regime, which the authors understand is also the view of the European Commission. Why it was not possible to confirm this in the legislative text remains a mystery to the authors. 1.27  Subsequently, the topics of omission of information, incorporation by reference, publication, and language of the prospectus are discussed by Paola Leocani (Chapter 15). The author argues that the reform of the prospectus provisions governing these topics is aimed at facilitating the recourse to capital markets by reducing the costs of a prospectus, without weakening investor protection. The new rules also determine a more efficient coordination of the prospectus regime with other aspects of the EU legal framework for capital markets, such as the Market Abuse Regulation and the Transparency Directive. Indeed, the Prospectus Regulation allows for prospectus information to be omitted in some cases without the responsible parties being accountable for it, provided that specific requirements are complied with in order to guarantee investor protection. The first type of omission allowed is the incorporation by reference, where the relevant information is not expressly disclosed, but incorporated by reference to one or more documents having certain characteristics. Moreover, the prospectus can omit the final number or price of the securities to be offered, which can be disclosed through an announcement to be published and submitted to the relevant competent authority after the publication of the prospectus or the relevant final terms. Furthermore, the prospectus can omit sensitive information in certain circumstances on a case-by-case basis by means of a specific derogation granted by the competent authority in order to avoid detrimental situations for the issuer. In the author’s view, enhancement of the incorporation by reference is a valuable instrument (i) to reduce the administrative and paperwork burdens of drawing up a prospectus; (ii) to make the prospectus a more relevant disclosure tool for potential investors; and (iii) to achieve more convergence between the EU prospectus and other EU disclosure rules. 1.28  The rules regarding competent authorities, approval of the prospectus, notification, and sanctions are set out in Chapter 16 by Carmine Di Noia and Matteo Gargantini. This (p. 14) chapter analyses the regulatory framework for prospectus approval by national competent authorities (NCAs). Just like under the previous Prospectus Directive, NCAs approve prospectuses after verifying that they are complete, consistent, and comprehensible. The delegated acts supplementing the Prospectus Regulation specify the contents of the supervisory activity at a much greater level of detail than the previous regime. However, the authors submit that it remains to be seen whether this will suffice to ensure an actual level playing field across the Union. Indeed, NCAs might maintain different approaches during the approval process, even in the presence of ESMA’s coordination efforts. Next to this, Member States retain discretion on some crucial regulatory options, and the liability regimes are often uneven across Member States. All these remaining differences create space for arbitration, and make the rules on the From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

identification of the relevant NCA all the more important. This chapter has analyses the legal regime for the allocation of the power to approve prospectuses from two different perspectives. The first perspective concerns the transfer of such power from one NCA to another. In this respect, the transfer of prospectus approval might enable a better allocation of supervisory powers whenever the predefined NCA is not the most suitable one for this task. Unfortunately, the transfer of prospectus approval has not been used very often to date. The second perspective relies on issuer choice, and therefore concerns the connecting factors the Prospectus Regulation sets forth to identify the relevant NCA. This regime is quite flexible for non-equity securities of higher face value, but it remains linked to issuers’ registered office otherwise. While the intention to avoid a race to the bottom is understandable, the chapter submits that broader margins for issuer choice would be beneficial. With a view to further centralizing supervisory tasks, the chapter also considers the policy option of charging ESMA with a more direct role in prospectus approval, without displacing—at least as a preliminary step—NCAs and their expertise. 1.29  Finally, Simon Gleeson discusses the third-country regime against the backdrop of Brexit (Chapter 17). The author explains that post-Brexit it will no longer be possible to use a UK prospectus for distribution of securities in the EU. However, since the majorities of securities offered on the UK markets are in fact sold to UK or international (non-EU) investors, it is difficult to know whether the consequence of this will be an increase in EU prospectus offerings (in order to maximize the potential investor base) or a decrease (on the basis that the incremental cost of increasing the investor base by 10 per cent or so by incurring the costs of filing an EU prospectus may be uneconomic). Gleeson concludes that in reality the point is that there is a relatively well-established prospectus orthodoxy in the international securities markets, and as long as the EU regime remains closely aligned with that international orthodoxy, it is likely that the incremental cost of adding an EU limb to a global offering will remain acceptable. However, if EU disclosure standards diverge from international standards, the issue will become more acute, and issuers may find themselves having to choose between a domestic EU offering and an international offering.

(p. 15) 3.  Prospectus Liability and Litigation 1.30  The new Prospectus Regulation being one of the cornerstones of the CMU pursued by the European Commission, it goes without saying that a comprehensive analysis and discussion of important aspects of this regulation is highly relevant for both academia and practice (see Part II of the book, summarized above). However, the more classical subjects of prospectus liability and litigation are inseparably linked with the prospectus rules and therefore deserve to be dealt with in this book as well. A book providing an integrated analysis of (i) prospectus rules and (ii) prospectus liability and litigation in a European context fills a gap in the existing literature.14 1.31  In view of the above, Part III of this book deals with prospectus liability and litigation. The civil liability for a misleading prospectus is (virtually) not covered by the new Prospectus Regulation. Article 11(2) provides that Member States shall ensure that their own national rules on civil liability shall apply to persons responsible for the information given in a prospectus. In Chapter 18, Danny Busch examines what this means and to what extent the civil courts are bound under EU law by the EU prospectus rules when judging issues of liability. Busch concludes that the influence of the new EU prospectus rules on private law is potentially considerable, but that the subject is unfortunately surrounded by much uncertainty. EU legislation on prospectus liability would be the best solution, not only for reasons of legal certainty, but also for the sake of uniform investor protection and a truly level playing field in Europe. However, in the current political climate (less rather than more Europe), that is likely to be a non-starter for the time being. The author submits that our hopes must therefore be pinned on the Court of Justice of the European Union (CJEU), which will hopefully provide more clarity in the years ahead. But to achieve this, the CJEU is dependent on the willingness of national civil courts to submit preliminary rulings with From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

precisely formulated questions that give it sufficient insight into the facts of the case. Otherwise, there is a considerable risk of abstract judgments capable of varying interpretations, which are of little help in developing either theory or practice. It is an open secret that Supreme Court judges are sometimes reluctant to refer questions to the CJEU for a preliminary ruling. They would rather not have their freedom curtailed. Moreover, they are well aware that it is better not to ask a question if the answer may well not be to their liking. Naturally, however, the litigants and their lawyers can urge the civil court to refer questions for a preliminary ruling. 1.32  In the event that a misleading statement in the prospectus would cause a decline in the share price, it is essential that investors have the possibility of addressing a competent court of jurisdiction which will efficiently deal with their claim for damages. Adequate (p. 16) judicial investor protection is the final element of a well-functioning pan-European capital market. In the first place, this means that there should be clear rules specifying which national court(s) are competent to deal with investor claims in an international setting. Rules on international competence are provided by the Brussels I Regulation on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.15 Secondly, the competent court(s) should determine in a consistent manner which national rules of civil liability apply in a cross-border litigation relating to a misleading prospectus. The conflict-of-law rules on which this determination should be based are set out in the Rome I Regulation on the law applicable to contractual obligations16 and the Rome II Regulation on the law applicable to non-contractual obligations.17 These rules are critically discussed by Matteo Gargantini in Chapter 19. 1.33  The rules on prospectus liability not being harmonized, the remainder of Part III features chapters providing analysis of prospectus liability under domestic law in key capital markets jurisdictions in Europe, including Germany, France, Italy, Spain, The Netherlands, Luxembourg, and the UK. Sebastian Mock discusses German law (Chapter 20), Thierry Bonneau sets out French law (Chapter 21), Paolo Giudici focuses on Italian law (Chapter 22), Javier Redonet Sánchez del Campo offers a treatment of Spanish law (Chapter 23), Jan Paul Franx discusses Dutch law (Chapter 24), Véronique Hoffeld offers an overview of the relevant Luxembourg law (Chapter 25) and, finally, Gerard McMeel provides an overview of the relevant UK law, including a treatment of complications arising from Brexit (Chapter 26). It transpires from these chapters that the national prospectus liability regimes diverge to a considerable extent. 1.34  In some Member States, there are specific statutory provisions governing liability for prospectuses.18 In others, the general provisions of civil liability are applicable in such cases.19 And between these two ‘extremes’, there are also ‘mixed forms’ in which liability for an incorrect or incomplete prospectus is based on a combination of general liability law and special legislation.20 1.35  Furthermore, under German law, French law, and Dutch law a raised threshold for director liability for an incorrect or incomplete prospectus must be met.21 Under Italian law it seems possible, at least theoretically, to hold directors liable on the basis of the ordinary rules of tort, evidently without a raised liability threshold being applicable.22 (p. 17) In Spanish law, simple fault seems sufficient.23 Under Luxembourg law, directors can theoretically be held liable under ordinary tort law, but in practice the civil courts are unlikely to grant such claims. They generally assume that if third parties (investors) suffer damage as a result of the actions of a director, they must submit a claim to the company itself.24 In the UK, it seems to follow that a director of an equity issuer (not: a non-equity issuer) and each person who is a senior executive of an equity issuer (not: a non-equity issuer) can be held liable based on a simple fault requirement.25

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

1.36  Many, but not all, jurisdictions covered by this book have adopted approaches that help investors to prove causal link, but not in a uniform way. For example, the French courts apply the theory of loss of opportunity or the theory of loss or damage suffered as a consequence of a limitation of freedom of choice, whereas, for example, in German, Italian, and Spanish law there is a rebuttable presumption that an incorrect or incomplete prospectus has led to the investment decision. According to Luxembourg law, however, investors still seem to have the full burden of proving a causal link between the incorrect or incomplete prospectus and their investment decision.26 1.37  Under German, Italian, and Luxembourg law, provisions that exclude or limit the liability of persons responsible for a prospectus are invalid.27 Under French law, a limitation or exclusion of liability will have only limited effect, since (i) it only applies between contracting parties and not in relation to third parties in tort claims; and (ii) it may not relate to essential contractual clauses. Moreover, it will have no effect if there has been intent or gross negligence.28 In the Netherlands, the Supreme Court held in the case of Coop that an issuer may legitimately include a provision in the prospectus to the effect that it does not accept responsibility for certain parts of the prospectus that relate to information provided by third parties (e.g. its accountant).29 Nonetheless, disclaimers of this kind have not become commonplace in the Dutch market, and the author of the Dutch chapter doubts whether such disclaimers are consistent with the European principle of effectiveness. Finally, it is noted in the Dutch chapter that it is not unusual in international practice and also in the Netherlands for a general disclaimer to be included in a prospectus for the benefit of the underwriters, to the effect that ‘no representation (p. 18) or warranty whatsoever is made by them as to the accuracy and completeness of the information in the entire prospectus’. The author of the Dutch chapter observes that it is doubtful whether a Dutch court would permit such a far-reaching disclaimer, at least in relation to the underwriters who were actively involved in drawing up the prospectus.30 In the UK, the matter would appear to be one for the general law whereby any exemption in a contract or a notice of disclaimer is subject to restrictions on excluding or restricting liability in the Unfair Contract Terms Act 1977, s. 3(1) of the Misrepresentation Act 1967 and Pt 2 of the Consumer Rights Act 2015.31 Customary disclaimers are typically included in Spanish prospectuses and found acceptable by the Spanish supervisory authority, the National Securities Market Commission (CNMV), including on forward-looking statements, reliance by the managers on information delivered by the issuer, etc., provided that disclaimers may not seek to exonerate a person responsible for the content of the prospectus of its liability under the Securities Market Act and Royal Decree 1310/2005, as these are mandatory provisions of imperative law which are meant to protect investors and which may not be waived or overridden by the parties.32 1.38  As mentioned previously at 1.31, EU legislation on prospectus liability would be the best solution to eliminate divergences between national prospectus liability regimes, not only for reasons of legal certainty but also for the sake of uniform investor protection and a truly level playing field in Europe. However, in the current political climate (less rather than more Europe), that is likely to be a non-starter for the time being.

Footnotes: 1

  COM(2015) 468 final.

2

  See European Commission, Capital Markets Union—Accelerating Reform, COM(2016) 601 final (14 September 2016), p. 2. See extensively on CMU: Danny Busch, Emilios Avgouleas, and Guido Ferrarini (eds), Capital Markets Union in Europe (Oxford: OUP, 2018). For a treatment which includes a discussion of the most recent CMU developments: D.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Busch, ‘Capital Markets Union’, in: F. Fabbrini and M. Ventoruzzo (eds), Research Handbook of EU Economic Law (Cheltenham, Edward Elgar, 2019), 434–76. 3

  His full title is Commissioner for Financial Stability, Financial Services and Capital Markets Union. 4

  European Commission, Capital Markets Union—Accelerating Reform, COM(2016) (14 September 2016) 601 final, p. 7. See on Brexit and the financial sector, e.g., Kern Alexander, Catherine Barnard, Eilis Ferran, Andrew Lang, and Niamh Moloney, Brexit and Financial Services—Law and Policy (Hart/Bloomsbury, 2018); Eddy Wymeersch, ‘Some Aspects of the Impact of Brexit in the Field of Financial Services’, in: Busch, Avgouleas, and Ferrarini (n. 2), 81–96; Niamh Moloney, ‘Capital Markets Union, Third Countries, and Equivalence’, in: Busch, Avgouleas, and Ferrarini (n. 2), 97–139; Guido Ferrarini and Davide Trasciatti ‘OTC Derivatives Clearing, Brexit, and the CMU’, in: Busch, Avgouleas, and Ferrarini (n. 2), 140–67; Danny Busch, ‘A Stronger Role for the European Supervisory Authorities in the EU’, in: Busch, Avgouleas, and Ferrarini (n. 2) 28–54; Eddy Wymeersch, ‘Third-Country Equivalence and Access to the EU Financial Markets Including in Case of Brexit’, Journal of Financial Regulation (2018) 4, 209–75. 5

  Regulation 2017/1129 [2017] OJ EU L168/12. See also the following Level 2 instruments: Commission Delegated Regulation (EU) 2019/979 [2019] OJ EU L166/1; Commission Delegated Regulation (EU) 2019/980 [2019] OJ EU L166/26. At Level 3, the European Securities and Markets Authority (ESMA) has published a range of relevant ‘soft law’ instruments (guidelines, opinions, and Q&As): https://www.esma.europa.eu/regulation/ corporate-disclosure/prospectus. 6

  Directive 2004/109/EC [2004] OJ EC L390/38 (Transparency Directive); Regulation (EU) 1286/2014 [2014] OJ EU L352/1. ‘PRIIPs’ stands for ‘packaged retail and insurance-based investment products’. 7

  Article 15.

8

  COM(2015) 583 final, p. 7.

9

  For the prospectus, see: https://www.abnamro.com/nl/images/do_not_index/IPO/ Prospectus.pdf. 10

  See, e.g., Niamh Moloney, How to Protect Investors—Lessons from the EC and the UK (Cambridge: CUP, 2010), 288 ff.; Luca Enriques and S. Gilotta, ‘Disclosure and Financial Markets Regulation’, in: Niamh Moloney, Eilis Ferran, and Jennifer Payne (eds), The Oxford Handbook of Financial Regulation (Oxford: OUP, 2015), 511–36; Veerle Colaert, ‘Investor Protection in the Capital Markets Union’, in: Busch, Avgouleas, and Ferrarini (n. 2), 341–71. 11

  Cf. Danny Busch, ‘A Capital Markets Union for a Divided Europe’, Journal of Financial Regulation (2017) 3, 262–79, at 273–4; Emilios Avgouleas and Guido Ferrarini, ‘A Single Listing Authority and Securities Regulator for the CMU and the Future of ESMA’, in: Busch, Avgouleas, and Ferrarini (n. 2), 55–78. See for an up-to-date treatment of EBU, for example, Danny Busch and Guido Ferrarini (eds), European Banking Union (Oxford: OUP, 2020). 12

  See Article 9(10) of COM(2017) 536 final.

13

  See the European Parliament legislative resolution of 16 April 2019 (COM(2018)0646 — C8-0409/2018—2017/0230(COD)): http://www.europarl.europa.eu/doceo/document/ TA-8-2019-0374_EN.html. The Parliament vote was preceded by a provisional deal between the Council presidency and the Parliament: see the confirmation of the final compromise text with a view to agreement on the Amended Proposal for a Regulation of the European Parliament and of the Council (2017/0230(COD)), 7940/19 ADD 1, Brussels, 29 March 2019: http://data.consilium.europa.eu/doc/document/ST-7940-2019-ADD-1/en/pdf. See C. Di Noia

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

and M. Gargantini, Chapter 16, ‘Competent Authorities, Approval of Prospectus, Notification, and Sanctions’, this volume, section IX. 14

  But see recently Pierre-Henri Conac and Martin Geltler (eds), Global Securities Litigation and Enforcement (Cambridge: CUP, 2019). The book is, however, much broader in scope. It not only addresses prospectus liability but also concerns securities litigation in a broader sense. In addition, the book has a global rather than a European scope. It does not contain a detailed treatment of the new EU prospectus rules. 15

  Regulation (EU) 1215/2012, OJ EU [2012] L351/1.

16

  Regulation (EC) 593/2008, OJ EU [2008] L177/6.

17

  Regulation (EC) 864/2007, OJ EU [2007] L199/40.

18

  This is the case, for example, under German, Italian, Spanish, and UK law. See S. Mock, Chapter 20 ‘Germany’, this volume, section II; P. Giudici, Chapter 22 ‘Italy’, this volume, section II; J. Redonet Sánchez del Campo, Chapter 23 (Spain), this volume, section II; G. McMeel, Chapter 26 ‘United Kingdom’, this volume, section II. 19

  This is the case, for example, in French law. See: T. Bonneau, Chapter 21 ‘France’, this volume, section II. 20

  As under Luxembourg law, but also in fact under Dutch law, where, however, the scope of the special legislation is not confined to liability for the prospectus. See: V. Hoffeld, Chapter 25 ‘Luxembourg’, this volume, section II; J. P. Franx, Chapter 24 ‘The Netherlands’, this volume, section II. 21

  See S. Mock, Chapter 20 ‘Germany’, this volume, section XIII; T. Bonneau, Chapter 21 ‘France’, this volume, section V; J. P. Franx, Chapter 24 ‘The Netherlands’, this volume, section XIII. 22

  See P. Giudici, Chapter 22 ‘Italy’, this volume, section X.

23

  See J. Redonet Sánchez del Campo, Chapter 23 ‘Spain’, this volume, section XIII.

24

  See: V. Hoffeld, Chapter 25 ‘Luxembourg’, this volume, section IX.4.

25

  In the UK, in PRR 5.3.2R, under (b)(i) and (iii) it is mentioned that each person who is a director of the equity (not: non-equity) issuer and each person who is a senior executive of the equity (not: non-equity) issuer is a responsible person (see G. McMeel, Chapter 26 ‘United Kingdom’, this volume, section I.4). In section V of Chapter 26, it is stated that ‘under UK law it is clear that the persons who are liable for misleading prospectus information are those identified in PRR 5.3’. In section VIII of Chapter 26, it is stated that there is a fault requirement. From the foregoing, it seems to follow that under UK law and within the context of prospectus liability directors of equity issuers and each person who is a senior executive of the equity issuer can be held liable based on a simple fault requirement. 26

  See: T. Bonneau, Chapter 21 ‘France’, this volume, section IX; S. Mock, Chapter 20 ‘Germany’, this volume, section IX; P. Giudici, Chapter 22 ‘Italy’, this volume, section IX; J. Redonet Sánchez del Campo, Chapter 23 ‘Spain’, this volume, section IX; V. Hoffeld, Chapter 25 ‘Luxembourg’, this volume, section IX. 27

  See: S. Mock, Chapter 20 ‘Germany’, this volume, section XI; P. Giudici, Chapter 22 ‘Italy’, this volume, section XI; V. Hoffeld, Chapter 25 ‘Luxembourg’, this volume, section IX. 28

  See: T. Bonneau, Chapter 21 ‘France’, this volume, section XI.

29

  HR 2 December 1994, ECLI: NL: HR: 1994: ZC1564.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

30

  See: J. P. Franx, Chapter 24 ‘The Netherlands’, this volume, section XI. This will particularly apply to the lead manager. 31

  See: G. McMeel, Chapter 26 ‘United Kingdom’, this volume, section XI.

32

  See: J. Redonet Sánchez del Campo, Chapter 23 ‘Spain’, this volume, section XI.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Part I General Aspects, 2 The IPO Process, IPO Disclosure, and the Prospectus Regulation Han Teerink From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

Subject(s): Prospectus liability — Improper disclosure — Financial regulation — Claims

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 19) 2  The IPO Process, IPO Disclosure, and the Prospectus Regulation I.  Introduction 2.01 II.  Key IPO Considerations 2.08 1.  Reasons for an IPO 2.08 2.  Preparing for an IPO 2.12 3.  Execution of the IPO and Disclosure 2.18 III.  The IPO Prospectus 2.39 1.  Drafting the Prospectus 2.40 2.  Drafting Sessions 2.45 3.  Review and Approval of the IPO Prospectus 2.46 4.  Format of the IPO Prospectus 2.47 5.  Review Period 2.48 6.  Publication and Reading Time 2.51 7.  Exemptions 2.53 IV.  IPO Prospectuses and the Prospectus Regulation 2.62 1.  Introduction 2.62 2.  Risk Factors 2.63 3.  Use of Proceeds 2.67 4.  Summary in the IPO Prospectus 2.70 5.  Profit Forecasts and Profit Estimates 2.72 V.  Concluding Remarks 2.74

I.  Introduction 2.01  Pursuant to the Prospectus Regulation,1 the publication of a prospectus is required in the event of an offering of securities to the public as well as in relation to the admission of securities to trading on a regulated market. As such, a typical initial public offering of shares in a company, combined with the admission to trading of such shares on a stock exchange (together referred to as an IPO), will require a prospectus to be prepared, approved, and published. 2.02  The prospectus plays a key role in the preparations for, and execution of, an IPO. As an IPO prospectus typically constitutes a company’s first public dissemination of financial and business information, the company and other parties involved in the IPO process must carefully consider the right balance between, on the one hand, drafting the IPO prospectus as a marketing document introducing the company and its business to potential investors, whilst, on the other hand, being able to use the prospectus as a disclosure document as protection against liability arising from claims from investors or others after the IPO.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 20) 2.03  This chapter provides insight into a typical IPO process, highlighting key practical and legal considerations around disclosure, through the IPO prospectus and otherwise. It summarizes the different phases in an IPO process and the most important documents and parties involved, focusing on the central role of the IPO prospectus. A number of changes resulting from the enactment of the Prospectus Regulation are likely to be of particular relevance to IPO processes. The expected impact of these changes is therefore also discussed in this chapter, with reference to the other chapters in this book, where the new legislation is described in more detail and further explanations can be found. 2.04  There are a couple of reading notes to be made at the outset. As acknowledged in the recitals of the Commission Delegated Regulation supplementing the Prospectus Regulation (the CDR), ‘the content and the format of a prospectus depends on a variety of factors, including, amongst others, the type of issuer, type of security, type of issuance and the question whether or not there is an admission to trading’.2 This chapter focuses on company IPOs, i.e. the initial offering, in combination with a first admission to trading, of a company’s ordinary shares on a regulated market in the EU. 2.05  The Prospectus Regulation is drawn up in the form of a regulation (and no longer as a directive) in order to achieve uniform application of the rules in the EU and to facilitate cross-border offers of securities and multiple listings on regulated markets.3 Using the framework of a regulation is also aimed at strengthening confidence in the transparency of markets across the European Union, and to reduce regulatory complexity. However, and this in particular applies in respect of IPOs, capital market practices in Member States have evolved over decades and are cemented in local practice. Consequently, IPOs conducted in the EU have, and, even after enactment of the Prospectus Regulation, will continue to have, distinct local features. 2.06  Nevertheless, a typical IPO process comprises a number of standard phases, regardless of the jurisdiction in which the company is based or the jurisdiction where the regulated market to which the company’s shares are proposed to be admitted is based. This chapter focuses on those phases and takes a ‘holistic’ approach towards the IPO process, highlighting certain specific local practices only to illustrate how they affect the key considerations around preparation of an IPO prospectus in the context of the Prospectus Regulation. (p. 21) 2.07  Based on the foregoing, the chapter is structured along the following lines: Section II ‘Key IPO Considerations’ (para. 2.08) provides an overview of key IPO considerations, a typical IPO process, and IPO disclosure; section III ‘The IPO Prospectus’ (para. 2.39) discusses the preparation and key contents of an IPO prospectus; and section IV ‘IPO Prospectuses and the Prospectus Regulation’ (para. 2.62) discusses the potential impact of the Prospectus Regulation on IPO processes and the IPO prospectus.

II.  Key IPO Considerations 1.  Reasons for an IPO 2.08  There are many reasons for a company and its shareholders to pursue an IPO. For a company, the key reasons to go public typically are4 (i) to raise capital to finance its growth plans; (ii) to have better and continuous access to capital markets for financing purposes, including in respect of mergers and acquisitions, enabling the company to use its own shares as acquisition consideration; (iii) development of company brand and reputation, strengthened by public adherence to strict disclosure, reporting, and governance standards; (iv) extended possibilities for management and employee compensation programmes, offering employees ownership in the form of tradeable shares; (v) to increase visibility for students and employees and attract and retain talent; and (vi) to optimize the ‘gearing’ of the company (the ratio between equity and debt capital on a company’s balance sheet) for regulatory and/or commercial purposes. The key reason for shareholders to From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

pursue an IPO is to facilitate an exit from their investment, through the IPO and/or in the secondary market after the IPO. 2.09  A company considering an IPO will also take into account the disadvantages of operating in a public environment. It will need to adhere to a large set of transparency, market abuse, corporate governance, and disclosure-related requirements, which will typically require the company to incorporate the underlying functions and processes into its organization and may require additional capacity in its workforce. The company will also need to deal with new shareholders, investors, financial media, and analysts, all with their own specific agendas, rights, and powers, through voting or economic rights, media access, or otherwise. 2.10  Consequently, the company’s liability profile changes and with the public scrutiny, the company becomes more susceptible to claims from investors and other third parties. As Franx comments,5 interestingly enough—especially given the potential consequences—this particular disadvantage is virtually never considered a key factor in discussions on whether or not to pursue an IPO in a European context. (p. 22) 2.11  Connecting the IPO considerations set out above to the contents of this chapter, it is important to realize that the approach taken by the company in the IPO process in respect of disclosure—in the IPO prospectus or otherwise—will have an important impact on its life as a listed company as well. When the IPO prospectus or other communication materials include a certain level of detail in relation to, in particular, financial performance or other key performance indicators (KPIs), shareholders and the financial community in general are likely to expect the company to maintain such level of disclosure after the IPO,6 i.e. the IPO prospectus and related financial disclosures will set the standard for future reporting.

2.  Preparing for an IPO (i)  IPO readiness 2.12  If practitioners were to name one aspect that is critical to the success of every single IPO, it would likely be the preparation. Companies considering an IPO will often need to spend between one and two years, or sometimes even longer, preparing for the execution of an IPO. Once in execution mode, everything will need to work out exactly according to very detailed plans and timelines, with little or no room for delay. Before reaching the implementation phase, however, a company must assess whether it is ready for an IPO. In essence, this means the company’s management and shareholders need to answer a number of strategic questions. The most important of these questions and related readiness assessments evolve around the following themes. 2.13  Listing venue: the decision where to list will depend on a number of aspects. Capital markets have become increasingly global and studies show that around 90 per cent of all companies going public will do so in the country where their main business operations and headquarters are located.7 Familiarity with the market, stock exchange, stakeholders, and with local corporate governance practices and regulatory requirements will play a role in taking that decision. Nevertheless, for some companies there may well be good reasons to try and pursue a listing abroad or on a particular stock exchange; for example, if peers are listed on such an exchange (e.g. tech companies on Nasdaq), because of the size and depth of a market (e.g. London, New York), if investors in the company’s industry have a preference for companies listed on such an exchange, or potentially as a result of any of the foregoing, if listing on such exchange would lead to a higher valuation of the company.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Speed, complexity, and costs of the (p. 23) listing process and tax considerations are also typical factors taken into account in relation to this decision. 2.14  Offer structure: key questions to be dealt with are whether the IPO will be used to give shareholders the opportunity to sell existing shares (a secondary IPO), or whether the company needs or wants to raise capital by issuing new shares (a primary IPO), or whether it will be a combination of both. Will shares be offered to retail investors or to institutional investors only, and in which jurisdictions will the shares be offered, and what are the implications of such choices? Even though the actual choices can be made closer to execution of the IPO, a company must consider them in a timely manner in order to be able to assess the potential impact these choices may have on the timeline and process it has in mind. 2.15  Corporate governance and pre-IPO restructuring: choices will have to be made in relation to important corporate governance topics, including composition and structure of (the) board(s) and management team following the IPO, appointment of independent board members, powers and authority of the general meeting and other corporate bodies, postIPO shareholder relations, introduction of anti-takeover measures, adherence to applicable corporate governance regimes, and putting in place remuneration plans and policies. Also, in relation to these choices, does the company or its group have to implement or undergo major pre-IPO restructurings for it to be IPO-ready (from a tax, governance, or operational perspective)? 2.16  Financial reporting: in order to meet the requirements in the Prospectus Regulation8 and the financial disclosure rules for public companies post-IPO, private companies must often adapt and update their financial reporting processes and related IT and internal control systems before being able to go public. The company will have to prepare its financial statements on the basis of International Financial Reporting Standards (IFRS) or equivalent standards. Where a company is used to report in accordance with local generally accepted accounting practices (GAAP), this typically requires a change of reporting, reporting lines, and auditing practices of the company, as well as an upgrade of business and risk management functions. A gap analysis needs to be performed and any identified issues assessed from an accounting perspective, but also for any implication on the company’s IT and reporting systems, business processes, and financial impact. To be able to present financial statements over a historical period on a comparable basis to IPO investors, a company should try to achieve consistency in its financial reporting early on in the process. Last but not least, the company will need to assess whether there have been any mergers and acquisitions (M&A) activities or corporate restructurings that may have an impact on its ability to present financial information on a comparative basis in the IPO and afterwards.9 (p. 24) 2.17  Business and strategy: the company will need a sound strategy supported by a business plan, with concrete operational, financial, and strategic elements and milestones towards and beyond the IPO. The business plan should also illustrate the need for, and upside of, pursuing an IPO, in particular in the case of a primary IPO, where the company should have a clear plan in respect of the use of proceeds from the capital raise. The strategy and underlying business plan also form the basis for the ‘equity story’ in the IPO, as explained in more detail below at para 2.23, and will be used in part to determine a valuation range and pricing of the shares in the IPO.

3.  Execution of the IPO and Disclosure 2.18  In practice, the most challenging aspect of an IPO for a company is to manage the execution of a ‘once-in-a-lifetime’ event whilst at the same time maintaining focus on the

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

performance of the business, successfully managing and growing the day-to-day operations underlying the IPO. 2.19  Once the readiness analysis and efforts confirm that the company is ready to take the step and the decision has been taken by the company and its shareholders to pursue an IPO, the execution phase starts. As a rule of thumb, a typical IPO process will last around six months from the moment the execution starts to the first trading of the company’s shares. There are examples of IPOs being completed faster than that, but the process may well take longer in specific situations, in particular in the event of privatizations of what are typically businesses in regulated sectors (e.g. financial institutions, energy, infrastructure, or natural resources), or IPOs where a carve-out, spin-off, or other complex restructuring needs to be completed in order to execute the IPO. 2.20  Timing of the execution period is also essential. Taking into account market sentiment and the timing of preparation and availability of recent (interim) financial statements,10 this effectively leaves only a few windows—of a couple of weeks each—in every calendar year during which an IPO can be launched and completed. 2.21  The start of the execution phase is marked by the formal appointment of the IPO team, including one or more banks that will act as global coordinator(s) and underwriter(s),11 legal counsel, auditors and, sometimes, communication specialists.12 In some (p. 25) jurisdictions, such as the United Kingdom, it is becoming increasingly common for a company to appoint a separate financial advisor. A kick-off meeting is organized with these advisors and the internal project team. 2.22  Immediately after the kick-off meeting, a number of disclosure-related work streams will typically commence in parallel: the preparation of management presentations and due diligence sessions, preparing for—or continuing—so-called ‘early look’ or ‘pilot fishing’ meetings, preparation of the research analyst presentation, the drafting of the IPO prospectus, and the confirmation of publicity guidelines.13 All these processes and work streams have their own timing and dynamics.14 What they have in common is that disclosure is at their core, whereby disclosure standards15 and consistency of the information included and disclosed throughout these documents and processes is a key requirement in which the IPO prospectus plays a central role. This requirement for consistency is reflected in a specific provision in the Prospectus Regulation requiring that ‘all information disclosed in an oral or written form concerning the offer of securities to the public or the admission to trading on a regulated market, even where not for advertising purposes, shall be consistent with the information contained in the prospectus’.16

(i)  Management presentation 2.23  The management team will typically, either as part of the kick-off meeting or shortly afterwards, give a detailed presentation on the business to the banks and other advisors involved in the IPO. The banks and their advisors prepare a list of topics and questions that they would expect to see addressed. This presentation marks the start of building what is called the ‘equity story’, or in layman’s terms, how to sell the business to prospective investors. The equity story needs to be developed early on in the process, as it plays a critical role throughout all phases of the IPO. It typically comprises a focused description of the key elements of the business and strategy of the company and why management believes the company is well positioned to execute and capitalize on that (p. 26) strategy; in other words, why investors should buy shares in the IPO. The equity story should be supported by historical financial performance and reflect the key items of management’s business plans. Part of developing the equity story is to decide which KPIs the company will measure and monitor going forward. These KPIs will be reflected in its IPO-related

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

presentations and other communications to the market and typically find their way into the company’s financial reporting post-IPO.

(ii)  Early-look and pilot fishing meeting 2.24  The external marketing of an IPO will typically begin with ‘early-look’ or ‘pilot fishing’ meetings. These are meetings where members of the company’s management and investment banks conduct informal meetings with large, institutional or sector-specific investors to test their appetite for the company’s IPO, i.e. whether and on what basis such investors would be interested in an IPO. These meetings may well take place in the preparation phase (to obtain support for the decision to pursue an IPO), but are typically also held in the early phases of execution of the IPO. They provide the company with the opportunity to test investor sentiment and get market feedback on the initial outline of the equity story and the guidance and KPIs that investors will require for their investment decisions. These meetings are private, and presentations are not distributed beyond such meetings. On the basis of feedback from early-look and pilot fishing sessions, the company and investment banks will fine-tune the equity story and valuation parameters. They still have the opportunity to alter and fine-tune these elements at this stage, but it is important to remain consistent on the fundamental messages as far as possible. As set out below, once reflected in the analyst presentation and IPO prospectus it will be more difficult to change these key messages.

(iii)  Analyst presentation and research reports 2.25  During the IPO execution phase, generally around eight to twelve weeks after kick-off and six to eight weeks before the company announces for the first time its intention to go public by way of an ‘intention to float’ or ‘ITF’ announcement, the company’s senior management, typically comprising its management board/executive directors and heads of legal, risk, technology, and other important departments or business units, will give a daylong presentation—sometimes accompanied by a site visit—to analysts within the research division of the banks involved in the IPO, the ‘connected analysts’. 2.26  Based on the delivery and contents of this analyst presentation, the research analysts will prepare research reports on the company, its business, the proposed IPO, and the analysts’ views in respect thereof. During the preparation of their report, the research analysts will have an opportunity to submit questions to, and receive responses from, the company’s senior management. In addition, the draft research report (with valuation information redacted) will be reviewed by the company and by the company’s and the investment bank’s legal counsel for factual accuracy and consistency. The research reports will also need to comply with research guidelines drafted by the investment (p. 27) banks and their counsel, containing restrictions on the preparation, content, and distribution of research in the run-up to and after the IPO. 2.27  After their finalization, these detailed reports will be sent to the institutional client base of the relevant investment bank. This is typically done simultaneously with the ITF announcement referred to in paragraph 2.25. In practice, there is typically a period of approximately two weeks between the ITF announcement and the publication of the IPO prospectus, marking the public launch of the IPO and start of the subscription period. During the two-week interim period, the investment banks will use the research report for ‘PDIE’, or pre-deal investor education. This means the research analysts will conduct followup meetings with investors who received a copy of the research reports to try and receive further and final feedback ahead of the launch of the IPO, in particular in relation to valuation, so as to provide the investment banks with further insights on the pricing of the IPO. Once determined, a price range will either be included in the IPO prospectus or otherwise communicated to investors by the banks (if conducting a roadshow with qualified

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

investors, using an unapproved ‘pathfinder’, or ‘preliminary’ prospectus): see section III ‘The IPO Prospectus’ (para. 2.39). 2.28  This also means that a large part of the potential investor base of the company is informed of the IPO, the company, and its investment case on the basis of the research reports, rather than on the basis of the IPO prospectus, typically published a few weeks later. That by itself is not necessarily a cause for concern, but it does mean that from an IPO disclosure perspective it is particularly instrumental that there is consistency between the contents of the analyst presentation and the research reports on the one hand, and the contents of the IPO prospectus and other public disclosures on the other. In the UK, this specific timing aspect of an IPO has recently led to a revision of the rules regarding the timing of disseminating information in an IPO.17 (p. 28) 2.29  By way of example of the practical considerations around this topic, the timing of the analyst presentation and of the IPO prospectus preparation means that at the time of the analyst presentation any guidance on KPIs will need to be clear, in particular where such guidance may or would qualify as a profit forecast or profit estimate.18 Depending on the overall timing of the IPO, it may well happen that the analyst presentation takes place before the competent authority has provided comments on a first filing of the IPO prospectus. Parties need to be comfortable that the comments from the competent authority will not have a bearing on the scope and contents of the analyst presentation. In practice, competent authorities are aware of these concerns and are typically willing to consider and address concerns caused by the timetable (assuming the planning is reasonable and realistic in view of the competent authority).

(iv)  Due diligence 2.30  Immediately after the kick-off meeting, the banks will also start their due diligence efforts in order to facilitate and verify disclosure in the IPO documents. Hoevers summarizes the relevance of a due diligence process in the context of an IPO in a single paragraph as (my translation): a process conducted by the banks, with the assistance of external experts (typically including financial and legal experts), of due and careful investigation, taking into account the specific circumstances, into the affairs of the company and its business in the broadest sense, where the results of such investigation will be reflected (as appropriate) in the IPO prospectus.19 2.31  In general terms, if an IPO prospectus is misleading, the banks may establish a socalled due diligence defence to avoid prospectus liability. Put simply, they will have to prove that they conducted a reasonable investigation in respect of—alleged—material misstatements or omissions and that, following such investigation, the banks should have had reasonable grounds to believe that at the time the prospectus was published, the statements therein were materially true and that there was no omission of any material fact.20 Given that background, the due diligence performed by the underwriters will generally and in any event cover all items that need to be included in the prospectus pursuant to the Prospectus Regulation and the annexes to the CDR. 2.32  In practice, IPO due diligence (legal, commercial, and financial) commences at the kick-off meeting with the management presentation and continues throughout the IPO process up until completion of the IPO. Senior management of the company will have (p. 29) continuous involvement in this work stream, as they will be involved in initial due diligence sessions at the outset and throughout the IPO in various due diligence ‘bring down’ sessions by phone or in person, aimed at reconfirming the absence of any material due diligence developments necessitating additional disclosure at certain milestones in the process, for

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

example at the time of the ITF announcement, publication of the IPO prospectus, pricing of the IPO, and settlement of the shares upon completion of the IPO. 2.33  At the start of the process, the kick-off and/or management presentation will disclose items of particular interest and relevance for the company, such as specific business or financial risks, management concerns, important contracts, and ongoing litigation. Typically, shortly after the management presentation, the banks and their advisors provide the company with a customary, but tailored, information request list, to ensure that, taking into account the profile, size, activities, and structure of the company, all relevant information is provided for the purposes of the banks’ due diligence review. The company will collect and make available the requested information for review by uploading them into a virtual data room. In parallel, due diligence interviews are scheduled with senior representatives of the company to further discuss relevant topics on the basis of questionnaires provided by the banks and their advisors ahead of the interviews. Relevant due diligence findings are not only reflected in the IPO prospectus (see section III ‘The IPO Prospectus’, para. 2.39 below), but will also be used to build and progress the equity story for purposes of the early-look presentation and the analyst presentation. 2.34  To ensure that all information on management and senior employees that is required to be included on the basis of the Prospectus Regulation is provided, the banks (or legal counsel) will also prepare a so-called Directors’ and Officers' (D&O) questionnaire asking board members and certain designated senior officers to confirm certain personal details necessary for inclusion in the IPO prospectus, as well as details which may be material for due diligence.21 2.35  Also as part of their due diligence exercise, the banks will ask for different types of comfort from the company and expert advisors. In respect of the company, in addition to the presentation, interviews, and questionnaires described above, the banks will also require the company (and the selling shareholders, as the case may be) to provide an extensive set of representations and warranties in relation to the business, its conduct of operations, and the disclosures in the IPO prospectus, to be included in the underwriting agreement. In certain jurisdictions, including the UK, the company’s board members are also required to verify that the information in the IPO prospectus is correct and complete. This is done through a verification process, whereby the accuracy of all material factual statements in the IPO prospectus is ensured through (p. 30) cross-checks against appropriate supporting materials, and, where statements of opinion or belief are included, management is requested to confirm that such opinions are reasonable. 2.36  Furthermore, the banks will ask for specific comfort from the company’s auditor involved in the IPO.22 A ‘long-form’ due diligence report may also be requested. The auditor will participate in a due diligence session with the banks and their legal counsel, in which they respond to questions on the company’s accounting controls, systems, and financial reporting. Depending on the type of company, business, and jurisdiction, an external auditor may provide the banks with a working capital report23 supporting the company’s working capital statement in the prospectus,24 and sometimes a further memorandum on the company’s internal control systems (also known as financial position and prospects procedures, or ‘FPPPs’). The auditor will also be requested to provide a customary ‘comfort letter’ that provides negative assurance in relation to the financial information included in the prospectus and by ‘circling up’ all financial numbers in the IPO prospectus, providing comfort on their accuracy by tying each of them back to their origins. Comfort levels vary from a direct link between the numbers in the IPO prospectus and the audited or reviewed financials—where the number can be traced back to the company’s audited or reviewed accounts—to a confirmation of their mathematical accuracy—where the confirmation (merely) states that certain numbers in the IPO prospectus have been added up correctly. Where the auditor is unable to provide sufficient comfort, the banks will typically ask the

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

chief financial officer (CFO) of the company to provide comfort on the numbers as included, through a so-called CFO certificate. 2.37  From the company’s legal counsel and their own counsel, the banks will also request various legal opinions, confirming certain legal aspects in relation to, amongst other things, the company, its constitutional documents, and internal approvals in relation to the IPO, as well as the enforceability of legal documentation. 2.38  Finally, in so-called ‘144A’ IPOs, where US institutional investors are also targeted, the company’s US legal counsel and the banks’ own US counsel will typically be requested by the banks to render a so-called ‘10b-5 disclosure letter’, providing the banks with negative assurance on the contents of the IPO prospectus. Without going into too much detail, it is important to briefly explain these two concepts and their background, as they play an important role in the vast majority of European IPOs. (p. 31) US securities laws and European IPOs—144A, 10b-5, and US practices

With the global nature of capital markets and the continued importance of the US investor base, European IPOs are typically extended into the US with offerings made into the US on the basis of Rule 144A or similar exemptions under the US Securities Act, facilitating an offering of the shares to certain institutional investors without having to register them with the Securities and Exchange Commission (SEC) in the US, which would trigger, amongst other things, extensive disclosure obligations and additional costs. In general terms, Rule 144A provides an exemption from this registration requirement whereby the shares are only offered and sold to qualified institutional buyers (QIBs) in the United States. It does not, however, provide an exemption from various US securities antifraud laws, in particular those in Rule 10b-5 of the Securities Act. Nevertheless, the exemption is often relied upon and with it, a number of US practices addressing Rule 10b-5 concerns have found their way into European IPOs. Rule 10b-5 has a broad application, but in relation to IPOs it basically means that the company, its board members, its banks (underwriters), and others may be liable to US investors if the prospectus or other offering materials ‘contain any untrue statement of a material factor or omit material facts necessary to make the statements that are made in the prospectus not misleading’. To be found liable under Rule 10b-5, the defendant must have acted recklessly or with intent to deceive. A thoroughly conducted due diligence review will, in practice, help to mitigate the existence of the intent to deceive or recklessness required for a 10b-5 claim. As a result, ‘US-style’ due diligence by the banks has become a regular feature in European IPOs in order to build a due diligence defence as protection against potential liability in Rule 144A offerings. As part of that exercise, the banks typically request, from their own and the company’s US counsel a ‘10b-5’ disclosure letter, which is a negative assurance letter confirming, on the basis of customary wording, that nothing has come to their attention to give them reason to believe that the IPO prospectus contains any untrue statement of a material factor or omission of any material fact necessary to make the statements that are made in the prospectus not misleading. In order to be able to render such a disclosure letter, US securities lawyers play an important role in drafting the key sections of the prospectus to ensure compliance with US disclosure standards (as well as carrying out extensive documentary due diligence); also see section III ‘The IPO Prospectus’ (para. 2.39) below. The comparable disclosure and materiality tests under the Prospectus Regulation apply in parallel, but in practice, US investors and shareholders, as well as US regulatory authorities, are more likely to sue and/or file liability claims under

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

applicable securities laws, or otherwise claim compensation from the company, its board members, or the banks. Another interesting consequence of the relevance of US securities laws is the way in which due diligence reviews and findings are documented. In the US, there is limited historical practice of drawing up reports with due diligence findings for capital markets transactions. In a European context, parties are sometimes inclined to take the opposite approach and prepare relatively detailed reports. There is no tried-and-tested approach that addresses concerns from both sides, and approaches may vary depending on the jurisdiction within which the company is located or will be listed as well as the profile and country of origin of the banks. In any case, the company, banks, and their advisors should discuss reporting requirements and restrictions early on in the process to agree on an approach that works for all. (p. 32)

III.  The IPO Prospectus 2.39  As illustrated, there are multiple disclosure documents that each play an important role in an IPO. Nevertheless, the prospectus remains the central disclosure document in any IPO. It must contain the necessary information which is material to an investor for making an informed assessment of (i) the assets and liabilities, profits and losses, financial position and prospects of the company; (ii) the rights attaching to the shares that are being offered; and (iii) the reasons for the offering and its impact on the company.25 Publication of a prospectus is required in the event of an offering of securities to the public as well as upon the admission of securities to trading on a regulated market. In an IPO, this typically means that the prospectus is published upon commencement of the public offering, although in certain jurisdictions and where the offering is made to qualified investors only, an unapproved ‘pathfinder’ or 'preliminary' prospectus is published prior to the subscription and book-building period, to be followed by a prospectus approved by the relevant competent authority on pricing.

1.  Drafting the Prospectus 2.40  Typically, an IPO marks the first time that information in respect of a company is widely disseminated publicly, and even though the company is ultimately responsible for the publication of the prospectus and its contents, the persons responsible within the company for collecting and processing the relevant information will very likely not have much experience, if any, in dealing with such public disclosures. In practice, the preparation of the IPO prospectus is a joint effort between the company, its local and US legal counsel, its auditor, and the banks and their local and US legal counsel. (p. 33) 2.41  The IPO prospectus tracks the requirements—in terms of contents and order— set out in the Annexes to the CDR.26 In practice, parties will use the kick-off meeting to make detailed plans setting out which party will be responsible for delivery of a first draft of a prospectus chapter and by when. That typically leads to the following division of work. 2.42  The company will be responsible for preparing the framework of the prospectus, with its own local legal counsel holding the pen. 2.43  The company’s US legal counsel27 will—in coordination with local legal counsel— typically prepare first drafts of the ‘Risk Factors’,28 ‘Business’29 (other than the ‘Strategy and strengths’ section—see below) and the ‘Operating and Financial Review’30 chapters. These chapters often require the most attention from senior management and are typically therefore the first ones prepared. The other chapters, including those on ‘Management, Employees and Corporate Governance’, ‘Shareholding Structure and Related Party

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Transactions’ and certain ‘boilerplate’ sections are typically completed at a later stage, closer to the date of first filing with the competent authority. 2.44  Banks typically prepare a first draft of the ‘strategy and strengths’ section for the Business chapter (typically with assistance from the company and based on, or using elements of, the company's internal strategy papers). These paragraphs reflect the equity story and (p. 34) should be consistent with the other disclosure documents in which these elements play a crucial role, most notably the analyst presentation. Another chapter that is typically prepared by the banks (or sometimes an external consultant) is the ‘Industry’ chapter, which describes sector trends and developments as well as the company’s market position compared to its competitors. The information will generally come from external market research reports, either available in the market or commissioned by the company or the banks specifically for the IPO. The contents of this chapter also help frame the proposition set out in the equity story. Finally, the banks (or their legal counsel) also typically hold the pen on the contents of the ‘Plan of Distribution’ chapter, setting out key underwriting and other offer terms, and the ‘Selling and transfer restrictions’ sections.

2.  Drafting Sessions 2.45  Once first drafts of the most important chapters of the prospectus (‘Risk Factors’, ‘Business’, and ‘OFR’) have been prepared, they are discussed and progressed in drafting sessions. Drafting sessions are typically held in person and take place over the course of one or two days. Multiple drafting sessions are typically held during the course of the IPO process, often in conjunction with due diligence meetings. Drafting session participants will include representatives from the company that have in-depth knowledge and understanding of the business (for ‘Business’), the risks that the company faces or may face in the future and how it deals with those (for ‘Risk Factors’) and/or the company’s financial performance (for the ‘OFR’). Alongside the company, these sessions will be attended by the company’s US and local legal counsel, the banks and their local and US legal counsel and, sometimes, the company’s auditor. Depending on the status of the disclosure in the chapter, the drafting sessions consist of a high-level review of the relevant chapter or a more detailed page-turn and textual review, in each case to verify whether the disclosure is correct, but also to test information and underlying assumptions, and to discuss findings from due diligence to confirm whether they merit disclosure in the IPO prospectus. After each session, the company’s counsels will typically update the IPO prospectus for redistribution to the other advisors in preparation for the next drafting session or round of comments ahead of filing. This process repeats itself a number of times to arrive at a draft prospectus that is ready for first filing with the competent authority.

3.  Review and Approval of the IPO Prospectus 2.46  The IPO prospectus for an IPO by an EU-based company with admission to trading of its shares on a stock exchange (qualifying as a regulated market) in the EU must be approved by the competent authority in the Member State where the company has its (p. 35) registered office.31 As set out in paragraph 2.13 above, the vast majority of companies pursuing an IPO will apply for an admission to trading of its shares in the Member State where its office is registered. However, there may be good reasons for a company to seek admission in another Member State, or even outside the EU.32 Also, a company may pursue an admission to trading or listing on multiple stock exchanges, whether in parallel at the time of IPO or at a later stage, opting for a dual listing or cross-listing.33 In each of these scenarios, different sets of rules will apply in relation to the prospectus review and approval procedures, the listing rules, and also in respect of the corporate governance regimes formally applicable or customary in each of the relevant jurisdictions. As such, the framework of applicable rules will in practice be complex and will require a timely and

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

thorough assessment in the IPO preparation phase to avoid any delays or more substantive issues at a later stage.

4.  Format of the IPO Prospectus 2.47  Pursuant to the Prospectus Regulation, an IPO prospectus may be drawn up as a single document or in separate documents, comprising a registration document, securities note, and summary.34 The format of the IPO prospectuses used in different Member States is typically driven primarily by market practice rather than by the Prospectus Regulation and related legislation. The most common approach is to publish the IPO prospectus as a single document, approved on the basis of a pricing range, with the final price and final number of shares for the IPO published and filed with the competent authority in accordance with the Prospectus Regulation.35

(p. 36) 5.  Review Period 2.48  When a first draft of the IPO prospectus is sufficiently advanced and stable, it will be filed with the competent authority for review and comments. In accordance with Article 20(3), Prospectus Regulation and similar to the approach applied under the Prospectus Directive, the competent authority must notify the company (and offeror, as the case may be) of its decision regarding the approval of the prospectus within twenty working days of the submission of the draft prospectus.36 2.49  The twenty-working-day review period only applies to the initial submission of the draft prospectus. Where subsequent submissions are necessary, the review period is shortened to a maximum of ten working days.37 In practice, as it is typically the first time for the competent authority to be dealing with a particular company, its business, and securities, the competent authority will, upon receipt of the first draft, take twenty business days for its review, and can even ‘stop the clock’ or simply not commence the review when it deems that the prospectus is of insufficient quality or substance. This process will repeat itself as often as is required to finalize the prospectus. The time between filing of a first draft of an IPO prospectus with the competent authority and formal approval of the prospectus varies per jurisdiction and per IPO, but is generally between eight and twelve weeks, also depending on the specific nature of the company and the offering. 2.50  The competent authority will review and approve an IPO prospectus based on the requirements of the Prospectus Regulation as well as the CDR (confirming whether all required information has been included). Approval of the IPO prospectus by the competent authority does not constitute endorsement of the merits of the offering, a confirmation of the accuracy or completeness of the information, or the authenticity of the financial information and other information presented.

6.  Publication and Reading Time 2.51  Once approved, the prospectus should be made available to the public at a reasonable time in advance of, and at the latest at the beginning of, the offer to the public or the admission to trading of the securities involved. In the case of an IPO of a class of shares that is being admitted to trading on a regulated market for the first time, the prospectus (p. 37) shall be made available to the public at least six working days before the end of the offering.38 2.52  Furthermore, an IPO prospectus must be published on a dedicated section of the company’s website which is easily accessible upon entering the website. The prospectus must be downloadable, printable, and in searchable electronic format.39 In addition to any documents containing information incorporated by reference, any supplements, and/or final terms related to the prospectus, the Prospectus Regulation also requires companies to make available a separate copy of the summary under the same section as the IPO prospectus.40 Access to the IPO prospectus may not be subject to the completion of a

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

registration process, the acceptance of a disclaimer limiting legal liability, or to the payment of a fee, although warnings specifying the jurisdiction(s) in which an offer or an admission to trading is being made are permitted.

7.  Exemptions 2.53  As set out in the introduction to this chapter, a typical IPO will require a prospectus to be drawn up in accordance with the Prospectus Regulation requirements. For various reasons, only a few of the extensive list of exemptions to the obligation to publish a prospectus are in practice relied upon in the context of an IPO. Nevertheless, a couple of them merit a brief discussion, given their relevance in the IPO process.41 2.54  Qualified investors:42 depending on the jurisdiction and the nature of the company, IPOs often include an offering to the public of the shares, i.e. a retail component,43 but the geographical scope of such an offering will typically be limited to only the jurisdiction(s) where the company has its registered office and where its shares will be admitted to trading. Passporting of the IPO prospectus would mean that an offering to the public could easily be extended into additional jurisdictions, but in practice this does not occur often: the company and the banks are generally comfortable limiting the extension of the public offering (if any) to the ‘home jurisdiction’ and, for the offering (p. 38) into other jurisdictions, they will often rely on the ‘qualified investor’ or similar exemptions.44 For the avoidance of doubt, the ‘qualified investor’ exemption is not available in relation to the admission to trading of the shares, so unless another exemption is available, an IPO prospectus will still need to be published. This regime has not changed under the Prospectus Regulation. 2.55  Takeover and (de)mergers:45 in the case of shares offered, allotted, or to be allotted in connection with a takeover, merger, or demerger, and the admission of such shares to trading, no (IPO) prospectus is required to be prepared, provided that a document is published containing information ‘describing the transaction and its impact on the company’. In practice, this exemption is sometimes relied upon if companies are ‘IPO-ed’ immediately upon completion of a takeover or in the event of an IPO of a division or business unit of a company, typically effected through a spin-off or carve-out. Compared to the requirements to rely on the exemption under the old regime, an ‘equivalent document’ (i.e. equivalent to that of a prospectus as required under the old regime) is no longer required.46 It remains to be seen whether the new test will mean the exemption will be more often relied upon in case of IPOs, but the requirements have become less burdensome. 2.56  Cross-listing: the Prospectus Regulation also offers an exemption relevant for crosslistings; no prospectus is required in the event of the admission to trading of shares if these are already admitted to trading on another regulated market, provided a number of conditions are met, including that those securities, or securities of the same class, have been admitted to trading on that other regulated market for more than eighteen months.47 2.57  Growth Prospectus: the Prospectus Regulation introduces a new proportionate disclosure regime for small and medium-sized enterprises (SMEs).48 The regime is introduced to encourage the use of capital market financing by SMEs, striking a proper balance ‘between cost-efficient access to financial markets and investor protection when calibrating the content of an EU Growth prospectus’ in a manner, in relation to the prospectus, that ‘focuses on information that is material and relevant when investing in the securities offered, and on the need to ensure proportionality between the size of the company and its fundraising needs, on the one hand, and the cost of producing a prospectus, on the other hand’.49 Whether the regime will in practice lower the threshold (p. 39) for smaller companies to pursue an IPO will depend, amongst other things, on whether banks and investors can in practice work with the revised scope of information (also taking into account disclosure requirements outside the EU) and whether there is From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

sufficient interest and momentum to create and maintain markets and listing venues for public SMEs.

(i)  Completing the IPO—some final disclosure considerations 2.58  The publication of the IPO prospectus typically (and in any event in case of an IPO with a retail offering) marks the beginning of the subscription and book-building period that lasts for approximately two weeks.50 After that, the shares are priced and allocated on the basis of the order book, following which public trading in the shares of the company commences.51 There are two final comments to make in relation to the specific IPO disclosures during this final phase of execution of the IPO. 2.59  Roadshow presentation: during the subscription and book-building period it is customary for the senior management of the company, accompanied by representatives of the banks, to (re)visit prospective institutional investors, to introduce the company or follow up on earlier meetings. The roadshow presentation that is used for these purposes will typically be based on the early-look or pilot fishing slide deck, updated to reflect the finetuning of the equity story and other feedback received from investors throughout the process. As with all other communication in connection with the IPO, its contents must be consistent with that of the IPO prospectus. 2.60  Retail communication and other advertisements: depending primarily on the nature of the business of the company, IPOs may also comprise a dedicated marketing effort to retail investors, where sometimes these investors are promised a guaranteed or preferential allocation of shares in the IPO. Offering shares to retail investors, combined with (p. 40) additional, targeted marketing efforts and advertisements, increases the company’s and banks’ liability profile in relation to the IPO.52 The Prospectus Regulation sets out a number of specific rules in relation to such advertisements. An advertisement is now defined as a ‘communication’,53 which the European Securities and Markets Authority (ESMA) has confirmed is intended to be broader in scope than ‘announcement’, which was the definition under the old regime and will now also capture oral communications, as well as written communications other than announcements. However, the communication will still only qualify as an advertisement if it meets the following tests: it should (i) relate to a specific offer of securities to the public or to an admission to trading on a regulated market; and (ii) aim to specifically promote the potential subscription or acquisition of securities. Advertisements must be clearly recognizable as such and must state that a prospectus has been or will be published in relation to the IPO and indicate where investors are or will be able to obtain it (including by adding a hyperlink in digital advertisements). 2.61  Also in relation to advertisements, the prospectus is explicitly positioned as the central disclosure document for an IPO, as ‘information contained in an advertisement shall not be inaccurate or misleading and shall be consistent with the information contained in the prospectus, where already published, or with the information required to be in the prospectus, where the prospectus is yet to be published’.54 The Commission Delegated Regulation (EU) 2019/979 of 14 March 201955 provides further detailed rules implementing this approach. It states that to avoid misleading retail investors during the process of marketing an IPO, an advertisement should not purport to be the principal information document; and to avoid confusion with the prospectus, advertisements should not be inappropriately long (which could in practice impact the use of retail brochures in IPOs). In addition, the information contained in advertisements should not present an unbalanced view of the company, for example by presenting negative aspects of such information with less prominence than the positive aspects. The requirement of consistency also applies to oral or written disclosures of information on the IPO, even where not for advertising purposes. Finally, the competent authority in the Member State in which the advertisement is disseminated will have the power to exercise control over compliance with the rules for advertisements.56 This may impact cross-border IPOs (e.g. dual or cross-listings), in

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

particular where a (p. 41) particular competent authority applies different policies in respect of compliance with these advertising rules.

IV.  IPO Prospectuses and the Prospectus Regulation 1.  Introduction 2.62  As alluded to earlier in section III.1 ‘Drafting the prospectus’ (para. 2.40), the general test for disclosure in an IPO prospectus has remain broadly unchanged under the Prospectus Regulation. It must contain the necessary information which is material to an investor for making an informed assessment of (i) the assets and liabilities, profits and losses, financial position and prospects of the company; (ii) the rights attaching to the shares that are being offered; and (iii) the reasons for the offering and its impact on the company.57 In the final section of this chapter, certain provisions in the Prospectus Regulation are discussed that are of particular relevance for the IPO process or the IPO prospectus. The provisions are briefly summarized, along with their expected impact.

2.  Risk Factors 2.63  Pursuant to the Prospectus Regulation, the primary purpose of including risk factors in a prospectus is to ensure that investors make an informed assessment of such risks and thus take investment decisions in full knowledge of the facts.58 That purpose does not differ from the approach under the Prospectus Directive. However, the introduction of more detailed, specific requirements in relation to the presentation and contents of the risk factors are likely to result in a number of changes to the disclosure practice on IPOs across the European Union, given the importance of this section and its prominent position in an IPO prospectus. How drastic or radical these changes will turn out to be in practice and in the longer term remains to be seen, but the European Commission and ESMA59 have given concrete guidance to competent authorities, which such authorities will use when reviewing and approving risk factor sections in prospectuses after 21 July 2019. It goes beyond the scope of this chapter to discuss all changes,60 but it is worthwhile listing the key ones and assessing their potential impact in the context of an IPO process. The Prospectus Regulation61 ‘sets the scene’ by specifying that: (p. 42) •  risk factors shall be limited to risks which are specific to the company and/ or to the securities and which are material for taking an informed investment decision, as corroborated by the content of the prospectus and showing how the company or securities are affected by the risk, and only a limited number of risk factors should be included in the summary; •  the materiality of the risk factors shall be assessed based on the probability of their occurrence and the expected magnitude of their negative impact (and may also be disclosed by using a qualitative scale of low, medium, or high); and •  the risk factors must be presented in a limited number of categories depending on their nature. In each category the most material risk factors shall be mentioned first using the assessment provided for above. 2.64  In the ESMA Risk Factor Final Report, twelve specific guidelines are presented to competent authorities, presented around a number of selected themes:62

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Specificity 1.  Establish a clear and direct link between the risk factor and the issuer/ securities. 2.  Avoid inclusion of risk factors that only serve as disclaimers or are too generic. Materiality 3.  Materiality of the risk factor and potential negative impact should be clear. 4.  Materiality should not be compromised by mitigating language. 5.  Consider including probability of occurrence vs expected magnitude of negative impact. Corroboration 6.  Materiality and specificity of the risk factor must be corroborated by the overall picture presented by the prospectus. This means a risk factor cannot be included if it relates to matters not disclosed elsewhere in the prospectus. Presentation 7.  Presentation of risk factors across categories (depending on their nature) should aid investors in navigating the risk factors section. 63 8.  Categories should be identified via the use of appropriate headings. 9.  Number of categories must be proportionate to the size/complexity of the transaction and risk to the issuer/guarantor. 10.  Categories should be further divided into sub-categories in cases where subcategorisation can be justified on the basis of the particular prospectus (p. 43) but not if there is no clear/obvious need for subcategories and it compromises comprehensibility. Focus 11.  Disclosure of each risk factor is presented in a focused and concise form. Summary 12.  Where relevant, risk factors in the summary must be consistent with disclosure presentation and the order of the risk factors section in a prospectus.

(i)  Implications of changes for IPOs 2.65  The introduction of the new risk factor requirements is likely to be of particular relevance in the context of IPOs. Generally, an increase in the number and scope of discussions with competent authorities is expected (and can already be seen in practice), in particular given the clear instructions from ESMA in relation to the assessment of the new risk factor regime. Competent authorities need to adhere to these new, stricter, guidelines. IPO prospectuses, on the other hand, traditionally contain a relatively large number of risk factors, covering a broad spectrum of categories, such as company, industry, regulatory, tax and share, and stock market-related risks. In practice, these are not all explicitly tailored to the company or its business. The company to be IPO-ed typically has no (extensive) previous public risk disclosure and investors are not familiar with the company and its business, From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

frequently resulting in a relatively long list of risk factors to ensure that all potential risks are covered. As Bloomberg puts it in context (commenting on the Lyft IPO): ‘The risk-factors section of an IPO prospectus is a bit like a transcript of a chief financial officer’s worst nightmares.’64 2.66  Companies, with the help of their advisors, may well have to spend more time than was previously the case considering how to limit risk factors to those determined to be material and specific to the company. This is likely to impact drafting of the IPO prospectus and the timing of the approval process. Companies and competent authorities will need to reach agreement on a number of relevant questions, including: •  Limiting the number of risk factors: companies need to assess the risk of not including a risk that materializes following the IPO. How will investors, companies, and, potentially, judges respond if a risk factor that has not been listed in the prospectus is the reason for a claim? The consequences of making the wrong determinations are unclear and likely to differ between jurisdictions. 65 (p. 44) •  Listing the most material risk factors first: 66 this requires an assessment of how the materiality of each risk corresponds with other risks, and on the concept of materiality itself: is a low-probability risk with a high-impact more material than a high-probability risk with a low impact? Will a company be able to apply a high– medium–low categorization? How does the chosen approach impact ongoing disclosure on risks by the company after the IPO? •  Link with summary: which risk factors will not make it into the summary as a result of the new requirements? Investors may only read the summary and, with the benefit of hindsight, could claim that a materialized risk should have been listed, even though the Prospectus Regulation provides companies with some comfort on this particular concern. 67

3.  Use of Proceeds 2.67  In the IPO prospectus, the company must disclose the reasons for the IPO and the contemplated use of proceeds, by specifying, where applicable, the estimated net amount of the proceeds broken into each principal intended use and presented in order of priority of such uses. The European Securities and Markets Authority considers this section as important information for investors and, in comparison to the old regime, seeks to move away from use of the term ‘general corporate purposes’ in describing the use of proceeds. The phrase may still be used, but cannot be used in all cases, and if proceeds are being raised for specific purposes these must be stated. Put simply, companies issuing for a specific purpose should include specific information, rather than general corporate purposes only.68 2.68  The CDR also introduces criteria for the scrutiny of the consistency of the information contained in the IPO prospectus.69 Competent authorities must, for purposes of scrutinizing the consistency of the information in a draft IPO prospectus, amongst other things, consider (i) whether any figures on the use of proceeds correspond to the amount of proceeds being raised and whether the disclosed use of proceeds is in line with the disclosed strategy of the company; and (ii) whether the working capital statement is in line with the risk factors, the auditor’s report, the use of proceeds, and the disclosed strategy of the company and how that strategy will be funded. If the (p. 45) company is aware that the anticipated proceeds of the IPO will not be sufficient to fund all the proposed uses, then it should state the amount and sources of other funds needed. Details must also be given with regard to the use of the proceeds, in particular when they are being used to acquire assets, other than in

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

the ordinary course of business, to finance announced acquisitions of other business, or to reduce or repay indebtedness.70

(i)  Implications of changes for IPOs 2.69  In a primary IPO (i.e. where the company will issue new shares), when preparing the ‘Use of proceeds’ section of the IPO prospectus, a company can expect greater scrutiny from the competent authority in the review thereof. In IPO practice, for purposes of the equity story underlying the IPO, a company will typically already have a fairly detailed explanation for the way it intends to use the funds raised, but the emphasis and guidance in the CDR and by ESMA will mean that the company and banks will need to carefully assess the level of detail of information to be disclosed and the connection between the ‘Use of proceeds’ disclosure and other sections in the prospectus, and ensure consistent disclosure across all IPO disclosures in this respect.

4.  Summary in the IPO Prospectus 2.70  The objective of the Prospectus Regulation, as far as the summary is concerned, is to move towards a more investor-friendly summary regime through a detailed set of requirements ensuring a non-technical, concise, and comprehensible summary. A number of limitations to that effect are introduced: summaries must be prepared as a short document with a maximum length of seven sides of A4-sized paper and have a limit on listing only the fifteen most material risk factors. In addition, detailed requirements on the order and layout of presentation of information, including financial information, now have to be complied with.71 The Prospectus Regulation confirms that the summary of the prospectus should be a useful source of information for investors, in particular retail investors. It should be a selfcontained part of the prospectus and should focus on key information that investors need in order to be able to decide which offers and admissions to trading of securities they want to study further by reviewing the prospectus as a whole to make their investment decision. The summary of the prospectus should be short, simple, and easy for investors to understand and written in plain, non-technical language, presenting the information in an easily accessible way.72 Finally, the Prospectus Regulation now also requires (p. 46) companies to make available a separate copy of the summary under the same section as the IPO prospectus.73

(i)  Implications of changes for IPOs 2.71  A first concern triggered by the new summary requirements is that companies, in particular those going public for the first time, may find it difficult to draft a concise summary that contains all the key information for investors in light of the IPO, including financials and other company-specific information, that at the same time complies with the prescriptive disclosure requirements and size limitations. For example, companies will have to assess and discuss with the banks and advisors which risk factors will make it into the summary as a result of the new requirements limiting that number to fifteen.74 Also, more scrutiny can be expected, from the company and the banks, but also from competent authorities, in relation to compliance with the new requirements now that the summary must be published as a stand-alone document.75 Even though the Prospectus Regulation confirms that in principle no civil liability should be attached to any person solely on the basis of the summary (unless presented in a misleading manner),76 in practice investors, humans after all, may well resort to reading the summary instead of the full IPO prospectus if presented with a choice on the company’s website to use either.

5.  Profit Forecasts and Profit Estimates

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

2.72  Historical financial information included in an IPO prospectus helps investors form an investment decision by giving an insight into the financial development of the company. Companies are able, to a large extent and with the assistance of its auditor, to ensure such information is complete, accurate, and not misleading when included in the IPO prospectus. However, the expected future performance of the company, expressed as a profit forecast or profit estimate, may well be even more relevant for an investor to know, in particular in an IPO, but for companies it is much more difficult to verify that information. In addition, its inclusion is likely to increase the liability profile of the company and the banks in relation to the IPO. Under the old prospectus regime, if a company included a profit forecast or profit estimate in the prospectus it had to include—put simply—key assumptions by management underlying the profit forecast, and a report prepared by an auditor stating that, in the opinion of the auditor, the forecast or estimate had been properly compiled and on a basis consistent with the accounting policies of the company. That process is typically fairly timeconsuming and consequently, these formal requirements and the liability considerations make (p. 47) the inclusion of a profit forecast or profit estimate in an IPO prospectus uncommon in most jurisdictions. Under the Prospectus Regulation, the key change to this concept is that the requirement to prepare an auditor’s report is abolished.77

(i)  Implications of changes for IPOs 2.73  Whether the abolishment of the requirement to prepare an auditor report will in practice lead to more profit forecasts or profit estimates being included in an IPO prospectus seems doubtful. Under the old regime, the required audit reports provided comfort to the company, the banks, and investors in an IPO. A pertinent question is whether and how the parties involved will get comfortable with only management information and assessments underlying the inclusion of a profit forecast or profit estimate, if these are no longer supported by external audit reports. The outcome may well be that, particularly in relation to an IPO, if the decision is taken to include profit forecast or profit estimate, the company, but even more so, the banks, will still request the auditors to provide private comfort in respect thereof. Whether auditors will be willing to do so if no longer formally required is a further question in that context.78

V.  Concluding Remarks 2.74  There are various reasons for a company and its shareholders to pursue an IPO. Preparation for and execution of an IPO take time and effort. Based on market practices that go back decades and that differ per jurisdiction, IPOs have evolved into a distinct form of capital market transactions. 2.75  One of the key focus areas in the run-up and during an IPO is disclosure, whereby the IPO prospectus plays a central role. However, information is disseminated throughout the process, both before and after publication of the IPO prospectus, and to different recipients. As a result, monitoring the consistency of all IPO-related disclosures is of vital importance. 2.76  The Prospectus Regulation introduces a number of new rules that are of particular relevance for IPOs and IPO-related disclosure. In particular, the revised disclosure requirements in relation to risk factors, the description of the use of proceeds, the contents of the prospectus summary, and the inclusion of a profit forecast in an IPO prospectus are likely to have an impact on European IPO practices. How big that impact will be remains to be seen.(p. 48)

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Footnotes: 1

  Pursuant to Articles 3(1) and 3(3) of Council Regulation (EU) 2017/1129 on the prospectus to be published when securities are offered to the public or admitted to trading 2017 OJ L168/12 (Prospectus Regulation). 2

  Recital (2) of the Commission Delegated Regulation (EU) 2019/980 of 14 March 2019 supplementing Regulation (EU) 2017/1129 of the European Parliament and of the Council as regards the format, content, scrutiny and approval of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Commission Regulation (EC) No. 809/2004 (CDR). 3

  As the Commission states in Recital (5), Prospectus Regulation: It is appropriate and necessary for the rules on disclosure when securities are offered to the public or admitted to trading on a regulated market to take the legislative form of a regulation in order to ensure that [ . . . ] are applied in a uniform manner throughout the Union. [ . . . ] even small divergences on the approach taken regarding one of those aspects could result in significant impediments to cross-border offers of securities, to multiple listings on regulated markets and to Union consumer protection rules. Therefore, the use of a regulation [ . . . ] should reduce the possibility of divergent measures being taken at national level, and should ensure a consistent approach, greater legal certainty and prevent such significant impediments.

4

  See J.P. Franx, Prospectusaansprakelijkheid uit onrechtmatige daad en contract (Deventer: Kluwer, 2017) 40–41; B. Bierens et al., Handboek Beursgang (Onderneming en recht, nr. 68) (Deventer: Kluwer, 2017); and others 5

  Franx, Prospectusaansprakelijkheid uit onrechtmatige daad en contract, 42.

6

  If, for example, an IPO is conducted on the basis of quarterly financial statements, these financial statements would, for the purposes of the IPO, typically be prepared on the same basis as the company’s annual accounts, be reviewed by an auditor, and be published in full in the prospectus. A question the company must ask itself is whether as a consequence of this approach it will be expected to publish quarterly results on this basis going forward, even though under applicable Member State legislation in implementation of the transparency directive (Directive 2013/50/EU of the European Parliament and of the Council), the company may very well not be formally required to publish quarterly financial information. 7

  Ernst & Young, ‘Global IPO Trends’, Q2 (2019) 5.

8

  For more details, see G. Strampelli, Chapter 8 ‘The Contents of the Prospectus: Rules for Financial Information’, this volume. 9

  The Prospectus Regulation and related legislation contain ‘pro forma’ and ‘complex financial history’ provisions providing guidance and setting out the requirements for the presentation of financial information in these situations, if certain thresholds in terms of size and impact of these events are met. 10

  This is mainly driven by the so-called 135-day rule derived originally from US auditor requirements. Put simply, in order to be able to obtain comfort from the company’s auditor on the financial information included in the prospectus, which is a key requirement for companies and banks, the most recent audited or reviewed financial statements included in the prospectus may not be older than 135 calendar days.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

11

  Typically, one or more of the company’s financial advisors will already be involved ahead of formal IPO appointments. Also, additional syndicate members are likely to be appointed later on in the process, depending on size and type of the IPO. These banks, typically awarded a role as joint bookrunner or co-lead manager, may have specific knowledge, contacts, and/or experience in target investor markets or the company’s sector, or particularly strong research capabilities. 12

  Across jurisdictions, the formal role and responsibilities in relation to the lead banks’ involvement differ, but it goes beyond the scope of this book to discuss these differences in detail. Nevertheless, these rules will have an impact on how parties approach and fulfil their role in an IPO. For example, in the UK a company applying for a premium listing must appoint a sponsor that has distinct responsibilities towards the company as well as the UK Financial Conduct Authority, the FCA (https://www.fca.org.uk/markets/sponsor-regime/roleand-responsibilities-sponsor), whereas the scope of formal responsibilities in the Netherlands, for example, is (far) less detailed. 13

  Publicity guidelines are guidelines that govern the process and procedures for preparation and dissemination of information in the context of a securities offering, particularly into the US. They are of particular relevance in an IPO where the company typically does not have prior experience in dealing with public disclosure. They are prepared at the outset of the IPO execution phase by company’s legal counsel and distributed to all parties involved in the IPO. The key objective is to ensure compliance with all publicity and other disclosure-related aspects of the IPO. Concrete guidance is given on what is allowed in respect of (for example) press releases, interviews, and other communication in the context of the IPO, whilst allowing for day-to-day business to continue. The guidelines set out procedures, including review and approval rounds, for the various documents described in the chapter, such as the IPO prospectus and the early-look, pilot fishing, and roadshow presentation. 14

  Other work streams that typically start immediately after the kick-off presentation (with preparation having started earlier already) are the confirmation and implementation of any pre-IPO capital or corporate governance (re)structuring; the further development of the financial model, and confirmation of availability of financial statements and timing of preparation thereof. 15

  Such as under Article 6(1), Prospectus Regulation and similar tests under US securities laws, as explained in more detail later on this chapter at section III ‘The IPO Prospectus’ (para. 2.39). 16

  Article 22(4), Prospectus Regulation.

17

  Following a lengthy consultation process, the FCA introduced updated rules on 1 July 2018. In their view, company information, and not connected analyst research reports (i.e. reports prepared by analysts employed by the syndicate banks), should form the basis on which investors decide whether or not to participate in an IPO. The new rules therefore stipulate that connected analyst research is not permitted to be published until after the publication of an approved registration document. The syndicate banks must also ensure unconnected analysts (i.e. analysts not employed by the syndicate banks) are also provided with the same information as connected analysts, with the aim of encouraging more unconnected research to be published. Despite the new rules, companies in practice still choose to publish a single-format, ‘price range’ prospectus, rather than adding a securities note and summary to the previously approved registration document, although (in accordance with the expressed preference of the FCA) there has been a movement towards using approved price range prospectuses to conduct the IPO roadshow, rather than unapproved ‘pathfinder’ prospectuses which were previously typically used in the UK (other than for IPOs, including a retail offering). The registration document will be silent as to the offering, but otherwise would typically contain the same information about the company as From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

the IPO prospectus. If unconnected analysts are provided with information at the same time as connected analysts, then connected analyst research may be published one day after publication of the registration document. If, however, as has been the case on every UK IPO to date since the new rules came into force (largely due to concerns about minimizing the risk of a leak), unconnected analysts are not provided with information until after publication of the registration document, then connected research may be published seven days after publication of the registration document. The registration document is now typically accompanied by an ‘expected intention to float’ announcement, followed by a ‘confirmed intention to float’ announcement at the date of connected research publication (one or seven days later, depending on which approach has been taken). Following publication of the ‘confirmed intention to float’ announcement, the remainder of the UK IPO timeline is largely unchanged, but the new rules have effectively added a week to the typical IPO process. 18

  Also see G. Strampelli, Chapter 8 ‘The Contents of the Prospectus: Rules for Financial Information’, this volume. 19

  J. W. Hoevers, ‘Het Due Diligence Onderzoek: Onderzoeksplicht, Disculpatie en Procedure’, in: B. Bierens et al. (eds), Handboek Beursgang, Onderneming en Recht, no. 68 (Deventer: Kluwer, 2017). 20

  Also see boxed text ‘US securities laws and European IPOs—144A, 10b-5, and US practices’, para. 2.38 below as well as section III ‘The IPO Prospectus’ (para. 2.39) (on prospectus liability) and section IV ‘IPO Prospectuses and the Prospectus Regulation’ (para. 2.62) (on securities litigation) for more details on prospectus liability and defences. 21

  This in particular relates to the information required to be included pursuant to Item 12 of Annex 1 of the CDR. 22

  In addition to the auditor’s report that needs to be included in relation to the financial statements included in the prospectus pursuant to the Prospectus Regulation (Item 18 of Annex 1 of the CDR). 23

  Practice differs across the European Union. Whereas in certain jurisdictions working capital reports need to be prepared as part of the listing process, in other jurisdictions these reports are only prepared in specific circumstances, for example when the financial position of the company or the nature of its business give rise to a request from the banks for such a report to be prepared. 24

  Item 3 (Essential information) of Annex 11 of the CDR: ‘a statement by the issuer that, in its opinion, the working capital is sufficient for the issuer’s present requirements or, if not, how it proposes to provide the additional working capital needed’. 25

  Article 6(1), Prospectus Regulation.

26

  This approach with different building blocks for different types of securities and offerings has remained unchanged compared to the approach under the old prospectus rules. 27

  See boxed text ‘US securities laws in European IPOs—144A, 10b-5, and US practices’, para. 2.38 for the background to this division of roles. 28

  See section IV.2 ‘Risk Factors’ (para. 2.63).

29

  Even though the customary set-up and order of the equity story in a typical ‘Business’ chapter is based on market practice more than anything else, Annex 1, item 5.4 CDR requires the inclusion of a ‘description of the issuer’s business strategy and objectives, both financial and non-financial (if any)’, whereby ‘This description shall take into account the issuer’s future challenges and prospects.’ The chapter typically starts with a brief overview or introduction to the company’s business, after which the strategy, key strengths, and financial objectives (guidance) are presented. The remainder of the ‘Business’ chapter is From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

typically populated on the basis of the requirements of the Prospectus Regulation, whereby items 5.1–5.7 of Annex 1 to the CDR set out the key pieces of information that must be included, requiring a description of the issuer’s operations and its principal activities, including: main categories of products sold and/or services performed and significant new products and/or services that have been introduced or are under development (5.1); a description of the principal markets, including a breakdown of total revenues by operating segment and geographic market (5.2); important events in the development of the issuer’s business (5.3); summary information regarding the extent to which the issuer is dependent on patents or licenses, contracts or new manufacturing processes (5.5); the basis for any statements made by the issuer regarding its competitive position (5.6); and information on the issuer’s investments (5.7). 30

  The ‘Operating and Financial Review’ (OFR) chapter discusses the company’s financial results and condition. Its purpose is to provide investors with the information necessary to interpret the company’s operating results over recent financial periods and financial condition through the eyes of the company’s management. It explains the company’s business as management sees it, separately discussing each operating segment’s performance, as well as the business as a whole. It will also identify and discuss the key performance indicators, or KPIs, that management uses to evaluate the performance and financial health of the business. In accordance with the Annex 1, item 7.1.1 CDR, the company needs: to the extent necessary for an understanding of the issuer’s business as a whole, to present a fair review of the development and performance of the issuer’s business and of its position for each year and interim period for which historical financial information is required, including the causes of material changes. Information regarding significant factors materially affecting the company’s results must also be included (Item 7.2.1) whereby these factors should come back in the year-on-year descriptions illustrating the extent of their impact and key trends in the company’s business and industry. Other elements in the OFR are a description of key accounting policies and liquidity and capital resources, describing capital structure and cashflows. 31

  Based on Article 20 in combination with the definitions of ‘Home Member State’, ‘ “approval” and “competent authority” ’ in Article 2, Prospectus Regulation. 32

  See section II.2 ‘Preparing for an IPO’ (i) ‘IPO readiness’ (para. 2.12).

33

  While the terms ‘dual listing’ and ‘cross-listing’ are often used interchangeably, they are technically two distinct concepts. A cross-listing occurs where a company’s shares are listed on more than one stock exchange. Arguments for pursuing an additional listing in another jurisdiction typically are (i) improved access to capital; (ii) an increased profile and global presence; (iii) increased liquidity of their shares; or (iv) business-political reasons. An example of a cross-listing is Airbus SE, a Societas Europaea with its corporate seat in the Netherlands and listings in France, Spain, and Germany. Other well-known more general examples are European companies with a separate ADR/GDR listing on a US stock exchange. A dual listing, on the other hand, occurs when two or more companies (shares of which are admitted to trading on separate stock exchanges) combine their operations but have separate ownership structures through two separate holding companies. While this structure is sometimes seen as complicated, arguments for its use are access to capital and potential tax and other financial advantages to both companies and shareholders. Wellknown examples of companies that have or had dual listings, include Unilever (Unilever Plc in the UK and Unilever NV in the Netherlands), ABB Group (Sweden and Switzerland),

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

RELX Group (the former ReedElsevier: UK and the Netherlands), Fortis (Belgium and the Netherlands), and Shell (UK and the Netherlands). 34

  Articles 8 and 10, Prospectus Regulation.

35

  Based on Article 17(2), Prospectus Regulation. The ‘single document, price-range approach’ is typically used in IPOs, for example in the UK, Germany, and the Netherlands, whereas in France the more common approach is to publish an approved registration document early on in the IPO process, supplemented by a securities note, including a summary, at the time of launch of the IPO. See section II.3.iii ‘Analyst presentation and research reports’ (para. 2.25) for recent developments in the UK that had an impact on these practices. 36

  The twenty-working-day period applies where the offer to the public involves securities issued by an company (i) that does not have any securities admitted to trading on a regulated market; and (ii) that has not previously offered securities to the public. For secondary issues or admissions, a ten-working-day period applies, see Article 20(2), Prospectus Regulation. In some jurisdictions, such as the UK, the competent authorities as a matter of practice will work with shorter review periods than formally allowed for (e.g. in the UK, on an IPO ten working days for the initial submission and five working days for subsequent submissions, as well as shorter periods on secondary issues or admissions). 37

  Article 20(3), Prospectus Regulation.

38

  Article 21(1), Prospectus Regulation.

39

  Upon the competent authority’s formal approval of the IPO in the past, a printer would print a number of hard copies of the IPO prospectus for distribution to potential investors, but there is a trend towards no longer distributing physical copies, but to have only digital copies available (with hard copies printed and provided only on demand). 40

  Article 21(3), Prospectus Regulation.

41

  For a detailed overview of all available exemptions, see K. Lieverse, Chapter 7 ‘The Obligation to Publish a Prospectus and Exemptions’, this volume. 42

  Recital (25) and Article 1(4)(a), Prospectus Regulation.

43

  Market practice in relation to retail offering differs across jurisdictions. For example, they are common in the Netherlands, with a few notable exemptions, such as the June 2018 IPO of Adyen N.V. on Euronext Amsterdam, where shares were only offered to, and subscription was only open for, qualified investors. Nevertheless, approval of the IPO prospectus was sought prior to commencement of the subscription and book-building period, i.e. the offering could have been made to retail investors in the Netherlands. In other jurisdictions, such as the UK, retail offerings are much less common and are typically only included where the nature of the company is such that it would be expected to attract significant attention from retail investors, e.g. in the case of household names, retail businesses, or luxury goods manufacturers. 44

  The selling restrictions used in the IPO prospectus will typically contain ‘catch-all’ wording to make clear that any other exemption (e.g. the 150-person limit) may, where relevant, also be relied upon. 45

  Articles 1(4)(g) and 1(5)(f), Prospectus Regulation.

46

  That requirement meant that in practice, companies would still often choose to prepare a fully fledged prospectus, (i) as it was difficult to assess what exactly was required to achieve ‘equivalence’; or (ii) the parties involved simply opted to go for the ‘seal of approval’ of a normal prospectus approved by a competent authority; and (iii) in some

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

jurisdictions, the ‘equivalence’ test applied was effectively the same as for a prospectus prepared in accordance with the normal regime. 47

  Article 1(5)(j), Prospectus Regulation.

48

  For more details, see P. Horsten, Chapter 11 ‘ “Light” Disclosure Regimes: Secondary Issuances’, this volume. 49

  Recitals (50) and (51), Prospectus Regulation.

50

  See nn. 17 and 35 and elsewhere for different approaches.

51

  Recently, tech companies Spotify and Slack pursued an IPO on the New York Stock Exchange (NYSE) in deviation from this traditional approach, by pursuing a so-called ‘direct listing’. In short, the direct listing entails that a company’s shareholders sell shares directly to the public without the assistance of intermediary banks. The direct listing does not involve a building of an order book, but focuses on facilitating a purely market-driven ‘supply-and-demand’ approach to price setting. To that effect there is no lock-up period either, so existing shareholders (including employees) can directly sell their shares to the public. The approach also brings along a number of risks, as there is no support or guarantee that sufficient shareholders will sell, or for the opening price or trading liquidity post-IPO, no control over allocation to (long-term) investors, and no defence against any volatility in the share price. The banks are still involved, but as financial advisors rather than coordinators and underwriters. Technically, a direct listing would also be possible in European markets, as parties should be able to find a way to work with regulatory and other formal constraints (e.g. mandatory involvement of sponsors in listing procedures) that would be triggered by a direct listing. Equally as important, however, is the question whether there are many companies that are suitable for a direct listing (not only in Europe, but on a global level, including the US). A successful direct listing seems to require specific conditions and circumstances, most importantly: (i) there is no need for a capital raise; (ii) the company has the valuation (also in order to meet stock exchange requirements), brand name, and reputation, and its business model is easily understandable by the market to allow for leaving out investor education and roadshows; and (iii) there must be enough selling shareholders to ensure a minimum liquidity level for the trade in the company’s shares (also with a view to realistic pricing). Given these specific requirements, it remains to be seen at this stage whether the concept is here to stay and how many companies will be able to benefit from its distinct advantages. 52

  See Part III ‘Prospectus Liability and Litigation’ of this volume for more details on liability, including in relation to retail offerings. 53

  Article 2(k), Prospectus Regulation.

54

  Articles 22(2) and 22(3), Prospectus Regulation.

55

  Commission Delegated Regulation (EU) 2019/979 (14 March 2019) supplementing Regulation (EU) 2017/1129 of the European Parliament and of the Council with regard to regulatory technical standards on key financial information in the summary of a prospectus, the publication and classification of prospectuses, advertisements for securities, supplements to a prospectus, and the notification portal, and repealing Commission Delegated Regulation (EU) No. 382/2014 and Commission Delegated Regulation (EU) 2016/301 (CDR II). 56

  By way of example, the Dutch competent authority, the Dutch Authority for the Financial Markets (AFM), has issued guidance that in its view, the ‘advertisement’ norms set out in Article 22(4) of the Prospectus Regulation and article 16 CDR II also apply to analyst

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

presentations. Consequently, AFM will request a copy of the (draft) analyst presentation and will review that presentation based on these norms. 57

  Article 6, Prospectus Regulation.

58

  Recital (54), Prospectus Regulation.

59

  As set out in the ESMA’s Final Report: Guidelines on Risk Factors under the Prospectus Regulation dated 29 March 2019 (ESMA RF Final Report) 60

  For an extensive discussion of the new risk-factor regime, see R. ten Have, Chapter 12 ‘The Summary and Risk Factors’, this volume. 61

  Recital (54) and Article 16(1), Prospectus Regulation.

62

  See Section IV (‘Compliance and reporting obligations’) of the ESMA RF Final Report, which includes specific instructions to competent authorities to make every effort to comply with the guidelines and to incorporate them into their supervisory frameworks and consider them when carrying out their scrutiny of a prospectus in accordance with Article 20, Prospectus Regulation. 63

  The ESMA RF Final Report does not prescribe the specific categories to be used, but includes examples and suggestions for categorization. 64

  Eric Newcomer and Olivia Zaleski, Lyft’s Risk Factors Are the Stuff of Bad IPO Dreams (Bloomberg, 2019). Even though relating to a US IPO, where rules on tailoring and making risk factors specific and concrete have been in place for decades, this illustrates the perception of the general public of risk factors in a prospectus. 65

  See Part III ‘Prospectus Liability and Litigation’ of this volume.

66

  While this exercise has generally been carried out previously as a matter of practice, the new rules mean that the process is likely to receive more focus and therefore require more time during the IPO process. 67

  Recital (33), Prospectus Regulation stipulates that: no civil liability should be attached to any person solely on the basis of the summary, including any translation thereof, unless it is misleading, inaccurate or inconsistent with the relevant parts of the prospectus or where it does not provide, when read together with the other parts of the prospectus, key information in order to aid investors when considering whether to invest in such securities.

68

  ESMA Final Report—Technical Advice under the Prospectus Regulation, paragraphs 56 and 359. 69

  Articles 38(d) and 38(f), CDR.

70

  CDR, Annex 11, section 3.4.

71

  Article 7, Prospectus Regulation and CDR II, Chapter I.

72

  Recitals (28)–(31), Prospectus Regulation.

73

  For more details, see R. ten Have, Chapter 12 ‘The Summary and Risk Factors’, this volume. 74

  Also see under section IV.2 ‘IPO Prospectuses and the Prospectus Regulation—Risk Factors’ (para. 2.63). 75

  Article 21(3), Prospectus Regulation.

76

  Recital (33), Prospectus Regulation.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

77

  For more details on profit forecasts and profit estimates and the background to the abolishment of this requirement, see G. Strampelli, Chapter 8 ‘The Contents of the Prospectus: Rules for Financial Information’, section V ‘Profit Forecasts and Profit Estimates’ (para. 8.64), this volume. 78

  In the UK, for instance, auditors have made clear that in the absence of a regulatory requirement they would not be prepared to give a public opinion, but may be willing to provide some level of private (diligence-based) comfort.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Part I General Aspects, 3 Stabilization and Underpricing in IPOs Stefano Lombardo From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

Subject(s): Securities — Insider dealing — Market Abuse Directive (MAD)

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 49) 3  Stabilization and Underpricing in IPOs I.  Introduction 3.01 II.  The Economics of IPOs 3.04 1.  The Structure of the IPO 3.05 2.  IPOs and Underpricing 3.07 3.  Overpricing and Theories of Stabilization 3.10 III.  The US Regulatory Regime 3.11 IV.  The European Regulatory Regime 3.17 1.  Insider Trading and Market Manipulation 3.17 2.  The Notion and the Purpose of Stabilization 3.21 3.  The Notion of Ancillary Stabilization 3.27 4.  The Notion of Overallotment Facility and of Allotment 3.28 5.  The Notion of Greenshoe Option 3.33 6.  The Substantive Rules for Stabilization: The Stabilization Period 3.34 7.  The Substantive Rules for Stabilization: The Price Conditions 3.42 8.  The Substantive Rules for Ancillary Stabilization 3.43 9.  The Disclosure Regime for Stabilization 3.44 10.  Insider Trading and Stabilization 3.51 V.  Conclusion 3.54

I.  Introduction 3.01  The Initial Public Offering of shares (IPO) with a Prospectus, now regulated by the Prospectus Regulation 2017/1129,1 is a complex procedure where the offering price determination (the price discovery mechanism) is subject to particular characteristics, dynamics, and constraints, specifically also with reference to possible activities of market manipulation and insider trading (market abuse). 3.02  The Market Abuse Regulation (MAR)2 applies not only to financial instruments already admitted to trading, but also to those for which a request for admission to trading has been made (Art. 2(1) MAR). The MAR provides, as the Market Abuse Directive (Art. 8, MAD),3 two exemptions from the prohibitions of insider dealing (and of unlawful disclosure of inside information, Art. 14 MAR) and of market manipulation (Art. 15 (p. 50) MAR). These exemptions are (Art. 5 MAR): (i) for trading in own shares in buy-back programmes; and (ii) for stabilization of securities.4 This chapter focuses on the second exemption, i.e. on the stabilization activity,5 which is usually realized in case of an IPO and of a secondary offering of shares (SEO) (on a regulated market or a multilateral trading facility (MTF)) and is regulated in detail by Commission Delegated Regulation 2016/1052, according to Article 5(6), MAR.6 3.03  More particularly, this chapter concentrates on stabilization activity during IPOs (in regulated markets) and is structured as follows. Section II ‘The Economics of IPOs’ (para. 3.04) offers a background to the economic theories of IPOs, analysing in particular the underpricing phenomenon (and its opposite, the overpricing phenomenon) and reports the main reasons, economists have developed for justifying the stabilization of IPO shares. For From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

comparative purposes, section III ‘The US Regulatory Regime’ (para. 3.11) offers a short but useful analysis of the US system of IPO stabilization activity. Section IV ‘The European Regulatory Regime’ (para. 3.17) focuses on the detailed analysis of the European regulatory system as provided by the MAR and by Regulation 2016/1052, as integrated by other sources of relevant European regulation. Section V ‘Conclusion’ (para. 3.54) concludes.

II.  The Economics of IPOs 3.04  Even though the legal procedure of an IPO can diverge depending on the legal system and the type of trading venue, the economic structure and dimension of an IPO is the same everywhere, also because of internationally developed standards, particularly influenced by those originating from the US.7

(p. 51) 1.  The Structure of the IPO 3.05  Shares offered in an IPO can come either from selling shareholders (e.g. from the family controlling the company, private equity funds, etc.) or from a capital increase (with the subscription of new shares) of the issuer, or from a combination of both. During the entire IPO procedure, the company is assisted by a plurality of actors, i.e. gatekeepers playing a certification role about the quality of the company.8 Among these, particularly important are banks, which organize themselves in one or more syndicates that sell the shares to investors and are usually led by a managing underwriting bank (lead manager).9 According to the US nomenclature (and US English), there exist mainly three types of banking syndicates, with a different degree of risk taken and different types of compensation: (i) firm-commitment syndicates: where the banking syndicate buys ex ante the old shares from the selling shareholders/company or underwrites new shares and then resells them to investors; (ii) strict-underwriting syndicates: where the banking syndicate buys ex post the shares it is unable to sell to investors; and finally the (iii) best-effort syndicates: where the banking syndicate limits itself solely to selling the shares without taking any risk.10 3.06  Another characteristic of IPOs, worth mentioning for both economic and legal purposes, is the fact that the offering price at which the shares are offered to the public is a single price for all the investors involved.11 In other words, independently from the legal question in each jurisdiction about the possible permissibility of different prices for the different types of investors (particularly with respect to a possible differentiation between institutional investors and retail investors), the experience is that IPOs always have a single offering price.12 It is not possible here to evaluate the issue of the overall efficiency of this solution.13 One can only anticipate that with the bookbuilding system (p. 52) (on which see section II.2 ‘IPOs and Underpricing’, para. 3.07) the syndicating banks, being unable/ unwilling to discriminate among investors on the offering price (as first influenceable variable in a supply–demand context), are able/willing to discriminate in the quantity of shares (as second influenceable variable) allocated to the different investors.

2.  IPOs and Underpricing 3.07  Independently from the legal structure of the IPO, two common phenomena are typical worldwide: (i) underpricing (or its opposite, overpricing); and (ii) long-run underperformance.14 The first phenomenon, underpricing, is the most important and the most studied both theoretically and empirically. Underpricing of an IPO means that the share price has a positive return (measured by the positive difference between the closing price on the first day of trading and the offering price)15 in the first day of trading. Underpricing is the normal result of a ‘good’ IPO.16 Underpricing is an indirect (transaction) cost of an IPO and represents, as economists say, ‘money left on the table’.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Overpricing, on the other hand, is the negative return in the first day of trading and is the result of a ‘bad’ IPO.17 3.08  The most common theory to explain this typical phenomenon relates underpricing to the asymmetric information problem about the ‘true’ value of the company:18 either the company, or the syndicating banks, or some investors have more information about the ‘true’ value of the company.19 Inside this asymmetric information paradigm, some investors are considered to be crucial for explaining underpricing. There are two possible illustrative models. The first one is the so-called ‘winner’s curse model’ (which relies on a fixed-price offering), according to which some investors have more information about the value of a company and buy only good IPOs; to solve this adverse selection problem, all IPOs are underpriced in order to find enough investors.20 (p. 53) 3.09  The second, the predominant model, is the ‘information revelation model’, according to which institutional investors reveal to the syndicating banks the ‘true’ value of the company shares in an open price mechanism,21 more recently, typically based on the bookbuilding system.22 The IPO company is presented to institutional investors in roadshows and during the offering time the syndicating banks’ bookrunner (usually the lead manager) collects in its order book the quantity and quality of institutional investors’ indication of interests, i.e. non-binding orders.23 Indeed, institutional investors are able to process public information about the company disclosed in the IPO prospectus and have the correct incentive to reveal to the syndicating banks precious information about the ‘true’ value of the company, being remunerated by favourable shares allocations.24 This second model is promising, because bookbuilding has replaced almost worldwide the fixed-price offering system,25 also reducing the average level of underpricing of IPOs in comparison to fixed-price offerings.26

3.  Overpricing and Theories of Stabilization 3.10  As mentioned, overpricing is the opposite of underpricing: it is the negative return in the first day of trading. Overpricing can be corrected by the syndicating banks by stabilizing the shares’ price in the aftermarket (defined as the period of time after negotiation starts on the market and ending usually after thirty days). Stabilization is a form of (permitted) market manipulation because it artificially alters the normal development of the price in the aftermarket. It alters the normal game between supply and demand by stimulating artificial demand, with the effect of increasing the price. Stabilization usually occurs in the sense that a member of the syndicating banks, usually the lead manager (who becomes also stabilization manager) buys shares on the aftermarket and by stimulating (p. 54) demand tries to (artificially) increase the share price. There are some theories that (try to) explain (particularly with respect to the US regulatory regime) why underwriters stabilize IPO share prices.27 In short, stabilization is used (i) in order to support prices (i.e. in order to prevent/retard price fall), hence being a form of price manipulation used by underwriters to hide overpriced offerings, or even to permanently increase the aftermarket stock price; (ii) as a form of reward to investors, i.e. either to retail ones to compensate them for the adverse selection costs or to institutional investors for submission of truthful information during bookbuilding; (iii) as a form of reputation protection for underwriters to avoid a decrease in future underwriting revenues; (iv) as a form of profit maximization for underwriters; (v) as a form of risk transfer to naive investors who buy overpriced shares; (vi) as a bonding mechanism against aggressive pricing in case of bookbuilding; (vii) as a form of risk reduction against volume shocks, when the price collapses due to the impossibility of matching supply and demand.

III.  The US Regulatory Regime

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

3.11  For comparative purposes, it is useful to analyse briefly the regulatory regime in the US, where stabilization is considered a form of permitted market manipulation according to Regulation M,28 introduced in 1997 in order to regulate securities offerings.29 In particular, Rule 104 of Regulation M provides for three types of IPO stabilization devices,30 regulating them in detail on a rule-based regulatory approach rather than, as it seems in the EU, on a standard-based approach.31 3.12  The first device is stabilization (pure stabilization). In this case, the lead manager supports the share’s price by buying shares (stabilizing bids) in the market in order to be able to complete the shares’ distribution.32 In other words, the syndicate temporally buys shares, the price of which is falling below the offering price (overpricing), simply in order to be able to sell them during the distribution at the offering price. It is useful to (p. 55) mention that this form of stabilization is no longer used in the US, because the banking syndicate typically ends when negotiations on the market start and the distribution has been completed.33 3.13  The second type of stabilization, the one still commonly used in the US, is the syndicate covering transaction (short covering).34 The syndicate typically completes the offering, by assuming a short position, later covering it by either (i) buying the shares in the aftermarket (in case of overpricing), so stabilizing (increasing) the price by a syndicate covering transaction (i.e. short covering); or (ii) by exercising the greenshoe option (in case of underpricing). 3.14  Historically, this stabilization type derives from the structure of section 5 SA. Indeed, the offering process is divided basically into three steps:35 (i) the pre-filing period, before the registration statement is filed with the SEC; (ii) the waiting period, starting with the registration and ending with the SEC authorization of the IPO; and (iii) the post-effective period, which starts when the SEC authorizes the offering and ends when the shares distribution is completed. Before the registration statement is authorized by the SEC, the selling of securities is prohibited, while the solicitation of unbinding orders is permitted. Solicitation occurs with a preliminary prospectus containing all relevant information ‘except for the omission of information with respect to the offering price, underwriting discounts or commissions, . . ., or other matters dependent upon the offering price’, determined by the bookbuilding procedure.36 After SEC authorization, a statutory prospectus with the final offering price (and other relevant information) is required for selling the shares to investors.37 Since during the waiting period there are only investors’ manifestation of interests (unbinding orders), once the registration statement becomes effective these may or may not lead to a final binding order. The problem is that in firm-commitment agreements, which are extremely risky for the syndicating banks, some investors may withdraw (renege) their unbinding orders, with the consequence that the banking syndicate has to keep in its portfolio reneged shares (so-called reneging costs). To avoid this problem, the syndicating banks allocate during the waiting period more shares among investors than the registered number of shares to be authorized by the SEC. This overallotment activity results in a syndicate short position.38 (p. 56) As mentioned, this short position (up to 15 per cent of the registered shares) is covered later, either by buying shares on the market (in case of overpricing), or by contracting with the company or a selling shareholder a greenshoe option, according to which the syndicate can buy shares at the offer price from one or both of them (in case of underpricing). In this way, from a historic perspective the problems deriving from section 5 SA structure have been shifted to the issuer.39 It is not possible here to evaluate the extent to which the mechanism between overallotment/ greenshoe option is still used to minimize reneging costs, as was in the past, or for other purposes such as reputational issues or profit maximizing.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

3.15  Finally, the third type of stabilization is penalty bids. According to Regulation M Rule 100, a penalty bid is an arrangement that permits the managing underwriter to reclaim a selling concession from a syndicate member in connection with an offering when the securities originally sold by the syndicate member are purchased in syndicate covering transactions. Indeed, it is usual for IPO investors to sell their shares in the first day(s) of trading (flipping) in order to monetize the profits deriving from underpricing or limit the loss deriving from overpricing.40 Penalty bids are a mechanism designed to manage the problems related to flipping.41 3.16  It is useful to end this short review of the US regulatory regime, pointing out that historically the three different types of stabilization developed (and are regulated in Regulation M) in order to minimize the risks the syndicating banks face in firm-commitment contracts. Indeed, in these types of underwriting contracts banks bear the risks associated with being able to sell all the shares during an IPO (or SEO). It is not possible here to evaluate from a theoretical perspective the question of the overall efficiency of this stabilization system that seems to shift the risks (and particularly also the underwriting risks) ultimately to the IPO company and to investors.42

(p. 57) IV.  The European Regulatory Regime 1.  Insider Trading and Market Manipulation 3.17  Article 5, MAR exempts stabilization from the prohibitions of Article 14, MAR (insider dealing and unlawful disclosure of inside information) and from those established by Article 15, MAR (market manipulation). It is necessary to briefly analyse these prohibitions in order to better understand the proper content and limits of legitimate behaviour in case of stabilization activity.43 3.18  Article 7, MAR provides the definition of inside information as being information:44 (i) of precise nature with respect to circumstances/events already realized or reasonably realizable, also with respect to intermediate steps in a protracted process; (ii) nonpublic; (iii) relating directly or indirectly to one or more issuers or to one or more financial instruments; (iv) which if made public would have a significant effect on prices, because a reasonable investor would be likely to use it for investment decisions. The prohibitions set out in Article 14, MAR relate to three possible forms of behaviour:45 (i) insider dealing (engaged or even attempted) (Art. 8 MAR); (ii) recommendation or inducement to another person in engaging in insider dealing (Art. 8 MAR); and (iii) unlawful disclosure of inside information (Art. 10 MAR). On the other hand, Article 17, MAR (ad-hoc disclosure) provides for the public disclosure of inside information as an incentive to reduce the probability of insider dealing by granting equal access to all investors to this information.46 3.19  Market manipulation is defined in Article 12, MAR in terms of activities, which are described in quite extensive terms and prohibited according to Article 15, MAR. Article 12, MAR describes (as the MAD did) market manipulation essentially according to two types of behaviours:47 (i) execution of a transactions or transaction-based market manipulation (Art. 12(a) and (b)); and (ii) dissemination/transmission of information or information-based market manipulation (Art. 12 (c) and (d)). 3.20  As will be explained in section IV.2 ‘The Notion and the Purpose of Stabilization’ (para. 3.21), from a practical perspective, stabilization activity in case of (public) offerings refers to behaviour, which can be properly included in the scope of Article 12(a) and (b), (p. 58) i.e. as a form of transaction-based market manipulation. It is necessary to mention that stabilization of IPO share prices as regulated by Article 5, MAR and Regulation 2016/1052 is a safe harbour, but Recital 12 MAR points out that stabilizing financial instruments which would not benefit from the exemptions under MAR should not in itself be deemed to constitute market abuse. From this Recital, it follows that the European regulatory philosophy of stabilization uses a standards-based approach (rather From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

than a rules-based one, as in the US) that gives national authorities discretion to apply the rule. In this context, to avoid possible confusion, one has also to differentiate between (i) the safe harbour of stabilization (and buy-back programmes) of Article 5, MAR, which provides exemptions for both market manipulation and insider trading; and (ii) accepted market practices (Art. 13 MAR) which, from a systematic perspective, differ because they are exempted only from market manipulation and follow particular procedural rules for their identification.

2.  The Notion and the Purpose of Stabilization 3.21  Article 3(2)(d), MAR defines stabilization as the purchase or offer to purchase securities which is undertaken by a credit institution or an investment firm in the context of a significant distribution of such securities exclusively for supporting the market price of those securities for a predetermined period of time due to a selling pressure in such securities.48 This definition mentions two possible permitted actions, namely the purchase or the offer to purchase securities, which are included, as mentioned, in the definition of transaction-based manipulation (Art. 12(1)(a) and (b) MAR).49 The purchase (or the offer to purchase) is carried out with the intention of supporting the market price of the securities, which are subject to selling pressures (i.e. to overpricing). 3.22  The definition of stabilization incudes furthermore the notion of significant distribution, which is an autonomous notion according to Article 3(2)(c), MAR and represents the context in which stabilization can be legitimately pursued. A significant distribution means an initial or secondary offering that is distinct from ordinary trading both in terms of the amount in value of the securities to be offered and the selling method to (p. 59) be employed.50 This notion includes both IPOs and SEOs, which require a formal offering procedure and a prospectus to be published.51 3.23  While Recital 11 MAR provides quite a general justification for stabilization, arguing that it can be legitimate for economic reasons and on this basis should be exempted from market abuse, it is Recital 6 of Regulation 2016/1052 that specifies the justification of stabilization. It explains that stabilization is intended to provide support for the price of an initial or secondary offering of securities during a limited period of time if the securities come under selling pressure, thus alleviating sales pressure generated by short-term investors and maintaining an orderly market in those securities. As explained, an IPO can end with underpricing or overpricing, but the closing price of the first day of trading usually includes also the flipping activity, which is the normal behaviour of those investors that decide to capitalize the profit deriving from the underpricing or to limit the loss deriving from overpricing, simply by selling the securities. The Recital seems to refer to flippers when it mentions short-term investors and legitimates stabilization as a possible solution for flipping that ends in overpricing, i.e. when the selling activity of IPO investors is not absorbed by sufficient demand on the aftermarket. 3.24  The second part of Recital 6 tries to give further justification to stabilization, including the interests of some market actors. Stabilization contributes to greater confidence of investors and the issuers on financial markets. This statement implicitly assumes that the equilibrium price (the overpricing price) of the first negotiations after trading starts could not be the ‘right’ one and should be properly corrected by a form of manipulation, i.e. by permitting the syndicating banks to buy on the aftermarket. This artificial demand is considered to be beneficial for the integrity of the market. This economic reasoning is quite ambitious and could be considered not perfectly in line with an economic theory that considers the market efficient and able to correctly price the share already after the first negotiations.52

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

3.25  Recital 6 continues by mentioning the interests of both the investors who have purchased the shares during the distribution and issuers, whose interests are apparently protected by the stabilization activity. This Recital thus excludes from the interests protected those of the investors who buy on the aftermarket shares whose price is artificially increased (i.e. manipulated) by the stabilization activity. For these investors, some substantial rules related to stabilization (i.e. to the manipulatory activity) and disclosure requirements are provided as a form of protection. (p. 60) 3.26  The Recital also seems to exclude the interests of syndicating banks from the interests the stabilization activity is legitimately allowed to protect. It has been noted that in the US regulatory regime, the stabilization activity (the three types) historically developed in order to minimize the different risks associated with public offerings of securities with firm-commitment agreements, where the risk the underwriters have to deal with was (is) very high. The purpose of stabilization as explained in the Recital seems to exclude (or include only indirectly) the interests of the syndicating banks as those to be protected.

3.  The Notion of Ancillary Stabilization 3.27  The stabilization activity that can be performed by the syndicating banks in order to support a declining market price (i.e. in case of overpricing) is supported by two instruments, which define the notion of ancillary stabilization. Ancillary stabilization is functional to the facilitation of the stabilization activity during a significant distribution (Art. 1(e) Regulation 2016/1052) because it provides resources and hedging for stabilization activity (Recital 10 Regulation 2016/1052): Ancillary stabilization includes: (i) the exercise of the overallotment facility; or (ii) the exercise of the greenshoe option. It is useful to analyse the two notions (and the others related to them) with the preliminary indication that the meaning of the various notions can be more properly understood through an understanding of their economic functionality, as the systematic definitions are hindered by the divergences in the linguistic versions of the relevant provisions produced in some Member State languages (also in the context of other rules, such as the Markets in Financial Instruments II package, ‘MIFID II package’).

4.  The Notion of Overallotment Facility and of Allotment 3.28  Article 1(f), Regulation 2016/1052 defines the overallotment facility as a clause in the underwriting agreement or lead management agreement which permits acceptance of subscriptions or offers to purchase a greater number of securities than originally offered.53 This notion includes two relationships. 3.29  The first is between the offeror (as defined in Art. 1(c) Regulation 2016/1052) and the syndicating banks and relates to the underwriting agreement or lead management agreement between the offeror and the syndicating banks.54 These two types of agreement are not precisely defined and their meaning is not completely clear. It appears (p. 61) more plausible that they refer to the same type of agreement, with the former referring to the relationship between the offeror and the complex of the syndicating banks, while the latter refers to the relationship between the offeror and only the lead manager and not to two different types of agreement. In any case, according to the systematic of the MIFID II Directive,55 in very general terms the underwriting agreement and the lead management agreement belong (i) to Annex I, section A number 6 and/or 7;56 and (ii) to Annex I, section B number 6, services related to underwriting. 3.30  Notwithstanding these interpretative difficulties, the stabilization mechanic requires a particular clause in the contractual relationship between offeror and syndicating banks. This clause provides the possibility of offering investors more securities than originally

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

planned and disclosed in the prospectus, in order to end up with a short position that creates the correct incentives to stabilize the price in case of overpricing.57 3.31  The second relationship the provision refers to is the one between the syndicating banks and investors. From this perspective, the notion of overallotment facility permits acceptance of subscriptions or offers to purchase a greater number of securities than originally offered.58 Again, the notions of acceptance of subscriptions and offer to purchase are not defined from a contractual perspective. For their definition, it is necessary to introduce the notion of allotment defined by Article 1(d), Regulation 2016/1052. Allotment is defined as the process or processes by which the number of securities to be received by investors who have previously subscribed or applied for them is determined. This definition seems to stress the fact that there was either a previous investor subscription or a previous investor application to be defined by a final mechanism (the process/processes) that decides the final allocation. 3.32  On the basis of this definition of allotment, the terms ‘acceptance of subscriptions’ and ‘offers to purchase’ seem to refer to the possible nature of the offering. Indeed, the nature of the offering can be in terms of (i) an offering with investors’ binding orders; or (ii) an invitatio ad offerendum with simple investors’ unbinding orders. In this context, the term ‘acceptance of subscriptions’ appears to refer to an offering with investors’ binding (p. 62) orders,59 while the term ‘offers to purchase’ seems to refer to the invitatio ad offerendum (with simple investors’ unbinding orders or simple manifestation of interests, i.e. a simple application). The offerings (IPO and SEO, with the complication of pre-emptive rights) differ from Member State to Member State according to the contract law of each legal system.60 This interpretation could be more in line with the notion of allotment, which includes, as mentioned, a previous subscription or an application (and not a purchase).61 This interpretation, which is the more plausible from a literal perspective, is nevertheless problematic from a second comparative perspective. Indeed, as mentioned in paragraph 3.14, the overallotment facility was developed and was (is?) used in the US to manage the reneging costs deriving from investors unbinding orders in firm commitment agreements in a regulatory context where investors simply apply for shares in the first stage of the offering. If there are already subscriptions (in terms of binding orders), there is by definition no risk of the syndicating banks having to manage the investors’ reneging costs. For this reason, the European stabilization regime seems to enlarge the possibility of creating the stabilization resources (deriving from the allotment facility) also in case of investors’ subscriptions and not only simple unbinding applications. It is difficult to assess the extent to which the syndicating banks in Europe use the overallotment facility in IPO without the reneging costs problem. An empirical study related to Italy has shown that (ancillary) stabilization (i.e. the overallotment facility) is used only in the case of a global offering with a private placement to institutional investors according to Regulation S, Rule 144A SA. In this case, the problem of the reneging costs is potentially present, confirming the intuition that stabilization is not primarily used in the interests of the issuer/investors/ market but in the interests of the syndicating banks.62

5.  The Notion of Greenshoe Option 3.33  Article 1(g), Regulation 2016/1052 provides the notion of greenshoe option as an option granted by the offeror in favour of the investment firm(s) or credit institution(s) involved in the offer for the purpose of covering overallotments, under the terms of (p. 63) which such firm(s) or institution(s) is (are) allowed to purchase up to a certain amount in securities at the offer price for a certain period of time after the offer of securities. The greenshoe option, first used in the US in 1963, helps to cover the short position created by the syndicating banks in case of IPO underpricing. It is in fact more convenient to buy the shares necessary to cover the short position coming from the overallotment from selling

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

shareholders or from the IPO company at the offering price, instead of buying them on the aftermarket at a higher price.

6.  The Substantive Rules for Stabilization: The Stabilization Period 3.34  Article 5, MAR and Regulation 2016/1052 provide some rules to limit the manipulative character of the stabilization activity. Recalling their standard philosophy as explained by Recital 12 MAR, more particularly Article 5, MAR allows stabilization only for a limited period of time (Art. 5(4)(a) MAR). The stabilization period (Art. 5 Regulation 2016/1052) is structured differently in the case of IPOs and in the case of SEOs.63 In an IPO, the period starts with the date of negotiations starting on the trading venue and ends after thirty days. 3.35  IPOs benefit from an exemption to this general rule in case of trading prior to the commencement of trading on a trading venue. This provision refers to the grey market (or ‘when issued trading’ according to Recital 7 Regulation 2016/1052)64 that is allowed by some Member States (as in the United Kingdom)65 but is forbidden in the US system.66 In any case, trading occurring during the grey market (or when issued trading) has to be carried out according to the applicable rules of the trading venue on which the securities are to be admitted to trading, including any rules referring to public disclosure and trade reporting. In this particular case, the starting point for stabilization is the moment of the adequate public disclosure of the final price of the securities. 3.36  In this context, it has to be mentioned that Article 17, Prospectus Regulation permits the omission of information concerning the final offer price and/or amount of securities to be offered to the public. This is typical with the open price system based on the bookbuilding procedure, which is today the predominant mechanism of selling securities in IPOs, as already mentioned in section II.2 ‘IPOs and Underpricing’ (para. 3.07). Indeed, the prospectus only reports an open range with the indication of a minimum and a maximum price determined on the basis of several (accounting (p. 64) and management) methods. Taking account of this element, Article 17, Prospectus Regulation provides some safeguards for the protection of investors (as stressed by Recital 55 of the Prospectus Regulation, which refers to the market practice). 3.37  It is alternatively provided that either (i) the acceptance of the purchase or subscription of securities may be withdrawn for not less than two working days after the final offer price and/or amount of securities to be offered to the public has been filed; or that (ii) information is disclosed in the prospectus about (a) the maximum price and/or the maximum amount of securities, as far as they are available; or (b) the valuation methods and criteria, and/or conditions in accordance with which the final offer price is to be determined and an explanation of any valuation method used. In any case, the final offer price and amount of securities shall be made public according to Article 21(2), Prospectus Regulation. 3.38  Article 17, Prospectus Regulation allows for the adaption of the contractual characteristics of the offering that are determined by the civil law systems of the single Member States to an open price system (based on the bookbuilding mechanism), which has the important aim of decreasing the average level of underpricing, so increasing the efficiency of the IPO procedure. At the same time, it should also be mentioned that the withdrawn right activates the reneging costs problem that the overallotment facility tries to solve. 3.39  In this context of price formation and bookbuilding system, Commission Delegated Regulation 2017/56567 has notably introduced some constraints (as additional requirements to the general requirements on conflict of interests) on the behaviour of the syndicating banks in terms of the management of possible conflict of interests deriving particularly from the syndicating activity.68 Given the practical impossibility of analysing here such a

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

complex issue that is strongly connected with the contract law system of each Member State, only a very short overview is provided.69 Recital 57 provides a kind of general clause of good behaviour in favour of all the involved parties,70 Recital 58 specifies that the pricing process, including bookbuilding, is not detrimental to the (p. 65) issuer’s interests,71 while Recital 59 concentrates on the allotment process.72 Article 38 specifies some requirements before the underwriting contract is signed, particularly with respect to ‘. . . (b) the timing and the process with regard to the corporate finance advice on pricing of the offer; (c) the timing and the process with regard to the corporate finance advice on placing of the offering; (d) details of the targeted investors, to whom the firm intends to offer the financial instruments’. 3.40  Article 39 sets rules on conflict of interests related to possible underpricing or overpricing of an issue or involvement of relevant parties in the process, particularly with respect to the fact that (i) the pricing of the offer does not promote the interests of other clients or firm’s own interests, in a way that may conflict with the issuer client’s interests; and (ii) the prevention or management of a situation where persons responsible for providing services to the firm’s investment clients are directly involved in decisions about corporate finance advice on pricing given to the issuer client. Furthermore, Article 39.2 specifies also information to be provided to the IPO company about pricing and the possible stabilization activity.73 Article 40 focuses on requirements in relation to placing prohibiting some practices that may distort the integrity of the market. 3.41  It is difficult to assess the real meaning of the Recitals and of the briefly mentioned relevant Articles (see also Arts 41–43) in terms of the efficiency of the bookbuilding procedure. As a price discovery mechanism, it alleviates problems of asymmetric information because there is an economic difference between informed institutional investors who have to be compensated for revealing precious information about the true value of the IPO company and uniformed (retail) investors. As already mentioned in paragraph 3.09, worldwide IPOs are characterized by a single price, the same for all types of investors. Since it is not possible (or major actors are not willing) to discriminate in the price, discretionary allocation among investors is the only possible alternative. Not surprisingly, the economic literature studying the positive effects of the bookbuilding procedure exposes the tension between, on the one hand, syndicating (p. 66) banks’ discretion and, on the other, possible investor discrimination. It is difficult to say whether the rules on the conflict of interests are able to prevent and solve this tension by finding an efficient equilibrium among the several variables existing.

7.  The Substantive Rules for Stabilization: The Price Conditions 3.42  In IPOs (and in SEOs), the stabilization activity can be done only with the upper limit of the offering price (Art. 5(4)(c) MAR and Art. 7(1) Regulation 2016/1052).74 This limitation is functional to alleviate the manipulative character of stabilization that alters the normal development of the price in the aftermarket by creating an artificial price. Recital 11 of Regulation 2016/1052 provides some insights as to the price conditions for stabilizing and the liquidation of shares purchased during the stabilization activity. Both stabilization and liquidation should be carried out to minimize market impact and with due regard to prevailing market conditions. This general clause allows some freedom for the syndicating banks with a general limitation in terms of alleviating the manipulative character of stabilizing and liquidation, i.e. by minimizing their artificial impact. Recital 11 of Regulation 2016/1052 continues by stating that selling securities acquired through stabilization purchases, including selling in order to facilitate subsequent stabilization activity, should not be deemed for the purposes of price support. This statement appears tautological if one thinks that stabilization is a purchase or an offer to purchase (and not sell) precisely in order to create an artificial increase of the price but at the same time takes into consideration the manipulative character of the stabilization activity. The Recital ends with a general statement where subsequent trading (both in terms of the sales of shares From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

acquired for stabilization and subsequent purchases) should be considered abusive even if it does not benefit from the exemption provided under the MAR. Given the standard-based approach, national authorities enforcing the rules of stabilization activity have significant discretional powers and considering also Recital 12 MAR, it appears that underwriters enjoy a flexible legal environment in which to implement stabilization activity.

8.  The Substantive Rules for Ancillary Stabilization 3.43  Ancillary stabilization in terms of the overallotment facility and the greenshoe option is considered instrumental to the stabilization activity by creating the hedging resources underwriters use to stabilize. Article 8, Regulation 2016/1052 provides for conditions to be respected for ancillary stabilization. Again, these conditions are deemed to be necessary (despite a standard-based approach) in order to limit the manipulative character (p. 67) of stabilization activity that creates an artificial price by stimulating demand for shares with a declining price on the aftermarket. (a)  Overallotment of securities is allowed only during the subscription period and at the offering price. From the contractual perspective between the syndicating banks and the investors, the overallotment facility includes the postponement of the selling– purchasing settlement (and the delivery of the shares). Indeed, those investors who receive overallotted shares have to wait for their delivery that negotiations start on the market. In case of overpricing, the stabilization activity permits to buy the shares on the aftermarket and their delivery to investors, while in case of underpricing the delivery of the shares is granted from the exercise of the greenshoe option. (b)  The naked short position (i.e. the short position not covered by the greenshoe option) shall not exceed 5 per cent of the original offer. This limitation is functional to stress the strong connection between overallotment facility and greenshoe option as hedging activity functional to stabilization. Indeed, it serves to limit the manipulative character of possible purchases on the aftermarket covering the short position not covered by a corresponding greenshoe. In this case, the possible danger is that the purchasing activity of the syndicating banks would increase the shares price even above the offering price that is the limit for stabilization and/or that the quantity of shares offered would no longer be limited and transparent in amount. (c)  The greenshoe option shall be exercised by its beneficiaries only where securities have been overallotted, which preserves the integrity of the market. This is because, in the case of a greenshoe option without an overallotment, the effect would be to allow the underwriters to buy ex post when negotiation starts with underpricing, an amount of shares from the offeror, thus increasing de facto the dimension of the offer with the effect, by selling these shares, of decreasing the price on the aftermarket. (d)  The greenshoe option and the overallotment to 15 per cent of the offer are limited, meaning that the total overallotment (covered plus naked) can be 20 per cent of the offer. (e)  The greenshoe option has an exercise period which is the same as the stabilization period (i.e. normally thirty days). (f)  The exercise of the greenshoe option has to be disclosed to the market in a very detailed way, including the date of exercise and the nature of the securities involved.

9.  The Disclosure Regime for Stabilization

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

3.44  Disclosure of the stabilization activity is an important tool to alleviate the manipulatory character of this intervention, which artificially alters the natural development of the (p. 68) share price on the aftermarket and potentially compromises market integrity (Recital 8, Regulation 2012/1052). Article 5(4)(b) and 5(5), MAR, as well as Article 6, Regulation 2016/1052, detail the rules for adequate public disclosure and reporting obligations.75 3.45  This disclosure and reporting system is based on three steps, which accompany stabilization, before it takes place, during its realization, and after its completion. It is necessary to start the analysis by saying that for efficiency reasons Article 6(5), Regulation 2016/1052 requires the appointment of either the issuer, the offeror, and any entity undertaking the stabilization or the person acting on their behalf, as the one central point for public disclosure and for interaction with the competent authorities. The praxis of stabilization is such that, among the syndicating banks, the lead manager is also the major stabilization actor of the offering, becoming the stabilization manager. 3.46  Before the start of the IPO (or SEO), the person delegated shall ensure adequate information of (i) the fact that stabilization may not necessarily occur and that it may cease at any time; (ii) the fact that stabilization transactions aim to support the market price of the securities during the stabilization period; (iii) the beginning and the end of the stabilization period, during which stabilization may be carried out; (iv) the identity of the entity undertaking the stabilization, unless unknown at the time of disclosure, in which case it shall be subject to adequate public disclosure before the stabilization begins; (v) the existence of any overallotment facility or greenshoe option and the maximum number of securities covered by that facility or option, the period during which the greenshoe option may be exercised, and any conditions for the use of the overallotment facility or exercise of the greenshoe option; and (vi) the place where the stabilization may be undertaken including, where relevant, the name of the trading venue(s). 3.47  In the context of disclosure before the offering starts, it has to be mentioned that the same Prospectus Regulation regime requires the reporting of the possible future stabilization activity in the delegated acts.76 This means that investors are ex ante informed that in event of overpricing the syndicating banks may intervene by supporting the share price. 3.48  During the stabilization period, the person appointed shall ensure adequate public disclosure of the details of all stabilization transactions no later than the end of the seventh daily market session following the date of execution of such transactions. This rule makes clear that the stabilization activity in terms of purchase or offer to purchase is carried out as a manipulatory activity, with the market knowing nothing as to the exact (p. 69) moment of execution. The investor that sells the shares as a counterpart of the stabilization manager is not aware of the increased price at which the transaction takes place, also because the counterpart’s identity is unknown. 3.49  After the end of the stabilization period, but within one week, the person appointed shall ensure adequate public disclosure of the following information: (i) whether or not the stabilization was undertaken; (ii) the date on which stabilization started; (iii) the date on which stabilization last occurred; (iv) the price range within which stabilization was carried out, for each of the dates during which stabilization transactions were carried out; (v) the trading venue(s) on which the stabilization transactions were carried out, where applicable. This information will be historical information, possibly with a limited price impact, given the fact that the price will have already discounted the impact of the stabilization activity.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Nevertheless, it will signal to the market the exact amount of the stabilization activity and/ or the exercise of the greenshoe option. 3.50  Finally, Article 6(4) and (5), Regulation 2016/1052 provides for keeping records of stabilization activity and for notifying stabilization activity to competent authorities.

10.  Insider Trading and Stabilization 3.51  It has been mentioned several times that from an operational perspective stabilization is a form of (permitted) transaction-based market manipulation, because it includes the purchase of securities or the offer to purchase securities. This operative qualification raises the question of the relationship between stabilization and insider trading because the safe harbour also includes protection from insider trading. This relationship is a complex one and in order to be explained has to take into consideration also the ratio legis of the prospectus regime.77 3.52  The market abuse regime applies to listed companies in the case of SEOs and to IPO companies, i.e. those companies which require an admission to trading (Art. 2(1) MAR). The safe harbour granted to stabilization in terms of exemption from the prohibition of market manipulation and insider dealing and unlawful disclosure of inside information as well as the existence of an ad-hoc disclosure of inside information (Art. 17 MAR) has in any case to be matched with the prospectus regime. Indeed, the prospectus is the document where full disclosure about the IPO company (SEO company) is required in order to alleviate (minimize) the asymmetric information problem related to IPOs. The prospectus regime does not tolerate a deviation from full disclosure of information and a possible exemption from market manipulation and insider trading and, as mentioned above, does also include a short reference to the possibility of future stabilization. Indeed, the MAR applies also to IPO companies in the phase before negotiation starts on the market, but the application for admission to trading (p. 70) has been made. In this very delicate phase (the pre-marketing phase, which is not uniformly regulated in the EU but with the provisions of some conflictof-interests rules already mentioned), the EU regulatory regime does not provide exemption from market manipulation and insider trading. Indeed, in Europe also the bookbuilding procedure could be scrutinized in terms of market manipulation and insider trading (and the conflict-of-interests rules).78 The MAR excludes the stabilization activity from market abuse. The stabilization activity can be carried out only during the stabilization period, which starts, as already mentioned, when negotiation starts on the market or when the offering price is made public in case of when-issued securities. In this context, it has to be pointed out that—in terms of inside information—the only relevant information included in the safe harbour relate to the bookbuilding phase and the allotment phase and to investors behaviours/strategies. In this phase, the bookrunner collects the (unbinding) orders and allots the shares to investors and is able to understand the mood of the market, when negotiation starts being able to have at least an impression about who is selling and generating pressures on the price. In other words, the only inside information which is covered by the safe harbour is information about the investing behaviours/strategies of the (allotted) investors (in particular, of institutional investors) and not inside information about the IPO company, which is always covered by full disclosure: before the IPO, by the Prospectus Regulation (including also the supplements to the prospectus of Article 23) and by Article 17, MAR (which applies to financial instruments to be admitted to trading) and after negotiations start by Article 17, MAR. 3.53  Another kind of inside information relates to the stabilization activity itself. A person cannot legitimately exploit the information related to the occurring stabilization activity by

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

trading on the share. This behaviour is not covered by the safe harbour, which covers only legitimately carried out stabilization activity.79

V.  Conclusion 3.54  This chapter has analysed the stabilization activity in IPOs taking into consideration its economic dimension and a comparison with the US regulatory regime. It has been stressed that in the US, stabilization has traditionally been developed and regulated in order to protect the interests of the syndicating banks and is applied on a rule basis. In (p. 71) Europe, stabilization is regulated in terms of the relationship between overallotment facility, stabilization, and the greenshoe option with the aim of protecting market and investors’ interests and is applied on a standard-based approach. This relationship relies on legal definitions which are not completely clear in their meanings and are possibly applied in the single Member States to adapt to the contractual different solutions they adopt in order to manage the IPO. Furthermore, Recital 12 MAR supports the interpretation of flexibility because certain forms of behaviour not covered by the conditions provided should not in themselves be considered market abuse. 3.55  Given this picture, it is not possible here to assess the overall result of the European regulation of stabilization in terms of efficiency and in terms of regulatory convergence or divergence in relation to the practical application of the rules in the single Member States. (p. 72)

Footnotes: 1

  Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 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/CE, 2017, L168/12 (Prospectus Regulation). 2

  Regulation (EU) 565/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directive 2003/124/EC, 2003/125, and 2004/72/EC, 2014, OJ L173/1. For a first commentary of the MAR, see Marco Ventoruzzo and Sebastian Mock (eds), Market Abuse Regulation (Oxford: OUP, 2017). 3 

Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation (market abuse), 2003, L96/16. On the MAD, see Guido A. Ferrarini, ‘The European Market Abuse Directive’, Common Market Law Review (2004) 41, 711. 4

  In the previous regulatory regime, the two exemptions were regulated in detail by Commission Regulation (EC) 2273/2003 of 22 December 2003 implementing Directive 2003/6/EC of the European Parliament and of the Council as regards exemptions for buyback programmes and stabilization of financial instruments, 2003, L336/33. For buy-back programmes, see Mathias M. Siems and Amedeo De Cesari, ‘The Law and Finance of Share Repurchases in Europe’, Journal of Corporate Law Studies (2012) 12, 33; for stabilization activity in IPOs, see Stefano Lombardo, ‘The Stabilisation of the Share Price of IPOs in the United States and the European Union’, European Business Organization Law Review (2007) 8, 521; Dmitri Boreiko and Stefano Lombardo, ‘Stabilisation Activity in Italian IPOs’, European Business Organization Law Review (2011) 12, 437; Stefano Lombardo, Quotazione in borsa e stabilizzazione del prezzo delle azioni (Milano: Giuffrè, 2011). 5

  In this chapter, the words ‘stabilization’ and ‘stabilisation’ have the same meaning and are considered the same.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

6

  Commission Delegated Regulation (EU) 2016/1052 of 8 March 2016 supplementing Regulation (EU) 596/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the conditions applicable to buy-back programmes and stabilization measures, 2016, L173/34. On stabilization (and buy-back programmes) in the new regulatory regime of MAR, see for a first introduction, Sebastian Mock, ‘Exemptions for Buy-Back Programmes and Stabilization’, in: Ventoruzzo and Mock (n. 2), 154–68. 7

  See Alexander P. Ljungqvist, Tim Jenkinson, and William J. Wilhelm Jr, ‘Global Integration in Primary Equity Markets: The Role of US Banks and US Investors’, Review of Financial Studies (2003) 16, 63. The literature on the economics of IPOs is extensive, with studies covering both theoretical and empirical topics for many countries. For general introductions, see Jason Draho, The IPO Decision: Why and How Companies Go Public (Cheltenham: Edward Elgar, 2004); Tim Jenkinson and Alexander P. Ljungqvist, Going Public: The Theory and Evidence on How Companies Raise Equity Finance (Oxford: OUP, 2001); Jay R. Ritter and Ivo Welch, ‘A Review of IPO Activity, Pricing and Allocations’, Journal of Finance (2002) 57, 1795; Jay R. Ritter, ‘Differences between European and American IPO Markets’, European Financial Management (2003) 9, 421. With respect to European IPOs, see the contributions in Mario Levis and Silvio Vismara (eds), Handbook of Research on IPOs (Cheltenham: Edward Elgar, 2015). 8

  Reinier H. Kraakman, ‘Gatekeepers: The Anatomy of a Third-Party Enforcement Stategy’, Journal of Law, Economics, and Organization (1986) 2, 53; Ronald J. Gilson and Reinier H. Kraakman, ‘The Mechanism of Market Efficiency’, Virginia Law Review (1984) 70, 549, 613. 9

  For the US, the relational choice is analysed by Chitru S. Fernando, Vladimir A. Gatchev, and Paul A. Spindt, ‘Two-Sided Matching: How Corporate Issuers and their Underwriters Choose Each Other’, Journal of Applied Corporate Finance (2013) 25, 103. 10

  It is also possible to have combinations of the three. See Samuel N. Allen, ‘A Lawyer’s Guide to the Operation of Underwriting Syndicates’, New England Law Review (1991) 26, 320. On the structure of compensation, see for the US, where fees converge to 7 per cent of the value of the offering, Husuan-Chi Chen and Jay R. Ritter, ‘The Seven Percent Solution’, Journal of Finance (2000) 55, 1105; for the lower level of European fees, see Sami Torstila, ‘What Determines IPO Gross Spread in Europe?’, European Financial Management (2001) 7, 523; Mark Abrahamson, Tim Jenkinson, and Howard Jones, ‘Why Don’t US Issuers Demand European Fees for IPOs?’, Journal of Finance (2011) 56, 2055. 11

  There can be a discount (of e.g. 5 per cent) for some investors (e.g. customers or employees of the company) on the basis of equal treatment rules, but always based on the single offering price. 12

  This fact is typically not studied by economists, who consider it as given and normal. For the US, see Sean J. Griffith, ‘The Puzzling Persistence of the Fixed Price Offering: Implicit Price Discrimination in Ipos’, in University of Connecticut School of Law Working Paper Series, 2005, also at disposal on http://www.ssrn.com. For the European Union, Article 8, Prospectus Directive 2003/71/EC and now Article 17, Prospectus Regulation refer to the final offer price (singular), as do other rules (see e.g. Art. 5.1(b) Regulation 2016/1052 referring to the final price (singular)). The continuous reference of EU legislation to an offering final price (singular) maybe proves the impossibility of setting different prices for different investors, and is a situation that can be evaluated by everyone in the European and national context. 13

  Theoretically, following the so-called ‘Law of One Price’, one could argue that the single price is the result provided by the market to anticipate possible arbitrage mechanisms between the two different prices that would in any case reach a single price. On the Law of

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

One Price in financial markets, see Owen A. Lamont and Richard H. Thaler, ‘The Law of One Price in Financial Markets’, Journal of Economic Perspectives (2003) 17, 191. 14

  On underpricing, see the excellent introduction by Alexander P. Ljungqvist, ‘IPO Underpricing’, in: B. Espen Ebcko (ed.), Handbook of Corporate Finance: Empirical Corporate Finance, Vol. 1 (Amsterdam: Elsevier, 2007), 375. For underpricing in an alternative market, see Miguel À. Acedo-Ramírez and Francisco J. Ruiz-Cabestre, ‘IPO Characteristics and Underpricing in the Alternative Investment Market’, Applied Economic Letters (2017) 24, 485. The long-run underperformance of IPO shares means that on average their return underperforms the market return for a period of three to five years after the IPO, see Ljungqvist, ‘IPO Underpricing’, 385. 15

  For example, the price switches from €10 (the offering IPO price) to €11 with an underpricing of 10 per cent. 16

  Statistical data for an international comparison among several countries is provided by Timothy Loughran, Jay R. Ritter, and Kristian Rydqvist, ‘Initial Public Offerings: International Insights’, Pacific-Basin Finance Journal (1994) 2, 165. 17

  For example, the price switches from €10 (the offering IPO price) to €9 with an overpricing of 10 per cent. 18

  See Liungsqvist (n. 14), 384. Other theories to explain underpricing are (i) institutional theories; (ii) agency costs theories; (iii) behavioural finance theories. 19

  So, underpricing depends on which of these actors has more information, Liungsqvist (n. 14), 400 for the company and 396 for the syndicating banks. 20

  On this model, see Kevin Rock, ‘Why New Issues are Underpriced’, Journal of Financial Economics (1986) 15, 187. 21

  See Lawrence M. Benveniste and Paul A Spindt, ‘How Investment Bankers Determine the Offer Price and Allocation of New Issues’, Journal of Financial Economics (1989) 24, 343. 22

  For the book-building system, see Lawrence M. Benveniste and William J. Wilhelm Jr, ‘Initial Public Offering: Going by the Book’, Journal of Applied Corporate Finance (1997) 10, 98. 23

  See e.g. Francesca Cornelli and David Goldreich, ‘Bookbuilding and Strategic Allocation’, Journal of Finance (2001) 56, 2337; Francesca Cornelli and David Goldreich, ‘Bookbuilding: How Informative is the Order Book?’, Journal of Finance (2003) 58, 1415. 24

  For instance for the US, see Reena Aggarwal, Nagpurnanand R. Prabhala, and M. Puri, ‘Institutional Allocation in Initial Public Offerings: Empirical Evidence’, Journal of Finance (2002) 57, 1421; also for Europe and other countries, see Alexander P. Ljungqvist and William J. Wilhelm Jr, ‘IPO Allocations: Discriminatory or Discretionary?’, Journal of Financial Economics, (2002) 75, 167; more recently, Tim Jenkinson, Howard Jones, and Felix Suntheim, ‘Quid Pro Quo? What Factors Influence IPO Allocations to Investors?’, Journal of Finance (2018) 73, 2303. 25

  The third price-setting system is an open system based on (Dutch) auction, which is not so diffused and was used, for instance, in the IPO of Google in 2004, on which see Anita I. Anand, ‘Is the Dutch Auction IPO a Good Idea?’, Stanford Journal of Law, Business & Finance (2006) 12, 233; for a comparison between auction and bookbuilding, see Zhaohui Chen, Alan D. Morrison, and William J. Wilhelm Jr, ‘Another Look at Bookbuilding, Auctions, and the Future of the IPO Process’, Journal of Applied Corporate Finance (2014) 26, 19.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

26

  Theoretical models analyse the optimal use of the bookbuilding system under different conditions, see e.g. Lawrence M. Benveniste and William J. Wilhelm, ‘A Comparative Analysis of IPO Proceeds under Alternative Regulatory Environments’, Journal of Financial Economics (1990) 32, 173; Ann E. Sherman, ‘IPOs and Long-Term Relationship: An Advantage of Book Building’, Review of Financial Studies (2000) 13, 697; Ann E. Sherman and Sheridan Titman, ‘Building the IPO Order Book: Underpricing and Participation Limits with Costly Information’, Journal of Financial Economics (2002) 65, 3. 27

  A useful review is provided by Tim Jenkinson and Howard Jones, ‘The Economics of IPO Stabilization, Syndicates and Naked Shorts’, European Financial Management (2007) 13, 616; see also William J. Wilhelm Jr, ‘Secondary Market Stabilization of IPOs’, Journal of Applied Corporate Finance (1999) 12, 78. 28

  After some rules introduced in 1934, the SEC first regulated stabilization in 1940 and then again in 1955. See in general George S. Parlin and Edward Everett, ‘The Stabilization of Securities Prices’, Columbia Law Review (1949) 49, 607; William Ward Foshay, ‘Market Activities of Participants in Securities Distributions’, Virginia Law Review (1959) 45, 907. 29

  See SEC, Anti-Manipulation Rules concerning Securities Offerings; Final Rule, Friday, January 3, 1997, in Federal Register, Vol. 62, No. 2, 519–50. 30

  For a proposal of Reform of Regulation M, SEC, Amendments to Regulation M: AntiManipulation Rules concerning Securities Offerings: Proposed Rule, Friday, 17 December 2004, in Federal Register, Vol. 69, No. 242, 75774–95. 31

  Louis Kaplan, ‘Rules versus Standards: An Economic Analysis’, Duke Law Journal (1992) 42, 557. Regulation M is integrated by Item 508(i) (plan of distribution: stabilization and other transactions) of Regulation S-K to disclose ex ante in the registration statement, among others, also information about stabilization activity. Financial Industry Regulation (FINRA) Rule 5190 specifies other requirements. 32

  According to Regulation M Rule 100, ‘stabilize’ or ‘stabilizing’ means the placing of any bid, or the effecting of any purchase, for the purpose of pegging, fixing, or maintaining the price of a security. 33

  See Reena Aggarwal, ‘Stabilization Activities by Underwriters after Initial Public Offerings’, Journal of Finance (2000) 55, 1075, 1082. 34

  According to Regulation M Rule 100, a syndicate covering transaction means the placing of any bid or the effecting of any purchase on behalf of the sole distributor or the underwriting syndicate or group to reduce a short position created in connection with the offering. 35

  See e.g. Thomas L. Hazen, The Law of Securities Regulation (St Paul: West Academic Publishing, 2016), 74; James D. Cox, Robert W. Hilman, and Donald C. Langewoort, Securities Regulation. Cases and Materials (New York: Wolters Kluwer, 2013), 155. 36

  See Hazen (n. 35), 99.

37

  See Hazen (n. 35), 103.

38

  While originally the overallotment option was used in order to minimize the reneging costs, the greenshoe option to cover the risks associated with the overallotment option was introduced only in 1963. See Chris J. Muscarella, John W. Peavi III, and Michael R. Vetsuypens, ‘Optimal Exercise of the Over-Allotment Option in IPOs’, Financial Analysts Journal (1992) 48, 76; Craig G. Dunbar, ‘Overallotment Option Restrictions and Contract Choice in Initial Public Offerings’, Journal of Applied Corporate Finance (1997) 3, 251; Robert S. Hansen, R. Beverly, and Vahan Janjigian, ‘The Over-Allotment Option and Equity Financing Flotation Costs: An Empirical Investigation’, Financial Management (1987) 16, 24; J. F. Cotter and R. S. Thomas, ‘Firm Commitment Underwriting Risk and the Over-

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Allotment Option: Do We Need Further Legal Regulation?’, Securities Regulation Law Journal (1998) 26, 245. 39

  The limit to the exercise of the greenshoe option was 10 per cent but since 1983 it has been fixed by the National Association of Securities Dealers (NASD) (FINRA) at 15 per cent of the registered shares; see Rules 5110 (and 5190), http://www.finra.org. 40

  For a recent general review of the economics of flipping with an empirical analysis of the Indian IPO market, see Suman Neupane et al., ‘Do Investors Flip Less in Bookbuilding than in Auction IPOs?’, Journal of Applied Corporate Finance (2017) 47, 253. 41

  See Lombardo (n. 4), 38.

42

  The IPO company could be considered the cheapest cost avoider and for this reason should bear the risks associated with the underwriting system of a firm commitment contract, which with the open price system and the bookbuilding procedure has granted an average reduction of underpricing. 43

  For a general introduction to the topics, see Marco Ventoruzzo, ‘The Concept of Insider Dealing’, in: Ventoruzzo and Mock (n. 2), 13–32; Sebastian Mock, ‘The Concept of Market Manipulation’, in: Ventoruzzo and Mock (n. 2), 33–46. 44

  See Marco Ventoruzzo and Chiara Picciau, ‘Inside Information’, in: Ventoruzzo and Mock (n. 2), 175–207. 45

  See Jesper Lau Hansen, ‘Insider Dealing’, in: Ventoruzzo and Mock (n. 2), 208–53; Chiara Mosca, ‘Unlawful Discourse of Inside Information’, in: Ventoruzzo and Mock (n. 2), 275–96; Jesper Lau Hansen, ‘Prohibition of Insider Dealing and of Unlawful Disclosure of Inside Information’, in: Ventoruzzo and Mock (n. 2), 326–31. 46

  See Alan Pietrancosta, ‘Public Disclosure of Inside Information and Market Abuse’, in: Ventoruzzo and Mock (n. 2), 47–62 and 343–84. 47

  On the MAD, see Ferrarini (n. 3), 724; for the definition of market manipulation in the MAR, see Arad Reisberg, ‘Market Manipulation’, in: Ventoruzzo and Mock (n. 2), 309–18; for the prohibition of market manipulation in the MAR, see Sebastian Mock, ‘Prohibition of Market Manipulation’, in: Ventoruzzo and Mock (n. 2), 332–36. 48

  Article 3(2)(a), MAR defines securities, including shares and other securities equivalent to shares, bonds, and other forms of securitized debt or securitized debt convertible or exchangeable into shares or into other securities equivalent to shares. 49

  The stabilization of securities can also be pursued by means of a transaction of associated instruments (Art. 5(4) and 3(2)(d) MAR), where associate instruments are defined by Article 3(2)(b), MAR, which includes some financial instruments (admitted or traded on a trading venue or not) as (i) contracts or rights to subscribe for, acquire, or dispose of securities; (ii) financial derivatives of securities; (iii) where securities are convertible or exchangeable debt instruments, the securities into which such convertible or exchangeable debt instruments may be converted or exchanged; (iv) instruments which are issued or guaranteed by the issuer guarantor of the securities and whose market price is likely to materially influence the price of the securities, or vice versa; (v) where the securities are securities equivalent to shares, the shares represented by those securities, and any other securities equivalent to those shares. 50

  Article 2(d), Prospectus Regulation provides the notion of ‘offer of securities to the public’ as a communication to persons in any form and by any means, presenting sufficient information on the terms of the offer and the securities to be offered, so as to enable an

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

investor to decide to purchase or subscribe for those securities with the specification that the definition includes also the placing of securities through financial intermediaries. 51

  While Regulation 2273/2003 included in the notion of significant distribution an initial or secondary offer publicly announced, the requisite of public announcement has been eliminated in Regulation 2016/1052, apparently with the result that it can be also a private placement. 52

  The initial price discovery of IPOs, i.e. the time after negotiations start on the market, is analysed by Reena Aggarwal and Pat Conroy, ‘Price Discovery in Initial Public Offerings and the Role of the Lead Underwriter’, Journal of Finance (2000) 52, 2903. 53

  The notion of overallotment facility presents some variations in the Italian, German, French, and Spanish linguistic versions of Regulation 2016/1052. Italian: facoltà di sovrallocazione; German: Überzeichnung; French: faculté de surallocation; Spanish: instrumento de sobreasignación. 54

  The linguistic versions of Regulation 2016/1052 present the following patterns: Italian: contratto di sottoscrizione o contratto di collocamento; German: Emissions-bzw Garantievertrag; French: convention de prise ferme ou de l’accord de gestion du placement; Spanish: acuerdo de suscripción o en el acuerdo de gestión principal. 55

  Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending 2002/92/EC and Directive 2011/61/EU (2014) OJ L173/349. 56

  The versions of section A in the four languages are: English: (6) Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis; (7) Placing of financial instruments without a firm commitment basis; Italian: 6) Assunzione a fermo di strumenti finanziari e/o collocamento di strumenti finanziari sulla base di un impegno irrevocabile. 7) Collocamento di strumenti finanziari senza impegno irrevocabile; German: (6) Übernahme der Emission von Finanzinstrumenten und/oder Platzierung von Finanzinstrumenten mit fester Übernahmeverpflichtung; (7) Platzierung von Finanzinstrumenten ohne feste Übernahmeverpflichtung; French: (6) Prise ferme d’instruments financiers et/ou placement d’instruments financiers avec engagement ferme; (7) Platzierung von Finanzinstrumenten ohne feste Übernahmeverpflichtung; Spanish: 6) Aseguramiento de instrumentos financieros o colocación de instrumentos financieros sobre la base de un compromiso firme. 7) Colocación de instrumentos financieros sin base en un compromiso firme. 57

  The proper set of incentives at stake can also be analysed with respect to the type of underwriting agreement between the offeror and the syndicating banks: stabilization is more important for the syndicating banks in case of an agreement where the risk is supported by them, i.e. by the firm commitment agreement. 58

  Italian: accettare sottoscrizioni o offerte di acquisto; German: Zeichnungs-oder Kaufangebote; French: les souscriptions ou les offres d’achat; Spanish: aceptación de suscripciones u ofertas para comprar. 59

  This interpretation relies on the fact that the term ‘subscription’ refers both to the subscription of new shares coming from a company capital increase during the IPO and to the subscription of old shares coming from selling shareholders, which is technically not a subscription but a purchase. Otherwise, an alternative but less plausible interpretation, would be that the term ‘acceptance of subscriptions’ refers to a capital increase of the IPO company and the creation of new shares that have to be subscribed by the investors, while the term ‘offers to purchase’ refers to the selling of old shares coming from previous holders, which seems to replicate Article 17(1)(a), Prospectus Regulation that refers to (i)

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

the acceptances of the purchase and to the acceptance of subscription so taking into consideration the case of the selling shareholders and the capital increase. 60

  See for instance for Germany, Stefano Lombardo, ‘Invitatio ad Offerendum und Overallotment und Greenshoe Option in Deutschland’, in: Thomas Eger et al. (eds), Internationalisierung des Rechts und seine ökonomische Analyse (Internationalization of the Law and its Economic Analysis). Festshrift für H.-B. Schäfer zum 65. Geurtstag) (Wiesbaden: Gabler, 2008), 537–45 and for Italy, Paolo Giudici and Stefano Lombardo, ‘La tutela degli investitori nelle IPO con prezzo di vendita aperto’, Rivista delle società (2012) 57, 907. 61

  Article 17(1)(a), Prospectus Regulation refers to (i) the acceptances of the purchase and to the acceptance of subscription, so taking into consideration the case of the selling shareholders and the capital increase. 62

  See Boreiko and Lombardo (n. 4).

63

  In the case of debt securities and other cases, Article 5(3), Regulation 2016/1052 provides for more complex rules. In an SEO, being already negotiated on a trading venue as in the case of the grey market, the stabilization period starts on the date of adequate public disclosure of the final price and ends thirty days after the date of allotment. 64

  See e.g. Francesca Cornelli, David Goldreich, and Alexander Ljungqvist, ‘Investor Sentiment and Pre-IPO Markets’, Journal of Finance, 2006, 61, 1187. 65

  See https://www.londonstockexchange.com/traders-and-brokers/rules-regulations/whenissued-stabilisation.htm. 66

  Rule 105 of Regulation M eliminates the possibility of creating a grey market before negotiations officially start. 67

  Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive (2017) OJ L87/1. 68

  That offerings of securities, and particularly IPOs can be extremely delicate has been previously stressed by the SEC in 2005; see SEC, Commission Guidance regarding Prohibited Conduct in Connection with IPO Allocations; Final Rule, Wednesday, 13 April 2005, in Federal Register, Vol. 70, No. 70, 19672–7. 69

  On conflict of interests in the MiFID context, see the very general introduction by Stefan Grundmann and Philipp Hacker, ‘Conflict of Interests’, in: Danny Busch and Guido Ferrarini (eds), Regulation of the EU Financial Markets. MiFID II and MiFIR (Oxford: OUP, 2017), 165. 70

  Recital 57: Given the specificities of underwriting and placing services and the potential for conflicts of interest to arise in relation to such services, more detailed and tailored requirements should be specified in this Regulation. In particular, such requirements should ensure that the underwriting and placing process is managed in a way which respects the interests of different actors. Investment firms should ensure that their own interests or interests of their other clients do not improperly influence the quality of services provided to the issuer client. Such arrangements should be explained to that client, along with other relevant information about the offering process, before the firm accepts to undertake the offering.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

71

  Recital 58: ‘Investment firms engaged in underwriting or placing activities should have appropriate arrangements in place to ensure that the pricing process, including bookbuilding, is not detrimental to the issuer’s interests.’ 72

  Recital 59: The placing process involves the exercise of judgement by an investment firm as to the allocation of an issue, and is based on the particular facts and circumstances of the arrangements, which raises conflicts of interest concerns. The firm should have in place effective organisational requirements to ensure that allocations made as part of the placing process do not result in the firm’s interest being placed ahead of the interests of the issuer client, or the interests of one investment client over those of another investment client. In particular, firms should clearly set out the process for developing allocation recommendations in an allocation policy.

73

  Article 39.2: Investment firms shall provide clients with information about how the recommendation as to the price of the offering and the timings involved is determined. In particular, the firm shall inform and engage with the issuer client about any hedging or stabilisation strategies it intends to undertake with respect to the offering, including how these strategies may impact the issuer clients’ interests. During the offering process, firms shall also take all reasonable steps to keep the issuer client informed about developments with respect to the pricing of the issue.

74

  Article 7(2), Regulation 2016/1052 defines the price limitations in case of debt instruments. 75

  Adequate public disclosure is defined in Article 1(b), Regulation 2016/1052 in terms of making information public in a manner which enables fast access and complete, correct, and timely assessment of the information by the public, in accordance with the mentioned provisions. Furthermore, Recital 8 specifies that market integrity requires the adequate public disclosure of stabilization measures. 76

  See Commission Delegated Regulation (EU) 2019/980 of 14 March 2019 supplementing Regulation (EU) 2017/1129 of the European Parliament and of the Council as regards the format, content, scrutiny, and approval of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Commission Regulation (EC) No. 809/2004, 2019, L166/26 has provided the ex ante disclosure of the possible stabilization activity, for instance in point 6.5 of Annex XI. 77

  See Lombardo (n. 4), 179.

78

  The allotment is defined by Article 1(d), Regulation 2016/1052 in terms of process or processes by which the number of securities to be received by investors who have subscribed or applied for them is determined. Notwithstanding the fact that from a contractual perspective this definition is not completely clear with respect to the terms subscribed and applied, it is important to stress that the allotment itself is covered by the prohibition of market manipulation and insider trading. This is particularly significant with the bookbuilding procedure and the possible behaviour of the syndicating banks to inflate the offering price (i.e. to manipulate it) in the knowledge of inflating it, possibly shifting the expensive shares to ignorant retail investors and to intentionally overpricing the IPO. On these problems, see Giudici and Lombardo (n. 60). In other words, the bookbuilding/

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

allotment procedure in Europe is covered by the MAR in the interests of the integrity of the capital market. 79

  On the point see also Mock (n. 6), 156.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Part I General Aspects, 4 The Prospectus Regulation and Other EU Legislation: The Wider Context for Prospectuses Marieke Driessen From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

Subject(s): Passport — Securities — Financial regulation — Monetary union — European Central Bank

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 73) 4  The Prospectus Regulation and Other EU Legislation The Wider Context for Prospectuses I.  Introduction 4.01 II.  References in the Prospectus Regulation to Other EU Laws and their Legal Implications 4.06 1.  Securities 4.07 2.  Bail-innable Securities 4.14 3.  ‘Qualified Investors’ 4.17 4.  Regulated Markets 4.21 5.  Home Member State 4.25 6.  PRIIPs 4.28 III.  Contents of Prospectuses beyond the Prospectus Regulation 4.31 1.  MiFID II and MiFIR 4.32 2.  Transparency on Financial Reporting and Alternative Performance Measures (APMs) 4.39 3.  The Market Abuse Regulation 4.45 4.  The Benchmarks Regulation 4.49 5.  The Credit Rating Agencies Regulation 4.56 6.  The Securitization Regulation 4.59 7.  The Take-over Bid Directive 4.63 8.  Prospectuses for Financial Sector Issuers 4.67 IV.  Prospectuses in the Context of Brexit Legislation 4.78 1.  The EU Approach 4.79 2.  The UK Approach 4.81 V.  Conclusion 4.84

I.  Introduction 4.01  This chapter discusses the interaction between the Prospectus Regulation1 and other EU financial markets legislation. The Prospectus Regulation incorporates elements of other EU laws in numerous references and provisions. How do these influence the scope of application of the Prospectus Regulation? And how are the contents of a prospectus itself affected by EU rules other than the Prospectus Regulation? 4.02  Section II ‘References in the Prospectus Regulation to other EU Laws and their Legal Implications’ (para. 4.06) explores the impact of references in the Prospectus Regulation to other EU laws and how this affects the scope of the Prospectus Regulation. In addition to

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

providing context for the Prospectus Regulation, this overview also may serve (p. 74) as an introduction to other subjects explored in more detail in other chapters in this volume. 4.03  The contents and format of prospectuses are not only affected by the Prospectus Regulation, but also by various other provisions of EU law. We will explore these in section III ‘Contents of Prospectuses beyond the Prospectus Regulation’ (para. 4.31). 4.04  A chapter on the interplay between the Prospectus Regulation and other EU laws, in a book to be published in 20192—the year in which the exit of the United Kingdom from the EU (‘Brexit’) may have occurred potentially without a withdrawal agreement (‘hard Brexit’) —would not be complete without a brief discussion of the current prospects for prospectus regulation post-Brexit, in both the remaining EU jurisdictions (‘EU27’) and the UK. A discussion of how Brexit may affect prospectuses in the UK and in the EU27 is set out in section IV ‘Prospectuses in the Context of Brexit Legislation’ (para. 4.78). 4.05  Conclusions follow in section V ‘Conclusion’ (para. 4.84).

II.  References in the Prospectus Regulation to Other EU Laws and their Legal Implications 4.06  The Prospectus Regulation refers to other EU rules and regulations in many places. In particular, the articles in relation to subject matter and scope of the Prospectus Regulation and the definitions cross-refer to other directives and regulations.

1.  Securities 4.07  In relation to the scope of application of the Prospectus Regulation, the Prospectus Regulation applies to ‘securities’ which are defined by reference to ‘transferable securities’ within the meaning of the Markets in Financial Instruments Directive II (MiFID II),3 i.e. ‘those classes of securities which are negotiable’ on the capital market, with the exception of instruments of payment, such as: (i) shares in companies and other securities equivalent to shares in companies, partnerships, or other entities, and depositary receipts in respect of shares; (ii) bonds or other forms of securitized debt, including depositary receipts in respect of such securities; (iii) any other securities giving the right to acquire or sell any such transferable securities or giving rise to a cash settlement determined by reference to transferable securities, currencies, interest rates or yields, commodities, or other indices or measures. (p. 75) 4.08  In addition to payment instruments, money market instruments with a maturity of less than twelve months are also specifically excluded.4 4.09  In practice, this means that, as under the Prospectus Directive,5 the typical securities transactions for which prospectuses are required include: initial public offerings (IPOs) of shares, other share offerings, and also offerings and admission to trading on a regulated market of fund units, bonds, options, convertibles, and exchangeables, including regulatory capital instruments such as Additional Tier 1 instruments (contingent convertibles), minimum requirement for own funds and eligible liabilities (MREL)-instruments (e.g. senior non-preferred debt), and Tier 2 instruments (e.g. subordinated bonds). 4.10  In practice, commercial paper (which typically has a maturity of less than twelve months) is not subject to prospectus requirements. 4.11  The main feature of ‘securities’ as defined in the Prospectus Regulation is therefore that they are negotiable on the capital market. This element was not further defined in the Prospectus Directive, and it is not further defined in MiFID II either. Due to differences in implementation of MiFID II in national legislation, this led to national regulators providing

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

guidance and taking positions on ‘negotiability’ and ‘transferability’ that were not fully harmonized.6 4.12  The situation in which the Prospectus Regulation applies to ‘transferable securities’, which term is not yet harmonized across the EU, leads to different scopes of application of EU financial law. By way of example, a topical issue is whether forms of digital currency (e.g. Bitcoin and other virtual currency) would qualify as ‘securities’. There is no denying that some forms of such currency are being negotiated on the capital markets, as a result of which they would qualify as ‘securities’, unless they are to be viewed as ‘instruments of payment’. In fact, ESMA acknowledges that—in an exercise involving hypothetical nonpayment digital currencies—national regulators did provide different qualifications of such currencies.7 4.13  Under the Prospectus Regulation, a harmonized interpretation of ‘securities’ would be welcome. Instead, by referring to MiFID II, the divergence between national regulators has been ‘imported’ into the Prospectus Regulation. Although the current practice (p. 76) around more familiar types of securities would not change, the arrival of both new forms of transferable instruments and new forms of capital markets would require uniform application across the EU.

2.  Bail-innable Securities 4.14  As shown in paragraph 4.09, the definition of ‘securities’ under the Prospectus Regulation also includes regulatory capital instruments issued by financial institutions subject to capital requirements for banks and investment firms under the Capital Requirements Directive/Regulation (‘CRD/CRR’).8 Such instruments may be subject to resolution and recovery powers of competent authorities pursuant to the bail-in provisions of the Bank Recovery and Resolution Directive (‘BRRD’).9 However, the prospectus requirement under the Prospectus Regulation for any public offering, or admission to trading on a regulated market, of such instruments does not apply when such competent authorities make use of their powers, for example to convert debt into equity, as a result of the following provisions: (a)  Article 5(c), Prospectus Regulation provides that a prospectus requirement does not apply to the admission to trading on a regulated market where securities result from conversion or exchange by a resolution authority due to the exercise of its powers to write down, convert, and amend terms of securities pursuant to Articles 53(2), 59(2) or 63(1) and (2), BRRD; (b)  Article 1(5)(j), second sub-paragraph, under (c) and (d), Prospectus Regulation specifies that any conversion of exchange of instruments pursuant to bail-in powers under CRR 575/2013 and Directive 2009/138/EC does not count towards the 20 per cent exemption for convertible and exchangeable securities. 4.15  These provisions of the Prospectus Regulation are the mirror images of: (a)  Article 53(2)(d), BRRD, providing that resolution authorities have the power to complete or require the completion of all the administrative and procedural tasks necessary to give effect to the exercise of a resolution power, including any (p. 77) relisting or readmission of any debt instruments which have been written down, without the requirement for the issuing of an approved prospectus; and (b)  Article 63(2), BRRD, providing that resolution authorities, when applying the resolution tools and exercising the resolution powers, are not subject to any

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

requirement to publish any notice or prospectus or to file or register any document with any other authority. 4.16  It is worth noting that Article 53(2)(d), BRRD expressly provides that any relisting or readmission of debt instruments by resolution authorities does not require an approved prospectus, whereas Article 53(2)(c), BRRD, which applies to the power to give effect to resolution by way of the listing or admission to trading of new shares or other instruments of ownership, does not include such express stipulation. Accordingly, Article 53(2)(c), BRRD leaves open the possibility that the resolution authority may be required to publish an approved prospectus in relation to the listing or admission to trading of newly issued shares or other ownership instruments. In such case, one would fall back on Article 1(5)(c), Prospectus Regulation, which provides that in such cases a prospectus is not required for an admission to trading. Since Article 1(5)(c), Prospectus Regulation creates this exception in relation to admission to trading only, any offer of new share or other ownership securities that is deemed to be to the public, would require the publication of an approved prospectus, even if resolution powers are exercised.

3.  ‘Qualified Investors’ 4.17  The concept of qualified investors is an important one in the demarcation of compliance with the Prospectus Regulation. On the one hand, offers of securities to qualified investors are exempt from the prospectus requirement under Article 1(4)(a), Prospectus Regulation. On the other hand, the standard of disclosure is lower for a prospectus to be drawn up for admission to trading on (a segment of) a regulated market of non-equity securities to which only qualified investors can have access for the purposes of trading in such securities: in such cases, no summary is required (Art. 7 Prospectus Regulation), the language regime is less severe (Art. 27 Prospectus Regulation), and the overall level of disclosure is limited. 4.18  The prospectus requirement does not apply under the exemption for offerings of securities to ‘qualified investors’, which is defined by reference to ‘professionals’ within the meaning of points 1–4 of part I of Annex II of MiFID II: (1)  Entities which are required to be authorised or regulated to operate in the financial markets. The list below shall be understood as including all authorised entities carrying out the characteristic activities of the entities mentioned: entities authorised by a Member State under a Directive, entities authorised or regulated by a Member (p. 78) State without reference to a Directive, and entities authorised or regulated by a third country: (a)  Credit institutions; (b)  Investment firms; (c)  Other authorised or regulated financial institutions; (d)  Insurance companies; (e)  Collective investment schemes and management companies of such schemes; (f)  Pension funds and management companies of such funds; (g)  Commodity and commodity derivatives dealers; (h)  Locals; (i)  Other institutional investors;

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(2)  Large undertakings meeting two of the following size requirements on a company basis: –  balance sheet total: EUR 20 000 000; –  net turnover: EUR 40 000 000; –  own funds: EUR 2 000 000; (3)  National and regional governments, including public bodies that manage public debt at national or regional level, Central Banks, international and supranational institutions such as the World Bank, the IMF (International Monetary Fund), the ECB (European Central Bank), the EIB (European Investment Bank) and other similar international organisations. (4)  Other institutional investors whose main activity is to invest in financial instruments, including entities dedicated to the securitisation of assets or other financing transactions. 4.19  Furthermore, the list of qualified investors under the Prospectus Directive includes: (a)  opt-up professional clients; and (b)  eligible counterparties, unless any of the above have requested to be treated as non-professional clients. 4.20  Although it is helpful that the Prospectus Regulation aligns the concept of ‘qualified investors’ to MiFID II, there is also something to be said for alignment with the concept of ‘public’ in CRD/CRR. For example, an issuer that uses proceeds of securities issued by it to on-lend such funds to others must consider not only (i) whether the prospectus requirement for securities offerings to the ‘public’ applies under the Prospectus Regulation; but also (ii) whether it is engaging in the business of attracting repayable funds from the ‘public’ and granting credit under Article 4, CRR (in which case, licensing and other requirements apply).10 (p. 79) An entity attracting repayable funds only from others than the ‘public’ (as meant in Article 9(1), CRD and Article 4, CRR) is exempt from CRD/CRR licensing requirements. In practice, this exemption is widely used by issuers that are, for example, special-purpose vehicles issuing structured, asset-backed, or other debt instruments and group finance companies such as the ‘in-house bank’ of international corporate groups. In the absence of definitions of ‘public’ in both the Prospectus Regulation and CRD/CRR, the scope of these terms and thus the scope of application of the Prospectus Regulation and CRD/CRR is unclear and subject to potentially divergent interpretation by national regulators. Guidance on the interpretation of ‘public’ under the Prospectus Regulation, also as it relates to the ‘public’ as used in CRD/CRR in relation to attracting repayable funds, would be helpful.11

4.  Regulated Markets 4.21  Article 3(3), Prospectus Regulation imposes a prospectus requirement for admissions to trading on regulated markets (in addition to a prospectus requirement for offers to the public). The Prospectus Regulation does not apply to admissions to trading on any other trading facilities, such as multilateral trading facilities (MTFs) and organized trading facilities (OTFs) without more. Obviously, MTFs and OTFs could impose disclosure requirements on admissions to trading in ways that are the same or similar to the prospectus requirements under the Prospectus Regulation.12 Since operators of MTFs did

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

and do in fact apply disclosure standards the same or similar to the Prospectus Directive, the Prospectus Regulation has an impact beyond regulated markets. 4.22  In respect of markets and trading venues, the scope of the Prospectus Regulation applying to regulated markets only is markedly more limited than that of other EU legislation, such as, for example, the Market Abuse Regulation (MAR),13 which applies not only to financial instruments admitted to a regulated market, but also to those admitted to MTFs, OTFs, and to trading through systematic internalizers.14 4.23  As a result, investors in securities admitted to trading on regulated markets have the benefit of the prospectus requirement of the Prospectus Regulation and the standards of disclosure that this entails. EU legislators accept that investors may also choose to trade at markets where disclosure on the relevant securities is ‘unregulated’, although (p. 80) they do not accept behaviours that would abuse such markets to the detriment of other investors and market integrity by bringing such alternative markets within the scope of the MAR.15 4.24  Although the Prospectus Regulation applies to regulated markets only, it does refer to MTFs in relation to how approved prospectuses may be made available to the public. A prospectus is deemed to have been made available to the public if published in electronic form on the website of the issuer, the offeror, the person asking for admission to trading, financial intermediaries, or the regulated market where admission to trading is sought, or— where no such admission is sought—the operator of the MTF.16 The situation that a prospectus is published on the website of the operator of an MTF (admission to trading on which does not require a prospectus), implies that the admission to trading on the MTF takes place in the context of an offer of securities to the public (for which a prospectus is required). Admission of securities to trading on an MTF does not in and of itself qualify as an offer of securities to the public.17 Trading venues other than regulated markets and MTFs are not generally accessible to the public, which would make publication of a prospectus on the website of their operators less effective.

5.  Home Member State 4.25  The concept of home Member State of an issuer of securities in the Prospectus Regulation is relevant to determine which competent authority is to approve a prospectus where this is required (in relation to an offering and/or an admission to trading on a regulated market that is in the scope of the Prospectus Regulation) or desirable (in relation to an offering and/or an admission to trading on a regulated market that is outside the scope of the Prospectus Regulation).18 The home Member State is determined by the issuer’s registered office (if in the EU) or, for issuers of debt instruments with a minimum denomination of at least EUR 1,000 (or equivalent in another currency) or of exchangeable instruments, chosen from among the registered office (if in the EU), the jurisdiction of the public offer, or admission to trading. 4.26  In other cases, for non-EU issuers of equity securities or debt securities, for example, with a denomination lower than EUR 1,000 (or equivalent in another currency), the home Member State is determined by reference to the first offering to the public or the first request for admission to trading on a regulated market or any other market which (p. 81) the issuer may choose in accordance with Article 2(1), Transparency Directive. Since Article 2(1), Transparency Directive allows for the choice and potential new election of a home Member State, with this reference applying in the Prospectus Regulation only to thirdcountry issuers, one could consider whether there is a wider choice for non-EU issuers than for EU issuers. 4.27  This also applies to issuers with issuance programmes pursuant to which they have not yet issued securities offered or admitted to trading on a regulated market.19

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

6.  PRIIPs 4.28  The Prospectus Regulation frequently refers to PRIIPs.20 This regulation applies to packaged retail and insurance-based investment products (PRIIPs) that are offered to retail clients (e.g. consumers and other non-professional clients). Examples of such products include products combining a mortgage with home insurance and structured notes, where the return on the relevant note is linked to an underlying asset. The risks inherent in such products are difficult to understand for non-professional investors on the basis of a prospectus alone. PRIIPs therefore requires that key information documents (‘KIDs’) are made available to retail investors which explain, in a maximum of three pages on A4 format and in a prescribed format, the key characteristics of the relevant product. The information to be included in a KID overlaps to a significant extent with the prescribed contents of a prospectus summary, including in relation to information on the issuer and risk factors, for example. 4.29  Article 7(3), Prospectus Regulation prescribes that the summary of a prospectus has a maximum length of ‘seven sides of A4-sized paper when printed’. Pursuant to Article 7(7), Prospectus Regulation, several items typically required in a summary do not need to be disclosed if a KID prepared under PRIIPs is included in the summary. Competent authorities may require issuers or those seeking admission to listing to include the KID in the summary. Where the KID is included in the prospectus summary, the summary may be three pages longer than the maximum length of seven pages (as the length of a KID is a maximum of three pages under PRIIPs). Pursuant to Article 7(12), PRIIPs, distributors, who under PRIIPs may have their own obligation to provide KIDs, are deemed to have satisfied any such obligation if a KID has been included in the prospectus summary.21 (p. 82) 4.30  There are several points to note in relation to the interplay between the prospectus summary and the KID: (a)  the KID may be included in the prospectus summary only where the KID is required to be prepared pursuant to PRIIPs. Thus, this leaves out any KIDs that have been prepared voluntarily. This situation may arise where issuers wish to offer potential investors a tool to compare (i) a product that is within the scope of PRIIPs, i.e. for which a KID must be prepared, for example an index-linked note; with (ii) a product that is not within the scope of PRIIPs, for example a fixed-rate note. Also, some trading platforms apply a general requirement to issuers to prepare KIDs, as a matter of compliance with listing and/or trading requirements, even though issuers are issuing products that are not within the scope of PRIIPs. These voluntary KIDs may not be used in prospectus summaries. (b)  The purpose of a KID is to provide transparency, for example in relation to risks and performance scenarios. These must be calculated and set out in KIDs in the precise manner stipulated by PRIIPs. The information does thus not necessarily represent the information that a reasonable investor would deem reasonable for its investment decision. However, a prospectus summary has the purpose of providing ‘material’ information and is required not to be misleading. Not all KIDs would necessarily qualify as such. As a result, where a KID is included in a prospectus summary, the remaining summary will need to address any such issues within the maximum space of seven pages. (c)  Article 7(10), Prospectus Regulation requires a maximum of fifteen risk factors to be disclosed in the summary. KIDs also include risk warnings, which are not subject to strict risk factor requirements. There is evidently the possibility that the risks described in KIDs are not consistent with those required to be disclosed in the prospectus under the Prospectus Regulation. For parties responsible—and potentially liable—for the contents of a prospectus and a KID, it is advisable to perform a gap

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

analysis on the risks disclosed in each and to ensure consistency among both documents. (d)  KIDs are not subject to approval from competent authorities, but prospectuses are. The question is how relevant authorities would deal with non-approved KIDs for the purposes of approving prospectuses, and how they would address the potential inconsistencies set out in the points above. It cannot be excluded that KIDs do become subject to indirect scrutiny from regulators that are asked to approve prospectuses in this manner.

III.  Contents of Prospectuses beyond the Prospectus Regulation 4.31  The contents of prospectuses also depend on other EU legal instruments, in addition to the Prospectus Regulation, either because they directly prescribe disclosure in (p. 83) prospectuses outright or because they have an indirect effect that makes it desirable to include additional information for investors.

1.  MiFID II and MiFIR 4.32  As of 3 January 2018, MiFID II22 and MiFIR23 apply. Major developments under MiFID II affecting prospectuses are the newly introduced product governance requirements and the requirement for both manufacturers and distributors of financial instruments to formulate a target market. 4.33  MiFID II introduced a new product governance regime applicable to firms that manufacture financial instruments (manufacturers) or distribute the same to end investors (distributors), or both. For the purposes of MiFID II, manufacturers are MiFID firms ‘that create, develop, issue and/or design financial instruments, including when advising corporate issuers on the launch of new financial instruments’,24 whereas distributors are MiFID firms ‘that offer or sell financial instruments and services to clients’.25 4.34  As such, any MiFID firm issuing financial instruments may be considered to be a manufacturer. However, the position is less clear in relation to managers and underwriters. Owing to the broad scope of the definitions of the terms ‘manufacturer’ and ‘distributor’, a common view among market participants has emerged that, in the context of a typical issuance of debt instruments, the (joint) lead managers involved may qualify as both (co-)manufacturers and distributors, whereas more passive managers potentially only qualify as distributors (but not as manufacturers).26 That being said, an assessment will need to be made, for each case, as to who is a manufacturer and who is a distributor (or both) with regard to the activities performed by the relevant managers and underwriters. 4.35  Pursuant to Article 16(3), MiFID II, a manufacturer of financial instruments must, among other things: (a)  identify a target market for the relevant financial instruments, ensuring that the distribution strategy is consistent with the target market and taking reasonable steps to ensure that the financial instruments are distributed to the target market; (p. 84) (b)  regularly assess whether the relevant financial instrument remains consistent with the needs of the identified target market; and (c)  provide the distributors with information on, among other things, the appropriate distribution channels and the identified target market in order for the distributors to

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

understand and recommend or sell the relevant financial instruments in a proper manner. 4.36  Pursuant to Article 16(3), MiFID II, a distributor of financial instruments must, among other things, identify its own target market and distribution strategy, using the information obtained from manufacturers and information about their own clients. 4.37  Where multiple parties manufacture financial instruments, they enter into a written agreement with co-manufacturers (including third-country firms and non-MiFID firms, which perform the same activities as a manufacturer) outlining their mutual responsibilities. A written agreement is typically included in the subscription/underwriting agreement on the basis of industry standards developed by the International Capital Markets Association (ICMA).27 4.38  The ICMA has introduced a practice in the international capital markets that prospectuses include details of the target market of the financial instruments identified by the (co-)manufacturers, and the arrangements between them, so as to alert both distributors and end-investors of applicable limitations. The template provision on target markets suggested by ICMA for a prospectus for a debt issuance programme is as follows: MIFID II product governance/target market—The Final Terms in respect of any Notes (or Pricing Supplement, in the case of Exempt Notes) will include a legend entitled ‘MiFID II Product Governance’ which will outline the target market assessment in respect of the Notes and which channels for distribution of the Notes are appropriate. Any person subsequently offering, selling or recommending the Notes (a ‘distributor’) should take into consideration the target market assessment; however, a distributor subject to [Directive 2014/65/EU (as amended, ‘MiFID II’)/ MiFID II] is responsible for undertaking its own target market assessment in respect of the Notes (by either adopting or refining the target market assessment) and determining appropriate distribution channels. A determination will be made in relation to each issue about whether, for the purpose of the MiFID Product Governance rules under EU Delegated Directive 2017/593 (the ‘MiFID Product Governance Rules’), any Dealer subscribing for any Notes is a manufacturer in respect of such Notes, but otherwise neither the Arranger nor the Dealers nor any of their respective affiliates will be a manufacturer for the purpose of the MIFID Product Governance Rules.28

(p. 85) 2.  Transparency on Financial Reporting and Alternative Performance Measures (APMs) 4.39  In addition to the financial information required by the Prospectus Regulation, prospectuses may set out financial information on a voluntary basis. In practice, this issue arises in relation to alternative performance measures (‘APMs’), i.e. a financial measure of historical or future financial performance, financial position, or cash flows, other than a financial measure defined or specified in the applicable financial reporting framework. Typically, APMs are ratios or numbers derived from (or based on) financial statements, such as operating earnings, cash earnings, earnings before one-time charges, earnings before interest, taxes, depreciation, and amortization (EBITDA), net debt, autonomous growth, or similar terms denoting adjustments to line items of statements of comprehensive income, statements of financial position, or statements of cash flow. Issuers may include APMs

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

under the general standard of disclosure of the Prospectus Regulation that information material to investors must be included in the prospectus. 4.40  Issuers (other than EU Member States) whose securities are admitted to trading on a regulated market and who are required to publish regulated information, as well as persons responsible for the prospectus under Article 6(1), Prospectus Regulation must comply with the Guidelines on Alternative Performance Measures published by ESMA (the ‘APM Guidelines’).29 The APM Guidelines are aimed at increasing the usefulness and transparency of APMs included in prospectuses and at improving the comparability, reliability, and/or comprehensibility of APMs. 4.41  The quality and quantity of information related to APMs set out in prospectuses must meet (i) standards set out in Articles 4 and 5, Transparency Directive that a true and fair view of an issuer’s assets, liabilities, financial position, and profit or loss are provided; (ii) standards set out in Article 17, Market Abuse Regulation in relation to the disclosure of price-sensitive information; and (iii) the principle that all information included in a prospectus shall be presented in an easily analysable and comprehensible form.30 In practical terms, this means that persons responsible for the prospectus who include APMs in a prospectus should define such APMs, provide them with meaningful labels, reconcile them to financial statements, and explain their relevance and reliability.31 In order to ensure that this will be the case, competent authorities with responsibilities in approving prospectuses have incorporated the APM Guidelines into their supervisory practices.32 (p. 86) 4.42  Accordingly, when it comes to disclosure in prospectuses on APMs, both the format and content of prospectuses would need to comply with the APM Guidelines. 4.43  Where issuers are of the opinion that APMs are meeting that standard, APMs will find their way into prospectuses (or supplements) by way of: (a)  incorporation by reference to specific pages of sections containing APM disclosure in annual financial statements; 33 (b)  incorporation by reference of APM sections in interim financial reporting to the extent that such reporting qualifies as ‘regulated information’ under the Transparency Directive, i.e.: –  semi-annual reporting pursuant to Article 5, Transparency Directive; and –  information referred to in Article 3(1a), Transparency Directive; (c)  incorporation by reference of relevant APM sections in documents outside financial statements, such as ad hoc disclosures (press releases) issued in compliance with Article 17, MAR; (d)  inclusion of relevant APM disclosure throughout the relevant sections of the prospectus or in a separate section of the prospectus, that relates to APMs shared with investors during roadshows or in investor presentations, on the principle that APMs shared with investors are apparently deemed material to them, so that also a wider community of investors should have this information to meet the standards of the Prospectus Regulation. 34 4.44  The prospectus sections dealing with APMs must comply with the ESMA Guidelines on APMs only in respect of information accompanying financial statements (e.g. interim management report) as the Guidelines on APMs exclude from their scope the financial statements themselves (ESMA Guidelines on APMs para. 4).35

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

3.  The Market Abuse Regulation 4.45  Article 7(1)(a), MAR defines inside information as comprising (among other types of information) information of a precise nature, which has not been made public, relating, directly or indirectly, to one or more issuers or to one or more financial instruments, and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments. Inside information which directly concerns the issuer must be publicly (p. 87) disclosed by way of a press release by the issuer pursuant to Article 17, Market Abuse Regulation. 4.46  Given the definition of inside information, such information would also qualify as being material to potential investors by the standards of the Prospectus Regulation, as a result of which such information is also included in a prospectus or prospectus supplement (whether in the text itself or by way of incorporation by reference). 4.47  The MAR introduced requirements applicable to the practice of market sounding, whereby issuers of financial instruments test market appetite among potential investors for a certain issuance. Pursuant to Article 11(1), MAR, a ‘market sounding’ comprises the communication of information, prior to the announcement of a transaction, in order to gauge the interest of potential investors in a possible transaction and the conditions relating to it, such as its potential size or pricing, to one or more potential investors by an issuer and certain other parties.36 Where market sounding is being conducted, the relevant market participant must (i) consider whether inside information is being divulged and record its analysis; (ii) obtain consent from the recipient to receipt of inside information and inform the recipient of relevant prohibitions and obligations; and (iii) maintain records of the information disclosed and details of the recipient and disclosure itself, pursuant to Article 11(3) and further, MAR. 4.48  Article 11(1), MAR applies to the communication of ‘information’, which may or may not include inside information, in relation to a potential transaction. In practice, frequent issuers of financial instruments nurture investor relations by providing regular market updates to potential investors in the form of general roadshows, investor presentations, or other means, which may include information about funding requirements and priorities of the issuer. Where any such activities are general in nature and not specific as to a potential transaction, these will not qualify as market sounding pursuant to Article 11, MAR. However, to the extent that, in the course of such communications, information as to size or price of a specific potential transaction is divulged to gauge market interest, this may constitute market sounding, as a result of which the requirements set out above in paragraph 4.47 apply. If the information disclosed also constitutes inside information, it must in principle be made public for the benefit of all investors pursuant to Article 17, MAR, and it will need to be included in any prospectus (or prospectus supplement) when a transaction is effected.

(p. 88) 4.  The Benchmarks Regulation 4.49  The Benchmarks Regulation (BMR)37 was introduced in 2016, with the majority of the provisions applying from 1 January 2018 onwards (subject to certain transitional provisions that apply until 1 January 2020). It applies to (i) the provision of benchmarks (e.g. Euro Interbank Offered Rate (EURIBOR), Euro Overnight Index Average (EONIA), London InterBank Offered Rate (LIBOR), proprietary benchmarks); (ii) the contribution of input data to a benchmark; and (iii) the use of a benchmark, within the European Economic Area (EEA). 4.50  Article 29(2), BMR requires disclosure in prospectuses in relation to an offer of transferable securities or other investment products that reference a benchmark, by the issuer, the offeror, or the person asking for admission to trading on a regulated market. Such person is required to ensure that the prospectus includes clear and prominent information stating whether or not the benchmark is provided by an administrator included

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

in a public register established and maintained by ESMA pursuant to Article 36, BMR. Pursuant to Article 52, BMR, such statement should be included in all prospectuses from 1 January 2019.38 4.51  Although neither the Prospectus Regulation nor the BMR specifically require disclosure of risks in relation to benchmarks being amended or terminated, ESMA has issued Questions and Answers dealing with disclosure of BMR compliance in prospectuses, to the effect that prospectuses must include a reference to the fact that the administrator of a benchmark is listed in the ESMA register of benchmarks, or that it is not (as applicable).39 4.52  Competent authorities approving prospectus have also included BMR compliance in their supervisory practices. The Netherlands Authority for the Financial Markets (AFM), for example, expects disclosure in relation to: (a)  all the fall-back provisions which will be applied when the original benchmark ceases to exist or when this benchmark is (temporarily) not available/published; (b)  all material risk factors in relation to the original benchmark ceasing to exist or when this benchmark is (temporarily) not available/published; (c)  any potential conflicts of interest that the issuer (or an affiliated company) could have when the issuer or such company has discretionary power in deciding (p. 89) the applicability of a benchmark event and/or replacement or amendment of a benchmark; (d)  whether the issuer or any external party which is or could be appointed to establish or determine a replacement rate, or a spread thereto, meets all requirements of the BMR, including licensing requirements; (e)  recent relevant information regarding the selected benchmarks and benchmark reform and regulation; and (f)  a statement whether the benchmark provider of the selected benchmark is listed in the ESMA Register of benchmark providers. 40 4.53  The key term is ‘benchmarks’, which for the purposes of the BMR is defined as: (a)  any index

41

by reference to which:

–  the amount payable under, or the value of, a financial instrument, for which a request has been made for admission to trading, or which is traded, on a regulated market, MTF, or OTF, or which is traded via a systematic internalizer; or –  the amount payable under a consumer credit agreement within the scope of the Consumer Credit Directive or a consumer credit agreement relating to residential immovable property within the scope of the Mortgage Credit Directive (each being a financial contract as defined in the BMR); is determined; or (b)  an index that is used to measure the performance of an investment fund, an alternative investment fund, or an undertaking for the collective investment of transferable securities (UCITS) with the purpose of tracking the return of the index or of defining the asset allocation of a portfolio or of computing the performance fees. 42

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

4.54  The BMR governs, among other things, the provision of benchmarks, which is defined as (i) administering the arrangements for determining a benchmark; (ii) collecting, analysing, or processing input data for the purpose of determining a benchmark; and (iii) determining a benchmark through the application of a formula or other method of calculation or by an assessment of input data provided for that purpose. Any person who has control over the provision of a benchmark is considered an administrator for the purposes of the Benchmarks Regulation.43 (p. 90) 4.55  Administrators are subject to various transparency, governance, and conflicts of interest requirements under the BMR and will need to be authorized by the competent authority of the Member State where the person is located (or in the case of the (intended) provision of (i) non-significant benchmarks; or (ii) non-critical benchmarks (provided by supervised entities other than administrators) registered with the competent authority.44 The names of the administrators so authorized or registered will be included in a register for benchmarks and administrators maintained by ESMA pursuant to Article 36, BMR. This register includes parties such as ICE Benchmark Administration Limited in relation to LIBOR and the European Money Markets Institute in relation to EURIBOR and EONIA.45

5.  The Credit Rating Agencies Regulation 4.56  There is no general requirement for issuers or those seeking admission of securities to trading on a regulated market to solicit one or more ratings, although having one or more credit ratings attributed to securities is common practice to enable (potential) investors to review material information about the issuer and the securities. In addition, listing rules of stock exchanges, such as Euronext, refer to credit ratings in their rules for admission to listing and/or trading of securities. Euronext may require that corporate bonds are rated by a credit rating agency (‘CRA’) as a condition to admission to listing.46 Where credit ratings of issuers or securities have been solicited (on a voluntary basis), the Prospectus Regulation requires those responsible for drawing up the prospectus to include relevant references to credit ratings, if available.47 4.57  Article 4(1), CRA Regulation48 provides that credit institutions, investment firms, insurance undertakings, reinsurance undertakings, institutions for occupational retirement provision, management companies, investment companies, alternative investment fund managers, and central counterparties may use credit ratings for regulatory purposes only if they are issued by CRAs established in the EU and registered in accordance with the CRA Regulation. Article 8c, CRA Regulation requires an issuer or a related third party that intends to solicit a credit rating of a structured finance instrument to appoint at least two CRAs to provide credit ratings independently of each other. 4.58  Where a prospectus contains a reference to a credit rating or credit ratings, the issuer, offeror, or person asking for admission to trading on a regulated market shall ensure that the prospectus also includes clear and prominent information stating whether or (p. 91) not such credit ratings are issued by a CRA established in the EU and registered under the CRA Regulation.49 The requirement to provide clear and prominent information on rating agencies applies whenever credit ratings are referred to in a prospectus, whether this is pursuant to a requirement to disclose the credit ratings under the Annexes to the Commission Delegated Regulation (supplementing the Prospectus Regulation, or otherwise (e.g. where rating information on underlying assets, other securities than those the subject of the prospectus or investment strategies, is disclosed).50

6.  The Securitization Regulation

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

4.59  The Securitization Regulation51 provides for a general framework applicable to all securitizations and also sets out a specific framework in relation to simple, transparent, and standardized (‘STS’) securitizations, which benefit from favourable capital treatment under CRR. The Securitization Regulation introduces a ban on re-securitizations and harmonizes due diligence requirements for institutional investors. Finally, issuers, originators, and sponsors are now under a direct obligation to ensure that risk-retention requirements are satisfied and are subject to disclosure requirements. 4.60  Where prospectuses are drawn up for securitizations that are to qualify as STS securitizations (which would be the case where securitization notes are offered to the public and/or listed on a regulated market), the contents of the prospectus would reflect compliance with the STS requirements. 4.61  Also where STS securitization notes are not offered to the public and are not listed, and thus no approved prospectus would be required under the Prospectus Regulation, the relevant offering document may be influenced by prospectus requirements. Article 7, Securitization Regulation provides that, where there is no approved prospectus, still a transaction summary or overview of the main features of the securitization must be offered to investors, which includes at least: (a)  details regarding the structure of the deal, including the structure diagrams containing an overview of the transaction, the cash flows, and the ownership structure; (b)  details regarding the exposure characteristics, cash flows, loss waterfall, credit enhancement, and liquidity support features; (c)  details regarding the voting rights of the holders of a securitization position and their relationship to other secured creditors; and (p. 92) (d)  a list of all triggers and events referred to in the documents provided in accordance with point (b) that could have a material impact on the performance of the securitization position. 4.62  Annex 13 (in particular items 3.1–3.4) to the Delegated Prospectus Regulation (which applies to approved prospectuses) deems these elements relevant as well and describes them in more detail. It is therefore to be expected that the contents of offering documents to which the Prospectus Regulation does not apply would still converge with those of approved prospectuses for asset-backed transactions.

7.  The Take-over Bid Directive 4.63  The Take-over Bid Directive52 is another example of an EU directive that has had an impact on the contents of prospectuses. Article 3(1)(b), Take-over Bid Directive mandates EU Member States to ensure that holders of securities of a company that is subject to takeover bids must have ‘sufficient time and information to enable them to reach a properly informed decision on the bid’. Such securities holders are entitled to an offer document that sets out such information. Where a take-over bid is made and the consideration for the securities that are subject to the offer consists of securities itself (such exchange offers occur regularly), both the rules implementing the Take-over Bid Directive (in relation to the take-over) and the prospectus rules (in relation to the securities offered in exchange) would apply. 4.64  However, no prospectus is required for a public offer or an admission to trading on a regulated market in the context of a take-over by way of an exchange offer, provided that the transaction and its impact on the issuer are disclosed in a document (e.g. the offer

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

document) that is made available to the public by publication on the websites of the issuer, financial intermediaries, and the regulated market or MTF operator.53 4.65  The wording of this exemption in the Prospectus Regulation differs from that of the take-over exemption under the Prospectus Directive, in that it only seems to request a description of the transaction and its impact on the issuer, but no other information, although one could consider that more information than just these would be material to an investor deciding to accept or not any take-over offer by way of exchange offer. This exemption (and the wideness of it) also places an additional supervisory burden on the competent authority approving the offer document as including all relevant information for investors in relation to not only the take-over pursuant to the Take-over Bid Directive,54 but also the impact of the transaction on (p. 93) the issuer—which is an assessment that is presumably difficult to make for any competent authority. 4.66  Pursuant to Article 6, Take-over Bid Directive, the offer document concerning bids to be made available must contain the information necessary to enable the holders of the offeree company’s securities to reach a properly informed decision on the bid. National regimes may or may not impose that the offer document must be approved by the relevant supervisory authority. In case of approval, the offer document can be passported to other EU jurisdictions, with: (a)  a translation (where required); (b)  such additional information as is specific to the market of a Member State or Member States on which the offeree company’s securities are admitted to trading and relates to the formalities to be complied with to accept the bid and to receive the consideration due at the close of the bid; and (c)  the tax treatment of the consideration offered. As such, this regime is consistent with that of the Prospectus Directive and the Prospectus Regulation.

8.  Prospectuses for Financial Sector Issuers (i)  CRD/CRR: regulatory capital 4.67  In addition to the examples above and below of disclosure in a prospectus being dictated by European regulations other than the Prospectus Directive, there is also an indirect effect of various European legislative instruments referring to prospectuses, which causes such prospectuses to include information to render instruments issued under a prospectus eligible for (for example) regulatory capital purposes. 4.68  The CRR55 sets out how banks and investment firms that are subject to it may calculate risk weightings of investment instruments held by them, provided certain criteria are met. For example, where banks or investment firms hold collective investment units (CIUs),56 these may be risk-weighted in a favourable manner, provided the prospectus under which they are issued includes references to: (p. 94) (a)  the categories of assets the CIU is authorized to invest in; (b)  where investment limits apply, the relative limits and the methodologies to calculate them; (c)  where leverage is allowed, the maximum level of leverage; and

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(d)  where concluding over-the-counter (OTC) financial derivatives transactions or repurchase transactions or securities borrowing or lending is allowed, a policy to limit counterparty risk arising from these transactions. 57 4.69  It is clear that such rules setting out eligibility criteria related to prospectuses will dictate the contents of a prospectus, in addition to the Prospectus Regulation.

(ii)  Asset-backed securities: from STS to ECB eligibility criteria and guiding principles 4.70  Not only EU regulations such as the Securitization Regulation (on STS securitizations as discussed in section III.6 ‘Securitization Regulation’, para. 4.59) are the reason for additional disclosure in prospectuses, the ECB’s monetary policy is too. The ECB (i) allows financial institutions to borrow money from it by posting collateral for liquidity transactions; or (ii) purchases instruments issued by financial institutions and/or corporate issuers under several asset purchase programmes. Certain eligibility criteria that the ECB applies for such transactions in capital markets instruments refer to circumstances that can or must be disclosed in prospectuses. 4.71  ECB eligibility criteria thus provide an impetus for regulated prospectus contents as well. For example, in order to be eligible as collateral for Eurosystem credit operations, marketable assets must comply with the criteria of the ‘General framework’58 and additional criteria of the ‘Temporary framework’ set out by the ECB. The General Framework criteria include requirements as to: (a)  principal amounts of securities being unconditional and being fixed or linked to only one Euro-area inflation index, coupon structures not featuring issuer optionality, and settlement systems; and (b)  in relation to asset-backed securities: the issuer, originator, obligors, and creditors of the underlying assets, the underlying being an homogenous asset class, and template reporting, clawback limitations, and credit quality requirements applying to the underlying assets. 4.72  Information on all of this information, as well as Eurosystem eligibility itself, is typically included in prospectuses. (p. 95) 4.73  In addition, and although these do not amount to eligibility criteria set by the ECB (as the General Framework and Temporary Framework in para. 4.71 above), the ECB has published ‘guiding principles’ for the asset-backed securities that the ECB prefers to purchase as part of its liquidity purchase programmes. The guiding principles are ‘highlevel, non-binding and non-exhaustive’ and concern information and disclosure (including in prospectuses) of diversification and granularity in the underlying assets, safeguards against deterioration of the asset pool, rating, and other performance triggers.59 It is also a guiding principle of the ECB that the relevant prospectus must meet all requirements set out under the Prospectus Directive and the Prospectus Regulation.

(iii)  BRRD: bail-in 4.74  As discussed above in section II.2 ‘Bail-innable Securities’ (para. 4.14), competent authorities have resolution powers, which include the powers to write down regulatory capital instruments in full, or to convert them to Common Equity Tier 1 instruments, at the point of non-viability of a supervised institution and before any resolution action is taken. For that purpose, the BRRD deems the point of non-viability as the point at which the relevant authority determines that the institution meets the conditions for resolution or the

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

point at which the authority decides that the institution would cease to be viable if those capital instruments were not written down or converted. 4.75  Recital 81 BRRD requires that the fact that the instruments are to be written down or converted by authorities in the circumstances required by the BRRD is recognized not only in the terms governing the instrument, but also in any prospectus or offering documents published or provided in connection with the instruments. Accordingly, any prospectus relating to instruments issued by an institution that is subject to BRRD will need to include disclosure on the resolution powers. 4.76  Article 55, BRRD requires the terms governing the relevant instruments to include specific references to bail-in powers of relevant authorities. Since the terms and conditions are an integral part of prospectuses, these will need to include consequential disclosure as well under the general materiality standard applicable to prospectuses. 4.77  Pursuant to Articles 7(7)(a)(iv) and 16(2), Prospectus Regulation, and in line with the position under the Prospectus Directive,60 this disclosure is specifically required also in the Summary and the Risk Factors. In practice, BRRD disclosure in prospectuses is usually found also in the description of (regulation applicable to) the issuer.

(p. 96) IV.  Prospectuses in the Context of Brexit Legislation 4.78  The decision of the UK to leave the EU (‘Brexit’) has had a significant impact on the international capital markets and its participants. Therefore, this chapter would not be complete without a brief word on Brexit legislation adopted by the EU and the United Kingdom in relation to prospectuses.

1.  The EU Approach 4.79  In case the United Kingdom withdraws from the EU without a withdrawal agreement (‘hard Brexit’), the UK is regarded by EU law and regulators as a third country. Accordingly, prospectuses and supplements approved by the UK regulator Financial Conduct Authority (FCA) before or after the date on which a hard Brexit would come into effect, cannot be used in the EU27 (or EEA/European Free Trade Association (EFTA)), formerly applying passporting of prospectuses would come to an end, and supplementing prospectuses already approved in the UK would no longer be possible.61 In essence, this means that issuers of financial instruments offered to the public and those seeking admission to listing on a regulated market in the EU27, will need to comply with the Prospectus Regulation requirements, i.e. have a prospectus approved and published in the applicable EU27 jurisdiction, even where a UK-approved prospectus is available. 4.80  Issuers would also need to make a new choice of home Member State from among the EU27 for prospectus approval in case of a hard Brexit.62

2.  The UK Approach 4.81  In the UK, the European Union (Withdrawal) Act 2018 provides that most existing EU law in the UK will continue to apply (as a matter of UK law) after Brexit by creating a new body of retained EU law. The UK would decide whether to mirror any post-exit developments in EU law in domestic law by amending that body of retained EU law. 4.82  For example, the UK’s draft ‘Official Listing’ statutory instrument, designed to onshore the existing Prospectus Directive into UK legislation in the event of a hard Brexit, was aimed at ensuring that the prospectus, transparency, and listing regimes continue to function in the UK after Brexit, with the idea that the existing regime would be maintained.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Article 73, ‘Official Listing’ statutory instrument provided that the UK would (p. 97) accept passporting into the UK of prospectuses approved by EU27 national competent authorities. 4.83  However, on 20 March 2019, the UK regulator FCA published changes to UK prospectus rules, which would apply in the case of and with effect from a hard Brexit.63 In the case of a hard Brexit, the UK will no longer recognize prospectuses and prospectus supplements approved by an EU27 authority, except for prospectuses and supplements that were already passported into the UK before the hard Brexit date, which will remain valid until their expiry. Accordingly, with effect from a hard Brexit, any prospectuses and supplements approved by the relevant EU27 authorities thereafter would also need FCA approval. Final Terms for issuances into the UK after exit day will need to be filed with both the EU27 regulator and the UK FCA.64 If and when the UK Government decide to reform the UK prospectus regime after Brexit, the UK and EU27 prospectus regimes would start to diverge.

V.  Conclusion 4.84  This chapter provided an overview of how the scope and application of the Prospectus Regulation is affected by other EU laws, for example due to references in definitions to MiFID II, BRRD, CRD/CRR, MAR, the Transparency Directive, and PRIIPs. 4.85  The content and format of prospectuses is not only subject to the Prospectus Regulation, but other EU laws and policy also leave their imprint on prospectuses, including MiFID II, regulatory capital requirements under CRD/CRR, bail-in under BRRD, ESMA guidelines on alternative performance measures (APMs), as well as EU regulations on market abuse, benchmarks, CRAs, and securitization. Also, the Take-over Bid Directive and ECB monetary policy for the Eurosystem drive disclosure in prospectuses. 4.86  With the prospect of a hard Brexit hanging over the international capital markets for much of 2019, this chapter also briefly discussed approaches in the EU27 and the UK to prospectus regulation post-Brexit. Whereas currently an approved prospectus benefits from passporting rights to all other EU jurisdictions, in the case of a hard Brexit, the EU capital markets will become fractured, with securities offerings and listings in both the EU27 and in the UK requiring their own prospectus approvals, unless a Brexit deal is reached whereby the Prospectus Regulation would continue to apply to the United Kingdom.(p. 98)

Footnotes: 1

  Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 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, OJ 2017, L168/12 (Prospectus Regulation). 2 

This manuscript was closed on 15 July 2019.

3

  Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (MiFID II) and Regulation (EU) 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) 648/2012 (MiFIR). For the purposes of this chapter, MiFID II is deemed to refer to both the Directive and the Regulation. 4

  Article 2(a), Prospectus Regulation.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

5

  Directive 2003/71/EC of the European Parliament and the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC, OJ 2003, L345/64 (Prospectus Directive). 6

  ‘Your questions on MiFID’ by the European Commission Services (question 115) states that the key element is negotiability in the capital markets. In relation to the Prospectus Directive, the European Securities and Markets Authority (ESMA) gave guidance on the concept of ‘transferable securities’ in ESMA’s Questions and Answers on Prospectuses, No. 67 (ESMA Q&A Prospectus), to the extent that contractual securities transfer restrictions (such as lock-up provisions and selling restrictions) do not per se render securities ‘nontransferrable’, although ‘some restrictions may be so broad that they result in transforming “transferable securities” into non-transferable securities, falling no longer into the scope of the Prospectus Directive’. 7

  ESMA, ‘Advice on “Initial Coin Offerings and Crypto-Assets” ’, 9 January 2019, 19 https:// www.esma.europa.eu/sites/default/files/library/esma50-157-1391_crypto_advice.pdf. 8

  Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, as amended or replaced from time to time (Capital Requirements Directive, CRD) and Capital Requirements Regulation (EU) 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) 648/2012, as amended or replaced from time to time (CRR). 9

  Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU, and 2013/36/ EU, and Regulations (EU) 1093/2010 and (EU) 648/2012, of the European Parliament and of the Council, as amended or replaced from time to time, including, without limitation, by Directive (EU) 2017/2399 of the European Parliament and of the Council of 12 December 2017 on the ranking of unsecured debt instruments in insolvency hierarchy (BRRD). 10

  Article 9(1), CRD provides that Member States shall prohibit persons or undertakings that are not credit institutions from carrying out the business of taking deposits or other repayable funds from the ‘public’. Article 4(1)(1), CRR defines a credit institution as an undertaking the business of which is to take deposits or other repayable funds from the ‘public’ and to grant credits for its own account. 11

  The European Banking Authority (EBA)’s Opinion and Report on matters relating to the regulatory perimeter under the CRD IV/CRR dated 9 February 2019 (EBA/2018/D/1685) referring to ‘the differences in the approaches of the Member States to the definition of the terms “deposit”, “other repayable funds” and “public” ’ under CRD/CRR’. 12

  Recital (13), Prospectus Regulation acknowledges that operators of MTFs may determine the content of the admission document which an issuer is required to produce upon initial admission to trading of its securities or the modalities of its review. 13

  Regulation (EU) 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (MAR). 14

  Article 3(1), MAR defines these concepts by reference to the definitions of Article 4(1), MiFID II.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

15

  Recital 8, MAR considers that a broader scope of application to include also nonregulated markets should improve investor protection, preserve the integrity of markets, and ensure that market abuse of such instruments is clearly prohibited. 16

  Article 21(2), Prospectus Regulation.

17

  Recital (14), Prospectus Regulation considers that the mere admission of securities to trading on an MTF or the publication of bid and offer prices is not to be regarded in itself as an offer of securities to the public and is therefore not subject to the obligation to draw up a prospectus under the Prospectus Regulation. A prospectus is required only where those situations are accompanied by a communication constituting an offer of securities to the public as defined in the Prospectus Regulation. 18

  Articles 3 and 4, Prospectus Regulation.

19

  ESMA, Q&A Prospectus No. 46. This interpretation and other guidance of ESMA under the Prospectus Directive remains relevant also under the Prospectus Regulation pursuant to ESMA, Q&A Prospectus, No. 2.1, which provides that ESMA guidance should continue to be applied to the extent compatible with the Prospectus Regulation. 20

  Regulation (EU) 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs). 21

  Robert ten Have, Chapter 12 ‘The Summary and Risk Factors’, this volume, deals with prospectus summaries in more detail. 22

  Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments. 23

  Regulation (EU) 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments. 24

  Commission Delegated Directive (EU) 2017/593 of 7 April 2016, Recital 15.

25

  ibid.

26

  ESMA Guidelines on MiFID II product governance requirements (ESMA35-43-620) provide that a ‘manufacturer’ means a firm that ‘manufactures an investment product, including the creation, development, issuance or design of that product, including when advising corporate issuers on the launch of a new product’. Lead managers will typically engage in at least one of these activities (e.g. developing and advising on the characteristics of the securities to be issued), whereas more passive managers do not. 27

  http://www.icmagroup.org.

28

  https://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/Primary-Markets/ primary-market-topics/mifid-ii-r-in-primary-markets/. 29

  ESMA’s Guidelines on Alternative Performance Measures (ESMA/2015/1415), para. 1.

30

  Article 5, Prospectus Directive.

31

  ESMA, Questions and Answers, ESMA Guidelines on Alternative Performance Measures (APMs), 30 October 2017 (ESMA32-51-370). 32

  ibid., paras 13 and 14.

33

  ibid., paras 45–48.

34

  ESMA, Q&A Prospectus, No. 100 sets out ESMA’s view that APMs given in live presentations, such as roadshows or interviews, must be included in the prospectus before

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

it is approved and published, or where a prospectus is already approved and published, in a supplement or, alternatively is not given at all during any live presentation. 35

  Giovanni Strampelli, Chapter 8 ‘The Contents of the Prospectus: Rules for Financial Information’, this volume, deals with requirements on financial information in prospectuses in more detail. 36

  Pursuant to Article 11(1), MAR, such activity also constitutes market sounding if engaged in by, in addition to an issuer, a secondary offeror in certain circumstances, an emission allowance market participant, or a third party acting on behalf or on the account of such a person (e.g. arrangers, dealers). Pursuant to Article 11(2), MAR, market sounding may also be constituted of disclosure of inside information by a person intending to make a takeover bid for the securities of a company or a merger with a company to parties entitled to the securities if certain additional conditions are met. 37

  Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (BMR). 38

  See also ESMA Questions and Answers on the Benchmarks Regulation (ESMA70-145-11) No. 8.2, where ESMA confirmed that there is no BMR specific requirement to systematically update prospectuses approved under the Prospectus Directive upon a relevant administrator becoming included in the Register. However, this is without prejudice to the obligation under the Prospectus Directive to assess, on a case-by-case basis, the significance and/or materiality of the specific situation. 39

  ESMA, Questions and Answers on the Benchmarks Regulation (ESMA70-145-11).

40

  The AFM position is publicly available at: https://www.afm.nl/en/professionals/ veelgestelde-vragen/aanbieding-notering-effecten-algemeen/benchmarkverordening. 41

  For the purposes of the BMR, an index is any figure that is (i) published or made available to the public; and (ii) regularly determined (a) entirely or partially by the application of a formula or any other method of calculation, or by an assessment; and (b) on the basis of the value of one or more underlying assets or prices, including estimated prices, actual or estimated interest rates, quotes and committed quotes, or other values or surveys. See Regulation (EU) 2016/1011, Article 3(1)(1) and, for further guidance, Commission Delegated Regulation (EU) 2018/65 of 29 September 2017. 42

  Article 3, BMR.

43

  ibid.

44

  Article 34, BMR.

45

  These parties are included in ESMA’s register for benchmark administrators, which is available for consultation at: https://registers.esma.europa.eu/publication/. 46

  Euronext Rulebook 6303/3, which is available for consultation at: https:// www.euronext.com/en/regulation/euronext-regulated-markets. 47

  Annexes to the Commission Delegated Regulation (EU) supplementing the Prospectus Regulation. 48

  Regulation (EU) 462/2013 of the European Parliament and of the Council of 21 May 2013 amending Regulation (EC) 1060/2009 on credit rating agencies (CRA Regulation). 49

  Article 4(1), CRA Regulation.

50

  ESMA, Q&A Prospectus, No. 76.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

51

  Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised securitisation, and amending Directives 2009/65/EC, 2009/138/EC, and 2011/61/EU and Regulations (EC) 1060/2009 and (EU) 648/2012. 52

  Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids (Take-over Bid Directive). 53

  Articles 1(4)(f) and 1(5)(e), Prospectus Regulation in combination with Article 21(2), Prospectus Regulation. 54

  Article 6(3), Take-over Bid Directive states the minimum requirements for disclosure in the offer document. 55

  Regulation (EU) 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) 648/2012. 56

  Article 4(7), CRR defines a collective investment undertaking or CIU as including (i) undertakings for collective investment in transferable securities (UCITS, as defined in Article 1(2), Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS)); (ii) unless otherwise provided, third-country entities which carry out similar activities, which are subject to supervision pursuant to EU or to the law of a third country which applies supervisory and regulatory requirements at least equivalent to those applied in the EU; (iii) an alternative investment fund manager (AIF) as defined in Article 4(1)(a), Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers; or (iv) a non-EU AIF as defined in Article 4(1)(aa) of that Directive. 57

  Articles 132(3)(b) and 349, CRR.

58

  Guideline (EU) 2015/5109 of the ECB of 19 December 2014 on the implementation of the Eurosystem monetary policy framework (ECB/2014/60) (recast), as amended and supplemented, including by Guidelines (EU) 2015/732, 2015/1938, 2016/64, 2016/2298, 2017/1362, and 2018/570. 59

  The Guiding principles (with examples) of Eurosystem-preferred eligible asset-backed securities (ABSs), published by the ECB on 6 July 2015, http://www.ecb.europa.eu. 60

  Under the Prospectus Directive, issuers were required to include information in the prospectus on the rights (and limitations thereon) attaching to securities, and ESMA suggested issuers consider whether to include additional bail-in disclosure in risk factors and prospectus summaries. In relation to risk factors, the minimum level of detail required includes information on bail-in powers to write down, convert, and amend terms of securities and bail-out with public monies being a last resort, after bail-in: ESMA, Q&A Prospectus, No. 96. 61

  https://www.esma.europa.eu/press-news/esma-news/esma-qas-clarify-prospectus-andtransparency-rules-in-case-no-deal-brexit. 62

  ESMA, Q&A Prospectus, Nos 103 and 104. See section II.5 ‘Home Member State’ (para. 4.25).

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

63

  FCA PS19/5: Brexit Policy Statement. Powers in this respect are granted to the FCA under the Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019. 64

  FCA Primary Market Bulletin, March 2019, No. 22, https://www.fca.org.uk/publication/ newsletters/primary-market-bulletin-22.pdf.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Part I General Aspects, 5 The Disclosure Paradigm: Conventional Understandings and Modern Divergences Henry T. C. Hu From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

Subject(s): Securities — Improper disclosure

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 99) 5  The Disclosure Paradigm Conventional Understandings and Modern Divergences I.  Introduction 5.01 II.  The Disclosure Paradigm: Conventional Understandings 5.10 1.  Overview 5.10 2.  The SEC’s Basic Approach to Information: The ‘Descriptive Mode’ and ‘Intermediary Depictions’ 5.13 III.  The Impact of Financial Innovation on Conventional Understandings 5.19 1.  Complexity and the Need for a Portfolio of Modes of Information 5.19 2.  The Exchange-Traded Fund: A Traded Security without Disclosure’s Heart and Soul 5.53 3.  Decoupling and New Extra-Company Informational Asymmetries 5.62 IV.  The Regulatory Ends of Disclosure and the Emergence of a Parallel Disclosure Universe 5.78 1.  Changing Regulatory Ends and the SEC 5.78 2.  Systemic Risk: The SEC and the New Bank Regulator Disclosure Universe 5.87 V.  Conclusion 5.110

I.  Introduction 5.01  The American disclosure paradigm—the regulatory effort to enhance the quality and quantity of information made available in the securities markets—has long been familiar to regulators, practitioners, and academics worldwide. Modern realities, however, sometimes depart from conventional understandings in fundamental, yet often unrecognized, ways. This chapter offers a brief overview of key divergences and possible future pathways. Some of the divergences that exist are sensible, even necessary. Others are needed or insufficiently developed. The nature of the divergences starts with the overarching matter of animating philosophy, proceeds to building block matters (p. 100) such as the concept of ‘information’, and extends down to the street-level matters of statutory mandates. 5.02  The matters disrupting the classic foundations of disclosure largely fall into three major groups. First and foremost, the modern process of financial innovation that began in the early 1980s has resulted in new, sometimes highly complex products such as over-thecounter derivatives, asset-backed securities, and exchange-traded funds. These new financial products and the underlying process of innovation poses major informational challenges. Second, revolutionary advances in computer- and Web-related technologies, along with the associated emergence of ‘alternative data’, create new informational opportunities as well as regulatory complexities. Third, there are changing conceptions as to the regulatory ends of public disclosure. With respect to banks, for example, an entirely new bank regulator system of public disclosure has emerged, eliminating the monopoly long enjoyed by the Securities and Exchange Commission (SEC). The regulatory ends and means of the new bank public disclosure system depart materially from those contemplated by the

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

disclosure paradigm. And even at the SEC itself, the matter of regulatory ends is now in flux. 5.03  These matters are at play not only in the US, but also worldwide. Analysing how such matters are disrupting what some believe to be the archetypal disclosure regime can not only be useful for charting future pathways for that regime, but also provide insights as to how to respond in the advanced capital markets of Europe and elsewhere. 5.04  Section II ‘The Disclosure Paradigm: Conventional Understandings’ (para. 5.10) sets out the disclosure paradigm’s core aspects from the standpoint of an analytical framework for ‘information’ introduced in 2012 and refined in 2014. With respect to regulatory means, the basic approach to information that the SEC has largely, yet only implicitly, relied on since its creation relies on ‘intermediary depictions’ of objective reality. Under this ‘descriptive mode’ of information, the reporting entity is to observe, analyse, and depict pertinent aspects of the objective reality, and provide such depictions to investors. With respect to regulatory ends, disclosure is primarily intended to protect investors and enhance market efficiency. 5.05  Section III ‘The Impact of Financial Innovation on Conventional Understandings’ (para. 5.19) shows the impact of financial and technological innovation. Section III.1(i) ‘The limitations of the descriptive mode’ (para. 5.19) begins by briefly outlining how the analytical framework shows, first, how the descriptive mode can fail to capture the extraordinarily complex objective realities now being created and, second, how new modes of information made possible by advances in computer- and Web-related technologies can help. In particular, investors can also benefit from the ‘pure information’ available under a ‘transfer mode’ of information and the ‘moderately pure information’ available under a ‘hybrid mode’ of information. All three modes deserve consideration in today’s informational portfolios. (p. 101) 5.06  Section III.1(ii) ‘The “transfer mode”, the “hybrid mode”, and the portfolio approach to information’ (para. 5.26) and Section III.1(iii) ‘Asset-backed securities and pure information: loan-level data and downloadable waterfall codes’ (para. 5.35) then turn to two recent developments that shed light on the promise of such a portfolio approach, especially as enhanced by the increasing availability of original, company-specific information from third-party information providers. First, a 2019 working paper provides empirical support for the value of an initial 2016 move towards pure information in asset-based security (ABS) disclosures. Further steps in the same direction deserve careful consideration. Second, the current striking growth in the market for alternative data illustrates the importance of pure information as well as the role that third parties increasingly play as sources of both pure information and depictions. While alternative data can benefit investors, especially institutional investors, it raises level-playing-field concerns. 5.07  Section III.2 ‘The Exchange-Traded Fund: A Traded Security without Disclosure’s Heart and Soul’ (para. 5.53) shows that core aspects of the disclosure paradigm do not apply with respect to a new, increasingly important segment of the securities market: exchange-traded funds (ETFs). Trading in ETF shares now usually accounts for one-quarter of the daily volume in US stock markets, and ETF shares can be far more risky than shares of ordinary public companies. But with ETFs, the SEC does not require the disclosures representing what has been referred to as the ‘heart and soul’ of the SEC disclosure system. 5.08  Section III.3 ‘Decoupling and New Extra-Company Informational Asymmetries’ (para. 5.62) shows how third parties, through their use of derivatives and ‘decoupling’ techniques, can now severely undermine the robust informational predicate intended by the SEC. Such

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

‘extra-company’ informational asymmetries could affect not only the control of companies, but their very survival, as illustrated by a notable 25 February 2019 bankruptcy filing. 5.09  Section IV ‘The Regulatory Ends of Disclosure and the Emergence of a Parallel Disclosure Universe’ (para. 5.78) focuses on how non-traditional goals are being imposed on disclosure and on the particularly important goal of the minimization of systemic risk. Section IV.1 ‘Changing Regulatory Ends and the SEC’ (para. 5.78) considers new mandates on the SEC to require ‘conflict minerals’ and ‘pay ratio’ disclosures and the possibility that the SEC may require certain environmental, social, and governance (ESG) disclosures. The systemic risk analysis in section IV.2(i) ‘The global financial crisis, the SEC, and the call for a change in the SEC’s statutory mandate’ (para. 5.87) discusses how the SEC deviated from its investor-centric ends during the global financial crisis and a 2018 call for a statutory change in SEC goals. Section IV.2(ii) ‘The bank regulator public disclosure system’ (para. 5.97) considers the new bank regulator public disclosure system, one with regulatory ends and means that differ sharply from those contemplated by the disclosure paradigm.

(p. 102) II.  The Disclosure Paradigm: Conventional Understandings 1.  Overview 5.10  At the grandest level, the paradigm contemplates that the SEC’s primary goal is defined by what is referred to as a ‘disclosure philosophy’.1 The overarching ends centre on the needs of investors. The SEC has the sole responsibility for determining the quality and nature of information corporations must make publicly available, and in doing so, helps corporate investors in their decision-making and promotes market efficiency, facilitates corporate governance, and contributes to the proper allocation of real resources in the economy. As a necessary corollary, the disclosure philosophy is also highly incremental in nature: the SEC would not venture beyond the realm of information to that of substantive decision-making. 5.11  The author has suggested that the implementation of the disclosure paradigm is rooted in a particular conception of information. Information is largely conceived of as, if not equated with, what an analytical framework refers to as the intermediary depictions provided by the company. 5.12  Finally, from a street-level legal perspective, the SEC implements the disclosure philosophy through means rooted in two different SEC disclosure regimes. The Securities Act of 1933 (1933 Act) requires a corporation issuing securities to the public to provide offering materials—i.e. a ‘registration statement’, the most important component of which is the ‘prospectus’—consistent with 1933 Act rules. Once a company is public, the Securities Exchange Act of 1934 (1934 Act) requires periodic disclosures—for example, the quarterly Form 10-Q and the annual Form 10-K—consistent with 1934 Act rules. The source of a disclosure requirement is irrelevant, whether it is to be found in a 1933 Act prospectus or in a 1934 Act Form 10-K. This is because, irrespective of which of the SEC regimes is applicable, disclosures as to any particular topic must comply with the same set of specifications. For example, a company’s disclosures on either executive compensation or risk factors must comply with the executive compensation and risk factors ‘Items’ that are set out in Regulation S-K. In particular, as we shall see, the ‘Management’s discussion and analysis of financial condition and results of operations’ (MD&A), required by Item 303 of Regulation S-K, is the central item of narrative disclosure found in both 1933 Act prospectuses and 1934 Act Forms 10-Q and 10-K.2

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 103) 2.  The SEC’s Basic Approach to Information: The ‘Descriptive Mode’ and ‘Intermediary Depictions’ 5.13  Under an analytical framework introduced by the author in 2012 (‘Too Complex to Depict’) and refined in 2014 (‘Disclosure Universes’),3 the SEC can be viewed as having always implemented the disclosure philosophy largely through a single approach to information—a single ‘mode of information’. An intermediary—for instance, the corporation issuing securities—stands between objective reality and the investor. The corporation observes and analyses the objective reality, determines which aspects of the reality must be depicted under the governing SEC rules, crafts a depiction, and provides the depiction to investors. The content is defined by general concepts (e.g. the ‘materiality’ standard) and by requirements pertinent to the specific SEC form (e.g. the prospectus, or the Form 10-K). The truthfulness and completeness of the depictions would be supported by vigorous public and private enforcement. The company and its lawyers, accountants, and underwriters, as well as the SEC seek to make sure that the depictions are not only truthful and complete, but comprehensible and accessible. 5.14  This ‘descriptive’ mode of information is depicted graphically at ‘Figure 1. Descriptive Mode’ in ‘Disclosure Universes’ and the reader is urged to refer to it. The key aspect of this informational strategy is that the business entity stands between the objective reality and market participants (such as investors), and that the business entity depicts the reality and provides that depiction to market participants. 5.15  Consider, for instance, the MD&A, the ‘heart and soul of the [SEC’s] disclosure rules’, in the words of SEC Commissioner Richard Roberts,4 In explaining the MD&A’s purpose, the SEC stated that: The Commission has long recognized the need for a narrative explanation of the financial statements, because a numerical presentation and brief accompanying footnotes alone may be insufficient for an investor to judge the quality of earnings and the likelihood that past performance is indicative of future performance. MD&A is intended to give the investor an opportunity to look at the company through the eyes of management by providing both a short and long-term analysis of the business of the company.5 (p. 104) 5.16  More specifically, the ‘eyes of management’ would be required to elucidate various trends and uncertainties relating to material changes to the company’s liquidity, capital resources, and sales, revenues, or income. 5.17  To provide such a depiction, the intermediary must rely on words, graphs, accounting, risk metrics, and other ‘depiction tools’. The English language would be the primary depiction tool used because the MD&A is primarily narrative in form. In contrast, disclosure requirements for quantitative disclosures pertaining to certain market risks the company is exposed to would necessitate the use of depiction tools such as ‘Value at Risk’ (VaR).6 5.18  The reliance on an informational strategy based on intermediary depictions is not explicit, or even consciously considered. However, it is firmly established. Most of the major reform efforts relating to disclosure since the SEC’s creation, such as the ‘Plain English’ rules and the integration of 1933 Act and 1934 Act disclosures, implicitly take the descriptive mode as a given.

III.  The Impact of Financial Innovation on Conventional Understandings

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

1.  Complexity and the Need for a Portfolio of Modes of Information (i)  The limitations of the descriptive mode 5.19  The descriptive mode depends on the company’s ability to provide accurate and complete depictions to market participants. Financial innovation sometimes poses major challenges to this expectation, both in respect of prospectus disclosures of specific new financial products being issued to the public (e.g. asset-backed securities) and in respect of periodic reports of companies heavily exposed to such products (e.g. many ‘too-big-to-fail’ banks). These challenges occur even assuming highly diligent, expert, and honest issuers and companies. 5.20  There are two basic reasons for this. First, there may be a ‘too-complex-to-depict’ issue, flowing from the complexity of some modern financial innovations and the rudimentary nature of the depiction tools upon which the descriptive mode must rely.7 The English language can provide only a highly incomplete view of the esoteric risk and return characteristics of many new financial products. Graphical, tabular, and other visual techniques for displaying data largely developed long before the emergence of modern financial science. Accounting conventions and terminology are generally directed to historical matters; even modern accounting efforts relating to new financial (p. 105) products, such as those relating to their proper valuation, only provide guides as to future risks in an indirect, inferential manner. Even new depiction tools developed to offer quantitative information on risk, such as VaRs and ‘stress test’ results, have many limitations, including the lack of standardization of methodologies and assumptions. 5.21  Second, sometimes the intermediary may suffer from ‘true’ or ‘functional’ misunderstandings of the objective reality. If the intermediary does not understand the reality, no matter how well intentioned the intermediary, and no matter how well the available depiction tools are used, any depictions the intermediary offers are necessarily flawed. ‘True’ misunderstandings occur when no one at the intermediary understands the true risk–return characteristics of one or more financial innovations. ‘Functional’ misunderstandings occur when one or more people at the intermediary may understand the true risk–return characteristics, but the intermediary acts as if it does not understand those characteristics. This may occur, for instance, because of ‘silos’ that develop in large banking entities with offices spread worldwide. A 1993 article, ‘Misunderstood Derivatives’, showed how cognitive bases in derivatives modelling, highly asymmetric incentive structures in the derivatives industry, the opaque and long-term nature of certain derivatives’ risks, and the idiosyncratic nature of financial ‘science’ could undermine the decision-making of even highly sophisticated financial institutions.8 5.22  ‘Too Complex to Depict’ and ‘Disclosure Universes’ provide a wide range of examples confirming the impact of both the ‘depiction tools’ roadblock and the ‘misunderstanding’ roadblock. One particularly important example discussed is the 2012 credit derivatives debacle involving a trader at the chief investment office (CIO) of JPMorgan Chase (JPM). 5.23  In early April 2012, that trader had entered into credit derivatives positions so large that it was disrupting prices in the $10 trillion market. On 13 April, Jamie Dimon, JPM’s CEO, dismissed concerns over the risks posed by such positions as a ‘complete tempest in a teapot’. However, in the ensuing days, losses of $100 million a day began showing up on the CIO’s books. On 30 April, unhappy with the daily reports he was getting, Dimon stated, ‘I want to see the positions! . . . Now! I want to see everything!’ When he saw the numbers, he ‘couldn’t breathe’.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

5.24  As for the depiction tools roadblock, JPM’s core depiction of its CIO risk exposures rested in its VaR disclosures. As reported on 13 April, the VaR for its CIO as of quarter-end was merely $67 million, at a 95 per cent confidence level. On 10 May, JPM reported that VaR was in fact $129 million, nearly double that reported earlier. JPM stated that the methodology it used for its 13 April disclosure was ‘inadequate’ and that the $129 million figure reflected a ‘more adequate’ methodology. But JPM did not describe differences between the ‘inadequate’ and ‘more adequate’ methodologies. During the (p. 106) third quarter of 2012, JPM decided to report on the basis of yet a third VaR model, but provided limited information on the new methodology. 5.25  True and functional misunderstandings were both pervasive. A JPM task force, after numerous interviews of current and former JPM employees and an examination of millions of documents and tens of thousands of audio files, determined that the trading strategies were not ‘fully understood by CIO management or the traders’. As for functional misunderstandings, in SEC cease-and-desist proceedings, JPM admitted that the ‘silo-ing’ of information contributed to JPM’s ‘incomplete understanding of deficiencies’ relating to the valuation problems at the CIO. The silo-ing occurred throughout JPM: among employees below senior management, between employees and senior management, and between senior management and board committees.

(ii)  The ‘transfer mode’, the ‘hybrid mode’, and the portfolio approach to information 5.26  The depiction tools and misunderstanding roadblocks are inherent to the descriptive mode. At least two responses are possible. 5.27  The first response is to simplify the objective reality. In a physical sense, it would be much easier to both describe fully and accurately, and to understand, Kazimir Malevich’s abstract painting White on White than, say, Hieronymus Bosch’s triptych, The Garden of Earthly Delights. It has never been suggested that banks that are ‘too complex to depict’ are also ‘too complex to exist’, but the author does believe that incremental measures to make the objective reality simpler are generally worth considering. Limiting the scope of bank activities (such as contemplated by the Volcker rule) and promoting the simplification and standardization of certain financial products are examples of such incremental measures. 5.28  A far more direct response is to also deploy other modes of information, modes of information now possible because of epochal advances in computer- and Web-technologies. In particular, the author termed these new modes a ‘transfer mode’, relying on ‘pure information’, and a ‘hybrid mode’, relying on ‘moderately pure information’. Neither mode is as susceptible to the depiction tools or misunderstanding roadblocks. 5.29  The descriptive mode relies on intermediary depictions of reality. Technological advances now make it far easier to use an approach to information more focused on the ‘transfer’ of objective reality itself—or, more technically, information that is highly mimetic of objective reality and exists independently of any observer. 5.30  This ‘transfer’ mode of information is depicted graphically at ‘Figure 2. Transfer Mode’ in ‘Disclosure Universes’, and the reader is urged to refer to it. Here, the intermediary does not stand between the objective reality and the investor, telling the investor what the intermediary sees. Instead, the intermediary ‘steps out of the way’, allowing the investor to see for himself, and to download, the objective reality in its full, perhaps (p. 107) terabyte richness. There are no depiction tool issues because there are no depictions. And because there are no intermediary depictions, any true or functional misunderstandings on the part of the intermediary cannot taint the information conveyed.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

5.31  The ‘hybrid’ mode of information is depicted graphically by way of an example at ‘Figure 3. Hybrid Mode’ in ‘Disclosure Universes’. This approach falls in between the descriptive mode and the transfer mode, drawing on elements of both. It results in ‘moderately pure information’ being provided to market participants and can occur in several ways. 5.32  Consider a physical, non-financial example to illustrate differences between the transfer and descriptive modes. Assume that Mount Everest as the objective reality. While Mount Everest itself cannot be transferred to a person sitting at his computer, pure information in the form of, for instance, a photo of Mount Everest can be. Such pure information flows largely from the actual characteristics of the mountain itself, and only modestly from the camera, image-processing software, and other technology used to generate and transmit the photo. As long as the person at the computer is aware of the technology used, she can to a large extent isolate the true characteristics of Mount Everest from artefacts introduced by the technology. An intermediary depiction of Mount Everest, written with the succinctness of Hemingway and the nuance of Tolstoy, cannot match a high-quality photo. 5.33  But the transfer mode has its own disadvantages. Two stand out. First, the difficult task of observing and analysing objective reality is transferred, not eliminated. Instead of the task being undertaken by the company (with the expertise, resources, and obligation to craft a depiction), the task falls to investors and other market participants. Not only do such market participants have no obligation to undertake this task, but retail investors and many other market participants will also not have sufficient incentive or expertise to do so. Thus, market participants will not be on a level playing field informationally, except perhaps to the extent that trading prices reflect the more informed trades engaged in by the more diligent and expert. Second, the granularity of the information provided with the transfer mode and the absence of business entity intermediation may result in the disclosure of confidential or proprietary information. 5.34  Each of the three modes of information has its own advantages and disadvantages. The relative lack of ‘correlation’ of the risks and returns of these modes of information calls to mind the virtues of portfolio diversification as an investment strategy. The path forward lies in an eclectic, comprehensive conception of ‘information’. The SEC’s information portfolio should consist of all three modes of information, even if the descriptive mode has pride of place.9 A general principle of ‘informational neutrality’, across modes of information in this sense of equal consideration is merited.

(p. 108) (iii)  Asset-backed securities and pure information: loan-level data and downloadable waterfall codes 5.35  Problems associated with ABS played a major contributing role in the global financial crisis. Indeed, some financial academics have gone so far as to suggest that, at the core of the crisis ‘was the discovery that securities are far riskier than originally advertised’.10 There were many reasons why this was so, including conflicts of interest between the originators and investors, credit ratings agency modelling failures, and outright fraud.11 5.36  One other reason relates to the intermediary depictions of the characteristics of the pool assets underlying the ABS. No information at the level of the individual assets that make up the pool was required, even though very subtle differences in pool characteristics could make huge differences in the possibility of default. And the data on pool assets that was generally provided, such as descriptions of the pool assets at the aggregate or subset levels, were subject to wide issuer discretion, not only with respect to the types or categories of information disclosed, but also to the manner in which it was disclosed.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

5.37  On 24 November 2016, an important requirement in the direction of pure information became effective.12 Under the new approach, prospectuses for public offerings under the 1933 Act and ongoing reports under the 1934 Act for many kinds of ABS would be required to contain specified information for each of the assets in the pool. 5.38  The amount of information required is massive. For each loan, there would be data points for, among other things, its contractual terms and scheduled payment amounts, as well as the actual payments the debtor is making. For ABS backed by automobile loans, there would be seventy-two data points. For ABS backed by automobile leases, there would be sixty-six. Such automobile and automobile lease-backed ABS typically have pools with between 20,000 and 100,000 assets.13 5.39  Relying on an intermediary depiction of the seventy or so data points for each of the 20,000–100,000 assets would be difficult. However, pure information and the transfer mode can be relied on. Indeed, to make such information accessible and usable, the SEC required that such loan-level data be in a standardized eXtensible Markup Language (XML) format. This echoes the reliance on XML with respect to other recent SEC efforts, such as those relating to the portfolio and other information required to be provided by mutual funds pursuant to Forms ‘N-PORT’ and ‘N-CEN’.14 (p. 109) 5.40  This new requirement thus involved the direct use of the transfer mode. In effect, objective reality, in the form of a highly detailed photo mosaic consisting of 20,000– 100,000 detailed images of each of the loans, could be transferred to any interested investor with a computer and the right software. 5.41  A 2019 working paper by Professor Jed Neilson and his co-authors provides strong empirical evidence as to the value of this new approach to information.15 They used as the treatment group automobile ABS subject to the new ABS requirement, and as the control group various ABS that either were not subject to the new disclosure requirement or which in practice had provided loan-level disclosures even prior to the new regime. They found, among other things, that the initial yield spreads on the automobile ABS predicted subsequent delinquencies significantly better than the initial yield spreads for ABS in the control group after the requirement’s effective date than before that date. 5.42  This deployment of the transfer mode with respect to loan assets in many ABS offerings is welcome. However, the SEC has not yet decided to make a similar move with respect to the matter of requiring downloadable computer codes for ‘waterfalls’.16 5.43  ‘Too Complex to Depict’ showed that the depiction problems run deeper as to the waterfall—the specification of the precise cash flows each tranche holder is to receive. Before one even gets to the problems in the depiction of reality, there are foundational concerns as to what ‘reality’ even means. Several alternative conceptions exist. Chairman James Doty of the Public Company Accounting Oversight Board found this prospect ‘absolutely terrifying’.17 In addition, whatever the conception of reality used in the intermediary’s depiction, even assuming that there is no possibility of default, it can be difficult for the investor to map the intermediary’s depiction to the actual cash flows he would receive over the life of his investment: –  there could be, and have been, slippages between the often arcane mathematical concept intended to be implemented and the actual pooling and servicing agreement; –  there could be, and have been, slippages between the contractual provisions of the pooling and servicing agreement and the actual computer program used to distribute the cash flows among the tranches; and

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

–  there could be, and have been, slippages between the prospectus and both the contractual provisions and the actual computer program. 5.44  The deployment of the transfer mode could do rough justice. As a practical matter, the actual cash flow to be received by an investor depends completely on the computer (p. 110) algorithm. Even though, as a legal matter, the pooling and servicing agreement is supposed to control the disbursements (and not, for instance, the mathematical concept intended to be implemented or the depiction offered in the prospectus), what actually controls the disbursements is the computer algorithm. 5.45  The pertinent objective reality is the objective reality as embodied in the computer program. An investor, by downloading the program, would know precisely what will be disbursed. While there are legitimate concerns over the need for precision in specifying such a waterfall code requirement and the possible liability under federal securities laws,18 the most serious factor weighing against adopting a downloadable waterfall code requirement is the matter of benefits and costs. Pure information, in the form of such downloadable programs, has many benefits, but it is an open question whether the associated costs justify such a move.19

(iv)  Alternative data: the portfolio approach and original third-party companyspecific information 5.46  ‘Alternative data’ has attracted wide interest among institutional investors over the past few years.20 Rather than relying on such traditional sources of information as financial statements, SEC filings, and management presentations, hedge funds and other institutional investors have started looking at such matters as satellite imagery of parking lots, social media posts, and insurance policy databases.21 5.47  The nature and sources of information are noteworthy. Such imagery and insurance policy data and many other examples of alternative data are of the pure information variety. And the information comes not from the company, but from third parties. An investor in Tesla need not rely on Tesla as the sole source of information on its car sales. Bloomberg now tracks Tesla production by looking at the number of vehicle identification numbers Tesla registers.22 5.48  Because of factors such as increasing computer power and advances in machine learning, the universe of available data is large and expanding rapidly. JPMorgan Chase estimated in 2017 that the universe of data is expected to increase ten-fold by 2020, (p. 111) reaching 44 zettabytes (one zettabyte equals a trillion gigabytes).23 The bank estimated that investment industry spending on such data in 2017 was between $2 and $3 billion, while Deloitte has estimated that spending may reach $7 billion by 2020.24 5.49  In terms of the analytic framework for information, the rise of alternative data has implications for the transfer mode and the descriptive mode, both of which assume that the company is the informational source. 5.50  First, alternative data providers can be important sources of pure information about the company. Trends in the provision of data, unadorned by analysis,25 suggest that some investors value pure information, in and of itself. With multiple and growing number of vendors of pure information, a correspondingly wide and increasing diversity in the sources and kinds of pure data can be expected. Already, vendors are using clickstream data on a website’s visitors to gauge e-commerce efforts, foot-traffic data from Wi-Fi signals for analysing retailing efforts, mobile phone data to generate credit risk scores, and Twitter posts to generate predictions on potential market impact of political and social events.26

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Third parties could offer pure information in the form of big structured or unstructured datasets for sophisticated investors to analyse themselves. 5.51  Second, such third parties can also be increasingly important sources of information in more processed form—including, for example, third-party depictions of reality. This may help address the depiction tools and misunderstanding roadblocks inherent in the classic company-generated depictions of reality. As investors can obtain information from multiple intermediaries in a decentralized fashion, it is likely that, in the aggregate, there will be a very wide range of depiction tools being used and a range of how the tools are being deployed. As investors thus, in effect, rely on a wide range of attempted depictions, the limitations of any one depiction should cause less harm. Similarly, intermediary diversity should reduce the ‘true’ and ‘functional’ misunderstandings associated with the descriptive mode. As to the ‘functional’ misunderstandings, smaller alternative data suppliers are less likely to suffer from the ‘silo’ and other organizational issues that contribute to such misunderstandings. As to ‘true’ misunderstandings, multiple sources of information might help provide investors with a market check on the possibly mistaken views of any single source. 5.52  The rise of alternative data heightens certain public policy concerns. For instance, if the data is in pure information form, such as with large, unstructured data sets, only certain investors may have the ability or incentive to make use of the data. This disadvantage has already been discussed in relation to company-provided pure information (p. 112) (at para. 5.33). However, alternative data is a private good: only investors who purchase the data will have access.

2.  The Exchange-Traded Fund: A Traded Security without Disclosure’s Heart and Soul 5.53  The first US listed exchange-traded fund (ETF), the SPDR S&P 500 ETF (‘SPY’) launched in January 1993 with $6.5 million in assets.27 By 2016, seven of the ten most actively traded securities in the US were ETFs.28 At its quarter-century anniversary, SPY was the most traded security in the world. As of year-end 2018, each of the top fifteen holdings of Bridgewater, the world’s largest hedge fund, was an ETF.29 By 28 February 2019, assets in US-listed ETFs reached $3.7 trillion, about thirty-seven-fold the number at year-end 2002.30 5.54  Key aspects of the normal SEC disclosure system do not apply to this important, rapidly growing segment of the securities market.31 Unlike virtually all other private issuers of publicly tradedshares, issuers of most ETFs are not required to provide ‘MD&A’ disclosures. Generally speaking, exchange-traded fund disclosure is missing the ‘heart and soul’ of SEC disclosure rules. The basic legal reason for this is that most ETFs are not subject to the 1933 Act/1934 Act disclosure regime applicable to ordinary public companies. Instead, the disclosure mandates for most ETFs stem largely from a patchwork of requirements arising from the Investment Company Act of 1940, stock exchange listing requirements, and ETF-specific SEC exemptive orders. Considered as a whole, the disclosure requirements with respect to most ETFs also depart from the core tenet of the disclosure philosophy that the SEC’s role is restricted to the informational realm, not substantive decision-making. 5.55  From the standpoint of risks to, and the nature of, ETF investors, the disparate treatment of ETFs as to the MD&A makes little sense. Shares in ETFs, like shares in ordinary public companies, vary widely in terms of risk. Some ETFs, such as SPY, track the S&P 500 and have risks generally corresponding to holding the stocks of the 500 ordinary public companies that constitute that index. However, some ETFs can be quite risky or involve highly counterintuitive risk–return characteristics, including some ETFs (p. 113) offering leveraged or inverse exposures to various market indices and some ETFs that provide access to highly esoteric asset classes. For example, between the close of trading From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

on Friday, 2 February 2018 and Monday, 5 February, the net asset value of the shares of an ETF intended to allow investors to bet on the volatility of the S&P 500 fell from $103.7288 to $3.9635—a fall of over 96 per cent.32 5.56  The wide range in riskiness will continue, flowing directly from what has been conceived as the ETF’s unique investment premise. The ETF offers both individual and institutional investors a nearly ‘frictionless’, often low-cost portal to a bewildering, continually expanding universe of plain vanilla and arcane asset classes, passive and active investment strategies, and long, short, and leveraged exposures.33 5.57  The nature of investors in ETFs overlaps to a large degree with the nature of investors in ordinary public companies. First, the percentage of institutional ownership appears to be roughly the same. Most shares in both ETFs and ordinary public companies are held by institutional investors. As of the end of 2016, institutional investors held 58.5 per cent of shares in US ETFs.34 As of April 2017, institutional investors held about 78 per cent of the market value of the Russell 3000 index.35 Second, the retail investors in both categories of traded securities appear to be comparable. As of mid-2017, the median household income and financial assets for households owning ETFs were $125,000 and $500,000, respectively, while those for households owning individual stocks were $102,000 and $350,000, respectively.36 5.58  The current disclosure requirements for ETFs largely reflect a mutual fund mindset. Mutual funds, in contrast to ordinary public companies, do not have to provide an MD&A. The corresponding disclosure item for mutual funds is the ‘management’s discussion of fund performance’ (MDFP), required in the annual report. In contrast to the MD&A, the MDFP only requires discussion of past performance and does not require management views as to trends or uncertainties relating to future prospects. This stems in part from the MDFP emerging in the context of mutual fund investors, a group viewed by the SEC as not sophisticated enough to desire or to appreciate such forward-looking disclosures. 5.59  Mutual fund investors, however, are far different from ETF investors. The percentage of mutual fund shares held by institutional investors is far lower. As of year-end 2017, only 10 per cent of mutual fund assets were held by institutional investors, and the majority of that was in money market funds.37 And retail investors in ETFs have materially (p. 114) higher income and assets than retail investors in mutual funds. For instance, as of mid-2017, the median household financial assets of households owning ETFs was more than double the financial assets of households owning mutual funds.38 5.60  The MD&A offers, from the manager’s standpoint, a view of the trends and uncertainties that affect the outlook for an ordinary public company. This type of forwardlooking information, or at least some information along these lines, could be helpful in the case of ETFs as well. ETFs are no less risky and the ETF investors no less capable of understanding nuanced managerial discussions. Moreover, as discussed elsewhere, the views of ETF managements are likely to be exceptionally well informed relative even to sophisticated institutional investors holding ETF shares.39 5.61  Elsewhere, a co-author and I made the case for an MD&A-style disclosure item for ETFs, but only with respect to the ETF’s ‘arbitrage mechanism’ and related matters. There are issues relating to ETFs that extend well beyond the absence of any MD&A-style requirements, not only in terms of disclosure but in terms of the substantive regulation of ETFs. No comprehensive regulatory framework for ETFs exists, and we offer one in that work.40

3.  Decoupling and New Extra-Company Informational Asymmetries

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(i)  Overview 5.62  Longstanding legal, economic, and business understandings of equity and debt—the basic building blocks of the corporation—are that they consist of packages of rights and obligations that cannot be ‘decoupled’. Ownership of equity, for instance, generally conveys economic, voting, and other rights, as well as disclosure and other obligations. The assumption has been that a shareholder’s voting rights cannot be separated from its economic interest in the corporation. 5.63  These foundational understandings can no longer be relied upon. With the derivatives revolution and for other reasons, it is now possible for market participants to easily decouple the associated elements of these packages.41 This decoupling has implications (p. 115) for shareholder voting rights, creditor control rights, the market for corporate control, and myriad other matters—including for disclosure requirements. 5.64  A series of articles extending back to 2006 showed in detail how the use of equity derivatives enabled hedge funds and other third parties to game blockholder disclosure rules of the section 13(d) variety throughout the world.42 Many jurisdictions, though notably not the US, have responded to such attempts at ‘hidden (morphable) ownership’ by modernizing their blockholder disclosure rules to take into account such equity derivativesbased strategies. 5.65  Because of such responses to equity decoupling made outside the US, section 13(d)type disclosure requirements remain very helpful in alerting investors and incumbent management as to possible third-party moves to engage in takeovers or cause other changes in control. Information on the equity and equity derivative holdings of third parties —‘extra-company’ information—has proven critically important to the matter of control. 5.66  In contrast, responses are yet to be forthcoming with respect to debt decoupling that can result in the ultimate change in control: bankruptcy. To illustrate the importance of certain ‘extra-company’ information requirements relating to debt derivatives and decoupling, the 2019 bankruptcy of Windstream Services (an Arkansas telecommunications company) is discussed in detail and, in passing, the 2017 bankruptcy of Norske Skog (a Norwegian lumber company).

(ii)  Credit default swaps and the empty creditor with negative economic exposure issue 5.67  Credit default swaps (CDS) help creditors hedge against the risk that debtors will default.43 In the event a debtor goes bankrupt, the seller of CDS protection provides financial solace to the CDS buyer. 5.68  This important financial innovation, unfortunately, has seen highly counterintuitive incentive patterns and gaming behaviour that are often opaque and sometimes quite troublesome. (p. 116) 5.69  Consider, for instance, a creditor who has purchased $200 million of CDS protection but only holds $100 million of bonds. Such a creditor—an extreme version of an ‘empty creditor’ (a term coined by the author in 2007)—would actually benefit from the bankruptcy of its debtor. This is because, on bankruptcy, the payoff it would receive on its large CDS position would exceed its losses on the bonds. 5.70  Indeed, the incentives of this ‘empty creditor with negative economic exposure’ (or, more colloquially, this ‘net short’ creditor) are, broadly speaking, opposite to those of a traditional creditor. A traditional creditor will often find it beneficial to both it and its borrower to work closely with the borrower in manifold ways to help the borrower out of its immediate difficulties.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

5.71  A possible illustration of the impact of such counterintuitive incentives occurred on 25 February 2019, when Windstream Services filed for bankruptcy. This was after an extended court battle between it and Aurelius Capital Management, a hedge fund. In 2017, Aurelius, a Windstream creditor, sent a notice of default asserting that, two years earlier, Windstream had breached certain bond covenants. No other creditor had complained of this. Litigation ensued, involving multiple matters. On 15 February, the judge found for Aurelius in all respects, and awarded it $310 million. The next trading day, Windstream’s stock fell by about two-thirds. On 25 February, Windstream filed for bankruptcy. 5.72  Why did Aurelius undertake an action that might cause its borrower to go bankrupt? Windstream has argued—no one knows for sure because Aurelius was not required to disclose and did not disclose its CDS positions—that Aurelius had a large CDS position relative to the debt it holds. 5.73  Consider another example. In late 2015, the debt of Norske Skog reached ‘unacceptable’ levels. Its survival, at least as a temporary matter, was dependent on the approval of an exchange offer that was supported by GSO Capital Partners (GSO), an alleged seller of short-term CDS and alleged purchaser of longer-term CDS protection. In the ensuing litigation, it was alleged that, because of GSO’s CDS positions, GSO would benefit from the firm not going bankrupt in the short term as well as from the firm going bankrupt in the long term. The true CDS positions and incentives of key players were disputed in the litigation. In 2017, Norske Skog filed for bankruptcy. 5.74  A large variety of regulatory, industry, and debtor-level responses are possible. One major starting point could be greater transparency of CDS positions. Currently, even the debtor corporation itself, much less investors, may have to rely on hearsay as to the possible presence of empty creditors with negative economic exposure. Improved transparency would help improve investor and market evaluations of the financial prospects of the company. 5.75  Efforts at extending extra-company information disclosure to holders of large CDS positions may help as a substantive matter in reducing the likelihood of inappropriate bankruptcies. Thus, armed with reliable, granular information, a debtor corporation (p. 117) would be better able to enlist the help of investors, traditional creditors, and others to fend off net short creditor behaviour that would be detrimental to the corporation as well as to its investors and traditional creditors. 5.76  Being able to reliably characterize a creditor as an empty creditor with a negative economic exposure is crucial in trying to encourage at least some judges to consider disallowing the exercise of control rights by such creditors. (The 15 February opinion in the Windstream matter did not refer to any empty creditor issues, and thus the judge in that case at least implicitly did not consider the matter relevant.) There is precedent for this involving the corresponding situation on the equity decoupling side: empty voters with a negative economic exposure. 5.77  The precedent arose in the context of the bitter 2012 battle over whether TELUS, a large Canadian telecommunications company, could undertake a planned recapitalization. Relying in part on the author’s affidavit, Justice Fitzgerald of the Supreme Court of British Columbia found hedge fund Mason Capital’s likely status as an empty voter with negative economic exposure to be relevant in considering Mason’s objection to the recapitalization.44 The court approved the recapitalization.

IV.  The Regulatory Ends of Disclosure and the Emergence of a Parallel Disclosure Universe

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

1.  Changing Regulatory Ends and the SEC 5.78  The disclosure paradigm contemplates that the essential goals of public disclosure relate to the protection of investors and market efficiency. Information that is ‘material’ from the standpoint of reasonable investors must be disclosed, and public and private enforcement loom in case of failure to comply. In 1975, the SEC stated that it would require disclosure relating to a corporation’s social and environmental performance ‘only if such information . . . is important to the reasonable investor—material information’.45 In 2016, the SEC noted that the current statutory requirements for adopting disclosure requirements ‘remains generally consistent with the framework that the [SEC] considered in 1975’.46 In an accompanying footnote, the SEC added that, since 1996, the SEC also has been statutorily required to consider, in addition to protection of investors, whether an action will promote efficiency, competition, and capital formation.47 5.79  While the core regulatory ends of disclosure have not changed at the SEC, at least three recent developments have started nipping at the edges. In addition, two other (p. 118) developments have occurred that involve the minimization of systemic risk as a regulatory end, one relating directly to the SEC from and after the global financial crisis and the other relating to a new bank regulator-developed public disclosure system. In the remainder of this section, we will briefly discuss certain non-systemic, risk-related ends. We defer the systemic risk matters to section IV.2 ‘Systemic Risk: The SEC and the New Bank Regulator Disclosure Universe’ (para. 5.87). 5.80  First, the Dodd-Frank Act of 2010 required that the SEC adopt a disclosure requirement with the humanitarian goal of ending a violent conflict in the Democratic Republic of the Congo, a conflict partially financed by the exploitation and trade of certain minerals originating in that country.48 Two years after the enactment of the Act, the US Comptroller General was to submit a report to Congress that included an assessment of the statutory provision in promoting ‘peace and security’ in specified countries.49 The SEC was directed to promulgate regulations requiring, among other things, that a broad range of public companies disclose annually whether any ‘conflict minerals’ necessary to a product manufactured by the company originated in the specified countries. 5.81  In the adopting release for the conflict minerals rule, the SEC noted that the statute ‘aims to achieve compelling social benefits’ and that ‘the social benefits are quite different from the economic or investor protection benefits that our rules ordinarily strive to achieve’.50 In 2015, the US Court of Appeals for the District of Columbia Circuit struck down the rule on First Amendment grounds.51 Notably, the court characterized the statutory provision’s goal of dissuading manufacturers from purchasing minerals that fund armed groups in the Congo as ‘unique to this securities law’.52 5.82  Second, Dodd-Frank required the SEC to adopt a rule requiring disclosure of pay ratios. The Dodd-Frank directive was bare-bones in nature. The SEC was mandated to promulgate a rule requiring proxy statements to disclose: (i) the median of annual total compensation of employees; (ii) the annual total compensation of the CEO; and (iii) the ratio of that median worker compensation to the CEO’s compensation.53 5.83  In contrast to Dodd-Frank’s conflict minerals provision, Congress was silent as to the purposes of the pay ratio provision. The SEC’s adopting release noted that ‘Congress did not expressly state the specific objectives of the provision and that the legislative history of Dodd-Frank did not do so either.’54 Based in part on the comments the (p. 119) SEC received, it treated the requirement as being intended to ‘provide shareholders a companyspecific metric that can assist in their evaluation of a registrant’s executive compensation practices’.55

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

5.84  In 2015, the SEC promulgated the pay ratio rule in a 3:2 vote. While the SEC’s adopting release largely framed the pay ratio disclosure in investor-centric terms, the two Republican commissioners, both of whom voted against the rule, would have none of it. Commissioner Dan Gallagher criticized the number as ‘likely to be useless for anything but naming and shaming’ well-paid corporate executives, and noted that it was desired largely by ‘ideologues, special-interest groups . . . and idiosyncratic investors’; moreover, ‘[a]ddressing income inequality is not the province of the SEC’.56 5.85  A September 2018 study by Pearl Meyer, a compensation consulting firm, offers interesting findings that were at least generally consistent with Commissioner Gallagher’s reservations.57 They found that neither ISS nor Glass-Lewis, the two biggest shareholder advisory services would take into account pay ratio disclosures in issuing their recommendations. And while some institutional investors indicated to Pearl Meyer that the pay ratio disclosure could be valuable in making an informed voting decision, not one institutional investor ultimately admitted to having used the pay ratio outcomes in their voting decisions. 5.86  Third, in 2016, the SEC asked for comments on whether it should require disclosure of various ‘ESG’ matters, such as ‘climate change, resource scarcity, corporate social responsibility, and good corporate citizenship’.58 As a general matter, the author believes that, if properly structured and circumscribed, the case for requiring certain ESG disclosures can be far more firmly grounded in the SEC’s traditional investor-centric goals than the cases for requiring disclosures on conflict minerals and pay ratios. The public statements of two major asset managers are telling. In 2018, Larry Fink, the CEO of BlackRock, the world’s largest asset manager, wrote that ‘a company’s ability to manage [ESG] matters demonstrates the leadership and good governance that is so essential to sustainable growth, which is why we are increasingly integrating these issues into our investment process’.59 Similarly, in 2019, another large asset manager stated that ‘[a]t State Street Global Advisors, we firmly believe that ESG investing and fiduciary (p. 120) responsibility are not contradictory, but rather that the consideration of material ESG factors in the investment process is an integral part of honoring our fiduciary duty’.60

2.  Systemic Risk: The SEC and the New Bank Regulator Disclosure Universe (i)  The global financial crisis, the SEC, and the call for a change in the SEC’s statutory mandate 5.87  The disclosure philosophy contemplates the SEC to have a limited role with respect to market prices. The SEC is to stay within the realm of information, and devote its energies to ensuring a robust informational base. Stock market prices are to be determined by a wellinformed market. The SEC should be a neutral bystander as bears and bulls engage, and should not try to manipulate prices upwards or downwards. 5.88  In fact, this incrementalist regulatory approach has been in metamorphosis, especially from and after the 2007–2009 global financial crisis (GFC). In 2018, the Systemic Risk Council, an advisory body chaired by Sir Paul Tucker, a renowned former Deputy Governor of the Bank of England, called for an explicit statutory mandate that the SEC seek to ensure the resilience of the financial system.61 5.89  The most important departure from the incrementalist approach occurred on 18 September 2008, at the height of the GFC. That day, the SEC decided to ban all short selling of securities of financial firms.62 This decision was directly contrary to the SEC’s

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

approach throughout the modern era to move increasingly to relax the SEC’s core shortselling constraint, the so-called ‘uptick rule’. 5.90  This uptick rule, adopted in 1938, limited short selling in a declining market. The basic idea was to allow relatively unrestricted short sales when prices were rising but to prevent short selling at successively lower prices, and thereby prevent bear raiders and other short sellers from accelerating a market decline. Although the uptick rule remained virtually unchanged for nearly seven decades, the SEC moved increasingly to lessen the rule’s effect, such as through granting requests for relief. In July 2004, the SEC temporarily suspended short-sale price tests for certain securities so that the SEC could do a pilot study to assess whether changes to the rule would make sense. In a public report issued in February 2007, economists at the SEC concluded that removing short-selling price restrictions ‘on balance has not had a deleterious impact on market quality (p. 121) or liquidity’. In July 2007, following a careful, deliberative rule-making process, the SEC abolished all short-sale price-test restrictions. 5.91  With the onset of the GFC, matters moved quickly in the opposite direction. Between July 2008 and April 2009, the SEC took more than fifteen regulatory actions on short selling, the most important of which occurred on 18 September 2008. The emergency order was issued that day without any opportunity for public comment, and went into immediate effect. Nearly 1,000 firms were deemed to be a financial firm for such purposes, even including CVS, Caremark, Ford, and General Motors. 5.92  This decision was extraordinary. The last time short selling had been banned in the US was in 1931, even before the SEC was created. And the primary justification for the 2008 ban was cast not in terms of the price efficiency of individual stocks, but instead on ‘investor confidence’ in financial markets as a whole. 5.93  More specifically, public evidence later emerged that this occurred in large part due to intense pressure from the Treasury Secretary and the Federal Reserve Chairman and their concerns over the possible failure of financial institutions. Preventing the failure of financial institutions and reducing systemic risk are not traditional goals for the SEC. SEC Chairman Christopher Cox later referred to this action as the ‘biggest mistake’ of his tenure. 5.94  At least three groups of issues arise from the September 2008 ban. First, whatever the ban’s merits, did the ban have the intended effect? Second, when should the usual goals of the SEC be sacrificed in the interests of short-term financial stability? Third, to what extent should the SEC be insulated from the political and other pressures from the Treasury Secretary, Federal Reserve Chairman, and others who are not as focused on investor interests and market efficiency? 5.95  The subsequent creation of the Financial Stability Oversight Council (FSOC) under the Dodd-Frank Act moved the SEC further into the systemic risk arena. With ten voting members, including the Treasury Secretary as chairperson and the Federal Reserve Board chairman and SEC chairman as members, one of the three primary purposes of FSOC is to ‘respond to emerging threats to the stability of the U.S. financial system’. 5.96  Some are now calling for an explicit change in the SEC’s statutory mandate along these lines. In February 2018, the Systemic Risk Council stated that Congress should ensure that the SEC have an ‘overt statutory objective for the stability of the financial system’.63 The Council believed that FSOC cannot succeed in the long run when the agencies (as distinguished from the individuals) around its table do not all have an unambiguous mandate from Congress to prioritize the resilience of the system. With such a

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

legal duty, the Council believes, there would be more public debate about how to promote resilient markets and thus the likelihood of systemic vulnerabilities would be reduced.

(p. 122) (ii)  The bank regulator public disclosure system 5.97  The mention of the word ‘disclosure’ usually conjures up the SECs system for mandatory public disclosure, the system’s core goals of investor protection and market efficiency, the implementation by way of Form 10-K’s and other SEC-mandated documents. 5.98  Beginning in 2013, certain financial institutions must not only make public disclosures mandated by the SEC’s system, but also those mandated by a new system developed by the Federal Reserve System and other bank regulators in the shadow of the Basel Committee on Banking Supervision. The first set of requirements, which came into effect on 1 January 2013, centres on market risk and, specifically, the market risks of the trading activities of major banks.64 The second set of requirements, which came into effect on 2 January 2014, centres on a broad range of matters related to the capital adequacy of the institution, including credit risk.65 The third set of requirements, which came into effect on 1 April 2017, centres on liquidity.66 5.99  Unlike the SEC’s system, the bank regulator public disclosure system is not directed at the interests of investors and market efficiency. Instead, it is directed at the well-being of the bank entities themselves and the reduction of systemic risk. The origins of the bank regulator system go back to a 1988 accord reached under the auspices of the Basel Committee which established minimum levels of capital for internationally active banks (Basel I). The purpose of such capital adequacy standards was to promote the safety and soundness of banks. Bank regulators did not address the matter of public disclosures. 5.100  This changed with the Basel’s Committee’s adoption of what is now referred to as ‘Basel II’, also intended as the basis for consultation and implementation at the national level.67 Basel II’s first two ‘pillars’—minimal capital requirements (Pillar 1) and supervisory review of capital adequacy (Pillar 2)—are intended to ensure the soundness of banks. Basel II states that Pillar 3—market discipline—is to ‘complement the minimal capital requirements (Pillar 1) and the supervisory review process (Pillar 2)’.68 More broadly, the bank regulators hoped that Pillar 3 could ‘produce significant benefits in helping banks and supervisors to manage risk and improve stability’.69 (p. 123) 5.101  Basel II uses the term ‘market discipline’, but its conception of market discipline and the benefits of market discipline depart from the common understanding on the part of those interested in corporate governance. Basel II’s use of the term reflects its instrumental value in furthering two goals—the welfare of the business entity itself and overall financial system stability. Under the common understanding, public disclosure is directed at neither goal; instead, ‘market discipline’ is commonly used to refer to the market pressures causing corporate managements to further the well-being of shareholders. 5.102  Federal bank regulators share the Basel Committee’s views on ‘market discipline’ and the regulatory ends of public disclosure. Thus, in proposing the initial market riskrelated disclosure requirements, the Federal regulators stated: The proposed rule imposes disclosure requirements designed to increase transparency and market discipline . . . The agencies recognize the importance of market discipline in encouraging sound risk management practices and fostering financial stability.70

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

5.103  The regulatory ends of the SEC and bank regulator disclosure universes thus differ. The regulatory means diverge as well. For instance, the bank regulator system reflects far more sophistication about financial modelling and its limitations, as reflected in the striking differences between what are the requirements of the SEC and bank regulators relating to market risk.71 5.104  The bank regulator public disclosure system now has requirements in place with respect to market risk, credit risk, and liquidity risk—that is, most risks faced by banks. This vast domain is, and will continue to be, also fully subject to the SEC disclosure system. 5.105  This overlap in subject matter is large, and the two systems often require different disclosures. The overlap and the differences can be easily illustrated. JPM regularly places the public disclosures mandated by the bank regulator disclosure system on its website in a report entitled, ‘Pillar 3 Regulatory Capital Disclosures’. The Introduction to the report for the quarter ended 31 December 2018 states that the report ‘should be read in conjunction with the 2018 Form 10-K’.72 To help the investor to do so, page 1 of the report has a fullpage table titled ‘Disclosure Map’, listing twelve broad categories of subject matter required under both Pillar 3 and in the Form 10-K, and indicating where overlapping topics can be found in the report and in the Form 10-K. There were more than sixty distinct crossreferences to the Form 10-K. And, within particular subject matter discussions in the report —such as that for VaR—there are additional reminders (p. 124) to investors about additional information being available on specified pages in the VaR discussion in Form 10-K.73 5.106  The information provided as to VaR is different in the two reports. This is not surprising, in part because the Pillar 3 and SEC requirements as to VaR disclosures vary widely.74 5.107  In 2014, the article ‘Disclosure Universes’ showed that having two sets of regulators with divergent regulatory ends and divergent regulatory means with full authority over the same informational territory is, at best, unwieldy. The 2014 article, a 2015 article, and a 2015 comment letter suggested that this duality in fact raises fundamental concerns needing serious attention, and offered some suggestions.75 5.108  In 2017, the SEC started considering steps to try to address the duality. In 1976— the year the first Rocky was released—the SEC published a guide intended to provide bank holding companies with a convenient reference to the statistical disclosures required under the 1933 Act and 1934 Act.76 This represents the only effort the SEC has ever taken to comprehensively address the disclosures required of banks. And the guide has remained largely unchanged, notwithstanding the striking changes in the nature of banking and capital market products in the subsequent four decades. 5.109  In 2017, the SEC requested comments as to the disclosures called for by the guide.77 The SEC explicitly recognized that much information is publicly available beyond what is called for by the SEC. It noted not only the bank regulator public disclosure system, but, for instance, information flowing from generally accepted accounting principles (GAAP) about compliance with regulatory capital requirements and ‘stress testing’ results.78 The SEC explicitly acknowledged some of the problems associated with the dual public disclosure systems, stating: We are also mindful of how our disclosure regime interacts with the various disclosure requirements of the U.S. banking agencies. In some cases, our disclosure regime and the regimes of the U.S. banking agencies require different types of information or present information in inconsistent ways; in other cases, the various regimes may overlap with or duplicate one another . . . We are cognizant of the fact

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

that securities and banking disclosures serve different purposes in light of the different missions of their respective regulatory agencies.79

(p. 125) V.  Conclusion 5.110  The disclosure paradigm contemplates a unique regulatory role for the SEC. The fulfilment of its core mission is essential not only to investor protection and market efficiency, but also to a wide variety of transparency-dependent corporate governance mechanisms. Financial innovation is contributing to a ‘too-complex-to-depict’ problem that brings into question the sufficiency of the core approach to information that the SEC has used since its creation. Moreover, particular financial innovations, including ABS, ETFs, and CDS, pose product-specific challenges to the fulfilment of the SEC’s mission. Additionally, changing conceptions of the ends to be achieved by public disclosure, within the SEC disclosure system itself and pursuant to a new disclosure system driven by regulators with far different mindsets, raise new issues. It is now demonstrable that the new modes of information and the alternative data made possible by technological innovation can help address some of the disclosure challenges posed by financial innovation. At the same time, these new modes and alternative data introduce regulatory complexities. Modern divergences are making life interesting for regulators, practitioners, and academics alike. (p. 126)

Footnotes: *  Professor Hu holds the Allan Shivers Chair in the Law of Banking and Finance, University of Texas Law School. I much appreciate the insights of participants at the January 2019 conference in Amsterdam of the International Working Group on Prospectus Regulation and Liability, and especially those of the conference organizers and editors of this book, Professors Danny Busch, Guido Ferrarini, and Jan Paul Franx, and of the discussants at my presentation, Professors Joseph McCahery and Veerle Colaert. I also appreciate the library assistance of Scott Vdoviak and Lei Zhang and the research assistance of Jacob McDonald and Helen Xiang. Professor Hu served as the founding Director of the US Securities and Exchange Commission’s Division of Economic and Risk Analysis (formerly called the Division of Risk, Strategy, and Financial Innovation) (2009–2011), and he and his staff were involved in certain matters discussed in this chapter. 1

  See e.g. Henry T. C. Hu, ‘Efficient Markets and the Law: A Predictable Past and an Uncertain Future’, Annual Review of the Financial Economy (2012) 4, 179, 180–2 (Hu, ‘EMH and the Law’), http://ssrn.com/abstract=2144432; Henry T. C. Hu, ‘Too Complex to Depict? Innovation, “Pure Information,” and the SEC Disclosure Paradigm’, Texas Law Review (2012) 90, 1601, 1614–21 (Hu, ‘Too Complex to Depict?’), http://ssrn.com/ abstract=2083708. 2

  Regulation S-K, 17 C.F.R. section 229.303 (S-K 303).

3 

Hu, ‘Too Complex to Depict?’ (n. 1); Henry T. C. Hu, ‘Disclosure Universes and Modes of Information: Banks, Innovation, and Divergent Regulatory Quests’, Yale Journal on Regulation (2014) 31, 565 (Hu, ‘Disclosure Universes’), http://ssrn.com/abstract=2442092. See also Henry T. C. Hu, ‘Financial Innovation and Governance Mechanisms’, Business Lawyer (2015) 70, 347, 381–404 (Hu, ‘Governance Mechanisms’), http://ssrn.com/ abstract=2588052. 4 

Richard Y. Roberts, Commissioner, US Securities and Exchange Commission, Current Disclosure Rules, 14 December 1994, https://www.sec.gov/news/speech/speechesarchive/ 1994/spch021.txt; S-K 303. On 20 March 2019, the SEC adopted a variety of amendments to its rules and forms, almost all of which removed or lightened existing requirements. FAST Act Modernization and Simplification of Regulation S-K, Release No. 33-10618, 20 From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

March 2019, https://www.sec.gov/rules/final/2019/33-10618.pdf. The changes to the MD&A were modest, and do not affect the analysis in this chapter. 5

  Concept Release on Management’s Discussion and Analysis of Financial Condition and Operations, Securities Act Release No. 6711, Exchange Act Release No. 24,356, 52 Fed. Reg. 13,715, 13,717, 24 April 1987 (emphasis added). 6

  Regulation S-K, 17 C.F.R. section 229.305.

7

  The ‘too-complex-to-depict issue’ can also arise in non-financial innovation contexts. See Hu, ‘Too Complex to Depict?’ (n. 1), 1665–6 (pension funding); Hu, ‘Governance Mechanisms’ (n. 3), 397 (companies in research-intensive industries). 8

  Henry T. C. Hu, ‘Misunderstood Derivatives: The Causes of Informational Failure and the Promise of Regulatory Incrementalism’, Yale Law Journal (1993) 102, 1457. 9

  Hu, ‘Governance Mechanisms’ (n. 3), 393–5.

10

  Joshua Coval, Jakub Jurek, and Erik Stafford, ‘The Economics of Structured Finance’, Journal of Economic Perspectives (1989) 23, 3. 11

  Hu, ‘Too Complex to Depict?’ (n. 1), 1633–47.

12

  Asset-Backed Securities Disclosure and Registration, Release No. 33-9638, 79 Fed. Reg. 57184, 57305, 24 September 2014 (ABS Release). 13

  Jed J. Neilson, Stephen G. Ryan, K. Philip Wang, and Biqin Xie, ‘Asset-Level Transparency and the (E)Valuation of Asset-Backed Securities’ (draft of 26 February 2019), 2, http:// ssrn.com/abstract=3247342. 14

  US Securities and Exchange Commission, ‘Investment Company Reporting Modernization Rules—A Small Entity Compliance Guide’ (rev. 29 March 2019), https:// www.sec.gov/divisions/investment/guidance/secg-investment-company-reportingmodernization-rules.htm. 15

  Neilson et al. (n. 13).

16

  See ABS Release, 57,190-91.

17

  See Auditor Independence and Audit Firm Rotation, ‘PCAO Rulemaking Docket No. 37— Public Meeting of the Public Company Accounting Oversight Board 127–28’, 18 October 2012 (unofficial transcript), http://pcaobus.org/Rules/Rulemaking/ Docket037/2012-10-18_Transcript_Houston.pdf (referring to this discussion in Hu, ‘Too Complex to Depict?’ (n. 1)). 18

  See e.g. Re-Proposal of Shelf Eligibility Conditions for Asset-Backed Securities, Rel. No. 33-9244, 76 Fed. Reg. 47,948, 47,971, 26 July 2011. 19

  As of 23 September 2018, the SEC has not mandated downloadable waterfall codes. The SEC first proposed a waterfall computer program requirement in April 2010, and after the receipt of many comment letters opposing such a requirement, indicated in August 2011 that it planned to re-propose such a requirement. See Asset-Backed Securities, Rel. No. 33-9117, 75 Fed. Reg. 23,328, 7 April 2010; Re-Proposal of Shelf Eligibility Conditions for Asset-Backed Securities, Rel. No. 33-9244, 76 Fed. Reg. 47,948, 26 July 2011. 20

  See e.g. Deloitte Center for Financial Services, Alternative Data for Investment Decisions: Today’s Innovation be Tomorrow’s Requirement (2017), https:// www2.deloitte.com/content/dam/Deloitte/us/Documents/financial-services/us-fsi-dcfsalternative-data-for-investment-decisions.pdf; Ben Eisen, ‘Satellites and Cell Phones: Where

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Investors are Turning for Data’, Wall Street Journal, 23 May 2017, https://blogs.wsj.com/ moneybeat/2017/05/23/satellites-and-mobile-phones-where-investors-are-turning-for-data/. 21

  See e.g. What is Alternative Data?, Alternativedata.org, https://alternativedata.org/ alterantive-data/. 22

  ‘New Data Sources Make It Harder for Executives to Mislead Investors’, Economist, 28 February 2019, https://www.economist.com/finance-and-economics/2019/03/02/new-datasources-make-it-harder-for-executives-to-mislead-investors. 23

  Eisen (n. 20), 20.

24

  Deloitte Center for Financial Services (n. 20), 3; Eisen (n. 20).

25

  Telis Demos, ‘Wall Street Analysts Are Now Selling More Data, Less Analysis’, Wall Street Journal, 7 November 2018, https://www.wsj.com/articles/driving-to-the-mall-andgoogling-luke-cage-banks-try-to-keep-clients-attention-with-data-1541586600. 26

  See e.g. What is Alternative Data (n. 21); Eisen (n. 20).

27

  State Street Global Advisors, SPY: The Original ETF Innovation, 29 January 2018 (press release). 28

  Dani Burger, Stocks Are No Longer the Most Actively Traded Securities in Stock Markets, Bloomberg, 12 January 2017, https://www.bloomberg.com/news/articles/ 2017-01-12/stock-exchanges-tun-into-etf-exchanges-as-passive-rules-all. 29

  See https://whalewisdom.com/filer/bridgewater-associates-inc#tabholdings_tab_link (based on Bridgewater’s 13-F filing for holdings as of 31 December 2018). 30

  See Inv. Co. Institute, ETF Assets and Net Issuance—February 2019, 29 March 2018, https://www.ici.org/research/stats/etf/etfs_02_19; Inv. Co. Institute, 2018 Investment Company Fact Book 218 (58th edn, Inv. Co. Institute, 2018). 31

  See Henry T. C. Hu and John D. Morley, ‘A Regulatory Framework for Exchange-Traded Funds’, Southern California Law Review (2018) 91 839, 889–99, http://ssrn.com/ abstract=3137918 (Hu and Morley, ‘ETF Regulatory Framework’). 32

  ibid., 862–3.

33

  ibid., 843.

34

  Joe Rennison, ‘Institutional Investors Boost Ownership of ETFs’, Financial Times, 13 April 2017, https://www.ft.com/content/c70113ac-ab83-33ac-a624-d2d874533fb0 35

  See Charles McGrath, ‘80% of Equity Market Cap Held by Institutions’, Pensions & Investments, 25 April 2017, https://www.pionline.com/article/20170425/INTERACTIVE/ 170429926/80-of-equity-market-cap-held-by-institutions. 36

  Inv. Co. Institute, 2018 Investment Company Fact Book 102 (58th edn, Washington D.C.: Inv. Co. Institute, 2018). 37

  ibid., 60.

38

  ibid., 102.

39

  Hu and Morley, ‘ETF Regulatory Framework’ (n. 31), 931–2.

40

  See ibid.; Henry T. C. Hu, ‘The $5tn ETF Market Balances Precariously on Outdated Rules’, Financial Times, 23 April 2018, https://www.ft.com/content/08cc83b8-38e0-11e8b161-65936015ebc3. In June 2018, the SEC proposed certain reforms with respect to the regulation of ETFs, and cited ETF Regulatory Framework. See Exchange-Traded Funds, Rel. No. 33-10515, 83 Fed. Reg. 32,332, 37,361 nn. 291–4, 37,362 n. 303, 37,378 nn. 407–9

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

and accompanying text, 31 July 2018, https://www.govinfo.gov/content/pkg/FR-2018-07-31/ pdf/2018-14370.pdf. 41

  The concept of ‘decoupling’ and associated analytical framework and terminology (such as ‘empty voters’ and ‘hidden (morphable) ownership’) was introduced in Henry T. C. Hu and Bernard Black, ‘The New Vote Buying: Empty Voting Hidden (Morphable) Ownership’, Southern California Law Review (2016) 79, 811 (Hu and Black, ‘Decoupling I’), http:// ssrn.com/abstract=904004. 42

  See e.g. ibid., 836–9, 867–9; Henry T. C. Hu and Bernard Black, ‘Equity and Debt Decoupling and Empty Voting II’, University of Pennsylvania Law Review (2008) 156, 625, 652–81 (Hu and Black, ‘Decoupling II (Penn)’), http://ssrn.com/abstract=1030721; Henry T. C. Hu and Bernard Black, ‘Debt, Equity, and Hybrid Decoupling: Governance and Systemic Risk Implications’, European Financial Management (2008) 14, 663, 668–9 (Hu and Black, ‘Decoupling II (EEM)’), http://ssrn.com/abstract=1084075; Hu, ‘Governance Mechanisms’ (n. 3), 359–60, 366–9. 43

  As to some of the articles relating to debt decoupling and CDS on which this Subpart draws, see e.g. Hu and Black, ‘Decoupling II (EEM)’ (n. 42), 679–93; Hu, ‘Governance Mechanisms’ (n. 3), 369–75; Henry T. C. Hu, ‘Corporate Distress, Credit Default Swaps, and Defaults: Information and Traditional, Contingent, and Empty Creditors’, Brooklyn Journal of Corporation, Finance & Commercial Law (2018) 13, 5, http://ssrn.com/ abstract=3302816; Henry Hu, ‘Reform the Credit Swaps Market to Rein in Abuses’, Financial Times, 24 February 2019, https://www.ft.com/content/ 1fcd2f34-2e14-11e9-80d2-7b637a9e1ba1. 44

  See TELUS Corporation (RE), 2012 BCSC 1919 (2012). For a detailed discussion of this case, see Hu, ‘Governance Mechanisms’ (n. 3), 375–81. 45

  Environmental and Social Disclosure, Rel. No. 33-5627, 40 Fed. Reg. 51,656, 51,660, 6 November 1975. 46

  Business and Financial Disclosure Required by Regulation S-K—Concept Release, Rel. No. 33-10064, 81 Fed. Reg. 23,916, 23,971, 22 April 2016. 47

  ibid., 23,971 n. 689.

48

  Dodd-Frank Wall Street Reform and Consumer Protection Act, section 1502, Pub. Law 111–203, 124 Stat. 1376, 21 July 2010. 49

  ibid., section 1502(d)(2)(A).

50

  Conflict Minerals, Rel. No. 34-67716, 77 Fed. Reg. 56,274, 56,335, 12 September 2012.

51

  National Ass’n of Mfrs v S.E.C., 800 F.3d 518 (D.C. Cir. 2015).

52

  ibid., 531. As for the impact of the opinion, see e.g. SEC Division of Corporation Finance, Updated Statement on the Effect of the Court of Appeals Decision on the Conflict Minerals Rule, 7 April 2017, https://www.sec.gov/news/public-statement/corpfin-updated-statementcourt-decision-conflict-minerals-rule; Andrea Vittorio, Firms Aren’t Scaling Back Conflict Minerals Reporting as Feared, Bloomberg, 19 June 2018, https://www.bna.com/firms-arentscaling-n73014476646/ 53

  Dodd-Frank Act, section 953(b).

54

  Pay Ratio Disclosure, 80 Fed. Reg. 50,104, 50,105, 18 August 2015.C.

55

  ibid.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

56

  Drew Harwell, ‘In Win for Income-Gap Fight, SEC Approves Rule Comparing CEO and Worker Pay’, Washington Post, 5 August 2015, https://www.washingtonpost.com/news/onleadership/wp/2015/08/05/in-big-win-for-income-gap-fight-sec-approves-rule-comparing-ceoand-worker-pay/?noredirect=on&utm_term=.6163b71283b, 9. 57

  The CEO Pay Ratio: Data and Perspectives from the 2018 Proxy Season, Pearl Meyer, 15.See also ‘Will Pay Ratio Disclosures Tell Investors What They Want to Know?’, Talent Daily, 18 April 2018, https://www.cebglobal.com/talentdaily/will-pay-ratio-disclosures-tellinvestors-what-they-want-to-know/ (discussing various problems with the disclosed pay ratios). 58

  See Business and Financial Disclosure Required by Regulation S-K—Concept Release, Rel. No. 33-10064, 81 Fed. Reg. 23,916, 23,970, 22 April 2016. 59

  Larry Fink, ‘A Sense of Purpose’, Harvard Law School Forum on Corporal Governance & Financial Regulation, 17 January 2018, https://corpgov.law.harvard.edu/2018/01/17/a-senseof-purpose/. 60

  Rakhi Kumar, ‘R-Factor—Reinventing ESG Investing through a Transparent Scoring System’, May 2019, 2, https://www.ssga.com/investment-topics/environmental-socialgovernance/2019/04/inst-r-factor-reinventing-esg-through-scoring-system.pdf. 61

  Letter from Paul Tucker, Chair, Systemic Risk Council, to US Treasury Secretary Steven T. Mnuchin, 23 February 2018 (2018 Systemic Risk Council Letter), https:// 4atmuz3ab8k0glu2m35oem99-wpengine.netdna-ssl.com/wp-content/uploads/2018/02/SRCComment-Letter-to-Treasury-Dept-2.23.18.pdf. 62

  For more detailed discussions of this and certain other departures, see e.g. Hu, ‘EMH and the Law’ (n. 1), 186–93; Hu, ‘Too Complex to Depict?’ (n. 1), 1687–712. 63

  2018 Systemic Risk Council Letter, 7.

64

  See Risk-Based Capital Guidelines: Market Risk, 77 Fed. Reg. 53060, 53091–2, 30 August 2012. 65

  See Regulatory Capital Rules: Regulation Capital. Implementation of Basel II, Capital Adequacy, Transition Provisions, Prompt Corrective Action, Standardized Approach for RiskWeighted Assets, Market Discipline and Disclosure Requirements, Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital Rule, 78 Fed. Reg. 62,018, 62,128–30, 62,145–6, 11 October 2013. 66

  See Liquidity Coverage Ratio: Public Disclosure Requirements; Extension of Compliance Period for Certain Companies to Meet the Liquidity Coverage Ratio Requirements, 81 Fed. Reg. 94,922, 94,924–7, 27 December 2016. Disclosure requirements reflating to a net stable funding ratio were proposed in 2016, but have not been adopted. See Net Stability Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirements, 81 Fed. Reg. 35,124, 35,158–161, 1 June 2016. 67

  Basel Comm. on Banking Supervision, ‘International Convergence of Capital Measurement and Capital Standards—A Revised Framework (Comprehensive Version)’, June 2006, https://www.bis.org/publ/bcbs128.pdf (Basel II Framework). 68

  ibid., 226.

69

  Basel Comm. on Banking Supervision, ‘Consultative Document—Overview of the New Basel Capital Accord’, April 2003, https://www.bis.org/bcbs/cp3ov.pdf. 70

  Risk-Based Capital Guidelines: Market Risk, 76 Fed. Reg. 1890, 1907, 11 January 2011. Similarly, the Federal Reserve stated that the supervisory stress test rule required under the Dodd-Frank Act was a means of ‘[mitigating] the threat to financial stability’ caused by

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

subject entities. Supervisory and Company-Run Stress Test Requirements for Covered Companies, 77 Fed. Reg. 62,378, 62,379, 12 October 2012. 71

  Hu, ‘Disclosure Universes’ (n. 3), 612–14.

72

  J. P. Morgan Chase & Co., ‘Pillar 3 Regulatory Capital Disclosures for the Quarterly Period Ended December 31, 2018’, https://jpmorganchaseco.gcs-web.com/static-files/ ff891124-f0a4-4880-9143-b138765cd918. 73

  Specifically, the report’s discussion of JPM’s Value at Risk includes the suggestion that investors ‘[r]efer to Market Risk management on pages 124–128 of the 2018 Form 10-K for information on the firm’s VaR framework’: ibid., 25. 74

  See Hu, ‘Disclosure Universes’, (n. 3), 612–13.

75

  ibid., 655–65; Hu, ‘Governance Mechanisms’ (n. 3), 399–404; Henry T. C. Hu, Comment Letter on SEC’s Disclosure Effectiveness Initiative, 7 October 2015, 5–6 https:// www.sec.gov/comments/s7-15-18/s71518-4267989-73128.pdf. 76

  Guides for Statistical Disclosure by Bank Holding Companies, Sec. Act. Rel. 5735, 41 Fed. Reg. 39.007, September 1976. 77

  Request for Comment on Possible Changes to Industry Guide 3 (Statistical Disclosure by Bank Holding Companies), Rel. No. 33-10349, 82 Fed. Reg. 12,757, 7 March 2017. 78

  ibid., 12,759–60.

79

  ibid., 12,777–8.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Part II The New EU Prospectus Rules, 6 Transferable Securities and the Scope of the Prospectus Regulation: The Case of ICOs Guido Ferrarini, Paolo Giudici From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

Subject(s): Prospectus — Securities — Financial regulation

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 129) 6  Transferable Securities and the Scope of the Prospectus Regulation The Case of ICOs I.  Introduction 6.01 II.  Financial Instruments and Transferable Securities in MiFID II 6.04 III.  Transferable Securities in the Prospectus Regulation 6.11 IV.  The Rise of ICOs 6.14 1.  Legal Issues 6.14 2.  Token Categories 6.17 V.  ICOs and US Securities Regulation 6.21 VI.  ICOs and EU Securities Regulation 6.25 1.  Current Approaches 6.25 2.  Risk-Based Approach 6.30 3.  Purposive Techniques 6.37 VII.  Conclusions 6.41

I.  Introduction 6.01  The Prospectus Regulation defines its subject matter and scope of application under Article 1(1) as follows: This Regulation lays down requirements for the drawing up, approval and distribution of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market situated or operating within a Member State. 6.02  Three concepts therefore delimit the Prospectus Regulation scope: ‘offer to the public’, which is defined by Article 2(d) and further refined by the exemptions stated by Article 1(3);1 ‘admission to trading on a regulated market’, which is further demarcated by the exemptions stated by Article 1(4);2 and ‘securities’, which are (p. 130) defined by reference to the Markets in Financial Instruments Directive II (MiFID II) as follows: ‘securities’ means transferable securities as defined in point (44) of Article 4(1) of Directive 2014/65/EU with the exception of money market instruments as defined in point (17) of Article 4(1) of Directive 2014/65/EU, having a maturity of less than 12 months. 6.03  In this chapter, we focus on the concept of security as defining the scope of application of the Prospectus Regulation. In section II ‘Financial Instruments and Transferable Securities in MiFID II’ (para. 6.04), we consider the definitions of ‘financial instrument’ and of ‘transferable security’ in MiFID II, which offer the key concepts also for other directives and regulations. In section III ‘Transferable Securities in the Prospectus Regulation’ (para. 6.11), we examine the concept of security in the Prospectus Regulation, which makes reference to the MiFID’s definitions, while adding some criteria that shed light on the same concept. In section IV ‘The Rise of ICOs’ (para. 6.14), we introduce the From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

initial coin offering (ICO) phenomenon and the main categories of tokens, as a case study for testing the latitude of the transferable security concept in a digital world. In section V ‘ICOs and US Securities Regulation’ (6.21), we briefly discuss the treatment of ICOs under US securities regulation, with special regard to the Howey test and its application to cryptoassets and ICOs. In section VI ‘ICOs and EU Securities Regulation’ (6.25), we discuss whether tokens in general and utility tokens in particular should be qualified as transferable securities under the PR and EU securities regulation. In section VII ‘Conclusions’ (para. 6.41), we conclude.

II.  Financial Instruments and Transferable Securities in MiFID II 6.04  ‘Financial instrument’ is a core concept of EU securities regulation and one which defines the scope of application of the MiFID II. The need for a Directive is indicated by the fourth recital in the Preamble: The financial crisis has exposed weaknesses in the functioning and in the transparency of financial markets. The evolution of financial markets has exposed the need to strengthen the framework for the regulation of markets in financial instruments, including where trading in such markets takes place over-the-counter (OTC), in order to increase transparency, better protect investors, reinforce confidence, address unregulated areas, and ensure that supervisors are granted adequate powers to fulfil their tasks. (p. 131) 6.05  The focus of the new Directive, as that of the original one, is therefore on markets in financial instruments, which include not only organized markets, but also OTC markets. The purpose of the Directive is to enhance the regulation of these markets in order to increase their transparency and better protect investors. The concept of a financial instrument identifies the relevant markets with regard to both cash and derivative instruments. Indeed, Annex I, section C, MiFID II3 enumerates the different types of financial instruments that are covered by the Directive, such as transferable securities, money-market instruments, units in collective investment undertakings, options, futures, swaps, forward-rate agreements, and any other derivative contracts relating to securities, currencies, interest rates, or yields, etc. 6.06  The financial instrument concept concurs to the definition of two other core concepts of MiFID II: investment service and investment firm.4 Under Article 4(2), ‘investment service and activities’ means any of the services and activities listed in section A of Annex I relating to any of the instruments listed in section C of Annex I. Under Article 4(1), ‘investment firm’ means any legal person whose regular occupation or business activity is the provision of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis. 6.07  MiFID II’s scope is therefore defined on the basis of concepts that are grounded on the financial instrument idea.5 Indeed, the Directive has a broad purpose, as it establishes legal requirements in relation to authorization and operating conditions for investment firms; provision of investment services or activities by third-country firms through the establishment of a branch; authorization and operation of regulated markets; authorization and operation of data reporting services providers; and supervision, cooperation, and enforcement by competent authorities.6 On the whole, these provisions establish the legal regime of markets in financial instruments in the EU, except for what is provided in other directives and regulations which concur to the formation of the EU regulatory framework of

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

financial markets, including the Prospectus Regulation that is specifically examined in this volume. 6.08  The financial instrument concept includes that of ‘transferable securities’, which are defined by Article 4(1)(44), MiFID II as: those classes of securities which are negotiable on the capital market, with the exception of instruments of payment, such as: (a) shares in companies (p. 132) and other securities equivalent to shares in companies, partnerships or other entities, and depositary receipts in respect of shares; (b) bonds or other forms of securitised debt, including depositary receipts in respect of such securities; (c) any other securities giving the right to acquire or sell any such transferable securities or giving rise to a cash settlement determined by reference to transferable securities, currencies, interest rates or yields, commodities or other indices or measures. The other instruments specified in Annex I, section C, mainly belong to the derivatives’ type (with the exception of units in collective undertakings). 6.09  The provision quoted in paragraph 6.08 offers a non-exhaustive list of transferable securities (‘such as’), which creates the typical problem of deciding whether the broad category (‘the classes of securities which are negotiable on the capital market’) should be read and restricted in the light of the examples (ejusdem generis rule) or not. We will return to this later on. 6.10  Securities are transferable when they do not embed limits to their transferability.7 Moreover, they are negotiable on the capital market, which also implies that they are standardized instruments. Negotiability is not a legal requirement equivalent to transferability, but denotes ease of exchange as a matter of fact.8 As clarified by the Commission in its Q&A on MiFID I: The notion of ‘capital market’ is not explicitly defined in MiFID. It is a broad one and is meant to include all contexts where buying and selling interest in securities meet. ‘Instruments of payment’ are securities which are used only for the purposes of payment and not for investment. For example, this notion usually includes cheques, bills of exchanges, etc.

III.  Transferable Securities in the Prospectus Regulation 6.11  Article 2(a), Prospectus Regulation states that: ‘securities’ means transferable securities as defined in point (44) of Article 4(1) of Directive 2014/65/EU with the exception of money market instruments as defined in point (17) of Article 4(1) of Directive 2014/65/EU, having a maturity of less than 12 months payment. (p. 133) As stated in paragraph 6.10, securities are transferable when they do not embed limits to their transferability, whereas negotiability denotes ease of exchange on the capital market as a matter of fact. 6.12  The definition of transferable security should also take into account the negative examples contained in the Prospectus Regulation. Article 1(2) identifies the instruments to which the Directive shall not apply, such as units issued by collective investment undertakings other than the closed-end type, which are subject to the special regime of the Undertakings for Collective Investment in Transferabe Securities Directive 2009 (UCITS). Moreover, certain securities issued (or guaranteed) by Member States or other public entities are exempt.9 In addition, the Directive does not apply to ‘(e) securities issued by associations with legal status or non-profit-making bodies, recognised by a Member State,

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

for the purposes of obtaining the funding necessary to achieve their non-profit-making objectives’. This exemption highlights the fact that the securities to which the PR applies are generally issued by firms whose business activities are run for profit. Furthermore, the following securities are excluded from the scope of Prospectus Regulation: ‘(f) non-fungible shares of capital whose main purpose is to provide the holder with a right to occupy an apartment, or other form of immovable property or a part thereof and where the shares cannot be sold on without that right being given up’. This exemption confirms that securities must be fungible and provides indications about what negotiability means. If the shares can be sold but lose some of the rights attached, they are not negotiable. 6.13  The Prospectus Directive stated in its Preamble, Recital 19: Investment in securities, like any other form of investment, involves risk. Safeguards for the protection of the interests of actual and potential investors are required in all Member States in order to enable them to make an informed assessment of such risks and thus to take investment decisions in full knowledge of the facts. This recital points out that risk, in the sense of financial risk, is an essential feature of an investment in securities and differentiates that investment from the purchase of goods or services, where financial risk is not a pre-eminent feature. A buyer of a cloud service faces product failures and obsolescence. The buyer of the shares in the tech company which offers the service faces a long list of risks that affect her returns on the shares and put at risk her capital. We will return to the investment component and the related financial risk issue in section VI ‘ICOs and EU Securities Regulation’ (para. 6.25).

(p. 134) IV.  The Rise of ICOs 1.  Legal Issues 6.14  Initial coin offerings (ICOs) are a novel instrument of entrepreneurial finance. By the end of 2018, more than 2,100 ICOs had been launched worldwide, raising more than USD 14 billion.10 In an ICO, cryptographically secured digital assets (tokens) are sold by a blockchain team to prospective users of the future platform and investors. The project is then financed with the sale proceeds. Thus, ICOs are a brand-new form of financing that can be used by start-ups that have a blockchain-related business idea. 6.15  Blockchain teams face a large amount of novel legal problems when they decide to finance their venture through an ICO, but two issues dominate the others. The first one is whether the crypto-proceeds are taxable to the entity selling the tokens. In many jurisdictions, and from a purely tax perspective, it would be preferable for promoters if tokens were treated like financing instruments and their proceeds as equity or debt.11 6.16  The second issue is whether tokens should be characterized as investment securities (US) or financial instruments/transferable securities (EU). Here the promoters’ wishes are reversed, because the consequences of a classification as security can be dramatic. It would bring the ICO within the realm of securities regulation, which means, from a European perspective, prospectus regulation, investment firms’ involvement in broker-dealer operations, investment intermediary rules of conduct, exchange regulation, pre- and posttrading information, market abuse regulation, central custodians regulation, short selling rules, etc. No surprise, therefore, that the legal debate concerning ICOs has been mainly focused on the security regulation issue.12

2.  Token Categories

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

6.17  Tokens can offer different rights and are usually classified in categories whose differences are blurred and may be confusing. Bitcoin was created as a cryptocurrency and therefore as a means of payment.13 The same is true with regard to Ethereum, which also became a platform for smart contracts. Dogecoin (the name of the currency is DOGE), Monero (XMR), Ripple (XRP), Litecoin (LTC) are a few other examples of (p. 135) cryptocurrencies, among which Facebook’s project, Libra, might be added in the near future.14 To the extent that currency tokens are instruments of payment, they do not fall under the definition of transferable security, which expressly excludes those instruments (see sections II ‘Financial Instrument and Transferable Securities in MiFID II’, para. 6.04 and III ‘Transferable Securities in the Prospectus Regulation’, para. 6.11 above). However, a different conclusion could be drawn for hybrid tokens, which include an investment function in addition to the payment one, as argued more generally in section VI ‘ ICOs and EU Securities Regulation’ (para. 6.25) below. 6.18  Other tokens, called stablecoins, are designed to tokenize the rights to some assets, such as commodities, and allow investors’ participation in some exclusive markets. Typical examples are cryptocurrencies backed by gold (such as Zengold), silver (Silvercoin), precious or industrial metals (Zrcoin, Sandcoin), or even electricity (GigaWatt). Investors, in exchange for their contribution, obtain tokens that are promised to represent shares of the assets’ pool, to be redeemed with a profit in the future. 6.19  Still other tokens openly represent digital equivalents of shares in a common enterprise (Lykke) or an investment company (Swarm, Melonport, Iconomi, BCAP). Others offer some form of profit distribution or governance rights in the project (the decentralized autonomous organization (DAO)). These participative tokens are usually classified as ‘investment tokens’. Since they grant rights that are equivalent to shares, bonds, or hybrids, they clearly fall within the definition of ‘transferable security’ under the PR (see section VI ‘ICOS and EU Securities Regulation’, para. 6.25). 6.20  The most problematic, from our perspective, are tokens that offer some type of functional utility.15 The most-cited example is Filecoin, which is considered the prototypical compliant-aware ICO.16 Filecoin aims to offer a decentralized storage network to its community. Users pay tokens to miners in order to store data, and miners validate and store.17 ‘Utility tokens’ are the most widespread and the ones that create more problems under European securities law, because it is not clear whether they have the features of a financial instrument or not.

V.  ICOs and US Securities Regulation 6.21  Around half of the blockchain initiatives are American, and the US is the largest investor market in the world. Moreover, US securities regulation is one of the better enforced in the globe, due to the mix of public enforcement (driven by the Securities and (p. 136) Exchange Commission (SEC), Department of Justice (DOJ), state attorneys) and private enforcement, mainly in the form of class actions. It is not surprising, therefore, that the whole blockchain world has observed with great anxiety the reaction of US authorities to the spread of ICOs. 6.22  After an initial, quiet learning period,18 in July 2017 the SEC published an investigative report where it warned market participants that offers and sales of digital assets might be considered as securities, depending on the facts and circumstances of each ICO.19 The report was issued with regard to an investigation concerning ‘The DAO’, which was a ‘decentralized autonomous organization’ that wanted to operate as a for-profit entity by funding blockchain projects and sharing the earnings with the holders of DAO tokens, which would have been negotiable on crypto-exchanges. The SEC reminded the cryptocommunity that under section 2(a)(1) of the Securities Act and section 3(a)(10) of the Exchange Act, a security includes ‘an investment contract’. An investment contract is an investment of money in a common enterprise with a reasonable expectation of profits to be From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

derived from the entrepreneurial or managerial efforts of others. Accordingly, the Howey test can be applied to determine whether (i) there exists an investment of money; (ii) there exists a common enterprise; (iii) there exists an expectation of profits; and (iv) the expectation of profits results solely from the efforts of others.20 6.23  The crypto-world suddenly realized that ‘simply labelling a digital asset a “utility token” does not turn the asset into something that is not a security’.21 What really matters is how the token is promoted and sold, and what are the reasonable expectations of purchasers.22 Actually, a few well-advised actors were aware of these old, solidly established principles. In the second half of 2017, Protocol Labs launched Filecoin. The offer concerned ‘Simple Agreements of Token Sales’ (SAFT), basically a future sale of tokens. SAFTs were treated as securities by their promoters and were offered exclusively to US accredited investors and to non-US investors in an equivalent position.23 Filecoin’s offer was a great success and it immediately became the poster child for any regulation’s compliant ICOs: it raised $ 205 millions from more than 2,100 professional and accredited investors.24 (p. 137) 6.24  In the meantime, at the end of 2017, the SEC issued a settled order against an issuer named Munchee, reinstating that a token may be a security even if it has some purported utility and regardless of the jargon or technology adopted.25 Then it pursued many other cyber enforcement actions, among which was one concerning two ICOs purportedly backed by investments in real estate and diamonds (Recoin Group Foundation and Diamond Reserve Club), which led to the first Court decision concerning ICOs, issued by Judge Dearie of the Eastern District of New York.26 Other actions up to date have concerned an unregistered broker-dealer,27 two unregistered offers of tokens,28 a cryptofund not registered as an investment company,29 and an unregistered exchange platform.30 In order to cope with the new world of fintech and ICOs, the SEC has established its own Strategic Hub for Innovation and Financial Technology (FinHub). The FinHub has published a framework for analysing whether a digital asset is offered and sold as an investment contract, and should accordingly be considered a security. Moreover, the FinHub has also published its first no-action letters with regard to offers of some pure utility tokens.31

VI.  ICOs and EU Securities Regulation 1.  Current Approaches 6.25  As we mentioned in section III ‘Transferable Securities in the Prospectus Regulation’ (para. 6.11), the PR defines transferable securities through reference to Article 4(1)(44), MiFID II as ‘those classes of securities which are negotiable on the capital market, with the exception of instruments of payment’. Transferable securities are therefore standardized (‘classes’) and negotiable. The examples provided for by Article 4(1)(44), MiFID II and which were already contained in Article 4(1)(18), MiFID offer a list of transferable securities, which includes: (a) shares in companies and other securities equivalent to shares in companies, partnerships or other entities, and depositary receipts in respect of shares; (b) bonds or other forms of securitised debt, including depositary receipts in respect of such securities; (c) any other securities giving the right to acquire or sell any such (p. 138) transferable securities or giving rise to a cash settlement determined by reference to transferable securities, currencies, interest rates or yields, commodities or other indices or measures.32

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

6.26  Some scholars suggest that tokens should be equivalent to shares, bonds, or derivatives to be considered transferable securities, provided that they are negotiable on the capital market.33 Tokens are equivalent to shares if they embody a residual interest, meaning an equity investment, in a legal entity, especially (but not necessarily) if they are associated with voting and other governance rights.34 Tokens are equivalent to bonds if they represent some form of securitized debt, i.e. debt capital which promises a financial return and is incorporated in an instrument negotiable on the capital market.35 6.27  Needless to say, many utility tokens would not pass the equivalence test. Two types of utility tokens can be distinguished, depending on whether they include an equity or debt component (hybrid utility-investment tokens) or not. Two examples of hybrid tokens were submitted by the European Securities and Markets Authority (ESMA) to national certification authorities (NCAs) for drafting the Advice on ICOs cited above.36 The first is the case of PAquarium, which aimed to build the world’s largest aquarium. PAquarium promised to pay 20 per cent of the aquarium’s operational profit to PAquarium Tokens (PQTs) holders on an annual basis. The white paper mentioned the possibility of selling and exchanging PQTs. The crypto-assets had voting rights on the location of the aquarium and could be used as a means of payment for goods at the aquarium. A certain number of crypto-assets gave a lifetime free entry to the aquarium. PAquarium sold 1.2 billion PQTs for a total value of USD 120 Million. PQTs are not traded on any crypto-exchange and the project was in a very early stage. Most national authorities questioned by ESMA answered that these hybrid (investment/utility) tokens would fall under the EU concept of ‘transferable security’. This would also be our conclusion on the basis of the negotiable character of the instrument and the investors’ participation in profits, despite the concurrent presence of a utility and maybe also a payment function in the PQTs. 6.28  The second hypothetical indicated by ESMA concerns the case of Crypterium (CRPT), which aims to build up a ‘cryptobank’ with vertically integrated services.37 The cryptoassets should be used to pay for transaction fees when using the services of the cryptobank and also grant the right to receive a monthly share of the revenues derived (p. 139) from the transactions. In addition, other services might be available to crypto-asset holders at a discount or for free. The majority of the NCAs questioned by ESMA answered that the crypto-assets in question were not securities, possibly on the assumption that investors do not participate in the profits of the venture. However, they share in the revenues of the bank, which may be sufficient, in our opinion, to qualify the relevant crypto-assets as securities, provided that they are negotiable on the capital market (which is not specified, however, in the hypothetical). 6.29  While hybrid tokens may be considered, depending on the circumstances, similar to either shares or bonds, and therefore qualify as securities of the equity or debt type, pure utility tokens do not comply with the equivalence criteria.38 To the extent that they offer the right to purchase or consume goods or services, investors do not benefit from profit participation or governance rights. However, similar tokens may still perform an investment function when those investing in them seek the profits potentially deriving from an increase in the value of the instruments through negotiation on the capital market. Indeed, we do not think that the equivalence approach is the only one available. As argued by scholars and held by some NCAs, other approaches are possible under EU securities regulation, which look at the general characteristics of a given instrument or to the rationale of regulation in order to conclude that also utility tokens that do not pass the equivalence test can be defined as transferable securities.39

2.  Risk-Based Approach

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

6.30  In order to assess whether utility tokens that are exchangeable on crypto-markets are to be considered as transferable securities, we do not believe that the examples contained in Article 4(1)(44), MiFID II are to be read with the ejusdem generis approach that underpins the equivalence test, restricting the category of negotiable securities to instruments that at least resemble shares, bonds, or put or sell options on assets or indices and measures. According to the ejusdem generis rule, where a class of things is followed by a general term, the general term is usually restricted to things of the same type as the listed ones. Put another way, if the words that describe the items or the situation fall into a specific category, the general word must be restricted to matters of the same kind and should not be used to expand the class.40 6.31  Article 4(1)(44) mentions the general term first and then uses ‘such as’ to offer a list of examples of transferable securities which does not limit the finding of different transferable securities. Thus, simple literalism and reductionist interpretative theories such as the ejusdem generis approach do not work here. Rather, we believe that the key (p. 140) concepts are those of ‘negotiability on capital markets’ and ‘financial risk’ involved in the investment component of the asset. If tokens, whatever their nature, are easily negotiable and tradable on capital markets, and are offered as such to investors, their purchase involves a financial risk and therefore they are tradable securities in accordance with EU financial markets regulation. 6.32  According to our analysis, whatever the rights embedded in the token, if the latter is easily exchangeable on the capital market and incorporates a financial risk as a result, it is a tradable security. This conclusion is important especially with regard to utility tokens. The majority of utility tokens that have been sold through ICOs have been made exchangeable on crypto-exchanges and have been intensively exchanged on secondary markets. As we mentioned in paragraph 6.13, financial risk should be considered a characteristic feature of a tradeable security. Risk can be divided into three categories. The first one is fraud risk, which, of course, is very important in ICOs.41 The other two categories are financial risk and non-financial risk.42 6.33  Financial risks originate from the financial markets due to adverse movements of economic conditions or factors affecting prices of investments. Market risks may arise from overall market sentiment to fintech and blockchain, or negative performance of bitcoin or ether, to which many other tokens are quite sensitive. Another type of financial risk is liquidity risk, which is the risk of a significant downward valuation adjustment when selling a financial asset such as a token. Quite often, token investors have to offer large discounts to find buyers for unpopular or thinly traded tokens. Then there is counterparty risk, which is particularly significant in utility tokens. Since most of the tokens are traded on online crypto-exchanges and not directly between buyers and sellers of tokens, the risks that these exchanges that act as intermediaries collapse or go bankrupt is quite substantial, as recent evidence shows.43 Such risks are called counterparty or credit risks, and these pose a great problem for crypto-investors. 6.34  Non-financial risks have a very different nature. First, they are idiosyncratic, concerning the product itself. If the smart contract that governs the relationship between the users and the platform does not work well, the product or the service fails to deliver its utility. In addition, there are the risks affecting the entity that sells the service. These are compliance risks and operational risks, which are quite substantial for ICO investors, since the majority of them are simple start-ups that have no assets, legal form, or sound business plan. Moreover, there is solvency risk, which is the risk that the entity does not survive or succeed because it runs out of cash, even though it might otherwise be solvent.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

6.35  Since virtually all ICO projects are financed by bitcoin, ether, or other cryptocurrency, should the value of the cryptocurrency collapse, the relevant projects will be left without (p. 141) resources to operate. In addition, most ICO projects are based on blockchain and IT concepts that are hard to grasp for common investors, who often have only basic information about tokens derived from published white papers. The novelty and complexity pose high security risks due to high probability of hackers stealing company resources or doing mischief.44 The last group of risks is taxation risks which directly address investors and their trading of tokens that might give rise to tax on income obligations, depending on the jurisdiction. 6.36  All tokens actively exchanged on a secondary market present a financial risk, because the value of the investment depends on market risk, liquidity risk, and credit risk. Pure utility tokens, therefore, should qualify as transferable securities under MiFID II and the Prospectus Regulation if they are negotiable on the capital market and their investors undertake financial risks with respect to them as a result. This would allow us to consider the token of filecoin as a transferable security under EU regulation, contrary to what all national authorities answered to ESMA with respect to the same case, which was included amongst the six submitted to them as hypotheticals. The hypothetical was described as follows: Filecoin (FIL) is a decentralized storage network that turns cloud storage into an algorithmic market. Filecoins can be spent to get access to unused storage capacity on computers worldwide. Providers of the unused storage capacity in turn earn filecoins, which then can be sold for cryptocurrencies or fiat money. It is not clear what led NCAs to reach a negative conclusion, also considering that Filecoin was launched under US securities regulation with the assumption that filecoins are investment securities. Maybe the fact that the coins have not yet been issued and therefore are not negotiable, contributed to the negative answer by all regulators involved.45 Whatever the case, the description contained in ESMA’s questions to NCAs seems to put all the emphasis on the utility function of the token and does not contain any reference to the investment component and financial risk involved in its purchase.

3.  Purposive Techniques 6.37  In order to support the investment component, risk-based approach suggested in this section, one may fruitfully embrace a purposive technique. The difficulty in the field of EU financial markets regulation is that the legislative purpose must apply to many different areas. The broad concept of ‘transferable securities’ should be construed in the light of all the EU statutory materials that refer to securities and regulate securities markets and issuers. Accordingly, one definition that fits, say, the PR, but does not fit (p. 142) the MAR cannot be accepted. The EU rulebook turns around one definition and should work with that definition only. In order to establish whether an instrument (e.g. an ICO token) is a security for the purpose of the Prospectus Regulation, it is not sufficient to draw inferences from the scope and purpose of the Prospectus Regulation, but it is also necessary to test the final result in the light of all the statutory materials that refer to the concept of security. 6.38  However, at some level of generality the purposes of EU securities regulation can be identified with some confidence and can assist in complementing the definition of transferable security analysed throughout this chapter. No doubt, the objectives of investor protection and capital formation are relevant to securities regulation in general, both in the EU and the US. Moreover, social welfare objectives are important as to the existence and development of capital markets and justify the adoption of an investor protection framework.46 The regulation of disclosure is part of a similar framework and prospectuses

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

play a significant role in overcoming information asymmetries and facilitating investment in securities while, at the same time, protecting investors from financial risks. 6.39  Therefore, focusing on the need of protection of ICO investors may assist in establishing whether a given token should qualify as a transferable security or not, particularly in borderline cases like those examined with respect to pure utility tokens. Given the role of information asymmetries in ICOs, prospectuses should also have a role for them, despite the fact that the contents of prospectuses have been designed for traditional initial public offerings (IPOs), which no doubt show substantial differences to ICOs. Hence, the development of ICO markets should be accompanied by the drafting of prospectuses that are fit for those markets and for the venture-like nature of the projects financed in them. 6.40  Similar considerations could be developed with reference to those tokens that are promoted as a future cryptocurrency but, at the same time, are marketed and sold as forms of investment that can be resold in future on crypto-exchanges at a profit. At the moment, one of the most important cryptocurrencies is involved in a securities class action where it is alleged that it was, in reality, a security under US law.47 Probably the idea that a token can be created as a currency from the start and can therefore be offered to the public without any concern about its security-like nature should be re-analysed.

VII.  Conclusions 6.41  In this chapter, we have analysed the concept of transferable security under EU securities regulation and tested its latitude and flexibility with reference to ICOs. We have (p. 143) shown, in particular, that digital tokens should be treated like transferable securities under the Prospectus Regulation when offered to the public through an ICO, provided that they satisfy all the requirements examined throughout this chapter, including their standardization and negotiability on the capital markets. We have acknowledged, however, that the prospectus requirements should be adapted to ICO transactions, taking into account their differences to IPOs. 6.42  To the extent that tokens are transferable securities, other parts of EU securities regulation may also apply. However, the requirements defining the scope of application of the relevant provisions should be complied with, including the admission of the securities to trading on a regulated market. Whether a similar requirement is applicable to cryptosecurities will depend on whether the tokens offered in an ICO are traded on a platform which qualifies as a regulated market under EU securities regulation. 6.43  Regulated markets represent the archetype of a public market. In practice, they encompass the main stock and derivatives exchanges; in theory, they may also include crypto-exchanges, which are presently found only in countries outside the EU. Regulated markets are multilateral and non-discretionary trading venues, where buyers and sellers can trade in accordance with pre-set rules, and where trades conform to transparency requirements.48 Market operators of regulated markets are the main target of MiFID II attention. Article 44(1) in particular makes a distinction between the market operator and the systems of the regulated market, both of which must comply with the relevant regulated market provisions. Paragraph (2) of the same Article specifies that the market operator performs the tasks relating to the organization and operation of the regulated market under the supervision of the competent authority. To the extent that a crypto-exchange is set up and run under similar rules, the same would qualify as a regulated market and the relevant parts of EU securities regulation would therefore apply.49(p. 144)

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Footnotes: 1

  Under Article 2(d): ‘offer of securities to the public’ means a communication to persons in any form and by any means, presenting sufficient information on the terms of the offer and the securities to be offered, so as to enable an investor to decide to purchase or subscribe for those securities. This definition also applies to the placing of securities through financial intermediaries.

On the concept of ‘offer to the public’, see Kitty Lieverse, Chapter 7 ‘The Obligation to Publish a Prospectus and Exemptions’, this volume, which gives an exhaustive analysis of the scope of application of the Prospectus Regulation. 2

  As stated in Recital 14 of the Preamble: the mere admission of securities to trading on a MTF or the publication of bid and offer prices is not to be regarded in itself as an offer of securities to the public and is therefore not subject to the obligation to draw up a prospectus under this Regulation. A prospectus should only be required where those situations are accompanied by a communication constituting an ‘offer of securities to the public’ as defined in this Regulation.

On the admission to trading as a ‘trigger’ for the application of Prospectus Regulation, see Kitty Lieverse, Chapter 7 ‘The Obligation to Publish a Prospectus and Exemptions’, this volume. 3

  Article 4(1)(15) states that ‘financial instrument’ means those instruments specified in section C of Annex 1. 4

  On all three concepts, see Kitty Lieverse, ‘The Scope of MiFID II’, in: Danny Busch and Guido Ferrarini (eds), Regulation of the EU Financial Markets. MiFID II and MiFIR (Oxford: OUP, 2017), 27 ff. 5

  Article 1(1) provides: ‘This Directive shall apply to investment firms, market operators, data reporting services providers, and third-country firms providing investment services or performing investment activities through the establishment of a branch in the Union.’ 6

  See Article 1(2), MiFID II. Article 1(3) further specifies: ‘The following provisions shall also apply to credit institutions authorised under Directive 2013/36/EU, when providing one or more investment services and/or performing investment activities.’ 7

  Philip Hacker and Chris Thomale, ‘Crypto-Securities Regulation: ICOs, Token Sales and Cryptocurrencies under the EU Financial Law’, European Company and Financial Law Review (2018) 15(4), 645. The authors mention the case of EOS tokens, which became technically non-transferable on the Ethereum blockchain within twenty-three hours after the end of the final EOS token distribution period. 8

  ibid.

9

  They include: ‘(b) non-equity securities issued by a Member State or by one of a Member State’s regional or local authorities, by public international bodies of which one or more Member States are members, by the European Central Bank or by the central banks of the Member States; (c) shares in the capital of central banks of the Member

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

States; (d) securities unconditionally and irrevocably guaranteed by a Member State or by one of a Member State’s regional or local authorities’. 10

  Data from http://www.Icodata.com, ICO aggregator. At the same time, https:// www.coinschedule.com reports that from 2016 more than 1,600 ICOs raised around USD 28.44 billions. 11

  Juan Batiz-Benet, Jesse Clayburgh, and Marco Santori, ‘The SAFT Project: Toward a Compliant Token Sale Framework’, 2017, 13–14, https://saftproject.com/static/SAFT-ProjectWhitepaper.pdf. 12

  See ESMA’s Advice, ‘Initial Coin Offerings and Crypto-Assets’, 9 January 2019, ESMA50-157-1391, 18 ff. (ESMA, Advice on ICOs); Apolline Blandin, Ann Sofie Cloots, Hatim Hussain et al., Global Cryptoasset Regulatory Landscape Study (Cambridge Centre for Alternative Finance, 2019), 13, noting that ‘Regulators have to date focused mainly on addressing regulatory concerns over initial coin offering (ICOs) and cryptoasset exchange activities.’ 13

  Hossein Nabilou and André Prüm, ‘Ignorance, Debt, and Cryptocurrencies: The Old and the New in the Law and Economics of Concurrent Currencies’, Journal of Financial Regulation (2019) 5(1), 29. 14

  See Katharina Pistor, ‘Facebook’s Libra Must Be Stopped’, Project Syndacate, 20 June 2019, https://www.project-syndicate.org/commentary/facebook-libra-must-be-stopped-bykatharina-pistor-2019-06. 15

  See Hacker and Thomale, ‘Cryptosecurities Regulation’ (n. 7), 645.

16

  For an analysis, see S. T., Howell, M. Niessner, and D. Yermack, ‘Initial Coin Offerings: Financing Growth with Cryptocurrency Token Sales’, European Corporate Governance Institute Finance Working Paper No. 564/2018. 17

  Protocol Labs, Filecoin, at https://filecoin.io/filecoin.pdf.

18

  During which some articles had already discussed whether crypto-assets could be considered securities: version 1 of Peter van Valkenburgh, ‘Framework for Securities Regulation of Cryptocurrencies (version 2.0)’, Coin Center Report, August 2018, https:// coincenter.org/entry/framework-for-securities-regulation-of-cryptocurrencies. 19

  SEC, ‘Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO’, 25 July 2017. 20

  SEC v W. J. Howey Co., 328 U.S. 293.

21

  William Hinman, ‘Digital Asset Transactions: When Howey Met Gary (Plastic)’, Remarks at the Yahoo Finance All Markets Summit: Crypto, San Francisco, 14 June 2018, https:// www.sec.gov/news/speech/speech-hinman-061418. 22

  With regard to crypto-assets, a rather specific issue concerning the Howey test is the individuation of ‘the efforts of others’. At the start of the project, there is a team of developers and they are ‘the others’ whose efforts investors rely on. But if the project becomes a platform and its fortune depends on a network of users, there is no longer any specific third party to make reference to. 23

  Filecoin Token Sale Economics, https://coinlist.co/assets/index/filecoin_index/FilecoinSale-Economicse3f703f8cd5f644aecd7ae3860ce932064ce014dd60de115d67ff1e9047ffa8e.pdf, 4. 24

  See https://coinlist.co/filecoin.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

25

  Munchee, Inc., Securities Act Rel. No. 10445, 11 December 2017 (settled order).

26

  Memorandum and Order, 1:17-cr-00647-RJD-RER (E.D.N.Y.), ECF No. 37, 11 September 2018. 27

  Tokenlot LLC, Lenny Kugel, and Eli L. Lewitt, Rel. No. 33-10543, 11 September 2018 (settled order) (‘TokenLot Order’). 28

  CarrierEQ, Inc., Rel. No. 33-10575, 16 November 2018; Paragon Coin, Inc., Rel. No. 33-10574, 16 November 2018. 29

  Crypto Asset Management, LP and Timothy Enneking, Rel. No. 33-10544, 11 September 2018 (settled order). 30

  Zachary Coburn, Rel. No. 34-84553, 8 November 2018 (settled order) (Coburn Order).

31

  See https://www.sec.gov/finhub. For further comparative analysis of the legal treatment of ICOs in the US and the wider role that prospectus exemptions play in that system, see Dmitri Boreiko, Guido Ferrarini, and Paolo Giudici, ‘Blockchain Startups and Prospectus Regulation’ European Business Organization Law Review (2019), forthcoming. 32

  In principle, the third category indicated in the provision quoted above does not apply to tokens, which are not derivative instruments. See, however, for the possible definition of some tokens as derivatives, Filippo Annunziata, ‘Speak, If You Can: What Are You? An Alternative Approach to the Qualification of Tokens and Initial Coin Offerings’, Bocconi Legal Studies Research Paper Series, February 2019. 33

  Lars Klöhn, Nicolas Parhofer, and Daniel Resas, ‘Initial Coin Offerings (ICOs): Economics and Regulation’, Working Paper, 26 November 2018, 29 https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=3290882. 34

  ibid., 30.

35

  ibid., 32.

36

  See ESMA, Advice on ICOs (n. 12). See also ESMA, ‘Annex 1, Legal Qualification of Crypto Assets. Survey to NCAs’, 9 January 2019, ESMA50-157-1384 (ESMA, Annex 1). 37

  ESMA, Annex 1 (n. 36), 25.

38

  Hacker and Thomale, ‘Cryptosecurities Regulation’ (n. 7), 695, exclude that pure utility tokens can be defined as transferable securities. 39

  See Philip Maume and Mathias Fromberger, ‘Regulation of Initial Coin Offerings: Reconciling US and EU Securities Laws’, 40, https://ssrn.com/abstract=3200037. 40

  See Max Radin, ‘Statutory Interpretation’, Harvard Law Review (1930) 43, 886.

41

  SEC, ‘SEC Stops Fraudulent ICO that Falsely Claimed SEC Approval’, SEC Press release, 11 October 2018. 42

  Chartered Financial Analyst Level 1 Curriculum, Volume VI, Reading 42.

43

  See https://www.coinstaker.com/five-major-cryptocurrency-exchange-collapses.

44

  Lucinda Shen, ‘Hackers Have Stolen $400 Million from ICOs’, 22 January 2018, http:// fortune.com/2018/01/22/ico-2018-coin-bitcoin-hack. 45

  See Thijs Maas, ‘Initial Coin Offerings: When are Tokens Securities in the EU and US?’, Tilburg University, 13 February 2019, 60, https://ssrn.com/abstract=3337514. 46

  See Merritt Fox, Lawrence Glosten, Edward Green, and Menesh Patel (eds), ‘Securities Market Issues for the Twenty-First Century’, 2018, 12 ff., https://www.law.columbia.edu/

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

sites/default/files/microsites/capital-markets/ securities_market_issues_for_the_21st_century.pdf. 47

  Coinspeaker, ‘Ripple Faces Another Lawsuit from Investors Claiming XRP is an Unregistered Security’, 14 August 2019, https://www.coinspeaker.com/ripple-lawsuit-xrpsecurity. 48

  Guido Ferrarini and Paolo Saguato, ‘Governance and Organization of Trading Venues. The Role of Financial Market Infrastructure Groups’, in: Danny Busch and Guido Ferrarini (n. 4), para. 11.17. 49

  ibid., para. 11.15 ff.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Part II The New EU Prospectus Rules, 7 The Obligation to Publish a Prospectus and Exemptions Kitty Lieverse From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

Subject(s): Prospectus — Improper disclosure — Financial regulation

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 145) 7  The Obligation to Publish a Prospectus and Exemptions I.  Introduction 7.01 II.  Trigger No. 1: An Offer of Securities to the Public 7.05 III.  Trigger No. 2: An Admittance to Trading on a Regulated Market 7.12 IV.  The Geographical Demarcation 7.16 V.  Exemptions to the Obligation to Publish a Prospectus—General Comments 7.18 VI.  Exemption Type No. 1: The Type of Security 7.20 VII.  Exemption Type No. 2: Small Offerings 7.25 VIII.  Exemption Type No. 3: Exemptions Specific to an Offer to the Public 7.28 IX.  Exemption Type No. 4: Exemptions Specific to an Admittance to Trading on a Regulated Market 7.38 X.  Combination of Exemptions 7.47 XI.  A Voluntary Prospectus 7.48 XII.  The Prospectus Requirement for Investment Institutions (as a Special Type of Issuer) 7.50 XIII.  Subsequent Resale if an Exemption Has Been Used 7.55 XIV.  Conclusion 7.58

I.  Introduction 7.01  Under the Prospectus Regulation,1 the obligation to publish a prospectus is triggered by two events. This is first of all the event when securities are offered to the public. The second trigger is the admittance of securities to trading on a regulated market. These events may be combined. This is, for example, the case in the event of an initial public offering (IPO) of shares. In the context of an IPO, shares2 are offered to the public, while there is a simultaneous admittance of the shares to allow future trading of these shares via a regulated market. Another example of a combination of the two triggers is an offering of newly issued shares by a listed company to a group of qualified investors, and an admittance of these shares to trading on a regulated market.3 However, it is equally (p. 146) possible that there is solely an offering to the public or a stand-alone (without an offer to the public) admittance to trading on a regulated market. This chapter discusses both triggers of the obligation to publish a prospectus under the Prospectus Regulation. In addition, the exemptions as provided by the Prospectus Regulation from the obligation to publish a prospectus are discussed. An obligation to publish a prospectus is only triggered if the offer or admittance to listing on a regulated market relates to (transferable) securities. This chapter does not discuss the concept of ‘securities’. For this, reference is made to Chapter 6 of this volume.4 7.02  The subject matter of the Prospectus Regulation does not differ from that of the former Prospectus Directive5 that is repealed by the Prospectus Regulation. This subject matter is described in Article 1(1), Prospectus Regulation, as follows: ‘This Regulation lays down requirements for the drawing up, approval and distribution of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market situated or operating within a Member State.’ This chapter focuses on any changes

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

made by the Prospectus Regulation in respect of the obligation to publish a prospectus (and the exemptions thereto), compared to the Prospective Directive. 7.03  The effective date of most provisions of the Prospectus Regulation is 21 July 2019.6 Notably, some provisions that relate to the exemptions of the obligation to publish a prospectus in accordance with the Prospectus Regulation have an earlier effective date of 20 July 2017 or 21 July 2018.7 7.04  As of the relevant effective date, the provisions of the Prospectus Regulation will apply directly in the Member States. Apart from the exercise of some Member State options,8 (p. 147) the appointment of a competent authority and the granting of powers thereto,9 and some further action points that have been imposed upon the Member States,10 no implementation will be required. As a result, the harmonization of the prospectus regime in the EU will be further enhanced. The Prospectus Directive 2003 had already aimed for such harmonization, but this was not established as a matter of fact, due to various factors,11 including deviations in the interpretation of the concept of an offer to the public, as is discussed in section II ‘Trigger No. 1: An Offer of Securities to the Public’ (para. 7.05).

II.  Trigger No. 1: An Offer of Securities to the Public 7.05  The first trigger for the publication of a prospectus is the offer of securities to the public. This is defined in Article 2(d), Prospectus Regulation. In this provision, an ‘offer of securities to the public’ is defined as ‘a communication to persons in any form and by any means, presenting sufficient information on the terms of the offer and the securities to be offered, so as to enable an investor to decide to purchase or subscribe for those securities’. This definition distinguishes an offer from a teaser or other type of marketing material, which basically serves to test the appetite of investors to invest in a certain type of security, rather than to already make an offer (that the investor could accept). Also, the publication of bid and offer prices is not to be regarded in itself as an offer of securities to the public and is therefore not subject to the obligation to draw up a prospectus under the Prospectus Regulation.12 7.06  A further demarcation is provided by Recital (22) to the Prospectus Regulation, which clarifies that the element ‘offer’ implies that the investor may or may not decide to accept the offer. This means that an allocation of securities without an element of individual choice on the part of the recipient, including allocations of securities where there is no right to repudiate the allocation or where allocation is automatic following a decision by a court, such as an allocation of securities to existing creditors in the course of a judicial insolvency proceeding, does not qualify as an offer of securities to the public.13 7.07  Article 2(d), Prospectus Regulation adds that the definition (‘offer of securities to the public’) also applies to the placing of securities through financial intermediaries. This means that the engagement by the issuer to place securities in the market via an (p. 148) intermediary, who may approach investors directly or via an intermediary acting for the investor, does not alter the fact that this placing constitutes an offer to the public. 7.08  There is very little guidance on the concept of an offer of securities to the public in case law of the Court of Justice. There is, however, clarity that an offer in the context of an enforced sale of securities does not qualify as an offer of securities to the public.14 This is based on the reasoning that the situation where a creditor is selling securities by way of an enforcement to seek recourse on the proceeds of such sale for a claim on its debtor differs substantially from the typical situation of an offering of securities the aim of which is to raise capital in order to enable future investments by the company issuing those securities. This argument is not very convincing, as this typical situation as described by the Court of Justice is also not present in the event of secondary trades, for example where a selling shareholder is offering securities to the public, which are clearly considered as an offer to

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

the public in the context of the prospectus requirement.15 The other arguments as listed by the Court of Justice show a pragmatic approach in favour of the creditor seeking enforcement: (i) an obligation to publish a prospectus prior to an enforced sale of securities would impede the achievement of the objectives of the enforcement proceedings, including that of swiftly and effectively satisfying the debt owed to the creditor; and (ii) such an obligation would not only delay the enforced sale and, consequently, the payment of the creditor, but it would also give rise to expenses linked to drawing up the prospectus that would have to be deducted from the proceeds of that sale, which could reduce the creditor’s chances of being reimbursed.16 7.09  There is no further definition or guidance as to what exactly constitutes ‘the public’. However, the reference to ‘persons’ (in the definition as cited in para. 7.05 above), in plural, entails that an offer made to a single person, does not constitute an offer to the public. 7.10  This trigger to publish a prospectus does not differ from that included in the Prospectus Directive 2003. Interestingly, there is nevertheless considerable variation between Member States under the Prospectus Directive 2003 regime in the application of the concept of ‘offer to the public’. A clear example of this is linked to Recital (5) of the Prospectus Directive 2003. This Recital seems to recognize the concept of private placements, alongside the concept of public offerings (‘an offer to the public’). With this reading,17 there is room to take the position that the exemptions to the prospectus requirement for an offer to the public (as further discussed in sections VI ‘Exemption (p. 149) Type No. 1: The Type of Security’, para. 7.20; VII ‘Exemption Type No. 2: Small Offerings’, para. 7.25; and VIII: ‘Exemption Type No. 3: Exemptions Specific to an Offer to the Public’, para. 7.28) are safe harbours only, and do not alter the fact that offerings (for example) to a small group of investors should not be viewed as an offer to the public in the first place. Based on the clear wording of the Prospectus Regulation, there is in my view no room for such reading under the Prospectus Regulation. Nevertheless, this example is an illustration of potential deviations in applications per Member State on the concept of ‘offer to the public’. The Prospectus Regulation no longer allows for such deviations in application. 7.11  Another example is the definition of ‘offer to the public’ in Article 5:1 under (a) of the Dutch Act on financial supervision (Wet op het financieel toezicht). This definition first of all refers to the Dutch law civil law concept of an offer, as referred to in Article 6:217, paragraph 1 of the Dutch Civil Code (Burgerlijk Wetboek). Further, the definition contains an extension to an invitation to make an offer on the securities. This was added to make the concept of an offer to the public in the context of the prospectus requirement consistent with the concept of an offer that qualifies as a public bid.18 However, the Prospectus Regulation does not allow for such national consistency efforts.

III.  Trigger No. 2: An Admittance to Trading on a Regulated Market 7.12  The alternative trigger for the publication of a prospectus is the admittance of securities to trading on a regulated market. This is based on Article 1(5), Prospectus Regulation. 7.13  The element ‘regulated market’ is defined in Article 2(j) by reference to a regulated market as defined in point (21) of Article 4(1), MiFID II.19 This definition includes that there is a multilateral system which brings together multiple, third-party20 buying and selling interests in financial instruments in a way that results in a contract.21 A distinctive feature of a regulated market (as opposed to a multilateral trading facility (MTF)22) is that the admittance of securities to trading via the regulated market is governed by the rules and/or systems of the regulated market. Further, the definition includes that the regulated market must be authorized and is functioning regularly and in accordance with MiFID II (more

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

specifically, Title III thereof). This reference means that only EU markets, that have an EU home Member State, can be regulated markets within the (p. 150) meaning of MiFID II.23 As a result, an admittance to trading of securities on a stock exchange established outside the EU does not trigger a prospectus requirement under the Prospectus Regulation. 7.14  The admittance to trading refers to the admittance of the securities to trading on that market, under its rules of operation in accordance with Article 51, MiFID II.24 Typically, the rules as adopted by the regulated market will require the contractual acceptance by the issuer of the conditions for admittance as posed by the regulated market in accordance with this provision in order to enable enforcement of these rules. As a result, an admittance to trading of securities on a regulated market can only take place with the consent and cooperation of the issuer. 7.15  The mere admission of securities to trading on an MTF25 does not trigger a prospectus requirement. This is only the case if this admission is accompanied by a communication that qualifies as an offer of the securities to the public.26 In that case, the first trigger as discussed in section II ‘Trigger No. 1: An Offer of Securities to the Public’ (para. 7.05) applies.

IV.  The Geographical Demarcation 7.16  The background of the Prospectus Regulation is the improvement of the operation of the capital markets within the EU.27 In accordance with this background, the Prospectus Regulation regulates the offer of securities to the public and the admittance to trading of securities to a regulated market, to the extent that these triggers occur within a Member State. This is confirmed by the wording of Article 1(1), Prospectus Regulation on the scope which refers to such an offering or admittance situated or operating within a Member State. The Prospectus Regulation does not specify, however, how to determine exactly when a trigger for the publication of a prospectus should be localized in a specific Member State. In respect of the admittance to trading on a regulated market, it seems quite easy to make the determination on locating the event, as it is linked to the place of operation of the regulated market within a Member State. As to an offer to the public, to determine whether such offer is ‘situated’ in a Member (p. 151) State, it seems a logical interpretation to look at where the public is, as the offer is directed to such public. This entails that an offer of securities made by a Dutch issuer to public established in (for example) France, is regulated by the Prospectus Regulation as applicable in France. Even though the Prospectus Regulation provides for a harmonized system of prospectus supervision, it remains relevant to distinguish between the various Member States through which the Prospectus Regulation finds application, i.e. because of deviations in a national regime (reference is made to section VII ‘Exemption Type No. 2: Small Offerings’, para. 7.25). 7.17  Based on this system of geographical demarcation, the place of business of the issuer or offeror of the securities is not relevant to determining the prospectus requirement under the Prospectus Regulation. The place of business of the issuer is relevant, however, to determine the home and/or host Member State.28 The home Member State of an issuer determines which supervisor has the authority to grant prospectus approval.29

V.  Exemptions to the Obligation to Publish a Prospectus— General Comments 7.18  There are various types of exemptions to the obligation to publish a prospectus. As a starting point, there are exemptions that are linked to the type of securities that are being offered to the public and/or that are admitted to trading on a regulated market. This exemption is discussed in section VI ‘Exemption Type No. 1: The Type of Security’ (para. 7.20). For all other exemptions, it is important to distinguish whether the prospectus requirement is triggered by an offer to the public, or by an admittance to trading on a regulated market, as different exemptions apply, depending on the trigger for the From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

prospectus requirement.30 In section VII ‘Exemption Type No. 2: Small Offerings’ (para. 7.25), a specific exemption is discussed for small offerings of securities to the public. In section VIII ‘Exemption Type No. 3: Exemptions Specific to an Offer to the Public’ (para. 7.28), the general exemptions to the prospectus requirement for the public offerings of securities are discussed (regardless of the size of the offering), which are either linked to the type of public to whom the offering is directed, or to a specific type of securities. In section IX ‘Exemption Type No. 4: Exemptions Specific to an Admittance to Trading on a Regulated Market’ (para. 7.38), the exemptions specific to the admittance of securities to trading on a regulated market are discussed. (p. 152) 7.19  Clearly, the applicability of an exemption of the obligation to publish a prospectus is without prejudice to any information or transparency requirement that may result from civil law obligations or other financial regulatory law obligations.31 In addition, it is recommended by ESMA that if an information document is published and/or provided to investors that is not subject to the requirements of the Prospectus Regulation (i.e. if an exemption is used), to clarify this by not using the term ‘prospectus’ and/or by making clear that the Prospectus Regulation is not applicable.32

VI.  Exemption Type No. 1: The Type of Security 7.20  Based on Article 1(2), Prospectus Regulation, certain types of securities are carved out from the prospectus requirement under the Prospectus Regulation, regardless whether these securities are offered to the public and/or admitted to trading on a regulated market. 7.21  Such exemption first of all applies to units issued by collective investment undertakings other than the closed-end type.33 This basically means that any prospectus requirement in respect of units issued by collective investment undertakings other than the closed-end type (such as open-end or semi open-end investment undertakings34), is not governed by the Prospectus Regulation. In section XII ‘The Prospectus Requirement for Investment Institutions (as a Special Type of Issuer)’ (para. 7.50), the prospectus requirement for units issued by collective investment undertakings is discussed in more detail. 7.22  In addition, there are exemptions linked to the type of securities based on the public law identity of the issuer or a guarantor or a status as non-profit-making body recognized by a Member State. This concerns the following securities:35 (a)  non-equity securities issued by a Member State or by one of a Member State’s regional or local authorities, by public international bodies of which one or more (p. 153) Member States are members, by the European Central Bank, or by the central banks of the Member States; 36 (b)  shares in the capital of central banks of the Member States;

37

(c)  securities unconditionally and irrevocably guaranteed by a Member State or by one of a Member State’s regional or local authorities; 38 (d)  securities issued by associations with legal status or non-profit-making bodies, recognized by a Member State, for the purposes of obtaining the funding necessary to achieve their non-profit-making objectives. 39 7.23  Further, there is an exemption that is linked to time-sharing.40 Exempted are nonfungible shares of capital whose main purpose is to provide the holder with a right to occupy an apartment, or other form of immovable property or a part thereof, and where the shares cannot be sold on without that right being given up.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

7.24  This list of securities which are carved out from the regime of the Prospectus Regulation has not changed compared to the Prospectus Directive 2003, with the exception of the deletion of item 1(2)(f) and (i) from the Prospectus Directive 2003.41

VII.  Exemption Type No. 2: Small Offerings 7.25  There is no obligation to publish a prospectus (assuming it concerns unlisted securities, i.e. securities that will not be admitted to trading on a regulated market), if the size of the offer of the relevant securities to the public stays below a EUR 1,000,000 threshold.42 This is based on Article 1(3), Prospectus Regulation, which reads as follows: ‘Without prejudice to the second subparagraph of this paragraph and to Article 4, this Regulation shall not apply to an offer of securities to the public with a total consideration in the Union of less than EUR 1 000 000, which shall be calculated over a period of 12 months.’ The rationale for this de minimus exemption is the disproportionate cost burden for preparing a prospectus compared to the envisaged proceeds of the offer.43 The fact that these small-sized issuances are excluded from the scope of the Prospectus Regulation does not mean that Member States may introduce any national regime to regulate these offers. Article 1(3), second paragraph, Prospectus Regulation entails that Member States should not extend the obligation to draw up a prospectus in accordance with the Prospectus Regulation to offers of (p. 154) securities to the public up to EUR 1,000,000. Member States may introduce other disclosure requirements at a national level, but only to the extent that such requirements do not constitute a disproportionate or unnecessary burden in relation to such offers of securities. As a result of this system, for small-sized issuances of securities to the public (up to EUR 1,000,000 within the EU), issuers have to check for any national disclosure regimes in each Member State where an offer to the public is made. Clearly, this affects the harmonization as envisaged by the Prospectus Regulation. 7.26  A similar effect applies to any offerings of securities to the public in one or more Member States as of the EUR 1,000,000 threshold up to EUR 8,000,000. This is the result of a Member State option provided by Article 3(2), Prospectus Regulation. Based on this, a Member State may decide to exempt offers of securities to the public from the obligation to publish a prospectus under the Prospectus Regulation if the total consideration of each such offer in the EU calculated over a period of twelve months does not exceed EUR 8,000,000.44 If this Member State option is used, the Member State must notify the Commission and ESMA thereof. The size of the offerings to the public that are subject to this national regime may therefore vary between any amount in excess of EUR 1,000,000 and EUR 8,000,000.45 As a result of this Member State option, for offerings up to EUR 8,000,000, in one or more Member States, issuers have to check in each of these Member States for any national regime that may apply. If no national regime applies for offerings in excess of EUR 1,000,000, the Prospectus Regulation shall apply. As discussed, this may differ per Member State. The provision as discussed above on small-sized offerings are effective as of 21 July 2018.46 7.27  This system of a carve-out of offerings up to EUR 1,000,000 and the Member State option of Article 3(2), Prospectus Regulation, means an extension of the potential to exclude small offerings, compared to the regime of the Prospectus Directive 2003.47 As set out in paragraph 7.25 above, this increases the non-harmonized approach for small offerings. This is enhanced by the fact that another exemption, namely for offerings up to EUR 100,000 (on a twelve-month basis), has been deleted.48 On the basis of the exemption, such small-sized offerings could always count on an exemption. Under the Prospectus Regulation, however, such small-sized offerings may be subject to a national regime under Article 1(3).

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 155) VIII.  Exemption Type No. 3: Exemptions Specific to an Offer to the Public 7.28  If there is solely an offer of securities to the public within the EU (meaning: there is no admittance of the securities to trading on a regulated market within the EU), the offeror may be able to benefit from one of the exemptions to the obligation to publish a prospectus that are available under the Prospectus Regulation. 7.29  First if all, an exemption is available if the offer of securities is addressed solely to qualified investors.49 For the concept of ‘qualified investors’, Article 2(e), Prospectus Regulation refers to: (i) points (1)–(4) of section I of Annex II to MiFID II; and (ii) persons or entities who are, on request, treated as professional clients in accordance with section II of that Annex, or recognized as eligible counterparties in accordance with Article 30, MiFID II (unless they have entered into an agreement to be treated as non-professional clients in accordance with the fourth paragraph of section I of that Annex).50 7.30  A second option to use an exemption is that the offer of securities is addressed to fewer than 150 natural or legal persons per Member State (other than qualified investors).51 7.31  In addition, an exemption is available if the investment that is required from the investor is at least EUR 100,000 (either because the nominal value of each security is at least EUR 100,000 or because the size of a package of securities being offered is at least EUR 100,000).52 7.32  In addition to these three exemptions that can be used for each type of offering of securities to the public (provided that the conditions for the exemption are met), there are a couple of more specific exemptions, as listed below. 7.33  First of all, there is a number of exemptions to facilitate for corporate actions, such as a substitution of shares and offerings in the context of an exchange offer or a merger or acquisition. On this basis, no prospectus has to be published for an offer to the public of: (a)  shares issued in substitution for shares of the same class already issued, if the issuing of such new shares does not involve any increase in the issued capital; 53 (b)  securities offered in connection with a takeover by means of an exchange offer, provided that a document is made available to the public in accordance with (p. 156) the arrangements set out in Article 21(2), containing information describing the transaction and its impact on the issuer; 54 (c)  securities offered, allotted, or to be allotted in connection with a merger or division, provided that a document is made available to the public in accordance with the arrangements set out in Article 21(2), containing information describing the transaction and its impact on the issuer; 55 (d)  dividends paid out to existing shareholders in the form of shares of the same class as the shares in respect of which such dividends are paid, provided that a document is made available containing information on the number and nature of the shares and the reasons for and details of the offer. 56 7.34  The exemptions as referred to under (b) and (c) have been simplified compared to the Prospective Directive 2003 regime, as it is no longer required that the alternative document provides equivalent information.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

7.35  Further, offerings to employees in the context of participation plans are facilitated by providing an exemption of the prospectus requirement for securities offered, allotted, or to be allotted to existing or former directors or employees by their employer or by an affiliated undertaking provided that a document is made available containing information on the number and nature of the securities and the reasons for and details of the offer or allotment.57 Compared to the Prospectus Directive 2003 regime, the requirement that the employer should be located in the EU has been deleted. 7.36  Finally, there is an exemption for debt securities issued regularly by credit institutions, as the offerings of the following securities are also exempted: non-equity securities issued in a continuous or repeated manner by a credit institution, where the total aggregated consideration in the EU for the securities offered is less than EUR 75,000,000 per credit institution calculated over a period of twelve months, provided that those securities: (i) are not subordinated, convertible or exchangeable; and (ii) do not give a right to subscribe for or acquire other types of securities and are not linked to a derivative instrument.58 7.37  The exemptions of the prospectus requirement for offers to the public under the Prospectus Regulation have largely remained the same, compared to the Prospectus Directive 2003. Some of the conditions to the use of the exemptions have been deleted.

(p. 157) IX.  Exemption Type No. 4: Exemptions Specific to an Admittance to Trading on a Regulated Market 7.38  In respect of the prospectus requirement that is triggered by an admittance of securities to trading on a regulated market, the available exemptions are limited and quite specific.59 In comparison with the Prospectus Directive, there has been both an extension and a limitation of the exemptions, as well as some simplifications, as is further set out below. 7.39  First of all, the Prospectus Regulation introduces an extension for the admittance of securities that are fungible with securities already admitted to trading on the same regulated market. Under the Prospectus Directive 2003, this exemption was available provided that the newly admitted securities represented, over a period of twelve months, less than 10 per cent of the number of securities already admitted to trading on the same regulated market. Under the Prospectus Regulation, this threshold has been raised to 20 per cent.60 In addition, under the Prospectus Directive 2003 regime, this exemption could only be applied for shares, but under the Prospectus Regulation, there is an extension to any type of securities. This extended exemption was applicable as of 20 July 2017, and is particularly useful for listed issuers that may wish to conduct a private placement of shares (which would typically be structured as an exempted offering to the public, as it is made to a limited number of investors and/or to qualified investors), and prefer not to be subject to a prospectus requirement triggered by the subsequent admittance of these shares to trading on the regulated market, where this type of shares is already listed. Whether issuers can de facto benefit from this extended exemption depends also on whether any pre-emptive rights of existing shareholders have been waived. 7.40  The second exemption as listed for an admittance to trading on a regulated market contains a limitation, compared to the Prospectus Directive. This updated exemption applies as of 20 July 2017. The Prospectus Directive provided for an unlimited exemption for the admittance to trading of shares61 resulting from the conversion or exchange of other securities or from the exercise of the rights conferred by other securities, where the resulting shares are of the same class as the shares already admitted to trading on the same regulated market. This exemption has been maintained by the Prospectus Regulation, provided that the resulting shares represent, over a period of twelve months, less than 20

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

per cent of the number of shares of the same class already admitted to trading on the same regulated market. (p. 158) 7.41  There is a carve-out to 20 per cent restriction, as introduced by the Prospectus Regulation, as set forth in Article 1(5), second paragraph, Prospectus Regulation. The requirement that the resulting shares represent, over a period of twelve months, less than 20 per cent of the number of shares of the same class already admitted to trading on the same regulated market as referred to in point (b) of the first subparagraph shall not apply in any of the following cases: (a)  where a prospectus was drawn up in accordance with either this Regulation or Directive 2003/71/EC upon the offer to the public or admission to trading on a regulated market of the securities giving access to the shares; (b)  where the securities giving access to the shares were issued before 20 July 2017; (c)  where the shares qualify as Common Equity Tier 1 items as laid down in Article 26 of Regulation (EU) 575/2013 of the European Parliament and of the Council (1) of an institution as defined in point (3) of Article 4(1) of that Regulation and result from the conversion of Additional Tier 1 instruments issued by that institution due to the occurrence of a trigger event as laid down in point (a) of Article 54(1) of that Regulation; (d)  where the shares qualify as eligible own funds or eligible basic own funds as defined in section 3 of Chapter VI of Title I of Directive 2009/138/EC of the European Parliament and of the Council, and result from the conversion of other securities which was triggered for the purposes of fulfilling the obligations to comply with the Solvency Capital Requirement or Minimum Capital Requirement as laid down in sections 4 and 5 of Chapter VI of Title I of Directive 2009/138/EC or the group solvency requirement as laid down in Title III of Directive 2009/138/EC. 7.42  A limitation as to a combined application of these two exemptions is that also a total threshold of 20 per cent applies. The combination of the two exemptions may not lead to the immediate or deferred admission to trading on a regulated market over a period of twelve months of more than 20 per cent of the number of shares of the same class already admitted to trading on the same regulated market, without a prospectus being published.62 7.43  Similar to the exemptions for offerings to the public, there are various exemptions linked to admittance of securities to listing that would result from certain corporate actions: (a)  shares issued in substitution for shares of the same class already admitted to trading on the same regulated market, where the issuing of such shares does not involve any increase in the issued capital; 63 (p. 159) (b)  securities offered in connection with a takeover by means of an exchange offer, provided that a document is made available to the public in accordance with the arrangements set out in Article 21(2), containing information describing the transaction and its impact on the issuer; 64 (c)  securities offered, allotted, or to be allotted in connection with a merger or a division, provided that a document is made available to the public in accordance with the arrangements set out in Article 21(2), containing information describing the transaction and its impact on the issuer; 65 (d)  shares offered, allotted, or to be allotted free of charge to existing shareholders, and dividends paid out in the form of shares of the same class as the shares in respect of which such dividends are paid, provided that the said shares are of the same class as the shares already admitted to trading on the same regulated market and that a

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

document is made available containing information on the number and nature of the shares and the reasons for and details of the offer or allotment. 66 7.44  In addition, and also similar to an exemption that is available to facilitate the execution of participation plans for employees, there is an exemption for the admittance to listing of securities offered, allotted, or to be allotted to existing or former directors or employees by their employer or an affiliated undertaking, provided that the said securities are of the same class as the securities already admitted to trading on the same regulated market and that a document is made available containing information on the number and nature of the securities and the reasons for and detail of the offer or allotment.67 7.45  The other exemptions that are available for an admittance to trading on a regulated market, can be listed as follows: (a)  securities resulting from the conversion or exchange of other securities, own funds or eligible liabilities by a resolution authority due to the exercise of a power referred to in Articles 53(2), 59(2), or 63(1) or (2) of Directive 2014/59/ EU; 68 (b)  non-equity securities issued in a continuous or repeated manner by a credit institution, where the total aggregated consideration in the EU for the securities offered is less than EUR 75,000,000 per credit institution calculated over a period of twelve months, provided that those securities: (i) are not subordinated, convertible, or exchangeable; and (ii) do not give a right to subscribe for or acquire other types of securities and are not linked to a derivative instrument. 69 (p. 160) 7.46  Finally, there is an exemption available for the admittance of securities that already admitted to trading on another regulated market, on the following conditions:70 (a)  that those securities, or securities of the same class, have been admitted to trading on that other regulated market for more than eighteen months; (b)  that, for securities first admitted to trading on a regulated market after 1 July 2005, the admission to trading on that other regulated market was subject to a prospectus approved and published in accordance with Directive 2003/71/ EC; (c)  that, except where point (b) applies, for securities first admitted to listing after 30 June 1983, listing particulars were approved in accordance with the requirements of Council Directive 80/390/EEC (1) or Directive 2001/34/EC of the European Parliament and of the Council (2); (d)  that the ongoing obligations for trading on that other regulated market have been fulfilled; (e)  that the person seeking the admission of a security to trading on a regulated market under this exemption makes available to the public in the Member State of the regulated market where admission to trading is sought, in accordance with the arrangements set out in Article 21(2), a document the content of which complies with Article 7, except that the maximum length set out in Article 7(3) shall be extended by two additional sides of A4-sized paper, drawn up in a language accepted by the competent authority of the Member State of the regulated market where admission is sought; and (f)  that the document referred to in point (e) states where the most recent prospectus can be obtained and where the financial information published by the issuer pursuant to ongoing disclosure obligations is available.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

X.  Combination of Exemptions 7.47  As a general rule, exemptions may be combined. For example, where an offer is addressed simultaneously to qualified investors, to non-qualified investors that commit to invest at least EUR 100 000 each, to the employees of the issuer and, in addition, to a limited number of non-qualified investors not exceeding the number set out in the Regulation, that offer should be exempt from the obligation to publish a prospectus.71 However, there is a limitation for making combinations of exemptions. Reference is made to paragraph 7.46: the combined use of the exemptions as provided in Article 1(5)(a) and 1(5) (b), Prospectus Regulation may not lead to an admittance of more than 20 per cent of the shares or other securities already admitted to listing.72

(p. 161) XI.  A Voluntary Prospectus 7.48  If there is no obligation to publish a prospectus, a voluntary prospectus may be published. The option applies to:73 (a)  small-sized offerings to the public that are carved out from the Prospectus Regulation on the basis of Article 1(3), Prospectus Regulation; (b)  small-sized offerings that are subject to a national regime on the basis of Article 3(2), Prospectus Regulation; (c)  offerings to the public that may benefit from an exemption under Article 1(4), Prospectus Regulation; and (d)  any admittance to trading on a regulated market that could benefit from an exemption under Article 1(5), Prospectus Regulation. 7.49  Such a voluntary prospectus, provided it is drawn up in accordance with the Prospectus Regulation and approved by the competent authority of the home Member State, as determined in accordance with Article 2(m), Prospectus Regulation, entails all the rights and obligations provided for a prospectus required under the Prospectus Regulation.74

XII.  The Prospectus Requirement for Investment Institutions (as a Special Type of Issuer) 7.50  In respect of units in collective investment undertakings, the following observations are made with regard to the prospectus requirement for the offerings or admittance to trading on a regulated market of such units. 7.51  First of all, a distinction has to be made depending on whether the collective investment undertaking is a closed-end type or other than the closed-end type. For this purpose, the Prospectus Regulation provides a definition in Article 2(p) of a collective investment undertaking other than the closed-end type. This means: unit trusts and investment companies with both of the following characteristics: (i) they raise capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors; (ii) their units are, at the holder’s request, repurchased or redeemed, directly or indirectly, out of their assets. Related to this definition is a separate definition of ‘units of a collective investment undertaking’, which means securities issued by a collective investment undertaking as representing the rights of the participants in such an undertaking over its assets.75

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 162) 7.52  Units issued by ‘collective investment undertakings other than the closed-end type’ (in short: open-end collective investment undertakings) are carved out from the scope of the Prospectus Regulation.76 This means that any offering to the public or admittance to listing on a regulated market of units issued by an open-end collective investment undertakings, is not subject to a prospectus requirement under the Prospectus Regulation. This does not mean that there is no prospectus requirement whatsoever. For collective investment undertakings that qualify as an undertaking for collective investment in transferable securities (UCITS),77 the prospectus requirement under the UCITS Directive applies.78 For collective investment undertakings that do not qualify as a UCITS, but rather as an alternative investment fund under the Alternative Investment Fund Managers Directive (AIFMD),79 the prospectus requirement of Article 23, AIFMD applies. Article 4(1) (a), AIFMD provides for a definition of an alternative investment fund, which basically excludes all UCITS and covers all other collective investment undertakings which raise capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors. To avoid closed-end collective investment undertakings which are not carved out from the Prospectus Regulation being subject to two separate prospectus requirements, Article 23(3), AIFMD provides that the AIFMD prospectus requirement only applies if and to the extent that no prospectus requirement applies under the Prospectus Regulation. This means that if an offer of securities falls outside the scope of the Prospectus Regulation, or is exempt from the prospectus requirement under the Prospectus Regulation, and the securities qualify as participation rights in an alternative investment fund, the prospectus requirement of Article 23(3), AIFMD applies. Further, the prospectus requirements under Article 23, AIFMD prevail for the offering of units in an alternative investment fund over the Prospectus Regulation requirements. This can be deducted from the rule of Article 23(3), AIMFD: Where the AIF is required to publish a prospectus in accordance with Directive 2003/71/EC or in accordance with national law, only such information referred to in paragraphs 1 and 2 which is in addition to that contained in the prospectus needs to be disclosed separately or as additional information in the prospectus.80 7.53  The Prospectus Regulation provides for an exemption from the prospectus requirement if an offer is solely made to qualified investors, from the perspective that qualified investors are able to make their investment decisions without such full disclosure. Under (p. 163) the AIFMD, however, the result is very different: there is, in fact, still an obligation to publish a full AIFMD prospectus if the offer is solely made to qualified investors. One may query whether the difference in the type of securities covered by the Prospectus Regulation (any type of securities) as opposed to the AIFMD (securities that qualify as units in collective investment undertakings that qualify as AIFs) justifies this difference in treatment. 7.54  Further, units in collective investment undertakings (to the extent that these are transferable, which they typically are) not only qualify as securities, but also as a packaged retail investment product (a PRIP) under the PRIIPs Regulation.81 As a result, if the units are made available to retail investors, a Key Investor Document (KID) has to be prepared and made available, typically by the manager of the collective investment undertakings as the PRIIP manufacturer.82 Article 3, PRIIPs Regulation leads to the result that in such a situation, the requirements of the PRIIPs Regulation and the Prospectus Regulation simply apply simultaneously. This is remarkable in the sense that the information regimes of the Prospectus Regulation and the PRIIPs Regulation differ considerably. This is not only the difference between long-form (the Prospectus Regulation) and short-form (the KID) disclosure. There also seems to be an inconsistency in the simultaneous application of these two regimes. A KID has to be made publicly available on the website of the PRIIPs manufacturer (i.e. the fund manager). Based on the definition of ‘an offer to the public’ in

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

the Prospectus Regulation, such website publication very likely constitutes such offer to the public. However, one may query how such a publication requirement can coincide with the intention of the fund manager (for example) to only make an offer of the relevant units to less than 150 persons in a Member State, thus benefitting from an exemption of the obligation to make an approved prospectus under the Prospectus Regulation available.

XIII.  Subsequent Resale if an Exemption Has Been Used 7.55  The prospectus requirement for an offer of securities to the public, is not limited to the primary market (i.e. the offering of securities upon their issuance). Any offerings in the secondary market are equally caught by the definition of ‘an offer to the public’. This means that if a holder of existing securities makes a communication to persons in any form and by any means, presenting sufficient information on the terms of the offer and the securities to be offered, so as to enable an investor to decide to purchase for those securities,83 a prospectus has to be made available, unless an exemption applies. If there is a prospectus available that has been made for the initial offering and that is (p. 164) still valid,84 no new or additional prospectus has to be made in respect of an offering for a resale, provided that the issuer or the person responsible for drawing up such prospectus consents to its use by means of a written agreement.85 If the initial offering was made without a prospectus, because of the use of an exemption, this does not change the fact that for any offering to the public made in the context of a resale, the prospectus requirement still applies. This is confirmed by the rule provided in Article 5(1), first sentence: Any subsequent resale of securities which were previously the subject of one or more of the types of offer of securities to the public listed in points (a) to (d) of Article 1(4) shall be considered as a separate offer and the definition set out in point (d) of Article 2 shall apply for the purpose of determining whether that resale is an offer of securities to the public. 7.56  There is limitation to the re-use of a prospectus. Article 5(2), Prospectus Regulation limits the use of a prospectus that has been drawn up for the admittance of non-equity securities to a regulated market or a segment thereof, that is only accessible to qualified investors. The prospectus may then not be used for any resale to non-qualified investors, unless a prospectus is drawn up in accordance with the Prospectus Regulation that is appropriate for non-qualified investors. 7.57  The placement of securities in the context of a subsequent resale through financial intermediaries is also subject to publication of a prospectus. This is in accordance with the definition of ‘offer of securities to the public’, which confirms that the definition also applies to the placement of securities through financial intermediaries. Article 5(1), first paragraph, second sentence, of the Prospectus Regulation confirms this rule by stating the exception to this rule in case one of the exemptions listed in points (a)–(d) of Article 1(4), Prospectus Regulation applies in relation to the final placement.

XIV.  Conclusion 7.58  The Prospectus Regulation provides for an update of the prospectus obligation and the exemptions thereto, compared to the Prospectus Directive 2003. However, the provisions that determine the requirement to publish an approved prospectus (the offer of securities to the public, the admittance of securities to listing on a regulated market) have remained unaltered. In addition, the exemptions to have a prospectus available compliant with the Prospectus Regulation have largely remained the same. There have been some changes, though, when it comes to exemptions. Notably, the regime for small-sized offerings has changed. The result of these changes is that national regimes may apply for offerings up to EUR 8,000,000, and the starting threshold for full application (p. 165) of the Prospectus Regulation may vary per Member State between EUR 1,000,000 and EUR

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

8,000,000. On this point, one can conclude that the goal of the European legislator to enhance harmonization between the Member States by including the prospectus regime in a regulation has not been achieved for these small-sized offerings. In addition, some exemptions for the prospectus requirement in the event of a listing have either been extended or restricted. An extension has been provided for the listing of securities of a type that is already admitted to listing; the application of this exemption has been extended from shares to all securities and the threshold has been raised from 10 to 20 per cent. A restriction has been introduced for the listing of shares that result from a conversion, by imposing a 20 per cent limit thereto (on a twelve-month basis). Finally, it is noted that the disclosure regime as such, as is provided by a prospectus under the Prospectus Regulation, has not been truly reconsidered, in the context also of concurrence with other disclosure regimes, such as provided by the AIFMD and the PRIIPs Regulation. On this topic, it is noted that managers of AIFs, if they enter into the retail market, have to comply with both the prospectus requirement (under the Prospectus Regulation or the AIFMD) and the KID requirement under the PRIIPs Regulation.(p. 166)

Footnotes: 1

  Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 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, [2017] OJ L168/12 (Prospectus Regulation). 2

  This may concern newly issued shares offered by the issuer, or shares offered for sale by existing (‘selling’) shareholders. 3

  As will be further set out below, the first item (the offering of shares to a group of qualified investors) constitutes an offering to the public, which is exempted from the obligation to publish a prospectus. The rules applied by regulated markets will typically require these newly issued shares, which are of a similar type as the shares already admitted to trading, to be admitted as well (reference is made, as an example, to Rule 6607 of the Euronext Rule Book, Book I, Harmonised Rules). This then constitutes the second trigger. Also, for the second trigger, an exemption may be applicable if the volume of the additional shares as admitted stays below the 20 per cent threshold, as is further set out in section IX ‘Exemption Type No. 4: Exemptions Specific to an Admittance to Trading on a Regulated Market’ (para. 7.38). 4

  See Guido Ferrarini and Paolo Giudici, Chapter 6, ‘Transferable Securities and the Scope of the Prospectus Regulation: The Case of ICOs’, this volume, for scope: definition of ‘securities’ and applicability of the Prospectus Regulation in alternative finance structures. 5

  Directive 2003/71/EC (Prospectus Directive 2003) of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC, [2003], OJ L345/64, as supplemented by the Commission Regulation (EC) 809/2004 of 29 April 2004 implementing Directive 2003/71/EC of the European Parliament and of the Council as regards information contained in prospectuses as well as the format, incorporation by reference and publication of such prospectuses and dissemination of advertisements, [2004], OJ 149/1. 6

  Article 46(1) in conjunction with Article 49, Prospectus Regulation.

7

  This relates to Article 1(3) and 3(2) on small-sized offerings as discussed in section VII ‘Exemption Type No. 2: Small Offerings’ (para. 7.25), which are effective as of 21 July 2018 and the exemptions of Article 1(5)(a), (b), and (c) and the second subparagraph of Article 1(5), Prospectus Regulation. These provisions are discussed in section IX ‘Exemption Type

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

No. 4: Exemptions Specific to an Admittance to Trading on a Regulated Market’ (para. 7.38), which are effective as of 20 July 2017. 8

  For example, in respect of small-sized offerings, as discussed in section VII ‘Exemption Type No. 2: Small Offerings’ (para. 7.25). 9

  Reference is made to Articles 31 and 32, Prospectus Regulation.

10

  Such as the implementation of Article 11(1) and (2), Prospectus Regulation on prospectus liability. 11

  Reference is made to the following overview of the result of the implementation of Prospectus Directive 2003, which indicates various differences in the regimes per Member State: Hubert du Vignaux, Camille Gouzard, Axel Gehringer et al., ‘The Implementation of the EU Prospectus Directive—a Country-by-Country Analysis’, Capital Markets Law Journal (2006) 1(1), 89–112. 12

  Recital (14), Prospectus Regulation. Reference is also made to the European Securities and Markets Authority’s (ESMA’s) Q&A Prospectuses, 28th updated version of March 2018 (ESMA, Q&A Prospectus), No. 74, Definition of public offer, which indicates that an issuer should be allowed to repeat secondary market prices on its own website, without being considered to have made an offer to the public. 13

  This outcome is supported by ESMA, Q&A Prospectus, No. 6, Free offers.

14

  Judgment of the Court of Justice, 17 September 2014, Case C‑441/12.

15

  A similar reasoning applies, for instance, to exchange offers and offers of dividend payments in the form of shares, which nevertheless technically qualify as an offer to the public and are subject to prospectus requirement, if not for the fact that these events may benefit from a specific exemption, as further discussed in sections VIII ‘Exemption Type No. 3: Exemptions Specific to an Offer to the Public’ (para. 7.28) and IX ‘Exemption Type No. 4: Exemptions Specific to an Admittance to Trading on a Regulated Market’ (para. 7.38). 16

  This argument is without regard to the practical difficulties a creditor would experience if he had to draw up a prospectus, quite likely being unable to call upon the assistance of its debtor and/or the issuer. 17

  Alain Pietrancosta and Alexis Marraud des Grottes, ‘Has the Notion of ‘Private Offerings’ been Abolished by the Prospectus Regulation of 14 June 2017?’, SSRN paper id: 3124225. 18

  Kamerstukken II, 2005–2006, 29708, No. 37, 60–1 and No. 41, 37, 87–8.

19

  Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (recast), [2014], OJ L173/349 (MiFID II). 20

  In respect of the element ‘multilateral’ as opposed to bilateral, reference is made to the judgment of the Court of Justice, 16 November 2017, C-658/15, ECLI:EU:C:2017:870. 21

  For further guidance on the concept of a regulated market, reference is made to the ESMA Questions and Answers on MiFID II and MiFIR market structures topics, 14 November 2018, ESMA 70-872942901-38, para. 5.1. 22

  Article 4(1)(22), MiFID II.

23

  A list of regulated markets is maintained by ESMA, on the basis of national authorizations granted by Member States to regulated markets; reference is made to Article 56, MiFID II.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

24

  As supplemented by Commission Delegated Regulation (EU) 2017/568 of 24 May 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards for the admission of financial instruments to trading on regulated markets, [2017] OJ L87/117. Only securities that are freely transferable and capable of being traded in a fair, orderly, and efficient manner can be admitted to trading on a regulated market. This is the case if the requirements are met of Directive 2001/34/EC of the European Parliament and of the Council of 28 May 2001 on the admission of securities to official stock exchange listing and on information to be published on those securities, [2001] OJ L184/1. This entails, inter alia, that there should be a sufficiently large free float. 25

  A multi-lateral trading facility as defined in Article 4(1)(22), MiFID II.

26

  Recital (14), Prospectus Regulation.

27

  Reference is made to the Communication of the Commission of 30 September 2015, entitled ‘Action Plan on Building a Capital Markets Union’. 28

  As defined in Article 2(m) and (n), Prospectus Regulation.

29

  Reference is made to Article 20, Prospectus Regulation. Logically, the competent authority for the prospectus approval as determined by the home Member State of the offeror or the applicant for the listing, will apply the Prospectus Regulation as implemented in its own Member State, which implementation determines its authority on the basis of Articles 31 and 32, Prospectus Regulation. 30

  This is confirmed by ESMA, Q&A Prospectus, No. 44, Obligation to publish a prospectus for admission of securities to trading on a regulated market. 31

  Reference is made inter alia to short-form disclosure requirements that result from the Packaged Retail and Insurance-Based Investment Products (PRIIPs) Regulation (Regulation (EU) 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products, [2014] OJ L352/1 (PRIIPs Regulation), and consumer protection requirements, such as the directive on unfair commercial practices: Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market and amending Council Directive 84/450/EEC, Directives 97/7/EC, 98/27/EC and 2002/65/EC of the European Parliament and of the Council and Regulation (EC) 2006/2004 of the European Parliament and of the Council, [2005] OJ L149/22. 32

  ESMA, Q&A Prospectus, No. 49, Use of the term ‘prospectus’.

33

  Article 1(2)(a), Prospectus Regulation.

34

  Reference is made to the definition of investment undertakings ‘other than of the closedend type’, as included in Article 2(p), Prospectus Regulation. This refers to collective investment undertakings, the units of which are, at the holder’s request, repurchased or redeemed by the undertaking, directly or indirectly, out of the fund assets. 35

  Reference is made to Recital (9), Prospectus Regulation.

36

  Article 1(2)(b), Prospectus Regulation.

37

  Article 1(2)(c), Prospectus Regulation.

38

  Article 1(2)(d), Prospectus Regulation.

39

  Article 1(2)(e), Prospectus Regulation.

40

  Article 1(2)(f), Prospectus Regulation.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

41

  This concerns the Swedish ‘bostadsobligationer’ (item (i)) and certain notes issued by banks (item (f)). 42

  As Article 1(3), Prospectus Regulation is the replacement of Article 1(2)(h), Prospectus Directive 2003, ESMA, Q&A Prospectus, No. 26, How should the €5 million limit set out in Article 1(2)(h) ( . . . ) be calculated, is still relevant. 43

  Recital (12), Prospectus Regulation.

44

  As a condition hereto, Article 3(2) under (a) stipulates that such offer may not be subject to notification in accordance with Article 25, Prospectus Regulation. 45

  As an example, in the Netherlands, the threshold for this national regime is set at EUR 5,000,000. The same national regime also applies for offerings up to and including EUR 1,000,000. As set out in para. 7.25 above, this national regime is based on Article 1(3), Prospectus Regulation. 46

  Article 49(2), Prospectus Regulation.

47

  Reference is made to Articles 1(2)(h) and 3(2)(e), Prospectus Directive 2003. Small-size offerings up to EUR 5,000,000 were carved out of the Prospectus Directive 2003, but without a limitation on the application of national regimes. 48

  Reference is made to Article 3(2)(e), Prospectus Directive 2003.

49

  Article 1(4)(a), Prospectus Regulation.

50

  For the purposes of applying this definition, Article 2(e), Prospectus Regulation allows investment firms and credit institutions, upon request from the issuer, to communicate the classification of their clients to the issuer subject to compliance with the relevant laws on data protection. 51

  Article 1(4)(b), Prospectus Regulation.

52

  Article 1(4)(c) and (d), Prospectus Regulation.

53

  Article 1(4)(e), Prospectus Regulation.

54

  Article 1(4)(f), Prospectus Regulation.

55

  Article 1(4)(g), Prospectus Regulation.

56

  Article 1(4)(h), Prospectus Regulation.

57

  Article 1(4)(i), Prospectus Regulation. If this exemption cannot be used, reference is made to ESMA, Q&A Prospectus, No. 71, Employee Share Scheme Prospectuses; Short form disclosure regime in those cases where a prospectus is required (application of Article 23.4, Prospectus Regulation). 58

  Article 1(4)(j), Prospectus Regulation. Reference is made to ESMA, Q&A Prospectus, No. 38, Scope of Article 1.2(j), Prospectus Directive. 59

  Further, as a reminder: the fact that a related offering to the public may be exempted from the prospectus requirement does not alter the fact that a prospectus may nevertheless be required for an admittance of those same securities to trading on a regulated market, unless an exemption specific thereto applies; reference is made to n. 3 above. 60

  Article 1(5)(a), Prospectus Regulation. For the specifics of making the calculation, reference is made to ESMA, Q&A Prospectus, No. 31. 61

  Note that this is by nature a limited exemption that only applies to shares and not to other types of securities. 62

  Article 1(6), Prospectus Regulation.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

63

  Article 1(5)(d), Prospectus Regulation.

64

  Article 1(5)(e), Prospectus Regulation. This exemption has been simplified to the effect that the alternative document is no longer subject to an equivalence requirement. 65

  Article 1(5)(f), Prospectus Regulation. This exemption has been simplified to the effect that the alternative document is no longer subject to an equivalence requirement. 66

  Article 1(5)(g), Prospectus Regulation.

67

  Article 1(5)(h), Prospectus Regulation.

68

  Article 1(5)(c), Prospectus Regulation. This is a newly added exemption.

69

  Article 1(5)(i), Prospectus Regulation.

70

  Article 1(5)(j), Prospectus Regulation.

71

  Recital (20), Prospectus Regulation.

72

  Article 1(6), Prospectus Regulation.

73

  Article 4(1), Prospectus Regulation.

74

  Article 4(2), Prospectus Regulation.

75

  Article 2(q), Prospectus Regulation.

76

  Article 1(3), Prospectus Regulation.

77

  This means: undertaking for the collective investment in securities; reference is made to the description in Article 1(2) of Directive 2009/65/EG (UCITS Directive) of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), [2009] OJ L302/32. 78

  As set forth in Chapter IX, Part 1, UCITS Directive.

79

  Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/ EC and Regulations (EC) 1060/2009 and (EU) 1095/2010, [2011] OJ 174/1. 80

  For Dutch law, reference is made to Article 5:19a of the Act on financial supervision and Article 13 of the Decree on ‘uitvoering EU-Verordeningen financiële markten’. 81

  Reference is made to n. 31 above.

82

  For AIFs, this obligation is already effective, for UCITs the effective date for providing a KID has been delayed. Reference is made to Article 32, PRIIPs Regulation. 83

  This is a re-phrase of the definition of ‘offer of securities to the public’, as included in Article 2(d), Prospectus Regulation. 84

  Reference is made to Article 12, Prospectus Regulation, which stipulates a standard validity of twelve months. 85

  Article 5(1), Prospectus Regulation, second para.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Part II The New EU Prospectus Rules, 8 The Contents of the Prospectus: Rules for Financial Information Giovanni Strampelli From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

Subject(s): Prospectus

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 167) 8  The Contents of the Prospectus Rules for Financial Information I.  Introduction 8.01 II.  The Legal Background: Prospectus Regulation, Delegated Regulation, ESMA Recommendations, and Q&A 8.08 III.  Historical Financial Information 8.14 1.  Annual and Interim Financial Reports to be Included in the Prospectus 8.14 2.  Accounting Standards 8.21 3.  The Change of Accounting Framework and the Impact of IAS 8 on Historical Financial Information 8.23 4.  Incorporation by Reference 8.28 5.  The Alignment of the Operating and Financial Review Requirement with the Management Reports Required under the Accounting Directive 8.30 6.  The Removal of the Requirement for Issuers of Equity and Retail NonEquity to Include Selected Financial Information in the Prospectus 8.32 IV.  Pro Forma Financial Information 8.34 1.  Issuers Required to Provide Additional Financial Information 8.36 2.  The Additional Information Relating to an Entity Other than the Issuer 8.42 3.  Preparation and Presentation of Pro Forma Financial Information 8.50 4.  Pro Forma Adjustments to Historical Accounting 8.58 5.  Audit Requirement 8.63 V.  Profit Forecasts and Profit Estimates 8.64 1.  The Relevance of Profit Forecast and Profit Estimates: Equity vs NonEquity Issuance 8.65 2.  Definition 8.68 3.  Disclosure Requirements 8.74 4.  The Deletion of Audit Requirements on Profit Forecasts and Estimates 8.78 VI.  Conclusions 8.85

I.  Introduction 8.01  In keeping with the Prospectus Regulation’s1 aim of providing investors with any necessary information that is material for making an informed assessment of, among other things, the assets and liabilities, profits and losses, financial position, and prospects of the issuer,2 financial information is a key element of the prospectus information package. (p. 168) 8.02  Nevertheless, the Prospectus Regulation does not provide a clear definition of what financial information exactly means for the purposes of the prospectus, nor does it draw a clear distinction between financial information and non-financial information. However, it is possible to conclude that financial information consists of all accountingrelated information (i.e. all information, directly or indirectly extracted from or based on From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

issuer’s financial statements) that must be included in the prospectus. Hence, for the purposes of drafting the prospectus, financial information means all information concerning the issuer’s assets and liabilities, financial position, and profits and losses mentioned by section 18 of Annex I (and related sections of other annexes) of the Commission Delegated Regulation supplementing the Prospectus Regulation.3 On the other hand, any information concerning, for example, the history of the issuer, business overview, organizational structure, issuer corporate governance, or related-party transactions is classified as nonfinancial information and falls beyond the scope of the following analysis.4 8.03  Although under EU law, the content and the format of a prospectus both depend on a variety of factors, such as the type of issuer, security, and issuance; the prospectus must always provide detailed information concerning the issuers’ assets and liabilities, financial position, and profits or losses. 8.04  Specifically, the prospectus must incorporate (by reference5) audited financial statements covering a varying number of financial years, depending on the type of security or issuance. Moreover, where the issuer has published quarterly or half-yearly financial information since the date of its last audited financial statements, these must normally be included in the registration document.6 8.05  In addition, in order to ensure that financial statements included (by reference) in the prospectus represent the issuer’s undertaking accurately, and to avoid any potential inaccuracy within the information provided from affecting the ability of investors to make an informed assessment, equity security issuers with a complex financial history, or who have made a significant financial commitment, are required to provide additional information showing the impact of a relevant transaction or financial commitment on the issuer’s historical financial information, which should be incorporated into the prospectus.7 8.06  However, as a security’s value to investors depends on issuer’s future results, historical financial information may be relatively unhelpful for investors and not enough to allow (p. 169) them to make a sound investment decision. Hence, given that ‘information relevant to the issuer’s likely future performance is of much greater interest to investors’,8 issuers are also required or allowed (depending on the type of the security and offering) to include in the prospectus profit forecasts or profit estimates that are still outstanding and valid.9 8.07  Against this backdrop, and with a view to developing a comprehensive analysis of the rules for financial information set out by the EU prospectus regime, this chapter proceeds as follows: section II ‘The Legal Background: Prospectus Regulation, Delegated Regulation, ESMA Recommendations, and Q&A’ (para. 8.08) provides an overview of relevant rules concerning the financial information that must be included in the prospectus; section III ‘Historical Financial Information’ (para. 8.14) examines historical financial information; section IV ‘Pro Forma Financial Information’ (para. 8.34) deals with some specific issues concerning pro forma financial information; and finally, section V ‘Profit Forecasts and Estimates’ (para. 8.64) analyses the definition of profit forecasts and estimates along with related audit and disclosure requirements. Section VI ‘Conclusions’ (8.85) sets out some concluding remarks.

II.  The Legal Background: Prospectus Regulation, Delegated Regulation, ESMA Recommendations, and Q&A 8.08  In line with the overall structure of the EU prospectus regime, the rules on the financial information that must be included in the prospectus are ‘multi-layered, composed of three elements’:10 first, the Prospectus Regulation; second, the Delegated Regulation as regards the format, content, scrutiny, and approval of the prospectus; and, third, the European Securities and Markets Authority (ESMA) Prospectus Recommendations

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(updating the existing Committee of European Securities Regulators (CESR) recommendations)11 and the ESMA Q&A Prospectus.12 8.09  The Prospectus Regulation only provides rules on the key financial information that must be included in the summary, as well as the incorporation of information by (p. 170) reference to previously or simultaneously published documents. Indeed, according to Article 13, Prospectus Regulation, the European Commission is empowered to adopt delegated acts in accordance with Article 44 to supplement this Regulation regarding, among other things, the format of the prospectus and the schedules defining the specific information to be included in a prospectus. Hence, prospectus contents are mainly regulated by the CDR. 8.10  Article 13, Prospectus Regulation states that the delegated acts shall be based on the standards in the field of financial and non-financial information set out by international securities commission organizations, in particular by the International Organization of Securities Commissions (IOSCO) and, more generally, that information requirements shall be appropriate, taking into account the information needs of the investors concerned, depending on the type of the security and offering concerned.13 8.11  In keeping with such general principles, the CDR accepts a flexible and modular approach (so-called ‘building block approach’) according to which the prospectus shall be drawn up through a combination of schedules and building blocks,14 as appropriate for the type of issuer and security concerned.15 8.12  The Delegated Regulation largely enacts ESMA’s technical advice,16 apart from a few changes that do not have any substantial impact.17 Moreover, in many respects, it reproduces provisions of the Council Regulation (EC) 809/2004. This is in keeping with the contents of the formal mandate from the Commission seeking technical advice from ESMA in relation to, amongst other things, the format and content of the prospectus. In particular, with regard to the schedules defining the specific information that must be included in a prospectus, the EU Commission invited ESMA to carry forward the disclosure items required by the Council Regulation (EC) 809/2004 into the new schedules only after verifying that they strike an appropriate balance between investor protection and cost to the issuers.18 Nevertheless, with the aim of simplifying contents (p. 171) of the prospectus, ESMA was also asked to explore ways of streamlining schedules in order to reduce the overall number of annexes.19 8.13  Finally, the ESMA Prospectus Recommendations and Q&A Prospectus represent the third layer of the EU prospectus regime. Although they aim to promote common supervisory approaches and practices,20 the ESMA Prospectus Recommendations and Prospectus Q&A are also meant to provide market participants with an indication of what constitutes proper implementation of the prospectus rules.21 This is especially true for the financial information that must be included in the prospectus. Indeed, the ESMA Prospectus Recommendations and Q&A Prospectus provide relevant guidance on several practical issues concerning historical information, pro forma financial information, and profit forecasts and estimates.

III.  Historical Financial Information 1.  Annual and Interim Financial Reports to be Included in the Prospectus 8.14  According to section 18 of Annex I (and related sections of other annexes) of the CDR, issuers are required to incorporate into the prospectus audited historical—consolidated22— financial information covering a number of financial years,23 which varies depending on a variety of factors, such as the type of issuer, security, or issuance. For example, while the equity registration document includes audited historical financial information covering the

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

past three financial years,24 the retail non-equity registration document must include two years of audited historical financial information.25 (p. 172) 8.15  As far as issuers that have been in operation for a shorter period than the requisite duration of historical financial information are concerned, item 18.1 of Annex I (and related items of other annexes) of the CDR states that they shall disclose audited financial information covering that shorter period.26 Moreover, according to item 18.1.7 of Annex I (and related items of other annexes), the balance sheet date of the last year of audited financial information may not be older than: (i) eighteen months from the date of the registration document if the issuer includes audited interim financial statements in the registration document; (ii) sixteen months from the date of the registration document if the issuer includes unaudited interim financial statements in the registration document. The maximum sixteen-month period is consistent with the requirement, set forth by Article 4, Transparency Directive, to make a public annual financial report at the latest four months after the end of each financial year. As ESMA notes: The 18 month maximum period for the age of the annual financial statements is included where an issuer does not fall within the requirements of the Transparency Directive27 (for example where it makes an offer to the public but its securities are not admitted to trading) and may therefore not be required to produce audited accounts four months after its year end.28 8.16  In keeping with item 18.2.1 of Annex I (and related items of other annexes) issuers are also required to incorporate into the prospectus quarterly or half-yearly financial information published since the date of their last audited financial statements. In order to avoid duplicating information, ESMA has made it clear that, if at the time of prospectus filing (say 30 June), both half-yearly financial information and information on the first quarter are available, the prospectus shall include only half-yearly financial information, as it covers also the information for the first quarter. On the other hand, if at the time of prospectus filing (say 30 October) half-yearly financial information and information on the third quarter are available, both the half-yearly and the quarterly financial report must be included in the prospectus, as there is no duplication of information.29 8.17  The ESMA Q&A must be read in conjunction with item 18.2.1 of Annex I (and related items of other annexes) of the CDR according to which, if the registration document is dated more than nine months after the date of the last audited financial statements, it must contain interim financial information—which may be unaudited—covering at least the first six months of the financial year. Hence, in keeping with the CDR, where the prospectus is filed more than nine months after the date of the last audited financial (p. 173) statements, the incorporation of interim financial information covering the first six months of the year seems to be sufficient. 8.18  However, the abovementioned requirement set out by item 18.2.1 of Annex I does not clash with the ESMA Q&A. Indeed, while the CDR does not require the issuer to prepare a quarterly financial report if the registration document is dated more than nine months after the date of the last audited financial statements, item 18.2.1 of Annex I does not preclude the incorporation—required by the ESMA Q&A Prospectus—of financial information covering the third quarter of the year, if it has been already published. Put differently, in order to alleviate the prospectus-related burden, the CDR does not oblige the issuer to produce a quarterly financial report simply for the purposes of the prospectus. 8.19  Annual financial historical information must be independently audited in accordance with Directive 2014/56/EU and Regulation (EU) 537/2014, and the prospectus must contain the audit report in respect of each year.30 By contrast, the audit requirement does not apply to interim financial reports,31 although the issuer’s auditor is required to perform a review of interim financial information in accordance with the International Standard on Review From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Engagements (ISRE) 2410.32 A review of interim financial information conducted in accordance with the ISRE 2410 differs significantly from an audit conducted in accordance with the International Standards on Auditing. Pursuant to the ISRE 2410, a limited review of interim financial information ‘does not provide a basis for expressing an opinion whether the financial information gives a true and fair view, or is presented fairly, in all material respects, in accordance with an applicable financial reporting framework’.33 8.20  Where the EU audit regime does not apply, as in the case of third-country issuers, the historical annual financial information must be audited or reported on in order to establish whether or not, for the purposes of the registration document, it gives a true and fair view in accordance with auditing standards applicable in a Member State or an equivalent standard.34 In addition, if audit reports for the historical financial information have been rejected by the statutory auditors or if they contain qualifications, modifications of opinion, disclaimers, or an emphasis of matter, such qualifications and elements of the audit report must be reproduced in full in the prospectus, along with the reasons given.35

(p. 174) 2.  Accounting Standards 8.21  As stated in item 18.1.3 of Annex I (and related items of other annexes), both annual and interim financial information must be prepared according to International Financial Reporting Standards (IAS/IFRS) as endorsed in the EU based on Regulation (EC) 1606/2002.36 This requirement is generally unproblematic for European issuers. In keeping with item 18.1.6 of Annex I (and related items of other annexes), European issuers are required to include at least the consolidated financial statements in the registration document and, pursuant to Article 4, IAS Regulation, must prepare their consolidated accounts in accordance with IAS/IFRS.37 8.22  On the other hand, accounting standards requirements are, in theory, more burdensome for third-country issuers as they must present financial information according to an ‘equivalent’ accounting system38 or, absent such an equivalent system, restate their historical financial information in accordance with IAS/IFRS as endorsed in the EU.39 However, given that the requirement for restatement entails significant costs and could make prospectus requirements very expensive for third-country issuers,40 in 2008, based on the preventive ESMA’s (and previously CESR’s) assessment,41 the European Commission recognized the equivalence—for the purposes of the prospectus regime—of Japanese and US accounting standards.42 Moreover, from 1 January 2012, Generally Accepted Accounting Principles of the People’s Republic of China, Canada, and the Republic of Korea are also deemed to be equivalent to IAS/IFRS.43 Hence, the incorporation of historical financial information into the prospectus is not burdensome for third-country issuers adopting ‘equivalent’ accounting standards as a basis for their statutory consolidated financial statements.44

(p. 175) 3.  The Change of Accounting Framework and the Impact of IAS 8 on Historical Financial Information 8.23  As under the EU law, issuers are obliged to adopt IAS/IFRS as a basis for their consolidated accounts, issuers accessing financial markets for the first time may have to change their set of accounting standards if they used local generally accepted accounting principles (GAAP) until they prepared and filed the initial listing prospectus.45 8.24  In such cases, in order to render the historical financial information incorporated in the prospectus comparable with the financial information provided by the issuer once it is listed, item 18.1.4 of Annex I (and related items of other annexes) of the CDR requires that, ‘The last audited historical financial information, containing comparative information for the previous year, must be presented and prepared in a form consistent with the accounting standards framework that will be adopted in the issuer’s next published annual financial statements.’ Therefore, in keeping with this rule, the last annual report incorporated into From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

the prospectus must be restated in accordance with IAS/IFRS. Given that the last financial statements also contain comparative information for the previous year, the restatement implies that the prospectus must include IAS/IFRS-compliant figures for the last two years prior to the offering. 8.25  For example, if the issuer files the prospectus in January 2019, its next published annual financial statements will be those for 2018, which must be approved at the latest four months after the end of the previous financial year. In such cases, the issuer is required to restate the 2017 financial statements—containing comparative information for 2016—in accordance with IAS/IFRS. Consequently, the prospectus will incorporate: the 2017 restated financial statements prepared according to IAS/IFRS and financial statements covering 2016 and 2015 prepared according to the previous GAAP, as previously published. This is consistent with the so-called bridge approach recommended by ESMA, according to which the middle period (2016) is used as a bridge between the first year (2015) and the third year (2017).46 Indeed, the prospectus will incorporate 2016 figures drafted according both to IAS/IFRS (as included in the restated 2017 financial statements) and national GAAP (as included in the 2016 financial statements). 8.26  On the contrary, where the issuer adopted IAS/IFRS as the basis for its statutory consolidated accounts before it was listed, item 18.1.4 of Annex I (and related items of other annexes) of CDR states that changes within the accounting framework applicable to an issuer do not require the audited financial statements to be restated solely for the purposes of the prospectus. Nevertheless, if after the offering an issuer changes an accounting policy47 in its consolidated financial statements (e.g. upon the initial application of a new standard or interpretation issued by IASB or IFRIC or a voluntary change (p. 176) in accounting policies48), IAS 8 then applies. In this case, IAS 8 requires the retrospective application of changes of accounting policies, unless this is impracticable.49 Thus, the new accounting policy must be applied as if that policy had always been applied.50 8.27  Nevertheless, ESMA made it clear that no additional IAS 8 requirements should be applicable in a prospectus.51 For example, if the issuer incorporates into the prospectus the annual financial statements for 2017, 2016, and 2015, and then starts to apply a new accounting policy in 2017, according to the IAS 8 the issuer is required to restate only the set of financial statements for the year 2017 (including the comparative information included therein). Hence, according to the IAS 8, the restatement only concerns the comparative information (for 2016) included in the financial statements for 2017, whereas the 2016 and 2015 financial statements need not be restated and can be incorporated into the prospectus as they were published.52

4.  Incorporation by Reference 8.28  The historical information requirement can make the prospectus excessively long and complex, and lead to an increase in prospectus-related costs borne by issuers.53 In order to prevent such potential drawbacks, issuers are allowed to incorporate by reference some documents containing the information that must be disclosed in a prospectus. According to Article 17, Prospectus Regulation, information may be incorporated by reference into a prospectus where it has been previously or simultaneously published electronically and has been drawn up in a language fulfilling the requirements of Article 27.54 8.29  Therefore, information that may be incorporated by reference includes, inter alia, annual and interim financial reports, audit reports, and management reports as referred to in Chapter 5 of Directive 2013/34/EU.55 In order to ensure that the information remains accessible, a cross-reference list must be provided in the prospectus in order to enable investors to identify easily specific items of information.56 For the same purpose, the

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

prospectus must also contain hyperlinks to all documents containing information that is incorporated by reference.57

(p. 177) 5.  The Alignment of the Operating and Financial Review Requirement with the Management Reports Required under the Accounting Directive 8.30  In line with the aim of limiting prospectus complexity, the CDR aligns the operating and financial review (OFR) requirement with the management reports required under the Accounting Directive. According to item 7.1.2 of Annex I (and related items of other annexes) of the CDR, OFR requirements may be satisfied by the inclusion of the management report referred to in Articles 19 and 29, Directive 2013/34/EU. This is in keeping with Article 19, Prospectus Regulation, which includes the management report among the documents that can be incorporated into the prospectus by reference.58 8.31  As noted by ESMA,59 the management report also contains information that can be found elsewhere in the prospectus. For example, the description of the principal risks required by Article 19, Directive 2013/34/EU partially overlaps with the section of the prospectus dedicated to the risk factors. Although this can lead to some duplication of information, the solution adopted by the CDR has considerable advantages. First, it can significantly reduce costs for issuers. Second, as the yearly management report must include the information required under Articles 19 and 29, Accounting Directive, its incorporation by reference can enhance the comparability of the information disclosed for the financial years covered by historical financial information.60

6.  The Removal of the Requirement for Issuers of Equity and Retail Non-Equity to Include Selected Financial Information in the Prospectus 8.32  As recommended by the ESMA technical advice, the EU Commission has removed the requirement61 for issuers of equity and retail non-equity to include a section in the prospectus containing selected financial information. ESMA clarified that the removal of this requirement does not conflict with the provisions of Annex I of the Prospectus Regulation, on which the Commission is obliged to base its delegated (p. 178) acts. In particular, the Commission highlights that ‘selected financial data’, as referred to in Annex I, ‘is not a defined term and its inclusion in a prospectus can be achieved through the requirement to disclose a selection of historical key financial information in the summary’.62 8.33  The removal of the requirement for selected financial information is primarily aimed at avoiding the duplication of information and reducing prospectus-related costs. Nevertheless, as the primary purpose of including selected historical financial information in a prospectus is to summarize the key information originating from the historical financial information of the issuer,63 the removal of this requirement does not deprive investors of relevant information. First, the prospectus summary includes a selection of historical key financial information. Second, selected financial information is extracted from historical financial information that is incorporated into the prospectus in full by reference.64 Third, the management report (which can be incorporated into the prospectus by reference) must include references to, and additional explanations of amounts reported in, the annual financial statements insofar as it is necessary for an understanding of the issuer’s development, performance, or position.65

IV.  Pro Forma Financial Information

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

8.34  In order to ensure that financial statements incorporated (by reference) into the prospectus represent the issuer’s undertaking accurately, and to avoid the potential inaccuracy of the information provided affecting the ability of investors to make an informed assessment, equity issuers with a complex financial history or that have made a significant financial commitment are required to provide additional information showing the impact of a relevant transaction or financial commitment on the company’s historical financial information included in the prospectus.66 8.35  Specifically, according to Article 18(1), additional information relating to an entity other than the issuer must be included in the registration document and in the securities note. Moreover, Article 18(2) states that information relating to an entity other than the issuer must contain all information referred to in Annexes 1 and 20 that investors need to make an informed assessment as referred to in Article 6(1) and Article 14(2), Regulation (EU) 2017/1129, as if that entity were the issuer of the equity security.

(p. 179) 1.  Issuers Required to Provide Additional Financial Information 8.36  Additional financial information relating to an entity other than the issuer must be included in the registration document and in the securities note when the issuer (i) has a complex financial history; or (ii) has made a significant financial commitment. 8.37  As far as the latter hypothesis is concerned, Article 18(4), CDR states that ‘a significant financial commitment is a binding agreement to undertake a transaction that is likely to give rise to a variation of more than 25% relative to one or more indicators of the size of the issuer’s business’. For these purposes, indicators of size include total assets, revenues, profits, or losses.67 In addition, since historical financial information must contain the cash flow statement, cash flows can arguably also be regarded as a relevant indicator of size. 8.38  The ESMA Recommendations help to clarify the definition of financial commitment. First, a transaction is deemed to involve a significant financial commitment even where an agreement renders the completion of the transaction subject to certain conditions, including approval by a regulatory authority, if it is reasonably certain that those conditions will be fulfilled.68 Second, an agreement should be treated as binding: where it makes the completion of the transaction conditional on the outcome of the offer of the securities that are the subject matter of the prospectus or, in the case of a proposed takeover, if the offer of securities that are the subject matter of the prospectus has the objective of funding that takeover.69 8.39  According to Article 17(3), CDR, an issuer is considered as having a complex financial history where all of the conditions indicated therein are fulfilled. First, at the time of drawing up the prospectus, the information contained therein does not represent the issuer’s undertaking accurately; second, the inaccuracy of information contained in the prospectus affects the ability of investors to make an informed assessment; third, additional information, including financial information, relating to an entity other than the issuer is needed for investors to make an informed assessment. 8.40  In line with this definition, additional information relating to an entity other than the issuer is required when the issuer’s business undertaking underwent a significant change during the period covered by historical financial information incorporated into the prospectus. Hence, an issuer will be considered as having a complex financial history, for example, where it acquired a business that makes up a significant portion of its size or was incorporated during the period covered by historical financial information. (p. 180) In such

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

cases, additional information concerning the business acquired is required in order to allow investors to make an informed assessment. 8.41  Although the Delegated Regulation does not provide any explicit recommendation concerning this matter, it is apparent that ‘the larger an acquired business undertaking is, the more likely it is that separate financial information will be required’.70 Therefore, issuers can use size indicators that must be taken into account in order to assess whether a binding agreement to execute a transaction constitutes a significant financial commitment for the purposes of Article 18(1) also in order to consider whether a transaction is of such significance as to give rise to a complex financial history. This approach is consistent with the UK Listing Rules requirement for the admission of securities to the premium-listing segment of the London Stock Exchange. Listing Rule 6.1.3BR(1) states that historical financial information covering the past three years must represent at least 75 per cent of the new applicant’s business for the full period.

2.  The Additional Information Relating to an Entity Other than the Issuer 8.42  As mentioned in paragraph 8.35 above, according to Article 18(2), CDR, the additional information relating to an entity other than the issuer that must be included in the prospectus must contain all relevant information referred to in Annexes 1 and 20 that would be relevant in order to allow investors to make an informed assessment as referred to in Article 6(1) and Article 14(2), Regulation (EU) 2017/1129, as if that entity were the issuer of the equity security. 8.43  According to Article 17(2), draft CDR, the additional information relating to an entity other than that issuer would have to contain ‘(a) all relevant information items referred to in Annex 19 and (b) all relevant information referred to in the Annexes that would be relevant for that entity if it were the issuer of the equity security’. A number of participants in the public consultation on the draft CDR noted that this requirement would have imposed a significant burden on issuers. In fact, the draft CDR significantly extended the scope of information concerning the target that may be required. While Article 4a, Council Regulation (EC) 809/ 2004 required the registration document to include only certain items of financial information relating to an entity other than the issuer, the requirement set out by Article 17 of the draft CDR went well beyond financial information.71 Hence, the issuer seemed to be required to include in the prospectus (p. 181) risk factors, a business description, and other disclosures as if that acquired business were a stand-alone issuer.72 8.44  In line with the ESMA technical advice,73 several participants to the public consultation on the draft CDR also recommended that, when defining the information to be provided in accordance with Article 18(2), CDR, the competent authority should also take into account (alongside the other elements mentioned by Article 36, CDR) the ability of the issuer to obtain financial or other information relating to another entity with reasonable effort.74 Moreover, other participants asked for the reinstatement of the status quo as set out in Commission Delegated Regulation 809/2004,75 under which it was clear that only financial information of a company other than that of the issuer must be included in the prospectus.76 8.45  In the light of criticisms raised during the the public consultation on the draft CDR, the final version of the CDR significantly limits the information requirement relating to an entity other than the issuer, and essentially reinstates the previous regime. In fact, according to Article 18(2), CDR, with respect to an entity other than the issuer, a prospectus must only include all information referred to in Annexes 1 and 20 that are needed to allow investors to make an informed assessment as referred to in Article 6(1) and Article 14(2), Regulation (EU) 2017/1129, as if that entity were the issuer of the equity security. Hence, based on the reference to Article 6(1), Regulation (EU) 2017/1129, the additional information relating to an entity other than the issuer must only include the From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

necessary information which is material to an investor for making an informed assessment of: the assets and liabilities, profits and losses, financial position, and prospects of the issuer and of any guarantor; the rights attaching to the securities; the reasons for the issuance, and its impact on the issuer. Therefore, if compared to the wording of Article 17 of the draft CDR, the final rule of Article 18, CDR significantly reduces the scope of the information concerning an entity other than the issuer that equity issuers having a complex financial history are required to include in the prospectus. 8.46  In addition to the abovementioned information concerning the entity other than the issuer, in the event of a significant gross change, item 18.4 of Annex I (and related (p. 182) items of other annexes) of the CDR requires pro forma financial information to be prepared in order to describe how the transaction might have affected the assets, liabilities, and earnings of the issuer, had the transaction taken place at the commencement of the period being reported on or at the date reported.77 Hence, pro forma financial information complements the historical financial information of the issuer by ‘acting as a bridge to guide investors to an indication of the totality of what it is they are investing’.78 8.47  Based on the definition set out by Article 1(e), CDR, a significant gross change means a variation by more than 25 per cent of one or more of the indicators of the size of the issuer’s business.79 Moreover, ESMA clarified that the reference made to ‘transaction’ covers both transactions that have already occurred and transactions that have not yet taken place, but where the issuer has made a significant firm commitment.80 8.48  In addition, significant gross change transactions only include acquisitions and disposals, whereas equity or debt raisings are not in themselves significant gross changes, since they do not have a significant impact on issuer’s assets, liabilities, and earnings.81 Nevertheless, the effects of equity or debt raisings are reflected in the pro forma financial information where they are closely related to a transaction involving a significant firm commitment.82 For example, the Institute of Chartered Accountants in England and Wales (ICAEW) recognizes that: where a proposed acquisition is to be funded in part from the proceeds of an equity issue made subsequent to the last year-end, but prior to the proposed acquisition, it would be appropriate to present as an adjustment in a pro forma net assets statement the receipt of the proceeds from the equity issue.83 (p. 183) 8.49  Although in most cases the provision of pro forma financial information is the best way of describing the effect of a significant gross change, item 18.4.1of Annex I (and related items of other annexes), CDR recognizes (implicitly84) that sometimes the inclusion of pro forma information in the prospectus is not feasible or might not be a fair way of describing the effects of the transaction.85 In such cases, a narrative description of the transaction’s impact on issuer’s earnings or assets and liabilities is enough to comply with the information requirement for gross change transactions.86

3.  Preparation and Presentation of Pro Forma Financial Information 8.50  Pro forma financial information must be presented as set out in Annex 20 of the CDR and must be accompanied by a report prepared by independent accountants or auditors.87 In particular, item 1.1 of Annex 20 states that pro forma financial information shall consist of: (i) an introduction illustrating the purpose of the pro forma financial information, the period or date covered, and the effects of the transaction as if it had been undertaken at an earlier date; (ii) a profit-and-loss account, a balance sheet or both, depending on the circumstances presented in a columnar format; (iii) accompanying notes explaining, among other things, the sources from which the unadjusted financial information has been extracted, the basis upon which the pro forma financial information is prepared, source and

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

explanation for each adjustment, and whether each adjustment in respect of a pro forma profit-and-loss statement is expected to have a continuing impact on the issuer or not.88 8.51  As, in keeping with item 18.4.1 of Annex I (and related items of other annexes), pro forma financial information aims to illustrate the effects of the transaction as if had it been undertaken at the commencement of the period being reported on or at the date reported;89 the profit-and-loss account and (if needed) the balance sheet included in the pro forma financial information must be presented in a columnar format composed of (i) historical unadjusted information; (ii) accounting policy adjustments, where necessary; (iii) pro forma adjustments; (iii) the results of the pro forma financial information.90 (p. 184) 8.52  Pro forma financial information may be published in respect of the last completed annual financial period or the most recent interim period for which relevant unadjusted information has been published or are included in the prospectus.91 The specific period that is covered by pro forma financial information and whether it is necessary to present also a pro forma balance sheet are questions that depend on when the relevant transaction took place and when the prospectus is filed. In this regard, ESMA provides a detailed recommendation by distinguishing between four different cases.92 8.53  If the transaction occurred during the previous financial year and the prospectus is filed during the first half of the current year, a pro forma balance sheet is not required, since the transaction is already reflected in the balance sheet of the previous year financial statements. On the other hand, as the transaction is not reflected in the profit-and-loss account for the full previous year, a pro forma profit-and-loss account illustrating the transaction as if it had happened on 1 January of the previous year is required.93 The pro forma profit-and-loss account can be prepared according to two alternative approaches. First, it is possible to subtract the partially consolidated target financial information and then add the target’s latest full-year financial information to that of the issuer through separate adjustment columns for the pro forma profit-and-loss account. Otherwise, adjustments can only cover the pre-acquisition period.94 8.54  Where the transaction occurred during the previous financial year and the prospectus is filed during the second half of the current year, no pro forma balance sheet and profitand-loss account is required, since the transaction’s effects are already reflected in the published half-yearly financial report. As has been confirmed by ESMA,95 this implies that a period of six months is generally sufficient in order to illustrate the profit-and-loss effect of the transaction, unless in the specific case a longer period of time is required, for example where the issuer’s business is affected by seasonal factors.96 8.55  The position is in part different if the relevant transaction takes place during the current financial year. In this case, where the prospectus is issued during the first half-year after the transaction and contains audited annual financial statements for the previous year, then both a pro forma balance sheet and a pro forma profit-and-loss account for the previous financial year are required. On the other hand, where the prospectus is issued during the second half-year, there are two possible scenarios. If the issuer has already published the half-yearly financial report, a pro forma balance sheet is not needed, as the transaction is already reflected in the balance sheet within the half-yearly financial (p. 185) information. Alternatively, if the half-yearly financial report is not yet available, the issuer must also prepare a pro forma balance sheet covering the previous financial year. 8.56  As far as the profit-and-loss account is concerned, the ESMA guidance is not entirely clear.97 Nevertheless, based on the general criteria according to which a period of six months is generally sufficient in order to illustrate the profit-and-loss effect of a gross

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

change transaction, a pro forma profit and loss for the half-yearly financial information as if the transaction had occurred on 1 January would appear to be sufficient. 8.57  In order to render pro forma financial information comparable with the historical financial information included in the prospectus, item 2.1. of Annex 20 specifies that ‘the pro forma financial information must be prepared in a manner consistent with the accounting policies adopted by the issuer in its last or next financial statements’. Therefore, pro forma financial information must be based on accounting policies adopted in the historical financial information.98 Nevertheless, as the ICAEW notes, this requirement does not preclude simplified presentation, ‘where such simplification assists in a clear reading of the pro forma financial information and is consistent with the specific purpose of the pro forma information’.99

4.  Pro Forma Adjustments to Historical Accounting 8.58  As pro forma financial information amounts to a hypothetical illustration of the impact of a transaction on the issuer’s assets and liabilities or earnings as if it had been undertaken at an earlier date selected for purposes of the illustration, adjustments are the key element of pro forma financial information. Item 2.3 of Annex 20 sets out the criteria that issuers must apply when considering which adjustments to make in order to illustrate the pro forma effect of a transaction. Specifically, item 2.3. states that pro forma adjustments must (i) be clearly shown and explained; (ii) present all significant effects directly attributable to the transaction; and (iii) be factually supportable. 8.59  As far as the presentation of adjustments is concerned, it is crucial that the issuer provides a clear and comprehensive illustration of each adjustment in order to make it comprehensible to investors. For these purposes, according to the CDR, accompanying notes comprised in the pro forma financial information must provide the source and an explanation for each adjustment, and explain whether each adjustment in respect of a pro forma profit-and-loss statement is expected to have a continuing (p. 186) impact on the issuer or not.100 In addition, adjustments must be clearly stated in the pro forma balance sheet and profit-and-loss account, usually by using a columnar presentation.101 8.60  However, although having a separate column for each adjustment may be desirable, an excessive number of columns can make pro forma financial information too complex and unclear. Therefore, in order to avoid this potential drawback, the ICAEW recognizes that ‘it is normal for the adjustment columns to contain information, with varying degrees of aggregation, reflecting more than one adjustment’.102 Moreover, where appropriate, two or more adjustments can be presented on an aggregated basis.103 In such cases, additional details on adjustment indicated in the pro forma balance sheet and/or profit-and-loss account can be included in the notes.104 8.61  According to item 2.3 of Annex 20, adjustments must present all significant effects that are directly attributable to the transaction. Although its wording is not entirely clear, this rule seeks to prevent pro forma financial information from reflecting matters that are not an integral part of the transaction described in the prospectus, and also in particular any effects of the transaction that are dependent on the company’s future actions, regardless of whether such effects are central to the issuer’s purpose in entering into the transaction.105 For example, the EU Commission notes that, ‘the issuer should not include deferred or contingent consideration in its pro forma if such consideration is not directly attributable to the transaction at hand but to a future event and may result in unduly inflating the net assets figures’.106 Along the same lines, synergy benefits resulting from the transaction cannot be reflected in the pro forma financial information, since they depend on

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

the future actions of the issuer, which must be taken once the transaction has been completed.107 8.62  In order to provide an adequate level of assurance as to the reliability of pro forma financial information, item 2.3 of Annex 20 also requires adjustments to be factually sustainable. This requirement implies that adjustments must be backed up by facts that ‘are expected to be capable of some reasonable degree of objective determination’.108 Normally, support may be provided by published accounts, management accounts, other financial information, and valuations contained in the document, purchase, and sale agreements and other agreements to the transaction covered by the prospectus.109 Consequently, given the trade-off between the relevance and reliability of financial (p. 187) information depending on the availability of appropriate support, an issuer need not include in the prospectus any adjustments that may be relevant when sufficiently reliable supporting facts are lacking.110

5.  Audit Requirement 8.63  Pro forma financial information must be accompanied by a report prepared by an independent accountant or auditor.111 In line with the International Standard on Assurance Engagements 3420,112 accountants or auditors are required to state that ‘the pro forma financial information has been properly compiled on the basis stated’ and ‘this basis is consistent with the accounting policies of the issuer’. ESMA recommends that the auditor’s statement concerning pro forma information includes the exact wording as set out by the CDR and should not include qualifications or emphasis-of-matter paragraphs, as these are considered to reduce the clarity of the auditor’s or accountant’s statement.113 Nevertheless, it is questionable whether this position is correct, taking into account paragraph 34, ISAE 3420, according to which an auditor may consider it necessary to include an emphasis-ofmatter paragraph where, in the practitioner’s opinion, the matter is of such importance that it is fundamental to users’ understanding of whether the pro forma financial information has been compiled, in all material respects, on the basis of the applicable criteria.114

V.  Profit Forecasts and Profit Estimates 8.64  Profit forecasts and estimates are a crucial element of the prospectus since the issuer’s likely future performance is of much greater interest to investors than historical financial information.115 However, since information relating to future events is more sensitive to assumptions than historical financial information and can thus be presented in an over-optimistic manner,116 some concerns are associated with the inclusion of forwardlooking information in the prospectus. Therefore, in order to prevent issuers from presenting profit forecasts and profit estimates conveying unreliable predictions, (p. 188) estimates, and in particular the presentation of forecasts, are both tightly regulated under the EU prospectus regime.117

1.  The Relevance of Profit Forecast and Profit Estimates: Equity vs Non-Equity Issuance 8.65  Although profit forecasts and estimates are generally supposed to be of great interest for investors, their relevance varies depending upon the type of financial instrument. In particular, as recognized by ESMA, in some cases profit forecasts and profit estimates are not deemed to be relevant for non-equity investors, since they focus mainly on the issuer’s solvency.118 Hence, as item 8.1, Annex 6 (and related items of other annexes) of the CDR clarifies,119 profit estimates or profit forecasts can be included in a prospectus for nonequity securities on a voluntary basis. Nevertheless, as ESMA correctly notes, an issuer of non-equity securities is required to assess whether or not an outstanding profit forecast is

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

material for investors. If so, such information must be included in the prospectus in accordance with Article 6, Prospectus Regulation.120 8.66  On the other hand, there is a general presumption that an outstanding forecast is material for equity issuances.121 Thus, a profit estimate or profit forecast must be included in a prospectus for equity securities unless it is no longer outstanding and valid. Moreover, if a profit forecast or a profit estimate has been published and is still outstanding, but no longer valid, an explanation as to why such a forecast or estimate is no longer valid must be provided.122 8.67  However, in order to alleviate the burden on issuers, the ESMA recognizes that, despite the (apparently binding) requirement to include outstanding profit forecasts and profit estimates, previously published profit forecasts and profit estimates need only be disclosed within the context of an equity issuance where they are material and valid.123 (p. 189) A profit forecast cannot be considered (still) to be valid where, due to changes since the time when the forecast was made, the actual profits or losses are expected to be materially different from those forecast and such changes give rise to material differences between the currently expected profits or losses and those previously forecast.124 For example, a profit forecast made several months before an acquisition is announced is more likely to be no longer valid once the acquisition has been announced.125 In addition, where the profit forecast covers more than one year, the validity of profit forecasts for each year must be assessed. Therefore, it may be the case that the first year of a profit forecast is deemed to be valid, whereas later years are considered invalid.126

2.  Definition 8.68  Article 1(c) and (d), CDR defines profit forecasts and profit estimates and draws a clear distinction between forecasts and estimates. A profit forecast is: a statement that expressly or by implication indicates a figure or a minimum or maximum figure for the likely level of profits or losses for current or future financial periods, or contains data from which a calculation of such a figure for future profits or losses can be made, even if no particular figure is mentioned and the word ‘profit’ is not used. On the other hand, a profit estimate is ‘a profit forecast for a financial period which has expired and for which results have not yet been published’. 8.69  Based on these definitions, it is apparent that, while forecasts are future-oriented predictions, estimates can qualify as past-oriented since they refer to a period that has expired (and for which results are not yet available).127 Hence, profit estimates are not expected to be that assumption-sensitive128 and, normally, the financial information published after estimates would confirm the status of previously published data as an estimate. 8.70  In spite of the clear definition set out by Article 1, CDR, in practice it is problematic determining whether or not a profit forecast has been made. In order to tackle such a practical issue, in 2018 ESMA published a Q&A Prospectus with the aim of clarifying what a profit forecast is.129 Although it relies on the wording of Article 1, CDR, ESMA’s (p. 190) recommendation embraces the substance-over-form approach in order to determine which data or financial indicators may, under certain circumstances, be considered to constitute a profit forecast.130 8.71  In keeping with the substance-over-form approach, ESMA states that a profit forecast can refer, either directly or indirectly, to a precise figure or a range of figures, especially when a minimum or maximum figure is mentioned or implied.131 Moreover, the phrase ‘the likely level of profits or losses’—included in the definition of profit forecast—is deemed to refer not to the profit or loss for the year but also to other measures of profitability From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

conveying an expectation of a future performance. Hence, financial ratios derived from the profit-and-loss account such as, for example, earnings before interest, taxes, depreciation, and amortization (EBITDA), earnings before interest and taxes (EBIT), and earnings before taxes (EBT), are considered to be a profit forecast.132 8.72  In view of the above, in line with the substance-over-form approach and the definition of profit forecast,133 the wording of the statements made by the issuers is not crucial: also information that, when combined with other information in the prospectus, makes it possible to calculate a figure or a minimum or a maximum for the likely levels of future profit or loss may be considered as a profit forecast. For example, ESMA concludes that the statement, ‘We are expecting this year’s turnover to remain the same and this year’s EBITDA margin to rise by 5%’ is a profit forecast.134 Moreover, also information relating to one or more segments of the issuer’s business must be classified as a profit forecast where these segments generate the vast majority of the issuer’s profits or losses. Likewise, if the issuer is involved in an acquisition project, predictions concerning the level of the target’s profits or losses are deemed to constitute a profit forecast where they are included in the prospectus and the proposed acquisition is expected to generate the vast majority of the issuer’s profits or losses.135 8.73  In addition, ESMA also provides some insights into how to distinguish between profit forecasts and trend information required under item 10 of Annex 1 (and related items of other annexes) of the CDR. While a general discussion of the future prospects of the issuer under trend information does not normally constitute a profit forecast, a statement may have to be considered as a profit forecast if it is ‘specific with respect to (i) level of profit/ loss or other measure of profitability (a number/range/floor/ceiling) and (ii) a specific financial period’.136 That said, however, in keeping with the substance-over-form approach, a case-by-case analysis is required; thus for example, the statement (p. 191) announcing a certain dividend per share or describing the issuer’s dividend policy will not be considered as a profit forecast.137

3.  Disclosure Requirements 8.74  As pointed out by ESMA, persons responsible for the prospectus must ensure that profit forecasts or estimates are not misleading for investors.138 In line with this general principle, profit forecasts and profit estimates should be: Understandable, i.e. Profit forecasts or estimates should contain disclosure that is not too complex or extensive for investors to understand; reliable, i.e. Profit forecasts should be supported by a thorough analysis of the issuer’s business and should represent factual and not hypothetical strategies, plans and risk analysis; Comparable, i.e. Profit forecasts or estimates should be capable of justification by comparison with outcomes in the form of historical financial information; relevant, i.e. Profit forecasts or estimates must have an ability to influence economic decisions of investors and be provided on a timely basis so as to influence such decisions and assist in confirming or correcting past evaluations or assessments.139 8.75  That said, it is worth noting that item 11.2 of Annex I (and related items of other annexes), CDR pays particular attention to the assumptions on which the issuer has based its forecast or estimate. In particular, according to the abovementioned item, the prospectus must specifically distinguish between assumptions about factors that the members of the administrative, management, or supervisory bodies can influence and assumptions about factors that fall exclusively outside the influence of the members of the administrative, management, or supervisory bodies. Moreover, the assumptions must be

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

reasonable, readily understandable by investors, specific and precise, and not relate to the general accuracy of the estimates underlying the forecast. 8.76  As far as profit forecasts are concerned, the assumptions must draw the investor’s attention to factors that are uncertain and could materially alter the outcome of the forecast. This requirement does not apply to profit estimates as they relate to a financial period that has expired and for which results have not yet been published. Consequently, it is possible to assume that estimates are reasonably certain and should not include any uncertain facts that could materially change the estimate.140 8.77  Finally, as regards the basis on which profit forecasts or estimates must be prepared, paragraph 47 of the ESMA recommendations states that the forecast or estimate should (p. 192) normally be of profit before tax and that the tax effect should be clearly explained. If the forecast or estimate is not of profit before tax, the issuer is required to explain the reasons for presenting another figure from the profit-and-loss account. In addition, when financial statements relating to a period covered by a forecast or estimate are published, they must disclose the relevant figure so as to enable the forecast and actual results to be directly compared.141

4.  The Deletion of Audit Requirements on Profit Forecasts and Estimates 8.78  Based on the technical advice provided by ESMA,142 the CDR repeals audit requirements—previously set out by the Council Regulation (EC) 809/2004—on profit forecasts and estimates for equity and retail non-equity issuers. To be sure, this is one of the most relevant changes introduced by the new prospectus regime, and, probably, the most controversial. 8.79  Under the previous regime, when an issuer chose to disclose a profit forecast or a profit estimate, the prospectus would have included: A report prepared by independent accountants or auditors stating that in the opinion of the independent accountants or auditors the forecast or estimate has been properly compiled on the basis stated, and that the basis of accounting used for the profit forecast or estimate is consistent with the accounting policies of the issuer.143 8.80  In the opinion of ESMA, the rationale of the audit requirements’ deletion is straightforward.144 First, such requirements come with additional costs for the issuer without the added-value to investors being clear.145 Second, as far as profit forecasts are concerned, audit requirements provide limited comfort to investors, since such requirement —as formulated by the repealed Council Regulation (EC) 809/2004—simply asks the accountant or auditor to state that it has been properly compiled on the basis stated and that the basis of accounting used is consistent with the issuer’s accounting policies.146 ESMA’s opinion seems to be in line with relevant auditing standards providing guidance on engagements to examine and report on prospective financial information according to which ‘when reporting on the reasonableness of management’s assumptions the auditor provides only a moderate level of assurance’.147 In addition, the same auditing standards correctly recognize that, as far as prospective financial information (p. 193) is concerned, the auditor is not ‘in a position to express an opinion as to whether the results shown in the prospective financial information will be achieved’.148 Therefore, it is reasonable to assume that the longer the forecasts’ time horizon is, the lesser is the safeguard provided by the audit report.149

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

8.81  Nevertheless, the merit of the audit requirements’ deletion is forcefully contested. The majority of participants in the public consultation on the draft CDR was against the deletion of the abovementioned requirements and claimed that the audit report on profit forecasts and estimates provides investors with not inconsequential protection and comes with limited costs that, usually, are not significant if compared to the total issue costs.150 Moreover, several participants pointed out that widened disclosure obligations set out by item 11.2 of Annex I of the CDR—concerning, inter alia, uncertain factors that could materially alter the outcome of the forecast—‘would not fill the potential gap left by the audit report and would be an excessive burden for the issue’.151 ESMA’s Securities and Markets Stakeholders Group (SMSG) raised criticism against the deletion of audit requirements as well. In particular, the SMSG remarked that having some form of thirdparty oversight of these matters provides an important safeguard for investors.152 8.82  In the light of these arguments, the potential effects of the audit requirements’ deletion remains controversial, especially as far as profit forecasts are concerned.153 On the one hand, such a deletion eliminates the risk of not finding an auditor available to provide a report, especially in the case of longer-term forecasts, and of preventing an issuer issuing a prospectus due to the impossibility of complying with the profit forecasts audit requirement.154 On the other hand, even if one leaves aside the general question as to whether disclosure can be an adequate substitute for audit requirements and provide an effective safeguard for investors, to be sure the widened disclosure obligations concerning profit forecasts will make prospectuses longer and more complex. Thus, it seems apparent that such an outcome is not in line with the objective (which is at the core of the new Prospectus regime) of making prospectuses simpler and of increasing their readability. 8.83  At this stage, also taking into accounting the opposing argumentations raised during the public consultation on the draft CDR, it seems premature to draw definitive (p. 194) conclusions. Indeed, only the actual application of the modified prospectus regime will confirm whether it will pass the market test, or the deletion of the audit requirements will impair investors’ confidence and issuers will decide to regularly provide the audit report on profit forecasts and estimates on a voluntary basis. Nevertheless, if the latter is the case, it is worth mentioning that, as noted by ESMA, the issuer will be entitled to include the audit report on forecasts in the prospectus, where a report has been prepared on a voluntary basis or for other purposes (e.g. a due diligence155 ) and it is deemed to be material information.156 8.84  Having said that, if we consider the situation de lege ferenda, ESMA could weigh up the opportunity to require an audit report only on short-term profit forecast pointing to the current or next financial year. In this way, the report would be more reliable and, perhaps, ‘investors will place more weight on such an estimate/forecast given the relatively short period being forecast and its proximity to the time at which the prospectus is published’.157

VI.  Conclusions 8.85  As far as financial information is concerned, the reformed EU prospectus regime is in line with the objectives of the European Commission to reduce the administrative burden for issuers when drawing up a prospectus, and to make the prospectus a more relevant disclosure tool for potential investors. For example, the removal of the requirement for issuers of equity and retail non-equity to include selected financial information in the prospectus and the alignment of the Operating and Financial Review requirement with the management reports required under the Accounting Directive clearly go in this direction. 8.86  Nevertheless, in spite of such simplifications, the fact remains that financial information is one of the most technical elements of the prospectus contents and, as such, is primarily addressed to sophisticated investors. In particular, pro forma financial information and profit estimates and forecast are deemed to be of limited use for unsophisticated investors. Therefore, in this regard, it is particularly important that (as recommended by From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

the European Commission158) the information included in the prospectus summary and primarily addressed to retail investors should not be a mere compilation of excerpts from the prospectus.

Footnotes: 1

  Council Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 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, [2017] OJ L168/12 (Prospectus Regulation). 2

  Article 6(1), Prospectus Regulation. See Pierre Schammo, EU Prospectus Law (Cambridge: CUP, 2011) 92–3; John Armour, Dan Awrey, Paul Davies, Luca Enriques et al., Principles of Financial Regulation (Oxford: OUP, 2016), chapter 8; Eilis Ferran and Look Chan Ho, Principles of Corporate Finance Law (Oxford: OUP, 2nd edn, 2014), chapter 13. 3

  Commission Delegated Regulation (EU) 2019/980 of 14 March 2019 supplementing Regulation (EU) 2017/1129 of the European Parliament and of the Council as regards the format, content, scrutiny and approval of the prospectus to be published when securities are offered to the public or admitted to trading on a regulate market, and repealing Commission Regulation (EC) 809/2004, [2019] OJ L 166/26 (CDR). 4

  See Victor de Seriere, Chapter 9 ‘The Contents of the Prospectus: Non-Financial Information and Materiality’, this volume. 5

  Articles, 19, 27, Prospectus Regulation.

6

  CDR, Annex I, para. 18.2; Annex VI, para. 11.2.

7

  Article 17, CDR.

8

  Armour et al. (n. 2), 176.

9

  CDR, Annex I, para. 11.1; Annex VI, para. 8.1.

10

  Niamh Moloney, EU Securities and Financial Markets Regulation (3rd edn, Oxford: OUP 2014), 78. 11

  Initially adopted by CESR in 2005 (CESR/05-054b), then revised and updated by ESMA in 2011 (ESMA/2011/81) and subsequently (ESMA/2013/319) (ESMA Prospectus Recommendations). 12

  The Q&A Prospectus was initially adopted by CESR in 2006 and has been subject to several updates since then. This discussion refers to the 30th version adopted in April 2019 (ESMA31-62-780) (ESMA, Q&A Prospectus). In addition, in July 2019, the ESMA has also delivered the first version of the Questions and Answers on the Prospectus Regulation (ESMA/2019/ESMA31-62-1258) (ESMA, Q&A Prospectus Regulation) aimed at promoting ‘common, uniform and consistent supervisory approaches and practices in the day-to-day application of the Prospectus Regulation’. Against this regulatory background, it is worth mentioning that Questions and Answers on the Prospectus Regulation clearly state that ESMA Prospectus Q&A and the ESMA update of the CESR recommendations ‘should be applied to prospectuses drawn up under the Prospectus Regulation to the extent they are compatible with the Prospectus Regulation. The application of both documents can help to facilitate the review process and assist issuers when drawing up prospectuses.’ 13

  Article 13(1)(3), Prospectus Regulation.

14

  Although the CDR does not refer to these definitions, it is worth mentioning that, according to Article 2, Council Regulation (EC) 809/2004 implementing Directive 2003/71/ EC of the European Parliament and of the Council as regards information contained in prospectuses as well as the format, incorporation by reference and publication of such

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

prospectuses and dissemination of advertisements, [2004] OJ L149/3, schedule ‘means a list of minimum information requirements adapted to the particular nature of the different types of issuers and/or the different securities involved’, and building block ‘means a list of additional information requirements, not included in one of the schedules, to be added to one or more schedules, as the case may be, depending on the type of instrument and/or transaction for which a prospectus or base prospectus is drawn up’. 15

  Ferran and Ho (n. 2), 376.

16

  The CDR is based on the technical advice provided by the ESMA on 28 March 2018 (ESMA, Technical Advice under the Prospectus Regulation. Final Report, ESMA31-62-800, 28 March 2018) (ESMA, Technical Advice under the Prospectus Regulation). Following the formal mandate received from the Commission seeking technical advice under the Prospectus Regulation, ESMA published three consultation papers on 6 July 2017, and the Final Report is the follow-up to those consultation papers. 17

  Ashurst, ‘Proposed EU Delegated Regulation on the Format and Content of Prospectuses and their Regulatory Scrutiny’, 2018, https://www.ashurst.com/en/news-and-insights/legalupdates/proposed-eu-delegated-regulation-on-the-format-and-content-of-prospectuses. 18

  European Commission, ‘Request to ESMA for technical advice on possible delegated acts concerning the Regulation on the prospectus to be published’, 2018, https:// ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/ prospectus-regulation-esma-mandate_en.pdf. 19

  ibid.

20

  ESMA, Q&A Prospectus, 9. However, in relation to the ESMA Q&A Prospectus and Recommendations, the National Supervisory Authority is not subject to the ‘comply-orexplain’ requirement set out by Article 16, ESMA Regulation. See Moloney (n. 10), 81; Jan Paul Franx, ‘Disclosure Practices under the EU Prospectus Directive and the Role of CESR’, Capital Markets Law Journal (2007) 2, 296. 21

  ESMA, Q&A Prospectus, 9. See Moloney (n. 10), 80, noting that Q&A and the recommendations device ‘has emerged as an effective and flexible technique for identifying, addressing, and placing on the reform agenda difficulties which emerge in practice with the prospectus regime’ and deliver ‘practical and timely guidance to the market on the operation of the regime’. 22

  In order to avoid duplication of information, item 18.1.6 of Annex I (and related items of other annexes) of the CDR states that ‘If the issuer prepares both stand-alone and consolidated financial statements, include at least the consolidated financial statements in the registration document.’ 23

  If the issuer has changed its accounting reference date during the period for which historical financial information is required, it must provide historical information covering an equivalent period. For example, issuers of an equity security shall include in the prospectus historical financial information covering at least thirty-six months. See CDR, Annex I, item 18.1.2. 24

  CDR, Annex I, item 18.1.1. According to ESMA, Q&A Prospectus Regulation, 30 “The issuer has the right to choose the format of the historical financial information as far as the minimum information required by item 18.1.1 is included”. For example, issuers are allowed to present the historical financial information for the last three years in a columnar format. 25

  CDR, Annex VI, item 11.1.1.

26

  See ESMA, Q&A Prospectus, 19–21; Franx (n. 20), 302.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

27

  European Parliament and Council Directive 2004/109/EC of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market, [2004] OJ L390 as amended by Directive 2013/50/EU, [2013] OJ L294/13. 28

  ESMA, ‘Technical Advice under the Prospectus Regulation’, 49.

29

  ESMA, Q&A Prospectus, 25.

30

  CDR, Annex I, items 18.1.1 and 18.3.1 (and related items of other annexes).

31

  However, the fact that interim information is not audited or has not been reviewed must be disclosed. See CDR, Annex I, items 18.2.1 (and related items of other annexes). 32

  International Standard on Review Engagements 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity (2006) (ISRE 2410). 33

  ibid, 252.

34

  CDR, Annex I, item 18.1.3 (and related items of other annexes).

35

  ESMA, ‘Technical Advice under the Prospectus Regulation’, 39, clarifying that such disclosure requirement applies only to issuers that are not subject to the Audit Directive and Audit Regulation. 36

  European Parliament and Council Regulation (EC) 1606/2002 of 19 July 2002 on the application of international accounting standards, [2002] OJ L243/1 (IAS Regulation). 37

  See Ferran and Ho (n. 2), 382.

38

  The definitions of equivalence and procedural requirements are set out by the Commission Regulation (EC) 1569/2007 of 21 December 2007 establishing a mechanism for the determination of equivalence of accounting standards applied by third country issuers of securities pursuant to Directives 2003/71/EC and 2004/109/EC of the European Parliament and of the Council, [2007] L340/66. 39

  ibid.

40

  ibid.

41

  Schammo (n. 2).

42

  Commission Delegated Regulation (EC) 1289/2008 of 12 December 2008 amending Commission Regulation (EC) 809/2004 implementing Directive 2003/71/EC of the European Parliament and of the Council as regards elements related to prospectuses and advertisements, [2008] OJ L340/17. 43

  Commission Delegated Regulation (EU) 311/2012 of 21 December 2011 amending Regulation (EC) 809/2004 implementing Directive 2003/71/EC of the European Parliament and of the Council as regards elements related to prospectuses and advertisements, [2012] OJ L103/13. 44

  Ferran and Ho (n. 2), 382; Schammo (n. 2), 152–60.

45

  ESMA Prospectus Recommendations, 16.

46

  ibid, 17.

47

  According to the IAS Regulation 8, para. 5, accounting policy is ‘the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements’. 48

  See ESMA, Q&A Prospectus, 18–19.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

49

  IAS Regulation 8, para. 22.

50

  ibid, para. 5.

51

  See ESMA, Q&A Prospectus, 18–19.

52

  ibid.

53

  Recital (58), Prospectus Regulation.

54

  As regards language requirements, see ESMA, Q&A Prospectus, 14–15; ESMA, Q&A Prospectus Regulation, 29. 55

  European Parliament and Council Directive 2013/34/EU of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC, [2013] OJ L182/19 (Accounting Directive). 56

  Schammo (n. 2), 107.

57

  Article 19(2), Prospectus Regulation.

58

  Article 13(2), Prospectus Regulation: ‘the operating and financial review . . . shall be aligned as much as possible with the information required to be disclosed in the annual and half-yearly financial reports referred to in Articles 4 and 5 of Directive 2004/109/EC, including the management report and the corporate governance statement’. 59

  ESMA, Draft Technical Advice on Format and Content of the Prospectus, Consultation Paper (ESMA31-62-532) (2017), 34 (ESMA, Draft Technical Advice on Format and Content of the Prospectus). 60

  This is in line with the ESMA recommendations that highlight the importance of making investors ‘able to compare the information with similar information about the issuer for the period under review’. See ESMA Prospectus Recommendations, 11. 61

  Previously set out by item 3 of Annex I (and related items of other annexes) of the Council Regulation (EC) 809/2004. 62

  ESMA, Draft Technical Advice on Format and Content of the Prospectus, 34.

63

  ESMA Prospectus Recommendations, 8.

64

  ESMA, Draft Technical Advice on Format and Content of the Prospectus, 33.

65

  Articles 19 and 29, Accounting Directive.

66

  Article 18, Recital 9, CDR.

67

  ESMA Prospectus Recommendations, 23, stating that ‘significant financial commitment’ means a binding agreement to undertake a transaction that, on completion, is likely to give rise to a significant gross change. 68

  ESMA, Technical Advice under the Prospectus Regulation, 283.

69

  ibid.

70

  PricewaterhouseCoopers, ‘Complex Financial Histories’, 2017, 4, https://www.pwc.co.uk/ services/audit-assurance/capital-markets-accounting-advisory-and-structuring/insights/ complex-financial-histories.html. 71

  See German Banking Industry Committee, ‘Comments on Commission Proposal on a Delegated Regulation supplementing Regulation (EU) 2017/1129 as regards the format, content, scrutiny and approval of the prospectus and repealing Commission Regulation (EC) 809/2004’, 2018, 3, https://die-dk.de/media/files/181221_DK_CM_Feedback-onDel.Reg.pdf. , noting that the wording of the draft CDR was ambiguous as ‘It can be understood to mean, that not only additional financial information is to be included in the From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

prospectus, but any type of information (“all relevant information”). This is disproportionate in its generality, would overload the prospectus and would not provide any additional benefit for the investor.’ 72

  Association for Financial Markets in Europe, Feedback to the European Commission’s draft Delegated Acts regarding the content and format of Prospectuses under the Prospectus Regulation (EU 1129/2017), 2018, 2, https://ec.europa.eu/info/law/betterregulation/initiatives/ares-2018-2169999/feedback_en?p_id=336521. 73

  ESMA, Technical Advice under the Prospectus Regulation, 292.

74

  See Association français des enterprises privées, Comments on the Commission regarding the format, content, scrutiny and approval of Prospectuses, 2018, 4, https:// ec.europa.eu/info/law/better-regulation/initiatives/ares-2018-2169999/feedback_en? p_id=336521 (Association français des enterprises privées, Comments on the Commission draft Delegated Regulation regarding the format, content, scrutiny and approval of Prospectuses). 75

  According to Article 4a, para. 1, CDR 809/2004: Where the issuer of a security covered by Article 4(2) has a complex financial history, or has made a significant financial commitment, and in consequence the inclusion in the registration document of certain items of financial information relating to an entity other than the issuer is necessary in order to satisfy the obligation laid down in Article 5(1) of Directive 2003/71/EC, those items of financial information shall be deemed to relate to the issue.

76

  German Banking Industry Committee (n. 71), 3.

77

  See ESMA, Q&A Prospectus, 41: The commencement of the period being reported (first day of the period): this is the hypothetical date of the transaction when preparing a pro forma profit and loss account.—The date reported (last day of the period): this is the hypothetical date of the transaction when preparing a pro forma balance sheet. This date is independent from the date of the Prospectus.

Thus, as it refers to the first day of the period, ‘the preparation of a pro forma P&L can often be more complicated than that of a pro forma balance sheet’. See Financial Conduct Authority (FCA), UK Listing Authority (UKLA) Technical Note 633.1. Pro forma financial information (UKLA/TN/633.1), 2015 (FCA, UKLA Technical Note 633.1). 78

  PWC (n. 70), 9.

79

  As mentioned in para. 8.37 above, a non-exhaustive list of indicators of size includes: total assets, revenues, profits, losses. Moreover, ESMA recommends that the appropriate indicators of size should refer to figures from the issuer’s last or next published annual financial statements (see ESMA Prospectus Recommendations, 23). Although ESMA does not provide a clear guidance of this, despite the fact that the issuer can include only consolidated financial statements in the prospectus, it seems clear that the indicators of size shall be based on the issuer’s annual individual financial report. 80

  ESMA, Q&A Prospectus, 41. See also Institute of Chartered Accountants in England and Wales (ICAEW), Guidance for Preparers of Pro Forma Financial Information (TECH 01/15CFF updated), 2015, 6 (ICAEW, Guidance for Preparers of Pro Forma Financial Information), noting that a transaction which has already occurred will include one which

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

has occurred since the beginning of the most recently completed financial period for which historical financial information has been published. 81

  FCA, UKLA Technical Note 633.1..

82

  ibid.

83

  ICAEW, Guidance for Preparers of Pro Forma Financial Information, 10.

84

  According to CDR, Annex I, item 18.4.1, the inclusion of pro forma financial information ‘normally’ satisfies the requirement set out therein. 85

  ESMA, Q&A Prospectus, 41–2.

86

  ibid.

87

  CDR, Annex I, item 18.4.1 (and related items of other annexes).

88

  As regards the potential continuing impact of adjustments on pro forma P&L statement, ICAEW recommends that an issuer interprets the requirement of Annex II, Item 6 in line with the requirements of International Accounting Standard (IAS) 1 Presentation of Financial Statements, IAS 7 Statement of Cash Flows, and IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations for Sale and Discontinued Operations. See ICAEW, Guidance for Preparers of Pro Forma Financial Information, 16. 89

  See n. 77.

90

  CDR, Annex 20, item 1.1.

91

  CDR, Annex 20, item 2.2.

92

  ESMA, Q&A Prospectus, 43–6. See also FCA, UKLA Technical Note 633.1.

93

  As noted by the ESMA, Q&A Prospectus, 44, the pro forma financial information: compared with e.g. the disclosure required under IFRS 3 in the case of an acquisition provides additional material information to investors; i.e. a pro forma P&L and notes on pro forma adjustments and an identification of which pro forma adjustments have a continuing impact on the issuer and those which have not.

94

  FCA, UKLA Technical Note 633.1.

95

  ESMA, Q&A Prospectus, 43–6.

96

  FCA, UKLA Technical Note 633.1.

97

  According to ESMA, Q&A Prospectus, 46: Either a pro forma P&L for N-1 (12 months) as if the transaction happened on 1 January N-1 (according to item 5 b)) and/or a pro forma P&L for N half-yearly financial information as if the transaction had happened on 1 January N (according to item 5 c)) is required. In any case the transaction is reflected in the pro forma P&L for a period of at least 6 months.

98

  ICAEW, Guidance for Preparers of Pro Forma Financial Information, 12.

99

  ibid.

100

  CDR, Annex 20, item 1.1.

101

  See ICAEW, Guidance for Preparers of Pro Forma Financial Information, 15.

102

  ibid.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

103

  ibid: ‘An example might be an adjustment to reflect the net proceeds of a fundraising or disposal, which is made up of the gross proceeds after deducting the costs of the fundraising or disposal.’ 104

  ibid.

105

  Ibid, 16; ESMA Prospectus Recommendations, 22; FCA, UKLA Technical Note 633.1.

106

  ESMA Prospectus Recommendations, 23.

107

  FCA, UKLA Technical Note 633.1.

108

  ESMA Prospectus Recommendations, 23.

109

  ibid.

110

  ICAEW, Guidance for Preparers of Pro Forma Financial Information, 16.

111

  CDR, Annex I, item 18.4.1 (and related items of other annexes).

112

  International Federation of Accountants (IFAC), International Standard on Assurance Engagements 3420, Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus, 2010 (ISAE 3420), para. 28. 113

  ESMA, Q&A Prospectus, 48, contending that: an emphasis of matter paragraph cannot add substantial information from the point of view of investor’s protection because such information can neither add to the information already provided in the basis of preparation of the pro forma information nor add more information regarding the consistent application of the accounting policies of the issuer without becoming a qualification.

114

  ISAE 3420, para. 34.

115

  Armour et al. (n. 2), 176.

116

  ibid, 176.

117

  ibid, 176.

118

  ESMA, Technical Advice under the Prospectus Regulation, 38, 65.

119

  The wording of item 8.1, Annex 6 (and related items of other annexes) of the draft CDR was not entirely clear and has raised criticism during the public consultation on the draft CDR, since it did not clearly state that profit estimates or profit forecasts can be included in a prospectus for non-equity securities on a voluntary basis. See e.g. Association française des entreprises privées, Comments on the Commission draft Delegated Regulation regarding the format, content, scrutiny and approval of Prospectuses, 4, noting that ‘there should be a requirement to provide a statement regarding profit forecasts/estimates published and still outstanding, but no longer valid, only where the issuer has decided to include these forecasts/estimates in the prospectus’. 120

  ESMA, Technical Advice under the Prospectus Regulation, 38, 66.

121

  ESMA, Q&A Prospectus, 26; ESMA Prospectus Recommendations, 13: ‘there is a presumption that an outstanding forecast made other than in a previous prospectus will be material in the case of share issues (especially in the context of an IPO). This is not necessarily the presumption in case of non-equity securities.’ 122

  CDR, Annex I, item 11.1 (and related items of other annexes).

123

  ESMA, Technical Advice under the Prospectus Regulation, 38. See also ESMA Prospectus Recommendations, 13:

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

If an issuer has made a statement other than in a previous prospectus that would constitute a profit forecast or estimate if made in a prospectus, for instance, in a regulatory announcement, and that statement is still outstanding at the time of publication of the prospectus, the issuer should consider whether the forecasts or estimates are still material and valid and choose whether or not to include them in the prospectus. DavisPolk, Changes to the Format and Content of the Prospectus under the New EU Prospectus Regulation—ESMA’s Final Technical Advice and Proposed Guidelines, 2018, 6. 124

  FCA, Technical Note Profit forecasts and estimates (UKLA/TN/340.12) (2017), 2–3.

125

  ibid, noting that ‘A general reference to changes in “assumptions and estimates” is less likely to be sufficient to justify, on its own, that a profit forecast is invalid.’ 126

  ibid.

127

  ESMA, Technical Advice under the Prospectus Regulation, 35.

128

  ESMA Prospectus Recommendations, 12.

129

  ESMA, Q&A Prospectus, 82–4.

130

  ibid, 82.

131

  ibid, 82, mentioning, among others, the following as examples of profit forecasts: ‘The profit/loss is expected to be in line with the previous year’; ‘The profit/loss is expected to be higher/lower than the previous year.’ 132

  ibid, 82.

133

  ibid, 83, highlighting that ‘the scope of the profit forecast definition encompasses forms of words from which profits or losses can be derived even if no particular figure is mentioned and the word “profit” is not used’. 134

  ibid.

135

  ibid, 83.

136

  ibid, 84.

137

  ibid, 84, providing additional examples of statements that normally are not deemed to be a profit forecast (‘We expect our sales/revenue to decline to €560 million’; ‘Our target is to maintain an operating margin of 7% in the medium to long term’). 138

  ESMA Prospectus Recommendations, 12.

139

  ibid.

140

  ESMA, Technical Advice under the Prospectus Regulation, 49.

141

  ESMA Prospectus Recommendations, paras 47–48.

142

  ESMA, Technical Advice under the Prospectus Regulation, 37–8.

143

  Annex I, item 13.2, Council Regulation (EC) 809/2004.

144

  ESMA, Technical Advice under the Prospectus Regulation, 38.

145

  ibid.

146

  ibid.

147

  IFAC, International Standard on Assurance Engagements 3400, The Examination of Prospective Financial Information, 2012, para. 9. 148

  ibid, para 8.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

149

  ESMA, Draft technical advice on format and content of the prospectus, 36.

150

  For a synthesis of argumentations raised by the participants in the public consultation on the draft CDR see ESMA, Technical Advice under the Prospectus Regulation, 38. 151

  ibid.

152

  The Securities and Markets Stakeholders Group (SMSG), ‘Response to the Public Consultation on Prospectus Regulation Level 2’, 2017, 4–5, https://www.esma.europa.eu/ document/smsg-advice-response- public-consultation-prospectus-regulation-level-2. 153

  According to ESMA, audit requirements on profit estimates are ‘unnecessarily onerous and costly’ since profit estimates are past-oriented in so far as they are based on the issuer’s most recent financial period and will shortly be published as part of the issuer’s annual report and accounts. See ESMA, Draft technical advice on format and content of the prospectus, 36. 154

  ESMA, Draft technical advice on format and content of the prospectus, 36.

155

  See, on this point, PWC’s response to the ESMA’s consultation, noting that ‘whilst the auditor is often best placed to perform profit forecast reporting, their ability to perform due diligence work will be constrained by the application of the Audit Regulation 70% fee cap to non-audit services that are “not required by law” ’. PWC, ‘A Simplified Prospectus for Companies and Investors in Europe’, 2018, 2, https://ec.europa.eu/info/law/betterregulation/initiatives/ares-2018-2169999/feedback_en?p_id=336521. 156

  ibid, 38.

157

  Association for Financial Markets in Europe, ‘Feedback to the European Commission’s Draft Delegated Acts regarding the format and content of Prospectuses under the Prospectus Regulation (EU 1129/2017)’ 2018, 2, https://ec.europa.eu/info/law/betterregulation/initiatives/ares-2018-2169999/feedback_en?p_id=336521. 158

  Recital 30, Prospectus Regulation.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Part II The New EU Prospectus Rules, 9 The Contents of the Prospectus: Non-Financial Information and Materiality Victor de Serière From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

Subject(s): Prospectus liability — Securities — Financial regulation — Monetary union

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 195) 9  The Contents of the Prospectus Non-Financial Information and Materiality I.  Introduction 9.01 II.  Principal Rule 9.03 III.  Objective versus Subjective Materiality 9.06 IV.  The Scope of Article 6(1), Prospectus Regulation 9.10 V.  The Materiality Test Generally 9.13 VI.  Materiality in the Context of Prospectus Liability 9.14 VII.  ‘Materiality’ not Defined in the Prospectus Regulation or in Delegated Regulations 9.18 VIII.  The Average Investor 9.22 IX.  Materiality in the Context of the Prospectus Summary 9.25 X.  Materiality in Relation to Risk Factors 9.26 XI.  Materiality Thresholds as Applied by External Auditors 9.30 XII.  Materiality as a Concept in Various Jurisdictions: A High-Level Overview 9.32 1.  The Netherlands 9.33 2.  The US 9.34 3.  Germany 9.36 XIII.  Accommodating Funding Needs 9.39 XIV.  Possibilities for Omitting Sensitive Information 9.42 XV.  Exculpations 9.53 XVI.  Applicable Law and Jurisdiction 9.62 XVII.  Concluding Remarks 9.72

I.  Introduction 9.01  This chapter discusses: •  some general aspects of the new Prospectus Regulation;

1

•  materiality issues; and •  other aspects relevant to issuers and investors relating to the offering of securities where the Prospectus Regulation applies. The risk of exposure to prospectus liability is the context in which this discussion takes place. 9.02  The basic premise underlying the chapter is that an offer is made of securities issued by an issuer situated in an EU Member State whereby (newly to be issued and/or (p. 196) existing) securities are the subject of an international offering in the EU. We will assume the offering of equity securities (either shares or hybrid capital instruments); in case non-hybrid debt instruments are issued, the analysis contained in this chapter will be largely the same. An institution whose securities are on offer will herein be referred to as the ‘issuer’ (and this term will also, where relevant, include selling shareholders in case existing shares are From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

on offer). It is further assumed that the offering will be advised upon by a syndicate of banks comprising (global) coordinators, (lead) managers, and bookrunners, as well as various (listing, selling, paying, and stabilization) agents; these parties will be collectively referred to by the generic term ‘underwriters’. It is finally assumed that a ‘normal’ underwriting structure is used whereby the issuer makes the offer with the assistance of underwriters, whereby the (lead) managers undertake to take up those securities that are not subscribed for in the primary market.

II.  Principal Rule 9.03  Article 6(1), Prospectus Regulation provides that a prospectus: shall contain the necessary information which is material to an investor for making an informed assessment of: (a) the assets and liabilities, profits and losses, financial position and prospects of the issuer and of any guarantor; (b) the rights attaching to the securities; and (c) the reasons for the issuance and its impact on the issuer.2 This is the principal general rule that determines which information must be included in a prospectus. All the various specific rules contained in the Prospectus Regulation and delegated legislation must be deemed subservient to this general rule.3 Even if all such specific requirements have been duly complied with, it is still conceivable that this general rule is breached. Accordingly, after all the boxes have been ticked, the general question must still be answered: what else is possibly relevant to investors that was not yet disclosed? Compliance with this general rule will be a difficult challenge for issuers, their underwriters, and other advisers. 9.04  It is noted that Recital (31), Prospectus Regulation states: As long as they present it in a fair and balanced way, issuers should be given discretion to select the information that they deem to be material and meaningful. (p. 197) The contradiction between Article 6(1), Prospectus Regulation and Recital (31), Prospectus Regulation is glaring. Certainly, the notion as expressed in this recital—i.e. that issuers have a measure of discretion to decide which information is material or not—is firmly revoked by the text of Article 6(1), Prospectus Regulation. It cannot be argued that the meaning and impact of Article 6(1), Prospectus Regulation is mitigated by this recital.4 9.05  Although differently worded, the general rule as stated in Article 6(1), Prospectus Regulation is the same as that contained in its predecessor Prospectus Regulation, the Prospectus Directive5, but with one notable exception: in Article 5, Prospectus Directive, the materiality test was not expressly included; the corresponding provision of the Prospectus Directive requires inclusion of information which ‘is necessary to enable investors to make an informed assessment’ (italics added). The term ‘necessary’ was deemed by the Committee of European Securities Regulators (CESR) (the predecessor of the European Securities and Markets Authority (ESMA)) to constitute a materiality test; the CESR stated that: when information is not material in the context of the securities or the issuer, CESR does not expect issuers to mention it.6 The term ‘necessary’ denotes a rather different concept from the term ‘material’ (the former term is much narrower than the latter), but the difference in wording accordingly appears not to have any meaningful consequence. Certainly, the European legislator did not

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

when promulgating the Prospectus Regulation in 2017, intend to amend the intents and purposes of the clause.

III.  Objective versus Subjective Materiality 9.06  The criterion as used in Article 6(1), Prospectus Regulation is worded as an objective test, but is in one sense not wholly objective: the term ‘material to an investor’ implies that it must be determined whether a given item of information is material from the viewpoint of investors. Particular circumstances of individual investors naturally cannot and need not be taken into account, unless the offering is addressed to a particular, defined group of potential investors sharing certain materially relevant characteristics which must be addressed in the prospectus. Accordingly, the requirement is basically to be read as being ‘material to investors generally’. (p. 198) 9.07  However, if the offering is made to investors in various jurisdictions, and if in one or more of these jurisdictions particular rules of law apply that are of significant interest to investors in such jurisdictions, mention thereof should be made in particular if it is reasonably expected that the offering will to a certain level of magnitude be taken up in these jurisdictions. These rules of law will often amount to offering restrictions, and may accord specific tax treatment to an investment in the securities concerned. In case of a global offering, it is, of course, impossible to take such rules into account as they read in every possibly relevant jurisdiction. 9.08  ‘Exonerations’ in prospectuses to the effect that investors should revert to their own counsel as to the tax treatment of their contemplated investment and as to their ability to subscribe for the securities on offer will not necessarily let issuers and their advisers off the hook. This is a matter to be determined under the law governing prospectus liability issues. Likewise, the question whether an offering is in violation of ‘blue sky’ laws7 or national securities legislation applicable in the jurisdictions concerned cannot simply and definitively be addressed by a statement in the prospectus that the offering may not be deemed made in that jurisdiction if and to the extent in violation of such laws.8 Whether such statement is effective must be determined according to the law of the jurisdiction concerned. To my knowledge there is, however, little case law of offerings being considered illegal in a certain jurisdiction despite inclusion of such statement; this suggests that the problem is of a largely theoretical nature, certainly where ‘outlandish’ jurisdictions are concerned, where subscriptions are unlikely to reach substantive levels. The same comments apply as regards the effectiveness of statements in a prospectus that the offering is only made to professional investors (however, this category of investors may be defined in various jurisdictions, e.g. ‘qualified investors’, ‘qualified institutional buyers (QIBs)’, ‘investment professionals’, etc.). 9.09  In this context, the issue may arise whether transactions, whether effected in the ‘primary’ or in the ‘secondary’ market, are void or voidable if such transactions are entered into in disregard of the type of restrictions referred to in the previous paragraphs. Given that these restrictions are generally phrased as (or may be interpreted as) instructions to underwriters involved in placing the securities concerned, these restrictions should as such generally not lead to nullity or to the risk of nullification. At least, that would be the case under Dutch law, but it seems probable that the same outcome would prevail also in other civil law jurisdictions. Nevertheless, it will always depend on the specific wording of these restrictions and the interpretation thereof according to applicable law whether they have in rem effect (in the sense that a transaction made (p. 199) in violation thereof would be null and void or voidable). Selling restrictions normally follow standardized formats, but deviations will sometimes occur. If they would have such in rem effect, this would create havoc in the capital markets if initial and secondary transactions in the securities concerned would have to be unwound. This analysis then points to an ironic contradiction: to make these clauses have in rem effect would, on the one hand, increase their From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

effectiveness and reduce the likelihood of contravention of local offering rules, whilst on the other hand, giving this effect to selling restrictions would be detrimental to the smooth workings of the capital markets (where finality of transactions is key). These issues will not be explored further in this chapter.9

IV.  The Scope of Article 6(1), Prospectus Regulation 9.10  It is noted that according to its text, Article 6(1), Prospectus Regulation requires inclusion of information that permits an investor to make an informed assessment of certain specified topics relating to the issuer (and to the guarantor, if any). As stated in section II ‘Principle Rule’ (9.03) above, these topics are: assets and liabilities, profits and losses, and financial position and prospects. This appears to be a limitative list, albeit that the topics named can be interpreted as being comprehensive. The question arises nevertheless whether this means that material information that cannot be categorized as falling under one of these topics would be outside of the scope of Article 6(1), Prospectus Regulation. It is doubtful whether such conclusion will be upheld in court. The European legislator did not think it necessary to further specify the topics concerned; it is likely that other topics than those mentioned, such as quality and continuity of (both senior and lower-level) management, the environmental and social impact of the issuer’s business, the quality of its research and development, and other such (somewhat ‘softer’) issues must be deemed included. The narrowly worded approach of the European legislator can most probably be attributed to the fear that further specification might lead to unintended lacunas. 9.11  The limited number of topics listed in Article 6(1), Prospectus Regulation may, however, conceivably still lead to uncertainty as to whether—and if so in which manner—it is necessary to include in the prospectus issues that fall in the (large) grey area between what counts as pertaining to ‘profits and losses’ and ‘financial position and prospects’ on the one hand, and definitively out-of-scope aspects on the other hand. As stated, one could argue that any circumstance, event, or development affecting the issuer will by (p. 200) definition affect the ‘financial position and prospects’ of the issuer. In the end, all issues can be reduced to the effect on the bottom line. Subject to the materiality test, all such issues are thus relevant for inclusion in a prospectus. 9.12  It is particularly noteworthy in this context that issues such as the effect of climate change on the business and prospects of the issuer and the need for the issuer to adapt to more sustainable and/or eco-friendly manufacturing processes are now thought of as increasingly important. As time passes, there will undoubtedly be a more and more coercive pressure for more inclusive discussion of this type of issue in prospectuses, regardless of whether they can be categorized as falling within the scope of Article 6(1), Prospectus Regulation. That may initially perhaps be limited to market expectations or demands from the investment community (e.g. as a consequence of growing concerns of pension fund managers and their constituencies with such issues), but it may be expected eventually to evolve into mandatory legal requirements from the EU regulators, forcing a shift from more generalized signalling of these issues in the risk factors paragraph of prospectuses towards more specific, concrete, data-based analyses of their consequences. We are now at the forefront of these developments, which do not just concern hard-core manufacturing of products such as cars, aircraft engines, marine propulsion, etc., but also the financial sector, and more generally, the service industry at large. Obsolescence of products looms everywhere. But the unfettered right to provide funding and other services to more or less ‘eco-damaging’ undertakings is also at risk, not to mention the changing credit risk for lenders and investors alike caused by these developments and the impact on their customers. The ensuing threat to the profitability of the insurance industry is another such

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

issue. The risks concerned are gradually becoming more specific threats, already now worthy of more attention than generalized statements in risk-factor paragraphs.

V.  The Materiality Test Generally 9.13  The exact meaning and impact of the materiality test is of crucial importance in the context of drafting the prospectus. Applying this test will primarily determine what information is to be included in or, conversely, may be excluded from a prospectus. Generally, advisers entrusted with drafting prospectuses are well advised to err on the side of caution in applying the test. Correct compliance with the rule of Article 6(1), Prospectus Regulation is relevant in at least two differing contexts: that of possible breach of regulatory requirements, and that of prospectus liability. Recital (74), Prospectus Regulation requires Member States to: take necessary steps to ensure that infringements of this Regulation are subject to appropriate administrative sanctions and other administrative measures. Those sanctions and measures should be effective, proportionate and dissuasive and ensure a common approach in Member States and a deterrent effect. (p. 201) Administrative sanctions and other administrative or criminal law consequences of non-compliance with the Prospectus Regulation requirements will not be discussed in this chapter. Instances where issuers or their advisers are administratively or criminally sanctioned do not frequently occur in Europe; in cases of misleading information or fraud, the focus tends to be on recovery of damages by investors rather than on sanctions. The question arises whether in actual practice administrative law sanctions for violations of the Prospectus Regulation requirements are not too languidly pursued by conduct regulatory authorities in Europe. It has to be acknowledged that the preventive effect of threatened administrative or criminal law sanctions against issuers and persons (as opposed to the entities in which they work) responsible for the contents of prospectuses may be seen to be a rather useful addition to the toolkit of regulators in the context of investor protection.10 The effect of more rigorous imposition of these types of sanctions can be severe, and should be further evaluated. A tougher approach by the regulators (which would likely need expansion of the authority to impose these sanctions) would require considerable additional resources, as it would not only require the establishment of prosecutorial teams, but would also in all probability entail that regulators need to take a more substantive approach when scrutinizing and approving a prospectus pursuant to Article 20, Prospectus Regulation.11 In any event, the question needs to be asked whether a more strict approach is actually necessary: for which existing problem is this approach a possible solution? This chapter will not delve further into this complex and important topic. The focus will be on aspects of prospectus liability, a topic that the Prospectus Regulation does not itself specifically address. Interpreting the term ‘material’ in Article 6(1), Prospectus Regulation is a matter of EU law. The EU Court of Justice has the final say on the meaning of this term and on how the materiality test is to be applied. Generally, national courts, when having to judge on this issue, may (and courts in last instance must) request the EU Court of Justice to pronounce its views.12 However, national courts would not need to do that if there can be no doubt as to the correct interpretation of Article 6(1), Prospectus Regulation, or (p. 202) if the EU Court of Justice has already pronounced thereon (a so-called acte clair or an acte éclairé). Since materiality is not defined in the Prospectus Regulation and the EU Court of Justice has not to my knowledge given its views on this issue, and since there is little guidance thereon by the EU legislator (e.g. in delegated regulations), a court would only in rather clear-cut circumstances be likely to take the view that the issue concerns an acte clair.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

VI.  Materiality in the Context of Prospectus Liability 9.14  The notion of materiality in the context of Article 6(1), Prospectus Regulation strictly speaking only addresses the question whether certain information should be included in the prospectus. It does not determine whether or not a failure to include material information, or a failure to present such material information correctly, would lead to prospectus liability. This is because the Prospectus Regulation refrains from addressing the issue of civil prospectus liability,13 and leaves that issue for the national courts to decide upon in accordance with applicable national law. In a sense, this is unfortunate, because if national courts decide on liability issues according to national law, this may lead to widely diverging judgments on prospectus liability claims, depending on the jurisdiction concerned. From this perspective, the statement in recital (27), Prospectus Regulation that ‘harmonisation of the information contained in the prospectus should provide equivalent investor protection at Union level’ seems off the mark. Investor protection is as much dependent on investors’ ability to claim damages as on enforcement of administrative rules. 9.15  The reluctance of the EU legislators to regulate prospectus liability is understandable. Such regulation would require creating supra-national concepts of tort and breach of contract liability applicable across the European Economic Area (EEA), a daunting, if not impossible, task, even if it were limited to the context of securities offerings. 9.16  Under most national laws, a failure to include certain information in a prospectus cannot lead to prospectus liability if the incorrect or incomplete information is not material: how could an investor claim that he would not have made his investment decision if the information on which he bases his claim is not material? In the notorious leading Dutch World Online case concerning prospectus liability,14 the Dutch Supreme Court stated: A judge may qualify an incorrect or incomplete statement as being misleading only if it may reasonably be assumed that that statement, read in the context within which it is being made, is of material interest to the investment decision of the average investor. (p. 203) This is because in that case it is likely that the incorrectness or incompleteness may reasonably influence the investment decision of the average investor.15 The materiality test here is a test under national law. It is to be distinguished from the criterion of Article 6(1), Prospectus Regulation. Can it be argued that the substance of the test under national law is exactly the same as that of the materiality test of Article 6(1), Prospectus Regulation? The answer must be affirmative. But this would mean that although the notion of materiality under EU law is relevant, the materiality test applied in the context of prospectus liability proceedings is likely to be judged upon in the national courts on the basis of national law. This again entails the possibility that the outcome of this test may vary considerably, depending on the jurisdiction concerned. 9.17  The question whether misleading information is sufficiently material to allow a claim based on the doctrine of ‘error’ induced by misleading information is closely linked to but to be distinguished from the causal link requirements that will also need to be met if a prospectus liability claim is to be successful. This concerns the causal link between the misleading information concerned and the decision of the investor to subscribe, and the causal link between the misleading information and the damage that the investor may have incurred by subscribing for the securities concerned. In most EU jurisdictions, these are distinct causation requirements to be fulfilled if a prospectus liability claim is to be successful, even if the legal concepts concerned would in a particular jurisdiction be worded differently or are given different contexts. Clearly, there will be national variation as to when these requirements can be deemed to be fulfilled (one can think of varying

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

degrees of strictness in the application of the ‘sine qua non’ rule), and in this respect too it can be said that EU law has not, or not yet, achieved harmonization of investor protection.

VII.  ‘Materiality’ not Defined in the Prospectus Regulation or in Delegated Regulations 9.18  The term ‘material’ as used in Article 6, Prospectus Regulation is not defined in the Prospectus Regulation. Nor is any specific guidance offered by the EU legislator in respect of its meaning in the context of Article 6, Prospectus Regulation.16 This is not surprising: it is difficult to imagine a practically useful definition or description. Any effort to define is unlikely to provide any further enlightenment than given by way of, for instance, the formula of the Dutch Supreme Court quoted in section VI ‘Materiality in the Context of Prospectus Liability’ (para. 9.14). 9.19  Unlike in other Member States such as England, Germany, and France, in the Netherlands, prospectus liability is based on two distinct legal concepts. If the person (p. 204) claiming prospectus liability is not a consumer, then the general tort rules relating to misleading advertising would constitute the legal basis for claims.17 However, if such a person is a consumer, the rules on unfair commercial practices would be applicable.18 These latter rules implement Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices. This Directive (the CPD) uses a layered materiality standard. An unfair commercial practice is a practice (i) that is contrary to the requirements of professional diligence; and (ii) whereby the economic behaviour of consumers is materially distorted or likely to be materially distorted, and the consumer’s ability to make an informed decision is appreciably impaired, thereby causing the consumer to take a transactional decision that he would not have taken otherwise.19 9.20  The following comments may be made in respect of item (ii) above. If the distortion is required to be material, then a de minimis distortion should not constitute an unfair commercial practice. However, because consumer protection is at stake here, the materiality threshold cannot be set at a high level. If this is correct, then it may be argued that any distortion consumers may conceivably feel ‘in their pockets’ would meet the threshold. The second proviso in item (ii) above—i.e. that they took a decision which they would not have taken otherwise—may be characterized as a sine qua non requirement. The two requirements are inclusive, rather than cumulative: this is because the sine qua non requirement in itself establishes the materiality of the distortion concerned. 9.21  Meanwhile, it must be admitted that literal application of the sine qua non requirement in the context of prospectus liability is problematic. The requirement is simply too restrictive. Why should an investor be deprived of a prospectus liability claim if a correction of the misleading information would not actually have deterred him from subscribing for the securities concerned, but still causes damage simply by virtue of the fact that his securities are worth less than he was originally induced to believe? Accordingly, it is convincingly arguable that the requirement must be broadly interpreted in this context: the term ‘that he would not have taken otherwise’ must be deemed to include: or that he would not have taken on the same terms, or that he in any way acts to reduce the market value of the securities that he has obtained in the transaction concerned. A stricter approach would lead to an unacceptably low level of consumer protection under the CPD.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 205) VIII.  The Average Investor 9.22  The CPD takes the ‘average’ investor to measure whether or not infringement of the prohibited commercial practice has taken place. In the Gut/Springenheide and subsequent judgments,20 the EU Court of Justice has clarified that one has to apply the standard of: the perception of an average consumer of the products or services being advertised who is reasonably well informed and reasonably observant and circumspect.21 Among writers and practitioners, there are subtly different perspectives as to what level of understanding and effort must be deemed to be attributable to a consumer to satisfy the criteria of being ‘reasonably well informed’ and ‘circumspect’. From one perspective, these criteria are not really relevant. Consumers do not read prospectuses. If they were disposed to try, the sheer size, organization, and technical complexity of the information provided therein constitutes a compelling disincentive. The summary as required by the Prospectus Regulation does not really affect the import of these factual observations. Although the EU legislator’s efforts to improve the accessibility of prospectuses are necessary as well as laudable, they do not (and probably cannot) wholly achieve their purpose. Consumers generally follow market perception, as communicated to them by their financial advisers, the press, or the grapevine. These sources are, of course, directly or indirectly determined or influenced by the prospectus contents, and will ultimately more often than not, by the time the offering period opens, be focused on pricing. In that manner, the prospectus contents do influence—albeit not directly—consumers’ investment decisions. Most importantly, the prospectus requirements provide ex post consumer protection: failure to provide material information will generally expose issuers to liability, regardless of whether investing consumers have taken the trouble to try and grasp the portent of the offering; here, we have come full circle back to the causal link discussion mentioned in section VI ‘Materiality in the Context of Prospectus Liability’ (para. 9.14) above, which is not the topic of this chapter. The chapter will not further discuss the above-mentioned interpretation differences as to what intellectual and active attributes an average investor must possess. In the end, these differences are not likely to yield significantly varying results. But it is important to emphasize the relative value of that discussion, as demonstrated here. 9.23  Whether or not the CPD applies, the materiality test using the average investor threshold as described above will be applied, therefore also if an investor instituting a (p. 206) prospectus liability claim is not a consumer as defined in the CPD. At least this would be the position under Dutch law. The idea is that if the offering is general in the sense that it is addressed to both consumers and sophisticated investors, the issuer is in principle barred from denying liability for misleading information on the grounds that the claiming investor is a professional investor. However, this is not to say that a defence based on culpability of a sophisticated investor (‘who should have known better’, so to speak) would not be available to issuers and their advisers. Of course, securities offerings may be limited to a specific group of investors or a specific category of investors. In the case of such limited offering, the courts ought to apply the test taking into account characteristics of the particular group of investors concerned: their investment experience to date, their general knowledge of financial markets, their knowledge about securities such as the ones on offer, etc. It is ironic in this context that the 2008–2009 financial crisis disconcertingly demonstrates that the ability of financial professionals generally to analyse and understand investment risks is not all that impressive. 9.24  In section III ‘Objective versus Subjective Materiality’ (para. 9.06) above, the issue of the effectiveness of selling restrictions is addressed. If an offering is restricted to professional market parties but the restriction is not legally effective so that retail investors also have an opportunity, one way or another, to subscribe for the securities on offer, then presumably retail investors will have the benefit of the same limited protection that such

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

professional market parties would have: arguably, is it reasonable that the issuer bears the risk of retail investors ignoring the relevant warnings in the prospectus concerned?

IX.  Materiality in the Context of the Prospectus Summary 9.25  In the provisions on the prospectus summary (Art. 7, Prospectus Regulation),22 the term ‘key information’ is used, begging the question whether ‘key’ information can be regarded as equivalent to ‘material’ information. Obviously not: other information than key information to be included in a prospectus summary may well be considered ‘material’, whilst such other information would not necessarily be appropriate for inclusion in the summary given the brief, high-level approach that the Prospectus Regulation requires the prospectus summary to maintain. In other words, the materiality test for inclusion of information in the summary is different from that for inclusion (p. 207) of information in the long-form prospectus. One could argue that the key information criterion is stricter than that of materiality. For the purposes of the summary, a ‘double’ test applies: combining materiality per se with the notion of sufficient importance and impact to be included in the summary.

X.  Materiality in Relation to Risk Factors 9.26  The Regulation’s provisions on risk factors (Art. 16, Prospectus Regulation) impose a materiality test along the same lines as Article 6(1), Prospectus Regulation. Only risks which are ‘material for taking an informed investment decision’ may be included in the risk paragraph. This limitation, along with limitations requiring risk factors to be specific to the issuer or to the securities, reflects the EU legislator’s wish, on the one hand, to reduce the risk paragraph in order to make it more relevant and meaningful for prospective investors, and on the other hand, to prevent this paragraph being unduly used to limit the potential liability of the issuer, the guarantor (if any), and the underwriters.23 Materiality of risks must in this context, according to the EU legislator, be measured on the basis of ‘the probability of their occurrence and the expected magnitude of their negative impact’. Interestingly, it is stated that the assessment of the materiality of the risk factors ‘may also be disclosed by using a qualitative scale of low, medium or high’. Obviously, this scaling option is inspired by internal and external auditors’ penchants to qualify risks in this way in their audit reports (preferably using the colour codes green, orange, and red). Perhaps by chance the combined concept of probability and magnitude of negative impact as applied by the EU legislator neatly mirrors the vision of the US Supreme Court, where it states that materiality should be assessed using a probabilistic, expected value framework that balances the probability of the event and its anticipated magnitude.24 9.27  But: how to determine probability? Here one could use an intuitive approach, perhaps bolstered by historic data, or a more mathematical or statistical approach (e.g. using a Bayes theorem-based calculation25). Lack of guidance on this point means that issuers and their advisers are given discretion, although here also they would be well advised to err on the side of caution. Combining the probability of occurrence with the magnitude of potential impact may anyhow be problematic. One may ask: how misleading can the exclusion of a risk factor description be to an investor, (p. 208) if that factor concerned is given a ‘green colour code’ because of high improbability, whilst if the event concerned would materialize, the effect would be to collapse the stock price? Imagine, for instance, the initial public offering (IPO) of a promising young technology company whose stock price is largely dependent upon a certain technical application considered to be unique, and that to a large extent determines the value of the issuer. The risk of that application being made redundant because of a better competing technology having been developed unforeseen elsewhere in the world may be qualified as highly improbable, but if such other technology would nevertheless unexpectedly emerge, the stock price would nosedive towards zero. Another example would be where important patents on which the issuer relies are unexpectedly

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

successfully contested. The conclusion must be that the criteria of probability of occurrence and magnitude of the impact must be gauged cumulatively and independently of each other. 9.28  In its consultation on the Guidelines on risk factors under the Prospectus Regulation, ESMA states that: Although the Prospectus Regulation or these draft guidelines do not define materiality, the IFRS [International Financial Reporting Standards] conceptual framework has defined materiality as: ‘Information is material if omitting it or misstating it could influence decisions that the primary users of general purpose financial reports make on the basis of those reports, which provide financial information about a specific reporting entity. In other words, materiality is an entityspecific aspect of relevance based on the nature or magnitude, or both, of the items to which the information relates in the context of an individual entity’s financial report’ (section 2.11 of the IFRS Conceptual Framework).26 Apparently, the IFRS approach may be regarded to be leading also in the rather broader context than that of financial reporting. In the ESMA Guidelines27 themselves, the materiality concept is not further elaborated on, but the Guidelines (which actually address the national supervisory authorities, not issuers and their advisers) do require these authorities to examine the materiality aspects of risk factors, albeit that they do this in somewhat vague language; see for instance Guidelines 3, 4, and 5. 9.29  Can the risk-factor approach be applied more generally to determine the meaning of the materiality criterion? I think not. The determination of the materiality of risks as a measure for inclusion in a risk paragraph in compliance with Article 16, Prospectus Regulation is an altogether different exercise from that of determining whether any factual information is material enough for inclusion in the prospectus. However, the definition in the IFRS Conceptual Framework is generally useable. The continuing debate on this definition at the level of the International Accounting Standards Board (p. 209) (IASB) and other accounting standards agencies28 signifies how complex the defining issue actually is.29 The discussion on ‘obscuring’ information illustrates this point. Also, information that is obscured may be deemed material if that information so obscured could reasonably be expected to influence decisions of (prospective) investors, according to the IFRS approach. This is strictly speaking not a discussion on whether or not certain information is material. Rather, it is a discussion on whether material information that is included in the prospectus but which is ‘hidden’, either because it is inserted in an unusual place in the prospectus or because it is ‘submerged’ in a barrage of other (immaterial) information, is capable of being misleading. The discussion focuses on whether the term ‘obscured’ can actually be defined so as to provide accountants practical guidance. In connection with this latter aspect, the US Supreme Court pointedly stated that: [I]f the standard of materiality is unnecessarily low, not only may the corporation and its management be subjected to liability for insignificant omissions or misstatements, but also management's fear of exposing itself to substantial liability may cause it simply to bury the shareholders in an avalanche of trivial information— a result that is hardly conducive to informed decisionmaking.30 The discussion on ‘obscuring’ information is distinct from the debate on whether it is possible that although perhaps no individual piece of information is in itself material enough to be misleading, the overall picture (in German literature, this is called the Gesamteindruck31) painted in a prospectus might nevertheless be misleading in a material

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

way. Most likely, Article 6, Prospectus Regulation should be understood as also having been breached if the ‘overall picture’ is misleading in this sense.

XI.  Materiality Thresholds as Applied by External Auditors 9.30  In section X ‘Materiality in Relation to Risk Factors’ (para. 9.26) above, the IFRS Conceptual Framework was mentioned. The IASB draft Conceptual Framework states, somewhat obliquely: Information is material if omitting it or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity, In other words, materiality is an entity-specific aspect of relevance based on the nature and magnitude, or both, of the items to which the information relates in the context of an individual entity’s financial report. (p. 210) Under International Accounting Standard 1 (IAS 1),32 the formula is comparable. The following language is added there: Assessing whether an omission or misstatement could influence economic decisions of users, and so be material, requires consideration of the characteristics of those users. The Framework for the Preparation and Presentation of Financial Statements states . . . that ‘users are assumed to have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence.’ 9.31  This added language is very much aligned with that developed in EU and national civil law; see section VIII ‘The Average Investor’ (para. 9.22) above. In practice, a materiality test is often applied using monetary criteria in external auditors’ examinations of annual financial statements of public companies. Typically, auditors use a threshold of 3– 5 per cent of average income before tax (after eliminating extraordinary income items) in their audits of larger public companies. In addition, supervisory board audit committees of banks usually require external auditors (as well as the internal audit department) to report incidents directly to them above a certain threshold that is significantly lower (e.g., euro 4m or 5m) than that mentioned above.33 This monetary approach in the context of financial reporting that actually by and large serves the same purpose as that regarding information in a prospectus (both lay down factual information relevant to investors when determining whether to invest or divest), has the clear advantage of simplicity and clarity. But it is not useful for the purposes of prospectus liability standards because it may not capture information which in terms of immediate impact falls short of the threshold but which is still material in other than just direct monetary terms. In these cases, it will often be difficult to translate the immediate impact in financial terms from the uncertain but still possibly threatening longer-term effect. An example of this would be prior dealings in the securities on offer by the institution concerned by management or selling shareholders. If one measures such transactions in financial terms, this may not be significant. However, investments or divestments by management may be seen as respectively an act of faith or a significant warning signal. Another such example is the situation where changes other than those to be expected in the management of the institution concerned have occurred. One can also think of the situation where management board members or supervisory board members have conflicts of interest; this may arise in particular in take-over situations, where the acquiring company already wields influence in the decision-making process of the target company. Such take-over situations may well involve the offering of securities in respect of which a prospectus requirement applies. Numerous other examples (p. 211) could be given. In each such case, the directly attributable monetary impact may not be significant (and in any event difficult to quantify), but such circumstances may well be of

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

significant concern to prospective investors. Accordingly, application of a monetary threshold is never in itself sufficient.34

XII.  Materiality as a Concept in Various Jurisdictions: A HighLevel Overview 9.32  A comparative study as to the legal regimes on prospectus liability in various Member States was made in May 2013 by ESMA, with a comparative study by Hopt and Voigt.35 These studies predate the introduction of the Prospectus Regulation, and the national prospectus regimes are, of course, now largely replaced by that regulation and the Delegated Commission Regulations (DCRs). However, national law remains highly relevant for civil law aspects of securities offerings, because the Prospectus Regulation regime does not address civil law issues in this context. In this chapter, a summary overview is given of how the materiality concept is seen in three jurisdictions: the Netherlands, the US, and Germany.

1.  The Netherlands 9.33  As far as materiality as a concept under Dutch law is concerned, there is no more authoritative guidance than the Dutch Supreme Court judgment of 27 November 2009, quoted in section VI ‘Materiality in the Context of Prospectus Liability’ (para. 9.14) above. As already noted, that judgment provides little in terms of practically useful guidance. Dutch legal literature has not accorded much attention to the materiality concept in the context of prospectus liability, but the concept of the average investor, and the question as to what intellectual abilities the average investor can be considered to have, does enjoy some considerable interest in Dutch legal doctrine.36 See also Jan Paul Franx, Chapter 24 ‘The Netherlands’, this volume.

2.  The US 9.34  The following is only a brief summary, belying the complexity of the subject and the wealth of jurisprudence and literature on the (p. 212) subject.37 In the US, section 11 of the 1933 Securities Act states that securities purchasers have ‘an express right of action for damages . . . when a registration statement contains untrue statements of material fact or omissions of material fact’ (italics added). Rule 10-b5, which covers not only prospectuses but also information that may otherwise be disseminated in the context of a securities offering or transaction, prohibits a misstatement or omission of material facts. The US Supreme Court stated in a decision (albeit not concerning prospectus liability per se) that: [T]he question of materiality, it is universally agreed, is an objective one, involving the significance of an omitted or misrepresented fact to a reasonable investor. Variations in the formulation of a general test of materiality occur in the articulation of just how significant a fact must be or, put another way, how certain it must be that the fact would affect a reasonable investor’s judgment. There must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.38 And: . . . if the standard of materiality is unnecessarily low, not only may the corporation and its management be subjected to liability for insignificant omissions or misstatements, but also management’s fear of exposing itself to substantial liability

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

may cause it simply to bury the shareholders in an avalanche of trivial information— a result that is hardly conducive to informed decisionmaking. 9.35  This formula has been repeatedly used and referred to in later Supreme Court39 and lower court cases in the context of prospectus liability, as well as in US Securities and Exchange Commission (SEC) pronouncements on materiality; it seems to have considerable staying power. The formula has been criticized as giving too little practically useful guidance.40 The ‘substantial likelihood’ criterion is vague; it leads to arbitrary judgements. The term ‘reasonable investor’ seems inadequate on the premise that behavioural economics suggest that reasonability of investors is generally a somewhat questionable concept.41 A stock market bubble can make reasonable investors a rare phenomenon.42 In its Basic Inc. judgment, the Supreme Court stated that a materiality test does not: (p. 213) attribute to investors a child-like simplicity [or] an inability to grasp the probabilistic significance of the event in question. This coincides nicely with European law notions of average investors being deemed to be circumspect and prudent (see section VIII ‘The Average Investor’, para. 9.22, in fine).43

3.  Germany 9.36  A clear general overview of German law in relation to prospectus liability is found in Matteo Gargantini, Chapter 19 ‘Competent Courts of Jurisdiction and Applicable Law’, this volume, and again in the conclusion of Advocate-General Timmerman in the World Online case (see n. 14). Again, this concerns the position of German law as at 2009. Unlike in the Netherlands, the concept of materiality is given wide attention in German literature.44 The following quote may give a useful indication of the German approach: Unter berücksichtigung der Zielsetzung der Prospekthaftung, für die Richtigkeit und Vollständigkeit von Angaben zu sorgen, die einer durchsnittlicher, verständiger Anleger braucht, um eine informierte Chancen und Risiken erkennende Anlageentscheidung treffen zu können, lassen sich als wesentlich alle Angaben über Umstände bezeichnen die objektiv zu den wertbildenden Factoren einer Anlage gehören und die einer durchschnittlicher, verständiger Anleger “eher als nicht” bei seiner Anlageentscheidung berüchsichtigen würde.45 It is further stated in literature: Angesprochen sind insoweit diejenigen Angaben, die die wertbildenden Faktoren des Wertpapiers betreffen, darunter namentlich die derzeitige und zu erwartene Ertragslage, finanzielle und rechtlichen Risiken, Produkt- und Markenstrategien, nicht dagegen Angaben technischer Art wie etwa die Zahl der Hinterlegungsstellen oder gänzlich unbedeutende Bilanzpositionen.46 (p. 214) 9.37  It is interesting to see that the ‘eher als nicht’ criterion mentioned in the first quote above closely mirrors the approach under the CPD as advocated in this chapter in section VII ‘Materiality not Defined in the Prospectus Regulation or in Delegated Regulations’ (para. 9.18), in fine. Also noteworthy is that the German approach places specific emphasis on factors that determine the value of the securities on offer (the ‘wertbildenden Faktoren’), whilst, for instance, the Dutch and the US approach as summarized in sections XII.1 ‘The Netherlands’) (para. 9.33) and XII.2 ‘The US’ (para. 9.34) above focus on the relevance of the information concerned to the investor’s investment

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

decision more generally. It would appear, though, that this subtle difference should not lead to significantly varying outcomes. 9.38  German literature also examines at some length the intellectual abilities that ought to be accorded to the so-called ‘durchschnittlicher, verständiger Anleger’ when determining whether information is material in this context or not. Here, one sees the same basic uncertainty as is manifest in other jurisdictions (such as the Netherlands, see section XII.1 ‘The Netherlands’, para. 9.33 above). It seems difficult to strike the right balance between the necessary level of consumer protection on the one hand and paternalism on the other. This aspect will not be further dealt with in this chapter; reference may be made to the discourse on this topic in Gross, Kapitalmarktrecht/WpPG (containing further German references).47

XIII.  Accommodating Funding Needs 9.39  In some instances in the Prospectus Regulation, the EU legislator specifically mentions the importance for issuers of retaining access to funding. In Article 14, Prospectus Regulation, for instance, providing for simplified rules in case of secondary issuances, it is stated that: The Commission shall take into account the need to facilitate fundraising on capital markets and the importance of reducing the cost of capital. In order to avoid unnecessary burdens on issuers [ . . . ], the Commission shall also take into account the information which the issuer is already required to disclose under [the transparency directive] and [the market abuse regulation]. The alleviated regime of Article 15, Prospectus Regulation expresses a similar concern in relation to the EU Growth Prospectus, stating that: . . . the Commission shall calibrate the requirements to focus on [ . . . ] (a) the need to ensure that the EU Growth Prospectus is significantly lighter than the standard (p. 215) prospectus, in terms of administrative burdens and costs to issuers; (b) the need to facilitate access to capital markets for SMEs [small and medium-sized enterprises] and minimise costs for SMEs while ensuring investor confidence in investing in such companies. 9.40  The concern here is, of course, legitimate. According to a 2018 KPMG report, the average cost of debt in Europe fell from 3.4 per cent in 2015 to 2.8 per cent in 2018. But it appears that the cost of funding through the issuance of capital market instruments remains at an undesirably high level. A comparison with the average cost in the US is difficult to make, given the central bank interest rate differences, but it is clear that in terms of funding through the issuance of capital markets instruments, the deeper and more competitive US markets will lead to relatively cheap corporate funding there. 9.41  However that may be, there is a delicate balance to be struck here. Reduced disclosure requirements do not necessarily significantly alleviate issuing costs. It is still necessary to carry out costly due diligence and other preparatory work, and to weigh up which information is to be included and which not; this is an effort which has not so much to do with reduced disclosure requirements, but rather with assessing the risk of prospectus liability. There is an apparent conflict and inherent danger here: it will not take more than a few prospectus liability or fraud incidents to fundamentally undermine the confidence of investors in a light regime. Perhaps a better (or additional) approach to costs could be to permit national governments to develop state-owned agencies that would take over underwriters’ functions and bring SME bonds to the market on the basis of standardized documents and standardized procedures at subsidized fee levels; it would also perhaps be possible to provide fiscal incentives to issuers, enabling their access to capital

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

markets at reduced costs. These approaches have the advantage that investor protection is not jeopardized. They would leave it to the market to determine which level of reduced investor protection is still acceptable.

XIV.  Possibilities for Omitting Sensitive Information 9.42  More often than not in the context of drafting the prospectus, the issue will come up whether the inclusion of sensitive information relating to the company in the prospectus can be avoided. Issuers may be confronted with actual or possibly competitive disadvantages if having to disclose certain information. This can relate to all sorts of issues: the development of new products (whether or not subject to patent applications), threatened litigation, recent mishaps, labour unrest, regulatory inquiries, etc. But not only competitive aspects are relevant. It may also be that inclusion of a certain factual situation in a prospectus gives that situation more prominence and more attention than it objectively deserves. In this connection, one can think of frivolous lawsuits against an issuer or guarantor where the claim is sizable but where the chances of success are zero, or close to zero. It is also possible that there is a real litigation risk but that disclosure thereof might jeopardize the procedural position of the issuer or guarantor. One can (p. 216) also think of regulatory inquiries into possible license breaches where, for instance, the theoretical risk is factory closure or discontinuation of commercial activities, but where realistically the risk is limited to exposure to a manageable administrative fine. Many more examples can be given. 9.43  A distinction has to be made here between information that is sensitive but not material and information that is both sensitive and material. In the former case, the information concerned can be omitted from the prospectus. In the latter case, the facility of Article 18, Prospectus Regulation will have to be invoked. The distinction makes a significant procedural difference. The distinction is, however, blurred, and issuers will therefore sometimes have to make complex judgement calls; complex also because permissible omissions under Article 18, Prospectus Regulation are narrowly formulated. An omission under Article 18, Prospectus Regulation is permissible if: (i) disclosure would be contrary to the public interest;48 (ii) disclosure would be seriously detrimental to the issuer or the guarantor; or (iii) it concerns information of minor importance in relation to a specific offer or admission to trading on a regulated market and would not influence the assessment of the financial position and prospects of the issuer or the guarantor. In relation to the exclusion under (ii), an additional condition is imposed: the omission is not likely to mislead the public with regard to facts and circumstances essential for an informed assessment of the issuer or the guarantor, and of the rights attached to the securities on offer. 9.44  A few comments on Article 18, Prospectus Regulation are offered. In the previous paragraph, it is stated that if sensitive information is not material, it need not be included in a prospectus (unless a specific provision in the Prospectus Regulation regime requires inclusion), and would not fall within the scope of Article 18, Prospectus Regulation. The question arises whether the permitted omission under (iii) should be interpreted as requiring authorization under Article 18, Prospectus Regulation, even if the information concerned is immaterial. This appears arguable if meeting the test of ‘minor importance’ under Article 18, Prospectus Regulation must be interpreted to be the same as not meeting the materiality test of Article 6, Prospectus Regulation. This line of reasoning, however, comes across as unconvincing, and, in the author’s view, it can be safely assumed that these tests do not address the same issue.49

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

9.45  The permitted omissions under Article 18(1) sub (b), Prospectus Regulation are narrowly formulated. Disclosure ‘would be seriously detrimental to the issuer or the guarantor’ (italics added) if the exclusion is to be permissible. Note that the word ‘would’50 is used here, rather than the word ‘could’. This choice of words appears to indicate that (p. 217) there must be a level of certainty that the detrimental effect will as a matter of fact occur, and that the omission would not be permissible if there is only a possibility of detriment. 9.46  In this respect, the text of the clause is more restrictive than the (more or less) corresponding clause in the Market Abuse Regulation51 (the MAR): in clause 17(4) sub (a), MAR, the terminology used is ‘immediate disclosure is likely to prejudice the legitimate interests of the issuer . . .’ (italics added). The difference in terminology in the two Regulations is remarkable, not only because of the notions of certainty and probability discussed above, but also because of the use of the term ‘legitimate interests’ in the MAR clause.52 Is the absence of this term in the Prospectus Regulation clause significant? It may well be. Serious detriment relates primarily to the suffering of losses, financial or otherwise, and detriment may be serious regardless of whether or not this falls within the scope of legitimate interests. Thus, the Prospectus Regulation clause in this sense appears to be more permissive than the corresponding MAR clause. 9.47  In a strict literal interpretation of the Prospectus Regulation clause (i.e. there must be certainty of a serious detriment), its application in practice would be severely limited, and the question arises whether such interpretation is compatible with the intents and purposes of the EU legislator. This is a matter of interpretation where the EU Court of Justice has the final say. However, in first instance, the matter is to be decided upon by the competent authority of the home Member State. A more permissive interpretation by the regulators would arguably be better aligned with the intents and purposes of the clause: where the issuer or the guarantor has a justifiable economic interest in not disclosing sensitive information, that concern ought to be taken into account and honoured, and not be disregarded simply on the basis of the fact that there is perhaps some measure of doubt whether or not the incident or circumstance to which the information relates will materialize. A permissive interpretation seems defensible (even though the differing textual approach in the MAR admittedly indicates otherwise). 9.48  A second comment relates to the additional condition in the PR clause under (ii), that ‘the omission of such information would not be likely to mislead the public with regard to facts and circumstances essential for an informed assessment of the issuer or guarantor, and of the rights attached to the securities to which the prospectus relates’. Note here the use of the term ‘essential’. This seems to indicate that the competent authorities have somewhat more leeway here to permit the omission than in the case that the more inclusive term ‘ material’ had been used.53 Nevertheless, the very fact that information is sensitive from a competitive point of view will in practice often be a rather strong indication that that information is essential to prospective investors. (p. 218) If information is ‘essential’ in the sense of (ii), then by definition omission thereof is likely to mislead the public. All of this would then lead to the conclusion that the possibilities for omission under (ii) are hardly usable at all. That cannot be the intention of the EU legislator, and it can reasonably be argued that this condition is misconceived and ought to be ignored or narrowed down. The same issue arises under Article 17(4) sub (b), MAR, where a similar condition is imposed for postponing the publication of inside information.54 9.49  Under Article 17, MAR, companies may make use of the postponement facility ‘on their own responsibility’. This means that under the MAR, there will in any event be no need to consult the regulators on the admissibility of the delay. This language is not included in Article 18, Prospectus Regulation. This then means that national competent authorities may, at their discretion, impose individual prior regulatory consent requirements or grant a more general dispensation by way of regulation. (In the From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Netherlands, the second option is used.) In the context of the second option, the issuer concerned may find itself having to make a difficult judgement as to whether the omission conditions have been met. Unlike the MAR, the Prospectus Regulation does not specifically require justification of the omission to the competent authority. However, Member States may (and generally will) require such justification, either in the process of prospectus scrutiny and approval pursuant to Article 20, Prospectus Regulation, or by way of an ex post administrative process.55 Whether or not the language ‘on their own responsibility’ is included, issuers misjudging the ability to use the permission of Article 18, Prospectus Regulation are exposed to the risk of both administrative sanctions and civil liability. 9.50  Two comments can be made in conclusion. The first relates to the question as to at which stage information becomes material information subject to the rule of Article 6(1), Prospectus Regulation or becomes information to which the permission regime of Article 18, Prospectus Regulation may be applied. At what stage is information sufficiently concrete to fall under these rules? This question becomes acute, for instance, in cases of product development, or if litigation on substantive disputes is threatened against the issuer or the guarantor. Clearly, there are phases in which it will be unclear whether product development will lead to a realistic window of commercial success, or when it is still too early to gauge whether a litigation threat becomes realistic. Until such time, there will be a possible argument either that the information concerned is too uncertain and therefore as yet immaterial, or that disclosure would be to the serious detriment of the issuer or the guarantor and therefore not required. The same issue arises also with respect to disclosure obligations under the MAR; under both regimes, there (p. 219) is a grey area where the decision to omit (under the Prospectus Regulation) or to delay (under the MAR) may be a difficult judgement call. 9.51  The second comment relates to Article 18(2), Prospectus Regulation. This clause provides that if certain information is required to be included in a prospectus (by virtue of a specific provision to that effect in the Prospectus Regulation or relevant Delegated Commission Regulation (DCR), one must assume) but is ‘inappropriate to the sphere of activity or of the legal form of the issuer or the guarantor, or to the securities to which the prospectus relates’, the issuer will instead need to include equivalent information unless no such information exists. This is a potentially important ‘catch-all’ provision, widening the scope of the specific disclosure requirements in the Prospectus Regulation or relevant DCR if such specific requirements do not accurately address the characteristics of the issuer, its business, or the securities on offer. In other words, if such specific requirement does not ‘fit’ the factual position of the issuer or the securities concerned, that issuer will at its peril ignore such requirement rather than analyse whether Article 18(2), Prospectus Regulation nevertheless requires some form of equivalent disclosure. 9.52  Finally, see also Paola Leocani, Chapter 15 ‘Omission of Information, Incorporation by Reference, Publication, and Language of the Prospectus’, this volume, in relation to the topics discussed in this paragraph.

XV.  Exculpations 9.53  Can a person (be it the issuer, the guarantor or other entity, or even an individual) responsible for the contents of a prospectus exculpate himself? In other words, are limitations of liability permissible under the Prospectus Regulation? The Prospectus Regulation itself addresses this question in its Article 11. Member States are required to ensure ‘that their laws, regulations and administrative provisions on civil liability apply’. As commented on in section VI ‘Materiality in the Context of Prospectus Liability’ (para. 9.14) above, civil law liability is thus made dependent on the national laws of the Member States. In this respect, there is no EU harmonization. The consequences of acting in contravention of the Prospectus Regulation and the relevant CDRs may thus vary considerably, depending on the law of the Member State concerned. In this context, it can make a considerable From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

difference in which jurisdiction prospectus liability proceedings are brought and which law is applied. Principles of private international law will determine this; see section XVI ‘Applicable Law and Jurisdiction’ (para. 9.62) below. 9.54  The language of Article 11(2), Prospectus Regulation lacks precision. If the provisions on civil law liability in a given Member State generally permit exclusions or limitations of liability (as they will often do) in contractual relationships or in extra-contractual relationships (tort), then such limitations must be considered part of the civil liability regime of that jurisdiction; could Article 11(2), Prospectus Regulation accordingly be (p. 220) interpreted as also permitting the same? Limitation of liability undeniably thwarts the intents and purposes of this EU provision. The provision is clearly designed to offer investors protection in case they base (or are deemed to base) their investment decisions on incorrect or incomplete information. That protection might largely fall away if limitation of liability were allowed. Investors would be barred from instituting meaningful damages claims, and the corresponding incentive to issuers and their advisers to scrupulously abide by the EU disclosure rules would be lost. It is arguable that the so-called effet utile principle of EU law comes into play here.56 This chapter will not discuss this principle, save to say that its exact scope is unfortunately far from clear. 9.55  Apart from this principle, it is noted that limited liability protection would anyway not be available in case of breach of provisions of the Unfair Commercial Practices Directive (Directive 2005/29/EU of 11 May 2005). Whilst this directive is expressed to apply in relationships with ‘consumers’, it seems logical to extend the scope of its protection to other categories of investors, particularly in the case of public securities offerings that are not limited to qualified investors (as such term is defined in Art. 2 sub (e), Prospectus Regulation). If this approach is correct, then there is no need to resort to the hazy effet utile principle discussed above. 9.56  On the other hand, an argument could conceivably be developed to the effect that national law does not necessarily undermine the effectiveness of EU law in this instance. This would in particular not be the case if under national law an exculpatory clause can anyhow not be invoked under any circumstances (e.g. if invoking such clause is limited by principles of equity, or if the extent of culpa of the issuer is such as to prevent invocation). Most civil law jurisdictions cater for a defence in one form or another against invocation of limitation of liability clauses, if the result of such invocation would lead to a manifestly unjustifiable result. The argument would then be that if there is uncertainty whether or not a limitation of liability could be invoked, the possibility of civil liability would in itself be sufficient to ensure the effectiveness of the EU prospectus rules concerned. Whilst such an argument could perhaps justifiably be invoked in the context of the Markets in Financial Instruments Directive II (MiFID II), for example57, (where the effectiveness of the relevant EU law provisions is in any event safeguarded by a more or less well developed system of preventive administrative sanctions), it seems less convincing in the context of prospectus liability. 9.57  All in all, arguments developed in legal literature that limitation of prospectus liability is not permissible58 appear more convincing than counterarguments. The EU Court of (p. 221) Justice has regrettably to date not yet been given an opportunity to answer prejudicial questions on this point.59 Practice bears out that limitations of liability are generally not resorted to by issuers, underwriters, and others involved. It is difficult to say whether this is attributable to historically prevailing market practice or to uncertainty as to whether these clauses are effective; inclusion of these types of clauses would certainly trigger investor unease if current market practice would, in a given securities offering, unexpectedly be deserted . . .

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

9.58  The answer to this question on admissibility of limitation of liability protection may be different in case the incorrect or incomplete information included in a prospectus is not originated by the issuer or its advisers, but rather is provided by and attributable to third parties. A prospectus will often contain information which is not generated by the issuer or its advisers, but is purveyed by third parties: auditors’ reports, fairness opinions of investment bankers, legal opinions, valuation reports of real estate valuers, actuarial reports, etc. There appears to be a broad consensus that, in contrast to persons more directly responsible for the contents of a prospectus, these third parties could limit their liability in case their findings as published in a prospectus would prove to be erroneous or incomplete.60 In practice, third parties tend indeed to include exculpatory protection in their contractual relationship with the issuer or its advisors. Given their third-party status, their limited involvement in the securities offering itself, and their limited financial interest in that offering concerned (their interest being disproportionately small relative to the vastly greater amount of their potential liability exposure), it seems logical to allow these exculpations to extend also to the relationship of these third parties with investors. However, this general observation would not necessarily apply to the external auditor’s statements on financial accounts included in a prospectus.61 9.59  If third parties were permitted to exclude or limit their liability, why shouldn’t lead underwriters and issuers likewise also be permitted to exclude liability for the correctness and completeness of third parties’ statements included in a prospectus? In the so-called CoopAG prospectus liability case,62 where investors in bonds were wrongfooted by unduly optimistic audited financial statements of CoopAG, the Dutch Supreme Court acknowledged the possibility for underwriters to exclude their liability (often referred to as a so-called ‘disclaimer’) for information in the (p. 222) prospectus provided by third parties, provided that such disclaimer was specifically stated in the prospectus and it was made clear to which specific part of the prospectus the disclaimer applied. In this particular instance, such disclaimer was not made, but the Supreme Court fortunately used the opportunity in these proceedings to clarify this point. It was reiterated in the Supreme Court’s World Online judgment in 2009.63 In both these proceedings, the highest court did not find it opportune or necessary to revert to the EU Court of Justice to clarify related points of EU law. 9.60  The question posed in paragraph 9.59 above can also conversely be phrased as follows: if the persons responsible for the contents of the prospectus would not be permitted to seek protection under the umbrella of limitation of liability clause, shouldn’t the currently prevailing dictates of maximum investor protection prescribe that that same regime should also apply to third parties? If that approach were taken, the associated risks might discourage tapping the capital markets, and would in any event increase issuing costs. The attraction of pursuing this route is that the risks will ultimately be collectively shouldered by the capital markets community at large: the premiums they pay to their indemnity insurers would ensure that. 9.61  There is one final question on this topic. Were the EU legislators right to desist from regulating these predominantly civil liability questions? Arguably they were, on the basis that creating a supra-national civil liability regime with respect to prospectus issues is likely beyond their remit, and even if it were within their remit,64 it would require developing and adopting a massive and complex set of rules for which political consensus and acceptance would be difficult, if not impossible to obtain. But this is not a complete answer to the question at hand. If it was not possible to devise an overarching liability regime setting aside national law in this limited context, surely it would have been possible to devise and include in the Prospectus Regulation a number of principles to which national laws would be required to submit? Wouldn’t it have been possible to develop principles on, for instance (i) whether or not third parties could exonerate themselves; (ii) whether or not those responsible for the contents of the prospectus are permitted to exonerate themselves; (iii) From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

under which national law liability issues are to be decided upon and which courts have jurisdiction; (iv) issues of causal links between misinformation and damage; and (v) issues of what damages could be claimed in case of such misinformation, to name but a few such generalized topics that could perhaps be addressed without unduly interfering with the national legal regimes involved? This is an admittedly tall but seemingly not impossible order.

(p. 223) XVI.  Applicable Law and Jurisdiction 9.62  The topic of this paragraph is discussed in Matteo Gargantini, Chapter 19 ‘Competent Courts of Jurisdiction and Applicable Law’, this volume; I will here only proffer a few general observations. In section XV ‘Exculpations’ (para. 9.53), it was noted that whether or not a person can be held liable for a misleading prospectus is largely a matter of the applicable national law, rather than of EU law. In the context of prospectus liability, the applicable law is therefore of crucial importance. The applicable law is in turn dependent on the national courts where the prospectus liability claim is submitted. These national courts will apply their own jurisdiction’s private international law rules65 to determine the applicable law. Most, if not all, securities offerings will nowadays be international; offerings that are limited territorially are a thing of the past. This means that many jurisdictions are involved: for example the country where the issuer is located; any country where the prospectus was published or made available; the country where the prospectus was approved under Article 20, Prospectus Regulation; any country where the selling agents perform their placement activities; the country where the investor concerned is located; the country where that investor maintains his securities account to which the securities on offer are credited if the investor’s subscription is successful; the country where the investor maintains his cash account from which the purchase price for the securities concerned was paid out; the country where a relevant giro book-entry transfer system is located; the country where the relevant central securities depositaries (CSDs) and international central securities depositaries (ICSDs)66 are located; the country where the stock exchange is located on which the securities are being admitted to trading; and the country where the securities are physically held in custody. The complex conflicts-of-law issues that arise are in principle governed by Rome II in so far as non-contractual obligations are concerned, and by Rome I in so far as contractual obligations are concerned. The damage caused by contractual or tortuous prospectus misinformation can also arise in various jurisdictions. This may conceivably expose the issuer concerned with the unattractive prospect of multiple litigation in different jurisdictions. 9.63  The question where losses are actually suffered as a consequence of tortuous actions has meanwhile been the subject of a number of judgments by the EU Court of Justice: the Kolassa judgment, the Universal Music judgment, and the Löber judgment.67 In Kolassa, the EU Court of Justice determined that a court can assume competence inter alia if the losses are suffered in the bank account maintained with a bank in that court’s territorial jurisdiction. In Universal Music, the EU Court of Justice clarified that the fact (p. 224) alone that the loss was suffered on a bank account maintained with a bank in the jurisdiction concerned would in itself be insufficient to assume competence. It would be necessary to be able to point to further circumstances to arrive at a conclusion as to the so-called ‘Erfolgsort’ (locus damni68). In Löber, the EU Court of Justice followed these earlier judgments to their logical conclusion in stating that the factual circumstances supporting the determination of the Erfolgsort in this case was in full compliance with the requirements of the Brussels I Regulation.69

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

9.64  Is it possible for an issuer or guarantor to make a choice of applicable law and jurisdiction in relation to matters arising out of the publication of a prospectus and the securities offering in question? Conceivably it might be attractive if an issuer could effectively state that all issues of prospectus liability will be determined according to the law of a specific Member State and may only be adjudicated upon in a specified court of law in that Member State. Initial subscribers to the securities on offer could perhaps be held to that contractual restriction by making that restriction part of the offering terms and conditions. That approach would appear to satisfy the requirements of Article 3, Rome I. For secondary buyers of the securities concerned, of course, that would not work. In that case, the provisions of Article 14(1), Rome II are in any event likely be a stumbling block. These provisions state the principle that a choice of law can only be made after the occurrence of the event giving rise to the damage incurred. This does not apply in cases where ‘all the parties are pursuing a commercial activity’. However, the scope of this exemption is uncertain, since all investment activities can in principle be considered commercial, also (arguably) for instance where the investor is a consumer investing for his personal pension plan. However that may be, the exemption, if usable, would only give limited relief. 9.65  In practice, these choice-of-law and forum clauses are rarely, if ever, used. Presumably, this is in some measure due to historically developed market practice, but also because of severe doubts as to the effectiveness of these clauses in the various jurisdictions in which securities are being offered and invested. 9.66  In connection with exclusive forum choices, the judgment of the EU Court of Justice in Profit v Ossi70 deserves mentioning. In this judgment, the court considered a choice-offorum clause set forth in the terms and conditions applicable to the securities concerned, not just to relate to the relationship between issuer and bondholder with regard to the debt thereby assumed by the issuer, but also more generally to the relationship between the issuer as offeror of the securities concerned and the investor subscribing for these securities. This is remarkable. Because two distinct legal relationships are involved here that cannot be regarded to be one and the same, one may doubt whether the court got this right. It is simply not correct that a choice-of-forum clause unilaterally (p. 225) inserted by the issuer in terms and conditions of securities was intended by the issuer and the subscriber to encompass all aspects of their distinct relationships in relation to the offering concerned. 9.67  However, the judgment is also interesting because—subject to certain stringent conditions—the court acknowledges that contractual provisions such as a choice-of-forum clause agreed between the issuer and the subscriber in the primary market can also be applicable to a subsequent purchaser in the secondary market. This can be accomplished in two ways. One possibility exists if there is an agreed choice-of-forum clause between issuer and first subscriber. Agreement to that choice may be assumed only if the contract executed between the parties in the primary market transaction expressly mentions the acceptance of that choice or contains an express reference to the prospectus in which that choice is specified. The subsequent purchaser may be deemed bound by that original choice if acceptance of the choice is expressed or the prospectus is referenced also in his contract with the subscriber again. If not, then the subsequent purchaser will be bound if he succeeds in the rights and obligations attached to the securities under the applicable national law and the subsequent purchaser had the opportunity to become acquainted with the contents of the prospectus concerned. 9.68  The judgment is not very helpful to the position of the subsequent purchaser and further purchasers of the securities in question. Purchases in the secondary market, especially in the case of quoted securities that are traded in book-entry systems, are not normally documented in the way described above. And under the national law concerned,71 it will often not be possible to construe that the purchaser ‘succeeds’ in the rights of the From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

seller. Also, one has to realize that the conditions imposed by the court would have to be met each time in respect of each subsequent sale. Accordingly, the continued application of the choice-of-forum clause seems unlikely in the case of ordinary trading of the securities concerned on the capital markets. 9.69  There is, however, a second way in which the clause may survive beyond the first primary market transaction: a third party may be deemed bound by the clause if it is established market practice that such a third party is considered to have consented to the choice-of-forum clause. But the court sets quite stringent conditions as to how the existence of such market practice may be determined. It follows that this alternative possibility will be rather difficult to pursue. Generally, the existence of a certain market practice is extremely difficult to prove conclusively. 9.70  The foregoing summarizes how the EU Court of Justice interprets Article 23 of Regulation (EC) 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (this regulation is the predecessor of the regulation referenced in n. 69). The judgment is not very helpful in the context of an effort by an issuer to impose an exclusive choice of jurisdiction with (p. 226) respect to prospectus liability proceedings. This observation arguably applies correspondingly to choice-of-law clauses. Although the provisions of Article 23 of the regulation (Art. 25 of Regulation (EU) 1215/2012) do not actually correspond with those of Article 3, Rome I, the interpretation thereof relating to the question whether contractual arrangements can ‘filter through’ to subsequent purchasers of securities should not vary in any substantive respect. 9.71  So it is not surprising that choices of governing law and exclusive forum are in practice seldom, if ever, made in respect of securities offerings.

XVII.  Concluding Remarks 9.72  This chapter has examined some issues relating to non-financial information to be included in a prospectus under the new Prospectus Regulation regime. The decision whether certain information is required to be included in a prospectus is determined not only by specific inclusion requirements as contained in the Prospectus Regulation and the DCR, but also, and more generally, by application of Article 6(1), Prospectus Regulation: the materiality test. Whether or not this test is met is a matter of EU law. Whether or not a failure to include certain required information leads to prospectus liability will in most, if not all, Member States also be dependent on whether that information is material. However, this latter materiality test concerns a criterion under the applicable national law, rather than under EU law. 9.73  If this analysis is correct, it entails that the new Prospectus Regulation regime falls short of achieving a unified prospectus liability regime across the EU, simply because the national laws of the Member States concerned have not been harmonized. This not only relates to the application of the materiality test, but also to other civil and common law aspects of the law of tort, such as causality requirements. A level playing field in terms of uniform investor protection within the EU accordingly has regrettably not been achieved. This chapter argues that the Prospectus Regulation could have achieved more by requiring Member States to impose certain uniform tort law requirements in their national prospectus liability regimes. This is perhaps something to be considered for a forthcoming Prospectus Regulation 2? 9.74  Another topic addressed in this chapter relates to the possibility for offerors of securities to obtain liability protection by including exoneration clauses in prospectuses. The Prospectus Regulation does not regulate this topic, but the analysis in this chapter shows that the possibilities appear to be severely limited; practice in any event shows that exoneration is seldom (if ever) stipulated. The same applies with regard to efforts of

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

offerors of securities to seek some protection by stipulating exclusive choice-of-law and forum clauses. 9.75  All this appears to be relatively good news in terms of investor protection generally, but the lack of harmonization stands in the way of a unified EU capital markets (p. 227) union, where prospectus liability risks for offerors of securities should ideally be transparent and measurable across the EU borders. Although the (negative) effects on access to the EU capital markets by issuers are rather difficult to quantify, it is certain that a more comprehensively level playing field should enhance such access in significant ways. (p. 228)

Footnotes: 1

  Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 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, [2017] OJ L168/12 (Prospectus Regulation). 2

  Italics added. Generally, with respect to this clause, see J. P. Franx, ‘Prospectusaansprakelijkheid uit onrechtmatige daad en contract’, in: B. Bierens et al. (eds), Handboek Beursgang, Onderneming en Recht, no. 68 (Deventer: Kluwer, 2017) 97 ff. 3

  An exception to this general rule is given in Article 14(2), Prospectus Regulation in relation to prospectuses for secondary issuances where, subject to certain conditions, simplified rules apply. Article 14(2) specifically states that these rules apply ‘by way of derogation’ from Article 6(1), Prospectus Regulation. That language is notably not included in Article 15, which provides for the information to be included in an EU Growth Prospectus; the principle as stated in Article 6(1), Prospectus Regulation thus fully applies to that category of prospectuses. 4

  See also Recital (24), Prospectus Regulation, which likewise seems to imply a measure of flexibility. The above comments apply equally to this recital. 5

  Directive 2003/71/EC of the European Parliament and the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC (Prospectus Directive). 6

  See ‘ESMA Update of the CESR Recommendations’ dated 23 March 2011, ESMA 2011/81, to be found on the ESMA website. 7

  Blue sky laws are typically defined as state law in the US (as opposed to federal law), intended to protect investors from investment fraud. 8

  Typical language may read: ‘Nothing herein constitutes an offer of Securities for sale in the United States or any other jurisdiction where it is unlawful to do so.’ Often, the gist of this language will be repeated in various formulas for other specific jurisdictions, e.g. Canada, Japan, the UK, Australia, and the European Economic Area. Which jurisdictions are specifically addressed in this context seems to be a matter of market practice as much as an analysis of where the offer is likely to be taken up. 9

  See, for a Dutch law analysis, V.P.G. De Serière, Effectenrecht (Deventer: Kluwer, 2018) 938 ff. (in Dutch), with further references; L.J. Hijmans van den Bergh and M.C. Schouten, ‘Grensoverschrijdende biedingen’, in: M.P. Nieuwe Weme et al. (ed.), Handboek Openbaar Bod (Deventer: Kluwer, 2008) 174 (in Dutch). It is noted that the new Prospectus Regulation regime does not require any substantive changes to selling restrictions, but any references to the ‘old’ Prospectus Directive regime must, of course, be changed for new offerings, and Brexit may also require changes to references as currently used. Representative organizations such as The International Capital Markets Association (ICMA) and The Association for Financial Markets in Europe (AFME) are active in developing new standard From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

language for different categories of selling restrictions. See, for AFME, https:// www.afme.eu/globalassets/downloads/publications/20190327-afme-ecm-selling-restrictionsfor-equity-transasctions.pdf. 10

  Sanctions in this context include fines and other criminal law measures that may be taken against persons responsible for a prospectus. 11

  Article 20, Prospectus Regulation actually contains a sanction in the sense that the regulator may withhold its approval of a prospectus; in the context of public offerings, such denial of approval would in all likelihood be disastrous for the intended securities offering, and, of course, issuers would in practice not let matters get that far out of hand. The scrutiny and approval process under Article 20, Prospectus Regulation as further detailed in Article 36 ff., Commission Delegated Regulation (EU) 2019/980 of 14 March 2019, (CDR), however, does not require the competent authority to make an in-depth substantive determination of whether the prospectus is ‘PR compliant’, even though the requirements of Article 36 ff., CDR impose tougher rules for the national competent authorities than under the Prospective Directive regime. Prospectuses will in practice normally contain warning language to that effect, such as: This Prospectus has been approved by the [name competent authority], as competent authority under Regulation (EU) 2017/1129 (the Prospectus Regulation). The [competent authority] only approves this Prospectus as meeting the standards of completeness, comprehensibility and consistency imposed by the Prospectus Regulation. Approval by the [competent authority] should not be considered as an endorsement of the Issuer. Investors should make their own assessment as to the suitability of investing in the Securities. See also Chapter 16 of this publication. 12

  Article 267, Treaty on the Functioning of the European Union (TFEU).

13

  Apart from the provisions of Article 11, Prospectus Regulation, stating generally that Member States ‘shall ensure that their laws, regulations and administrative provisions on civil liability apply to those persons responsible for the information given in a prospectus’. 14

  Dutch Supreme Court, 27 November 2009, NJ 2014/201, point 4.10.4.

15

  Informal translation by the author.

16

  Some ‘clues’ can be found here and there. For instance, Recital (34), Prospectus Regulation states, ‘Any new matter liable to influence the assessment of the investment . . .’ (italics added). 17

  Article 6:194 ff., Dutch Civil Code (DCC). It is somewhat of an anomaly that the rules on misleading advertising apply, since a prospectus should not and cannot be characterized as advertising. 18

  Article 6:193a ff., DCC. A consumer is defined as a natural person not acting in the conduct of a profession or trade. 19

  Articles 2 and 5, Directive 2005/29/EC.

20

  EU Court of Justice, 16 July 1998, C-210/96 (Gut Springenheide) and 19 September 2006, C-356/04. 21

  Interestingly in this connection, International Accounting Standard (IAS) 1 notes that the Framework for the Preparation and Presentation of Financial Statements states that ‘users are assumed to have a reasonable knowledge of business and economic activities and accounting, and a willingness to study the information with reasonable diligence’. This, incidentally, mirrors the view of the Dutch Supreme Court in the World Online judgment that an average investor is a person who may be expected to be willing to examine the

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

information offered to him (see para. 4.10.3 of that judgment, referenced in n. 14). See also section XII ‘Materiality as a Concept in Various Jurisdictions: A High-Level Discourse’ (para. 9.32) below, where the term ‘reasonable investor’ is coined by the US Supreme Court; the use of this broad term has been widely criticized. 22

  Expanded on in Commission Delegated Regulation (EU) 2019/979 dated 14 March 2019. This Regulation provides more detailed information requirements, distinguishing between summaries for respectively non-financial entities issuing equity securities, non-financial entities issuing non-equity securities, credit institutions, insurers, special-purpose vehicles (SPVs) issuing asset-backed securities, closed-end funds, and guarantors. Issuers outside of these categories should follow the requirements for the type of securities that correspond most closely to their securities on offer. The Regulation itself does not offer any specific guidelines as to which information is key and which information does not qualify. The Annexes to the Regulation, however, do provide some insight in that they specify in particular the basic financial information that issuers are required to include in the summary. They do not provide insight into which non-financial information is deemed necessary to be included in the summary. 23

  ESMA also requires issuers to resist general risk factors (e.g. climate change, etc.) that do not have specific relevance to the issuer’s business concerned. See ESMA Guidelines on risk factors under the Prospectus Regulation of 29 March 2019 (reference ESMA31-62-1217), https://www.esma.europa.eu/sites/default/files/library/ esma31-62-1217_final_report_on_guidelines_on_risk_factors.pdf, in particular Guideline VI.1 (ESMA Guidelines on Risk Factors). 24

  Basic Inc. v. Levinson, 485 US, 224 (1988).

25

  See e.g. D.H. Kaye, ‘What is Bayesianism? A Guide for the Perplexed’, Jurismatics Journal (1988) 28, 161 ff; Enrico Guerra-Pujol, ‘Visualising Probabilistic Proof’, Washington University Jurisprudence Review (2014) 39, 71. 26

  See https://www.esma.europa.eu/sites/default/files/library/ esma31-62-996_consultation_paper_on_guidelines_on_risk_factors.pdf. 27

  ESMA Guidelines on risk factors.

28

  In the US, this would be the Financial Accounting Standards Board (FASB) and the Public Company Accounting Oversight Board (PCAOB). 29

  See IFRS, ‘Definition of Material—Amendments to IAS 1 and IAS 8’, October 2018, 19, https://www.ifrs.org/news-and-events/2018/10/iasb-clarifies-its-definition-of-material. 30

  TSC Industries, Inc. v Northway, Inc., 426 US 438 (1976).

31

  H.-D. Assmann and R.A. Schutze, Handbuch des Kapitalanlagerechts (Munich: Verlag C. H. Beck, 2007) 299 ff. 32

  See https://www.ifrs.org/issued-standards/list-of-standards/ias-1-presentation-offinancial-statements. 33

  See e.g. the External Auditors Report in relation to the Nationale Nederlanden NV 2018 Financial Statements, in relation to Aegon NV’s Financial Statements, to be found respectively at https://www.nn-group.com/Investors/2018-Annual-Report.htm, 187 and https://www.aegon.com/contentassets/79a288251c844944933a1b189dc02d82/aegonintegrated-annual-report-2018.pdf, 325. 34

  There is an abundance of literature and research papers on materiality standards as used in the accountancy profession. These will not be discussed in this chapter. For a useful introductory publication see W.F. Messier, N. Martinov-Bennie, and A. Eilifsen, ‘A Review

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

and Integration of Empirical Research on Materiality: two Decades Later’, Auditing: A Journal of Practice and Theory (2005) 24(2), 153 ff. 35

  Report of 30 May 2013, ESMA/2013/619; K.J. Hopt and H.-Chr. Voigt (eds), Prospektund Kapitalmarktinformationshaftung (Tübingen: Mohr Siebeck, 2005). 36

  See De Serière, Effectenrecht, 751 (in Dutch) for an overview.

37

  A clear summary of prospectus liability under US law is to be found in para. 4.1 of the conclusion of Advocate-General Timmerman in the World Online case (see n. 14). One has to bear in mind that this summary reflects the position in 2009, now some ten years ago. 38

  TSC Industries, Inc. v Northway, Inc., 426 US, 438 (1976).

39

  For instance: Basic Inc. v Levinson, 485 US, 224 (1988) and other Supreme Court and lower court cases cited in the publication mentioned in n. 37. 40

  See e.g. K.S. Schulzke and G. Berger-Walliser, ‘Towards a Unified Theory of Materiality in Securities Law’, Columbia Journal of Transnational Law (2017) 56(6), with further references. 41

  See e.g. R.H. Thaler, Misbehaving: the Making of Behavioural Economics (New York: Norton, 2015) 205, 231. 42

  See e.g. Gerding, Bubbles and Financial Regulation (New York: Routledge, 2014): ‘In a bubble, investors become like turkeys merrily enjoying the good food they are being served right up to their rude awakening to their fate at Christmas . . .’ (Free after Taleb’s The Black Swan). 43

  See also W. Joachim, ‘The “Reasonable Man” in United States and German Commercial Law’, Comparative Law Yearbook of International Business (1992) 15, 341 et seq. , who draws a parallel between the US concept of a reasonable man (investor) and the concept, largely comparable, prevailing in Germany. 44

  See e.g. M. Habersack, P.O. Mülbert, and M. Schlitt, Handbuch der Kapitalmarktinformation (2nd edn, Beck Online, 2013) para. 29; H.-D. Assmann and R.A. Schütze, Handbuch des Kapitalanlagerechts (4th edn, 2015) 131 ff; H. Harrer, F. Drinkhausen and H.-M. Eckstein, Handbuch der AG (13th edn, C.H. Beck, 2018) 329. 45

  H.-D.Assman and R.A. Schütze, Handbuch des Kapitalanlagerechts, 4th edn (n. 44), 141. In English: Taking into consideration the objectives of prospectus liability, in order to ensure the completeness and correctness of information an average sensible investor needs to arrive at an informed investment decision in which the chances and risks concerned are recognised, all information with respect to circumstances constituting the factors that determine the value [of the securities concerned] and that an average sensible investor would more likely than not take into consideration when making his investment decision, must be deemed material [Translation by the author]. 46

  In English: In this respect such information must be addressed [in the prospectus] that concern the factors that determine the value of the securities concerned, including in particular past and to be expected earnings, financial and legal risks, product and brand strategies, but on the other hand not technical information such as the

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

number of depositary agents involved or totally unimportant balance sheet items [Translation by the author]. 47

  W. Gross, Kapitalmarktrecht/WpPG (6th edn, C.H. Beck, 2015) para. 21, nn. 35 ff.

48

  Note the parallel with Article 17(5), Regulation (EU) 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (MAR), where a disclosure exemption is created specifically for banks and insurance companies if disclosure would disrupt the stability of a financial institution and of the financial system. 49

  This would appear also to be in line with ESMA’s approach: see Final Report (Technical Advice under the Prospectus Regulation) dated 28 March 2018, ESMA 31-62-800, 210. 50

  In the German text ‘würde’, and in the Dutch text ‘zou’.

51

  Regulation (EU) 596/2014 of 16 April 2014.

52

  The term ‘legitimate interests’ is not defined in MAR. The ESMA Guidelines (ESMA 2016/1478) also provide no definition, but the Guidelines give various examples of situations/circumstances where legitimate interests are involved. 53

  See, in comparison, the discussion on the terms ‘material’ and ‘necessary’ in para. 9.03 above. 54

  See e.g. T.M. Stevens, ‘Openbaarmaking van voorwetenschap’, in: D.R. Doorenbos et al. (eds), Handboek Marktmisbruik (Deventer: Kluwer, 2018), 7.6.4 (in Dutch). 55

  The scrutiny and approval process pursuant to Article 20, Prospectus Regulation, as further detailed in Article 36 ff., CDR, should in theory, when checking the completeness of the prospectus, bear out whether information has been left out. But this is only possible where the competent authority has knowledge of that missing information, which it will usually not have. 56

  See e.g. T. Tridimas, The General Principles of EU Law (Oxford University Press, 2006) 418; K. Van Gerven, ‘Of rights, remedies and procedures’ 37 Common Market Law Review, Issue 3 (2000) 501 ff ; L.A.D. Keus, Europees Privaatrecht (Deventer: Kluwer, 2010) 61; K. Lenaerts and P. Van Nuffel, European Union Law (London: Sweet & Maxwell 2011) 150; R. Meijer, ‘The Rewe/Comet “Doctrine” and its Implications for Dutch Law’, in: A. Hartkamp et al. (eds), Influence of EU Law on National Private Law (Deventer: Kluwer, 2014), 44; D. Busch, MiFID II/MiFIR: Nieuwe Regels voor Beleggingsondernemingen en financiële markten (Deventer: Kluwer, 2015) 211 (in Dutch); De Serière, Effectenrecht, 743 (in Dutch). 57

  Directive 2014/65/EU of 15 May 2015.

58

  The legal debate on this topic has focused more on this question in the context of MiFID II rather than with regard to the Prospectus Regulation. 59

  The EU Court of Justice has in numerous judgments invoked the effet utile principle; however, without clearly defining its scope. See e.g. CJ EU 16 December 1976, 33/76, Jurispr. 1976, 1989 (Rewe); CJ EU 20 September 2001, C-453/99 (Courage/Crehan); CJ EU 30 May 2013, C-604/11, JOR 2013/274 (Genil48/Bankinter). 60

  See amongst others J.P. Franx, Prospectusaansprakelijkheid uit onrechtmatige daad en contract (Deventer, Kluwer 2017) 295 ff (in Dutch); C.H.J. Jansen, E.R. Schreuder, and H.L.E. Verhagen, Prospectusaansprakelijkheid (Amsterdam: NIBE-SVV, 2003) 42 (in Dutch) ; De Seriere, Effectenrecht, 625 ff (in Dutch); 61

  There appears to be a level of divergence between the European and the Anglo-Saxon approach here. For instance, whilst under Dutch law liability of accountants in case of investors’ reliance on audited financial statements is acknowledged, the so-called proximity

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

doctrine may stand in the way of the liability of accountants under Anglo-Saxon law: see e.g. Gupta, Contemporary Auditing (6th edn, 2005) 1009 ff. 62

  Dutch Supreme Court 2 December 1994, NJ 1996/246. The Dutch Supreme Court reiterated this in its World Online ruling (see n. 14). 63

  See n. 14.

64

  One could argue that harmonizing prospectus liability is an essential part of the more general effort to harmonize capital markets rules, and therefore trumps any subsidiarity concern one might otherwise have. 65

  To the extent Regulation (EC) 864/2007 of 11 July 2007 on the law applicable to noncontractual obligations (Rome I) or Regulation (EC) 593/2008 of 17 June 2008 on the law applicable to contractual obligations (Rome II) would not determine the outcome. 66

  These are the central securities depositaries or international securities depositaries, such as Euroclear Bank in Brussels and Clearstream in Luxembourg, used for the settlement of securities transactions. 67

  Respectively: Kolassa C-375/13 of 28 January 2015; Universal Music C-12/15 of 16 June 2016, and Helga Löber C304/17 of 12 September 2018 68

  The place where the damage must be considered to have occurred.

69

  Regulation (EU) 1215/2012 of 12 December 2012.

70

  C-366/13 of 23 April 2015.

71

  The question arises: which national law would that be? Presumably the law determined according to the provisions of Rome I.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Part II The New EU Prospectus Rules, 10 ‘Light’ Disclosure Regimes: The EU Growth Prospectus Andrea Perrone From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

Subject(s): Prospectus — Financial regulation — Monetary union

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 229) 10  ‘Light’ Disclosure Regimes The EU Growth Prospectus I.  Introduction 10.01 II.  The Problems of SME Market-Based Finance 10.07 III.  The EU Growth Prospectus 10.12 1.  The Logic of the EU Growth Prospectus Regulation 10.14 2.  The Perimeter of Regime 10.17 3.  The Content of the EU Growth Prospectus 10.20 IV.  A Critical Evaluation 10.26 V.  An Alternative View 10.31 VI.  Conclusion 10.35

I.  Introduction 10.01  The need for an EU capital market for small and medium-sized enterprises (SMEs) is grounded on multiple reasons. In the aftermath of the global financial crisis and the euro crisis, banking has lost its traditional strength in financing SMEs. By lowering interest rates, the monetary policy implemented by the European Central Bank has dramatically curbed the intermediation margin, making loans significantly less profitable.1 At the same time, the combination of post-crisis prudential requirements and increasing non-performing loans has tied up more capital, raising the cost of traditional commercial banking.2 The resulting shortage of credit has triggered the search for alternative financing channels for SMEs, with a primary focus on capital markets. On the demand side, the recession of the welfare state and the demographic trends in the EU are pushing towards the allocation of household savings in more efficient (p. 230) asset classes.3 In this scenario, capital markets for SMEs may offer better investment opportunities. 10.02  In the light of the above, it is easy to understand why SME financing through capital markets is one of the critical points of the Action Plan for a Capital Markets Union (CMU) issued by the European Commission (EC) on 30 September 2015. After noting that in the EU SMEs ‘receive more than 75% of their external finance from bank loans’ and ‘five times less funding from capital markets’ than US SMEs, the CMU Action Plan envisages a situation where ‘SMEs can raise financing as easily as large companies’ and hopes that the CMU would ‘help to mobilise capital in Europe and channel it to all companies, including SMEs’.4 10.03  Among the different strategies identified to foster SME access to capital markets, the CMU Action Plan has considered the creation of a ‘genuinely proportionate regime for SMEs to draw up a prospectus’.5 Following a long-standing tradition, the CMU Action Plan is explicit in recognizing that prospectus requirements ‘are costly and onerous to produce, particularly for SMEs’ and in binding the EC to modernize the prospectus regime to reduce compliance costs for SMEs. To this aim, Regulation (EU) 2017/1129 (Prospectus Regulation) has introduced a simplified prospectus regime for SMEs, labelled ‘EU Growth Prospectus’6 and aimed at reducing ‘the cost of drawing up standard prospectus’ for companies who

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

‘usually need to raise relatively lower amounts than other issuers’.7 EC delegated acts provide the details of this simplified regime.8 10.04  In designing a tailor-made disclosure regime for SMEs, the Prospectus Regulation requires that a ‘proper balance should be struck between cost-efficient access to financial markets and investor protection’.9 This is not, however, any easy task. Due to their size and short track record, SMEs present ‘specific investment risks’,10 which may be at odds with a simplified prospectus. Moreover, considering that the EU Growth Prospectus is required for offers of securities addressed to retail investors,11 (p. 231) it is unclear which kind of information will be useful in protecting small investors, who usually face high transaction costs in processing and correctly understanding disclosed information.12 10.05  The choice adopted by the Prospectus Regulation following the CMU Action Plan is open to criticism on other points. In recent years, a broad consensus has emerged on the reduced ability of disclosure-based strategies to protect the investor adequately.13 From a different perspective, SME financing through capital markets faces huge structural hurdles which cannot be addressed disregarding the larger picture of the relevant ‘ecosystem’ and lacking a systematic approach.14 10.06  The chapter is organized as follows. After describing the problems of SME marketbased finance in section II, section III presents in detail the discipline of the EU Growth Prospectus. A critical evaluation of the new regime is offered in section IV, with a particular focus on the limits of disclosure. From a policy perspective, section V puts forward an alternative view. Section VI concludes.

II.  The Problems of SME Market-Based Finance 10.07  SME financing through capital markets must contend with substantial structural obstacles that explain why market-based SME finance has traditionally preferred a relationship-based approach (e.g. venture capital and private equity funds), rather than public offerings and arm’s length transactions in open secondary markets. 10.08  Asymmetries of information between issuers and investors and the consequent risks of moral hazard and adverse selection are a common feature of market-based finance. By exploiting superior information on the quality of projects, issuers may underperform, if not abuse investors’ resources. Being unable to distinguish the quality of the projects, investors may, in turn, require an indiscriminate return for both ‘good’ and ‘bad’ projects, thus forcing ‘good’ issuers to pass up profitable investment opportunities. The impact of asymmetries of information, however, is more severe for SMEs (p. 232) than for larger issuers with long track records. Typically, SMEs have less publicly available information and are therefore more ‘opaque’ than large firms.15 Moreover, SME risks tend to be firmspecific and are therefore particularly tricky for outsiders to assess.16 10.09  Also, the firm-specific feature of SME risks makes it challenging to sell SME securities to other investors, thus determining a lack of liquidity in the secondary market that discourages initial investments.17 With the only exception of private equity and private equity-like funds, long-term investors, for their part, tend to avoid engaging in SME secondary markets. Because even ‘a well-performing investment in smaller companies would have little impact on the total returns’, it is not efficient for an institutional investor to devote resources to equity research analysis.18 Overall, SME markets are therefore usually thin, volatile, and more vulnerable to market abuses, thus further undermining public confidence in their efficiency.19 10.10  The compliance with investor protection regulation is an additional obstacle to SME financing through capital markets. Because costs of compliance are fixed, regulatory compliance is more burdensome for smaller than for larger issuers.20 As recognized by EU law makers, in particular ‘the cost of drawing up a standard prospectus can be

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

disproportionately high and might deter [SMEs] from offering their securities to the public’,21 thus hindering the very beginning of a capital market for SMEs. 10.11  Finally, from a political economy perspective market-based finance is exposed to the risks of a severe opposition by the banking sector.22 SME finance through capital markets is an evident competitor of traditional bank lending. The consequent political pressure by incumbents is therefore an element that it would be naïve to overlook.

(p. 233) III.  The EU Growth Prospectus 10.12  Addressing the need for SME capital markets has traditionally adopted a piecemeal approach. Crowdfunding platform regulation aims to channel retail savings to small business.23 Growth markets rules provide a specific regime for SME-focused trading venues.24 The European Long-Term Investment Fund (ELTIF) regulation bridges long-term investment and retail investor protection.25 For its part, the Prospectus Regulation targets costs of compliance related to the drawing up of a prospectus by introducing simplified disclosure requirements for SMEs. 10.13  Simplified disclosure requirements were already provided by the former Directive 2003/71/EC (Prospectus Directive),26 however, with very limited effectiveness. Because the ‘reductions were so small’ and the use of a simplified disclosure could have been ‘regarded as a potential attempt to hide some information’, most of the issuers ‘feared that damage from the possible stigma’ would have been ‘greater than the benefit of the reduced prospectus costs’.27 Learning from this lesson, the provisions on the EU Growth Prospectus mean to ‘create a genuinely proportionate regime for SMEs to draw up a prospectus’,28 striking a proper balance ‘between cost-efficient access to financial markets and investor protection’.29 Along the same lines, the EC is required to specify in delegated acts the content and format of the EU Growth Prospectus, taking into account ‘the need to facilitate access to capital markets for SMEs and minimize costs for SMEs while ensuring investor confidence in investing in such companies’.30

1.  The Logic of the EU Growth Prospectus Regulation 10.14  Under the same rationale underlying the Prospectus Regulation, the EU Growth Prospectus regime is based on the traditional disclosure paradigm. Essentially, the prospectus represents a legal device meant to reduce the asymmetry of information between issuers and investors, enabling the latter ‘to make an informed investment (p. 234) decision’31 and thus ensuring ‘confidence in financial markets’, even ‘among retail investors’.32 10.15  In comparison with the default provisions of the Prospectus Regulation, the EU Growth Prospectus features a ‘proportionate disclosure regime’33 as its specific characteristic. On the issuer side, the proportionality criterion tackles the cost of drawing up a prospectus. The EU Growth Prospectus is required to be ‘a document of a standardised format’, ‘easy for issuers to complete’, and with ‘reduced content’.34 EC delegated acts are mandated to calibrate the relevant requirements, focusing on the ‘proportionality between the size of the company and the cost of producing a prospectus’35 and ‘the various types of information relating to equity and non-equity securities needed by investors’.36 On the investor protection side, the proportionality criterion affects the cost of processing information. The EU Growth Prospectus is required to be ‘written in a simple language’ and to focus on ‘the information that is material and relevant for investors when making an investment decision’. 10.16  While prevailing, proportionality is not the only criterion informing the EU Growth Prospectus regime. As for other types of prospectuses, the mutual recognition regime applies. Once approved, the EU Growth Prospectus is ‘valid for any offer of securities to the public across the Union’.37 Moreover, the proportionality criterion finds a balance in the need to preserve the ‘regulatory branding effect associated with regulated markets’.38 From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Thus, the proportionate disclosure regime for EU Growth Prospectus does not apply ‘where a company already has securities admitted to trading on regulated markets’. By banning a ‘two-tier disclosure standard on regulated markets depending on the size of the issuer’, investors on regulated markets are made confident that ‘the issuers whose securities they invest in are subject to one single set of disclosure rules’.39

2.  The Perimeter of Regime 10.17  The EU Growth Prospectus regime lies in the middle ground between complete exemption from the Prospectus Regulation40 and the fully fledged application of the standard (p. 235) regime. By stating that issuers ‘may choose to draw up an EU Growth prospectus’, the Prospectus Regulation models the simplified regime as an option available to certain small and medium issuers, ‘provided that they have no securities admitted to trading on a regulated market’.41 10.18  While keeping the original definition provided by the Prospectus Directive, the Prospectus Regulation extends the notion of SMEs to include SMEs as defined by MiFID II.42 Thus are considered SMEs companies that, alternatively: (i) ‘according to their last annual or consolidated accounts, meet at least two of the following three criteria: an average number of employees during the financial year of less than 250, a total balance sheet not exceeding 43,000,000 and an annual net turnover not exceeding 50,000,000 euro’;43 or (ii) ‘had an average market capitalisation of less than 200,000,000 euro on the basis of end-year quotes for the previous three calendar years’.44 10.19  Beyond the perimeter set by the above definitions, the EU Growth Prospectus regime applies in three further cases. First, the simplified disclosure regime may be adopted by issuers, other than SMEs, ‘whose securities are traded or are to be traded on an SME growth market’, provided that ‘those issuers had an average market capitalisation of less than EUR 500,000,000 on the basis of end-year quotes for the previous three calendar years’.45 Growth markets for SMEs are SME-focused trading venues introduced by MiFID II46 that the Prospectus Regulation considers ‘a promising tool to allow smaller, growing companies to raise capital’,47 and therefore aims to foster.48 The second extension covers issuers, other than SMEs, with no securities traded on an SME growth market or another multilateral trading facility, and ‘an average number of employees during the previous financial year of up to 499’.49 With a provision that shifts the focus from SMEs to the amount of raised capital, the Prospectus Regulation allows these issuers to draw up an EU Growth Prospectus where the offer of securities to the public ‘is of a total consideration in the Union that does not exceed € 20,000,000 calculated over a period of 12 months’.50 Finally, the EU Growth Prospectus regime applies to offerors of securities issued by SMEs or issuers whose securities are traded on SME growth markets.51 Indeed, from an investor protection perspective, there is no difference between a sale of already issued securities and an offer of newly issued ones.

(p. 236) 3.  The Content of the EU Growth Prospectus 10.20  Following the model of the ordinary prospectus,52 the EU Growth Prospectus consists of a summary, a ‘specific registration document’, and a ‘specific securities note’ presented in a ‘standardised sequence’.53 The EC delegated act provides the content, the format, and the sequence of the relevant information,54 allowing the EU Growth Prospectus to be drawn up as both a single document55 and as separate documents.56 As for the ordinary prospectus, ‘an EU Growth prospectus drawn up as a single document or as separate documents may take the form of a base prospectus’.57

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

10.21  Under the general approach of the Prospectus Regulation, the summary is intended to be a ‘useful source of information’, in particular for retail investors,58 and should focus on the key information needed for the investment decision.59 To this end, and in accordance with the model of the key information document (‘KID’) provided for packaged retail and insurance-based investment products (PRIIPs),60 the summary of the prospectus is required to be ‘short, simple and easy for investors to understand’, written ‘in plain, non-technical language’, and ‘presenting the information in an easily accessible way’.61 To avoid ‘additional burdens or costs on issuers’, the content of the summary is based on information already included in the EU Growth Prospectus.62 The EC delegated act provides the detailed regime and content of the summary.63 10.22  The content of the registration document and the securities note are outlined in general terms by the Prospectus Regulation.64 The EC delegated act provides a more detailed regulation, distinguishing between equity and non-equity securities.65 To assure investors about the ‘accuracy of the information disclosed’, both the registration document and the securities note identify the ‘persons responsible’ for the content of the information provided and the competent authority who approved the prospectus.66 As for any other information, the registration document focuses on the issuer, while the securities note deals with the specific securities offered. (p. 237) 10.23  The registration document covers the ‘strategy and objectives’ of the issuer to allow the investor ‘a clear understanding of the issuer’s activities and the main trends affecting its performance, its organisational structure and material investments’.67 When an equity issuer ‘has published a profit forecast’, this ‘shall be included in the registration document’.68 Together with information about the firm’s corporate governance69 and shareholders,70 the registration document provides ‘a description of the material risks that are specific to the issuer’,71 and the issuer’s financial information and key performance indicators.72 10.24  The securities note discloses the ‘material risks’,73 the terms and conditions of the securities being offered,74 and the detail of the offer or the admission to the trading.75 For equity issuers with a market capitalization above EUR 200,000,000 a working capital statement and a statement of capitalization and indebtedness are also included.76 Where non-equity securities include guarantees, guarantor information is also provided.77 10.25  The relevant information should be presented under the framework established by the EC delegated act to simplify the drafting and the comparability of EU Growth Prospectuses. Considering the need for ‘presenting information in a manner that is coherent and consistent with the different business models’,78 SMEs are allowed to ‘deviate from the order of the information items’ within each section.79 In the risk factors section, however, ‘the most material risks’ should ‘be set out first’.80

IV.  A Critical Evaluation 10.26  The choice made by the Prospectus Regulation to promote SME market-based finance through a ‘light’ disclosure approach appears doubtful. (p. 238) 10.27  From a theoretical perspective, the idea of a simplified prospectus for SMEs is unconvincing. By lessening disclosure requirements, the EU Growth Prospectus is at odds with the reality that SMEs ‘tend to be higher risk’,81 and ‘information asymmetries are often more pronounced for small firms’.82 Not surprisingly, an empirical analysis of the Canadian SME stock market has revealed that the relaxation of regulatory requirement for firms at a very early stage is positively correlated with ‘very poor returns’ for investors,83 thus justifying the reluctance of other jurisdictions to relax disclosure requirements.84

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

10.28  More generally, while the Prospectus Regulation still maintains that disclosure of information is ‘vital to protect investors’,85 the paradigm underlying the EU Growth Prospectus is mostly outdated. Disclosure assumes a rational economic agent and the absence of transaction costs.86 In the real world, however, retail investors face very high information-processing costs87 and are exposed to a wide range of mistakes.88 Because they do not have the time and the skills needed to assess the disclosed information accurately, instead of relying on their own assessment of risk, retail investors rather base their decisions on the advice received by trusted financial intermediaries.89 From a different perspective, behavioural economics has singled out an array of cognitive biases affecting investors’ decisions, leading them towards sub-optimal choices.90 In this context, disclosure may be ineffective and even counterproductive, possibly fostering overconfidence, and thus inducing retail investors to engage in risky investments they can hardly manage.91 (p. 239) 10.29  In SME market-based finance, disclosure does not favour the role of institutional investors either. While institutional investors process the information disclosed by larger issuers and thus contribute to the pricing of the securities,92 the cost of research analysis related to smaller firms normally exceed the expected returns. As it has been acutely noted, for institutional investors ‘analyzing and investing in smaller companies is not worth the time and the effort’.93 10.30  Empirical evidence confirms these theoretical remarks. Focusing on the small offering exemption provided by the Prospectus Directive regime, it has been shown that in both the US and the EU, ‘the correlation between deep capital markets and lax prospectus requirements is non-existent’ and a ‘light’ disclosure does not ‘seem to be correlated with how often SMEs use equity as funding instead of bank funding’.94

V.  An Alternative View 10.31  While being of limited use for the investment decision, the EU Growth Prospectus may be justified as an issuer’s commitment device.95 By binding the issuer to the disclosed information and by imposing the cost of drawing up the document, the EU Growth Prospectus may deter ‘bad’ issuers from entering the market, and thus help to overcome adverse selection. Under this rationale, the current mandatory content of the EU Growth Prospectus should be broadly reviewed and limited to those factors on which the return of the investment more immediately depends (e.g. financial statements, earnings before interest, taxes, depreciation, and amortization (EBITDA) margin, net financial position) or that are more easily verifiable (e.g. business and geographical sources of revenues, litigations and other legal proceedings, material contracts). 10.32  From a broader perspective, SME financing through capital markets is hardly feasible without a fully fledged ‘ecosystem’. As noted in a previous work, such an ecosystem includes ‘market advisory and venture capital, market making-systems, accounting and auditing standards, research on credit and investment information, regulation aimed at investor protection, and various forms of governmental intervention’.96 For this reason, the EU Growth Prospectus regime should be complemented by other institutional strategies. On the model of the Nominated Advisor (Nomad) introduced by the London Stock Exchange’s Alternative Investment Market (AIM), reputational gatekeepers could provide issuers’ prescreening and continuous post-listing monitoring, (p. 240) thus reducing the complexity faced by investors in assimilating, processing, and interpreting information.97 Moreover, market micro-structure trading rules (e.g. call auctions, rather than continuous trading) or other institutional arrangements (e.g. the creation of a single pan-EU exchange for SMEs) could help to develop liquid secondary markets.98

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

10.33  An effective solution, however, is still far to be reached. Gatekeepers’ fees may be disproportionate to the size of SMEs and secondary markets may be too small to provide the needed liquidity. This explains the choice of some Member States for a governmental intervention using the fiscal leverage to channel households’ savings into long-term investment schemes to finance SMEs, such as the ‘individual saving plans’ (piani individuali di risparmio) introduced by the Italian Budget Act 2017.99 10.34  An alternative approach may tackle the opposition of the banking system to SME financing through capital markets100 by involving the EU banking industry in a partnership with the EC aim to create a pan-European credit fund intended for long-term financing of SMEs and featuring units traded on a secondary market with high liquidity. The fund could benefit from the ‘informational assets’ of the banking industry to overcome the otherwise insurmountable obstacles created by information asymmetries between investors and SMEs. Further, the fund could allow retail investments by providing an easy exit through a liquid secondary market. Finally, in contrast to direct lending, the remuneration for the banks could be ensured by several elements: fees for screening activity and arranging contracts; spreads from market-making activities; cost savings from the absence of capital requirements for loss-absorption capacity; and reputational benefits resulting from participation in a pan-European partnership.101

VI.  Conclusion 10.35  SME financing through capital markets is no easy task. On the supply side, adverse selection and lack of liquid secondary markets hamper the access of both retail and professional investors. On the demand side, lack of financial literacy, costs of compliance, and the possibility for the owners to lose control of the firm discourage SMEs from turning to capital markets for funds.102 For both reasons, it is therefore understandable why SMEs are typically financed through banking, and banks maintain a ‘monopolistic’ power over SMEs.103 In this context, the ‘light’ disclosure regime introduced by (p. 241) the Prospectus Regulation is almost toothless. Still shaped by the ‘myth of the informed layman’104 and of little use to institutional investors, the EU Growth Prospectus does reduce compliance costs for issuers, but suffers the lack of an EU-based ‘eco-system’ fully supporting SMEs seeking finance. The picture of SME market-based finance is complicated. This chapter is an attempt to add a few pieces to the puzzle.(p. 242)

Footnotes: *  I am grateful to Davide Capelli for his insightful comments on an earlier draft. Matteo Arrigoni, Brittney Kidwell, and Enrico Restelli provided excellent assistance. Errors remain my own. 1 

Andreas Jobst and Huidan Lin, ‘Negative Interest Rate Policy (NIRP): Implications for Monetary Transmission and Bank Profitability in the Euro Area’, 2016, IMF Working Paper WP/16/172, 22 ff; Stefan Angrick and Naoko Nemoto, ‘Central Banking Below Zero: the Implication of Negative Interest Rates in Europe and Japan’, Asia Europe Journal (2017) 15(4), 417, 420 ff; more in general, Claudio Borio and Leonardo Gambacorta, ‘Monetary Policy and Bank Lending in a Low Interest Environment: Diminishing Effectiveness?’, 2017, BIS Working Papers No. 612. 2

  IOSCO, ‘SME Financing through Capital Markets’, July 2015, FR 11/2015 2 (IOSCO, ‘SME Financing’); David Howarth and Lucia Quaglia, ‘Banking on Stablity: The Political Economy of New Capital Requirements in the European Union’, Journal of European Integration (2013) 35, 333; Renato Maino, Rainer Masera, and Giancarlo Mazzoni, ‘Towards a New Architecture for Financial Regulation: Reform of the Risk Capital Standard (RCS)

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

and Systematically Important Financial Institutions (SIFIs)’, in: Luigi Paganetto (ed.), Recovery after the Crisis. Perspective and Policies (Saarbrücken: VDM, 2011), 82. 3

  Niamh Moloney, ‘Building a Retail Investment Culture through Law: The 2004 Markets in Financial Instruments Directive’, European Business Organization Law Review (2005) 6, 341, 355. 4

  European Commission, ‘Action Plan on Building a Capital Markets Union’, COM 2015, 468 final, 3ff. (CMU Action Plan) . See, however, World Savings Bank Institute (WSBI)— European Savings and Retail Banking Group (ESBG), ‘Financial Systems in Europe and the United States: Structural Differences Where Banks Remain the Main Source of Finance for Companies’, 2015, 3, noting that ‘surveys conducted in the EU and the US present comparable information regarding the preferred source of finance for companies and in particular SMEs’ and that ‘capital markets financing in both the US and EU, and in particular venture capital, represents only a fraction of the sources of finance for these companies (around 1% venture capital in the US and 3% equity in the EU)’. 5

  CMU Action Plan , 12.

6

  Article 15(1), Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 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, [2017] OJ L168/12 (Prospectus Regulation). 7

  Recital (51), Prospectus Regulation.

8

  Article 15(2), Prospectus Regulation.

9

  Recital (51), Prospectus Regulation.

10

  ibid.

11

  Under Article 1(4)(a), Prospectus Regulation, the obligation to publish a prospectus does not apply to ‘an offer of securities addressed solely to qualified investors’. 12

  Paolo Guidici, ‘Independent Financial Advice’, in: Danny Busch and Guido Ferrarini (eds), Regulation of the EU Financial Markets. MiFID II and MiFIR (Oxford: OUP, 2017), 147, 148 ff; Veerle Colaert, ‘Building Blocks of Investor Protection: All-Embracing Regulation Tightens Its Grip’, Journal of European Consumer and Market Law (2017) 6, 229, 230; for a recent survey of the Italian investors’ behaviour, see Monica Gentile, Nadia Linciano, and Paola Soccorso, ‘Financial Advice Seeking, Financial Knowledge and Overconfidence’, 2016, Quaderni di finanza Consob 83. 13

  Omri Ben-Shahar and Carl E. Schneider, More than You Wanted to Know: The Failure of Mandated Disclosure (Princeton, NJ: Princeton University Press, 2014), 169 ff; Steven M. Davidoff Solomon and Claire A. Hill, ‘Limits of Disclosure’, Seattle University Law Review (2013) 36, 599; Henry Hu, ‘Too Complex to Depict? Innovation, Pure Information, and the SEC Disclosure Paradigm’, Texas Law Review (2012) 90, 1601; Tamar Frankel, ‘The Failure of Investor Protection by Disclosure’, University o Cincinnati Law Review (2012) 81, 421; Robert A. Prentice, ‘Moral Equilibrium: Stock Brokers and the Limits of Disclosure’, Wisconsin Law Review (2011) 6, 1059. 14

  Andrea Perrone, ‘Small and Medium Enterprises Growth Markets’, in: Danny Busch, Emilios Avgouleas, and Guido Ferrarini (eds), Capital Markets Union in Europe (Oxford: OUP, 2018), 252, 263. See also IOSCO, ‘SME Financing’ (n. 2); CMU Action Plan (n. 3); European Commission, ‘Economic Analysis’ SWD (2017) 224 final, 46, 49 (Economic Analysis).

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

15

  Facundo Abraham and Sergio L. Schmukler, ‘Addressing the SME Finance Problem’, 2017, World Bank Policy Research Working Paper, 1 ff. 16

  Organization for Economic Cooperation and Development (OECD), ‘Opportunities and Constraints of Market-Based Financing for SMEs’ Report to G20 Finance Ministers and Central Bank Governors’, September 2015, 12 (Market-Based Financing for SMEs). 17

  Jeff Schwartz, ‘The Law and Economics of Scaled Equity Market Regulation’, Journal of Corporation Law (2013) 39, 347, 381–2; Guido Ferrarini and Andrea Ottolia, ‘Corporate Disclosure as a Transaction Cost: The Case of SMEs’, European Review of Contract Law (2011) 9, 363, 370. 18

  Jeff Schwartz, ‘Venture Exchange Regulation: Listing Standards, Market Microstructure, and Investor Protection’, 2018, https://papers.ssrn.com/sol3/papers.cfm? abstract_id=2836725, 7. 19

  IOSCO ‘SME Financing’ (n. 2); OECD, ‘Market-Based Financing for SMEs’ (n. 16), 23; Schwartz, ‘Venture Exchange Regulation’ (n. 18); Schwarz, ‘The Law and Economics of Scaled Equity Market Regulation’ (n. 17), 381–2; Ferrarini and Ottolia (n. 17), 370. 20

  Schwartz, ‘The Law and Economics of Scaled Equity Market Regulation’ (n. 17), 381–2; Ferrarini and Ottolia (n. 17), 370; Luca Enriques and Sergio Gilotta, ‘Disclosure and Financial Market Regulation’, in: Niamh Moloney, Eilís Ferran, and Jennifer Payne (eds), The Oxford Handbook of Financial Regulation (Oxford: OUP, 2015), 529. 21

  Recital (51), Prospectus Regulation.

22

  Andrea Perrone, ‘Capital Markets Union. A Proposal for Action’, 2016, Orizzonti del diritto commerciale, No. 3, 2 ff. (A Proposal for Action); Niamh Moloney, EU Securities and Financial Markets Regulation (3rd edn, Oxford: OUP 2014) 169, 91; Raghuram Rajan and Luigi Zingales, ‘Banks and Markets: The Changing Character of European Finance’, January 2003, Centre for Research in Security Prices (CRSP) Working Paper, No. 546, https://ssrn.com/abstract=389100 or http://dx.doi.org/10.2139/ssrn.389100. 23

  European Commission, Proposal for a Regulation on European Crowdfunding Services Providers (ECSP) for Business, COM(2018) 113 final; European Commission, Proposal for a Directive amending Directive 2014/65/EU on markets in financial instruments, COM(2018) 99 final. 24

  Article 33, Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (MiFID II); Articles 77–79 Commission Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive. 25

  Regulation (EU) 2015/760 of 29 April 2015 on European long-term investment funds.

26

  Article 7(2)(e), Directive 2003/71/EC of the European Parliament and the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC (Prospectus Directive). 27

  European Commission, ‘Impact Assessment’ SWD (2015) 255 final, 35.

28

  CMU Action Plan (n. 3), 12.

29

  Recital (51), Prospectus Regulation.

30

  Article 15(2)(4)(b), Prospectus Regulation.

31

  Recital (7), Prospectus Regulation.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

32

  Recital (83), Prospectus Regulation.

33

  Article 15(1) and Recital (53), Prospectus Regulation.

34

  Article 15(1), Prospectus Regulation.

35

  Article 15(2)(3)(b), Prospectus Regulation.

36

  Article 15(2)(3)(c), Prospectus Regulation.

37

  Recital (51), Prospectus Regulation.

38

  Moloney (n. 22), 93.

39

  Recital (53), Prospectus Regulation.

40

  With reference limited to SME finance, see Articles 1(3), 1(4)(a)–(b),1(4)(c)–(d), 3(2)(b), Prospectus Regulation concerning offers of securities to the public, respectively: (i) whose total consideration in the EU is less than EUR 1,000,000 calculated over a period of twelve months; (ii) which are addressed solely to qualified investors or to fewer than 150 natural or legal persons per Member States other than qualified investors; (iii) whose denomination per unit amounts to at least EUR 100,000 or which are addressed to investors who acquire securities for a total consideration of at least EUR 100,000 per investor for each separated offer; (iv) whose total consideration in the EU is less than EUR 8,000,000 calculated over a period of twelve months, when a Member State decides for this option. 41

  Article 15(1), Prospectus Regulation.

42

  Recital (51), Prospectus Regulation.

43

  Article 2(f)(i), Prospectus Regulation following Article 2(1)(f), Prospectus Directive.

44

  Article 4(1)(13), MiFID II, recalled by Article 2(f)(ii), Prospectus Regulation.

45

  Article 15(1)(b), Prospectus Regulation.

46

  See above n. 24.

47

  Recital (51), Prospectus Regulation.

48

  To the same aim, under the European Parliament legislative resolution of 18 April 2019 (COM(2018)0331—C8-0212/2018—2018/0165(COD)), Article 15(1), Prospectus Regulation has been amended to allow firms seeking an initial public offer with a tentative market capitalization of below EUR 200 million to draw up an EU Growth prospectus. 49

  Article 15(1)(c), Prospectus Regulation.

50

  ibid.

51

  Article 15(1)(d), Prospectus Regulation.

52

  Article 6(3), Prospectus Regulation.

53

  Article 15(1), Prospectus Regulation.

54

  Article 15(2), Prospectus Regulation; Articles 28–33 and Annexes 23–27, Commission Delegated Regulation (EU) 2019/980 of 14 March 2019 supplementing Regulation (EU) 2017/1129 of the European Parliament and of the Council as regards the format, content, scrutiny and approval of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Commission Regulation (EC) No 809/2004 (Delegated Prospectus Regulation). 55

  Article 32(1), Delegated Prospectus Regulation.

56

  Article 32(2), Delegated Prospectus Regulation.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

57

  Article 32(3), Delegated Prospectus Regulation.

58

  Recital (28), Prospectus Regulation.

59

  Article 33(1), Delegated Prospectus Regulation.

60

  Recital (31), Prospectus Regulation.

61

  Recital (32), Prospectus Regulation.

62

  Article 15(2), Prospectus Regulation.

63

  Article 33 and Annex 23, Delegated Prospectus Regulation.

64

  Annex IV and Annex V, Prospectus Regulation.

65

  For equity securities, Articles 28 and 30, and Annexes 24 and 26, Delegated Prospectus Regulation; for non-equity securities, Articles 29 and 31 and Annexes 25 and 27, Delegated Prospectus Regulation. 66

  Annexes 24–27, section 1, Delegated Prospectus Regulation.

67

  Annexes 24 and 25, section 2, Delegated Prospectus Regulation.

68

  Annex 24, section 2, Item 2.7.1, Delegated Prospectus Regulation.

69

  Annexes 24, section 4, Delegated Prospectus Regulation, focusing on ‘the issuer administration and the role of the persons involved in the management of the company’, as well as on ‘the background of the senior manager, their remuneration and its potential link to the issuer’s performance’; analogously, Annexes 25, section 4, Delegated Prospectus Regulation. 70

  Annexes 24 and 25, section 6, Delegated Prospectus Regulation, focusing on conflicts of interest, legal proceedings, and material contracts. 71

  Annexes 24 and 25, section 3, Item 3.1, Delegated Prospectus Regulation.

72

  Annexes 24 and 25, section 5, Delegated Prospectus Regulation.

73

  Annex 26, section 3, Item 3.1, and Annex 27, section 2, Item 2.1, Delegated Prospectus Regulation. 74

  Annex 26, section 4, and Annex 27, section 3, Delegated Prospectus Regulation.

75

  Annex 26, section 5, and Annex 27, section 4, Delegated Prospectus Regulation.

76

  Annex 26, section 2, Delegated Prospectus Regulation.

77

  Annex 27, section 5, Delegated Prospectus Regulation.

78

  Recital (18), Delegated Prospectus Regulation following the remarks of respondents to the public consultation launched by the European Securities and Markets Authority (ESMA): see ESMA, Final Report—Technical Advice under the Prospectus Regulation, 2018, 152 n. 645, http://www.esma.europa.eu. 79

  Article 32(4), Delegated Prospectus Regulation.

80

  Annexes 24–26, section 3, Item 3.1, Delegated Prospectus Regulation; Annex 27, section 2, Item 3.1, Delegated Prospectus Regulation. 81

  Niamh Moloney, ‘The Legacy Effects of the Financial Crisis on Regulatory Design in the EU’, in: Elis Ferran, Niamh Moloney, Jennifer G. Hill, and John C. Coffee Jr (eds), The Regulatory Aftermath of the Global Financial Crisis (CUP 2012), 179. 82

  European Commission, ‘Economic Analysis’ (n. 14); see also Perrone, ‘SME Growth Markets’ (n. 14), 262.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

83

  Cécile Carpentier and Jean-Marc Suret, ‘Entrepreneurial Equity Financing and Securities Regulation: An Empirical Analysis’, International Small Business Journal (2012) 30, 41. 84

  Elif Härkönen, ‘Crowdfunding and the Small Offering Exemption in European and US Prospectus Regulation: Striking a Balance between Investor Protection and Access to Capital?’, European Company and Financial Law Review (2017) 14, 121, 137. 85

  Recital (3), Prospectus Regulation.

86

  Niamh Moloney, How to Protect Investors. Lessons from the EC and the UK (Cambridge: CUP, 2010), 290 (How to Protect Investors) (noting that the assumption under-cutting the regime ‘has been that the retail investor is essentially rational, willing to decode disclosure, receptive of regulatory efforts to increase the volume, and improve the clarity of disclosure, and, when armed with appropriate disclosure, able to navigate an expanding universe of products and services and to exert market discipline’). 87

  Anita K. Krug, ‘Investors’ Paradox’, Journal of Corporation Law (2017) 42, 102, 124; Omri Ben-Shahar and Carl E. Schneider, ‘The Failure of Mandated Disclosure’, 159 University of Pennsylvania Law Review (2011) 647, 687; Bevis Longstreth, ‘The Profile: Designer Disclosure for Mutual Funds’, Brooklyn Law Review (1988) 64, 1019, 1031. The argument is, however, hardly new: Homer Kripke, ‘The Myth of the Informed Layman’, Business Law (1973) 28, 631, 632–3. 88

  Robert Baldwin, Martin Cave, and Martin Lodge, Understanding Regulation. Theory, Strategy, and Practice (2nd edn, Oxford: OUP, 2012), 120; 89

  Moloney, How to Protect Investors (n. 85), 86 f.; more in general, see Peter Mülbert and Alexander Sajnovits, ‘The Element of Trust in Financial Markets Law’, German Law Journal (2017) 18, 6. 90

  Moloney, How to Protect Investors (n. 85), 68 ff.; Mads Andenas and Iris H-Y Chiu, The Foundations and Future of Financial Regulation (London: Routledge, 2014), 242 ff. For a recent empirical analysis by the Italian securities supervisor, Consob, see Consob, ‘Report on Financial Investments of Italian Households—Behavioral Attitudes and Approaches’, 2019. 91

  Moloney, How to Protect Investors (n. 85), 291 ff.

92

  Zohar Goshen and Gideon Parchomovsky, ‘The Essential Role of Securities Regulation’, Duke Law Journal (2006) 55, 711, 758 93

  Schwartz, ‘The Law and Economics of Scaled Equity Market Regulation’ (n. 17), 6 ff.; Perrone, ‘SME Growth Markets’ (n. 14), 262. 94

  Härkönen (n. 84), 137.

95

  Edward B. Rock, ‘Securities Regulation as Lobster Trap: A Credible Commitment Theory of Mandatory Disclosure’, Cardoza Law Review (2002) 23, 675; Troy A. Paredes, ‘Blinded by the Light: Information Overload and Its Consequences for Securities Regulation’, Washington University Law Review (2003) 81, 417, 471 ff. 96

  Perrone, ‘SME Growth Markets’ (n. 14), 263.

97

  In general, Mülbert and Sajnovits (n. 89), 6.

98

  Perrone, ‘SME Growth Markets’ (n. 14), 264 ff.

99

  Article 1(88)–(114), Italian Budget Act 2017, Act of 11 December 2016, n. 232.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

100

  See section II ‘The Problems of SME Market-Based Finance’ (para. 10.07), text and n. 22. 101

  For a more detailed presentation of the proposal set forth by research group at the Università Cattolica del Sacro Cuore of Milan, see Perrone, ‘A Proposal for Action’ (n. 22), 2 ff. In more general terms, a ‘more centralised approach to tackling SMEs’ financing and growth concerns’ is suggested also in Association for Financial Markets in Europe, ‘Bridging the Growth Gap’, 2015, 33. 102

  Abraham and Schmukler (n. 15), 4.

103

  Rajan and Zingales (n. 22), 11.

104

  Kripke (n. 87).

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Part II The New EU Prospectus Rules, 11 ‘Light’ Disclosure Regimes: Secondary Issuances Pim Horsten From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

Subject(s): Prospectus

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 243) 11  ‘Light’ Disclosure Regimes Secondary Issuances I.  Introduction 11.01 II.  Background 11.02 1.  The Capital Markets Union 11.02 2.  The Prospectus Directive Review Consultation 11.07 III.  The Case for a Light Disclosure Regime for Secondary Offerings or Listings 11.10 1.  Introduction 11.10 2.  The Transparency Directive 11.12 3.  The Market Abuse Regulation 11.14 4.  Options for a Light Disclosure Regime 11.15 IV.  Scope 11.25 1.  Introduction 11.25 2.  Secondary Issuances: What are These, and by Whom? 11.26 3.  Offers or Admissions of What Securities? The Same? Same Class? Fungible? 11.28 V.  Content—What Information is not Specifically Prescribed? 11.39 1.  Level 1 Text 11.39 2.  Level 2: Commission Delegated Regulation and ESMA Advice 11.45 3.  Conclusion on Content 11.57 VI.  Conclusion: Use in Practice? 11.58

I.  Introduction 11.01  This chapter is in essence about negatives: when is what not required? It is more intuitive to write about what does need to be done, and when. A light disclosure regime implies that certain information that would otherwise be prescribed to be disclosed by being included in the prospectus now is not. That means omission of content. While important once one gets to actually preparing a prospectus with light disclosure only, laboriously setting out all the items that may be left out (or at least, that are not listed in the relevant annex to the relevant Commission Delegated Regulation1 supplementing the new Prospectus Regulation2) is perhaps not the most interesting read. A question that precedes the question of content is that of scope. In which circumstances is full disclosure not prescribed, in the sense that (p. 244) certain information is not prescribed to be included in the prospectus? And why would that be? These questions are more interesting to look into. This chapter therefore focuses on the background to the new regime for light disclosure for secondary issuances, and the case for it, and analyses the scope thereof. As for content (what information is not specifically prescribed?), this is described in brief thereafter. The chapter concludes with yet another question, which is whether it can be

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

expected that the regime allowing for light disclosure in case of secondary issuances will be much used in practice.

II.  Background 1.  The Capital Markets Union 11.02  In 2003, the Prospectus Directive3 was adopted and published, and it has applied since July 2005. It has been revised several times, including in 2010 when, inter alia, a proportionate disclosure regime was introduced for statutory rights issues. 11.03  The proportionate disclosure regime for statutory rights issues was little used in practice. Statutory pre-emptive rights are often excluded, because companies typically do not know where each and every shareholder is resident. This could be anywhere in the world, including many countries where the company does not want to make or be deemed to be making a public offer of securities, because it does not want to have to comply with the requirements for making a public offer there or because it is not aware of the requirements therefor, and has no intention and no interest offering there. Another reason why the proportionate disclosure regime for statutory rights issues was little used is that underwriters of securities offerings, or the sponsors of admissions to trading, were concerned that the general disclosure standard of Article 5, Prospectus Directive might still be relevant. And last but not least, many larger initial public offerings (IPOs) or securities offerings by European companies have a US tranche under which the securities are offered to US investors. Even if not to retail investors in the US (which would require a Securities and Exchange Commission (SEC) registration, including an SEC-approved prospectus), but to qualified institutional buyers only under Rule 144A, underwriters would expect the disclosure to meet relevant US standards, backed up by so-called 10b-5 letters from US counsel confirming that—in brief—in its view the information in the prospectus is materially correct and not misleading and does not omit anything material for investors. This means that other jurisdictions’ disclosure requirements (in this case, those of the US) are added on to the disclosure requirements under EU law, i.e. the lighter disclosure alone will not be sufficient. As we will see in section VI ‘Conclusion: Use (p. 245) in Practice?’ (para. 11.58), these considerations will likely remain relevant under the new Prospectus Regulation as well. 11.04  Leaving aside the long-standing 10 per cent4 exemption under Article 4(2)(a), Prospectus Directive for privately placed secondary issues of securities that needed to be admitted to trading, the 2010 amendment of the Prospectus Directive had brought no alleviation of prospectus requirements for secondary issuances in general, however. 11.05  In September 2015, the European Commission published the final version of its Action Plan on Building a Capital Markets Union (CMU).5 In the introduction, the Commission stated that its top priority is to strengthen Europe’s economy and stimulate investment to create jobs, and that to strengthen investment for the long term, Europe needs stronger capital markets. It was observed that while the European economy is as big as the US one, Europe’s equity markets are less than half the size, and its debt markets less than one-third of those of the US. Stronger capital markets should complement Europe’s strong tradition of bank financing. 11.06  A Capital Markets Union was to be delivered through a combination of steps. One of these was to modernize the Prospectus Directive to, inter alia, make it less costly for businesses to raise funds publicly. The Commission wrote that public offers of debt or equity instruments are the principal funding route for mid-sized and large companies seeking to raise in excess of EUR 50 million. Public markets offer access to the widest range of funding providers and provide an exit opportunity for private equity. For firms seeking funds, the ‘gateway’ to public markets, as it is described, is the prospectus, shortly referred to as a legally required document presenting all information about a company needed by From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

investors to make informed decisions about whether to invest or not. But so the Commission observed, prospectuses are costly and onerous to produce and typically run to hundreds of pages, can be complex for investors and excessively detailed, with the information that is critical for investment being hard to discern. The Commission therefore decided to ‘modernize’ the Prospectus Directive.

2.  The Prospectus Directive Review Consultation 11.07  In the context of CMU, the Commission ran many consultations, including one on the review of the Prospectus Directive. The consultation document on this was published in February 20156 and the consultation ran until May 2015. The two key objectives underpinning the Prospectus Directive were investor—‘and consumer’—protection and market efficiency. For the first objective, the prospectus should, in (p. 246) an easily analysable and comprehensible form, contain all the information which is necessary to enable investors to make an informed assessment of the issuer and the securities offered or admitted to trading on a regulated market. For the second, the Prospectus Directive aimed to facilitate the widest possible access to capital markets by companies across the EU, through requiring a common form and content of the prospectus and the EU-wide passport, making a prospectus approved by the competent authority of one Member State valid for offers to the public or admission to trading on regulated markets in the entire EU without additional scrutiny by the authorities of other Member States.7 11.08  In this consultation document too, the observation was made that the prospectus is the ‘gateway’ for firms seeking funding on the capital markets, and that most firms seeking such funding must produce one. The Commission stressed that ‘it is crucial that it does not act as an unnecessary barrier to the capital markets’, as ‘it should be as straightforward as possible for companies [ . . . ] to raise capital throughout the EU’. The review of the Prospectus Directive was to seek to ensure that a prospectus is only required when it is truly needed and that the information that must be included in prospectuses is useful and not burdensome to produce. The Commission observed several shortcomings of the Prospectus Directive, including that prospectuses had become ‘overly long’ documents, which has brought into question the effectiveness of the Prospectus Directive from an investor protection perspective. The objective of the Prospectus Directive review was stated to be to reform and reshape the prospectus regime in order to make it easier for companies to raise capital throughout the EU and to lower the associated costs, while maintaining effective levels of investor—‘and consumer’—protection.8 11.09  In addition to the more formal approval process, the issues identified by the Commission for discussion included the scope of the requirement to prepare—and publish— a prospectus (‘When is a prospectus needed?’) and what information a prospectus should contain: its contents. As for scope, the consultation requested respondents’ views on a possible recalibration of the obligation for issuers to publish a prospectus, including on whether a prospectus should be required for ‘secondary issuances’ (and for the admission of securities to trading on multilateral trading facilities (MTFs)).9 As for content, the consultation sought feedback on potential further flexibility, enhancing effectiveness to the benefit of issuers by alleviating administrative burden, while striking an appropriate balance with effective investor protection.10 This will be looked into further in section V ‘Content—What Information is not Specifically Prescribed?’ (from para. 11.39). We will now first look into the arguments for creating a lighter disclosure regime for certain cases, i.e. the case for that case.

(p. 247) III.  The Case for a Light Disclosure Regime for Secondary Offerings or Listings

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

1.  Introduction 11.10  The term ‘listing’ is being used here as a shorthand for admission to trading on a regulated market. Under the heading, ‘Creating an exemption for “secondary issuances” under certain conditions’,11 the Commission started by observing that a company which already has a class of securities admitted to trading on a regulated market is known to the market through the prospectus it has produced and got approved on that first occasion (acknowledging, in its specific questions, that a long time may have lapsed since, in which case one may query how relevant that prospectus still is). The Commission noted the proportionate disclosure regime that was brought by the 2010 amendment of the Prospectus Directive for rights issues, i.e. where statutory pre-emption rights which allow for the subscription of new shares are granted to existing shareholders. This regime thus only being available for offers addressed to existing shareholders (and little used in practice, as set out in section II.1 ‘The Capital Markets Union’, para. 11.03 above), there was no alleviation of prospectus requirements for secondary issuances in general. ‘It may be argued’, the Commission went on to contemplate, that there is ‘less of a need’ to require a prospectus for secondary issuances because, once the class of securities is admitted to trading on a regulated market, the disclosure regimes under the Transparency Directive12 and the Market Abuse Regulation13 (‘MAR’) provide the necessary information for purchasers. ‘On that basis’—i.e. on the basis that the initial prospectus published for initial admission to trading on a regulated market and subsequent disclosures made as required under the Transparency Directive and MAR together provide potential investors with the information they need—the Commission went on to say that a range of options could be envisaged to alleviate the prospectus burden for subsequent admissions to trading or offers of ‘the same class of fungible securities’.14 11.11  Before discussing these options further, we make a small sidestep by looking at these ongoing obligations under the Transparency Directive and MAR. As follows from the above, the Commission sees the Prospective Directive (and the Prospectus Regulation), the Transparency Directive, and the MAR as a trinity that provides investors with the information they need.

(p. 248) 2.  The Transparency Directive 11.12  The prospectus provides the initial disclosure for the initial offering or admission of securities to trading on a regulated market. Thereafter, in particular when securities have been admitted to trading on a regulated market, investors will require regular information on the financial performance and financial position of the issuer over a given period and on a given date, respectively. This information is included in the financial statements. For most issuers that have securities in issue that have been admitted to trading on a regulated market, the Transparency Directive provides for a reporting regime under which issuers that are subject to it must produce, file, and disclose information on a periodic basis in the form of annual and semi-annual reports. The most comprehensive is obviously the annual report. Its three main elements are the financial statements (including the audit report), the management report, and a responsibility statement. The management report is a narrative of important events that have occurred during the period covered and their effect on the financial position and prospects of the issuer, thus being both backward- and forwardlooking. The semi-annual report has a similar structure to the annual report, but instead of the full audited financial statements in the annual report, the semi-annual report only requires a ‘condensed set of financial statements’, which the auditors will typically not have audited but only reviewed, a review being a lower standard than an audit.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

11.13  Offers of securities with a denomination of at least EUR 100,000 (in practice referred to as ‘wholesale securities’) were exempt under the Prospectus Directive,15 and are so under the Prospectus Regulation.16 Such offers do not require the publication of a prospectus. Admission of wholesale securities to trading on a regulated market is not so exempt, and still required a prospectus under the Prospectus Directive and also requires one under the Prospective Regulation. Securities with a denomination of at least EUR 100,000 are typically non-equity securities. Shares with such a high denomination are not often seen, certainly not if they were intended to be available to the public (in the plain English meaning of ‘retail investors’) by being offered to retail and/or admitted to trading on a regulated market and being available to retail in the secondary market. Share denominations tend to be sufficiently low to enable retail participation, and where the stock price rises to higher levels, stock splits are sometimes seen to bring the price down again. Wholesale securities thus tend to be non-equity securities, for the purpose of this chapter simply referred to as debt securities (acknowledging that this term also evokes questions and debate, but those will not be addressed in this chapter). While thus being exempt from the obligation to publish a prospectus for their offer, wholesale debt securities do require a prospectus for their admission to trading. Under the Transparency Directive, however, issuers that have only debt securities with a denomination of at least EUR 100,000 (i.e. wholesale debt securities) (p. 249) admitted to trading on a regulated market, are exempted from the obligation to publish annual and half-yearly financial reports. Hence while for these securities, if admitted to trading, a prospectus may have been published in the past, given the exemption under the Transparency Directive just mentioned, one may wonder whether the further ‘necessary information’ about them and their issuer, which, the Commission wrote in its Prospectus Directive review consultation, the Transparency Directive (and MAR) disclosure regime provides purchasers with, is in fact there. Having said that, if the EU legislator had deemed annual and semi-annual reports crucial for wholesale debt investors, it would not have included this exemption in the Transparency Directive. By including this exemption, the EU legislator has apparently taken the view that this information is not necessary for wholesale debt investors.

3.  The Market Abuse Regulation 11.14  Leaving aside the periodic disclosure required by the Transparency Directive, if there are new developments affecting the issuer, its business, and its prospects, it may be relevant for those to be brought to the attention of investors. In the regulated market world, disclosure is an ongoing process. Where the prospectus provided a basis for the initial valuation and market price of the securities being admitted to trading, and regular annual and other financial reports (as to which, see section III.2 ‘The Transparency Directive’, para. 11.12 above) provided investors with periodic new financial and narrative information on the position, performance, and prospects of the company that might move the market price, the third type of information that investors require is that on other changes that may have a significant effect on that price. This information is provided under the ad hoc disclosure regime for inside information set out in the MAR. Under the MAR, issuers which have securities in issue that are admitted to trading on a regulated market (or MTF or organized trading facility (OTF)) are required to file and disclose price sensitive information on an ad hoc basis as and when it arises, without delay, so as to ensure that investors can factor this in when making buy-or-sell decisions that will in turn affect the market price.

4.  Options for a Light Disclosure Regime 11.15  Let us revert now to the mainstream of the case for a light disclosure regime for secondary offerings or listings. As noted in section III ‘The Case for a Light Disclosure Regime for Secondary Offerings or Listings’ (para. 11.10), on the basis that the initial prospectus published for initial admission to trading on a regulated market and subsequent disclosures made as required under the Transparency Directive and MAR together provide

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

potential investors with the information they need, the Commission said17 that a range of options could be envisaged to alleviate the prospectus burden for (p. 250) subsequent admissions to trading or offers of ‘the same class of fungible securities’.18 According to the Commission, such options could include: –  raising the exemption for secondary issues of Article 4(2)(a) from 10 per cent to at least 20 per cent; –  granting a prospectus exemption to rights issues (i.e. cases where the issuer has not disapplied the statutory pre-emptive rights); –  granting a prospectus exemption to any secondary admission to trading or public offers of securities that are fungible with securities already listed, for which a prospectus has been approved within a certain time frame (e.g. three years). 19 11.16  The Commission also contemplated that in the case of MTFs, a similar kind of exemption could be envisaged for offers to the public of a class of securities which has already been offered to the public over a certain period (e.g. three years). Multilateral trading facilities are not regulated markets. Admission of securities to trading on MTFs was and is outside the scope of the Prospectus Directive and the Prospectus Regulation, and thus does not require a prospectus under the Prospectus Directive or the Prospectus Regulation, and the Transparency Directive does not apply to MTFs, but only to regulated markets (i.e. to issuers having securities admitted to trading thereon). For this reason, the Commission contemplated that a similar exemption for secondary issuances20 of securities admitted to trading on MTFs may need to be conditional on the existence of appropriate market rules (i.e. rules of the relevant MTF) regarding periodic financial reporting by issuers.21 As set out above, the Transparency Directive deals with such periodic financial reporting by issuers having securities in issue which are admitted to trading on a regulated market (and as also set out there, the MAR deals with ad hoc disclosure of price-sensitive information by such issuers, applying, other than the Prospectus Directive and the Transparency Directive, also to issuers having securities in issue which are traded on an MTF or OTF). The consultation paper also sought feedback on the need to create a bespoke regime for companies admitted to trading on ‘SME growth markets’, an optional label created by MiFID II22 that may be obtained by MTFs that wish to have this status. In that case, at least 50 per cent of the issuers whose securities are admitted to trading on such MTF would have to be SMEs as defined by MFID II. That the process of preparing a prospectus is perceived as complex, time-consuming, and expensive holds especially for SMEs, the Commission observed. The Prospectus Directive review also aimed to promote SME growth markets, making them attractive for investors and issuers, including by contemplating a bespoke prospectus (p. 251) regime as an incentive for SMEs to access capital market through SME growth markets. Small and medium-sized enterprises will not be specifically addressed in this chapter, save for noting that the light disclosure regime for secondary issuances discussed in this chapter is also available to issuers having securities traded thereon. Recital (49), Prospectus Regulation considers that: The simplified disclosure regime for secondary issuances should be available for offers to the public by issuers whose securities are traded on SME growth markets, as their operators are required under Directive 2014/65/EU of the European Parliament and of the Council [author’s note: MiFID II] to establish and apply rules ensuring appropriate ongoing disclosure.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

11.17  Article 14(1) codifies this in a substantive provision stating that indeed this regime may also be used by issuers or offerors whose securities have been admitted to trading on an SME growth market (when publicly offering such securities or seeking admission to trading on a regulated market—the trading on the SME growth market itself being outside the scope of the Prospectus Regulation). 11.18  It is useful to consider some of the reactions submitted to the Commission by market participants in response to the Commission’s consultation, as appearing in either the relevant feedback itself if published, or as summarized by the Commission in its feedback statement on the public online consultation.23 11.19  The Commission established24 that a very large majority of respondents agreed that while an IPO of securities requires a full-blown prospectus, the obligation to draw up a prospectus could be mitigated or lifted for any ‘subsequent secondary issuance of the same securities’,25 provided relevant information updates are made available by the issuer. The rationale cited by the Commission is that respondents do not see a need for a full-blown prospectus for secondary issuance of securities listed on a regulated market, if the Transparency Directive and MAR information is published and important information is thus easily accessible to potential investors. The Commission noted that some respondents were of the opinion that no prospectus should be required at all for secondary issuances, or no listing prospectus, while for public offers of secondary issuances a lighter proportionate disclosure regime should be available. However, so the Commission went on to establish, many respondents did not want to lift requirements to disclose ‘the relevant information on the transaction’ (e.g. the offer terms), its impact on the issuer, and ‘the relevant risk factors’, and wanted to retain the requirement to incorporate a reference to recent announcements made by the issuer to the market (think of disclosures made under MAR). Some respondents argued that in a capital increase, the issuer should provide information about the intended use of proceeds and the (p. 252) expense of the offering, as this information cannot be obtained by investors from other sources (such as Transparency Directive and MAR disclosures), specific information about the offer (think of offer terms), the essential characteristics of the securities, and the major risks associated with the investment. Section V ‘Content—What Information is not Specifically Prescribed?’ (from para. 11.39) below briefly discusses where the Commission came out as regards content in its CDR and the Annexes thereto. 11.20  Getting to the Commission’s specific consultation questions related to secondary issuances, questions 8, 9, and 10 of the 2015 consultation are the most relevant. Question 8 was clearly the key one. We will look at question 8 in some more detail in section IV ‘Scope’ (para. 11.25), but first briefly set out here what came out of the consultation of questions 9 and 10. 11.21  Question 9 asked how Article 4(2)(a), Prospectus Directive, containing the longstanding 10 per cent exemption for privately placed secondary issues of securities that needed to be admitted to trading, should be amended to achieve the desired objective (e.g. by raising the 10 per cent threshold to a higher percentage or by applying this exemption to all secondary issuances of fungible securities, regardless of their proportion with respect to those already issued). According to the Commission,26 a majority of respondents was in favour of altering this to broaden the exemption. The preferred option was that the exemption should apply to all secondary issuances of fungible securities, regardless of their proportion to those already issued. Alternatively, respondents argued for raising the threshold, most suggested to 20 per cent. As already noted in section II.1 ‘The Capital Markets Union’ (para. 11.04) above, the latter found its way into the new Prospectus Regulation27 and started applying from 20 July 2017.28

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

11.22  Question 10 asked whether, if ‘the exemption’ for secondary issuances were to be made conditional on a full-blown prospectus having been approved in the past within a certain period of time, which time frame would be appropriate. As we will see below in section IV ‘Scope’ (para. 11.25), question 8 speaks of ‘mitigated or lifted’. Where lifting would indeed imply an exemption, mitigating would ‘merely’ imply a lighter proportionate disclosure regime. In any case, according to the Commission29 most respondents did not think such time frame requirement necessary. Those in favour of such requirement suggested on average a time frame of 2.5 years. Recital (50), Prospectus Regulation considers that: The simplified disclosure regime for secondary issuances should only be available for use after a minimum period has elapsed since the initial admission to trading on a regulated market or an SME growth market of a class of securities of an issuer. A delay (p. 253) of 18 months should ensure that the issuer has complied at least once with its obligation to publish an annual financial report under Directive 2004/109/ EC [author’s note: the Transparency Directive] or under the rules of the market operator of an SME growth market. 11.23  Article 14(1) codifies this in a substantive provision stating that indeed this regime is available for secondary issuances of securities admitted to trading on a regulated market or an SME growth market continuously for at least the past eighteen months. 11.24  Let us now look at question 8 in some more detail. This brings us to the issue of scope of the light disclosure regime.

IV.  Scope 1.  Introduction 11.25  As noted above, as far as the topic of this chapter is concerned, the key question in the Commission’s consultation document on the review of the Prospectus Directive of February 2015 was Question 8. It is worth setting it out in full: Do you agree that while an initial public offer of securities requires a full-blown prospectus, the obligation to draw up a prospectus could be mitigated or lifted for any subsequent secondary issuance of the same securities, providing [author’s note: presumably this should read ‘provided’] relevant information updates are made available by the issuer? Various words used in this question raise a number of questions in their own right. These go to the question of scope of the light disclosure regime discussed in this chapter. Making a leap in time, we jump to the relevant substantive provision of the new Prospectus Regulation dealing with this simplified disclosure regime for secondary issuances, Article 14.

2.  Secondary Issuances: What are These, and by Whom? 11.26  The first thing that strikes is the reference to ‘secondary issuances’, in both the title of Article 14 and the introductory sentence of paragraph 1 thereof. It also appears in the very last sentence of Article 14, the last sentence of its final paragraph 3, which provides that the Commission shall calibrate the reduced information so that it focuses on the information that is relevant for secondary issuances. Oddly perhaps, the term ‘secondary issuance’ is not defined in the Prospectus Regulation. The issuance as such of securities does not trigger a prospectus requirement. It is their public offer or admission to trading on a regulated market that does, not their issue. Also, while limbs (a) and (b) of Article 14(1) refer to issuers, limb (c) refers to offerors. An offeror of securities need not (p. 254) necessarily be the issuer thereof but can also be a third party, offering securities issued by From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

another entity. Like ‘issuer’, ‘offeror’ is a defined term in the Prospectus Regulation, meaning a legal entity or individual which offers securities to the public. 11.27  Question 8 of the Commission’s consultation document on the review of the Prospectus Directive of February 2015 spoke of ‘subsequent secondary issuances’ (of the same securities).30 ‘Subsequent secondary issuance’ is even more puzzling than ‘secondary issuances’ alone. ‘Subsequent secondary’? And subsequent to what? Question 8 as phrased in isolation (cited above) suggests ‘subsequent to an initial public offer of securities’. Viewed in light of the introduction to question, however, it would seem that the Commission meant subsequent to a class of securities having been admitted to trading on a regulated market, and that ‘secondary issuances’ refers to admissions to trading or offers of securities subsequent thereto. Indeed, the introductory sentence of Article 14(1) suggests, in the part after the comma, that the words ‘secondary issuances’ refer to an offer of securities to the public or an admission to trading of securities on a regulated market. This also seems to follow from Recital (48), which starts as follows: (48) Once a class of securities is admitted to trading on a regulated market, investors are provided with ongoing disclosures by the issuer under Regulation (EU) No 596/2014 of the European Parliament and of the Council [author’s note: the MAR] and Directive 2004/109/EC [author’s note: the Transparency Directive]. The need for a full prospectus is therefore less acute in cases of subsequent offers to the public or admissions to trading on a regulated market by such an issuer. A distinct simplified prospectus should therefore be available for use in cases of secondary issuances [ . . . ]. So, we conclude that ‘secondary issuance’ refers to an offer of securities to the public or an admission to trading of securities on a regulated market, in each case subsequent to a class of securities having been so admitted. The next question then is: secondary issuances— offers or admissions to trading on a regulated market—of what sort of securities?

3.  Offers or Admissions of What Securities? The Same? Same Class? Fungible? 11.28  As noted above, Question 8 of the Commission’s consultation document on the review of the Prospectus Directive of February 2015 spoke of subsequent secondary issuances of ‘the same securities’. It is not likely, however, that this meant to refer to the same securities that had been the object of the initial admission to trading being admitted again. In its introductory remarks leading up to the actual questions, the Commission wrote that a range of options could be envisaged to alleviate the prospectus burden for subsequent admissions to trading or offers of ‘the same class of fungible securities’, (p. 255) option 3 referring to secondary admission to trading or public offers of ‘securities that are fungible with securities already listed’.31 Fungibility of securities by necessity implies that they are of the same class. The opposite does not necessarily hold true: securities being of the same class does not necessarily imply fungibility. Plain vanilla bonds, for example, are a class of securities. Where an issuer has issued two series of bonds with identical terms apart from their respective maturity dates, the securities are not fungible. Had the terms been identical in all respects, including as to maturity, instead of being two series the two issues could have formed two tranches of a single series. The second tranche issued would then be fungible with the first one. 11.29  In the Commission’s November 2015 proposal32 for the Prospectus Regulation, Article 14(1)(a) referred to ‘issuers whose securities have been admitted to trading on a regulated market [ . . . ] for at least the last 18 months and who issue more securities of the same class’. So where in its consultation the Commission considered the situation of a class of securities having been admitted to trading on a regulated market and subsequent admissions to trading or offers of ‘the same class of fungible securities’33 or ‘securities that From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

are fungible with securities already listed’,34 it its actual proposal it only spoke of ‘securities of the same class’—which, as noted above, does not necessarily imply fungibility. 11.30  It is time to look at where the final wording in the Prospectus Regulation came out. As we will see, on the one hand nuance has been added; on the other, the wording is imprecise. Article 14(1) reads as follows: Article 14 Simplified disclosure regime for secondary issuances 1.  The following persons may choose to draw up a simplified prospectus under the simplified disclosure regime for secondary issuances, in the case of an offer of securities to the public or of an admission to trading of securities on a regulated market: (a)  issuers whose securities have been admitted to trading on a regulated market or an SME growth market continuously for at least the last 18 months and who issue securities fungible with existing securities which have been previously issued; (b)  issuers whose equity securities have been admitted to trading on a regulated market or an SME growth market continuously for at least the last 18 months and who issue non-equity securities; (c)  offerors of securities admitted to trading on a regulated market or an SME growth market continuously for at least the last 18 months. (p. 256) The simplified prospectus shall consist of a summary in accordance with Article 7, a specific registration document which may be used by persons referred to in points (a), (b) and (c) of the first subparagraph of this paragraph and a specific securities note which may be used by persons referred to in points (a) and (c) of that subparagraph. 11.31  As already noted, while nuance has been added, the wording is imprecise, prompting questions and leaving room for interpretation and discussion. That is unhelpful for practice, where issuers, underwriters, advisers, and regulators will have to form a view and reach a conclusion on whether or not in a certain situation the light disclosure regime is available. In case of doubt, parties may opt for the safest route and go for full disclosure. We will come back to this in section VI ‘Conclusion: Use in Practice’. 11.32  The introductory sentence of Article 14(1) suggests that it is about the question who may use the simplified disclosure regime, in the case of an offer of securities to the public or of an admission to trading of securities on a regulated market. At the same time, however, Article 14(1) deals in its limbs (a)–(c) with the question for offerings or listings of what sort of securities the simplified prospectus may be used. 11.33  Starting with limb (a): issuers whose securities have been admitted to trading on a regulated market or an SME growth market continuously for at least the past eighteen months and who issue securities fungible with existing securities which have been previously issued. The first part, ‘issuers whose securities have been admitted to trading on a regulated market’, could be read as meaning that all of its securities must be so admitted, such that none of its securities may be unlisted. There would seem to be no rationale, however, for such strict reading. Still, a more precise way of drafting could have been something along the lines of ‘issuers of which a class of securities has been admitted to

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

trading on a regulated market’, the reference to ‘a class’ being in line with the Commission’s consultation.35 11.34  The following part, ‘and who issue securities fungible with existing securities which have been previously issued’, also raises interpretation questions. As noted earlier, it is not the issue of securities that triggers a prospectus requirement, but their offer or listing. It seems clear that the references here to ‘issue’ and ‘issued’ are not to be read in a company law or contract law sense. The better reading of ‘and who issue’ is ‘and who seek admission to trading on a regulated market of, or offer to the public’. That leaves the question of how to interpret the phrase ‘securities fungible with existing securities which have been previously issued’. Securities can only be fungible if there are existing securities they can be fungible with, and in a company or contract law sense existing securities have by definition been previously issued. On a literal reading, this phrase would capture any issues of any fungible securities, whether or not the existing securities have been admitted to trading or offered to the public. Again, however, it (p. 257) seems clear that the reference to ‘issued’ is not to be read in a company or contract law sense, If ‘issued’ here too means ‘admitted to trading on a regulated market or offered to the public’, that would mean a simplified prospectus can be used for an offer (or admission) of securities fungible with existing securities that are admitted to trading or, while not being admitted to trading, have been publicly offered. In its February 2015 Prospectus Directive review consultation, the Commission mentioned the option of granting a prospectus exemption to any secondary admission to trading or public offers of securities that are fungible with securities already listed, for which a prospectus has been approved within a certain time frame.36 And in its November 2015 proposal for the Prospectus Regulation, the wording used by the Commission (in Article 14(1)(a) as then proposed, not a proposal for an exemption but for a simplified prospectus) was: ‘issuers whose securities have been admitted to trading on a regulated market [ . . . ] for at least the last 18 months and who issue more securities of the same class [author’s note: as those admitted to trading]’. On this basis, I would be inclined to think that limb (a) intends to say that issuers of which a class of securities has been admitted to trading on a regulated market may use a simplified prospectus in the case of an offer to the public or an admission to trading on a regulated market, of securities being of a class of and fungible with securities already admitted to trading on a regulated market, whether equity or debt. 11.35  Limb (b) allows the use of a simplified prospectus by issuers whose ‘equity’ securities have been admitted to trading on a regulated market continuously for at least the past eighteen months and who issue non-equity securities. Note that limb (a) about fungible securities speaks of ‘securities’ that have been admitted to trading on a regulated market, not specifically saying ‘equity securities’. Presumably, the thinking behind limb (b) is that where full equity disclosure has been published in the past in a prospectus (and disclosures required under the Transparency Directive and MAR have been made) and non-equity is issued, reduced disclosure suffices (as we will see below this only relates to the issuer, not to the securities). This does not work the other way around, in that the opposite of (b) is not available—a listed-debt-issuer offering equity securities. Compared to equity, non-equity requires less disclosure under both the Prospectus Directive and the new Prospectus Regulation, the MAR, and the Transparency Directive, certainly for wholesale debt. So, for listed-wholesale-debt-issuers can one say that once ‘a class’ of securities is admitted to trading on a regulated market (which would here be wholesale debt), the disclosure regimes under the Transparency Directive and the MAR provide the necessary information for purchasers? We touched upon this earlier, in section III.2 ‘The Transparency Directive’ (para. 11.13). As argued there, if the EU legislator had deemed annual and semiannual reports crucial for wholesale debt investors, it would have required those for wholesale debt issuers. By not having the Transparency Directive require this, the EU legislator has apparently taken the view that this information is not necessary for wholesale

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 258) debt investors. That becomes different if wholesale debt issuers subsequently offer equity, as equity investors require more information, also on the issuer. The issuer would then have to produce a full prospectus, as also noted in paragraph 11.37, where the last paragraph of Article 14(1) is discussed. 11.36  Last but not least, limb (c) allows the use of a simplified prospectus also by offerors (of securities admitted to trading on a regulated market continuously for at least the past eighteen months). As noted earlier, an offeror need not necessarily be the issuer but can also offer securities issued by another entity. A non-issuer offeror may have difficulty preparing a prospectus also describing the issuer. If someone holds listed securities and wishes to offer those to the public (they will be listed already, so no need for applying therefor), presumably the thinking is that where full disclosure has been published by the issuer in a past prospectus (and disclosures required under the Transparency Directive and MAR have been made by the issuer), reduced disclosure suffices. It will be interesting to see whether this will make it easier for non-issuer offerors to produce a prospectus. 11.37  The CDR includes the following Annexes for secondary issuances:37 –  Annex 3: secondary issuances equity registration document; –  Annex 8: secondary issuances non-equity registration document (covering both retail and wholesale); –  Annex 12: secondary issuances equity securities note; –  Annex 16: secondary issuances non-equity securities note (covering both retail and wholesale). Based on the last paragraph of Article 14(1) (cited in para. 11.30), a simplified registration document is available for—in short—(a) fungible issues; (b) debt issues by listed-equity issuers; and (c) offerors of listed securities. A simplified securities note is available for—in short and using the same references—(a) fungible issues; and (c) offerors of listed securities, but not (b) debt issues by listed-equity-issuers. So, while a listed-equity-issuer issuing debt may use a simplified registration document (non-equity) to describe itself, for the securities it must disclose information required by a full securities note (for non-equity). That is understandable, given debt securities are of a different nature and class than equity. As noted above, the opposite of limb (b) is not available—a listed-debt-issuer offering equity securities. That must publish not only a full equity securities note (given the different nature of equity securities compared to debt) but also a full equity registration document. This too is understandable, because compared to non-equity, equity requires more and different disclosure on the issuer. 11.38  This brings us to the question of content.

(p. 259) V.  Content—What Information is not Specifically Prescribed? 1.  Level 1 Text 11.39  As for the content question, Recital (48) of the Prospectus Regulation ends as follows: [. . . A distinct simplified prospectus should therefore be available for use in cases of secondary issuances and] its content should be alleviated compared to the normal regime, taking into account the information already disclosed. Still, investors need to be provided with consolidated and well-structured information, especially where such information is not required to be disclosed on an ongoing basis under

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Regulation (EU) No 596/2014 and Directive 2004/109/EC [author’s note: i.e. the MAR and the Transparency Directive]. 11.40  Recital (78) considers that, in order to specify the requirements set out in the new Prospectus Regulation, the power to adopt certain acts should be delegated to the Commission in respect of, inter alia and to the extent relevant for the purpose of this chapter, the reduced information to be included in the simplified prospectus in cases of secondary issuances, stressing that the Commission should carry out appropriate consultations during its preparatory work. 11.41  The substantive provisions of the Prospectus Regulation itself dealing with the content of the simplified prospectus are paragraphs (2) and (3) of Article 14. As they set parameters which the Commission is bound to in its CDR, it is worth setting these out in full here. First paragraph 2: 2.  By way of derogation from Article 6(1), and without prejudice to Article 18(1), the simplified prospectus shall contain the relevant reduced information which is necessary to enable investors to understand: (a)  the prospects of the issuer and the significant changes in the business and the financial position of the issuer and the guarantor that have occurred since the end of the last financial year, if any; (b)  the rights attaching to the securities; (c)  the reasons for the issuance and its impact on the issuer, including on its overall capital structure, and the use of the proceeds. The information contained in the simplified prospectus shall be written and presented in an easily analysable, concise and comprehensible form and shall enable investors to make an informed investment decision. It shall also take into account the regulated information that has already been disclosed to the public pursuant to Directive 2004/109/EC, where applicable, and Regulation (EU) 596/2014 [author’s note: i.e. the Transparency Directive and MAR]. 11.42  Article 18 concerns the omission from the prospectus of certain information that would otherwise need to be included therein. Such omission may be authorized by the competent authority in certain circumstances. This also applies for a simplified (p. 260) prospectus. Article 6(1) contains the basic standard of disclosure required by the Prospectus Regulation, providing that the prospectus must contain the necessary information which is material to an investor for making an informed assessment of, in brief, the issuer and the securities, depending on the nature and circumstances of the issuer and the type of securities. Article 14 states that this may be derogated from where a simplified prospectus may be used. 11.43  Paragraph 3, then, reads as follows: 3.  The Commission shall, by 21 January 2019, adopt delegated acts in accordance with Article 44 to supplement this Regulation by setting out the schedules specifying the reduced information to be included under the simplified disclosure regime referred to in paragraph 1.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

The schedules shall include in particular: (a)  the annual and half-yearly financial information published over the 12 months prior to the approval of the prospectus; (b)  where applicable, profit forecasts and estimates; (c)  a concise summary of the relevant information disclosed under Regulation (EU) No 596/2014 [author’s note: i.e. the MAR] over the 12 months prior to the approval of the prospectus; (d)  risk factors; (e)  for equity securities, the working capital statement, the statement of capitalisation and indebtedness, a disclosure of relevant conflicts of interest and related-party transactions, major shareholders and, where applicable, pro forma financial information. When specifying the reduced information to be included under the simplified disclosure regime, the Commission shall take into account the need to facilitate fundraising on capital markets and the importance of reducing the cost of capital. In order to avoid imposing unnecessary burdens on issuers, when specifying the reduced information, the Commission shall also take into account the information which an issuer is already required to disclose under Directive 2004/109/EC, where applicable, and Regulation (EU) No 596/2014 [author’s note: i.e. the Transparency Directive and MAR]. The Commission shall also calibrate the reduced information so that it focusses on the information that is relevant for secondary issuances and is proportionate. 11.44  In February 2017, the Commission gave a formal mandate to the European Securities and Markets Authority (ESMA) to provide technical advice in relation to, amongst other things, the reduced information requirements for secondary issuances. ESMA published consultation papers in July 201738 and in follow-up thereto, in March 2018 (p. 261) delivered its Final Report with technical advice to the Commission.39 The Commission published its draft CDR in November 2018, including the schedules or annexes, by and large following the ESMA Technical Advice. The Commission did not make the 21 January 2019 deadline, however, adopting its CDR on 14 March 2019. The final CDR was published in the Official Journal of 21 June 2019.

2.  Level 2: Commission Delegated Regulation and ESMA Advice 11.45  The CDR includes the following Annexes for secondary issuances:40 –  Annex 3: secondary issuances equity registration document; –  Annex 8: secondary issuances non-equity registration document (covering both retail and wholesale); –  Annex 12: secondary issuances equity securities note; –  Annex 16: secondary issuances non-equity securities note (covering both retail and wholesale). 11.46  Let us have a look now at what alleviations these offer compared to full disclosure. We will not go into every single detail, but flag at a high level where the differences are. Here and there we will refer to the ESMA Technical Advice to the Commission. Given that the disclosure required for equity securities is more encompassing than for debt securities, it is understandable that ESMA has used the disclosure for equity securities as a starting

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

point in terms of meeting the disclosure required, adding alternative requirements to facilitate the issuance of debt securities, both retail and wholesale.

(i)  Equity registration document 11.47  Compared to a full equity registration document of Annex 1, high-level alleviations allowed by Annex 3 for a secondary issuance equity registration document are the following (referring to sections of Annex 1): 11.48  Section 5 (Business overview) can be a lot shorter, requiring a ‘brief’ description of the ‘key’ principal activities and of any significant changes since the end of the period covered by the latest published audited financial statements. Not required are, for example, a description of the principal markets, strategy, and objectives, the basis for any statements regarding the issuer’s competitive position, information relating to joint ventures and participations, and environmental issues. (p. 262) 11.49  Section 18 (Financial information) can also be a lot shorter. Compared to Items 18.1 and 18.2 (including their sub-items, which require audited historical financial statements covering the latest three financial years and accounting related information), Item 11.1 of Annex 3 in essence only requires (annual and half-yearly) financial statements covering the twelve months prior to the approval of the prospectus. Where annual financial statements postdate half-yearly ones, only the annual statements are required. 11.50  Where section 9 (Regulatory environment) requires a description of the regulatory environment that the issuer operates in and that may materially affect its business, in Annex 3, Item 5.1 requires only a brief description of material changes in the issuer’s regulatory environment since the period covered by the latest published audited financial statements. 11.51  Sections 6 (Organisational structure), 7 (Operating and Financial Review), 8 (Capital resources), 13 (Remuneration and benefits), 14 (Board practices), and 15 (Employees) are not required. Deletion of these sections had also been proposed by ESMA, ‘being mindful of the general objective that the secondary issuance prospectus be an alleviated one, and taking into account the information that has already been published under the TD and MAR’.41 In its consultation, ESMA had also proposed deletion of most items of section 19 (Additional information), except for certain selected items (dilution on the existing shares, the rights attached to the existing shares, and poison pills, which ESMA considered central, also the case of a secondary issuance).42 In line with ESMA’s Technical Advice (there Annex 18, section 12),43 corresponding section 12 (Additional information) of Annex 3 of the CDR, while requiring information on dilution of the existing shares under convertible securities or warrants, no longer requires anti-takeover provisions in the articles of association44 to be included. 11.52  Specifically in relation to the Operating and Financial Review (‘OFR’), ESMA considered in its consultation that, while this information is considered useful for investors to assess the evolution of the issuer’s performance, ESMA proposed its deletion, since Level 1 requires that account be taken of information already published under the Transparency Directive and MAR. It was also noted by ESMA that, given the redrafting of this item in the share registration document, this information could be considered equivalent to the information provided by the management report under the Transparency Directive.45 In its Technical Advice to the Commission, ESMA noted that one respondent to its consultation was against the deletion of the OFR.46 It seems this respondent was AFME, the Association for Financial Markets in Europe.47 AFME (p. 263) considered that the OFR section of a prospectus is one of the most important sections in the prospectus from the point of view of enabling an investor to understand an issuer and its business. It wrote: ‘It is by necessity a sober analysis of an issuer’s financial statements, in contrast to the sometime exuberant and aspirational strengths and strategy section and wider business description.’ The Association for Financial Markets in Europe was therefore disappointed that ESMA From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

proposed not to require a simplified prospectus to include an OFR section at all, and instead to require investors to consult an issuer’s management report, which, AFME noted, would not typically be prepared to a prospectus standard, nor offer the same legal recourse to an issuer if it contained misstatement or omissions.48 The response by ESMA, in its Technical Advice, with regard to the OFR, however, was that the secondary issuance prospectus is an alleviation from the full prospectus and that given that the issuer will already have published regulatory information elsewhere, such as under the Transparency Directive and MAR, ESMA considered that the deletion of the OFR from the secondary issuance registration document, was not detrimental to investors.49 As we have seen above, Annex 3 to the CDR follows ESMA’s advice by not requiring an OFR section. 11.53  ESMA’s consultation noted that it maintained the information disclosure items required by Article 14(3), Prospectus Regulation. This is understandable, given the Level 1 text, that sets the parameters. As we have seen in section V.1 ‘Level 1 Text’ (para. 11.43) above, limb (c) of Article 14(3) prescribes a concise summary of the relevant information disclosed under the MAR over the twelve months prior to the approval of the prospectus. In its Technical Advice, ESMA remarked that the MAR disclosure summary was seen as problematic by respondents.50 According to ESMA, one respondent considered that there should be a statement that the MAR disclosure summary comprised a summary of certain information disclosed by the issuer, but that the full text of the disclosure could be found through the relevant regulatory announcement service. Two respondents said that there should be a statement that MAR and Transparency Directive disclosures do not form part of an issuer’s prospectus (unless explicitly incorporated). ESMA did not accept these comments.51 Annex 3 to the CDR follows ESMA’s advice. Section 13 of Annex 3 requires a summary of the information disclosed under the MAR over the past twelve months, which is relevant as at the date of the prospectus, providing further that, inter alia, the summary shall not be a replication of information already published under the MAR.

(ii)  Debt registration document 11.54  Retail debt offerings being relatively rare, we do not consider Annex 6 here. Compared to a full, wholesale non-equity registration document of Annex 7, high-level alleviations (p. 264) allowed by Annex 8 for a secondary issuance non-equity registration document are not many, but they include the following (referring to sections of Annex 7). Section 5 (Business overview) can be slightly shorter; for example, the basis for any statements regarding the issuer’s competitive position is not required. Section 11 (Financial information) can also be shorter by not requiring historical financial statements covering the latest two financial years and accounting information but only (annual and half-yearly) financial statements covering the twelve months prior to the approval of the prospectus. Where annual financial statements postdate half-yearly ones, only the annual statements are required. Section 6 (Organisational structure) is not required. As in the case of the secondary issuance equity registration document, Section 11 (Regulatory disclosures) of Annex 8 requires a summary of the information disclosed under the MAR over the past twelve months which is relevant as at the date of the prospectus.

(iii)  Equity securities note 11.55  Compared to a full equity securities note of Annex 11, Annex 12 for a secondary issuance equity securities note does not allow many alleviations, but some items that are not required include (referring to sections of Annex 11) Items 4.2 (governing law of the securities), 4.3 (form of the securities: bearer or registered) and some items that were also no longer required for an equity securities note under the proportionate disclosure regime for statutory rights issues introduced by the 2010 Prospectus Directive amendment, such as 5.2.1 (the various categories of potential investors), 5.2.3 (pre-allotment disclosure), 5.3.4 (any disparity between the public offer price and the effective cash cost to management),

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

6.5 (stabilisation), 6.6 (over-allotment and ‘green-shoe’), and 7 (details of selling shareholders—apart from lock-up agreements, which still is a disclosable item).

(iv)  Debt securities note 11.56  Retail debt offerings being relatively rare, we do not consider Annex 14 here. Compared to a full, wholesale non-equity securities note of Annex 15, Annex 16 for a secondary issuance non-equity securities note does not allow many alleviations, but some items that are not required include (referring to sections of Annex 15) Items 4.3 (governing law of the securities) and 4.4 (form of the securities: bearer or registered).

3.  Conclusion on Content 11.57  We can conclude that it is primarily for the equity registration document that the light disclosure regime for secondary issuances of Article 14 provides some alleviation. In particular, the OFR section not being prescribed is significant. Will the fact that less information is prescribed to be included in the prospectus for secondary issuances lead to the simplified prospectus being used much in practice? That is the subject of the final section of this chapter.

(p. 265) VI.  Conclusion: Use in Practice? 11.58  It remains to be seen whether this new simplified regime, if available in the circumstances and with the alleviations from Article 6, will be used much in practice. As we saw in section II.1 ‘The Capital Markets Union’ (para. 11.03), the proportionate disclosure regime for statutory rights issues introduced by the 2010 amendment of the Prospectus Directive was little used. One reason for this is that many larger IPOs or securities offerings by European companies have a US tranche under which the securities are offered to US investors. This means that other jurisdictions’ disclosure requirements (in this case those of the US) are added on to the disclosure requirements under EU law, i.e. the lighter disclosure may not be sufficient, even if alone from a strict regulatory perspective. 11.59  Aside from this regulatory securities law angle, there is the practical aspect that most securities offerings are arranged and underwritten by one or more banks. This holds true not only for IPOs or secondary offerings of equity, but also for debt issues. Nowadays many, if not most companies issuing debt securities do so under a debt issuance programme, on the basis of a base prospectus and final terms that supplement the terms and conditions that are included in the base prospectus. Even if a secondary issuance does not need to meet other jurisdictions’ disclosure requirements (e.g. those of the US), it remains to be seen whether underwriters would be agreeable to being involved in a securities offering where a simplified prospectus is used, giving reduced disclosure only. As also noted in section II.1 ‘The Capital Markets Union’ (para. 11.03) above in relation to the proportionate disclosure regime for statutory rights issues, underwriters were concerned that the overall disclosure standard of Article 5, Prospectus Directive might still be relevant. By the same token they may fear that the general disclosure requirement of Article 6 will still be relevant, despite what Article 14 says. At a conceptual level, for investors at some stage more disclosure may make a prospectus difficult to understand, as it may be difficult to discern important facts in a mass of less important detail. The ideal disclosure document is short, clear, and comprehensive in including all information an investor needs to make an informed investment decision. The tension is between short and comprehensive, in the sense of including all necessary information. Prospectus liability is not discussed in this chapter. It is key, however, also in the context of light disclosure regimes such as here, for secondary issuances. Put simply, it is one—easy—thing for a legislator to provide that a simplified prospectus with reduced disclosure may be used, but if that does not go hand in hand with lightened liability for those involved, there is a tension. With stringent liability, the tendency (and preference of underwriters and quite possibly also issuers who are, of course, themselves also at risk of being sued) will be to From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

include information on a ‘just-in-case’ basis, also where it is debatable whether investors would find it necessary. Imagine you are a bank underwriting securities and offering those to investors, risking being sued in case investors argue the prospectus was inaccurate or incomplete. You would probably want full disclosure rather than reduced. In underwriting agreements, underwriters will also ask the issuer (p. 266) to represent that the prospectus is, in brief, accurate, complete, and not misleading, and contains all information necessary to enable investors to make an informed investment decision. This representation is typically backed up by an explicit indemnity. 11.60  Only time will tell whether in case of secondary issuances we will see simplified prospectuses with reduced disclosure only.

Footnotes: 1

  Commission Delegated Regulation (EU) 2019/980 of 14 March 2019 supplementing Regulation (EU) 2017/1129 of the European Parliament and of the Council as regards the format, content, scrutiny and approval of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Commission Regulation (EC) 809/2004, OJ 2019, L166/26 (CDR). 2

  Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 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, OJ 2017, L168/12 (Prospectus Regulation). 3

  Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC, OJ 2003, L345/64 (Prospectus Directive). 4

  As described in section III.4 ‘Options for a Light Disclosure Regime’ (para. 11.21) below, this percentage increased to 20 per cent from 20 July 2017 already under the new Prospectus Regulation. 5

  COM(2015) 468 final.

6

  See http://ec.europa.eu/finance/consultations/2015/prospectus-directive/docs/ consultation-document_en.pdf (Commission Consultation). 7

  Commission Consultation, p. 2.

8

  Commission Consultation, pp. 2–3.

9

  We will come back to this phraseology in section IV ‘Scope’ (para. 11.26).

10

  Commission Consultation, pp. 4–5.

11

  Commission Consultation, p. 7.

12

  Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonization of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC (Transparency Directive). 13

  Regulation (EU) 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (MAR). 14

  We will come back on this phraseology in section IV ‘Scope’ (para. 11.28).

15

  Article 3(2)(c) and (d), Prospectus Directive.

16

  Article 1(4)(c), Prospectus Regulation.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

17

  Commission Consultation, p. 7.

18

  We will come back to this phraseology in section IV ‘Scope’ (para. 11.28).

19

  Commission Consultation, pp. 7–8.

20

  We will come back to this phraseology in section IV ‘Scope’ (para. 11.26). ‘Issuances’ must mean public offers of such securities (or admission to trading thereof on a regulated market), the trading on the MTF itself being outside the scope of the Prospectus Regulation. 21

  Commission Consultation, p. 8.

22

  Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (MiFID II). 23

  See http://ec.europa.eu/finance/consultations/2015/prospectus-directive/docs/summaryof-responses_en.pdf (Commission feedback statement). 24

  Commission feedback statement, p. 5.

25

  We will come back to this phraseology in section IV ‘Scope’ (para. 11.27).

26

  Commission feedback statement, p. 5.

27

  Article 1(5)(a), Prospectus Regulation.

28

  Article 49(2), Prospectus Regulation.

29

  Commission feedback statement, p. 5.

30

  Commission Consultation, p. 8.

31

  Commission Consultation, p. 7–8.

32

  COM(2015) 283 final. The Prospectus Regulation’s interinstitutional file number was 2015/0268 (COD). 33

  Commission Consultation, p. 7.

34

  Commission Consultation, p. 8.

35

  Commission Consultation, p. 7.

36

  Commission Consultation, p. 8.

37

  Abbreviated titles.

38

  ESMA Consultation Paper, Draft technical advice on format and content of the prospectus, ESMA31-62-532 (ESMA Prospectus Content Consultation Paper), 6 July 2017.https://www.esma.europa.eu/sites/default/files/library/ esma31-62-532_cp_format_and_content_of_the_prospectus.pdf. 39

  ESMA Final Report, Technical advice under the Prospectus Regulation, ESMA31-62-800 (ESMA Technical Advice), 28 March 2018, https://www.esma.europa.eu/search/site/ esma31-62-800. 40

  As before, using abbreviated titles.

41

  ESMA Prospectus Content Consultation Paper, p. 207.

42

  ESMA Prospectus Content Consultation Paper, pp. 207–08.

43

  ESMA Technical Advice, p. 422.

44

  Item 19.2.3 of section 19, Annex 1.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

45

  ESMA Prospectus Content Consultation Paper, p. 208.

46

  ESMA Technical Advice, p. 134.

47

  AFME represents leading global and European banks and other significant capital market players, focusing on equity where the International Capital Market Association (ICMA) focuses more on debt. 48

  AFME’s response can be found on https://www.esma.europa.eu/press-news/ consultations/consultation-technical-advice-under-new-prospectus-regulation. See p. 27. 49

  ESMA Technical Advice, p. 137.

50

  ESMA Technical Advice, p. 135.

51

  ESMA Technical Advice, pp. 136–7.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Part II The New EU Prospectus Rules, 12 The Summary and Risk Factors Robert ten Have From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

Subject(s): Prospectus liability — Financial regulation

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 267) 12  The Summary and Risk Factors I.  Introduction 12.01 II.  Purpose of the Summary and Risk Factors 12.04 1.  Purpose of the Summary 12.06 2.  Purpose of the Risk Factors 12.08 III.  The Summary and Risk Factors in the Single-Document Prospectus 12.09 1.  The Summary 12.09 2.  The Risk Factors 12.33 IV.  The Summary and Risk Factors in Other Prospectus Types 12.44 1.  Non-Retail, Non-Equity Prospectus 12.44 2.  Base Prospectus 12.48 3.  Prospectus Consisting of Separate Documents 12.56 4.  Universal Registration Document 12.59 5.  Simplified Disclosure Regime for Secondary Issuances 12.63 6.  EU Growth Prospectus 12.65 V.  Competent Authority’s Discretionary Powers 12.71 VI.  Responsibility for the Summary 12.75 VII.  Use of Language 12.77 VIII.  Conclusion 12.81

I.  Introduction 12.01  In this chapter, the focus is on the summary and the risk factors as parts of a prospectus. Both are key elements thereof. 12.02  As for the summary, while prospectuses are voluminous disclosure documents, the summary will often be the first point of reference for the investor. And in many cases, it may be the only part of the prospectus which the investor will actually read. It is also the only part of the prospectus which may have to be provided in the relevant official language, if different from the language of the prospectus (which, in most cases, will be English). In particular for retail investors, this may in the relevant circumstances increase the likelihood that they will restrict themselves to reading the summary. All of this calls for a proper set of requirements of what the summary should look like. At the same time, the new Prospectus Regulation seeks to further harmonize prospectuses across Member States. As a result, the new format for the summary is highly prescriptive and standardized, with a strong focus on accessibility. 12.03  The risk factors have two faces. On the one hand, they are key to warning investors about the risks of buying the relevant securities and as such, are an important part of the investor protection sought by the prospectus rules. On the other hand, they form an important line of defence for the company and others involved in the offering (p. 268) or admission to trading, if things at some point go wrong and the company or those others are held liable by investors. For this latter reason, those responsible for drafting and publication of the prospectus may be inclined to include as many risk factors as they can From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

possibly think of. That, however, prejudices the former function of the risk factors, as it will negatively impact the ability of investors to learn the ‘real’ risks of their investment, i.e. the material risks which are specifically relevant to the particular company or securities. Under the old Prospectus Regulation, local practices varied whereby some regulators more stringently enforced the requirement for the risk factors to be specific and material, while other regulators were more lenient on this point and allowed for more generic risk factors to be included in the prospectus. The new Prospectus Regulation seeks to harmonize these local practices by prescribing the approach that the risk factors to be included shall be limited to only specific and material risk factors.1

II.  Purpose of the Summary and Risk Factors 12.04  The overarching requirement for any prospectus is that it shall contain the necessary information which is material to an investor for making an informed assessment of (i) the assets and liabilities, profits and losses, financial position, and prospects of the issuer and of any guarantor; (ii) the rights attaching to the securities; and (iii) the reasons for the issuance and its impact on the issuer.2 In addition, it is required that the information in a prospectus shall be written and presented in an easily analysable, concise, and comprehensible form.3 12.05  Against this background, both the summary and risk factors serve their specific purpose in the prospectus.

1.  Purpose of the Summary 12.06  The purpose of the summary is set out in the recitals to the Prospectus Regulation: •  The summary of the prospectus should be a useful source of information for investors, in particular retail investors. It should be a self-contained part of the prospectus and should focus on key information that investors need in order to be (p. 269) able to decide which offers and admissions to trading of securities they want to study further by reviewing the prospectus as a whole to take their decision. Such key information should convey the essential characteristics of, and risks associated with, the issuer, any guarantor, and the securities offered or admitted to trading on a regulated market. It should also provide the general terms and conditions of the offer. 4

•  The summary of the prospectus should be short, simple and easy for investors to understand. It should be written in plain, non-technical language, presenting the information in an easily accessible way. It should not be a mere compilation of excerpts from the prospectus. It is appropriate to set a maximum length for the summary in order to ensure that investors are not deterred from reading it and to encourage issuers to select the information which is essential for investors. 5 •  To ensure the uniform structure of the prospectus summary, general sections and sub-headings should be provided, with indicative contents which the issuer should fill in with brief, narrative descriptions including figures where appropriate. As long as they present it in a fair and balanced way, issuers should be given discretion to select the information that they deem to be material and meaningful. 6 12.07  Also, the recitals reveal that in relation to the summary, the new Prospectus Regulation has been inspired by the Packaged Retail and Insurance-based Investment Products Regulation (PRIIPs).7 As stated in the recitals, the prospectus summary should be modelled as much as possible on the ‘key information document’ (KID) required under the PRIIPs regulation.8

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

2.  Purpose of the Risk Factors 12.08  The recitals to the Prospectus Regulation also state what the primary purpose is of including risk factors in a prospectus. Note the word ‘primary’ since, as mentioned above in section I ‘Introduction’ (para. 12.01), the risk factors serve the purpose of investor protection, but also the purpose of protecting the company and its advisers from liability. As stated in the recitals: •  The primary purpose of including risk factors in a prospectus is to ensure that investors make an informed assessment of such risks and thus take investment decisions in full knowledge of the facts. Risk factors should therefore be limited to those risks which are material and specific to the issuer and its securities and which (p. 270) are corroborated by the content of the prospectus. A prospectus should not contain risk factors which are generic and only serve as disclaimers, as those could obscure more specific risk factors that investors should be aware of, thereby preventing the prospectus from presenting information in an easily analysable, concise and comprehensible form. Among others, environmental, social, and governance circumstances can also constitute specific and material risks for the issuer and its securities and, in that case, should be disclosed. To help investors identify the most material risks, the issuer should adequately describe and present each risk factor in the prospectus. A limited number of risk factors selected by the issuer should be included in the summary. 9 •  The presentation of risk factors in the summary should consist of a limited selection of specific risks which the issuer considers to be of most relevance to the investor when the investor is making an investment decision. The description of the risk factors in the summary should be of relevance to the specific offer and should be prepared solely for the benefit of investors and not give general statements on investment risk, or limit the liability of the issuer, offeror, or any persons acting on their behalf. 10

III.  The Summary and Risk Factors in the Single-Document Prospectus 1.  The Summary (i)  General requirements for the summary 12.09  The new Prospectus Regulation requires that the prospectus shall include a summary that provides the key information that investors need in order to understand the nature and risks of the issuer, the guarantor, and the securities that are being offered or admitted to trading on a regulated market, and that is to be read together with the other parts of the prospectus to aid investors when considering whether to invest in such securities.11 12.10  Other general requirements relating to the summary are that: •  the content of the summary shall be accurate, fair, and clear and shall not be misleading. It is to be read as an introduction to the prospectus and it shall be consistent with the other parts of the prospectus; 12 •  the summary shall not contain cross-references to other parts of the prospectus or incorporate information by reference; 13

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 271) •  the summary shall:

14

°  be presented and laid out in a way that is easy to read, using characters of readable size; and °  be written in a language and a style that facilitate the understanding of the information, in particular, in language that is clear, non-technical, concise, and comprehensible for investors. 12.11  From an issuer’s perspective, when drawing up the prospectus, there may be a tension between, on the one hand, the (new) requirement that the summary shall be ‘accurate, fair, and not misleading’, while on the other hand, the summary needs to be ‘concise’ and is bound to a maximum length (see para. 12.27 below). In addition, there is a maximum number of risk factors that may be included in the summary (see para. 12.15 below). This combination of maximum length and maximum number requirements means that issuers and their advisers will need to make choices what to include or not include in the summary, which may sometimes be difficult in practice. In particular, in the drafting process of the prospectus, it may be expected that the banks will have to adjust to this new regime and its strict boundaries, as they typically push for more rather than less disclosure to be included. If the issuer, forced by these requirements and having made bona fide choices, leaves information or risk factors out of the summary which later on—and inherently with the benefit of hindsight—turn out to be so relevant as to have warranted their inclusion in the summary, this should in my opinion not in itself lead to liability for the issuer, provided such information or risk factors were included in other parts of the prospectus (see section VI ‘Responsibility for the Summary’, para. 12.75).

(ii)  Prescribed format of the summary 12.12  The new Prospectus Regulation contains a standardized format for the summary. It is precisely prescribed which four sections and which sub-sections the summary needs to contain, which headings these need to have, and which topics will at least need to be included thereunder. 12.13  Under three of the four sections, the issuer is allowed to add sub-headings where deemed necessary. This does not apply to the first section, i.e. the introduction containing warnings.15 12.14  For ease of reference, the format requirements as included in the text of Article 7 of the new Prospectus Regulation have been put in table format by the author (Table 12.1).

(iii)  Risk factors included in the summary 12.15  The new Prospectus Regulation applies an overall cap of fifteen for the number of risk factors that may be included in the summary.16 This overall cap is applicable to the two (p. 272) (p. 273) (p. 274) or—in case of a guarantor—three sub-sections where it is obligatory to include risk factors: •  the most material risk factors that are specific to the issuer (Article 7.6(c)); •  if applicable, the most material risk factors pertaining to the guarantor (Article 7.7(c)(iv)); and •  the most material risk factors that are specific to the securities (Article 7.7(d)).

(iv)  Key financial information regarding the issuer and guarantor 12.16  Pursuant to Article 7.13, Prospectus Regulation, the European Securities and Markets Authority (ESMA) shall develop draft regulatory technical standards (RTSs) to specify the content and format of presentation of the key financial information to be included in the summary, as referred to in Article 7.6, Prospectus Regulation. The European Securities and Markets Authority submitted these draft regulatory technical standards to From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

the Commission in its Final Report dated 17 July 2018. The Final Report contained a draft for the Commission RTSs regulation. Based on this draft, the Commission was to adopt the final RTSs regulation. To this end, the Commission published Commission Delegated Regulation (CDR) (EU) 2019/979 of 14 March 2019. 12.17  In its Final Report, ESMA has produced a set of key financial information according to the type of issuer and the type of securities. This information includes certain mandatory items, if included in the prospectus, but also gives the issuer flexibility to choose further key financial information (KFI) that it considers material for investors. It allows for the KFI to include alternative performance measures (APMs). 12.18  The draft RTS regulation has annexes attached, which include tables. Depending on the type of the issuer and the type of the securities involved, the key financial information shall be presented in tabular form according to the tables set out in Annexes I–VI to the draft RTS regulation. Where any information required in the tables is not included in the financial statements of the issuer, the issuer shall have to substitute a corresponding item from its financial statements. An issuer may include additional line items or APMs if they are key financial information to the issuer or the securities being (p. 275) offered or admitted to trading. The draft RTS regulation also prescribes how to deal with pro forma information included in the prospectus; where the issuer has ‘complex financial information’ included in the prospectus; or where a guarantor is involved. 12.19  The Annexes I–VI and the tables included therein relate to the following types of issuers and securities: •  Annex I: key financial information for non-financial entities issuing equity securities; •  Annex II: key financial information for non-financial entities issuing non-equity securities; •  Annex III: key financial information for credit institutions (equity and non-equity securities); •  Annex IV: key financial information for insurance companies (equity and non-equity securities); •  Annex V: key financial information for Special Purpose Vehicles (SPVs) issuing asset-backed securities; •  Annex VI: key financial information for closed-end funds. Where an issuer is of a type not specified in these annexes, the issuer should use the tables in the annexes relating to the securities that it considers most closely correspond to the type of securities that it is issuing. 12.20  The CDR (EU) 2019/979 of 14 March 2019 conforms to the above proposal from ESMA in the draft RTS regulation, as included in the ESMA Final Report dated 17 July 2018.

(v)  Relationship with PRIIPs regulation 12.21  In a number of places in the new Prospectus Regulation, the PRIIPs regulation17 plays a role in relation to the summary. 12.22  As set out in paragraph 12.07, the new Prospectus Regulation states in its recitals that the prospectus summary should be modelled as much as possible on the ‘key information document’ required under the PRIIPs regulation. Indeed, the prescribed format of the summary in the new Prospectus Regulation with mandatory entitlement of the subsections in the form of questions, follows the model of Article 8.3, PRIIPs, which also uses

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

mandatory questions as section titles (e.g. ‘What is this product?’, ‘What are the risks and what could I get in return?’, ‘What are the costs?’, etc.). 12.23  Specifically, the new Prospectus Regulation contains an arrangement for the situation wherein both a prospectus needs to be made available pursuant to the Prospectus Regulation, and in relation to the same securities also a key information document needs to be made available pursuant to the PRIIPs regulation.18 In that situation, the entire third section of the prospectus summary containing the key information on the securities, as required by and set out in Article 7.7, Prospectus Regulation, may be substituted with (p. 276) the information on the securities of the KID (more precisely, with the information set out in Article 8.3, points (c)–(i), PRIIPs). While this is included in the new Prospectus Regulation as an option to the discretion of the issuer (or offeror, or person asking for admission to trading), the new Prospectus Regulation simultaneously provides that each home Member State for the purposes of the new Prospectus Regulation may, in relation to the prospectuses approved by its competent regulator, require issuers (or offerors, or persons asking for admission to trading) to make this substitution. 12.24  If a substitution of content is made pursuant to the above, the content of the KID shall be included as a distinct section of the summary. The page layout of that section shall clearly identify it as the content of the KID as set out in Article 8.3, points (c)–(i), PRIIPs.19 12.25  Articles 13 and 14, PRIIPs contain rules about the provision of the KID to retail investors by the persons advising on, or selling, the relevant PRIIP. These rules contain the requirement to make this disclosure and address both the timing and the manner wherein the KID needs to be provided. The above substitution system as included in the new Prospectus Regulation also addresses the duplication of disclosure rules under both regulations. It provides that if the above substitution of content has to be made in the prospectus by requirement of the relevant home Member State, the persons advising on or selling the securities on behalf of the issuer (or offeror, or person asking for admission to trading) shall be deemed to have fulfilled, during the offer period, their obligation to provide the KID under PRIIPs, if instead they provide the relevant investors with the prospectus summary. In doing so, they will need to comply with the timing and conditions set out in Articles 13 and 14, PRIIPs.20 12.26  It is remarkable that this latter system, which avoids the duplication of disclosure rules, only applies, by the text of Article 7.12, Prospectus Regulation, in case the substitution of content is required by the relevant home Member State. As noted above, Article 7.7, Prospectus Regulation also gives the substitution of content as a discretionary option to the issuer (or offeror, or person asking for admission to trading). In my opinion, a reasonable interpretation of both clauses would be that the system of Article 7.12, Prospectus Regulation should also apply in case the relevant home Member State does not require the substitution of content, but the issuer (or offeror, or person asking for admission to trading) has voluntarily chosen to make this substitution of content based on Article 7.7, Prospectus Regulation. It would benefit the market if this point could be clarified, for example in an ESMA Question and Answer on the new Prospectus Regulation.

(vi)  Length of the summary 12.27  The main rule in relation to the length of the summary provides that it shall be drawn up as a short document written in a concise manner and of a maximum length of seven (7) sides of A4-sized paper when printed.21 As noted in paragraph 12.10 above, (p. 277) it is required for the summary to be presented and laid out in a way that is easy to read, using characters of readable size. Given this requirement, and as there is no requirement to use the same font size for the summary as for the rest of the prospectus, it

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

will be possible to use a smaller font size for the summary (while using characters of readable size). 12.28  The new maximum of seven sides of A4-sized paper when printed constitutes a significant change compared to the old Prospectus Regulation, which prescribed in Article 24 that the length of the summary shall not exceed 7 per cent of the length of a prospectus or fifteen pages, whichever is the longer. 12.29  If, as set out in paragraph 12.22 above, also a KID needs to be made available pursuant to the PRIIPs regulation and a substitution of content takes place, the abovementioned maximum length of the summary shall be extended by three (3) additional sides of A4-sized paper, bringing the maximum length of the summary (including the relevant content of the key information document as a distinct section of the summary) to ten (10) sides of A4-sized paper when printed.22 12.30  If a guarantee is attached to the securities and accordingly, the information included in Article 7.7(c), Prospectus Regulation needs to be included in the summary, the maximum length of the summary shall be extended by one (1) additional side of A4-sized paper, bringing the maximum length of the summary to eight (8) sides of A4-sized paper when printed.23 12.31  In accordance with the above, if both a PRIIPS regulation substitution of content takes place and a guarantee is attached to the securities, the maximum length of the summary will be eleven (11) sides of A4-sized paper when printed. 12.32  Finally, two specific exceptions to the maximum length requirement of the summary may apply in the case of a base prospectus, as set out in section IV.2 ‘Base Prospectus’ (para. 2.48) below.

2.  The Risk Factors 12.33  In view of the purpose of the risk factors described in section II.2 ‘Purpose of the Risk Factors’ (para. 12.08) above, the key requirement in the Prospectus Regulation is that the risk factors in a prospectus shall be limited to risks which are specific to the issuer and/ or to the securities and which are material for taking an informed investment decision, as corroborated by the content of the registration document and the securities note.24 This is a more narrow approach than in the old Prospectus Regulation, which required ‘Prominent disclosure of risk factors that are specific to the issuer or its industry in a (p. 278) section headed “Risk Factors” ’. Also, this requirement in the new Prospectus Regulation will need to be interpreted in accordance with Recital (54), Prospectus Regulation, stating that, ‘A prospectus should not contain risk factors which are generic and only serve as disclaimers, as those could obscure more specific risk factors that investors should be aware of ( . . . ).’ Further, in relation to the risk factors to be included in the summary, Recital (29), Prospectus Regulation states that these ‘should not give general statements on investment risk, or limit the liability of the issuer, offeror or any persons acting on their behalf’. 12.34  The risk factors have to be presented in a limited number of categories, depending on their nature. 12.35  As for the required specificity, each risk factor has to be adequately described, explaining how it affects the issuer or the securities being offered or to be admitted to trading.25 Based on the specificity requirement and abovementioned guidance in the Prospectus Regulation Recitals, all regulators will now need to refuse the inclusion of risk factors which are too generic in nature. As noted in paragraph 12.33 above, under the old Prospectus Regulation local practices varied in this respect, with some regulators already taking this approach while others did allow more general risk factors to be included. In the more restrictive harmonized regime of the new Prospectus Regulation, this practice of

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

including as many risk factors as possible as protection against liability of the issuer and its advisers is no longer allowed. 12.36  As for the materiality requirement, the Prospectus Regulation provides that when drawing up the prospectus, the issuer (or offeror, or person asking for admission to trading on a regulated market) shall assess the materiality of the risk factors based on the probability of their occurrence and the expected magnitude of their negative impact. In each category of risk factors, the most material risk factors will need to be mentioned first in accordance with this assessment having been made. The assessment made of the materiality of the risk factors may also be disclosed in the prospectus by using a qualitative scale of low, medium, or high.26 Note the word ‘may’, making clear that this use of a scale is a voluntary option. Towards investors, it is useful that issuers are required to list—or at least, attempt to list—the relevant risks in an order of materiality. Issuers, on the other hand, might worry about incurring liability, if—in hindsight—they got it wrong and a lowerranked risk appears to be the most significant. For the same reason, it will remain to be seen whether issuers will in practice make use of the option to disclose their risk assessment by placing their risks in a qualitative scale of low, medium, or high.27 12.37  While regulators and courts are aware of the risk of hindsight bias, and may be expected to avoid it, it may in practice be difficult to exclude it at all. As noted above, the issuer is supposed to first make an assessment of the materiality of the risk factors, and based (p. 279) thereon rank the relevant risks in order of materiality. It will be interesting to see what role the issuer’s risk assessment may get in practice. For instance, will regulators ask for it to be submitted with the draft prospectus, in order to assist them in their review of the prospectus in the approval process. Even if they don’t, it will be wise for issuers to duly prepare one and keep it in their ‘prospectus file’, alongside the series of comment forms from the regulator and other exchanges with the regulator in the approval process. Often, and at least in the Netherlands, the regulator will use comment forms in order to set out all of its comments on the prospectus draft as submitted, after which the issuer will address the comments in a revised draft prospectus, to be submitted again together with the comment form in which the issuer has included its responses to the comments. During the approval process, the comment forms will become shorter until at the end, all of the regulator’s comments will have been addressed and the regulator is prepared to approve the prospectus. If later on, and likely with some element of hindsight bias, the issuer is challenged on its inclusion and materiality ranking of the risk factors, this ‘prospectus file’, including the risk assessment prepared by the issuer, may assist the issuer in demonstrating why it had made certain choices and that this was done in a bona fide and diligent process. 12.38  By comparison, in recent years we have seen other types of EU regulation in which more emphasis has been put on process. For instance, in the revised market abuse regime, the new Market Abuse Regulation ((EU) 596/2014) (MAR) has added documentary and process requirements in a number of areas, such as market soundings (Article 11, MAR) and the obligation for listed companies to document and be able to explain to the competent regulator why the company has opted to delay the disclosure of inside information (Article 17, MAR). Underlying this obligation, many listed companies now have ‘disclosure committees’, whose decision-making process is recorded in writing. Another example is the Fourth Anti Money Laundering Directive ((EU) 2015/849) (AML Directive), which in Article 8 requires that entities falling under the Directive’s scope take appropriate steps to identify and assess their risks of money laundering and terrorist financing, that such risk assessments are documented, kept up to date, and made available to the competent authority, and that they have in place policies, controls, and procedures to mitigate and manage effectively the risks of money laundering and terrorist financing. The effect of this approach, whether it is MAR or the AML Directive, may be that before you even get to the question of whether a company has acted in breach of the substantive rules—for example, From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

the obligation to disclose inside information, or to identify clients—the company may already be held in breach if it does not have the required policies or process in place. By contrast, the new Prospectus Regulation requirement for an issuer to prepare a risk assessment seems different in nature but still, from a liability perspective, the failure by an issuer to prepare one could have a similar effect. 12.39  The Prospectus Regulation contains further tools to harmonize the practice in relation to the inclusion of risk factors (and address the varying local practices under the old Prospectus Regulation). First, the Prospectus Regulation provides that in order to encourage appropriate and focused disclosure of risk factors, ESMA shall develop (p. 280) guidelines to assist competent authorities in their review of the specificity and materiality of risk factors and of the presentation of risk factors across categories, depending on their nature.28 Second, the Prospectus Regulation empowers the Commission to adopt delegated acts to supplement the Prospectus Regulation by specifying criteria for the assessment of the specificity and materiality of risk factors and for the presentation of risk factors across categories, depending on their nature.29 Note the difference that while there shall be ESMA guidelines on this topic, the Commission may adopt delegated acts thereon. Also, while the ESMA guidelines will be addressed to the competent authorities, the Commission delegated acts could be addressed to both competent authorities and the persons responsible for the prospectus. It remains to be seen if and when the Commission will find it necessary to adopt delegated acts on this topic. 12.40  The European Securities and Markets Authority published a Consultation Paper30 on 13 July 2018 containing draft ‘Guidelines on risk factors under the Prospectus Regulation’. A Final Report31 containing a summary of all consultation responses and a final version of the guidelines was published by ESMA on 29 March 2019. Although the Guidelines are addressed to the competent authorities, ESMA found it necessary to do a public consultation on the draft Guidelines, considering that financial market participants should take them into account when drawing up a prospectus. 12.41  The Guidelines32 contain, for each guideline, also a further explanation. In addition, examples of specific and material risk factors are given, for illustrative purposes only. The topics of the Guidelines are as follows: •  Guidelines 1 and 2 are about specificity. The main rule is that the competent authority should review whether the disclosure of the risk factor establishes a ‘clear and direct link’ between the risk factor and the issuer, guarantor, or securities. The competent authority should challenge the inclusion of risk factors which are too generic and only serve as disclaimers, or where there is no such ‘clear and direct link’. •  Guidelines 3–5 are about materiality. The main rules are that the materiality has to be apparent from the disclosure in the risk factor, the potential negative impact of the risk factor on the issuer/guarantor/securities has to be disclosed, and materiality may not be compromised by the inclusion of mitigating language. •  Guideline 6 tasks the competent authority to consider whether the materiality and specificity of a risk factor is corroborated by a reading of the prospectus (i.e. the overall picture presented by the prospectus). (p. 281) •  Guidelines 7–10 are about the presentation of risk factors across categories. The main rules are that this presentation should aid investors in navigating the risk factors section, that appropriate headings have to be used, that the number of categories and sub-categories is not disproportionate to the size/ complexity of the transaction and the risk to the issuer/guarantor, and that categories should only be further divided into sub-categories in cases where this can be justified on the basis of the particular type of prospectus. As for the number of categories and sub-categories, ESMA considers that including more than ten categories and subFrom: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

categories in the case of a standard, single-issuer, single-security prospectus would go beyond the Prospectus Regulation requirement of a ‘limited number of categories’. •  Guideline 11 is about focused/concise risk factors. Competent authorities should ensure that the disclosure of each risk factor is presented in a concise form, or else challenge the wording and request more focused and concise disclosure. The European Securities and Markets Authority states in its comments that, ‘The “size inflation” of prospectuses, a phenomenon which may also be directly attributable to the inclusion of large quantities of information surrounding each risk factor included in a prospectus, may obscure the comprehensibility of a prospectus.’ •  Guideline 12 is about risk factors in the summary. Competent authorities should ensure consistency in disclosure presentation, including that the order of the presentation of key risks in the summary is consistent with the order of the risk factors in the risk factors section of the prospectus. 12.42  The ESMA Guidelines look useful, but still are (and can only be) generic in nature and it may be expected that certain choices to be made in practice, when drafting a prospectus, may remain challenging.33 That said, in practice the discussions with a regulator when it raises comments on a risk factor will usually lead to an agreed outcome for both the issuer and the regulator. For instance, if a regulator challenges a risk factor on the grounds that it is not specific enough to the issuer or does not show its materiality to the issuer, this can typically be addressed by amending the risk factor so that it more clearly specifies the risk to the issuer, or the negative impact on the issuer if the risk would materialize. So, often a challenge by the regulator will lead to improved drafting of the risk factor, rather than the risk factor having to be removed completely. It may be expected that the ESMA Guidelines will help in this process, and will procure a more harmonized approach by the different regulators across the EU. 12.43  For certain specific situations, the Prospectus Regulation prescribes the mandatory inclusion of risk factors: •  risk factors shall also include those resulting from the level of subordination of a security and the impact on the expected size or timing of payments to holders of (p. 282) the securities in the event of bankruptcy, or any other similar procedure, including where relevant the insolvency of a credit institution or its resolution or restructuring in accordance with the Bank Recovery and Resolution Directive (BRRD) (Directive 2014/59/EU); 34 and •  where there is a guarantee attached to the securities, the prospectus shall contain the specific and material risk factors pertaining to the guarantor to the extent that they are relevant to the guarantor’s ability to fulfil its commitment under the guarantee. 35

IV.  The Summary and Risk Factors in Other Prospectus Types 1.  Non-Retail, Non-Equity Prospectus

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

12.44  The main rule that a prospectus needs to contain a summary is laid down in Article 7.1, Prospectus Regulation (see section III.1 ‘The Summary’, para. 12.09). By way of derogation from this main rule, Article 7.1, Prospectus Regulation provides that no summary shall be required where the prospectus relates to the admission to trading on a regulated market of non-equity securities, provided that either:36 •  such securities are to be traded only on a regulated market, or a specific segment thereof, to which only qualified investors can have access for the purposes of trading in such securities; or •  such securities have a denomination per unit of at least EUR 100,000. 12.45  Whilst the Prospectus Regulation contains a definition of what constitutes ‘equity securities’, ‘non-equity securities’ is a negatively worded definition referring to ‘all securities that are not equity securities’.37 The typical example of non-equity securities are (non-convertible) bonds. 12.46  This exemption from the summary requirement fits into a broader set of exemptions applicable to non-retail, non-equity securities, designed to ensure the proper functioning of the wholesale market for these types of securities and increase market liquidity therein. The rationale can be found in the recitals to the Prospectus Regulation:38 In order to ensure the proper functioning of the wholesale market for non-equity securities and increase market liquidity, it is important to set out a distinct alleviated treatment for non-equity securities admitted to trading on a regulated market and designed for qualified investors. Such alleviated treatment should comprise minimum (p. 283) information requirements that are less onerous than those applying to non-equity securities offered to retail investors, no requirement to include a summary in the prospectus, and more flexible language requirements. The alleviated treatment should be applicable to, firstly, non-equity securities, regardless of their denomination, which are traded only on a regulated market, or a specific segment thereof, to which only qualified investors can have access for the purposes of trading in such securities and, secondly, to non-equity securities with a denomination of at least EUR 100,000, which reflects the higher investment capacity of the investors concerned by the prospectus. No resale to non-qualified investors should be allowed for non-equity securities that are traded only on a regulated market, or a specific segment thereof, to which only qualified investors can have access for the purposes of trading in such securities, unless a prospectus is drawn up in accordance with this Regulation that is appropriate for non-qualified investors. To that end, it is essential that market operators, when establishing such regulated markets, or a specific segment thereof, do not allow direct or indirect access by non-qualified investors to that regulated market or specific segment. 12.47  Note that, as stated above, the derogation from the main rule to include a summary applies where the prospectus relates to the admission to trading on a regulated market of non-equity securities (under the conditions stated above). A different, and more general, exemption applies for any offers of securities to the public, if either (amongst others) such an offer is addressed solely to qualified investors, or if it concerns an offer of securities whose denomination per unit amounts to at least EUR 100,000. Such offers of securities to the public are completely exempted from the obligation to publish a prospectus.39 However, it should always be kept in mind that the main rule of the Prospectus Regulation for the requirement to publish a prospectus applies, separately, to both an offering of securities to the public and the admission of securities to trading on a regulated market.40 Accordingly, even if an offer of securities to the public is exempted from the prospectus requirement, for example where the offer is only addressed to qualified investors or the securities have a From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

minimum denomination of EUR 100,000, if besides being offered to the public these securities are also being admitted to trading on a regulated market, the prospectus requirement kicks in again, unless an exemption applies. It is for that situation, the admission to trading on a regulated market of non-equity securities addressed to non-retail investors, that the abovementioned alleviated regime applies, including the exemption from the summary requirement pursuant to Article 7.1, Prospectus Regulation. In other words, there is still the need to publish a prospectus, but subject to less stringent requirements. For issuers of non-retail, non-equity securities, this alleviated regime is a new and helpful feature of the new Prospectus Regulation compared to the old one.

(p. 284) 2.  Base Prospectus 12.48  As was the case under the old Prospectus Regulation, it is possible under the Prospectus Regulation for an offering or admission to trading of non-equity securities (for the purposes hereof including warrants in any form) to make use of a base prospectus.41 In particular, this is useful for issue programmes or other repeat issues of non-equity securities on the back of the same base prospectus. For each such individual issue, the socalled ‘final terms’ will need to be published, either in the form of a separate document, or as included in the base prospectus or in any supplement thereto. The final terms may only contain information that relates to the ‘securities note’, and may not be used to supplement the base prospectus.42 12.49  In the old Prospectus Regulation, the content requirements relating to the base prospectus and the final terms had become rather lengthy and complex. In the Prospectus Regulation, this has been ‘cleaned up’ into a comprehensive Article 8 dealing with the base prospectus and final terms. As part of this exercise, the rules in relation to the summary have been changed. There is no longer any requirement that a summary be included in the base prospectus; instead, a summary should now only be drawn up by the issuer specifically in relation to each individual issue.43 The rationale given in the recitals to the Prospectus Regulation is ‘to reduce administrative burdens and to enhance the readability for investors’.44 12.50  The summary of the individual issue shall be subject to the same requirements as the final terms, as set out in Article 8, Prospectus Regulation, and will need to be annexed to such final terms.45 12.51  As set out in paragraph 12.48 above, there is a choice as to how the final terms are presented. If the final terms are neither included in the base prospectus, nor in a supplement thereto, but are presented in a separate document, this will need to be filed with the competent regulator and made publicly available. The document will need to contain a clear and prominent statement indicating that the final terms must be read in conjunction with the base prospectus, where the base prospectus and any supplement thereto are published, and that a summary of the individual issue is annexed to the final terms.46 12.52  The issue-specific final terms, including the summary attached, should only be approved by the competent authority where such final terms (and attached summary) are included in the base prospectus or in a supplement thereto. Otherwise, it should only be filed with the competent authority.47 It should be noted, however, that the base (p. 285) prospectus needs to include a template, entitled ‘Form of the final terms’, to be filled out for each individual issue and indicating the available options with regard to the information to be determined in the final terms of the offer. Where a base prospectus contains options with regard to the information required by the relevant securities note, the final terms shall

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

determine which of the options is applicable to the individual issue by referring to the relevant sections of the base prospectus or by replicating such information.48 12.53  As for its contents, the summary of the individual issue will need to comply with Article 7, Prospectus Regulation (dealing with the prospectus summary, see paragraph 12.09) and will need to provide the following:49 •  the key information in the base prospectus, including the key information on the issuer; and •  the key information in the appropriate final terms, including the key information which was not included in the base prospectus. 12.54  Article 8.9, Prospectus Regulation contains a specific provision in case the final terms relate to several securities which differ only in some very limited details, such as the issue price or maturity date. In that case, a single summary of the individual issue may be attached for all those securities, provided the information referring to the different securities is clearly segregated. 12.55  With the application to the summary of Article 7, Prospectus Regulation, also the requirements for the maximum length of the summary apply as set out therein (see paragraph 12.27). A specific extension, however, applies in case, as set out above, a single summary covers several securities which differ only in some very limited details, such as the issue price or maturity date. In that case, the maximum length set out in Article 7.3, Prospectus Regulation (i.e. seven sides of A4-sized paper when printed) shall be extended by two additional sides of A4-sized paper.50 It is also possible that in relation to those securities a KID is required to be prepared under the PRIIPs regulation and that the issuer proceeds with the ‘substitution of content’ rules (see paragraph 12.23).51 In that case, a different extension of the summary length will apply—to my understanding of Article 7.7, Prospectus Regulation, instead of the aforementioned two-page extension—pursuant to which the maximum length shall be extended by three additional sides of A4-sized paper for each additional security.

(p. 286) 3.  Prospectus Consisting of Separate Documents 12.56  The issuer (or offeror, or person asking for admission to trading on a regulated market) has the option to draw up the prospectus either as a single document or as separate documents. A prospectus composed of separate documents has to divide the required information into a registration document, a securities note, and a summary. In that case, the registration document shall contain the information relating to the issuer and the securities note shall contain the information concerning the securities offered to the public or to be admitted to trading on a regulated market.52 The summary will, in this case, be a separate document, subject to Article 7, Prospectus Regulation. 12.57  The prospectus consisting of separate documents can be a useful feature for issuers which repeatedly raise financing on capital markets, in order to provide them with more flexibility and enable them to seize market windows.53 On the back of an already approved registration document, if and when the issuer wishes to seize a market window for the issuance of securities, it will only need to draw up and obtain approval for the securities note and the summary. See also paragraph 12.59 for the universal registration document. 12.58  Article 10, Prospectus Regulation deals with prospectuses consisting of separate documents. An issuer that has already had a registration document approved by a competent authority shall be required to draw up only the securities note and the summary, if and when securities are being offered to the public or admitted to trading on a regulated market. The securities note and the summary shall be subject to a separate approval from the competent authority. The registration document (and any supplement thereto, as

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

required) accompanied by the securities note and the summary shall constitute a prospectus, once approved by the competent authority.

4.  Universal Registration Document 12.59  Frequent issuers who wish to benefit from the advantages of drawing up a prospectus consisting of separate documents, may in particular choose to draw up a universal registration document. Issuers whose securities are admitted to trading on regulated markets or multilateral trading facilities (MTFs) have the option, but not the obligation, to draw up and publish a universal registration document every financial year describing the company’s organization, business, financial position, earnings and prospects, governance, and shareholding structure. Drawing up a universal registration document (p. 287) enables the issuer to keep the information up to date and to draw up a prospectus when market conditions become favourable for an offer of securities to the public or an admission to trading on a regulated market, by adding a securities note and a summary. Since it is intended that a universal registration document can be used for both equity and non-equity securities, the disclosure standards for the universal registration document are based on those for equity securities.54 12.60  An issuer choosing to draw up a universal registration document every financial year shall submit it for approval to its competent authority. However, after the issuer had had a universal registration document approved by its competent authority for two consecutive financial years, subsequent universal registration documents may be filed with the competent authority without prior approval (provided this is done every consecutive year without omissions).55 This is optional; the frequent issuer may also choose to continue submitting its universal registration documents for approval. 12.61  This is a relevant choice, since frequent issuers using the system of the universal registration document should take care that the universal registration document can only be used as part of a prospectus if it has been approved. In accordance with the rules for a prospectus consisting of separate documents, all constituent parts of the prospectus should be subject to approval, including, where applicable, the universal registration document and any amendments thereto, where they have been previously filed with the competent authority but not approved.56 The frequent issuer may, however, in these circumstances, benefit from a faster approval process.57 12.62  As set out above, if the issuer wishes to use the universal registration document as part of a prospectus in connection with an offer of securities to the public or admission of securities to trading on a regulated market, it will need to draw up and obtain approval for the securities note and the summary, as set out in Article 10, Prospectus Regulation. If the universal registration document has already been approved previously by the competent authority, then only the securities note, the summary and, if applicable, all amendments to the universal registration document filed since the approval thereof shall be subject to a separate approval. If, on the other hand, the universal registration document was filed without prior approval, the entire documentation (universal registration document, any amendments made thereto since its filing, securities note, and summary) shall be subject to approval, notwithstanding the fact that those documents remain separate. Together, once approved, those documents then constitute the prospectus.58

(p. 288) 5.  Simplified Disclosure Regime for Secondary Issuances 12.63  Issuers whose securities have been admitted to trading on a regulated market or small and medium-sized enterprise (SME) growth market continuously for at least eighteen months and who wish to do a follow-on offering of such securities to the public or admission to trading, or issue non-equity securities, may benefit from the simplified disclosure regime for secondary issuances set out in Article 14, Prospectus Regulation. The rationale is that once a class of securities is already admitted to trading on a regulated market, investors are

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

provided with ongoing disclosures by the issuer under the MAR. The need for a full prospectus is therefore less acute in cases of subsequent offers to the public or admissions to trading on a regulated market by such an issuer.59 The same applies to securities traded on SME growth markets, as their operators are required under the Markets in financial instruments (MiFID II) Directive (2014/65/EU) to establish and apply rules ensuring appropriate ongoing disclosure.60 12.64  The simplified prospectus shall consist of a summary in accordance with Article 7, Prospectus Regulation, a specific registration document, and a specific securities note.61 The required content of the latter two documents has been set out in delegated acts adopted by the Commission in accordance with Articles 14.3 and 44, Prospectus Regulation (CDR (EU) 2019/980 of 14 March 2019). The required content as set out in the Annexes to this CDR applicable to the registration document and the securities note for secondary issuances, in each case includes risk factors—see Article 14.3(d), Prospectus Regulation, section 3 of Annex 3 and section 2 of Annex 12.

6.  EU Growth Prospectus 12.65  A further proportionate disclosure regime is available for SMEs, or small issuers other than SMEs who meet the conditions as set out in Article 15.1, Prospectus Regulation. The rationale for this regime is that as SMEs usually need to raise relatively lower amounts than other issuers, the cost of drawing up a standard prospectus can be disproportionally high, and thus might deter them from offering their securities to the public. At the same time, because of their size and potentially shorter track record, SMEs might carry a specific investment risk compared to larger issuers and should disclose sufficient information for investors to take their investment decision. Therefore, a proper balance should be struck between cost-efficient access to financial markets and investor protection when calibrating the content of an EU Growth Prospectus.62 Importantly, the EU growth disclosure regime is not available for issuers who have securities admitted to trading on a regulated market;63 investors on regulated markets should feel (p. 289) confident that the issuers whose securities they invest in are subject to one single set of disclosure rules and, therefore, there should not be a two-tier disclosure standard on regulated markets depending on the size of the issuer.64 12.66  An EU Growth Prospectus under the proportionate disclosure regime shall be a document of a standardized format, written in a simple language and which is easy for issuers to complete. It shall consist of a specific summary based on Article 7, Prospectus Regulation, a specific registration document, and a specific securities note.65 The required content of these three documents has been set out in delegated acts adopted by the Commission in accordance with Articles 15.2 and 44, Prospectus Regulation (CDR (EU) 2019/980 of 14 March 2019). The required content as set out in the Annexes to this CDR applicable to the EU growth share registration document, the EU growth non-equity registration document, the EU growth share securities note and the EU growth non-equity securities note, in each case includes risk factors—see section 3 of Annex 24, section 3 of Annex 25, section 3 of Annex 26, and section 2 of Annex 27. 12.67  As for the summary, note as set out above that the Prospectus Regulation prescribes a summary ‘based on’ Article 7, Prospectus Regulation. The Prospectus Regulation sets out that the specific summary shall not impose any additional burdens or costs on issuers in so far as it shall only require the relevant information already included in the EU Growth Prospectus. It calls for the Commission, when specifying the standardized format of the specific summary, to calibrate the requirements to ensure that it is shorter than the summary provided for in Article 7, Prospectus Regulation.66

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

12.68  The Commission delegated acts (CDR (EU) 2019/980 of 14 March 2019) set out the framework for the specific summary in Article 33 and prescribe its required contents in Annex 23 (Specific summary for the EU Growth Prospectus). The framework requirements of Annex 23 are in general the same as set out for the ‘normal’ summary of Article 7, Prospectus Regulation, as described in paragraph 12.27, except for the maximum length requirements. 12.69  The maximum length requirements set out in the delegated acts (Article 33 of CDR (EU) 2019/980 of 14 March 2019) can be summarized as follows: •  default maximum length: six sides of A4-sized paper when printed; •  where there is a substitution of content in view of the application of PRIIPs (cf. paragraph 12.29): the default maximum length shall be extended by three additional sides of A4-sized paper; •  where a single summary covers several securities which differ only in some very limited details, such as the issue price or maturity date (cf. paragraph 12.55), the default maximum length shall be extended by two additional sides of A4-sized paper; unless also a key information document under PRIIPs is required and the (p. 290) issuer proceeds with the substitution-of-content rules, in which case the maximum length shall be extended by three additional sides of A4-sized paper for each additional security; •  where the summary contains information related to a guarantee attached to the securities, the default maximum length shall be extended by one additional side of A4sized paper. 12.70  As noted in paragraph 12.67 above, the Prospectus Regulation calls for the Commission to ensure that the summary of the EU Growth Prospectus is shorter than the default summary of Article 7, Propsectus Regulation. With the content requirements for both types of summary being in general the same and the maximum length only being decreased with one page from seven to six pages, it should be noted that there is not much difference between the two types of summary.

V.  Competent Authority’s Discretionary Powers 12.71  Article 32, Prospectus Regulation (Powers of competent authorities) sets out a list of supervisory and investigatory powers that competent authorities shall at least need to have in order to fulfil their duties under the Prospectus Regulation. 12.72  One of these, set out in Article 32.1(a), Prospectus Regulation, is the power ‘to require issuers, offerors or persons asking for admission to trading on a regulated market to include in the prospectus supplementary information, where necessary for investor protection’. 12.73  As set out in paragraphs 12.27–12.32 and paragraph 12.15, the summary is subject to a maximum length requirement of seven A4-sized pages and the number of risk factors included in the summary is limited to fifteen. As noted above in paragraph 12.11, there may be a tension between on the one hand the (new) requirement that the summary shall be ‘accurate, fair and not misleading’, and on the other hand the need for the summary to be ‘concise’ and bound to a maximum length, and the number of risk factors to be included in the summary is bound to a maximum number. 12.74  Where in exceptional cases these requirements cannot be reconciled, possibly the competent authority could require the issuer to include supplementary information in the summary, pursuant to Article 32.1(a), Prospectus Regulation, if the competent authority feels (or agrees with the issuer) that this is necessary for investor protection.67 It is not clear from the Prospectus Regulation whether the power granted to the competent From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

authority in Article 32.1(a), Prospectus Regulation can override the (p. 291) maximum length and risk factor number requirements included in Articles 7.3 and 7.10, Prospectus Regulation.

VI.  Responsibility for the Summary 12.75  Consistent with the system of the old Prospectus Regulation, Article 11.2, Prospectus Regulation prescribes that Member States shall ensure that no civil liability shall attach to any person solely on the basis of the summary pursuant to Article 7, Prospectus Regulation or the specific summary of an EU Growth Prospectus pursuant to Article 15.1, Prospectus Regulation, including any translation thereof, unless: •  it is misleading, inaccurate, or inconsistent, when read together with the other parts of the prospectus; or •  it does not provide, when read together with the other parts of the prospectus, key information in order to aid investors when considering whether to invest in the securities. In the first part of the summary, i.e. the introduction containing warnings, a warning to this effect needs to be included.68 12.76  As set out in paragraph 12.11 above, these rules on responsibility for the summary should in my opinion not lead to liability for the issuer (or other persons responsible for the contents of the prospectus) in circumstances where the issuer, forced by the requirements about the maximum length of the summary and the maximum number of risk factors to be included therein, and having made bona fide choices, leaves information or risk factors out of the summary which—with the benefit of hindsight—later on turn out to be so relevant as to have warranted their inclusion in the summary, provided such information or risk factors were included in other parts of the prospectus.

VII.  Use of Language 12.77  Article 27, Prospectus Regulation contains rules about the use of language for the prospectus to be drawn up, thereby making a distinction between the situations where an offer of securities is made to the public or admission to trading on a regulated market is sought only in the home Member State; or in one or more Member States excluding the home Member State; or in more than one Member State including the home Member State. 12.78  Irrespective of this distinction, it is provided in relation to the summary that the competent authority of each host Member State shall require that the summary referred to (p. 292) in Article 7, Prospectus Regulation be available in its official language, or at least one of its official languages, or in another language accepted by the competent authority of that Member State, but it shall not require the translation of any other part of the prospectus.69 12.79  In case of a base prospectus, it is mandatory for the final terms and the summary of the individual issue to be drawn up in the same language as the language of the approved base prospectus.70

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

12.80  If a base prospectus has previously been passported to one or more other Member States and the final terms are neither included in the base prospectus, nor in a supplement thereto, it is prescribed that the competent authority of the home Member State shall communicate such final terms electronically to the competent authority of the host Member State(s) and to ESMA as soon as practicable after they are filed.71 In that case, the following language rules apply to the final terms and the summary annexed thereto:72 •  the summary of the individual issue annexed to the final terms shall be available in the official language, or at least one of the official languages of the host Member State, or in another language accepted by the competent authority of the host Member State; where the base prospectus is to be translated pursuant to [Articles 27.2 or 27.3, Prospectus Regulation], the final terms and the summary of the individual issue annexed thereto shall be subject to the same translation requirements as the base prospectus.

VIII.  Conclusion 12.81  Based on the aim of the new Prospectus Regulation to further harmonize prospectuses across Member States, the new format for the summary is highly prescriptive and standardized, with a strong focus on accessibility. The summary format makes use of mandatory entitlement of the sub-sections in the form of questions, modelled on the ‘key information document’ as required under the PRIIPs regulation. A separate CDR ((EU) 2019/979) contains regulatory technical standards developed by ESMA to specify the content and format of presentation of the key financial information to be included in the summary. From an issuer’s perspective, when drawing up the prospectus, there may be a tension between, on the one hand, the (new) requirement that the summary shall be ‘accurate, fair and not misleading’, while on the other hand, the need for the summary to be ‘concise’ and bound to a maximum length. In addition, (p. 293) the new Prospectus Regulation applies an overall cap of fifteen for the number of risk factors that may be included in the summary. In view of the maximum length requirement and the capped number of risk factors, issuers and their advisers will need to make choices what to include or not include in the summary, which may bring concerns about ensuing liability. 12.82  In relation to risk factors, the new Prospectus Regulation aims to harmonize local practices, which varied under the old Prospectus Regulation, by prescribing the approach that the risk factors to be included shall be limited to only specific and material risk factors. The European Securities and Markets Authority has issued Guidelines in order to provide more guidance to competent authorities—and indirectly to financial market participants— about the ‘specificity’ and ‘materiality’ requirements. The risk factors have to be presented in a limited number of categories, depending on their nature. When drawing up a prospectus, the issuer will have to make an assessment of the materiality of the risk factors based on the probability of their occurrence and the expected magnitude of their negative impact. Based on this assessment, in each category of risk factors the most material risk factors will need to be mentioned first. While towards investors it is useful that issuers are required to list the relevant risks in order of materiality, issuers may worry about liability if in hindsight they got it wrong. In this respect, it is essential that regulators and courts are aware of the risk of hindsight bias and seek to avoid this. 12.83  In view of the liability concerns mentioned above in relation to both the summary and the risk factors, it will be wise for issuers in the process of drafting and seeking approval for a prospectus to carefully record and keep a ‘prospectus file’, including the risk assessment made by the issuer in relation to the risk factors, so that in case of later

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

challenges, the issuer can demonstrate why it had made certain choices and that this was done in a bona fide and diligent process. Table 12.1  Required summary format and content per Article 7, Prospectus Regulation Reference to Art. 7, Prospectus Regulation

Required format and content

7.5

1. Introduction, containing warnings

(a)  the name and international securities identification number (ISIN) of the securities; (b)  the identity and contact details of the issuer, including its legal entity identifier (LEI); (c)  where applicable, the identity and contact details of the offeror, including its LEI if the offeror has legal personality, or of the person asking for admission to trading on a regulated market; (d)  the identity and contact details of the competent authority approving the prospectus and, where different, the competent authority that approved the registration document or the universal registration document; (e)  the date of approval of the prospectus.

Include the following warnings:

(a)  the summary should be read as an introduction to the prospectus; (b)  any decision to invest in the securities should be based on a consideration of the prospectus as a whole by the investor; (c)  where applicable, that the investor could lose all or part of the invested capital and, where the investor’s liability is not limited to the amount of the investment, a warning that the investor could lose more than the invested capital and the extent of such potential loss; (d)  where a claim relating to information contained in the prospectus is brought before a court, the plaintiff investor might, under national law, have to bear the costs of translating the prospectus before the legal proceedings are initiated; (e)  civil liability attaches only to those persons who have tabled the summary, including any translation thereof, but only where the summary is misleading, inaccurate, or inconsistent, when read together with the other parts of the prospectus, or where it does not provide, when read together with the other parts of the prospectus, key information in order to aid investors when considering whether to invest in such securities; (f)  where applicable, the comprehension alert required in accordance with point (b) of Article 8(3) of Regulation (EU) 1286/2014 [PRIIPs].

7.6

2. Key information on the issuer Who is the issuer of the securities? Include a brief description of the issuer of the securities, including at least the following: (i)  its domicile and legal form, its LEI, the law under which it operates, and its country of incorporation; (ii)  its principal activities;

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Reference to Art. 7, Prospectus Regulation

Required format and content

(iii)  its major shareholders, including whether it is directly or indirectly owned or controlled and by whom; (iv)  the identity of its key managing directors; (v)  the identity of its statutory auditors.

What is the key financial information regarding the issuer? Include a selection of historical key financial information presented for each financial year of the period covered by the historical financial information, and any subsequent interim financial period accompanied by comparative data from the same period in the prior financial year. The requirement for comparative balance sheet information shall be satisfied by presenting the year-end balance sheet information. Key financial information shall, where applicable, include: (i)  pro forma financial information; (ii)  a brief description of any qualifications in the audit report relating to the historical financial information.

What are the key risks that are specific to the issuer? Include a brief description of the most material risk factors specific to the issuer contained in the prospectus, while not exceeding the total number of risk factors set out in Article 7.10 [i.e. 15]. 7.7

3. Key information on the securities What are the main features of the securities? Include a brief description of the securities being offered to the public and/or admitted to trading on a regulated market, including at least: (i)  their type, class, and ISIN; (ii)  where applicable, their currency, denomination, par value, the number of securities issued, and the term of the securities; (iii)  the rights attached to the securities; (iv)  the relative seniority of the securities in the issuer’s capital structure in the event of insolvency, including, where applicable, information on the level of subordination of the securities and the potential impact on the investment in the event of a resolution under Directive 2014/59/EU [BRRD]; (v)  any restrictions on the free transferability of the securities; (vi)  where applicable, the dividend or payout policy.

Where will the securities be traded? Include an indication as to whether the securities are or will be subject to an application for admission to trading on a regulated market or for trading on an MTF and the identity of all the markets where the securities are or are to be traded. Is there a guarantee attached to the securities? If applicable, include this sub-section and the following information thereunder: (i)  a brief description of the nature and scope of the guarantee; (ii)  a brief description of the guarantor, including its LEI; (iii)  the relevant key financial information for the purpose of assessing the guarantor’s ability to fulfil its commitments under the guarantee; and

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Reference to Art. 7, Prospectus Regulation

Required format and content

(iv)  a brief description of the most material risk factors pertaining to the guarantor contained in the prospectus in accordance with Article 16(3), while not exceeding the total number of risk factors set out in Article 7.10 [i.e. 15].

What are the key risks that are specific to the securities? Include a brief description of the most material risk factors specific to the securities contained in the prospectus, while not exceeding the total number of risk factors set out in Article 7.10 [i.e. 15]. 7.8

4. Key information on the offer of securities to the public and/or the admission to trading on a regulated market Under which conditions and timetable can I invest in this security? Include, where applicable, the general terms, conditions and expected timetable of the offer, the details of the admission to trading on a regulated market, the plan for distribution, the amount and percentage of immediate dilution resulting from the offer, and an estimate of the total expenses of the issue and/or offer, including estimated expenses charged to the investor by the issuer or the offeror. Who is the offeror and/or the person asking for admission to trading? If different from the issuer, include a brief description of the offeror of the securities and/or the person asking for admission to trading on a regulated market, including its domicile and legal form, the law under which it operates, and its country of incorporation. Why is this prospectus being produced? Include a brief description of the reasons for the offer or for the admission to trading on a regulated market, as well as, where applicable: (i)  the use and estimated net amount of the proceeds; (ii)  an indication of whether the offer is subject to an underwriting agreement on a firm commitment basis, stating any portion not covered; (iii)  an indication of the most material conflicts of interest pertaining to the offer or the admission to trading.

(p. 294)

Footnotes: 1

  In line with the general approach as set out in Recital (27), Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 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, [2017] OJ L168/12 (Prospectus Regulation) : ‘A prospectus should not contain information which is not material or specific to the issuer and the securities concerned, as that could obscure the information relevant to the investment decision and thus undermine investor protection.’ 2 

Article 6.1, Prospectus Regulation.

3

  Article 6.2, Prospectus Regulation.

4

  Recital (28), Prospectus Regulation.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

5

  Recital (30), Prospectus Regulation.

6

  Recital (31), Prospectus Regulation.

7

  Regulation (EU) 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs). 8

  Recital (32), Prospectus Regulation.

9

  Recital (54), Prospectus Regulation.

10

  Recital (29), Prospectus Regulation.

11

  Article 7.1, Prospectus Regulation.

12

  Article 7.2, Prospectus Regulation.

13

  Article 7.11, Prospectus Regulation.

14

  Article 7.3, Prospectus Regulation.

15

  Article 7.9, Prospectus Regulation.

16

  Article 7.10, Prospectus Regulation.

17

  See n. 7.

18

  Article 7.7, Prospectus Regulation.

19

  ibid.

20

  Article 7.12, Prospectus Regulation.

21

  Article 7.3, Prospectus Regulation.

22

  Article 7.7, Prospectus Regulation.

23

  ibid.

24

  Article 16.1, Prospectus Regulation.

25

  ibid.

26

  ibid.

27

  cf. Simon Bullock, Anna Delgado, Tim Morris, and Caroline Chambers, ‘New Prospectus Regulation, an Evolving Regime’, PLC Magazine, July 2017. 28

  Article 16.4, Prospectus Regulation.

29

  Article 16.5, Prospectus Regulation.

30

  Consultation Paper, Guidelines on risk factors under the Prospectus Regulation, 13 July 2018, https://www.esma.europa.eu/sites/default/files/library/ esma31-62-996_consultation_paper_on_guidelines_on_risk_factors.pdf. 31

  ESMA, Final Report: Guidelines on risk factors under the Prospectus Regulation, 29 March 2019, https://www.esma.europa.eu/sites/default/files/library/ esma31-62-1217_final_report_on_guidelines_on_risk_factors.pdf (ESMA Final Report). 32

  See Annex II, 31 and further, ESMA Final Report.

33

  cf. W. J. Horsten, ‘ESMA-consultatie over risicofactoren in een prospectus’, Tijdschrift voor Financieel Recht (TvFR) (2018) 8/9, 449. 34

  Article 16.2, Prospectus Regulation.

35

  Article 16.3, Prospectus Regulation.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

36

  Article 7.1, Prospectus Regulation.

37

  Article 2, Prospectus Regulation.

38

  Recital (21), Prospectus Regulation.

39

  Article 1.4, Prospectus Regulation.

40

  Article 1.1, Prospectus Regulation.

41

  Article 8.1, Prospectus Regulation.

42

  Article 8.4, Prospectus Regulation.

43

  Article 8.8, Prospectus Regulation.

44

  Recital (37), Prospectus Regulation.

45

  Article 8.9, Prospectus Regulation.

46

  Article 8.5, Prospectus Regulation.

47

  Recitals (36) and (37), Prospectus Regulation.

48

  Articles 8.2 and 8.3, Prospectus Regulation.

49

  Article 8.9, Prospectus Regulation.

50

  Article 7.7, Prospectus Regulation.

51

  Application of the ‘substitution of content’ rule means that the entire third section of the prospectus summary containing the key information on the securities, as required by and set out in Article 7.7, Prospectus Regulation, may be substituted with the information on the securities of the key information document (more precisely, with the information set out in Article 8.3 points (c)–(i), PRIIPs). 52

  Article 6.3, Prospectus Regulation.

53

  cf. Recital (34), Prospectus Regulation.

54

  Recital (39), Prospectus Regulation.

55

  Article 9.2, Prospectus Regulation.

56

  Recital (42), Prospectus Regulation.

57

  Recital (43), Prospectus Regulation and Article 9.11, Prospectus Regulation.

58

  Article 10.3, Prospectus Regulation.

59

  Recital (48), Prospectus Regulation.

60

  Recital (49), Prospectus Regulation.

61

  Article 14.1, Prospectus Regulation.

62

  Recital (51), Prospectus Regulation.

63

  Article 15.1, Prospectus Regulation.

64

  Recital (53), Prospectus Regulation.

65

  Article 15.1, Prospectus Regulation.

66

  Article 15.2, Prospectus Regulation.

67

  As suggested previously by Professor Jan Paul Franx at the IFR Symposion on the Capital Markets Union in Amsterdam on 3 February 2017. 68

  Article 7.5, second sub-paragraph, item (e), Prospectus Regulation.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

69

  Articles 27.2 and 27.3, Prospectus Regulation.

70

  Article 27.4, Prospectus Regulation.

71

  Article 25.4, Prospectus Regulation.

72

  Article 27.4, Prospectus Regulation.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Part II The New EU Prospectus Rules, 13 Prospectus Formats and Shelf Registration Dorothee Fischer-Appelt From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

Subject(s): Transparency Directive — Securities

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 295) 13  Prospectus Formats and Shelf Registration I.  Introduction 13.01 II.  New Regulation and Delegated Acts 13.03 III.  Prospectus Formats and their Use in Practice 13.07 1.  Overview 13.07 2.  Stand-alone Prospectuses 13.09 3.  Tri-Partite Prospectuses and the ‘Old’ Shelf Registration 13.11 4.  Base Prospectuses and Final Terms/Supplements 13.15 5.  New Summary Requirements 13.17 IV.  New Prospectus Formats 13.18 1.  Simplified Prospectus for Secondary Issuances 13.19 2.  Introduction of the EU Growth Prospectus 13.23 3.  The New Universal Registration Document (URD) 13.30 V.  Discussion of URD and Simplified Prospectus 13.62 VI.  US Shelf Registration 13.67 1.  Overview and Evolution 13.67 2.  Timing of Filings in US Practice 13.76 3.  Comparison with URD 13.78 VII.  Conclusion 13.80

I.  Introduction 13.01  The new Prospectus Regulation1 is intended to simplify issuances and provide flexibility for issuers. To foster these aims, it introduces three new prospectus formats: first, a new universal registration document (URD) for listed companies that is updated annually and can be approved for use in a prospectus for a range of different securities (both debt and equity), even where issuers do not intend to offer or list securities immediately. The URD incorporates new features compared to the shelf registration that was already permitted under the Prospectus Directive,2 allowing faster access to capital markets and more efficient financial reporting (Art. 9). Second, the Prospectus Regulation also provides for a new form of EU Growth Prospectus (Art. 15), which permits small and medium-sized companies as well as certain other issuers with an average market capitalization of less than EUR 500 million that are planning an initial public offering or listing to use a simplified prospectus that requires less disclosure (p. 296) than the prospectus generally required for equity securities. Third, the new Prospectus Regulation provides for a simplified prospectus for secondary issuances (Art. 14), which broadens the system of proportionate disclosure to apply to both equity and debt prospectuses and reduces its disclosure burden.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

13.02  This chapter discusses the new URD in detail and evaluates its merits in the context of a comparison with the US system of shelf registration, which has been widely used in US securities regulation for decades. The chapter concludes with proposals to improve the new URD in future. It also discusses the prospectus formats available under the Prospectus Regulation generally, including the other new prospectus formats.

II.  New Regulation and Delegated Acts 13.03  The Prospectus Regulation requires the EU Commission to adopt delegated acts (Level 2) in relation to several of its provisions, and on 14 March 2019, the EU Commission published the final draft text of a delegated regulation (the ‘Delegated Act’) supplementing the new Prospectus Regulation.3 The Delegated Act sets out detailed requirements relating to the format, content, scrutiny, and approval of prospectuses. The Prospectus Regulation and the Delegated Act apply from 21 July 2019, repealing and replacing the old Prospectus Directive and related Regulation (809/2004). 13.04  The objectives of the Delegated Act are to set out the information that issuers must include in all types of prospectuses (whether drawn up as a single or separate documents) and to ensure that all EU competent authorities and relevant companies can interpret and apply the new prospectus rules consistently. It details and clarifies the following points of the policy framework laid down in the Prospectus Regulation: •  the format of the prospectus and the specific information that must be included in it; •  a reduced contents list and standard format of the EU Growth Prospectus; •  reduced information to be included in a simplified prospectus for secondary issuances; •  minimum information to be included in the URD; and •  criteria for scrutiny of prospectuses and the universal registration document. 13.05  The Delegated Act follows the ‘building block approach’ of the old Prospectus Directive regime, with the minimum information to be included in registration documents, (p. 297) securities notes, and any additional information, detailed in separate annexes. It also maintains most of the content requirements set out in the existing prospectus regime but does include several changes aimed at easing the burden on issuers. 13.06  The detailed disclosure requirements for all prospectus formats, including the URD, are set out in separate Annexes 1–29 to the Delegated Act. The Delegated Act was prepared by the European Securities and Markets Authority (‘ESMA’), which had provided its Technical Advice to the Commission, following the Commission’s formal request.4 In response, on 6 July 2017, ESMA published three consultation papers, containing draft technical advice, amongst others, in relation to the format and content of the prospectus,5 the format and content of the new EU growth prospectus,6 and scrutiny and approval of the prospectus.7 Following consultation, this resulted in the publication of ESMA’s final report in March 2018.8 In addition, on 12 July 2019, ESMA published the second set of Q&As relating to interpretative questions under the Prospectus Regulation for guidance and to foster uniform interpretation (Level 3), including clarification on the process of updating the information included in universal registration documents.9

III.  Prospectus Formats and their Use in Practice 1.  Overview

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

13.07  Chapter II of the Prospectus Regulation, ‘Drawing up of the Prospectus’, lays out certain general provisions for prospectus formats in addition to other general rules on prospectuses (responsibility, validity): Article 6 sets out the general content requirements for the prospectus; Article 7 covers the new rules for prospectus summaries; Article 8 provides, as did the previous regime, for the possibility of using a base prospectus for nonequity securities; Article 9 introduces the new URD; and Article 6(3) provides that prospectuses may continue to be drawn up as a single document or as separate documents, consisting of a registration document, a security note, and the summary.10 (p. 298) Article 10 provides more detail on prospectuses drawn up in tri-partite form, including those that use the URD, and the approval process. 13.08  Chapter III covers the content and format of the prospectus and includes the new simplified disclosure regime for secondary issuances (Article 14) and the EU Growth Prospectus (Article 15).

2.  Stand-alone Prospectuses 13.09  Where an issuer proposes to prepare a prospectus as a single document (i.e. a summary, registration document, and securities note combined), the Delegated Act prescribes that the format should comprise the following parts in the following order: (a) table of contents; (b) summary (where required); (c) risk factors; and (d) any other information included in the annexes according to which the prospectus was drawn up.11 The issuer can generally choose how to organize the sections within (d).12 A prospectus drafted as a single document may itself be supplemented if further issues are made within twelve months. 13.10  A stand-alone prospectus is the most typical format for listings or offers of equity securities, such as in an initial public offering (IPO) or a rights offering to existing shareholders.

3.  Tri-Partite Prospectuses and the ‘Old’ Shelf Registration 13.11  The tripartite prospectus consists of a registration document (relating to the issuer), a securities note (giving details of the securities being issued), and a summary note, which can be published separately. The Delegated Act requires both the registration document and securities note to be composed of the following elements in that order: (a) a table of contents; (b) the risk factors; and (c) any other information referred to the applicable annexes, and the issuer can then choose the order within (c).13 13.12  The registration document remains valid for a period of twelve months and can be used with a new security note and summary note for new issues during that period. The registration document continues to exist as a format. 13.13  This form of shelf registration has been used by some frequent issuers and in certain jurisdictions more than others, in particular in France. In France, the document de référence is similar to the new URD (and served as a model to the URD) and has been (p. 299) used for many years: the AMF approves this annual registration document in a shortened five-working-day limit and issuers have frequently used it for debt and equity offerings.14 There have been other instances, where tripartite prospectuses were used in initial public offerings of equity securities,15 and more recently, in the UK the use of a registration document in connection with IPOs has been made a more common feature of the process due to the UK IPO reform, which came into effect on 1 July 2018.16 13.14  However, generally the old registration document has not been as widely used throughout the EU as was intended when introduced in the Prospectus Directive. The inherent limitation of the old shelf registration and incorporation by reference system is that the Prospectus Directive required separate regulatory approval for each offering and restricted the use of incorporation by reference as a disclosure method. Even when a

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

registration document had previously been approved, a securities note needed separate approval when used with the previously approved registration document. This approach in principle has been retained in the URD, but shelf registrations are subject to the general prospectus approval time of ten working days (now Art. 20(2)), whereas the approval period is reduced to five working days for frequent issuers using a URD (Art. 20(6)).

4.  Base Prospectuses and Final Terms/Supplements 13.15  The Prospectus Regulation retains the format of a base prospectus that can be used for non-equity securities, including warrants, and which can be updated with final terms or a prospectus supplement in case of a significant new factor arising (Art. 8). Given that final terms do not require separate regulatory approval, this format allows debt issuers more flexibility and has been widely used for the issuance of debt securities under debt or medium-term note programmes across Europe. An issuer can prepare a base prospectus, which when prepared in a single document is composed of (a) a table of contents; (b) a general description of the offering programme; (c) the risk factors; and (d) any other information referred to in the applicable annexes.17 A base prospectus (p. 300) can also be prepared as a separate registration document and securities note, in which case the general programme description would be included in the securities note.18 The information to be included in the final terms continues to be presented in three separate categories, as was already the case under the amended Prospectus Directive.19 In practice, this has worked very efficiently. 13.16  This format is mostly unchanged in the Prospectus Regulation, except that Article 8(8) now provides that a summary only needs to be included once the final terms are included in the base prospectus or in a supplement, or are filed, and this summary is now transaction specific. Previously, issuers had to provide a summary in the base prospectus, when the terms of the individual issue were not clear yet. In addition, permitting base prospectuses to be comprised of securities notes and registration documents as separate documents is a new feature of the Prospectus Regulation.

5.  New Summary Requirements 13.17  All prospectus formats contain a summary. A new Article 7 Prospectus Regulation sets out detailed requirements for the prospectus summary, which is meant to be an introduction to the prospectus and has to be consistent with the other parts of the prospectus. Key changes are that the summary will be shortened to a maximum length of seven pages of A4 written in a concise manner and that it can only contain the fifteen most material risk factors specific to the issuer (cross-references to other sections remain prohibited). The summary has to comprise four sections—an introduction containing warnings, key information on the issuer, key information on the securities, and key information on the offer itself and/or the admission to trading. For each of the sections, the Prospectus Regulation introduces a number of subsections with specific content requirements. Among others, the section regarding key information on the issuer will contain a subsection covering the key financial information regarding the issuer, consisting of a selection of historical key financial information, whose content and format has to be developed further by ESMA. The liability regime of the summary will remain unchanged.

IV.  New Prospectus Formats 13.18  The following discusses the new prospectus formats: the simplified prospectus for secondary issuances, the URD, and the EU Growth Prospectus.

(p. 301) 1.  Simplified Prospectus for Secondary Issuances

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

13.19  Under the Prospectus Regulation, companies that already have had debt or equity securities admitted to trading on a regulated market or a small and medium-sized enterprises (SME) growth market for at least the past eighteen months can use a simplified disclosure regime for secondary issuances.20 These issuers have been subject to transparency and market abuse disclosure for eighteen months. The disclosure requirements are reduced and detailed in specific new disclosure annexes for registration documents and securities notes for the simplified prospectus. The disclosure burden is materially reduced compared to the previous proportionate disclosure regime under the Prospectus Directive, scaling down disclosure regarding the issuer and its business, and not requiring an operating and financial review even for initial offerings.21 In addition, the simplified prospectus allows issuers to incorporate by reference more broadly. The minimum disclosure regime consists of a registration document and securities note, and financial information is only required for the last financial year. 13.20  As early as 2012, a reduced (proportionate) disclosure regime had been introduced in an amendment to the Prospectus Directive,22 but it was not used frequently in practice. Hence, the new simplified regime is intended to further reduce disclosure requirements for secondary issuances. In addition, the minimum disclosure regime has now been extended to debt issuers and may be used for both their base prospectuses and stand-alone prospectuses. 13.21  The detailed content requirements of the specific registration document and securities note are set out in separate Annexes to the Delegated Act and include the following: •  the annual and half-yearly financial information published in the twelve months prior to the approval of the prospectus; •  any outstanding and valid profit forecast or estimate; •  a concise summary of any Market Abuse Regulation (MAR) disclosures made in the preceding twelve months; •  risk factors; •  a shorter business overview, which for equity securities is reduced to a brief description of the key principal activities of the issuer and significant changes impacting its operations since the end of the period covered by the latest audited financial statements, including any significant new products and services and material changes in the regulatory environment (see Annex 3), and a description of material investments since the latest published financial statement; (p. 302) •  for equity securities, the working capital statement, statement of capitalization and indebtedness, relevant conflicts of interest and related-party transactions, major shareholders, and pro forma financial information (if applicable); and •  information required by Article 14(2), being the reduced information which is necessary to enable investors to understand (i) the prospects of the issuer and the significant changes in the business and the financial position of the issuer and guarantor that have occurred since the end of the last financial year (if any); (ii) the rights attaching to the securities; and (iii) the reasons for the issuance and its impact on the issuer, including on its overall capital structure and the use of the proceeds. 13.22  It remains to be seen whether the new regime will be used more than the previous one. Allowing its use for debt securities offers a much broader scope of application, especially since debt issuers will continue to be able to use the format of base prospectus and final terms. As a result, it is to be expected that many issuers of debt securities will use the simplified prospectus format (probably in the format of base prospectus and final From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

terms), especially when offering debt securities in the European market. Where issuers will also be extending an offer to US investors, the practice conventions for a so-called Rule 144A offering to US investors, which are driven by liability considerations and underwriters’ due diligence defences and the associated need for lawyers’ disclosure letters, bring other disclosure considerations into play. As a result, when a US offering is combined with a European offering, it is likely that issuers and other offering participants (placing banks) will decide to adhere to more stringent disclosure requirements, even for an offering of debt securities.23

2.  Introduction of the EU Growth Prospectus 13.23  Fostering capital markets access by SMEs is one of the key objectives of the EU Capital Markets Union. Small and medium-sized enterprises and certain larger companies will be able to use a simplified EU Growth Prospectus with ‘proportionate disclosure’ for an IPO. This includes issuers, other than SMEs, whose securities are to be traded on an SME growth market, provided they have an average market capitalization of less than EUR 500 million for the previous three calendar years. The Growth Prospectus is also available for offerings of up to EUR 20 million calculated over a twelve-month period, provided that the issuer has no securities traded on a multilateral trading facility (MTF) and an average number of employees of only up to 499. 13.24  Chapter IV (Arts 28–34) of the Delegated Act contains more detailed provisions regarding the EU Growth Prospectus. In addition, the Annexes to the Delegated Act lay (p. 303) out the details of what will be included in the new Growth Prospectus in new Annexes 23–27, providing for a specific summary for the EU Growth Prospectus (Annex 23) and separate registration documents and securities notes for equity securities (Annexes 24 and 26) and non-equity securities (Annexes 25 and 27).24 It is possible to draw up a Growth Prospectus in all of the general prospectus formats—as a single prospectus and as a tripartite prospectus in separate documents, and both of these can also be in the form of a base prospectus. The Delegated Act has adapted individual disclosure items to an issuer’s size and the complexity of its operations. In certain instances, disclosure of an item is not required at all (e.g. statutory auditors), whereas in others, reduced disclosure is required (e.g. principal activities and markets). In short, there are a number of alleviations made in the required disclosures under the EU Growth Prospectus compared to the previous proportionate disclosure regime for SMEs.25 13.25  The reduced disclosure requirements include, among others, two years’ financial information for equity securities and one year for non-equity securities. Only equity issuers with a market capitalization above EUR 200 million need to provide an operating and financial review and a working capital statement and statement of capitalization and indebtedness. 13.26  The growth prospectus will also need to include information about the issuer’s principal activities, its controlling shareholders, a brief description of the most material risk factors specific to the issuer, and the key risks that are specific to the securities, as well as key information on the securities. 13.27  Article 33, Delegated Act and Annex 26 also set out an EU Growth Prospectus specific summary section, which only requires relevant information already included in the growth prospectus, thereby making it shorter than the summaries for other types of prospectuses. The maximum size for the growth prospectus summary is six sides of A4-sized paper (instead of seven for a regular prospectus summary). 13.28  The order of items in the growth prospectus is fixed, but issuers have flexibility to order information items within each section.26

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

13.29  The new simplified EU growth prospectus is a welcome new format, allowing smaller and mid-size issuers more access to the capital markets, which is fostering a key objective of the Capital Markets Union. In the US, the JOBS Act had introduced a somewhat similar concept of an emerging growth company (EGC) in 2012,27 which has been widely used. However, the threshold for qualifying as an EGC is different and generally larger than that used in the Prospectus Regulation, which makes it more widely available: a company qualifies as an EGC if it has total annual gross revenues of less than (p. 304) $1.07 billion during its most recently completed fiscal year and has not publicly offered common equity securities before. It continues to be an EGC for the first five fiscal years after it completes an IPO, unless its total annual revenues exceed that threshold, or it has issued more than $1 billion in debt securities in the past three years or it has more than $700 million of worldwide public float.28 It could be reviewed in the next review of the Prospectus Regulation whether increasing the thresholds for use of the EU Growth Prospectus could be beneficial to allow wider access to this format, which presents a significantly reduced disclosure burden.

3.  The New Universal Registration Document (URD) (i)  Overview 13.30  The Prospectus Regulation introduces the new procedure of a universal registration document (URD), which can be used to register any type of equity or debt security in advance and can be kept up to date by filing amendments thereto. It can then be used to do a quicker ‘take-down’ of securities from a shelf registration by simply preparing a securities note and summary (where applicable) at the time of the desired offering or listing, so as to allow companies to go to market quickly when market conditions are favourable. A URD can be prepared by all issuers29 listed on a regulated market or an MTF annually.

(ii)  ‘Well-known’ issuers 13.31  Once an issuer has obtained approval of its URD from its home Member State regulator for two consecutive years, it is considered to be ‘well known’ and can file subsequent URDs and any amendments thereto without prior approval, which also applies to issuers who have filed Prospectus Directive-compliant registration documents for at least two consecutive financial years prior to 21 July 2019, who will therefore be able to file a URD without prior approval from 21 July 2019. However, the prospectus that is used, incorporating a URD and any amendments thereto, is still subject to approval, so that the ability to file URDs without approval does not eliminate the time lag caused by the approval process. 13.32  These issuers will be granted the benefit of a faster approval process of five, rather than ten working days when they want to do an offering or listing. However, frequent issuers must alert the competent authority at least five working days before the submission of an application for approval, and the submission when made must include the securities note and the summary, as well as amendments to the URD. Accordingly, this new (p. 305) system is also referred to as the ‘5 + 5 regime’, still resulting in a total period of ten days before issuers can go to market. Even under the Prospectus Directive regime, competent authorities had the time limit of ten working days for secondary issuances. This calls into question the utility of the new system, although the five-day notice period saves a little time compared to the ten full working days of regulatory approval. 13.33  If a frequent issuer does not file a URD one year, approvals are required for two consecutive years again, to obtain well-known issuer status.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

13.34  For well-known issuers, the competent authority can review the content of a URD and any amendments thereto on an ex-post basis, where it deems necessary, as further discussed in section IV.3.(iv) ‘Amendments to URDs’ (para. 13.45) below (Article 9(8)).

(iii)  Approval process and passporting 13.35  The approval process for URDs and any amendments thereto depends on whether an issuer is using a URD for the first two years, or whether it has become a frequent issuer following two consecutive years of submitting URDs.30 For the first two consecutive financial years, the issuer’s URD is subject to approval before its publication, and the issuer will submit a draft URD to the competent authority, who will review it and, if appropriate, approve it. In this scenario, the URD will be approved on a stand-alone basis while the accompanying securities note, summary, and any amendments to the URD will be approved when the issuer submits an application for approval of those documents. 13.36  After having become a frequent issuer, the issuer may file the URD and publish it without prior approval. As such, the submission is not an application for approval but a filing of the URD. When the issuer decides to use the URD for purposes of an offer or admission to trading, approval of the URD can take place concurrently with approval of the securities note, summary, and any amendments to the URD. Filing of a URD without approval is a new procedure, which did not exist under the Prospectus Directive. 13.37  When filing a URD, the issuer must indicate in its application whether the URD is submitted for approval or filed without prior approval. The process for both types of submissions are set out in Article 42, Delegated Act. Where the URD has already been approved, the securities note, the summary, and all amendments to the URD filed since the approval of the URD are still subject to a separate approval,31 so that the entire documentation is approved before their use as a constituent part of a prospectus. 13.38  A filed URD and any amendments thereto must be approved before they can be passported to a competent authority in another Member State.32 (p. 306) 13.39  Issuers can passport URDs in accordance with the notification procedures laid out in Articles 25 and 26. Article 25 provides that the competent authority of the home Member State, at the request of the issuer, within one working day notify the competent authority of the host Member State with a certificate of approval. Article 26 applies to debt securities and third-country issuers, where the home Member State chosen for the prospectus approval is different from the Member State whose competent authority has approved the URD (or registration document). Where the issuer of debt securities requests that the competent authority notify another competent authority of its URD, where the offering or listing is intended to be made and who needs to then approve any prospectus in connection therewith, Article 26 provides that the URD needs to be submitted to the competent authority for the URD for approval before passporting to the competent authority in another Member State (Art. 26(2)).33 The Prospectus Regulation does not expressly state that URDs can also be passported independently across the European Economic Area (EEA). 13.40  This procedure means that a URD must be approved by one home Member State and, if applicable, one other Member State must approve the prospectus, but it is not providing for approval by multiple competent authorities in case of multiple public offers or listings. Currently, some large financial institutions seek approval of base prospectuses with multiple competent authorities. 13.41  When filing a URD, all issuers must provide a written confirmation to the competent authority that, to the best of its knowledge, all regulated information which it was required to disclose under the Transparency Directive and the MAR has been filed and published over the past eighteen months (or such shorter period that those obligations have applied to the issuer). Article 9(11)(a) only explicitly requires this confirmation for frequent issuers,

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

but the Delegated Act makes it mandatory for all URD filers (Art. 42(2)(h), Delegated Act) to provide such a confirmation, even though ESMA had noted in its Technical Advice that no additional requirements should be laid down at Level 2.34 According to the Delegated Act, it is sufficient to file the compliance statement on initial filing (rather than having to provide it again with the final draft of the URD),35 although the Delegated Act leaves issuers the option of submitting the confirmation statement together with the first draft of the prospectus or during the scrutiny process.36

(iv)  Amendments to URDs 13.42  The procedures for amendments to a URD are a novelty under the Prospectus Regulation, which has no counterpart in the Prospectus Directive. The procedures differ depending on whether amendments are made to a URD that is, or is not, in use (p. 307) as a constituent part of a prospectus. The procedures largely follow those for filing and approval of the URD (and for the prospectus in general). For clarification of certain aspects, ESMA issued its first Prospectus Regulation Q&As.37

(a)  Amendments to URDs where the URD is not in use as a constituent part of a prospectus 13.43  Where the URD is not in use as a constituent part of a prospectus, the provisions of Article 9(7) and 9(9) apply. Following the filing or approval of a URD, the issuer can at any time update the information it contains by filing an amendment thereto, which does not require separate approval (subject to the provisions in Art. 10(3) on approval of the securities note, summary, and all amendments to the URD) (Art. 9(7)). It appears to follow from Article 9(7) that the URD does not require the filing of any supplements, which are subject to approval by the competent authorities, but only amendments, which are not subject to approval (Art. 9(7)). 13.44  Where a URD has been approved and passported but is not yet a constituent part of a prospectus, the amendments thereto are subject to a separate approval under Article 10(3) before a prospectus, with the URD as a constituent part, can be approved by the competent authority of another Member State. After approval, the amendment must be passported to the same competent authority as the URD had been passported to in accordance with Article 26(2).38 13.45  The competent authority may at any time review the content of a URD which has been filed without prior approval as well as any amendments thereto (Art. 9(8)). If it finds that the URD does not meet the standards of completeness, comprehensibility, and consistency, or that additional information is needed, it notifies the issuer (Art. 9(9)). Criteria for the scrutiny of the comprehensibility and consistency are laid out in the Delegated Act (Chapter V).39 A request for additional information need only be taken into account by the issuer in the next URD filed for the following financial year, except where the issuer wants to use the URD as a constituent part of a prospectus submitted for approval, in which case the issuer has to file an amendment to the URD by the time it submits the application for approval (Art. 9(2)). However, if the competent authority concludes that the URD contains ‘a material omission, a material mistake or material inaccuracy’, the competent authority can require the issuer to make changes to the URD without undue delay even after it has been published (Art. 9(3)). The competent authority may request that the issuer includes a consolidated version in the amended (p. 308) URD to ensure comprehensibility of the information provided to investors, or the issuer can voluntarily include such a version in an annex to the amendment. 13.46  Issuers will then need to explain how a request from the competent authority for an amendment or supplementary information has been considered in the URD.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

13.47  This raises the concern that issuers might have liability vis-à-vis investors who made investment decisions based on the URD containing the prospectus in the unamended form. It remains to be seen whether competent authorities will use this discretion in practice and thereby deter issuers’ use of the URD, or whether this possibility will not be used frequently. Even where investors would not sue an issuer in relation to any material changes in a URD so made, making changes at that stage may cause issuers reputational concern.

(b) Where the URD is in use as a constituent part of a prospectus 13.48  Where the URD is in use as a constituent part of a prospectus, only Article 9(8), which provides for the right of the competent authority to review the content of any URD, and the general provisions of Article 23 on supplementing a prospectus apply between the time when the prospectus is approved and the final closing of the offer of securities or the time when trading begins, whichever occurs later. Article 23 provides that every significant new factor, material mistake, or material inaccuracy in the prospectus arising between the time when the prospectus is approved and the closing of the offer or commencement of trading requires preparation of a prospectus supplement without undue delay. The supplement is subject to a five-working-day approval (reduced from seven working days under the Prospectus Directive) and entitles investors to withdrawal rights exercisable within two working days after publication of the supplement. 13.49  In its Q&As to the Prospectus Regulation, ESMA noted in relation to different competent authorities approving the URD and the prospectus, that Article 26(3) creates a division of responsibility between the competent authority that approves the URD (or registration document) and the competent authority in the home Member State for the prospectus approval that approves the securities note and summary. Consequently, the authority that approved the URD is competent to approve any supplements to the URD, and the authority approving the prospectus is entitled to approve any supplements to information in the securities note,40 so that two supplements will be filed, one supplement to the URD and one supplement to the prospectus, which should both be included in a single document.41 13.50  If a URD is no longer a constituent part of a prospectus (as the prospectus may have a life that is shorter than the twelve-month validity period of the URD), then amendments (p. 309) and supplements to the URD follow the rules on URDs that are not in use as a constituent part of a prospectus.

(v)  URD and other registration documents and annual reports 13.51  The URD does not replace the existing registration document system, and both URDs and registration documents can be incorporated by reference into a prospectus.42 13.52  The URD can also be used in lieu of the annual report (or half-yearly report) required under the Transparency Directive, allowing for a single annual disclosure document, provided that the issuer has the same home Member State under the Prospectus Regulation and the Transparency Directive and provided the language of the URD fulfils the conditions of the Transparency Directive (Art. 9(13)). To benefit from this, the URD must be published within four months of the issuer’s financial year-end or within three months of its half-year end and must contain all the information required to be disclosed under the Transparency Directive (Art. 9(12)).43 13.53  When using the URD as a periodic financial report, the issuer needs to include in the URD a cross-reference list identifying where each item required in the annual and halfyearly financial reports can be found in the URD. The issuer must also file the URD in accordance with the provisions of the Transparency Directive and make it available to the

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

officially appointed mechanism appointed under that Directive, and must include in the URD a responsibility statement as required under the Transparency Directive.

(vi)  Content of the URD 13.54  The URD must contain a description of the issuer’s organization, business, financial position, earnings and prospects, governance, and shareholding structure. The document can incorporate information by reference. The standard of disclosure for the URD is based on the more onerous disclosure requirements for equity securities, as the URD can be used for issuances and admission to trading of equity and non-equity securities. Annex 2 to the Delegated Act contains the schedule for the URD and simply provides that the issuer shall disclose the information in accordance with the disclosure requirements for the registration document for equity securities laid down in Annex 1. 13.55  Provided the URD has not become a constituent part of an approved prospectus, issuers are able to amend the URD to ensure it contains updated disclosure. 13.56  One of the questions raised in the ESMA consultation leading up to adoption of the new disclosure annexes was whether the URD could benefit from more flexibility in relation to the information presented. ESMA noted that the Prospectus Regulation provides (p. 310) that the information had to be modelled on the stricter requirements for the equity prospectus and therefore there was no discretion to change this.44 However, there could be flexibility with respect to the order of information in order to encourage the use of the URD.45 The Delegated Act specifically allows for this.46 In practice, it will usually not make a significant difference to issuers as to whether they continue to present risk factors up front, following the summary, or whether they place them further back in the prospectus.

(vii)  URD and incorporation by reference 13.57  The URD relies on the concept of incorporation by reference, as does the system of shelf registration previously introduced in the Prospectus Directive. The Prospectus Regulation has expanded the information that can be incorporated by reference so that issuers will be able to incorporate by reference a wider range of information than in the past, including periodic reports, audit reports, and financial statements, management reports and corporate governance statements, certain valuation reports and remuneration reports, and memoranda and articles of association, provided that the information is published electronically and complies with the language requirements of the Prospectus Regulation. The documents to be incorporated by reference may be published and made accessible online on the same electronic platform as the prospectus that refers to them, thereby reducing the time and money spent on making a regulatory announcement or publishing a supplementary prospectus when material documents are published after the date of the prospectus. The European Securities and Markets Authority was given the power to develop regulatory technical standards to complete the list of documents required under EU law. 13.58  One of the issues with the previous system of shelf registration and incorporation by reference has been that there was no coordination between the content of documents approved or filed with national authorities under the Transparency Directive and MAR and other EU legislation and the prospectus content rules adopted in the Prospectus Directive. Thus, issuers have needed to review the documents and add disclosure as required. Moreover, the Transparency Directive harmonizes requirements for annual and interim reporting as a system of minimum harmonization rather than maximum harmonization, as has been the case under the Prospectus Directive and now even more so, the Prospectus Regulation. However, the EU Commission has now noticed this deficiency and in the Commission Request to ESMA for technical advice,47 it specifically called on ESMA to ensure consistency and adequate alignment with the disclosure requirements of other pieces of EU legislation, such as in particular the Transparency Directive (2004/109/EC) and the Accounting Directive (2013/34/EU).48 (p. 311) Accordingly, ESMA should ensure From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

that issuers may easily incorporate by reference in their prospectus to all or parts of the content of documents required under other acts, such as the management report drawn up under the Transparency Directive for use in the operating and financial review section in prospectuses.49 Equally, this is important in order to make it easier for frequent issuers to use their URDs in lieu of annual reports required under the Transparency Directive (in particular as to historical financial information, operating and financial review, and corporate governance). 13.59  Nonetheless, the reporting obligations adopted by Member States may still differ in some respects and may not always conform to the disclosure requirements adopted under the Prospectus Regulation. In order to streamline the disclosure regime further, it would be preferable if the Transparency Directive were, at a minimum, changed into a directive following maximum harmonization in the future or, matching the approach taken in relation to the MAR and Prospectus Regulation, into the format of a Transparency Regulation, and if it were completely aligned with the disclosure obligations under the Prospectus Regulation in the sense of having one rulebook with the same standards. Currently, disclosures in Transparency Directive reports are not subject to periodic reviews by competent authorities in all European jurisdictions, which would ensure that disclosures are, in principle, subject to the same level of scrutiny as prospectuses. In the US, the US Securities and Exchange Commission (SEC) reviews annual reports of issuers periodically and on an ongoing basis, so that it can be ensured that investors are protected when frequent issuers incorporate by reference disclosures from periodic reports. 13.60  For non-EU issuers, the Transparency Directive does not allow incorporation by reference of reports filed in jurisdictions outside the EU, such as the US. However, the Transparency Directive allows national competent authorities to exempt third-country issuers (where they are the competent authority) from certain requirements of the directive if they consider the law of the third country to be equivalent. For instance, the UK FCA has accepted as equivalent the periodic disclosure requirements under the US Securities Exchange Act of 1934 (‘Exchange Act’) and the rules governing financial reporting for issuers of securities in the US to the provisions of the UK Disclosure and Transparency Rules (DTR) 4.1 and 4.2. However, equivalence determinations differ among Member States and are also specific to certain parts of the EU legislation (for instance, the FCA accepts as equivalent certain, but not all, parts of the DTR in relation to different countries), so determinations are quite specific. 13.61  It would be easier for non-EU issuers if there was a uniform approach. By comparison, under the SEC’s rules, foreign private issuers only need to file annual reports on Form 20-F complying with the related disclosure obligations (which are based on the IOSCO (p. 312) equity disclosure principles50 and similar to the equity prospectus requirements under the Prospectus Regulation), but can then furnish current reports on Form 6-K based on what they are required to file under home country reporting (such as the Transparency Directive and other directives and regulations, in case of EU issuers).

V.  Discussion of URD and Simplified Prospectus 13.62  The URD adds more flexibility and efficiency to the previous system of shelf registration by streamlining procedures and shortening approvals, in particular for wellknown issuers. For instance, changes to an URD are made by amendment, which is not subject to approval, whereas the registration document included in the Prospectus Directive was subject to the rules on prospectus supplements, which at least in some countries made approvals cumbersome due to the lengthy vetting procedure.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

13.63  However, ‘frequent issuer status’ may in practice not offer much improvement due to the ‘5+5’ notice requirement, which effectively still means issuers must wait for a minimum of ten business days before accessing the capital markets, which can be a long time, considering swift changes to market conditions.51 13.64  In addition, the option for competent authorities to review a URD after it has been published potentially subjects issuers to liability to investors who relied on the document, although this may not be used much by regulators in practice, but it also allows for varying levels of scrutiny in different Member States. 13.65  Allowing issuers to fulfil their obligation to file annual and semi-annual reports under the Transparency Directive in the URD is a welcome addition and provides issuers with additional flexibility.52 It remains to be seen whether issuers will make use of this alternative to filing under the Transparency Directive, given that a cross reference table must be prepared. Many listed companies will have their routine of preparing periodic reports in place and their investors will be used to the format of reports, which might look different in case a URD was used in lieu of periodic reports. 13.66  The URD would be most useful to frequent issuers that issue both equity and debt on an ongoing basis, given that it requires issuers to comply with the more stringent requirements for equity prospectuses. Issuers that only issue equity securities infrequently but are frequent issuers of debt securities under programmes may not find that the URD (p. 313) offers advantages over the format of base prospectus and final terms for frequent debt issuances and preparing a stand-alone equity prospectus where required every few years. On the one hand, the advantage of the base prospectus and final terms is that the final terms do not require a separate regulatory approval, which means that access to the markets can be quicker. On the other hand, the URD covers a broader range of securities (any type of securities),53 whereas a base prospectus is used for debt securities issued under an offering programme or in a continuous and repeated way. Keeping a URD up to date will have more cost associated with it. In addition, frequent issuers also now have the option of preparing a simplified prospectus for debt issuances for the first time (as the previous proportionate disclosure regime only applied to equity). Ultimately, the use of the URD versus a simplified prospectus will depend on various variables: how often, through which instruments, and from which investors an issuer seeks to raise capital in future and the timing of an issuer’s financial disclosures. In practice, debt issuers may take advantage of the new simplified prospectus regime for secondary issuances of debt, which can be used to simplify both base prospectuses and stand-alone prospectuses.

VI.  US Shelf Registration 1.  Overview and Evolution 13.67  To evaluate the merits of the URD (and the previous shelf registration system under the Prospectus Directive), it is valuable to include a comparative analysis of the system of shelf registration that has been in place in the US securities laws for decades. A shelf registration statement is a filing with the SEC under Rule 415 of the US Securities Act of 1933, as amended, that allows a single registration document to be filed by a company that permits the issuance of multiple securities and considerable incorporation by reference of public disclosures in a registration statement for offerings by public companies. Eligible issuers (and/or selling security holders) may use shelf registration to register securities that will be offered on an immediate, continuous, or delayed basis in future. A company can register multiple classes of securities, including debt and equity, as well as new securities and resales of outstanding securities, in a single document.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

13.68  The introduction of US shelf registration practically created a revolution of the US securities markets when introduced in 1982/1983, together with the concept of integrated disclosure.54 The system was first proposed by Milton Cohen in 1966 and then incorporated into an SEC report in 1969.55 Prior to the adoption of this system, (p. 314) separate disclosure regimes applied, which often resulted in overlapping and duplicative requirements. Milton Cohen first pointed out the awkwardness created by the enactment of the Securities Act before the enactment of the Exchange Act, which deals with ongoing reporting, in that investors would seek largely the same information in valuing securities, regardless of whether they were investing in a primary transaction, purchasing from the issuer, or trading in the market, purchasing from another investor in a secondary market transaction. 13.69  Before adoption of the new system, filings under the Securities Act and periodic reporting under the Exchange Act were separate. The concept of integrated disclosure was based in large part on the American Law Institute’s Proposed Federal Securities Code. The SEC’s integrated disclosure system allows a company’s ongoing reporting under the Exchange Act to be integrated by reference in a prospectus for a registered offering under the Securities Act. As the requirements of the prospectus and the ongoing reports (annual and quarterly reports) are virtually identical, ‘seasoned’ (frequent) issuers may issue a short-form prospectus incorporating by reference their existing disclosure on file with the SEC. The invention of a system of incorporation by reference has proven to be a tremendous success, saving issuers time and cost, and as a result vastly increasing the number of offerings conducted. Today, most registration and reporting forms under the Securities Act and the Exchange Act refer to Regulation S-K for many of their substantive disclosure requirements 13.70  Securities Act Forms S-3 (for US issuers) and F-3 (for foreign issuers) allow a company to incorporate by reference disclosure not only from its current but also its future periodic reports (including financial reports) to satisfy disclosure requirements of the forms. Companies that are first-time SEC filers (on Forms S-1/F-1) were permitted to incorporate by reference from previously filed, but not future, reports. However, in December 2015, Congress enacted the ‘FAST Act’,56 which required the SEC to revise Form S-1 to permit smaller reporting companies to incorporate by reference Exchange Act filings made after the effectiveness of Form S-1. 13.71  From its inception, the US system of shelf registration allowed a seasoned issuer to register the amount of securities it wished to offer over a two-year period. Once registration has been completed, takedowns may be sold and the prospectus may be updated or supplemented without further SEC approval. The latter is essential, because it allows issuers to take advantage of good market opportunities immediately. 13.72  A significantly more flexible version of shelf registration referred to as ‘automatic shelf registration’ was introduced in the 2005 Securities Offering Reform, featuring automatic effectiveness of shelf registrations, the increase of a shelf’s effectiveness to three years, pay-asyou-go registration fees, and maximum flexibility in the offering process for ‘well-known seasoned issuers’ (‘WKSIs’).57 The concept of ‘well-known’ issuers in (p. 315) the Prospectus Regulation is similar to the concept used in US shelf registration since 2005. The alleviations for these seasoned issuers—i.e. large companies who have been in the marketplace for some time and are monitored by analysts and institutional investors— balances the belief in an efficient capital market with the need for investor protection. 13.73  Generally, US shelf registrations require at least $75 million in non-affiliate common equity public float and filing of all required SEC reports for the past twelve months. Shelf registrations of non-WKSIs are not automatically effective upon filing, and obtaining a

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

declaration of effectiveness from the SEC can take up to ten days. However, in most cases, even filings of non-WKSIs will not be reviewed by the SEC. 13.74  WKSIs are generally defined as issuers with $700 million or more of non-affiliate common equity public float or that have issued public debt securities for cash of more than $1 billion over the past three years and that have filed all required periodic reports and that are not ‘ineligible issuers’. 13.75  In practice, US issuers often use universal shelf filings and choose between debt and equity offerings based on prevailing relative market conditions. It must be noted that standalone offerings of debt securities in the US are generally subject to the same disclosure requirements as equity offerings, as Regulation S-K does not distinguish between both (except in relation to specific disclosure obligations relating to the nature of shares versus debt securities), so that no less burdensome prospectus format is available to debt issuers, as is the case under the Prospectus Regulation.

2.  Timing of Filings in US Practice 13.76  What is also interesting to note is that in the US, the practice among WKSIs is mixed as to whether issuers file in advance of engaging in public offerings or simply wait to file an automatically effective shelf registration on Form S-3 at the time of the public offering. The following timing considerations might also be relevant to frequent EU issuers considering the use of a URD versus the use of a stand-alone prospectus, although the financial disclosure requirements referenced in paragraph 13.77 differ under US standards compared to EU Prospectus Regulation and EU Accounting Regulation disclosure rules. 13.77  Filing of a US registration statement potentially triggers financial statement filing requirements, such as, for example, retrospectively revised financial statements for a change in business segments, or the occurrence of discontinued operations or a probable or completed significant acquisition or disposition. As a result, filing a registration statement on a clear day when such filing does not trigger a financial statement filing requirement may be beneficial compared to waiting to file it later. If a fundamental change has occurred between the time of filing and time of public offering, this may also trigger the requirement to file additional financial information at the time (p. 316) of offering, but under US rules, this is generally a higher threshold than the financial statement filing requirements associated with filing a registration statement. Generally, filing a registration statement can have the effect of adversely impacting the trading price of an issuer’s securities through its potential signal to the market that a takedown may be contemplated (depending on the issuer’s past practice). This would be less likely to be the case for those frequent issuers that always update their shelf registration statements, whereas it would be more likely to be the case for issuers that have rarely used shelf registration in the past or have only used it in connection with offerings consummated shortly after a filing.

3.  Comparison with URD 13.78  The URD bears some resemblance to the US shelf registration procedure, but the US system still works more efficiently in practice for the following reasons: first, the US system does not require the regulator’s approval of a prospectus supplement that supplements a shelf registration document—this allows issuers to take advantage of good market opportunities immediately (see Rule 424(b), US Securities Act). By contrast, the Prospectus Regulation ‘5+5 system’ extends the period to ten days even for well-known issuers. Second, the US system allows for incorporation by reference to future reports for shelf filers (e.g. to future financial information), which is not permitted under the URD. This is significant, as it makes amendments due to filings of future financial information later in time unnecessary. Third, the US system is based on the system of ‘integrated disclosure’, which means that issuers can save much time and expense complying with just one uniform set of disclosure standards for prospectus and ongoing reports. As pointed out in paragraph

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

13.58 above, this thought has now been incorporated by the EU Commission in a number of places, and efforts are being made to harmonize requirements, but a true system of integrated disclosure will require further alignment and changes to the Transparency Directive in particular (not least, moving it to a system of maximum harmonization, which would eliminate remaining differences between Member States), possibly to aspects of the MAR, and to the Prospectus Regulation, so that all disclosures would be subject to the same standards and so that it would be possible to integrate disclosures more easily. Fourth, the US system allows shelf registrations to be valid for three (previously two) years and to register a given amount of securities for that whole period. By contrast, under the Prospectus Regulation, URDs (and shelf registrations) can only be valid for one year. The longer period available in the US reduces costs for issuers. 13.79  Other differences between the URD and the US shelf registration system, as noted above, are inherent in the sliding scale of disclosure from wholesale debt, retail debt, to equity under the Prospectus Regulation, which by necessity means many issuers will be drawn more to using the simplified prospectus format in addition to the well-working base prospectus and final terms. The sliding scale approach is helpful to issuers, and just (p. 317) means that the benefits of shelf registration in Europe are more dependent on the type of issuer and nature of securities it is seeking to offer and the frequency of issuances.

VII.  Conclusion 13.80  The Prospectus Regulation introduces more flexibility and efficiency in the use of different prospectus formats. Different options for formats overlap even more than in the past and their use will depend on the frequency of issuances and instruments issued. The overlap between the URD and simplified prospectus will leave issuers to choose what best suits their needs, depending on how often, through which instruments, and from which investors issuers seek to raise capital in future and the timing of financial disclosures. The cost of keeping a URD up to date for more frequent issuers and issuers requiring both equity and debt must be balanced with the utility of having different equity and debt securities registered. The option of filing annual and half-yearly reports under the Transparency Directive in the form of a URD may reduce costs for certain issuers. The ‘frequent issuer status’ may in practice not offer much improvement on the service already provided by certain competent authorities (see the French example), also considering the advance notice requirement. 13.81  To summarize and conclude, there is room for improving the URD system in future, as follows: •  extending the life of the URD from one to three (or at least two) years for wellknown issuers; •  making approval of supplements unnecessary; •  creating a true system of integrated disclosure in Europe by further aligning the disclosures required under the Transparency Directive with the Prospectus Regulation; •  involving competent authorities in the regular review of disclosures made in periodic reports on a consistent basis throughout the EEA; •  amending the Prospectus Regulation at the next review to allow for future incorporation by reference; •  allowing incorporation by reference of reports filed in jurisdictions that are deemed equivalent;

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

•  removing competent authorities’ ability to review a URD when it is already included in a prospectus; and •  removing the need for the approval of prospectuses of frequent issuers making use of URDs altogether. (p. 318)

Footnotes: 1

  Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, OJ L168/12 of 30 June 2017 (Prospectus Regulation). 2

  Directive 2003/71/EC of the European Parliament and the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC, OJ 2003, L345/64 (Prospectus Directive). 3

  Commission Delegated Regulation (EU) 2019/980 of 14 March 2019, supplementing Regulation (EU) 2017/1129 of the EP and of the Council as regards the format content, scrutiny and approval of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Commission Regulation (EC) 809/2004, OJ L 166/26 of 21 June 2019 (Delegated Act). 4

  EU Commission, Request to ESMA for Technical Advice on possible Delegated Acts concerning the Regulation of The European Parliament and of the Council on the Prospectus to be published when securities are offered to the public or admitted to trading on a Regulated Market, updated 18 June 2018, Ref. Ares (2019) 3282605 (Commission Request). 5

  ESMA Consultation Paper, Draft technical advice on format and content of the prospectus, ESMA 31-62-532, 6 July 2017 (ESMA Prospectus Format Consultation Paper). 6

  ESMA Consultation Paper, Draft technical advice on content and format of the EU Growth prospectus, ESMA31-62-649, 6 July 2017 (ESMA Growth Prospectus Consultation Paper). 7

  ESMA Consultation Paper, Draft technical advice on scrutiny and approval of the prospectus, ESMA31-62-650, 6 July 2017 (ESMA Prospectus Approval Consultation Paper). 8

  ESMA Final Report, Technical advice under the Prospectus Regulation, ESMA31-62-800, 28 March 2018 (ESMA Technical Advice). 9

  ESMA, Questions and Answers on the Prospectus Regulation, ESMA/2019/ ESMA31-62-1258 Version 2, updated 12 July 2019 (ESMA Q&A Prospectus). 10

  Whenever this chapter makes references to ‘Articles’, these are Articles in the Prospectus Regulation (2017/1129), unless otherwise noted. 11

  Article 24(1), Delegated Act.

12

  Article 24(1), second paragraph, Delegated Act.

13

  Article 24(2), Delegated Act.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

14

  See the statement on the official website of the AMF (Autorité des Marchés Financiers), according to which more than half of the French companies listed on Euronext Paris prepare registration documents (and noting that now companies listed on Alternext Paris may also publish them). 15

  See e.g. the IPO prospectus published by Royal Mail plc in September 2013, which comprised a separate summary, registration document, and securities note (see under https://uk.practicallaw.thomsonreuters.com). 16

  See the discussion in Financial Conduct Authority (FCA), ‘Reforming the Availability of the Information in the UK Equity IPO Process’, Policy Statement PS17/23, October 2017, paras 2.19–2.22. The FCA discussed the use of the tri-partite prospectus model in the context of the need to have an approved prospectus in advance of publishing research, which is a new requirement introduced in the United Kingdom by the IPO reform. Respondents to the consultation noted that in practice, issuers and their placing banks would prefer to publish all information in one prospectus for ease of investors’ reference. The FCA noted that technically, they could do so by first seeking approval of a registration document for the purposes of allowing the publication of research, and then still filing for approval and publication of a single prospectus. 17

  Article 25(1), Delegated Act.

18

  Article 25(2), Delegated Act.

19

  Article 26, Delegated Act, which refers to the Category A, B, and C information set forth in annexes 14–19 and 27. The categories were introduced in 2010. See Directive 2010/73/ EU. 20

  The disclosure standards for registration documents and securities notes for secondary issuances are set out in Annexes 3 (registration document for equity securities), 8 (registration document for non-equity securities), 12 (securities note for equity securities), 14 (securities note for retail non-equity securities), and 15 (securities note for wholesale non-equity securities) to the Delegated Act. 21

  See ESMA Technical Advice and the Delegated Act.

22

  Directive 2010/73/EU.

23

  See the discussion of the US shelf registration system at section VI ‘US Shelf Registration’ (para. 13.67) below, where it is noted that US securities disclosure rules do not, in principle, distinguish between equity and debt securities. 24

  The original ESMA technical advice had provided for just one form of registration document and securities note for equity and non-equity issuances, to simplify the regime. 25

  For a discussion of the key differences, see ESMA Growth Prospectus Consultation Paper, para. 79. 26

  See Recital (18), Delegated Act.

27

  Jumpstart Our Business Startups Act, Public Law 112-106, 126 Stat. 306 (2012).

28

  Section 2(a)(19), US Securities Act 1933, as amended.

29

  Issuers do not have to be incorporated in the European Economic Area (EEA) to draw up an URD, contrary to what was proposed in an earlier draft of the regulation. This means that also third-country issuers trading on European regulated markets have the option of benefitting from the URD. 30

  For a discussion, see ESMA Prospectus Approval Consultation Paper, para. 119.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

31

  Article 10(3), second paragraph.

32

  See ESMA Q&A Prospectus, No. 1.3.

33

  See ESMA Q&A Prospectus, No. 1.3.

34

  ESMA Technical Advice, response 899 to Question 12, 3.3.2 Scrutiny of the prospectus and scrutiny and review of the URD. 35

  Article 44, Delegated Act. See also ESMA Technical Advice, response 896 to Question 11, 3.3.2 Scrutiny of the prospectus and scrutiny and review of the URD. 36

  Article 42(4), Delegated Act.

37

  In addition, ESMA also discussed amendment procedures in detail, Prospectus Approval Consultation Paper, para. 121 ff. 38

  See ESMA Q&A Prospectus, No. 1.3.

39

  The Delegated Act, in addition to setting forth lists of criteria, also includes a general clause in Article 40, which provides that a competent authority may, where necessary for investor protection, apply criteria in addition to those laid down in Articles 36–38 thereof. In addition, in the case of specialist issuers, competent authorities may require additional information to be included in the prospectus based on the activities of the specialist issuers. In its Technical Advice, ESMA had raised the question whether the scrutiny criteria should be different for URDs compared to prospectuses generally, but none of the respondents thought that should be the case. 40

  ESMA Q&A Prospectus, No. 3.3.

41

  See ESMA Q&A Prospectus, No. 3.3., 25, with reference to Articles 10(1), 23(1), 23(5), and 26(5). 42

  The URD and the general registration document are in many cases interchangeable, but the URD includes specific new rules and needs to be updated on an annual basis. See ESMA Technical Advice, paras 49 and 50 under question 4. 43

  See also ESMA Technical Advice, Question 14, answer 910, para. 909c, 3.3.2 Scrutiny of the prospectus and scrutiny and review of the URD. 44

  ESMA Technical Advice, Question 71, answers 558–60, 131.

45

  See ESMA Technical Advice, Question 4, answers 46–50, 20 ff.

46

  Articles 24(3) and 25(4), Delegated Act.

47

  Commission Request, 6–8.

48

  Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC, OJ L182 of 29 June 2013, 19 (EU Accounting Directive). 49

  Commission Request, 6.

50

  International Organization of Securities Commissions (IOSCO), International Disclosure Standards for Cross-Border Offerings and Initial Listings by Foreign Issuers (1998) (International Equity Disclosure Standards). 51

  In the ESMA Technical Advice, it was noted that ESMA had received ten responses to the question of what overall impact in terms of costs to issuers and benefits to investors its technical advice had. The respondents stated that it was difficult to estimate the usefulness

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

of the URD, and that its impact was considered limited, as it was a voluntary document. Only limited cost reduction was foreseen (see answer 564 to question 73, 133). 52

  Stressing the benefits of this feature, see T. Fagernäs, J. Kanervo, G. Núňez, and A. Alcalá, ‘The Why and How of the New European Union Prospectus Regulation’, Business Lawyer International (January 2019) 20, 5. 53

  See e.g. the reference in ESMA’s Prospectus Format Consultation Paper, para. 37.

54

  See the two related Securities Act Releases: Adoption of Integrated Disclosure System, Securities Act Release No. 33-6383, 47 Fed. Reg. 11380-01, 16 March 1982; and Shelf Registration, Securities Act Release No. 33-6499, 29 SEC Docket 138, 17 November 1983. 55

  Milton H. Cohen, ‘ “Truth in Securities” Revisited’, Harvard Law Review (1966) 79, 1340. 56

  Fixing America’s Surface Transportation Act, H.R.22, Pub. L. No. 114-94.

57

  Securities Offering Reform, Securities Act Release No. 33-8591, 85 SEC Docket 2871, 3 August 2005.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Part II The New EU Prospectus Rules, 14 The New Advertisement RegimeWhat a Difference a Word Makes? Gerard Kastelein, Tom Reutelingsperger From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

Subject(s): Prospectus — Securities — Supervision — Monetary union — European Securities and Markets Authority (ESMA)

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 319) 14  The New Advertisement RegimeWhat a Difference a Word Makes? I.  Introduction 14.01 II.  Background 14.03 III.  The Prospectus Regulation 14.08 1.  General 14.08 2.  From ‘Announcement’ to ‘Communication’ 14.11 3.  Level 1 Requirements to Advertisements 14.20 IV.  The Delegated Regulation 14.21 1.  Identification of (and Reference to) the Prospectus in any Advertisement 14.23 2.  Specific Content to be Included in any Advertisement (Retail Only) 14.29 3.  Requirements as to Amendments to Advertisements in Case a Supplement is Published 14.37 4.  General Requirement to Align Information Concerning Offers of Securities 14.44 V.  Supervision of the Advertisement Regime—Risk of Conflicting Views of Authorities? 14.46 1.  Procedure for the Cooperation between Competent Authorities 14.49 2.  What is Next? 14.51 VI.  No Grandfathering 14.54 VII.  Conclusion 14.55

I.  Introduction 14.01  On 21 July 2019 the new Prospectus Regulation (Prospectus Regulation)1 repealed and replaced the Prospectus Directive (Prospectus Directive)2 regime. Amongst others, the Prospectus Regulation provides for a new advertisement regime concerning offers of securities to the public or admission of securities to a regulated market in an EU Member State. The regime is set out in Article 22, Prospectus Regulation and the Delegated Regulation 2019/979 supplementing the Prospectus Regulation (the RTS Regulation).3 (p. 320) 14.02  In this chapter we discuss the advertisement regime under the Prospectus Regulation. Many provisions familiar under the Prospectus Directive have been carried over. What has changed is the definition of what constitutes an advertisement. While under the Prospectus Directive an advertisement had to be an ‘announcement’, since 21 July 2019 a ‘communication’ could trigger the regime to apply. The term communication is broader, as every announcement is a communication but not every communication is an announcement. Syndicate desks should be wary that bilateral communications could be caught. However, in our view the actual impact of the new regime is likely to be limited.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

II.  Background 14.03  Under the Prospectus Directive regime the term ‘advertisements’ was defined as ‘announcements (i) relating to a specific offer to the public of securities or to an admission to trading on a regulated market and (ii) aiming to specifically promote the potential subscription or acquisition of securities’.4 14.04  The term ‘announcement’ has not been defined but intends to include a wide range of oral and written communications (including the means of communication set out in the non-exhaustive list set out in Article 34, Prospectus Directive Regulation,5 such as addressed or unaddressed printed matter, electronic message, or advertisement received via a mobile telephone or pager, press advertising with or without order form, telephone with or without human intervention, seminars and presentations, radio, electronic mail, and television). As a result thereof, certain marketing materials commonly used in capital markets transactions (where the securities are offered to the public and/or to be admitted to trading on a regulated market in the European Economic Area (EEA)) were caught under the definition of advertisement (including preliminary offering circulars, investor presentation materials, and press releases regarding an issue). 14.05  The Prospectus Directive introduced a number of minor content requirements. It requires the information set out in an advertisement not to be ‘inaccurate’ or ‘misleading’ and to be ‘consistent’ with the information disclosed in the prospectus. It also requires the advertisement to be clearly recognizable as an advertisement. Finally, the advertisement must include a statement that a prospectus has been (or will be) published and an indication where investors may obtain a copy thereof.6 14.06  The market developed standard legends and disclaimers to be added to marketing materials used in capital markets transactions, such as investor presentations, preliminary (p. 321) offering circulars, and press releases regarding the issue. These legends and disclaimers serve the purpose of covering off these content requirements. 14.07  As part of the Commission’s overall review of the Prospectus Directive in 2015, new and further clarified prospectus rules were announced. These new rules were laid down in the ‘Omnibus II’ RTS (Omnibus II)7 and became applicable in March 2016. These new rules included changes to the advertisement regime on the dissemination of advertisements and the consistency with the prospectus (as well as specifying additional provisions about advertisements as required by the Prospectus Regulation). None of these new advertisement rules had a major impact on the market.

III.  The Prospectus Regulation 1.  General 14.08  The advertisement regime has been reconsidered as part of the Prospectus Regulation overhaul. The European Commission stated the following in respect of advertisements: it is necessary to harmonise advertisements in order to avoid undermining public confidence and prejudicing the proper functioning of financial markets. The fairness and accuracy of advertisements, as well as their consistency with the content of the prospectus are of utmost importance for the protection of investors, including retail investors.8 14.09  As seen in section I ‘Background’ (para. 14.03) above, harmonization of advertisements was already in process. In our view, the statement in paragraph 14.08 should therefore not be construed as meaning to say that public confidence under the Prospectus Directive’s advertisement regime was being undermined. It is more likely that the Commission was of the view that further harmonization would be helpful by eliminating From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

potential differences in the way the provisions had been implemented across Member States.9 14.10  For market participants, one single set of rules across the EU brings efficiency advantages. This is equally true for advertisement rules. A regulation is directly applicable in all Member States and eliminates discretion of Member States as to how to implement the prospectus rules into their national laws. The adoption of a regulation reduces differences in local requirements. Issuers and their agents (and advisors) will not have to familiarize themselves and comply with various national advertisements (p. 322) rules and regulations. No revolutionary changes were anticipated to the advertisement regime under the Prospectus Directive. As will be discussed in paragraph 14.45 below, the advertisement rules laid down in Omnibus II have largely remained unchanged. Advertisements must: (i) be clearly recognizable as such; (ii) not contain information which is inaccurate or misleading; and (iii) be consistent with the information contained in the prospectus, whether that prospectus has already been published or is yet to be published. In addition, advertisements must state that a prospectus has been or will be published and give details as to where such prospectus is or will be available to investors. The few changes and clarifications that are made under the Prospectus Regulation do not appear to be overly burdensome or difficult for market participants to implement in their marketing activities. The Prospectus Regulation does widen the definition of advertisement by replacing ‘announcement’ by ‘communication’.

2.  From ‘Announcement’ to ‘Communication’ 14.11  The change which has drawn most attention from market participants is the revised definition of advertisements. The Prospectus Regulation no longer refers to ‘announcements’ but to a ‘communication’. An advertisement is any communication with the following two characteristics: (i) relating to a specific offer of securities to the public or to an admission to trading on a regulated market; and (ii) aiming to specifically promote the potential subscription or acquisition of securities.10 14.12  We understand that the European Commission has given signals that in its view this change in definition does not significantly alter the scope of the advertisement regime but in the legislative procedure leading to the Prospectus Regulation this has not been formally confirmed. So, what does the term ‘communication’ cover? 14.13  As indicated by the European Securities and Markets Authority (ESMA), the use of the word ‘communication’ is not limited to an announcement per se. Any bilateral communication—even oral—could be caught, for example a bilateral telephone call. According to ESMA, the term ‘communication’ suggests that an advertisement is an act of transmitting and sharing of information by verbal or written means involving two or more parties and may therefore potentially capture a much wider range of information exchanges than was the case in some Member States under the Prospectus Directive, depending on implementing legislation.11 (p. 323) 14.14  The key question is therefore when do the advertisement rules apply to a transmission of information? The transmission must relate to a specific offer and must be aimed at specifically promoting the potential purchase of the securities, as was the case under the Prospectus Directive regime. It is not always clear when information exchanged or transmitted is to be construed as ‘communication relating to a specific offer of securities to the public or to an admission to trading on a regulated market and with the aim to specifically promote the potential subscription or acquisition of securities’. Uncertainty around whether the advertisement regime applies may be especially relevant in equity capital market transactions as an equity capital market transaction typically involves much more pre-deal research and therefore much more pre-launch (e.g. bookbuild) communication than a debt capital markets transaction. If such communication or ordinary course communications by syndicate banks to institutional investors would need to be From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

treated as advertisements, this would mean that issuers and syndicate banks would have to take into consideration the requirements that apply to advertisements at a much earlier stage than they were used to under the Prospectus Directive. 14.15  The Prospectus Regulation fails to define what constitutes an ‘offer’ of securities. Furthermore, the Prospectus Regulation does not clarify when a communication ‘relates’ to a ‘specific’ offer. A launch or announcement of an issue would clearly be in scope; a generic discussion with a cornerstone investor about the issue of securities as a means to attract funding would not. It is, however, not always easy to conclude whether a communication would be caught under the new regime. 14.16  By way of illustration, we have considered the following examples. Would a preannouncement communication—to test investor appetite for a potential securitization issue —be caught? Although no conclusive rules can be given in this context, we believe that in principle a pre-announcement communication to an investor contact, would generally not be specific if at such point in time no decision has been made by the issuer if and when to proceed with an issue and if it would, on which terms. From a civil law perspective, there is no offer of, or an invitation to bid for, securities. However, the assessment will depend on the circumstances of the matter at hand and it may well be that market participants will in the future simply take a conservative and pragmatic approach and already treat such communications as advertisements if there is an expectation or intention to issue securities to the public and/or to apply for admission to a regulated market. Another example we have considered relates to communications of an administrative or logistical nature, for example in which meetings are scheduled with potential investors. In our view, such communications themselves do not qualify as an advertisement. Such communication might be conducive to promoting securities, but in itself it does not contain any information or views on the offer. In case of an ongoing dialogue with one potential investor, we are inclined to believe that it is sufficient to only communicate once that a prospectus will be made available. We would suggest such communication is in writing or recorded. (p. 324) 14.17  As for any communication made after the launch of a transaction, it is easy to establish whether it relates to a specific offer or admission, so the question whether such communication constitutes an advertisement will depend on whether it is ‘aiming to specifically promote the potential subscription or acquisition of securities’. 14.18  For the vast majority of communications it will be fairly straightforward to establish whether they are meant to be promotional or serve a different purpose such as an administrative or logistical nature. However, there will inevitably be communications that fall within a grey area. Not only that, but it is also true that the course of conversations cannot always be predicted. It is possible that a phone call from a syndicate bank to an institutional investor that was initially not intended to be a sales pitch or marketing talk develops during the conversation into such talk. Our advice would be to treat a communication as an advertisement in case of doubt, especially when dealing with retail investors. 14.19  We trust issuers and managers will, as part of their governance, have their communication protocols aligned with the new advertisement regime (and perhaps in consultation with other industry participants), with clear instructions and guidance, depending on the type of communication with or addressed to (potential) investors in connection with securities offerings or admissions to regulated markets, such that the advertisement requirements under the Prospectus Regulation are complied with.

3.  Level 1 Requirements to Advertisements

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

14.20  The requirements that apply to advertisements under the Prospectus Regulation are listed in Article 22, Prospectus Regulation and in the RTS Regulation. The Level 1 requirements of Article 22, Prospectus Regulation are very similar to the rules pursuant to the former Prospectus Directive. Article 22, Prospectus Regulation requires the following: (i)  advertisements shall state that a prospectus has been or will be published and indicate where investors are or will be able to obtain it; (ii)  advertisements shall be clearly recognizable as such; (iii)  the information contained in an advertisement shall not be inaccurate or misleading and shall be consistent with the information contained in the prospectus, where already. published, or with the information required to be in the prospectus, where the prospectus is yet to be published; and (iv)  all information disclosed in an oral or written form concerning the offer of securities to the public or the admission to trading on a regulated market, even where not for advertising purposes, shall be consistent with the information contained in the prospectus.

(p. 325) IV.  The Delegated Regulation 14.21  At the request of the European Commission, ESMA has developed draft regulatory technical standards, in which it specifies the requirements relating to advertisements. The Commission has adopted these regulatory technical standards by means of a Delegated Regulation on 14 March 2019. The Delegated Regulation has been published in the Official Journal on 21 June 2019.12 14.22  The chapter about advertisements in the Delegated Regulation covers five different topics, which we discuss below.

1.  Identification of (and Reference to) the Prospectus in any Advertisement 14.23  First, if it is required to draw up a prospectus, any related advertisement will need to clearly identify and make reference to such prospectus.13 The rationale for this requirement is self-explanatory. The prospectus is the legal document on which an offering of securities is based. It contains the most detailed information about the issuer and the securities and is meant to enable the investor to make an informed investment decision. It is therefore only logical that potential investors are made aware of the existence of the prospectus, as well as being informed of where and how a copy can be obtained. 14.24  The manner in which this identification needs to take place is dependent on how an advertisement is disseminated. 14.25  If an advertisement is disseminated in written form by electronic means, the advertisement will need to include a hyperlink to the prospectus or, if the prospectus has not yet been published, to the page of the website where the prospectus will be published and to the relevant final terms of a base prospectus. 14.26  The European Securities and Markets Authority considers the inclusion of hyperlinks in advertisements necessary. Market participants have voiced concerns that it may not be known prior to publication where the prospectus will be published, in which case no hyperlink can be provided. In the latter case, ESMA takes the view that for the sake of investor protection a hyperlink to a general webpage should at least be provided and has clarified the distinction between prior- and post-publication of the prospectus in the rules.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 326) 14.27  If the advertisement is disseminated in written form but not by electronic means, the advertisement will need to clearly identify the website where the prospectus is published, or will be published. 14.28  For all other forms or means of advertisements, with oral communication as the most prominent example, accurate information on where the prospectus may be obtained, and accurate information on the offer of securities or the admission to trading on a regulated market to which it relates, must be included in such communication.

2.  Specific Content to be Included in any Advertisement (Retail Only) 14.29  The Delegation Regulation contains specific content requirements for advertisements that are targeted at retail investors.14 Perhaps somewhat surprisingly, the Delegated Regulation and the Prospectus Regulation are silent on what a retail investor means. We understand that market participants assume this term covers any person which would qualify as a MiFID II retail client.15 This would mean any party that is not a professional client would be covered, including small and medium-sized enterprises. 14.30  The new requirements are all in the area of warning signals and signposts. The first requirement is that for written advertisements the word ‘advertisement’ must be included in a prominent manner, so that it is clear for retail investors what the background and purpose of the communication is. 14.31  Where an advertisement is disseminated in an oral form, the purpose of the communication must be clearly explained at the beginning of the message. As mentioned in paragraph 14.18, it is not always clear whether a conversation (or part thereof) constitutes (or evolves into) an advertisement, so this requirement needs to be considered carefully by issuers and managers that are targeting retail investors to ensure that retail investors are not being subjected to advertisements without having received the appropriate warnings. We believe that it is best to take a cautious approach and basically treat all communication with a retail investor surrounding a securities offering as having the potential of being captured under the advertisements rules, even if the communication and the offer are only loosely connected with each other and a case could be build that the communication was not aimed at specifically promoting the potential subscription or acquisition of securities. (p. 327) 14.32  Furthermore, the advertisements will need to contain a statement that the approval of the prospectus should not be understood as an endorsement of the securities offered or admitted to trading on a regulated market. In addition, the advertisement should include a recommendation that potential investors read the prospectus before making an investment decision in order to fully understand the potential risks and rewards associated with the decision to invest in the securities. 14.33  Issuers are also required to include a warning statement—the so-called PRIIPS comprehension alert in case of securities which are not simple but deemed complex under MiFID II, which in short may be the case in respect of securities other than shares, bonds, or other debt securities without an embedded derivative or complex structural features or shares or participations in the Undertakings for the Collective Investment in Transferable Securities (UCITS).16 Recital (18), PRIIPS17 clarifies that a product should be regarded as not being simple and as being difficult to understand in particular if it invests in underlying assets in which retail investors do not commonly invest, if it uses a number of different mechanisms to calculate the final return of the investment, creating a greater risk of misunderstanding on the part of the retail investor, or if the investment’s pay-off takes advantage of the retail investor’s behavioural biases, such as a teaser rate followed by a much higher floating conditional rate, or an iterative formula. The statement in the

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

advertisement should be crafted along the following lines: ‘You are about to purchase a product that is not simple and may be difficult to understand.’ 14.34  This requirement applies to advertisements in general, and not to written advertisements only. Market participants have asked for a clarification that this requirement only applies to written advertisements. 14.35  In general, this requirement is rather confusing, as it cuts across the more appropriate warning to read the prospectus before making an investment decision. The alert is also incorrect, as retail investors should not be told they are ‘about to purchase a security’ when they read or hear an advertisement. The alert suggests a causal link which does not seem appropriate. 14.36  Finally, the Delegated Regulation contains as an overarching principle the rule that advertisements in written form, which are disseminated to potential retail investors, need to be sufficiently different in format and length from the prospectus so that no confusion with the prospectus is possible. In other words, issuers need to ensure that ‘advertisements’ are recognizable as such so that retail investors do not confuse an advertisement with the prospectus. We would expect it will not be difficult to comply with this requirement, as communications comprising an advertisement tend to be more concise than a prospectus anyway and such communications must already include a (p. 328) prominent statement that they qualify (or are deemed to qualify) as an advertisement within the meaning of the Prospectus Regulation. It is therefore unclear what is the added value of this requirement.

3.  Requirements as to Amendments to Advertisements in Case a Supplement is Published 14.37  The Delegated Regulation also provides a set of rules on how to act if a supplement in relation to prospectus is published (x) after dissemination of an advertisement to potential investors but (y) before the final closing of the offer period to the public or the time when trading on a regulated market begins, whichever occurs later.18 The framework applies irrespective of whether it is a wholesale offering or a retail offering. 14.38  In case of a significant new factor, material mistake, or material inaccuracy relating to the information included in a prospectus which may affect the assessment of the securities and which arises or is noted between the time when the prospectus is approved and the closing of the offer period or the time when trading on a regulated market begins, whichever occurs later, this must be covered in a supplement to the prospectus without undue delay.19 14.39  If the significant new factor, material mistake, or material inaccuracy mentioned in the supplement renders the previously disseminated advertisement materially inaccurate or misleading, this will also have a bearing on the advertisement at hand. 14.40  It is not sufficient to only distribute or disseminate updated versions. The newly distributed/disseminated advertisement must contain (i) a clear reference to the inaccurate or misleading version of the advertisement; (ii) an explanation that the advertisement has been amended as it contained materially inaccurate or misleading information; and (iii) a clear description of the differences between the two versions of the advertisement. 14.41  The Delegated Regulation stipulates that the amended advertisements must be disseminated to potential investors without undue delay following the publication of the supplement to the prospectus and that amended advertisements, except for orally disseminated advertisements shall be disseminated through at least the same means as the previous advertisement to have the best chance that the revised advertisement will reach the initial recipient(s) of the advertisement.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

14.42  Market participants have indicated that these requirements raise various issues. The key criticism is that it puts misplaced emphasis on advertisements. Advertisements speak as of their date only, and they make clear that all investment decisions must be made on the basis of the final prospectus. If a supplement to the prospectus is provided (p. 329) to the investors which clarifies or corrects or gives additional information, the information is already disseminated to the investors. To then also require issuers to ‘correct’ any prior advertisements puts unnecessary administrative burden and costs on the issuer on the one hand and has no benefit for the investors. Furthermore, it cannot be guaranteed that an amended advertisement will reach the same audience, in which case the new rules would not fulfil their purpose. 14.43  Although ESMA had sympathy for these points, these concerns were ultimately dismissed, as ESMA believes that preference must be given to investor protection, and that the interests of investors are best served by disseminating new advertisements.

4.  General Requirement to Align Information Concerning Offers of Securities 14.44  Finally, the Delegated Regulation reiterates the importance of any information to be aligned with the information set out in the prospectus, irrespective of whether such information is meant to be an advertisement or meant for other purposes.20 Information should not contradict the information in the prospectus, refer to information which contradicts the information in the prospectus, or contain alternative performance measures unless they are also contained in the prospectus. Moreover, any information may not present the information in the prospectus in a materially unbalanced way, including by way of presentation of negative aspects of such information with less prominence than the positive aspects, omission, or selective presentation of certain information. 14.45  These rules are not new. They are taken from Omnibus II (as are the rules relating to amendments to advertisements), so these rules do not provide for new challenges for market participants and should be manageable to work with.

V.  Supervision of the Advertisement Regime—Risk of Conflicting Views of Authorities? 14.46  The Prospectus Regulation contains a new framework as to the supervision of compliance with the advertisement rules. It introduces a rather complex cooperation mechanism between local competent authorities. 14.47  Oversight of compliance with the advertising requirements is the responsibility of each competent authority in any jurisdiction where the advertisement is disseminated.21 Multiple competent authorities can be involved in assessing compliance (p. 330) with advertisement requirements in the case of a cross-border offering of securities. This may result in a fragmentation of compliance requirements. There is a risk that different competent authorities will assess the same advertisement in a different manner, which is not helpful in achieving a proper functioning of the European capital markets. That being said, it is worth noting that, luckily, scrutiny of advertisements by a competent authority is not a precondition to the offer or admission taking place. 14.48  If a competent authority has reasonable grounds for believing that the rules of the Prospectus Regulation have been infringed it has the authority, among other things, to prohibit or suspend advertisements or require issuers, offerors, or persons asking for admission to trading on a regulated market, or relevant financial intermediaries, to cease or suspend advertisements for a maximum of ten consecutive working days on any single occasion. If a competent authority makes use of the above-mentioned supervisory and investigatory powers set out in the Prospection Regulation in relation to the enforcement of

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

the advertisement rules, it shall communicate this without undue delay to the competent authority of the home Member State of the issuer.22

1.  Procedure for the Cooperation between Competent Authorities 14.49  If the competent authority of a Member State in which an advertisement is disseminated believes that the content of that advertisement is inconsistent with the information in the prospectus, it may request the assistance of the competent authority of the home Member State.23 In such case, the competent authority in which the advertisement is disseminated must communicate the following to the competent authority of the home Member State: (a)  its reasons for believing that the content of the advertisement is inconsistent with the information in the prospectus; (b)  the relevant advertisement and, where necessary, a translation of the advertisement in the language of the prospectus or in a language customary in the sphere of international finance. 14.50  The competent authority of the home Member State must report to the competent authority in which the advertisement is disseminated as soon as possible the results of its assessment of the consistency of the advertisement with the information in the prospectus, but it remains the authority of the competent authority of the home Member State to assess whether an advertisement is in compliance with the applicable rules.

(p. 331) 2.  What is Next? 14.51  It is possible that in the future, the supervision on advertisements will be centralized at ESMA in specific circumstances. On 20 September 2017, the European Commission published its proposals on reforms intended to create a stronger and more integrated European financial supervision for the Capital Markets Union. The reforms, relating to a number of existing EU regulation, including the Prospectus Regulation, were grouped together in one proposed regulation (Omnibus III). 14.52  Amongst other things, Omnibus III proposed that the scrutiny and approval of the following four types of prospectuses under the Prospectus Regulation would be undertaken by ESMA rather than national competent authorities: (a)  non-equity securities prospectuses of EU issuers where the securities are being admitted to a specific qualified investor segment of the regulated market; (b)  prospectuses of EU issuers relating to asset-backed securities; (c)  prospectuses prepared by certain EU specialist issuers, i.e. property companies, mineral companies, scientific research-based companies, and shipping companies; and (d)  all prospectuses prepared by non-EU issuers. 14.53  The proposals also included the transfer of supervision of advertisements relating to the above types of prospectuses to ESMA. However, the proposals did not reach the finish line.24 It will be interesting to see to what extent the centralization of supervisory powers will develop.

VI.  No Grandfathering

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

14.54  It is worth mentioning that the Prospectus Regulation does not allow for any grandfathering with respect to advertisements. As of 21 July 2019, all new advertisements will need to comply, whereby it does not matter whether the advertisement relates to issuances that were already in preparation before 21 July 2019 or documented under a base prospectus that was approved prior to such date.

VII.  Conclusion 14.55  The advertisement regime under the Prospectus Regulation will not have a huge impact on the EU capital markets. The regime remains substantially the same. The good (p. 332) news is that discrepancies between local laws will disappear with the introduction of the Regulation. As a result of the Prospectus Regulation, there will be one set of rules which applies equally throughout the EU, although as of yet supervision will remain decentralized, with the risk of diverging interpretations. We expect a market practice to develop as to which type of communications will be (deemed) in scope for the definition of advertisements and which type of communications will be (deemed) out of scope, and which market practice will, where applicable, be supported and/or developed by ESMA’s Q&A Prospectus. All this is based on our assumption that the change in the definition of the word ‘announcement’ to ‘communication’ in the Prospectus Regulation does not significantly alter the scope of the advertisements regime, which we understand is also the view of the European Commission. Why it was not possible to confirm this in the legislative text remains a mystery to us. Could it be a matter of poor communication?

Footnotes: 1

  Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 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 (Prospectus Regulation). 2 

Prospectus Directive 2003/71/EC (as amended by Directive 2008/11/EC, Directive 2010/73/EU, Directive 2010/78/EU, Directive 2013/50/EU and Directive 2014/51/EU) (Prospectus Directive). 3

  Commission Delegated Regulation (EU) 2019/979 of 14 March 2019 supplementing Regulation (EU) 2017/1129 of the European Parliament and of the Council with regard to regulatory technical standards on key financial information in the summary of a prospectus, the publication and classification of prospectuses, advertisements for securities, supplements to a prospectus, and the notification portal, and repealing Commission Delegated Regulation (EU) 382/2014 and Commission Delegated Regulation (EU) 2016/301 (RTS Regulation). 4

  Article 2(9) of Prospectus Directive Regulation (EC) 809/2004 (as amended by Commission Regulations (EC) 1787/2006, 211/2007, 1289/2008 and Commission Delegated Regulations (EU) 311/2012, 486/2012, 862/2012 and 759/2013). 5

  Prospectus Directive Regulation (EC) 809/2004 (as amended by Commission Regulations (EC) 1787/2006, 211/2007, 1289/2008 and Commission Delegated Regulations (EU) 311/2012, 486/2012, 862/2012 and 759/2013). 6 

Article 15, Prospectus Directive.

7

  Commission Delegated Regulation (EU) 2016/301 of 30 November 2015 supplementing Directive 2003/71/EC of the European Parliament and of the Council with regard to regulatory technical standards for approval and publication of the prospectus and

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

dissemination of advertisements and amending Commission Regulation (EC) 809/2004 (Omnibus II). 8

  Recital (64), Prospectus Regulation.

9

  Recital (27), Prospectus Regulation.

10

  Article 2(k), Prospectus Regulation.

11

  Paragraph 121, Consultation Paper Draft regulatory technical standards under the new Prospectus Regulation. For example, in the Dutch legislation, which implemented the Prospectus Directive, the term ‘advertisements’ already covered ‘any form of information provision’ that serves to praise or recommend a particular financial service or a particular financial product. 12

  Commission Delegated Regulation (EU) 2019/979 of 14 March 2019 supplementing Regulation (EU) 2017/1129 of the European Parliament and of the Council with regard to regulatory technical standards on key financial information in the summary of a prospectus, the publication and classification of prospectuses, advertisements for securities, supplements to a prospectus, and the notification portal, and repealing Commission Delegated Regulation (EU) 382/2014 and Commission Delegated Regulation (EU) 2016/301 (Delegated Regulation). 13

  Article 13, Delegated Regulation.

14

  Article 14, Delegated Regulation.

15

  Directive 2014/65/EU of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (MiFID II). A ‘retail client’ is defined in Article 4 as a client who is not a ‘professional client’. A professional client is a client listed in Annex II to the Directive, which list includes (but is not limited to) regulated entities like credit institutions and insurance undertakings, large undertakings, governments, and institutional investors. See https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/? uri=CELEX:32014L0065&from=EN. 16

  See for the full text of the relevant securities those referred to in items (i), (ii), and (vi) of Article 25(4)(a), MiFID II. 17

  Regulation 1286/2014 of the European Parliament and of the Council, dated 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs). 18

  Article 15, Delegated Regulation.

19

  Article 23, Prospectus Regulation.

20

  Article 16, Delegated Regulation.

21

  Article 22(6), Prospectus Regulation.

22

  Article 32, Prospectus Regulation.

23

  Article 17, Delegated Regulation.

24

  See https://www.consilium.europa.eu/en/press/press-releases/2019/03/21/financialsupervision-council-presidency-and-parliament-reach-provisional-deal-on-supervisoryframework-for-european-financial-institutions.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Part II The New EU Prospectus Rules, 15 Omission of Information, Incorporation by Reference, Publication, and Language of the Prospectus Paola Leocani From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

Subject(s): Prospectus — Financial regulation — Monetary union

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 333) 15  Omission of Information, Incorporation by Reference, Publication, and Language of the Prospectus I.  Review of the Prospectus Directive and the Purpose of the Prospectus Regulation 15.01 II.  The Scope of the Prospectus and Different Types of ‘Omission’ of Material Information Allowed 15.05 III.  Incorporation by Reference 15.08 1.  Incorporation by Reference under the Prospectus Directive: Prevalence of the Prospective Directive Principles of Completeness, Accessibility, and Comprehensibility 15.08 2.  Making the Incorporation by Reference Mechanism More Flexible and Assessing the Need for Supplements in Case of Parallel Disclosure of Inside Information 15.14 3.  Incorporation by Reference under Article 19 of the Prospectus Regulation 15.27 4.  Incorporation by Reference and ‘Draw-Down’ Prospectus 15.46 IV.  Omission of Information 15.50 1.  Overview: Article 18, NPR 15.50 2.  Omission of Information—Offer Price, Yield, Amount of the Securities (Art. 17, NPR) 15.55 V.  Publication of the Prospectus (Art. 21, NPR) 15.61 VI.  Language (Art. 27, NPR) 15.70

I.  Review of the Prospectus Directive and the Purpose of the Prospectus Regulation 15.01  The review of the Prospectus Directive (2003/71) regime1 has been a crucial task of the Commission’s action plan for a Capital Markets Union,2 singled out as one of its early (p. 334) and high-priority actions. The reason was simple: the prospectus is the gateway into capital markets for firms seeking funding (most of those wishing to issue debt or equity must produce one), and it is crucial that this requirement does not act as an unnecessary barrier to the goal of accessing capital markets. It should be as straightforward as possible for companies (including small and medium-sized enterprises (SMEs)) to raise capital throughout the EU, whereas today it is seen by some as burdensome and ineffective at facilitating access to capital markets, in particular for SMEs and companies with lower market capitalization. At the same time, it is seen by some as inadequate in providing the information investors need.3 15.02  As a legal intervention into capital market framework, bundled into a single instrument, and a regulation instead of a directive, the reform of the Prospectus Directive regime had to guarantee, pursue, and balance accessibility to capital-raising markets as an alternative to the banking system along with adequate protection for investors, while also safeguarding the market’s stability. Its main objectives are, in summary, (i) to reduce the administrative burden of the drawing up of a prospectus for all issuers, in particular for SMEs, frequent issuers of securities, and secondary issuances; (ii) to make the prospectus a

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

more relevant disclosure tool for potential investors, especially those in SMEs; and (iii) to achieve more convergence between the EU prospectus and other EU disclosure rules. 15.03  With this aim, the legislative work preparing the New Prospectus Regulation (thus the review of the Prospectus Directive regime) (the ‘New Prospectus Regulation’ 2017/1129, or NPR) carefully considered the needs of market users with regard to prospectuses not only in relation to their scope, form, content, comparability, approval process, liability, and sanctions, but also in relation to some practical aspects that could unduly hinder access to capital markets for issuers, and which, if amended, could significantly reduce administrative burdens without undermining investor protection.4 15.04  In this context, amending the provisions governing incorporation by reference, publication, and languages of the prospectuses and, to a certain extent, omission of information (including on price and quantity of the relevant securities) could facilitate the procedure of accessing the markets by lowering the costs for issuers to draw and publish (p. 335) a prospectus, without lowering investor protection, and, at the same time, resulting in a more efficient coordination of the prospectus regime with other aspects of the legal framework for capital markets and duties of issuers under it, such as the Market Abuse Regulation (MAR, Regulation EU 596/2014) and the Transparency Directive (2004/109, revised by Directive 2013/50/EU), combining in such a way, once again, the three main goals of any legal intervention in this area.

II.  The Scope of the Prospectus and Different Types of ‘Omission’ of Material Information Allowed 15.05  A prospectus is a legal document, which must contain the information an investor needs in order to make a decision to invest in a company’s securities, typically relating to (i) the assets and liabilities, profits and losses, financial position, and prospects of the issuer and of any guarantor; (ii) the rights attaching to the securities; and (iii) the reasons for the issuance and its impact on the issuer (Art. 6(1), NPR).5 15.06  To this end, persons responsible for a prospectus must declare that, to the best of their knowledge, the information contained in the prospectus is in accordance with the facts and that the prospectus makes no omission likely to affect its import (Art. 11(1), NPR). 15.07  The NPR allows, however, certain types of legitimate omissions, which would thus not trigger any liability, establishing specific requirements to guarantee investor protections but, at the same time, taking into account the issuer’s interest in omitting certain information.6 (a)  The first type of ‘legitimate omission’ is the incorporation by reference, where the relevant information is not expressly disclosed but incorporated by reference to one or more documents having certain characteristics (Art. 19, NPR). In such a case, therefore, there is not an actual omission, since the relevant required information is indeed included in the prospectus, but only by reference. As indicated in Recital (58), NPR, this mechanism should be used by issuers without endangering investor protection, nor to the detriment of other interests the prospectus is meant to protect, including the accessibility of the information. For example, the language used for information incorporated by reference should follow the language regime applying to prospectuses, and information incorporated by reference should be able to refer to available historical data. Where such information is no longer relevant due to material changes, that should be (p. 336) clearly stated in the prospectus, and the updated information should then also be provided.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(b)  Furthermore, the prospectus can omit the final number or price of the securities to be offered, which can be disclosed through an announcement to be published and submitted to the relevant competent authority after the publication of the prospectus or relevant final terms. The protection is granted to investors through a right of withdrawal once the final offer price or amount of securities is known, or, alternatively, by making it possible for investors to assess the ‘worst-case scenario’, disclosing the maximum price investors might have to pay for the securities, or the maximum amount of securities they might have to buy, or the valuation methods and criteria, and/or conditions, used for its determination (Art. 8(1), Prospectus Directive and Art. 17, NPR). (c)  Finally, the prospectus can omit sensitive information in certain circumstances on a case-by-case basis by means of a specific derogation granted by the competent authority in order to avoid detrimental situations for an issuer (Art. 18, NPR).

III.  Incorporation by Reference 1.  Incorporation by Reference under the Prospectus Directive: Prevalence of the Prospectus Directive Principles of Completeness, Accessibility, and Comprehensibility 15.08  The Prospectus Directive regime had eventually permitted—to a limited extent, and under certain conditions—the incorporation by reference mechanism, which allows the issuer/offeror to disclose relevant information by referring in the prospectus to other documents already published. Nonetheless, before the adoption of the Prospectus Directive regime at the EU level, the procedures for incorporation by reference, its availability for companies (in particular, those active on a cross-border basis), and the specific circumstances in which it could be used varied from one country to another, and were based on the Listing Particulars Directive (80/390).7 (p. 337) 15.09  In terms of other securities law experiences (outside the EU), most countries permit information that is required to be disclosed in a document to be incorporated into that document by reference to another, previously filed with the supervisory authority or made available to market participants. In some cases, companies also may be permitted to incorporate information in ‘shelf’-offering documents on an ongoing basis, by reference to documents to be filed/published/approved/furnished in the future.8 15.10  For instance, in the US, the Securities and Exchange Commission (SEC) has progressively integrated the disclosure requirements under the Securities Act of 19339 (which primarily relates to primary market transactions, e.g. prospectuses and initial public offerings (IPOs)) and the Securities Exchange Act of 193410 (relating more to secondary market activities, including public reporting by listed issuers), showing confidence in the ‘efficient market hypothesis’, i.e. in the idea that publicly disclosed information, even when not checked and approved by the supervisory authority, are reliable as evaluated by market participants. Therefore, certain issuers subject to the public reporting requirements of the Securities Exchange Act are allowed to incorporate by reference the documents disclosed pursuant to those reporting obligations, such as annual and current reports, in their Securities Act filings such as prospectuses for new issuances, which thereby imposes liability on the relevant parties (including the issuer, underwriters, experts, directors, and accountants) under paragraphs 11 and 12 of the Securities Act, and this creates strong incentives to check disclosures of the incorporated information.11 This system has permitted streamlining of the process and (p. 338) reduced time and costs for the issuer.12 However, certain issuers can also rely on the ‘forward’ incorporation by reference (i.e.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

documents filed with the SEC after the registration is effective), also through the ‘shelfregistration’ system (i.e. registration of securities for future or continuous sales). 15.11  In its technical advice13 on the Prospectus Directive, the European Securities and Markets Authority’s (ESMA’s) predecessor (the Committee of European Securities Regulators (CESR)), while acknowledging that the aim of the Prospectus Directive was to simplify procedures and reduce costs for issuers, noted, as emphasized also in the Prospectus Directive recitals, that such aims should not be achieved to the detriment of the other interests the prospectus is meant to protect. In fact, the cardinal purpose of a prospectus is to contain ‘all the information necessary’ to enable investors to make an informed assessment of the assets and liabilities, financial position, profit and losses, as well as other material information regarding the prospects of the issuer and of any guarantor and of the rights attaching to such securities. To this end, when evaluating whether documents may or may not be incorporated by reference, any specific simplifications for issuers should be weighed against the fact that the natural location of the information required is the prospectus, and that, as clearly required by the Prospectus Directive, the information should be presented in an easily analysable and comprehensible form.14 15.12  Article 11, Prospectus Directive stipulated the requirements for issuers, offerors, and persons asking for admission to trading to comply with when incorporating information into a prospectus by reference. It also contained a mandate (para. 3) for the Commission to adopt implementing measures concerning the information to be incorporated by reference by 1 July 2004. The Commission fulfilled this mandate with Article 28 of Commission Regulation (EC) 809/2004 (Prospectus Regulation), which also contains a non-exhaustive list of documents that can be incorporated.15 (p. 339) 15.13  Article 11 was amended by the Directive 2010/73/EU (the Amending Directive) to better align its requirements with those of the Transparency Directive noted in paragraph 15.04 above. But incorporation by reference was only allowed for information that had already been published and previously or simultaneously approved or filed with the relevant authority in accordance with the Prospectus or Transparency Directives.16 This effectively limited the types of documentation that could be incorporated by reference. Moreover, no forward incorporation by reference was allowed, and as this is a maximum harmonization Directive, that meant forward incorporation was no longer allowed, even in Member States that used to permit forms of ‘shelf registration’).17

2.  Making the Incorporation by Reference Mechanism More Flexible and Assessing the Need for Supplements in Case of Parallel Disclosure of Inside Information 15.14  The enhancement of the incorporation by reference is generally considered as a valuable instrument to reduce costs and the administrative burden without affecting investors’ protection.18 15.15  As mentioned, the main objectives of the NPR have been in fact (i) to reduce the administrative and paperwork burdens of drawing up of prospectus for all issuers; (ii) to make the prospectus a more relevant disclosure tool for potential investors; and (iii) to achieve more convergence between the EU prospectus and other EU disclosure rules. (p. 340) 15.16  Further alignment of the prospectus rules with other EU disclosure rules (e.g. the Transparency Directive) and the Regulation on key information documents for packaged retail and insurance-based investment products (PRIIPs)19 could enhance the efficiency of the prospectus as a tool to bolster capital markets. By ensuring harmonized minimum investor protections by guaranteeing that all prospectuses, wherever they are published, provide clear, comprehensive, and standardized information investors need to make informed investment decisions, the prospectus regime is, indeed, complementary to

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

the ongoing and ad hoc reporting obligations laid down in the above- mentioned Transparency Directive and MAR. In particular, MAR obliges issuers with securities listed on a regulated market (or admitted to trading on a multilateral trading facility (MTF)) to inform the market on inside information which might have an impact on the price of the relevant securities and pertaining inter alia to such issuers (or the securities), so that investors can assess significant events having an impact on such issuers and, in turn, on their investment. The Transparency Directive requires the same issuers to regularly disclose to the public certain information (e.g. financial reports, major changes in the holding of voting rights, ad hoc inside information potentially affecting the price of securities). 15.17  The complementary natures of the Prospectus Directive, the Transparency Directive, and MAR stem from the fact that any prospectus regime in principle only concerns initial disclosure requirements for public offerings or listings on a regulated market, while the other measures govern the disclosure regime to protect investors already holding such securities. However, in case of issuers with securities listed/admitted to trading, it cannot be underestimated that information contained in a prospectus and not also properly disseminated also under the Transparency Directive and MAR might have an impact on existing investors and that, conversely, a set of information may be already available— through the Transparency Directive and MAR disclosures to the market and the public—and thus also to potential primary market investors. 15.18  This mechanism has been reviewed in order to assess whether it needs to be recalibrated in order to achieve more flexibility. A first issue is determining the merit in enlarging the type of documents allowed to be incorporated by reference, potentially extending that option to other types of regulated information. Second, particular attention has been given to the possible streamlining of the interaction between the disclosures required under the prospectus regime, MAR, and the Transparency Directive by allowing a ‘pure and automatic dynamic incorporation by reference’ of documents filed with any national competent authority (NCA), so that documents published/filed or to be published/ filed under other regimes would no longer be subject to incorporation by reference in the prospectus (neither through supplements).20 (p. 341) 15.19  Such a mechanism could be given that issuers having securities admitted to a regulated market are already required to file and disclose information on a periodic basis (under the Transparency Directive) and on an ad hoc basis (under MAR). Since information has been prepared and disclosed in compliance with the relevant EU securities law and as such is available to the public (even if not approved by the NCA), there is no need for it also to be included in a prospectus. Accordingly, taking this reasoning to its logical conclusion, any issuer required by securities law provisions—such as the Transparency Directive and MAR—to disclose to the market certain information regarding the issuer that would also have to be included in a prospectus, should be authorized to produce a very short prospectus, for example outlining the specific offer/listing such as the terms of the issue, the use of proceeds, without incorporating instead anything else into the prospectus by reference, considering that the remaining information is already available to the market (including the potential recipients of the prospectus and addressees of the relevant offer). 15.20  Under this radical approach, neither a substantial repetition of substance nor a reference to the document would need to be included in the prospectus (nor would it need to be supplemented or updated), as it should be assumed that potential investors already and independently have access and thus knowledge of the content of these documents (which, unlike prospectuses, are not normally subject to approval by the NCA).

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

15.21  As a consequence, the regime governing disclosure obligations to the market would overwrite the requirement under the prospectus regime to publish supplements or to annually update base prospectuses. More generally, this would affect primary market investors’ protection, which is based on the disclosure contained in the prospectus, its scrutiny and approval, its accessibility, and withdrawal rights deriving from (the publication of supplements which disclose) new and material facts not taken into account when they made their investment decision, as well as in terms of the regime governing prospectus liability.21 15.22  Nonetheless, by looking at the US experience noted previously in paragraph 15.10, an alternative and less radical route could be pursued: amending the Prospectus Directive regime so as to enable incorporation by reference of specified future information which could limit the need for the publication of several (base prospectus) supplements by incorporating, for example, interim financial information. This would improve market efficiency and reduce costs without affecting investor protection, nor the obligation to update base prospectuses in order to keep them easily accessible. It would place more reliance on regulated information disclosed under the Market Abuse Directive (MAD) and the Transparency Directive, while at the same time maintaining the protections conceived under the prospectus rules and permitting future specified information to (p. 342) be incorporated by reference. In such a framework, the prospectus ought to clearly indicate the future regulated information that will be included by reference (such as, quarterly/semiannual/annual financial statements and also, possibly, other ‘regulated information’ disclosed under MAD or the Transparency Directive). From a practical perspective, where information is to be only partially incorporated into the prospectus, that too can be clearly indicated.22 15.23  This forward-incorporation by reference would not alter the prospectus liability regime, as such incorporated information remains part of the prospectus, is of the same nature, and must comply with the same principles. Anyway, primary and secondary market investors would be able to rely on a different level of protection arising from the incompleteness or omission of such information due to national rules implementing the provisions on liability under the prospectus and under-regulated information (for which, in addition, there is a minimum—instead of maximum—harmonization). These might significantly diverge, as happens in the US.23 15.24  Furthermore, withdrawal rights and ‘future’ incorporation by reference are not incompatible. Currently, whenever a prospectus supplement is published during the relevant statutory period, a ‘walk-away’ right or ‘withdrawal right’ is triggered (Art. 16(2), Prospectus Directive).24 The concept of investor withdrawal rights is compatible with the incorporation of certain specified future information. The easiest solution would be to require issuers to publish announcements/supplements informing investors that such regulated information relating to a significant (negative) new factor has been published and that a withdrawal right has been triggered in respect of ongoing non-exempt offer(s). 15.25  Needless to say, even were forward incorporation by reference to be adopted, prospectus supplements should be published in any event in connection with (i) any future ‘regulated information’ that an issuer wishes to include by reference and that has not been specified in the prospectus that would have been included therein in the future; (p. 343) (ii) ‘non-regulated’ information (that is, not disclosed under MAR or the Transparency Directive) that the issuer wishes to incorporate by reference; (iii) changes to securities note information; and/or (iv) changes to other aspects of the prospectus (including ‘nonsignificant’ aspects, such as a change to the paying agent).

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

15.26  It is true that this lighter approach does not abolish the need for a base prospectus to be updated annually. But it is also true that it would significantly reduce the need for base prospectuses to be supplemented during the year, thus reducing additional burdens and costs for issuers, all while aligning the interaction between the Prospectus Directive, MAR, and the Transparency Directive and maintaining investor protections regarding accessibility of information, prospectus liability, and withdrawal rights.

3.  Incorporation by Reference under Article 19, Prospectus Regulation 15.27  Even if during the process of the reform the shared position seemed to emphasize the need for coordination of the disclosures required under the Prospectus regime, MAR, the Transparency Directive, and the definition of the actual standards to be adopted and the approaches suggested by the relevant market players resulted in expressions of sometimes very different views.25 Probably, as mentioned, a simple change to the incorporation by reference regime to allow for incorporation of pre-specified future information, notably interim financial data, would significantly limit the need for so many base prospectus supplements to be produced after an investment decision has been made, thus reducing costs and thereby improving market efficiency. Instead, the (p. 344) current law arguably grants withdrawal rights to investors regardless of the information conveyed in such interim financials, thus making issuers hostage to investors, who can use the trigger of the publication of a supplement to withdraw from their commitment even if the new information is immaterial or reflects positive developments for the issuer. 15.28  As things stand, the NPR will not permit incorporation of future documents, even if pre-identified and made public in accordance with other EU provisions. 15.29  Nevertheless, the scope of documents whose information may be incorporated by reference in a prospectus has been enlarged, subject to the condition that the information is published electronically, complies with the language regime of Article 27, and is the most recent available to the issuer (Art. 19).26 15.30  Due to their nature and scope, as in the previous regime, summaries cannot include information incorporated by reference. 15.31  Where only certain parts of a document are incorporated by reference, a statement shall be included in the prospectus that the non-incorporated parts are either not relevant for the investor or covered elsewhere in the prospectus. When incorporating information by reference, issuers, offerors, or persons asking for admission to trading on a regulated market shall ensure accessibility of the information. In particular, a cross-reference list shall be provided in the prospectus in order to enable investors to identify easily specified items of information, and the prospectus shall contain hyperlinks to all documents containing information which is incorporated by reference. 15.32  More specifically, issuers have the option not to explicitly include required disclosure in the body of the prospectus and to incorporate by reference into their prospectus documents which have been approved or filed with an NCA in accordance with the Prospectus Directive or the Transparency Directive and have been published previously or are being published at the same time as the prospectus. 15.33  Article 19, NPR expanded the list of such documents to include certain documents (such as regulated information, management reports—as referred to in the Accounting Directive—corporate governance statements and the issuer’s memorandum and articles of association), whether or not they have been approved by or filed with any NCA. (p. 345) The European Commission provided ESMA with the opportunity to further expand this list of

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

documents (Art. 16(4), NPR), but ESMA declined to do so in its March 2018 Technical Advice, considering the current list in Article 19, NPR sufficiently comprehensive.27 15.34  The list covers documents filed or approved by the competent authority of the home Member State in accordance with the Regulation as well as regulated information. However, it also permits companies which are not under the scope of the Transparency Directive (e.g. companies whose securities are traded on an MTF) or which are exempted from some of its requirements (e.g. issuers exclusively of debt securities admitted to trading on a regulated market, the denomination per unit of which is at least EUR 100,000) to incorporate by reference all or parts of their annual and interim financial information and management reports. 15.35  As pointed out by ESMA during the consultation process and confirmed by Article 19, there are three conditions for incorporating information into a prospectus by reference: (a)  the document(s) containing the information have been approved or filed with the home competent authority in accordance with the NPR; or (b)  the document(s) containing the information have been filed with the home competent authority in accordance with the Transparency Directive or the regulated information; (c)  in both of the above cases, such documents must be previously or simultaneously published electronically. 15.36  Note that, regarding the condition that information incorporated by reference must be contained in document(s) approved or filed with the competent authority of the home Member State under the Prospectus Directive, ‘approved’ and ‘filed’ can be distinguished as two separate stages of the treatment of the same document. 15.37  Since there is a difference between the two processes (i.e. there may be a period of delay between approval and filing of a document), a document can be approved but not yet filed (e.g. a prospectus); filed but not approved (this would be the case for documents not subject to approval); or both approved and filed. However, only certain documents can be approved by an NCA in accordance with the Prospectus Directive: prospectuses/base prospectuses, registration documents, securities notes, summaries, and supplements. 15.38  On the other hand, the meaning of ‘filed’ is less straightforward, as there is no definition of this term under the prospectus regime, nor in the context of other securities law. However, as the word ‘filed’ was used in a number of places in the Prospectus Directive, as now in the NPR, ESMA suggested that ‘documents filed in accordance with the PD’ (p. 346) is to be understood only as documents in connection with which the word ‘filed’ is used in the Prospectus Directive.28 Therefore, documents made ‘available’ (see Art. 4, Prospective Directive) or documents provided to an NCA (following a request under Art. 21) should not be considered ‘filed’. Furthermore, registration documents filed without approval under Article 12(3), Prospective Directive cannot be incorporated by reference, as they are not published.29 15.39  However, under the EU prospectus law, the term ‘filed’ does not have any technical definition ascribed to it and can be interpreted as ‘transmitted’ or ‘deposited’ to or with a supervisory authority. In contrast, US federal securities laws distinguish between information that is ‘filed’ with the SEC, and information ‘furnished’, for example current reports of foreign issuers with securities listed on US exchanges, with different liability implications for each case.30

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

15.40  Regarding the second condition for incorporation by reference—that documents are filed in accordance with the Transparency Directive—Article 19 expressly requires only regulated information to be filed with the NCA of the home Member State. According to Article 2(1)(k), Transparency Directive: ‘regulated information’ means all information which the issuer, or any other person who has applied for the admission of securities to trading on a regulated market without the issuer’s consent, is required to disclose under this Directive, under Article 6 of Directive 2003/6/EC [ . . . ], or under the laws, regulations or administrative provisions of a Member State under Article 3(1) of this Directive. 15.41  Finally, Article 3(1), Transparency Directive specifies that: the home Member State may make an issuer subject to requirements more stringent than those laid down in this Directive except that it may not require issuers to publish periodic financial information on a more frequent basis than the annual (p. 347) financial reports referred to in Article 4 and the half-yearly financial reports referred to in Article 5. 15.42  Additionally, regulated information covers information which the issuer, or any other person who has applied for admission to trading of securities without the issuer’s consent, is required to disclose under provisions enacted in connection with national transposition of Article 3(1), Transparency Directive. If additional information is required to be filed under national provisions enacted under the Transparency Directive, such information would fall under the definition of regulated information and be eligible for incorporation by reference. 15.43  The third condition expressed is that documents must be previously or simultaneously published to be eligible for incorporation by reference. Arguably, this must be taken to mean that documents approved or filed in accordance with the Regulation have to be published in accordance with its publication requirements, while documents filed in accordance with the Transparency Directive have to be published in accordance with the Transparency Directive’s publication requirements. As such publication requirements are defined, in Article 14 for the Prospectus Regulation and Article 21 for the Transparency Directive, respectively, the meaning of the term ‘previously published’ seems quite clear: any information approved or filed in accordance with the Regulation and published in accordance with Article 14 and any information filed in accordance with the Transparency Directive and published in accordance with Article 21 may be incorporated into a prospectus by reference.31 15.44  The expression ‘simultaneously published’, instead, appears less straightforward, since it is not clear which information could be published exactly at the same time as the publication of the prospectus into which the information is being incorporated by reference. However, certain provisions of the Prospectus Regulation clarify that the concept of ‘simultaneously published’ refers to situations in which, for instance, an issuer, offeror, or person asking for admission has had a registration document approved by the NCA but has not yet filed or published this document and decides to draw up a base prospectus (see Art. 26(4), Prospectus Regulation). Since the persons asking for admission to trading are required to incorporate the registration document into the base prospectus by reference, but that registration document has not yet been published, we need a simultaneous publication to allow the incorporation of the registration document. This stands even when many prospectuses are published at the same time: they may equally incorporate information from such simultaneously published prospectuses.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

15.45  Finally, the presence of a list does not imply that NCAs are always obliged to accept the incorporation by reference of any information included in such list. National (p. 348) Competent Authorities have to consider the incorporation by reference of any information in conjunction with the conditions set out by the Prospectus Directive and the Prospectus Regulation. Therefore, NCAs are allowed to reject, on a case-by-case basis, the incorporation by reference of any information when such information, in their opinion, is not the most recent available to the issuer; is not presented in an easily analysable and comprehensible form; is not easily accessible; or is not compliant with the language requirements.32

4.  Incorporation by Reference and ‘Draw-Down’ Prospectus 15.46  The incorporation by reference technique turns out to be particularly important in the context of issuance programmes. As we know, and as was emphasized in Recital (36), NPR, once a base prospectus is approved, neither the final terms nor a supplement can be used to include a type of security not already described in the base prospectus. Accordingly, in connection with offers and/or listing of securities having (certain) characteristics not contemplated in the programme, a specific transaction under a programme (a so-called ‘draw-down’ or DD) that had to be done via final terms (FT) is both documented vis-a-vis the prospectus which incorporates by reference the original programme base prospectus and issued under ancillary documentation upon issuance (provided that the programme itself contemplates such possibility to use a DD prospectus in lieu of FTs). In fact, as we know, a prospectus must conform to one of the following formats: (i) a base prospectus, utilized in connection with programmes, and subsequent Final Terms; or (ii) a single, stand-alone document utilized for a determined transaction.33 A draw-down prospectus is actually a single, stand-alone document, which incorporates by reference all or parts of a base prospectus. 15.47  However, certain national authorities seem to consider the draw-down prospectus as a separate type of prospectus. The Central Bank of Ireland (CBI) has expressly recognized the draw-down prospectus in its Handbook,34 and the Commission de Surveillance du Secteur Financier (CSSF) of Luxembourg has required so far the indication of ‘draw-down prospectus’ in the prospectus cover-page. However, a draw-down prospectus is not a particular type of format contemplated under the NPR and its peculiarity solely derives from the link to an existing programme established and/or renewed through (p. 349) an already approved and published base prospectus. In other terms, it is characterized by the sweeping use of the incorporation by reference and by the fact that the relevant issue is made under the issuance documents of the original base prospectus to which it is linked.35 15.48  As regards the requirements of the draw-down prospectus, like all prospectuses it must contain all information which, according to the particular nature of the issuer and of the securities offered and/or admitted to trading, is necessary to enable investors to make an informed assessment of: (a)  the issuer: the assets and liabilities, financial position, profit and losses, and prospects of the issuer and of any guarantor, so that most of the information already contained in the original base prospectus may be incorporated by reference. Also, when the draw-down prospectus is used to make a retail offer/listing under a wholesale programme, incorporation by reference must be very useful, as the information relating to the issuer and applicable to wholesales deal, and if it is to be included in connection to a retail deal, it must not present any significant differences;

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(b)  the rights attaching to such securities. In particular as regards the terms and conditions, the drawn-down prospectus shall contain the information items normally provided in the final terms without including the full set of terms and conditions. As expressly said in the relevant section of the prospectus, the terms and conditions of the notes will consist of the ‘General Note Conditions’ (or equivalent expression) set out in the base prospectus which is incorporated by reference in the draw-down prospectus, as amended and completed by the Terms of the Notes set out therein. Thus, References in the General Note Conditions to ‘Final Terms’ will be deemed to refer to the information set out under the heading ‘Terms of the Notes’. 15.49  It should be assessed whether—as suggested by the third informal meeting36 and in accordance with the accessibility principle set out in the NPR—risk factors pertaining to the issuer can be incorporated by reference and whether the market practice developed thus far of allowing issuers to do so will be continued.37

(p. 350) IV.  Omission of Information 1.  Overview: Article 18, NPR 15.50  Investors protection remains pivotal in the NPR. However, the combined reading of Recitals (7), (55), and Articles 17 and 18 makes it clear that is necessary to achieve a balance between investor protection and the issuer’s rights. 15.51  Under Article 18, the competent authority may authorize the issuer to omit certain information required to be disclosed under the NPR, provided that: (a)  disclosure of such information would be contrary to the public interest; (b)  disclosure of such information would be seriously detrimental to the issuer and its omission would not be misleading to the public; (c)  such information is of minor importance for a specific offer or admission to trading and will not influence investors’ assessments. 15.52  This rule assigns to the competent authority a relevant and difficult task, that of balancing the different interests involved. Competent authorities might show different approaches and interpretations of the conditions for omission, considering the flexibility of the terms ‘public interest’ and ‘detrimental to the issuer’ (notably as information detrimental to the issuer tends to be always relevant and its omission potentially misleading).38 Competent authorities will be required to submit an annual report to ESMA regarding the information whose omission it has authorized. 15.53  ESMA may (or will, if requested to do so by the Commission) develop draft regulatory technical standards to specify the cases where information may be omitted, taking into account the reports of competent authorities to ESMA (Art. 18(4)). 15.54  A similar delicate role is assigned to the SEC in the US in the context of the confidential treatment in connection with registration statements (Rules 406 and 24b-2). In fact, under the disclosure requirements applicable to public offerings of securities in the US, issuers must generally also include certain agreements deemed material as exhibits to the registration statement filed with the SEC. However, they can apply for confidential treatment with a request which has to be drawn narrowly (limiting the confidential parts), motivated, and subject to careful scrutiny.39 Nonetheless, the SEC has recently revised its rules (in particular, Regulation S-K, Item 601(b)) to permit registrants to file redacted (commercially sensitive) contracts without applying for confidential treatment provided that

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

the redacted information: (i) is not material; and (ii) would be competitively harmful if publicly disclosed; and (iii) respects certain procedural rules.40

(p. 351) 2.  Omission of Information—Offer Price, Yield, Amount of the Securities (Art. 17, NPR) 15.55  The market practice whereby an approved prospectus (including a base prospectus and related final terms) does not include the final offer price or the amount of securities to be offered to the public, whether expressed in number of securities or as an aggregate nominal amount, is accepted under the NPR when their final offer price and/or amount is as a matter of fact not available (either unknown, or when there is no established and/or liquid market for the shares)41 at the time when the prospectus has to be submitted and, therefore unable to be included in the prospectus (or final terms). The same applies, in the case of debt securities, to elements that can be considered in such a context as ‘price’ and pertaining to the relevant yield, such as interests, coupon, strike price, etc.42 15.56  Nonetheless, the NPR does set out some rules in order to protect investors. In fact, the prospectus shall disclose either (i) the valuation methods and criteria, and/or conditions, in accordance with which the price of the securities is to be determined, as well as an explanation of any valuation methods used (e.g. the discounted cash flow method, a peer group analysis, or any other commonly accepted valuation methods); or (ii) the maximum price investors might have to pay for the securities, or the maximum amount of securities they might have to buy. If such pieces of information have been omitted, investors have a right of withdrawal once the final price or amount is disclosed. 15.57  As clarified by ESMA,43 the valuation methods and criteria should be precise enough to make the price predictable and ensure a level of investor protection that is similar to the disclosure of the maximum price of the offer. This would also allow investors to check whether the final price has been calculated properly by the issuer or the financial intermediaries acting on behalf of the issuer. In that respect, a mere reference to the bookbuilding method would not be acceptable as a valuation method or criterion where no maximum price is included in the prospectus. The information on the final number and price of a security offer may comprise, for example, the share subscription price in the offer, the number of shares, or the final size of the bond issue. According to a traditional interpretation, the participation rate used for calculating the bond index return may also be compared to them. 15.58  On the basis of Article 17, NPR, the publication of the final offer terms does not require a supplement to the prospectus, nor, therefore an approval decision, and an (p. 352) announcement or notice—that will form part of the prospectus—will be sufficient. As mentioned, this represents an exception to the requirements that the prospectus (in the case of a programme, a base prospectus and related final terms) published in connection with a specific transaction must contain all the information items required under the NPR and the relevant applicable ‘scheme’. Accordingly, it is important that the prospectus (or the relevant final terms) contains information on when and how the final offer terms will be published, and that the final number or price shall be published and submitted to the relevant competent authority without undue delay after the decision has been made. 15.59  As already mentioned in paragraph 15.07, if the criteria for determining the number and price (or yield) of the securities, or the maximum price (or minimum coupon) has not been published in the prospectus, the investors shall have the right to withdraw their security subscriptions or purchase decisions and the prospectus should provide information on this right. Obviously, the right to withdraw also applies in a situation where a

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

preliminary price range has been provided in the prospectus and the final price falls outside this range. 15.60  Article 8(1), Prospectus Directive required the issuer to file the final offer price and amount of securities with the competent authority of the home Member State as well as make it available to the public, but ESMA clarified that the issuer is expected also to provide the host competent authorities with the above-mentioned information.44 Now, Article 17(2), NPR requires the issuer to file ‘[t]he final offer price and amount of securities [ . . . ] with the competent authority of the home Member State and [make it] available to the public in accordance with the arrangements set out in Article 21(2)’ (about the publication of the prospectus) and therefore through the publication on certain websites.

V.  Publication of the Prospectus (Art. 21, NPR) 15.61  According to Article 21, NPR, and as under the Prospectus Directive regime, the prospectus, once approved, must be made available to the public by the issuer or offeror or person asking for admission to trading on a regulated market at a reasonable time in advance of, and at the latest at the beginning of, the offer to the public or the admission to trading of the securities involved. 15.62  The responsibility of publishing the prospectus lies with the issuer, the offeror, or the person asking for admission to trading, as under the Prospectus Directive. However, the new regime provides that the prospectus shall be deemed available to the public (p. 353) when published in electronic form on any of the following websites: (i) the website of the issuer, the offeror, or the person asking for admission to trading on a regulated market; (ii) the website of the financial intermediaries placing or selling the securities, including paying agents; (iii) the website of the regulated market where admission to trading is sought or, where no admission to trading on a regulated market is sought, the website of the operator of the MTF (Art. 21(2), NPR).45 15.63  In addition to the requirement that the prospectus be published on a dedicated section of a specified website, Article 21(3), NPR provides that the prospectus be easily accessible when entering that website: it shall be downloadable, printable, and in searchable electronic form, and access shall not be subject to the completion of a registration process. Moreover, it shall not entail the acceptance of a disclaimer limiting legal liability or the payment of a fee, both requirements under the existing regime (see also Art. 6, Omnibus II46). In this respect, the new regime clarifies that warnings specifying the jurisdiction(s) in which an offer or an admission to trading is being made shall not be considered to be disclaimers limiting legal liability. 15.64  Again, according to Article 21(3), NPR, the documents containing information incorporated by reference in the prospectus, the supplementary prospectus, or the final terms, and a separate copy of the summary must be accessible under the same section of the website as the prospectus, including by hyperlinks where necessary. In fact, when the prospectus is composed of several documents and/or incorporating information by reference, the documents, and information that constitute the prospectus may be published and distributed separately provided that those documents are made available to the public in accordance with the general publication rules of paragraph 2 (Art. 21(9), NPR). 15.65  As under the Prospective Directive regime, the competent authority of the home Member State must publish on its website the prospectuses approved, or a list of prospectuses approved, including a hyperlink to the website where they are published (Art. 21(2), NPR). Under the new regime, the list, including the hyperlinks, shall be kept up to date (i.e. the hyperlinks must remain functional), and each item must remain on the website for at least ten years (Art. 21(5) and (7), NPR). Passporting notifications shall also be

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

published on the website of the competent authority of the host Member State (Art. 21(5), NPR). 15.66  Prospectuses will also be transmitted and published on ESMA’s website via a searchable storage mechanism (Art. 21(6), NPR). In this respect, the electronic publication of (p. 354) the prospectus, through a centralized storage mechanism at ESMA, would constitute a single access point which is expected to facilitate research, enforcement, and to increase the efficiency of prospectus passporting.47 15.67  An approved prospectus must contain a prominent warning stating when the validity of the prospectus will expire and that the obligation to supplement a prospectus in the event of significant new factors, material mistakes, or material inaccuracies does not apply when the prospectus is no longer valid (Art. 21(8), NPR). 15.68  The Prospectus Directive regime also provided for the prospectus to be deemed available to the public if published in a newspaper or in printed form, but where one of these options was taken, the prospectus also had to be published in electronic form on the website of the issuer or financial intermediaries. Under the new regime, the prospectus, as mentioned, is published in an electronic form, but a potential investor can request a copy of the prospectus on paper or another durable medium. The issuer (or the relevant person asking for the admission to trading of the securities) must deliver such copy free of charge and upon request, provided that the delivery is to jurisdictions in which the offer of securities to the public is made or where the admission to trading on a regulated market is taking place under the NPR (Art. 21(11) and Recital (63), NPR).48 15.69  ESMA has been mandated to develop regulatory technical standards to specify further the requirements relating to the publication of the prospectus, in particular, the data necessary for the classification of prospectuses referred to in Article 21(5), NPR and the practical arrangements to ensure that such data, including the International Securities Identification Numbers (ISINs) of the securities and the Legal Entity Identifiers (LEIs) of the issuers, offerors, and guarantors, is machine-readable according to Article 21(13), NPR.49

(p. 355) VI.  Language (Art. 27, NPR) 15.70  The prospectus language is an extremely important issue for both issuers/offerors (who can face significant costs in case of need of multiple translations) and investors (who, in principle, need to understand it to ground their investment decisions). The Prospectus Directive/NPR regime follows the efforts to facilitate the passporting of the prospectus and limiting issuers’ costs, mostly relying on the issuer’s choice of language.50 Nonetheless, this does not necessarily go hand in hand with investor protection and prospectus accessibility.51 15.71  Article 27, NPR, in setting language requirements for the prospectus, distinguishes different cases, based on the countries involved. In fact, ‘where an offer of securities to the public is made or admission to trading on a regulated market is sought only in the home Member State, the prospectus shall be drawn up in a language accepted by the competent authority of the home Member State’ (Art. 27(1), NPR). 15.72  Where instead the offer or admission to trading is sought in one or more Member States excluding the home Member State, the prospectus shall be drawn up either in a language accepted by the competent authorities of those Member States or in a language customary in the sphere of international finance, at the choice of the issuer, the offeror, or the person asking for admission to trading on a regulated market. For the purpose of the scrutiny and approval by the competent authority of the home Member State, the prospectus shall be drawn up either in a language accepted by that authority or in a

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

language customary in the sphere of international finance, again at the choice of the issuer, the offeror, or the person asking for admission to trading on a regulated market (Art. 27(2), NPR). 15.73  Therefore, where the offer is not made in the home state, these rules create an incentive to use the language ‘customary in the sphere of international finance’, since the same can be used for both home and host state purposes.52 English has always been considered a customary language in this regard, but the decision about the customary nature of a language rests with the competent authority (also German might be considered as such for offers in Central Europe, even if the securities in question then circulate in other Member States).53 15.74  The competent authority of each host Member State cannot require the translation of any part of the prospectus, except for the summary, which shall be available in the (p. 356) official language of each host country, or at least one of its official languages, or in another language accepted by the same. 15.75  Instead, where the offer or admission to listing is to take place in two or more Member States, including the home state, then the prospectus must be produced in a language acceptable to the home competent authority and, in addition, in either a language acceptable to each host state or a language customary in the sphere of international finance (Art. 27(3), NPR). 15.76  In line with the home-country-control principle, the competent authority of the home country is responsible for approving the prospectus, even when the capital raising is not taking place on its territory. Nonetheless, when the offer also takes place in the home country, the authority retains full discretion in setting language requirements, even when the capital raising also takes place in other Member States. Instead, when no capital raising takes place in the home country, the authority’s discretion is limited and it also has to accept a prospectus prepared in a language customary in international finance.54 15.77  Finally, special rules exist for certain non-equity securities. In the case of admission to trading of heavy-weight debt securities (i.e. those denominated in amounts of EUR 100,000 or more), the issuer, the offeror, or the person asking for admission to trading on a regulated market can only choose between using a customary language in the sphere of international finance (even where admission occurs in the home state) or a language acceptable to both home and host competent authorities. The issuer is therefore free to choose between these alternatives, but the competent authorities can always ask for a summary to be prepared in their official languages, provided that this possibility is entailed under their national laws.55 15.78  In case of an individual issue, the final terms and the summary shall be drawn up in the same language as the language of the approved base prospectus (Art. 27(4), NPR). Moreover, when the final terms are communicated to the competent authority of the host Member State or, if there is more than one host Member State, to the competent authorities of the host Member States, then: (i) the summary of the individual issue annexed to the final terms shall be available in the official language, or at least one of the official languages of the host Member State, or in another language accepted by the competent authority of the host Member State in accordance with the second (p. 357) subparagraph of Article 27(2) or the second subparagraph of Article 27(3), depending on the circumstances; and (ii) where the base prospectus is to be translated pursuant to the above-mentioned rules, the final terms and the summary of the individual issue annexed thereto shall be subject to the same translation requirements as the base prospectus.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

15.79  ESMA has clarified that the issuer can incorporate by reference documents in a different language than the one of the prospectus, respecting the ordinary language rules. Therefore, the issuer can passport the prospectus only in member countries where such language is accepted by the host authority.56 15.80  As regards translations, the person responsible for the prospectus is considered by ESMA also responsible for ensuring the quality of the translation.57 Since no civil liability can derive solely from the summary unless it is misleading, inaccurate, or inconsistent with the relevant parts of the prospectus, or where it does not provide key information, the same applies to the translation of the summary, and a warning in this regard should be included in the same (Art. 11 (2) and Recital (33), NPR). 15.81  Furthermore, the NCA of the host state cannot stop the offer after finding inaccuracies in the prospectus translation, but can only refer its findings to the home state NCA.58(p. 358)

Footnotes: 1

  As set forth under Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC (OJL 345, 31 December 2003, 64), as amended by Directive 2010/73/EU (the Amending Directive), and its implementing Regulation (EC) 809/2004 (Prospectus Directive). 2

  The revision of the Prospectus Directive is an important step in the construction of the Capital Markets Union. The harmonized EU prospectus is the ‘gateway’ for issuers in need of external finance to gain access to European capital markets. A reform of the prospectus rules was announced in the Investment Plan for Europe as part of the third pillar for improving the business environment, was featured in the Commission Work Programme for 2015—as part of the Regulatory Fitness and Performance Programme (REFIT)—and represents a key element of the Capital Markets Union (CMU). The CMU Action Plan presents a comprehensive and ambitious programme of measures to strengthen the role of market-based finance in the European economy. A key objective of the CMU is, notably, to facilitate raising funds on capital markets. Capital markets offer access to a wide set of funding providers and provide a cyclical exit opportunity for private equity and business angels, which invest in companies at an earlier stage of their development (see Commission, ‘Action Plan on Building a Capital Markets Union’, Communication COM(2015) 468/2; Commission, ‘Mid-Term Review of the Capital Markets Union Action Plan’, Communication COM(2017) 292 final; Commission, ‘Staff Working Document Accompanying the Communication on the Mid-Term Review of the Capital Markets Union Action Plan’, SWD(2017) 225 final). About the CMU plan, see D. Busch, E. Avgouleas, and G. Ferrarini (eds), Capital Markets Union in Europe, (Oxford: OUP, 2018). 3

  See European Commission, ‘Review of the Prospective Directive—Consultation Document’, 18 February 2015 (European Commission, Review of the Prospectus Directive); European Commission, ‘Proposal for a Regulation of the European Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading’, COM(2015) 583 final (European Commission, Final Proposal for a Regulation on the Prospectus); N. Moloney, How to Protect Investors: Lessons from the EC and the UK (Cambridge: CUP, 2010), 291–6; W. Schaeken Willemaers, The EU Issuer-Disclosure Regime. Objectives and Proposals for Reform (Alphen aan den Rijn: Wolter Kluwer, 2011); J. Armour et al., Principles of Financial Regulation, (Oxford:

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

OUP, 2016), 162–3; B. de Jong and T. Arons, ‘Modernizing the Prospectus Directive’, in: Busch, Avgouleas, and Ferrarini (n. 2). 4

  About the NPR, see de Jong and Arons (n. 3); G. Morse, Palmer’s Company Law (London, 2019), vol. 4, chapter 16.1. 5

  Surprisingly, Article 6 does not refer to the main three areas of information traditionally included in the prospectus (i.e. issuer, securities, offer/listing), avoiding explicitly mentioning the relevant offer and/or listing, as well as related risks. It is clear from the NPR, however, that the prospectus must disclose such details, as always, as the prospectus per se must be published only when the issuer or offeror is contemplating such a listing/ offer and investors need to know their terms and risks in order to decide whether to subscribe to them. 6

  See P. Schammo, EU Prospectus Law: New Perspectives on Regulatory Competition in Securities (Cambridge: CUP, 2011), 108. 7

  There were basically three systems in operation, all grounded in the Listing Particulars Directive, but two of them are not strictly forms of incorporation by reference: (i) Under Art. 6(1) of the Listing Particulars Directive, the supervisory authorities in Germany, Italy, Luxembourg, Spain, and the UK allow a company issuing securities in certain circumstances to circulate a document published within the previous twelve months and approved by that authority in lieu of a new document, providing a note is attached to the earlier document describing the characteristics of the issue and containing any updates as necessary (any material changes, accounts for the latest financial year, interim financial statements). (ii) In Belgium, France, and Spain, this article forms the basis for a ‘shelf registration’ system whereby a ‘shelf document’ containing general information on the company and financial statements is submitted to and approved by the supervisory authority on an annual basis. When an issue is made, an ‘issue document’ is published which contains the characteristics of the offering and any applicable updating of the shelf document and which must be approved by the supervisory authority. (iii) Finally, two countries permit a true incorporation by reference, notably Luxembourg (for Eurobonds only, under Art. 10 of the Listing Particulars Directive) and the Netherlands. See IOSCO, ‘International Disclosure Standards for Cross-Border Offerings and Initial Listings by Foreign Issuers’, 1998, https://www.iosco.org/library/pubdocs/pdf/IOSCOPD81.pdf. 8

  In Australia, the Corporations Law enables documents to be incorporated by reference in a prospectus if they are required to be lodged with the Australia Securities and Investments Commission (ASIC) and the prospectus includes a ‘summary’ of the document. The requirements are set forth in s1024F(1) of the Corporations Law. For the purposes of s1024F, the ASIC accepts as a ‘summary’ of a document a description which is accurate and sufficient to indicate whether a person needs to obtain a copy of the document, or part of it, being incorporated by reference. Further, the ASIC is prepared to allow incorporation into a prospectus of a document lodged at the same time as the prospectus. The document must exist when the prospectus is signed, must be lodged no later than the prospectus, and must have been lodged as required or allowed by another provision of the Corporations Law. In Japan, a company is able to incorporate by reference under the Securities and Exchange Law Section 5–3, and the Ministerial Ordinance regarding the Disclosure of the Company, Section 9–3. Ontario has a prompt offering qualification system (the ‘POP system’) for the distribution of securities of eligible issuers, which was designed to shorten the time period and to streamline the procedures by which these issuers and their selling security holders could obtain access to the Canadian capital markets through a prospectus offering. The POP system permits the incorporation of certain information by reference. The requirements are set forth in National Policy No. 47—Prompt Offering Qualification System, and National Policy No. 44—Rules for Shelf Prospectus Offerings and for Pricing Offerings After the Final Prospectus is Receipted. In Switzerland, incorporation by reference is

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

possible if equity securities of the issuer are already listed and the new equity securities are offered to holders of equity securities on the basis of ordinary or preferential subscription rights either with or without payment, or have been made available for the servicing of convertible debt securities or warrants. In such cases, all information which is specially marked in Annex I of the Listing Rules may be omitted from the listing particulars, provided such information was included in the last annual report or the last interim report and there have been no material changes since. In the latter case, the documents in question to which reference is made in the listing particulars are an integral part of the listing particulars and must be provided with them. Furthermore, incorporation by reference is also permitted with respect to earlier listing particulars, provided such earlier listing particulars are, as of the date of the publication, not older than three months. However, in all cases of incorporation by reference, the principle of up-to-date information remains valid. For the hereby presented comparative analysis, see again IOSCO (n. 7), 5 ff. 9

  Securities Act of 1933, CFR 17, para. 230.

10

  Securities Exchange Act of 1934, CFR 17, para. 240.

11

  In order to partially protect issuers from aggravated liability in case of incorporation by reference, the SEC has started considering certain information not ‘filed’ (but ‘furnished’) for certain purposes (including incorporation by reference in a registration statement): D. B. H. Martin and G. Robinson, ‘Securities Disclosure. To Be or Not to Be Filed?’, Insight (2003) 17(9). 12

  The registration statements that permit incorporation by reference are Forms S-1 (unseasoned issuers) and S-3 (seasoned issuers). See J. C. Coffee Jr, J. Seligman, and H. A. Sale, Securities Regulation. Cases and Materials, 10th edn (New York, 2007), 136ff, 141. 13

  CESR, ‘Advice on Level 2 Implementing Measures for the Prospectus Directive’, CESR/ 03-208, http://www.esma.europa.eu/system/files/83.pdf. 14

  This is further corroborated by Recital (29), Prospectus Directive, which states that the opportunity of allowing issuers to incorporate by reference documents containing the information to be disclosed in a prospectus—provided that the documents incorporated by reference have been previously filed with or accepted by the competent authority—should facilitate the procedure of drawing up a prospectus and lower the costs for the issuers without endangering investor protection. 15

  The Commission enacted its mandate providing the following principles for documents containing information incorporated by reference: (a) the documents may be more than one; (b) the documents must have been previously or simultaneously published; (c) the documents must have been approved by the competent authority of the home Member State or filed with it; (d) the abovementioned approval or filing must have been in accordance with the Prospectus Directive, in particular pursuant to Article 10, or with Titles IV and V of Directive 2001/34/EC (‘CARD’); and (e) the information shall be the latest available to the issuer. To assist the development of the implementing measures which the Commission was mandated to adopt on incorporation by reference, in 2002 it requested CESR to provide technical advice on possible draft rules concerning the documents that could be incorporated by reference in a prospectus. The request for advice specifically referred to memoranda of association, annual and interim accounts, and press releases as examples of the type of documents from which information could be incorporated by reference. In the advice (which was ultimately taken on board by the Commission), CESR suggested that, assuming that certain recommendations in its advice were taken on board and the requirements set by the Prospectus Directive were met, information contained in the documents listed below could be incorporated by reference in a prospectus: (a) annual and interim financial information; (b) documents prepared on occasion of a specific transaction such as a merger or de-merger; (c) audit report and financial statements; (d) memorandum and articles of association; (e) earlier approved and published prospectuses; (f) regulated From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

information; and (g) circulars to security holders. The abovementioned non-exhaustive list of documents corresponds to the list contained in Article 28(1) of the Regulation 809/2014: ESMA, ‘Consultation Paper—Draft Regulatory Technical Standards on prospectus related issues under the Omnibus II Directive’, 25 September 2014, ESMA/2014/1186, 7 ff., https:// www.esma.europa.eu/sites/default/files/library/ 2015/11/2014-1186_consultation_paper_on_omnibus_ii_rts.pdf (ESMA Consultation Paper —Omnibus II) Schammo (n. 6), 106ff. 16

  The original Article 10, Prospectus Directive also required issuers admitted to trading on regulated markets to provide a document containing all regulated information made available to the public in the previous twelve months. Such article was deleted in the 2010 revision, since the requirement appeared redundant in the light of the approval of the Transparency Directive: N. Moloney, EU Securities and Financial Markets Regulation, (Oxford: OUP, 2014), 108. The Amending Directive also changed the Commission’s mandate, conferring on the Commission the obligation to adopt measures concerning the information to be incorporated by reference by means of delegated acts. The new mandate did not set a deadline for such delegated acts and the Commission did not utilize the mandate. Article 1(2), Omnibus II changed the mandate in Article 11(3), Prospectus Directive once again by providing the empowerment to ESMA to deliver draft RTS to the Commission: ESMA (Consultation Paper—Omnibus II); Moloney, EU Securities (above); D. Fischer-Appelt, ‘Amendments to the EU Prospectus Directive Regime’, Business Law International (2014) 15(2), 95. 17

  Schammo (n. 6) 107.

18

  I. Ramsay, ‘Incorporation by Reference into Prospectuses: What Are the Rationales?’, Company and Securities Law Journal (1994) 12(5). 19

  Regulation (EU) 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (OJ L352, 9 December 2014, 1) (PRIIPs). 20

  See International Capital Markets Association (ICMA), ‘European Commission Review of the Prospectus Directive—Consultation Document Responses’, 1 May 2015, 53 ff., https:// www.icmagroup.org/assets/documents/Regulatory/Prospectuses-Offerings-and-Listings/ ICMA-response-to-EC-PD-consultation---FINAL---1-May-2015.pdf. 21

  ibid.

22

  ibid.

23

  In the US, the liability for misstatements or omissions under section 11, Securities Act is strict, while the liability regime under section 10(b), Securities Exchange Act of 1934 is grounded on due diligence and with more difficult burden of proof (also compared with the due diligence liability under section 12(a)(2), Securities Act). The incorporation by reference, therefore, allows investors to benefit from a more favourable regime: see T. Rodriguez and E. Tyson Marshall, ‘Incorporating Caution into Incorporating by Reference’, Securities Litigation Journal (2009), 22; Martin and Robinson (n. 11). 24

  The withdrawal right is also triggered by a negative event occurring after the publication—therefore unknown when investors made their investment decision—so that investors are given the opportunity to re-assess the proposed investment and, apparently, even when such information is not ‘significant’ (that for debt securities means circumstances where the issuer’s ability to repay or its creditworthiness might be impacted by the new factor): ICMA (n. 20). However, CESR’s specifications and the 2010 review introduced time limits to exercise the right and clarifications that the negative event triggering the supplement had to be significant and take place before the closing date and delivery of securities: ESMA, ‘Draft Regulatory Technical Standards on specific situations that require the publication of a supplement to the prospectus’, 15 March 2013, ESMA/ From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

2013/1537 (ESMA Technical Standards) (containing a list of possible triggering events); ESMA, ‘Final Report’, 17 December 2013, ESMA/2013/1970 (ESMA Final Report); Moloney, EU Securities (n. 16), 104; Fischer-Appelt (n. 16), 106–7; Schammo (n. 6), 104–5; G. Walker and R. Purves, Financial Services Law, 3rd edn (Oxford: OUP, 2014), 378–9. See also the new Article 23(2)–(5), NPR, containing several conditions and specifications. 25

  Regulatory and Supervisory authorities: the vast majority of authorities are in favour of making the incorporation by reference mechanism more flexible, as this would reduce the costs of prospectuses without lowering the investor protection. However, a small group of respondents does not feel comfortable with granting the incorporation of documents filed voluntarily with the authorities as they would prefer the reference only to documents that have been previously or simultaneously approved and filed. Crowdfunding organizations: this issue is hardly addressed by crowdfunding organizations. Non-governmental organizations: few associations express a view on this specific topic, but they generally support an extension of the incorporation by reference, specifying that the incorporated documents should be accessible at the same location of the prospectus and subject to a storage period aligned with the limitation period for the liability claims. Stock exchanges: a slight majority of respondents favours the extension of the incorporation by reference mechanism, particularly concerning the information published under the Transparency Directive and MAR, while further incorporation by reference is considered cautiously. To this end, ESMA should develop appropriate RTS. Investors’ associations: only a handful of associations replied to this question, and they generally expressed support. However, one respondent is reluctant to allow information disclosed under the Transparency Directive to be eligible for incorporation by reference in a prospectus. Consultancies and law firms: a significant majority of stakeholders supports making incorporation by reference more flexible, drawing up an exhaustive list based on existing EU legislation or on a principlebased approach. The basic thesis is that as information is already available to the market, there is no need to duplicate it. Companies, SMEs, micro-enterprises, sole traders: the majority of respondents supports the enhancement of the incorporation by reference mechanism (only two prefer the status quo), in particular via the streamlining of the disclosure provided under the Prospectus Directive, the Transparency Directive, and MAR. Financial industry: a vast majority of stakeholders supports a more flexible use of the incorporation by reference, drawing up an exhaustive list of disclosure items based on the existing EU legislation. All information published under the legislation on MAR and the Transparency Directive should be allowed to be implicitly incorporated (only one stakeholder disagreed on this point). See European Commission, ‘Consultation on the Review of the Prospectus Directive—Feedback Statement on the Public Online Consultation’, 2015, 16 ff., http://ec.europa.eu/finance/consultations/2015/prospectusdirective/docs/summary-of-responses_en.pdf (European Commission, Feedback Statement). 26

  Information may be incorporated by reference in a prospectus where it has been previously or simultaneously published electronically, drawn up in a language fulfilling the requirements of Article 27, and where it is contained in one of the following documents: (i) documents which have been approved by a competent authority, or filed with it, in accordance with this Regulation or Directive 2003/71/EC; (ii) documents referred to in points (f)–(i) of Article 1(4) and points (e)–(h) and point (j)(v) of the first subparagraph of Article 1(5);(iii) regulated information; (iv) annual and interim financial information; (v) audit reports and financial statements;(vi) management reports as referred to in Chapter 5 of Directive 2013/34/EU of the European Parliament and of the Council (22); (vii) corporate governance statements as referred to in Article 20, Directive 2013/34/EU; (viii) reports on the determination of the value of an asset or a company; (ix) remuneration reports as referred to in Article 9b, Directive 2007/36/EC of the European Parliament and of the Council (23); (x) annual reports or any disclosure of information required under Articles 22

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

and 23, Directive 2011/61/EU of the European Parliament and of the Council (24); (xi) memorandum and articles of association. 27

  ESMA, ‘Technical Advice under the Prospectus Regulation—Final Report’, 28 March 2018, 142, https://www.esma.europa.eu/sites/default/files/library/ esma31-62-800_final_report_on_technical_advice_under_the_pr.pdf (ESMA, Technical Advice—Final Report). 28

  This is the case for the prospectus (Art. 13(1), Prospectus Directive), the final offer price and amount of securities (Art. 8(1), second subpara., Prospective Directive), and final terms (Art. 5(4), Prospective Directive). 29

  ESMA Consultation Paper—Omnibus II, 21. The goal of ESMA has been to ensure consistent application and harmonization when it comes to incorporation by reference, providing a level playing field and limiting the risk of regulatory arbitrage. The practice of ‘voluntary filings’ of documents facilitated by certain NCAs (such as circulars sent to shareholders, financial statements not filed in accordance with the Transparency Directive, documents prepared in connection with a merger/takeover when such is not required under national provisions under the Transparency Directive), while likely seen as reducing the administrative burden on issuers offerors and persons asking for admission to trading, is, in ESMA’s opinion, not in line with the wording of Article 11, Prospectus Directive. If the colegislators intended to facilitate incorporation of documents submitted on a voluntary basis, they would not have included the explicit requirement that filing be done in accordance with the Prospective Directive. In many cases, the facilitation of such filings by competent authorities (possible prior to 2007 but under CARD, rather than the Prospective Directive), has continued despite legislative change, and has led to a vastly different application of incorporation by reference across Member States, and this runs counter to the goal of a single rule book and may endanger the objective of investor protection: ESMA Consultation Paper—Omnibus II, 21. 30

  However, these differences in liability essentially disappear once the information that is ‘furnished’ is incorporated by reference into a document (such as a prospectus or registration statement, which have their specific liability regime attached to their disclosure, i.e. to all information included therein, regardless whether expressly or by reference) that is ‘filed’ with the SEC. See Martin and Robinson (n. 11); J. Morlend, ‘Filed v. Furnished, What’s the Difference?’, 18 September 2017, https://blog.sullivanlaw.com/ inhousego2/filed-v.-furnished-whats-the-difference. 31

  ESMA Consultation Paper—Omnibus II, 25.

32

  ibid.

33

  See also ESMA, ‘Format of the Base Prospectus and Consistent Application of Article 26(4) of the Prospectus Regulation’ (Opinion), 17 December 2013, ESMA/2013/1944, https://www.esma.europa.eu/sites/default/files/library/ 2015/11/2013-1944_opinion_on_tripartite_base_prospectuses.pdf (ESMA, Format of the Base Prospectus (Opinion)). 34

  Central Bank of Ireland (CBI), ‘Prospectus Handbook—A Guide to Prospectus Approval in Ireland’, 19 November 2018, https://www.centralbank.ie/docs/default-source/regulation/ industry-market-sectors/securities-markets/prospectus-regulation/prospectus-handbook/ prospectus-handbook.pdf?sfvrsn=10. 35

  About draw-down prospectus and national practices, see CESR, ‘Report on the Supervisory Functioning of the Prospectus Directive and Regulation’, 2007, CESR/07-225, 26, http://www.cesr-eu.org/data/document/07_225.pdf.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

36

  European Commission, ‘3rd Informal Meeting on Prospectus Transposition’, 26 January 2005, MARKT/G3/WG D(2005) (European Commission, 3rd Informal Meeting on Prospectus Transposition). 37

  The CBI handbook provides that the prospectus prepared as a draw-down prospectus must contain the following parts in the following order: (i)  a clear and detailed table of contents; (ii)  a summary; (iii)  the risk factors linked to the issuer and the type of security or securities covered by the issue(s); and (iv)  the other information items included in the relevant annexes to the Prospectus Regulation according to which the draw-down prospectus is drawn up. See CBI (n. 34 ), 7–8. 38

  K. Sergakis, The Law of Capital Markets in the EU (London: 2018), 61.

39

  Separately by the examiner, the Special Counsel and Assistant director: Coffee Jr et al. (n. 12), 176. 40

  SEC, ‘New Rules and Procedures for Exhibits Containing Immaterial, Competitively Harmful Information’, 1 April 2019, https://www.sec.gov/corpfin/announcement/new-rulesand-procedures-exhibits-containing-immaterial; L. D. Richman et al., ‘SEC Adopts Rules to Modernize and Simplify Disclosure’, 27 March 2009, Mayer & Brown Legal Update, https:// www.mayerbrown.com/-/media/files/perspectives-events/publications/2019/03/ skmodernizationadopted.pdf. 41

  ESMA, ‘Questions and Answers—Prospectuses’, April 2019, ESMA/2019/31-62-780, 49 (ESMA, Q&A Prospectus). 42

  cf. Recital (36), NPR and ESMA, Technical Advice—Final Report, Article H and Annexe 5, 4.8 and 4.10 (listing as information that can be inserted in the final terms when not known at the time of the Base Prospectus publication in case of debt securities: interest payable, yield). 43

  ESMA, Q&A Prospectus, 50.

44

  ESMA, Q&A Prospectus, 11. The 2014 amendment required the home country NCA to communicate to the host competent authority the final terms, in relation to a base prospectus (Art. 5(4) final sub-para, Prospectus Directive) but missed the opportunity to clarify the same aspect within to the omission of information context: Schammo (n. 6), 109. 45

  Two of the options provided under the Prospectus Directive for publishing an approved prospectus, namely the insertion in a newspaper and the printed prospectus available at the offices of the issuer, have been removed as they were considered largely outdated. However, the obligation to provide a free paper copy to anyone who requests it is maintained under Article 21(11), NPR. 46

  Commission Delegated Regulation (EU) 2016/301 of 30 November 2015 supplementing Directive 2003/71/EC with regard to regulatory technical standards for approval and publication of the prospectus and dissemination of advertisements and amending Regulation (EC) 809/2004 (Omnibus II). 47

  The European Commission, in the context of the Consultation on the Review on the Prospectus Directive, promoted the creation of a single, centralized, EU database for prospectuses in view of the example of the Transparency Directive. According to the Commission, such a database could operate as a unique entry point for both investors and persons producing and filing prospectuses across the twenty-eight Member States and could facilitate effective cross-border access to information. Depending on its design, it From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

could even help streamlining the process of prospectus filing by issuers. Most of the respondents to the question were in favour of this suggestion. Arguments in favour were lower costs for issuers, easier and speedier submissions and approval processes, and greater transparency. According to the respondents, an integrated system should also facilitate harmonization and the spread of best practices which, in turn, should enhance investor protection. A one-stop-shop for all relevant information (Prospectus Directive, Transparency Directive, MAR/Directive) would avoid the need for duplication of information provision, would be a natural part of the Capital Market Union, and would improve the global competitiveness of EU markets. Investors would benefit from easier access and comparison of documents and wider choice across borders. Supervisors could enhance their monitoring of the passporting of prospectuses and benefit from cooperation/best practices. In the end, separate national databases in all Member States would be more expensive: European Commission, 3rd Informal Meeting on Prospectus Transposition, 27. 48

  However, that does not require the issuer, the offeror, the person asking for admission to trading on a regulated market, or the financial intermediary to keep in reserve printed copies of the prospectus to satisfy such potential requests (Recital (63)). 49

  See ESMA, ‘Draft Regulatory Technical Standards under the Prospectus Regulation— Final Report’, 17 July 2018, ESMA/2018/31-62-1002 (ESMA, Draft Regulatory Technical Standards—Final Report) in particular Articles 17–20 about the publication of the prospectus and technical arrangements for the notification portal. 50

  Moloney, How to Protect Investors (n. 3), 112–13.

51

  P. Mattil and F. Möslein, The Language of the Prospectus: Europeanisation and Investor Protection’, Journal of International Banking and Financial Law (2008) 23(1), 28; Sergakis (n. 38), 68. 52

  Morse (n. 4).

53

  See European Commission, 3rd Informal Meeting on Prospectus Transposition, 10; Schammo (n. 6), 113; Mattil and Möslein (n. 51), 29 ff. 54

  Schammo (n. 6), 113–15.

55

  See Article 27(5), NPR: where a prospectus relates to the admission to trading on a regulated market of non-equity securities and admission to trading on a regulated market is sought in one or more Member States, the prospectus shall be drawn up either in a language accepted by the competent authorities of the home and host Member States or in a language customary in the sphere of international finance, at the choice of the issuer, the offeror or the person asking for admission to trading on a regulated market, provided that either: (a) such securities are to be traded only on a regulated market, or a specific segment thereof, to which only qualified investors can have access for the purposes of trading such securities; or (b) such securities have a denomination per unit of at least EUR 100 000.

56

  ESMA , Consultation Paper—Omnibus II, 14.

57

  ibid., 31.

58

  ibid., 31; Schammo (n. 6), 115.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Part II The New EU Prospectus Rules, 16 The Approval of Prospectus: Competent Authorities, Notifications, and Sanctions Carmine Di Noia, Matteo Gargantini From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

Subject(s): Supplement prospectus — Financial regulation — European Securities and Markets Authority (ESMA)

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 359) 16  The Approval of Prospectus Competent Authorities, Notifications, and Sanctions I.  Introduction 16.01 II.  Prospectus Approval and the Role of National Competent Authorities 16.04 1.  The Transfer of Approval of the Prospectus 16.10 2.  Prospectus Approval: Definitions 16.20 3.  The Scrutiny 16.23 4.  Timing and Procedure of Prospectus Approval 16.39 III.  Geographical Validity of Prospectus 16.47 IV.  Linguistic Regime 16.54 V.  Sanctioning Regime 16.66 1.  Criminal and Administrative Sanctions 16.67 2.  The Menu of Sanctions and the Due Process 16.72 3.  Publication of Decisions 16.76 VI.  Remaining Spaces for Arbitrage in the Prospectus Regime 16.85 VII.  Identifying the National Competent Authority 16.90 VIII.  A Focus on Equity Securities 16.97 1.  Tying Prospectus Regime to Company Law 16.98 2.  Regulatory Arbitrage Techniques in Equity Markets 16.102 3.  Alternative Connecting Factors 16.110 IX.  Competition versus Centralization: A Trade-Off? 16.115 X.  Conclusion 16.124

I.  Introduction 16.01  The identification and role of competent authorities in the process of approving the prospectus, enforcing the applicable rules and, possibly, sanctioning market participants is of the utmost importance in the integration of financial markets in the EU and, therefore, in the completion of a true Capital Markets Union (CMU). 16.02  In spite of this potential ability to foster integration, the overall structure of the new Regulation (EU) 2017/1129 (Prospectus Regulation)1 is not substantially different from the previous Directive 2003/71/EC (Prospectus Directive),2 mainly because of (p. 360) the strong resistances by many Member States and National Competent Authorities (NCAs) to deeper innovations in this field. 16.03  In this chapter, we describe the most important characteristics of the prospectus approval process and point out some of the critical issues which, in our opinion, should be tackled either in the report which the EU Commission shall present to the EU Parliament

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

and Council before 21 July 2022 or in the next review of the European Supervisory Authorities (ESAs).

II.  Prospectus Approval and the Role of National Competent Authorities 16.04  A prospectus cannot be published unless the ‘relevant competent authority’ has approved it (Art. 20(1), Prospectus Regulation).3 Interestingly enough, the Prospectus Regulation provides no express definition of ‘relevant competent authority’, but this is obviously the national competent authority, rectius the competent authority of the home Member State as defined in Article 2(1)(m) (see section VII ‘Identifying the National Competent Authority’, para. 16.90 below).4 16.05  Each Member State has to designate a ‘single5 competent administrative authority’ responsible for carrying out the duties resulting from the Prospectus Regulation and for enforcing it. 16.06  The monopoly of the single NCA has been strengthened by the Prospectus Regulation, compared to the Prospectus Directive. In fact, the Regulation no longer provides the possibility for Member States to designate more than a single NCA. On the contrary, the Prospectus Directive allowed a Member State, if required by national law, to designate other administrative authorities for the approval of prospectuses (Art. 21(1), Prospectus Directive). Furthermore, Member States were given the power to allow their competent authority (or authorities) to delegate specific tasks either to other administrative authorities or to other entities, such as stock exchanges. 16.07  On the one hand, this tightened regime is positive because a variety of NCAs in a Member State, bearing different responsibilities, might create unnecessary costs and overlapping of responsibilities without providing any additional benefit. Moreover, the designation of an NCA for prospectus approval should not exclude cooperation between that authority and third parties, such as banking and insurance regulators or (p. 361) listing authorities, with a view to guaranteeing efficient scrutiny and approval of prospectuses in the interest of issuers, investors, markets participants, and markets alike (Recital (71), Prospectus Regulation). 16.08  On the other hand, the removal of any flexibility in the designation of multiple NCAs, especially with respect to third parties like stock exchanges, may limit the efficiency in the approval process due to the rigidity that public administrative authorities sometimes have, especially when it comes to hiring employees with sufficient expertise in the field directly from the market. In any case, the delegation of specific tasks in the Prospectus Directive was subject to stringent conditions, which reduced the risk of overly complex mechanisms and of circumvention of the supervisory regime.6 16.09  The only exception to the general ban on delegation of functions within the Prospectus Regulation is the possibility for Member States to delegate to third parties the tasks of electronic publication of approved prospectuses and related documents (Art. 31(2)), as was already the case in the Prospectus Directive.

1.  The Transfer of Approval of the Prospectus 16.10  What remains possible, at least in theory, is the transfer of approval to another NCA (Art. 20(8), Prospectus Regulation). 16.11  Why is the transfer important? The first reason is obviously that, in some circumstances, the approval process by another NCA may prove more efficient. As we shall see in section VII ‘Identifying the National Competent Authority’ (para. 16.90), in some cases issuers may choose an NCA themselves, by selecting their own Member State. However, this might not always be possible, especially for shares. But there are other reasons why transfer of approval may prove useful. For example, a small or medium-sized From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

enterprise (SME) might want to list only in a foreign exchange because it is too small for the listing requirements of the national exchange, or it might want to address the offer only to the residents in the Member State of the foreign exchange (for instance, with a view to investing the proceedings in that Member State). 16.12  That is why the transfer of approval has been historically considered by the European Commission as an essential tool for a Single Market of Financial Services. In its White Paper on Financial Services 2005–2010, the Commission included, as one of (p. 362) the supervisory challenges for that period, ‘the need to explore delegation of tasks and responsibilities, while ensuring that supervisors have the necessary information and mutual trust’,7 in the context of a reinforced cooperation between supervisors. In this respect, the report specifically mentioned the possibility under the prospectus legislation of certain functions being transferred between supervisors. The 2006 Financial Services Committee (FSC) report on Financial Supervision8 recommended increasing supervisory convergence in the implementation of the Financial Services Action Plan, and expressly mentioned the option of the transfer foreseen in the Prospectus Directive as an example of the cases included in the EU legislation of delegation of tasks and of responsibilities. 16.13  Then, CESR decided9 that it would conduct a pilot study in 2007, on the delegation of powers under the Prospectus Directive as a measure of the cooperation between NCAs, and among other things, CESR requested from its members information on the option envisaged in Article 13(5), Prospectus Directive10 on the transfer of approval. Apparently, there had been only ten cases of transfer since the entry into force of the Directive (half of them concerning shares, half debt securities). 16.14  Unsurprisingly, CESR concluded that ‘the experience in these cases has proved satisfactory’ for the issuers and the NCAs involved. Among the common aspects CESR observed, some are worth mentioning. In all the cases, the transfer process was initiated at the request of the issuer and there was an initial informal contact between the NCAs involved to make the process smoother during the subsequent stages. In their communications to the delegated NCAs, the delegating NCAs explained the factors taken into consideration when deciding on the transfer of the approval, and these communications were followed up by the delegated NCAs, which confirmed acceptance of the transfer. The delegating NCA duly informed the requesting issuer. Most importantly, the transfers of the prospectus approval had not led to an increase in the time for the approval of the prospectus, and the feedback from the issuers involved have been positive.11 In spite of CESR’s statement on the functioning of the transfer system, one may doubt whether ten cases is a sufficient number. To properly test the system, data should include the number of applications submitted to competent authorities, and perhaps (p. 363) not even this would include the rejections that may have been informally anticipated before formal requests were filed. 16.15  Now the Prospectus Regulation confirms the possibility. In particular, according to Article 20(8), Prospectus Regulation, on request of the issuer, the offeror, or the person asking for admission to trading on a regulated market (hereinafter also: applicants), the NCA of the home Member State may transfer the approval of a prospectus to the NCA of another Member State, subject to prior notification to ESMA and the agreement of that NCA. The NCA of the home Member State has to transfer the documentation filed, together with its decision to grant the transfer, in electronic format, to the NCA of the other Member State on the date of its decision. Such a transfer shall be notified to the applicant within three working days from the date of the decision taken by the NCA of the home Member State. Upon completion of the transfer of the approval, the NCA to whom the approval of

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

the prospectus has been transferred shall be deemed to be the NCA of the home Member State for that prospectus for the purposes of the Regulation. 16.16  Unfortunately, the Prospectus Regulation (in line with the Prospectus Directive) sets neither the criteria NCAs should follow to decide on the transfer after the applicants’ request, nor obliges them to transfer the approval in any circumstance, nor, finally, delegates power to the Commission or to ESMA to define such details. In this way, the maximum of discretion remains in the hands of NCAs. 16.17  Only a few NCAs identified explicitly some criteria, on a voluntary basis. One example is the Central Bank of Ireland—one of the most competitive NCAs in the approval of prospectuses. While confirming ‘its sole and absolute discretion’ on the final decision to transfer prospectus approvals, it lists some factors it shall take into account in considering the transfer request. These factors ‘may include the domicile of the issuer, the country where the issuer’s securities are admitted to trading and the location of any offer proposed by the issuer. This is not an exhaustive list and each transfer request is considered by the Central Bank on a case by case basis.’12 16.18  This lack of guidance by most NCAs is hardly compatible with any principles of good administration, as it deprives the applicants from any right to accountability (Art. 41, Charter of Fundamental Rights). The European Securities and Markets Authority should therefore press for more transparency on the transfer cases, whether accepted or nor, in entry or exit. Should it become evident that the transfer of approval remains substantially untapped, the Commission should also consider opening an infringement procedure against those Member States whose NCA has not identified any criteria concerning the decisions to transfer prospectus approvals (and to receive them). (p. 364) 16.19  A critical issue that still makes the transfer of prospectus approval less appealing to issuers is the allocation of supervisory responsibility on (national provisions implementing) the Transparency Directive (Directive 2004/109/EC) in case the prospectus refers to securities listed on a regulated market (but the same applies to securities traded on any trading venue, with regard to Market Abuse Regulation (EU 596/2014) (MAR) obligations).13 This responsibility remains, in fact, with the NCA of the home Member States, irrespective of any transfer of prospectus approval to another NCA. Overall, a more effective system would be, de lege ferenda, one where ESMA had the power to decide on transfers of prospectus approval procedures from an NCA to another. When the relevant securities are offered but not listed, the process should be much smoother and semiautomatic.

2.  Prospectus Approval: Definitions 16.20  What is the approval of a prospectus, in theory and practice? According to the Prospectus Regulation, this is the ‘positive act at the outcome of the scrutiny by the home Member State’s competent authority of the completeness, the consistency and the comprehensibility of the information given in the prospectus’ (Art. 2(r), emphasis added). These requirements are often referred to as ‘the 3Cs’. The definition is similar to its equivalent in the Prospectus Directive, but it formally grants each of the 3Cs the same weight while, in the Directive, completeness seemed to have a prominent role.14 16.21  But what exactly is the scrutiny and what do the 3Cs mean? More particularly, in light of what should the prospectus be regarded as complete? With what should the prospectus be consistent? And, finally, to whom must the prospectus be comprehensible? 16.22  Answering these questions is not easy, in spite of the approval and publication by the Commission of the delegated act to supplement Prospectus Regulation as regards the

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

format, content, scrutiny and approval of the prospectus (Commission delegated regulation (EU) 2019/980 (CPDR).

3.  The Scrutiny 16.23  The scrutiny of the prospectus is an assessment by the NCA of the 3Cs. Strangely enough, it is an undefined concept in the Prospectus Regulation (as it was in the Prospectus Directive), but it is still recognized in the Regulation as the key problem of (p. 365) approval, and the catalyst for scarce harmonization in the very different authorization processes by NCAs. 16.24  In fact, as clearly stated by Recital (60) Prospectus Regulation, ‘not all issuers have access to adequate information and guidance about the scrutiny and approval process and the necessary steps to follow to get a prospectus approved, as different approaches by competent authorities exist in Member States’. Hopefully, the Regulation should eliminate those differences by harmonizing the criteria for the scrutiny of the prospectus and the rules applicable to the approval processes of NCAs. These processes should be more streamlined in the future, but—as the same Recital goes—the implementation of a convergent approach on the scrutiny of the completeness, consistency, and comprehensibility of the information contained in a prospectus will crucially depend on the attitude of each NCA towards the need for a proportionate approach in the scrutiny of prospectuses based on the circumstances of the issuer and of the issuance. 16.25  Finally, NCAs should apply transparency standards that are at least as high as those which they require from market participants: they should (approve and15) publish on their websites guidance on how to seek the approval of a prospectus, in order to facilitate an efficient and timely scrutiny (Art. 20(7), Prospectus Regulation). Such guidance shall include contact details for the purposes of approvals.16 Unfortunately, there is no obligation to publish these guidelines in English but, hopefully, ESMA17 could request this to NCAs. 16.26  The scope of the scrutiny (Art. 35, CPDR) includes the prospectus or any of its constituent parts, including a universal registration document (URD), whether submitted for approval or filed without prior approval, and any amendments thereto, as well as any supplements to the prospectus.

(i)  Completeness 16.27  The first object of the scrutiny is the prospectus’ completeness. While this concept is not defined in the Prospectus Regulation, the criteria for the assessment of the completeness of the information contained in the prospectus are fleshed out in Article 36, CPDR. 16.28  In particular, for the purposes of scrutinizing the completeness of the information in a draft prospectus, NCAs have to consider both the following conditions: (i) whether the draft prospectus is drawn up in accordance with the Prospectus Regulation and the (p. 366) CPDR, depending on the type of issuer, the type of issuance, the type of security, and the type of offer or admission to trading; and (ii) whether the issuer has a complex financial history or has made a significant financial commitment.18

(ii)  Consistency

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

16.29  For the purposes of scrutinizing the consistency of the information in a draft prospectus, the competent authority has to consider, according to Article 38, CPDR, all of the following: (a)  whether the draft prospectus is free of material discrepancies between the different pieces of information provided therein, including any information incorporated by reference; (b)  whether any material and specific risks disclosed elsewhere in the draft prospectus are included in the risk factors section; (c)  whether the information in the summary is in line with information elsewhere in the draft prospectus; (d)  whether any figures on the use of proceeds correspond to the amount of proceeds being raised and whether the disclosed use of proceeds is in line with the disclosed strategy of the issuer; (e)  whether the description of the issuer in the operating and financial review, the historical financial information, the description of the issuer’s activity, and the description of the risk factors are consistent; (f)  whether the working capital statement is in line with the risk factors, the auditor’s report, the use of proceeds and the disclosed strategy of the issuer, and how that strategy will be funded.

(iii)  Comprehensibility 16.30  In order to be comprehensible, the draft prospectus must be capable of being understood, taking into consideration issuer features, type of securities, and type of targeted investors. 16.31  The criteria for the scrutiny of the comprehensibility of the information contained in the prospectus are contained in Article 37, CPDR. (p. 367) 16.32  In particular, for the purposes of scrutinizing the comprehensibility of the information in a draft prospectus, NCAs shall consider all of the following: (a)  whether the draft prospectus has a clear and detailed table of contents; (b)  whether the draft prospectus is free from unnecessary reiterations; (c)  whether related information is grouped together; (d)  whether the draft prospectus uses an easily readable font size; (e)  whether the draft prospectus has a structure that enables investors to understand its contents; (f)  whether the draft prospectus defines the components of mathematical formulas and, where applicable, clearly describes the product structure; (g)  whether the draft prospectus is written in plain language; (h)  whether the draft prospectus clearly describes the nature of the issuer’s operations and its principal activities; (i)  whether the draft prospectus explains trade- or industry-specific terminology. 16.33  However, competent authorities shall not be required to consider points (g), (h), and (i) where a draft prospectus is to be used exclusively for the purposes of admission to

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

trading on a regulated market of non-equity securities, for which a summary is not required by Article 7, Prospectus Regulation. 16.34  Competent authorities may, on a case-by-case basis, require that certain information provided in the draft prospectus be included in the summary.

(iv)  Stocktaking 16.35  The Level 2 regulatory effort to provide more detailed guidance on the assessment of the 3Cs is a commendable exercise. It provides issuers, other applicants, and investors with much more detailed indications than in the past. Unfortunately, however, the CPDR alone might not be able to ensure full harmonization of NCAs’ supervisory practices. The aim of ensuring full harmonization is indeed jeopardized by the large recourse to general standards that go beyond the 3Cs. As a matter of fact, NCAs may ask further information, not only when the 3Cs are not met, but also when they deem that changes or supplementary information are needed (Art. 20(4), Prospectus Regulation). 16.36  Article 40, CPDR also allows NCAs to use additional criteria for the scrutiny of the completeness, consistency, and comprehensibility of the information contained in the prospectus, where necessary for investor protection. 16.37  Furthermore, while NCAs are not required to look at information outside the prospectus, they are not prevented from doing so on a case-by-case basis.19 NCAs can raise (p. 368) comments in relation to information outside the prospectus, whenever this appears to be relevant for the prospectus scrutiny. One of the critical issues in this respect was under the Prospectus Directive, and will likely be under the Prospectus Regulation: the relationship with regulated information, mainly originating from the Transparency Directive and the MAR. 16.38  Identical considerations apply to the general requirement that a supplement be published any time a significant new factor emerges relating to the information included in a prospectus. The assessment of the materiality of such developments remains, in fact, largely subjective (Art. 23, Prospectus Regulation).

4.  Timing and Procedure of Prospectus Approval 16.39  A critical factor in the approval process is the timing. Apparently, this is strictly set in the Prospectus Regulation, as it was in the Prospectus Directive, so discrepancies among NCAs’ practices should not be allowed in principle (Art. 20). 16.40  The default regime gives the NCA ten working days to scrutinize the prospectus. The NCA must notify the applicant (whether the issuer, the offeror, or the person asking for admission to trading on a regulated market) of its decision regarding the approval of the prospectus within ten working days of the submission of the draft prospectus. Furthermore, the NCA shall notify ESMA of the approval of the prospectus and any supplement thereto as soon as possible, and in any event by no later than the end of the first working day after that approval is notified to the applicant. 16.41  The term is extended to twenty working days for unlisted first offerors (i.e. where the offer to the public involves securities issued by an issuer that does not have any securities admitted to trading on a regulated market and that has not previously offered securities to the public), due to the absence of any past and/or present information about the company. For the same reason, the term is reduced to five working days—a novelty of the Prospectus Regulation—in case of frequent issuers, as defined in Article 9(11), Prospectus Regulation, that submit a prospectus consisting of separate documents using the URD. To take advantage of this special regime, frequent issuers shall inform the

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

competent authority at least five working days before the date envisaged for the submission of an application for approval. 16.42  The critical issue, which had already affected the Prospectus Directive regime and remains largely unaddressed, is that these deadlines are not really binding on NCAs, because where these fail to take a decision on the prospectus within the time limits, such (p. 369) failure shall not be deemed to constitute approval of the application (Art. 20(2)).20 This is understandable, given that the Prospectus Regulation does not (and could not in any way) harmonize the liability regime for NCAs. However, the fact remains that these time limits are a very weak instrument with respect to NCAs, especially if one considers the limitation in the choice of the home Member State (see Section VIII ‘A Focus on Equity Securities’, para. 16.97 below). 16.43  Where the competent authority finds that the draft prospectus does not meet the standards of completeness, comprehensibility, and consistency necessary for its approval and/or that changes or supplementary information are needed, it asks for the changes or supplementary information that are needed within the deadline. 16.44  If the changes are not made, or the supplementary information is not provided, the approval is refused, with a clear indication of the motivations. Otherwise, if the information is provided, the competent authority has a new deadline for approving the prospectus, identical to the initial one except for the unlisted first offerors whose deadline for approval of the revised prospectus is ten days. 16.45  There are, therefore, only two possible outcomes under the Prospectus Regulation, namely approval or rejection: tertium non datur. This is why the Regulation does not clarify what happens if the NCAs request further clarification after having asked already for changes or supplementary information. This omission has given rise to diverging behaviours by competent authorities. As reiteration of requests is not explicitly mentioned, but is not ruled out either, there is no harmonization on this crucial element. As a consequence, the supervisory style of every NCA becomes a key determinant of the length of prospectus approval. In the previous regime, some countries provided for a cap of working days, but it is not clear if this can be compatible with the Prospectus Regulation, even if it can be a safeguard for market participants. Other NCAs regulate the pre-filing period. Still others do not consider the filing (and the deadline) as running until they verify that the prospectus is ready to be considered complete. 16.46  But, given that the new framework is composed of Level 1 and 2 Regulations, there should be no margin for discretion. A more intense coordination effort by ESMA and perhaps a more stringent enforcement by the European Commission would help solve this lack of consistency.

III.  Geographical Validity of Prospectus 16.47  The general rule of the Prospectus Regulation (as it was in the Prospectus Directive), in line with the free provision of services and home country control, is that once (p. 370) a prospectus is approved in the home Member State, it should be valid in the whole European Economic Area (EEA) as well. 16.48  In particular, where an offer of securities to the public or admission to trading on a regulated market occurs in more Member States, or in a Member State other than the home Member State, the prospectus approved by the home Member State and any supplements thereto are valid for the offer to the public or the admission to trading in any host Member States, provided that ESMA and the NCA of each host Member State are notified accordingly (Art. 24, Prospectus Regulation). So, a cross-border offer or listing requires notification by the home NCA, within one day, to ESMA (but in any case, ESMA must be

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

notified of an approval of a prospectus, even in a purely national offer/listing) and the host NCA (Art. 25). 16.49  An electronic copy of the prospectus (or supplement) must be translated (when required: see section IV ‘Linguisitic Regime’, para. 16.54 below) and notified, along with the certificate of approval. No fee can be charged from either home or host NCAs for notification (Art. 25(5), Prospectus Regulation). 16.50  Competent authorities of host Member States cannot undertake any approval or administrative procedures relating to prospectuses and supplements approved by the competent authorities of other Member States, or relating to final terms: this would violate the principle of home country control. There is a relevant exception provided in Article 37, however, which allows for precautionary measures. These are allowed when the host NCA believes the applicant has violated the prospectus regime. The procedure is designed as an escalation that starts with information by the host NCA to the home NCA that a violation has likely occurred, then continues with direct action by the host NCA, and, finally, with ESMA’s action for the settlement of possible disagreements. 16.51  First, where the NCA of the host Member State has clear and demonstrable grounds for believing that irregularities have been committed by the issuer, the offeror, or the person asking for admission to trading on a regulated market or by the financial intermediaries in charge of the offer of securities to the public or that those persons have infringed their obligations under this Regulation, it shall refer those findings to the NCA of the home Member State and to ESMA. 16.52  Second, where, despite the measures taken by the NCA of the home Member State, the issuer, the offeror, or the person asking for admission to trading on a regulated market or the financial intermediaries in charge of the offer of securities to the public persists in infringing this Regulation, the NCA of the host Member State, after informing the NCA of the home Member State and ESMA, shall take all appropriate measures in order to protect investors and shall inform the Commission and ESMA thereof without undue delay. 16.53  Third, where a NCA disagrees with any of the measures taken by another NCA pursuant to paragraph 2, it may bring the matter to the attention of ESMA. The European (p. 371) Securities and Markets Authority may act in accordance with the powers conferred on it under Article 19, Regulation (EU) 1095/2010.

IV.  Linguistic Regime 16.54  For offers and listings only in the home Member State, the prospectus is drawn up in a language accepted by the home NCA (Art. 27, Prospectus Regulation).21 16.55  For offers and listings that occur only in one or more host Member States (but not in the home Member State), the prospectus is drawn up in the official language of the host Member States (or at least in a language accepted by them) or in English (at the choice of the issuer). The Summary is translated in either the official language of the host Member States (or in a language accepted by them) or in English (at the choice of the host NCA). No translation can be requested on the other part of the prospectus. 16.56  Finally, for offers and listings in both the home and (at least one) host Member State, the prospectus is drawn up in a language accepted by the home NCA (at the choice of the home NCA) and in a language accepted by the host NCA or in English (at the choice of the issuer). The Summary is translated in either the official language of the host Member State or in English (at the choice of the host NCA).22 16.57  Member States and NCAs have made different use of the flexibility allowed by the Prospectus Regulation.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

16.58  In Italy, Consob allows the use of English for all non-equity prospectuses, provided that the summary is in Italian, while it does not allow it for equity offers, given that there is no chance for an offeror to choose a different competent authority changing the home Member State.23 16.59  In other EU countries, the implementation is more flexible.24 The French Autorité des Marchés Financiers (AMF) issued a consultation document in May 2019 proposing to allow the use of English in all prospectuses, except for those offers authorized and made only in France, where the offeror/issuer could use English for prospectus but should add a summary note in French.25 (p. 372) 16.60  In Germany, the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) allows the use of English for all prospectuses, but requires a summary note in German. On a voluntary basis, some German issuers enclose with the English version of the prospectus a non-binding translation in German, with no legal value.26 16.61  In Spain, Comisión Nacional del Mercado de Valores (CNMV) allows the prospectus to be in English, except in the case of a retail offer in Spain, in which case the prospectus must be in Spanish.27 16.62  In Denmark, the Finanstilsynet (Danish FSA) allows the use of English for all prospectuses, except for those offers authorized and made only in Denmark, where the offeror or the issuer could use English for the prospectus but should add a summary note in Danish, only in case of public offers. 16.63  The Czech National Bank allows the use of English for all prospectuses, and only in case of public offers the offeror is required to add a summary note in Czech. 16.64  The same applies to Norway: the Finanstilsynet (Norwegian FSA) allows the use of English for all prospectuses, but the offeror should add a summary note in Norwegian in case of public offer. 16.65  In Luxembourg, the Commission de Surveillance du Secteur Financier (CSSF) allows the use of English for all prospectuses, and so does the Dutch Authority for the Financial Markets (AFM) in the Netherlands.28

V.  Sanctioning Regime 16.66  The sanctioning regime is an important novelty in the Prospectus Regulation, as the Prospectus Directive only had one concise article with respect to sanctions.29 (p. 373) This implies that Member States and NCAs should carefully check and possibly review their sanctioning regime and due process when adapting their legal systems to the new Regulation.

1.  Criminal and Administrative Sanctions 16.67  The Prospectus Regulation stresses the importance of enforcement through appropriate administrative sanctions and other administrative measures, in line with the Communication of the Commission of 8 December 2010 on Reinforcing sanctioning regimes in the financial services sector. 16.68  As equally stated in many other Regulations and Directives, sanctions and measures for violation of the prospectus regime should be effective, proportionate, and dissuasive. On the one hand, the Prospectus Regulation auspices a common approach in Member States and a deterrent effect; on the other hand, it is—when it comes to sanctions—a minimum harmonization regulation, as it does not limit Member States in their ability to provide for higher levels of administrative sanctions (Recital (74)). At the same time, the Regulation

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

does not deal with criminal sanctions, as opposed to the Market Abuse Directive II (Directive 2014/57/EU). 16.69  Under the Prospectus Regulation, Member States are able to impose administrative and criminal sanctions for the same infringements, but are not obliged to impose administrative sanctions for infringements which are subject to criminal sanctions in their national law. The Regulation does not take position on the ne bis in idem issue: but in case of a criminal sanction which is not decided by an administrative authority, it recommends that Member States and NCAs, where possible, have in place cooperation systems that enable the exchange of information (Recital (76), Prospectus Regulation). 16.70  The minimum harmonization requirements set forth in Article 38, Prospectus Regulation deal with the violation of the main provisions of the Regulation30 or the failure to cooperate in an investigation or with an inspection or request covered by Article 32. 16.71  In case Member States do not impose administrative sanctions because violations are already subject to criminal sanctions as explained in paragraph 16.69 above, they must notify in detail, to the Commission and to ESMA, the relevant parts of their criminal law. In any case, Member States must also notify the Commission and ESMA of their sanctioning regimes and of any subsequent amendment thereto.

(p. 374) 2.  The Menu of Sanctions and the Due Process 16.72  The menu of administrative sanctions that can be imposed by NCAs (according to the powers Member States are required to confer upon them) includes public statements indicating the natural person or the legal entity responsible and the nature of the infringement , cease and desist orders,31 and administrative pecuniary sanctions (Art. 38, Prospectus Regulation). In this case, the rules do not mandate a minimum sanction, but rather set a minimum level of maximum sanctions. The Regulation provides for a general ‘minimum of the maximum’, which is defined for disgorgement of profits,32 and for two other similar thresholds, one for natural33 and the other for legal persons.34 At the same time, Member States ‘may provide for additional sanctions or measures and for higher levels of administrative pecuniary sanctions than those provided in this Regulation’ (Art. 38(3)), thus going beyond the minimum requirements of the Regulation. 16.73  In order for the sanctions and measures to be effective, proportionate, and dissuasive (and ensure a common approach in Member States and a deterrent effect), the NCAs, when determining the type and level of administrative sanctions and other administrative measures, must take into account all the relevant circumstances including, where appropriate: (i) the gravity and the duration of the infringement; (ii) the degree of responsibility of the person responsible for the infringement; (iii) the financial strength of the person responsible for the infringement (as indicated by the total turnover of the responsible legal person or the annual income and net assets of the responsible natural person); (iv) the impact of the infringement on retail investors’ interests; (v) the importance of the profits gained or the losses avoided by the person responsible for the infringement; (vi) the importance of the losses for third parties derived from the infringement, in so far as they can be determined; (vii) the level of cooperation of the person responsible for the infringement with the competent authority, without prejudice to the need to ensure disgorgement of profits gained or losses avoided by that person; (viii) previous infringements by the person responsible for the infringement; (ix) measures taken after the infringement by the person responsible for the infringement to prevent its repetition. 16.74  Given the explicit mention of these principles in the Prospectus Regulation (which was not the case in the Prospectus Directive), it is now binding for NCAs to take into account and motivate all the above points when deciding an administrative sanction (p. 375) and its level. At the same time, NCAs must cooperate closely to ensure that the exercise of their supervisory and investigative powers and the administrative sanctions and other

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

administrative measures that they impose are effective and appropriate, and to avoid duplication and overlaps when exercising their powers in cross-border cases (Art. 39(3)). 16.75  Finally, Member States must ensure that NCAs’ decisions taken under the Regulation are properly reasoned and always subject to a right of appeal before a tribunal. This should also apply in case of non-decisions or negative decisions in the approval process of a prospectus (including when no feedback is given, within the time limits, through a request for changes or supplementary information on the basis of Art. 20(2), (3), and (6)).

3.  Publication of Decisions 16.76  NCAs’ decisions imposing administrative sanctions or other administrative measures must have a deterrent effect on the public at large. For this reason, publication is the default rule, with three exceptions when NCAs deem it inappropriate: publication on an anonymous basis; delayed publication; or non-publication (Art. 42, Prospectus Regulation). 16.77  In principle, a decision imposing an administrative sanction or an administrative measure for infringement of Prospectus Regulation must be published by competent authorities on their official websites. This should happen not immediately after the final decision taken by NCA, but only after the person subject to that decision has been informed of it. In order to act as a deterrent, the publication shall include at least information on the type and nature of the infringement and the identity of the persons responsible. This does not apply to decisions imposing measures that are of an investigatory nature. 16.78  Exceptions to publication are carefully drafted in the Regulation, both in form and in substance. Where the publication of the identity of the legal entities, or identity or personal data of natural persons, is considered by the competent authority to be disproportionate following a case-by-case assessment conducted on the proportionality of the publication of such data, or where such publication would jeopardize the stability of financial markets or an ongoing investigation, Member States shall ensure that the NCAs adopt one of the following remedies: (i) deferral of the publication of the decision until the moment where the reasons for non-publication cease to exist; (ii) publication of the decision on an anonymous basis in a manner which is in conformity with national law, where such anonymous publication ensures an effective protection of the personal data concerned; (iii) abstention from publication in the event that the other options are considered to be insufficient to ensure the stability of financial markets or the proportionality of the publication (which is the case for offenses of a minor nature). (p. 376) 16.79  In the case of a decision to publish a sanction or measure on an anonymous basis, the publication of the relevant data may be deferred for a reasonable period where it is foreseen that, within that period, the reasons for anonymous publication shall cease to exist. 16.80  The Regulation does not impose to wait until expiration of the right to appeal (or even until res judicata) for publication, but it requires that NCAs also publish immediately, on their official website, that a decision was challenged and any subsequent information on the outcome of the appeal. Moreover, any decision annulling a previous decision to impose a sanction or a measure shall also be published. 16.81  NCAs should keep the decisions on their official website for a period of at least five years after its initial publication, but personal data contained in the publication shall be kept on the website only for the period which is necessary in accordance with the applicable data protection rules. 16.82  NCAs must provide ESMA, on an annual basis, with aggregate information regarding all administrative sanctions and other administrative measures imposed in

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

accordance with Article 38. The European Securities and Markets Authority shall publish that information in an annual report. 16.83  Where Member States have chosen, in accordance with Article 38(1), to lay down criminal sanctions for the infringements of the provisions referred to in that paragraph, their competent authorities shall provide ESMA annually with anonymized and aggregated data regarding all criminal investigations undertaken and criminal sanctions imposed. ESMA shall publish data on criminal sanctions imposed in an annual report. 16.84  Where the NCA has disclosed administrative sanctions, other administrative measures, or criminal sanctions to the public, it shall simultaneously report them to ESMA. National competent authorities must also inform ESMA of all administrative sanctions or other administrative measures imposed but not published, including any appeal in relation thereto and the outcome thereof. Member States shall ensure that NCAs receive information and the final judgment in relation to any criminal sanction imposed, and submit it to ESMA. The European Securities and Markets Authority shall, on its turn, maintain a central database of sanctions communicated to it solely for the purposes of exchanging information between NCAs. That database shall be accessible only to competent authorities, and it shall be updated on the basis of the information provided by the NCAs.

VI.  Remaining Spaces for Arbitrage in the Prospectus Regime 16.85  The previous analysis has demonstrated that determining the home Member State for an offer or an admission to trading may have remarkable implications. Identifying the home NCA also means identifying the administrative law applicable to the scrutiny (p. 377) and the subsequent approval of the prospectus, which also drives the application of national choices in matters where Member States retain national discretion under the Prospectus Regulation. Furthermore, not all the NCAs have the same supervisory style, and this can influence the way the prospectus approval procedure is actually run, as the previous sections show. 16.86  As for the hard law determinants, the law of the NCAs regulates key matters such as the linguistic regime and the supervisory fees, as well as the procedural and substantive rules on sanctions, which are subject to limited harmonization (sections IV ‘Linguistic Regime’, para. 16.54, and V ‘Sanctioning Regime’, para. 16.66). The sanctioning regime for both criminal and administrative violations follows, in fact, the home country principle, as NCAs and criminal judges always administer their national laws, and never apply foreign provisions. 16.87  Even in the absence of express optional regimes or national discretion, the supervisory style of national competent authorities may diverge, in particular on the interpretation of the role of NCAs in the scrutiny. This can lead to divergent outcomes for issuers and other applicants as regards the prospectus approval procedure and the interpretation of general rules such as those triggering the duty to publish a supplement (section II.4 ‘Timing and Procedure of Prospectus Approval’, para. 16.39). The variable length of the approval procedure as a consequence of the reiteration of requests for supplementary information under Article 20(4), Prospectus Regulation (section II.4) is a case in point. 16.88  These remaining divergences in areas where the EU prospectus regime does not allow for any national discretion may depend on a number of factors. Beside the unavoidable path dependence of different traditions on the vetting procedure, mention should be made at least of national courts. The role of the case law on prospectus liability can hardly be overestimated, as it influences NCAs in many respects. First, when a court adjudicates on prospectus liability disputes, it often determines whether the items in the document(s) contained all the material information an investor would need to know when making an informed assessment of the issuer and its securities (Art. 6, Prospectus

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Regulation). In spite of their non-negligible impact,35 EU soft-law tools may not always play a decisive role in judicial decisions,36 but national case law will in any event inevitably affect subsequent NCAs’ approval procedures. Second, when NCAs and their employees fear they may be easily held liable under the national law (Art. 20(9), Prospectus Regulation),37 they are likely to react in a defensive manner by (p. 378) making their scrutiny particularly strict and by relying on a more bureaucratic and formalistic approach to supervision. After all, bureaucrats, like any other individual, may be sensitive to risks. Issuers are not very likely to sue a supervisor that has rejected prospectuses that they consider complete, consistent, and comprehensible (Art. 40(2), Prospectus Regulation). To the contrary, the risk that a supervisor be sued for approving a prospectus that turns out to contain false information is incomparably higher. 16.89  For the time being, ESMA peer reviews have not proven particularly effective in reducing the distance between NCAs,38 but it remains to be seen whether the new ESMA guidelines to be issued under the Prospectus Regulation—such as those on the specificity and materiality of risk factors under Article 1639—will curb these inconsistencies and make the NCAs’ approach more homogeneous. As long as the existing divergences remain and are not negligible, market participants will have an incentive to select one or the other NCA, depending on their interests. The driver of such choice will typically consist in a combination of different factors, like the intention to show a credible commitment to higher standards and the desire to save on regulatory costs. The following sections analyse the default regime for the identification of the NCA (section VII ‘Identifying the National Competent Authority’, para. 16.90) and the margin for issuer choice (section VIII ‘A Focus on Equity Securities’, para. 16.97).

VII.  Identifying the National Competent Authority 16.90  With a view to identifying the home Member State—and hence the NCA40—the Prospectus Regulation sets different connecting factors, depending on the securities involved. The default rule, which applies unless the other rules determine otherwise, connects the home Member State with the issuer’s registered office (Art. 2(m)(i)). This rule —which we label as ‘(i)’ for the sake of exposition—has two exceptions. 16.91  The first exception—which we label as ‘(ii)’—concerns the public offers and the requests for admission to trading of non-equity securities whose denomination per unit amounts to at least EUR 1,000 (Art. 2(m)(ii), Prospectus Regulation).41 For those (p. 379) securities, the issuer or the offeror, or the person asking for admission to trading, as the case may be, has an option to determine the home Member State for the prospectus approval. This power is confined to three alternative anchors, however: once again, the Member State where the issuer has its registered office; the Member State where the securities were or are to be admitted to trading on a regulated market; or the Member State where the securities are offered to the public. 16.92  Rule (ii) is silent on the optional connecting factors in case of requests for multiple listings or of public offers that take place in more than one Member State simultaneously. A reasonable interpretation is that, in those circumstances, the issuer, the offeror, or the person asking for admission to trading can freely choose its home country among those involved. Furthermore, the choice of the home Member State is not done once and for all, as each offer or admission to trading is a separate transaction with its own home Member State. As a consequence, choices made by an applicant under rule (ii) bind neither other future applicants nor the same applicant in its future choices, so that all of them retain their freedom to select a different NCA when Article 2(m)(ii) allows it.42 For instance, a prospectus concerning a public offer in country A of non-equity securities above EUR 1,000 that are already listed on a regulated market in country B by an issuer having its registered

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

office in country C can be approved by the NCA of either country A, B, or C, regardless of the national competent authority that previously approved the listing prospectus. 16.93  The optional regime established by rule (ii) also includes hybrid or derivative nonequity securities,43 whether physically or cash-settled. This only applies in so far as the underlying securities are not issued by the same issuer of those non-equity securities, or by any member of the issuer’s group. This last limitation to rule (ii) is meant to curb elusive practices, as issuing call options having own securities as underlying securities would amount, from a purely financial perspective, to issuing those underlying securities directly (see also Art. 2(b), Prospectus Regulation). 16.94  As a consequence of the scope of application of the alternative regime (ii), nonequity securities whose face value per unit is below the EUR 1,000 threshold fall into the default rule (i), and so do equity derivative securities (whichever their denomination per unit). Therefore, for all these securities the Prospectus Regulation establishes the NCA on the basis of the issuer’s registered office (with no alternative anchors). 16.95  The other exception—‘(iii)’—to the general default rule (i) concerns third-country issuers (Art. 2(m)(iii), Prospectus Regulation). This regime determines the European country that plays the role of the home Member State on the basis of the (p. 380) place of first landing. This is where the securities will be offered to the public for the first time, or where the first application for admission to trading on a regulated market is made by any of the applicants. As opposed to the default regime (i), the special regime (iii) cannot, of course, rely on the registered office as a connecting factor. This has two implications, which the Prospectus Regulation tackles with ad hoc rules. First, when issuers are not the applicants in the prospectus approval procedure, rule (iii) would deprive them of any control over their home Member State. This would not be coherent with the default regime (i) for the same class of securities.44 To fix this misalignment, the special regime (iii) allows issuers to define their home Members States at a later stage, when they are not the original applicants. The second implication would emerge if, whichever the initial applicant, issuers lost their home Member States by changing the place of listing. This consequence is solved by moving the home Member State to the new country where the relevant securities are listed, and by giving issuers the option to select such Member State in case of multiple listing.45 16.96  This special regime for third-country issuers (iii) applies to public offers and requests for admission to trading of equity securities and non-equity securities that cannot take advantage of the optional regime set forth in Article 2(m)(ii). For securities falling under the scope of Article 2(m)(ii), therefore, the regime is identical, irrespective of the issuers’ registered office, whether in Europe or abroad, with the obvious—but unexpressed —limitation that the issuer registered office cannot anchor NCAs’ competence for thirdcountry issuers. This is in line with the fact that, under regime (ii), issuers do not have full control of choice of their home Member State.

VIII.  A Focus on Equity Securities 16.97  Because the issuer choice regime of the Prospectus Regulation is particularly strict, issuers have no easy way to select an NCA other than that of the country where they have their registered office. An alternative choice is available only for issuers of non-equity securities whose face value per unit exceeds EUR 1,000, provided that such securities are to be (or were already) admitted to trading on a regulated market or are offered to the public in the selected country. No connecting factor other than the registered office applies, instead, to equity securities, or to non-equity securities of lower face value. Firms issuing these latter two categories of securities are therefore bound, in principle, to the NCA of the

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

country where they have their registered office, with no way out in the event that the approval procedure is slow.

(p. 381) 1.  Tying Prospectus Regime to Company Law 16.98  The regulatory policy underlying this approach determines an infrangible link between prospectus regime and company law, and makes forum shopping more expensive. To some extent, tying prospectus regime and company law may facilitate the vetting procedure by the relevant NCA, which is typically more acquainted with local rules and best practices on corporate governance to be disclosed in prospectuses. For instance, the applicants have to disclose, in the registration document, their board practices, their corporate governance regime, and the rules applicable to related party transactions (sections 14 and 17, Annex 1, Prospectus Regulation), as well as the shareholder rights attached to shares (section 4, Annex 11, Prospectus Regulation).46 16.99  However, this policy also has some drawbacks. First, some matters to disclose in the prospectus may depend on the host country regime. For instance, the best practices of the UK Corporate Governance Code also apply to non-UK (overseas) companies with a premium listing in the UK.47 Scrutinizing this information may be uneasy for non-UK NCAs, and in any event the UK Listing Authority will be involved in the process for the admission to listing, which requires separate assessment of the eligibility requirements of the issuer even in the presence of a passported prospectuses approved by the home NCA.48 16.100  Furthermore, scholars have stressed that the current conflict-of-law policy for the identification of NCAs may deliver suboptimal outcomes in a context where the legal techniques to break the connection between company law and prospectus regime are expensive—as is the case nowadays (see section VII ‘Identifying the National Competent Authority’, para. 16.90).49 This holds true in the first place for issuers and investors themselves, as they might be unable to easily opt into supervisory regimes that better fit their respective needs. But it also relaxes the incentives on NCAs to improve the quality of their supervision, because they do not face the risk that the number of entities they supervise might shrink (together with the supervisory fees). (p. 382) 16.101  What are the options left to issuers against this drawback? We now summarize some legal techniques equity issuers may resort to when trying to have a prospectus approved by an NCA other than their own natural one.

2.  Regulatory Arbitrage Techniques in Equity Markets 16.102  Issuers of equity securities may resort to various techniques to escape their home Member State and become subject to another NCA. In this subsection, we consider three of them: the transfer of the registered office through a reincorporation abroad; the incorporation of a holding company in another Member State; and the issuance of depository receipts. 16.103  The first technique issuers may adopt to select another NCA is their reincorporation in another Member State. Absent, for the time being, an EU legal framework for the direct cross-border transfer of registered offices, issuers can rely on the European Court of Justice (ECJ) case law. Particularly relevant in this respect is the Vale decision, which prevents Member States of destination from discriminating against foreign companies wishing to reincorporate there.50 However, reincorporation may more easily take place through a cross-border merger (as per Directive 2005/56/EC).51 16.104  However, cross-border reincorporation has some limits in its ability to allow the selection of NCAs. First, this solution may not be available when the country of destination has adopted conflict-of-law rules inspired by the real seat doctrine, unless, of course, the relevant issuer is ready to move its head office as well. In this case, as recognized by the ECJ case law, the country of destination may refuse recognition of the issuer as a legal

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

entity governed by its law.52 Second, even when the country of destination recognizes companies with only their legal seat in its own territory and their administrative seat abroad, reincorporating might not be a cheap solution. This reorganization may require expensive legal advice and costly adjustments in the corporate structure and internal procedures as a result of the adoption of a new company law. For this reason, relocating the registered office may not be an optimal choice for issuers that wish to maintain, for whatever reason, the rules concerning their internal organization and their relationships with third parties. 16.105  With a view to retaining their original company law, issuers may also incorporate a holding company abroad and list this in their country of choice, while conveying (p. 383) the initial public offering’s (IPO’s) proceedings to the operating subsidiary. This is the typical form adopted when issuing Eurobonds, but it has also been tested for shares.53 The costs of this solution may be prohibitive for SMEs, however, not to mention the complexity deriving from the addition of a new layer to the corporate group structure. 16.106  Under the repealed Prospectus Directive, another system issuers could use to select their NCA was depositary receipts issued by a bank, having as underlying securities the shares of the same issuers.54 Depositary receipts qualified as non-equity securities under the Prospectus Directive (Recital (12)) and they were regarded as securities issued by the depositary bank (as ESMA confirmed in its Q&A on Prospectus Directive).55 Therefore, depositary receipts might be issued by a bank in the country of choice, so as to make the offering or the listing subject to local rules and supervisory competence. Whether this option is still feasible under the new Prospectus Regulation remains unclear, however. Not only is the Regulation less clear on the nature of depositary receipts,56 but the new ESMA Q&A Prospectus no longer addresses the question on the identification of their issuer. 16.107  However, even in the previous regime, recourse to depositary receipts was a difficult strategy to pursue. First, depositary receipts could help select the competent authority only for prospectus approval, but the home Member States would remain the same under the Transparency Directive (Art. 2(1)(d)).57 Second, depositary receipts would have made the governance structure more complex for the issuer of the underlying shares, as they would have added an extra layer to the holding chain of securities. As the custodian banks involved would have likely qualified as the legal shareholder or bondholder, managing corporate actions would have become more complex. For instance, the involvement of the depositary banks would have been necessary for the collection of votes by the holders of the underlying shares. 16.108  Although some uncertainties remain, the current legal framework therefore offers issuers some flexibility in selecting the NCA, but the available options are, overall, expensive and come with a number of side effects. To be sure, these drawbacks are not absolute obstacles, as the practice shows some examples where issuers have taken advantage of the full set of options the existing regime offers. For instance, in 2014 the Italian carmaker Fiat SpA merged into the Dutch company Fiat Investments NV, a member of the same corporate group, to create Fiat Chrysler Automobiles NV, which (p. 384) had the AFM as its NCA.58 The new company had its shares admitted to the Milan stock exchange,59 just like Fiat SpA previously did, and established its principal office in London. Incidentally, Fiat Chrysler Automobiles NV issues bonds, also through a subsidiary established in Luxembourg, which are listed on the Irish Stock Exchange.60 Furthermore, Exor NV, the controlling entity of Fiat Chrysler Automobiles, opted for the Dutch legal and supervisory regime on prospectus approval when listing its subsidiary Ferrari NV (equally having its registered office in the Netherlands) on the Milan stock exchange.61

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

16.109  The Fiat Chrysler example may suggest that companies have quite some room for selecting their home Member State and their NCA. However, the question remains whether the costs companies face to do so are excessive. While some companies will have the resources to undergo complex corporate restructurings, costs may be excessive for other issuers. At the margin, this may curb a material amount of efficient selections of NCAs other than those of the country where issuers have their registered office. We now analyse some alternative regimes on the determination of NCAs that have either been in force in the past or have been unsuccessfully proposed to reform the old Prospectus Directive, and will consider their pros and cons.

3.  Alternative Connecting Factors 16.110  The definition of the home Member State for prospectus approval has not always been the same. The Public Offers Directive (Directive 89/298/EEC) and the Listing Directive (Directive 2001/34/EC) determined the NCA on the basis of the registered office only if the offer was made or listing was sought in that country, either exclusively or in conjunction62 with joint offers or admissions to listing in other Member States. When the transaction did not involve the country where the issuing company was incorporated, the registered office ceased to be a connecting factor, and the competence to approve the prospectus lay with the NCA of the country where the offer (p. 385) was made or the listing was sought (Art. 20, Public Offers Directive; Arts 20 and 37, Listing Directive).63 16.111  The logic behind this framework seems to be that local authorities were regarded as better suited to protecting local investors, if only for their incentives and their accountability regimes. A passport was also available for subsequent offers or admissions to listing in other countries, but to avoid any abuse, Member States where issuers had their registered office were not bound by mutual recognition (Art. 21(4), Public Offers Directive; Art. 38(5), Listing Directive). This regime for requests to ‘passport back’ in the country of incorporation entailed the risk that issuers be prone to conflicting rules, and punished the decision to raise capitals abroad with an increased cost of subsequent decisions to do the same in one’s own country—quite a paradox from a market integration perspective. 16.112  The Prospectus Directive repealed these rules and introduced the regime subsequently reproduced in the Prospectus Regulation, but the EU lawmakers have repeatedly tried to adopt different regimes in recent years, without success. For instance, the European Commission proposed to foster issuers’ freedom to select their NCA by expanding the rule currently applicable to non-equity securities whose face value per unit exceeds EUR 1,00064 in its reform proposal, which subsequently led to Directive 2010/73/ EU.65 In previous years, that rule had supported the development of the Eurobond market and had strengthened the role of pan-European financial infrastructures such as the two international central securities depositaries (ICSDs) Euroclear and Clearstream. The European Parliament removed the Commission’s amendment to protect retail investors from the risk of arbitrage.66 16.113  In a surprising exchange of roles, the Commission’s proposal for a new Prospectus Regulation, adopted in the context of the CMU initiative, left the Prospectus Directive regime on the identification of NCAs unchanged. While this proposal made its way through the preparatory work, the European Parliament’s ECON Report unsuccessfully recommended granting issuers the possibility of selecting their NCA for both equity and non-equity securities, regardless of their face value.67 (p. 386) 16.114  An even more flexible regime would be one where operators of regulated markets had the power to approve prospectuses (for admission to listing and admission to trading), as the ESMA Securities and Markets Stakeholder Group suggested in 2012.68 This connecting factor would disentangle company law and securities regulation and

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

supervision, possibly without the drawbacks of the rules in force before the Prospectus Directive was introduced.

IX.  Competition versus Centralization: A Trade-Off? 16.115  It remains, of course, uncertain whether facilitating competition among NCAs in the realm of equity securities—and of small debt securities—would determine a race to the top or a race to the bottom. In this chapter, we cannot analyse all the arguments in favour or against broader issuer choice.69 Suffice it to say, however, that in a context like the CMU, the risks of suboptimal outcomes in a more competitive context are greatly reduced by ESMA’s powers of intervention, at least in the case of blatant violations of the rules on prospectus approval.70 If, to the contrary, some believe that these powers, alone or in combination with investor ability to discount low-quality prospectuses in higher prices, do not suffice to curb moral hazard and adverse selection as a consequence of the opportunity to select more lenient NCAs, then the whole CMU would need a deep overhaul, based as it is on mutual recognition. If that was the case, indeed, the idea of ensuring a level playing field among issuers in different countries would already be a chimera. 16.116  Rather, what is worth stressing here is that both the Prospectus Directive and Regulation regime and the alternative measures we considered rely on the presence of multiple NCAs, the only difference between them being the scope of issuer freedom to choose their authority. A radically different system would be one where some or all offering and listing prospectuses would be subject to approval by a centralized competent authority. In this regard, some scholars have submitted that completion of a true CMU would require the creation of a fully fledged European Listing Authority for the entire EU. This central authority would, to some extent, replicate the functioning of the Single Supervisory Mechanism (SSM) which serves as the backbone of the European Banking Union.71 In line with this term of comparison, also the European Listing Authority would be competent for larger issuers, while the approval of prospectuses concerning smaller companies would remain in the NCAs’ remit.72 In this (p. 387) manner, the European capital markets would retain some form of forum shopping and supervisory competition. For larger issuers, this proposal would also eliminate the bureaucratic costs of prospectus notification, which is today required to take advantage of the European passport (Arts 25 and 26, Prospectus Regulation), and would deliver higher economies of scale, thus potentially reducing the direct and indirect costs of supervision. 16.117  The European Commission took a step towards the centralization of prospectus approval in its proposal for a reform of the three European supervisory authorities (ESAs).73 This initiative devised the conferral upon ESMA of the power to approve certain prospectuses for which centralization was justified, in the Commission’s opinion, by a crossborder dimension within the Union, by a particular level of technical complexity, or by the potential risks of regulatory arbitrage. These were prospectuses for the admission to trading of wholesale non-equity securities on a regulated market accessible only to qualified investors, prospectuses relating to specific types of complex securities, such as assetbacked securities, or to specific types of issuers, such as property companies, mineral companies, scientific research-based companies, shipping companies and, remarkably, third-country issuers. 16.118  As one can see, the Commission proposed to centralize prospectus approval both in areas where issuer choice is today broader (such as wholesale non-equity securities, by definition above the EUR 1,000 threshold) and in areas where the only connecting factor is the issuer’s registered office. Due to lack of political agreement, these proposals did not remain in the reform package that was subsequently approved.74

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

16.119  The unsuccessful attempt of the Commission shows that the time might not be yet ripe for a complete centralization of prospectus approval, whether this concerns only some specific matters or it encompasses all issuers above a certain threshold. Another approach that might deserve consideration—either as such or as an intermediate step towards further supervisory centralization—is also the conferral on ESMA of the power to approve prospectuses, but with no exclusive competence on them. In other words, ESMA could qualify as an additional twenty-ninth (or twenty-eighth, considering Brexit) NCA, to which issuers and other applicants could refer to regardless of the place of the public offer, of the admission to trading, or of the issuer’s registered office.75 (p. 388) 16.120  This approach would be a halfway step between the Prospectus Regulation regime and the centralization of competence, its intermediate nature being both contentand (possibly) time-related. While a similar attempt might, of course, face some resistance,76 it should be politically more palatable than the immediate creation of a European Securities and Exchange Commission. 16.121  Furthermore, we believe that adding ESMA to the existing NCAs would be beneficial in many respects. First, it would offer issuers and investors an additional option without dispersing the expertise that local NCAs have developed over the years. To some extent, European capital markets are already enjoying a high level of centralization, whenever the connecting factors enable a sufficient freedom to choose the preferred NCA. A look at the data ESMA collected on the number of prospectuses that are approved and passported, combined with the type of securities these prospectuses concern, demonstrates the point.77 In particular, the NCAs of Luxembourg, Ireland, and Germany seem to have a consolidated role as European hubs for the approval of prospectuses on, respectively, debt securities, asset-backed securities, and derivatives, sometimes sharing the role among them.78 Unsurprisingly, no such centralization seems to exist for equity securities, due to the current regime for the identification of NCAs.79 16.122  In a system where centralization is already a fact, the immediate establishment of a single competent authority would prevent issuers and investors from continuing to rely on those NCAs that have demonstrated to be better able to meet their needs. To the contrary, adding ESMA as an additional central authority would avoid the risk of petrification that may accompany the creation of a competent authority with a monopolistic power, and would allow the big step towards a European single authority to be made—if this is deemed appropriate—only after testing its success among issuers and investors alike. This form of competition would also avoid the risk of a race to the bottom, as ESMA would surely not allow any competition to attract equity issuers at the expense of prospectus quality. 16.123  The role of ESMA as an additional competent authority would make restrictions to issuer choice in the realm of equity capital a less compelling problem. However, it might be advisable that policymakers keep this option on their table even in this context. Fostering competition among NCAs would in fact still facilitate the spontaneous (p. 389) creation of European hubs, in case these proved more efficient than ESMA. Once again, this might be an intermediate step towards top-down centralization.

X.  Conclusion 16.124  This chapter has analysed the regulatory framework for prospectus approval by NCAs. As under the previous Prospectus Directive, NCAs approve prospectuses after verifying that they are complete, consistent, and comprehensible. The delegated acts supplementing the Prospectus Regulation specify the contents of the supervisory activity at a much greater level of detail than the previous regime. However, it remains to be seen whether this will suffice to ensure an actual level playing field across the EU. Indeed, NCAs might maintain different approaches during the approval process, even in the presence of

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

ESMA’s coordination efforts. Next to this, Member States retain discretion on some crucial regulatory options, and the liability regimes are often uneven across Member States. 16.125  All these remaining differences create space for arbitration, and make the rules on the identification of the relevant NCA all the more important. This chapter has analysed the legal regime for the allocation of the power to approve prospectuses from two different perspectives. The first perspective concerns the transfer of such power from one NCA to another. In this respect, the transfer of prospectus approval might enable a better allocation of supervisory powers whenever the predefined NCA is not the most suitable one for the task. Unfortunately, the transfer of prospectus approval has not been used very often to date. The second perspective relies on issuer choice, and therefore concerns the connecting factors the Prospectus Regulation sets forth to identify the relevant NCA. This regime is quite flexible for non-equity securities of higher face value, but it remains linked to issuers’ registered office otherwise. While the intention to avoid a race to the bottom is understandable, the chapter submits that broader margins for issuer choice would be beneficial. With a view to further centralize supervisory tasks, the chapter also considers the policy option of charging ESMA with a more direct role in prospectus approval, without displacing—at least as a preliminary step—NCAs and their expertise.(p. 390)

Footnotes: *  Opinions expressed are personal and do not necessarily correspond to those of the authors’ respective organizations. Although the chapter is the result of common reflections, sections I–V shall be attributed to Carmine Di Noia, and sections VI–IX to Matteo Gargantini. 1

  Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 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 (Prospectus Regulation). 2

  Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC (Prospectus Directive). 3

  For an analysis of the previous regime, see Pierre Schammo, EU Prospectus Law. New Perspectives on Regulatory Competition in Securities Markets (Cambridge: CUP, 2011), 213–26. 4

  For instance, Article 20 clearly relies on the assumption that the NCA is the authority designated by the relevant home Member State under Article 31 (see e.g. Art. 20(8), which allows the competent authority of the home Member State to transfer the approval of a prospectus to the competent authority of another Member State). 5

  The Prospectus Directive used the word ‘central’ instead of ‘single’. The reasons for the amendment are not entirely clear, but the new wording may perhaps allow the identification of a ‘local’ competent authority in federal MS. 6

  As per Article 21(2), Prospectus Directive, any delegation of tasks to entities other than the NCA had to be made in a specific manner, stating the tasks to be undertaken by the delegated entity and the conditions under which such tasks had to be carried out. These conditions included a clause obliging the delegated entity to act and be organized in such a manner as to avoid conflict of interest and so that information obtained from carrying out the delegated tasks was not used unfairly or to prevent competition. In any case, the final responsibility for supervising compliance with the Directive and its implementing measures,

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

and for approving the prospectus, lay with the competent authority or authorities designated by the Member State. 7

  European Commission, White Paper—Financial Services Policy 2005–2010 (COM(2005) 629 final), Brussels, 1 December 2005. 8

  Financial Services Committee, FSC Report on Financial Supervision (FSC 4159/06), Brussels, 23 February 2006. 9

  See CESR, ‘CESR Welcomes the EU Financial Ministers’ Political Backing for Greater Supervisory Convergence amongst Securities Regulators in the EU’, press release CESR/ 06-198, 5 May 2006. 10

  The language of Article 13.5, Prospective Directive is quite similar to the Prospective Regulation: The competent authority of the Home Member State may transfer the approval of a prospectus to the competent authority of another Member State, subject to the agreement of that authority. Furthermore, this transfer shall be notified to the issuer, the offeror or the person asking for admission to trading on a regulated market within three working days from the date of the decision taken by the competent authority of the Home Member State. 11

  CESR, ‘Report on the Supervisory Functioning of the Prospectus Directive and Regulation’, CESR/07-225, June 2017, 14. 12

  Central Bank of Ireland (CBI), Prospectus Handbook, A Guide to Prospectus Approval in Ireland (2016), 24, to https://www.centralbank.ie.. At the same time, no criteria is set for accepting the request by another NCA to approve the prospectus: ‘the relevant competent authority in accordance with the requirements and procedures set out by that competent authority, will contact the Central Bank to confirm whether it is willing to agree to the proposed transfer.’ 13

  For more information on the interactions between the Prospectus Regulation and other European statutes, see Marieke Driessen, Chapter 4 ‘The Prospectus Regulation and other EU Legislation—the Wider Context for Prospectuses’, this volume. 14

  Article 2(s), Prospectus Directive: ‘ “Approval” means the positive act at the outcome of the scrutiny of the completeness of the prospectus by the home Member State’s competent authority including the consistency of the information given and its comprehensibility.’ 15

  This is not made explicit in the Prospectus Regulation.

16

  Furthermore, the issuer, the offeror, the person asking for admission to trading on a regulated market, or the person responsible for drawing up the prospectus shall have the possibility of directly communicating and interacting with the staff of the competent authority throughout the process of approval of the prospectus. 17

  Actually, ESMA is requested to conduct peer reviews covering activities of the competent authorities under the Prospectus Regulation within an appropriate time frame before its review and in accordance with its founding Regulation (Regulation (EU) 1095/2010). Market participants should be included among those interviewed during the peer reviews, so as to minimize the risk that mutual assessment may distort the outcome.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

18

  For the purposes of the scrutiny addressing issuers with a complex financial history or that have made significant financial commitments (Art. 18, CPDR), NCAs may require the issuer to include, modify, or remove information from a draft prospectus, taking into account: (a)  the type of securities; (b)  the information already included in the prospectus and the existence and content of information already included in a prospectus of the entity other than the issuer, as well as the applicable accounting and auditing principles; (c)  the economic nature of the transactions by which the issuer has acquired, or disposed of, its undertaking or any part of it, and the specific nature of that undertaking; (d)  whether the issuer can obtain with reasonable effort information about the entity other than the issuer. 19

  ESMA, ‘Final Report Technical Advice under the Prospectus Regulation’, ESMA31-62-800, 28 March 2018, 207–8, specifies that, on the basis of Articles 2(r), 20(4), 20(11), 32(1)(a), (b), and (c), Prospectus Regulation, as well as Recitals (60) and (71), NCAs are not required to look at information outside the prospectus in connection with their scrutiny or review of a prospectus/universal registration document (URD). They are only required to scrutinize/review the information contained in the prospectus/URD. However, this should not prevent each NCA from looking into information outside the prospectus in specific situations and on a case-by-case basis when it considers that it might be relevant to do so, nor should it stop the NCA from raising comments in relation to information outside the prospectus which would seem relevant for inclusion in the prospectus. When an NCA chooses to look at information outside the prospectus, rather, the NCA is looking at the information outside the prospectus to assess whether supplementary information is needed in the prospectus. 20

  Paola Lucantoni, ‘Art. 13 Directive 2003/71/EC’, in: Matthias Lehmann and Christoph Kumpan (eds), European Financial Services Law (Baden-Baden, Munich, Oxford: Nomos, Beck, Hart, 2019), 1011–12. 21

  For a thorough analysis, see Paola Leocani, Chapter 15 ‘Omission of Information, Incorporation by Reference, Publication, and Language of the Prospectus’, this volume. 22

  For the problems that occurred before the entry into force of the current regime—which reproduces that of the Prospectus Directive—see Schammo (n. 3), 112–15. 23

  See the new Consob issuers regulation, which entered into force on 6 August 2019, at http://www.consob.it/documents/46180/46181/reg_consob_1999_11971.pdf/ bd8d1812-6866-473e-8234-c54c75c0363a. 24

  See Latham & Watkins, Linklaters, White & Case, Reply to Consob—Consultation for the Modifications to the Issuers Regulation due to EU Prospectus Regulation 2017/1129, 10 July 2019, http://www.consob.it. 25

  AMF, Consultation publique sur les modifications du Reglement General de l’AMF prevues a l’occasion de l’entrée en application, le 21 Juillet 2019, deu Reglement (UE) 2017/1129 dit ‘Prospectus’, 14 May 2019, https://www.amf-france.org. 26

  See Article 21 (accepted language) of the recent Prospectus law implementing the Prospectus Regulation (Gesetz zur weiteren Ausführung der EU- Prospektverordnung und zur Änderung von Finanzmarktgesetzen, 214/19), entered into force on 21 July 2019

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(https://www.bundesrat.de) and in line with previous law (Art. 19, Prospectus Law, https:// www.gesetze-im-internet.de/wppg). 27

  See Article 23.1, Real Decreto 1310/2005, de 4 de noviembre, por el que se desarrolla parcialmente la Ley 24/1988, de 28 de julio, del Mercado de Valores, en materia de admisión a negociación de valores en mercados secundarios oficiales, de ofertas públicas de venta o suscripción y del folleto exigible a tales efectos. This is confirmed by the Frequently Asked Questions on the CNMV’s website, https://cnmv.es/Portal/GPage.aspx?id=MP_FAQ3 and https://cnmv.es/Portal/GPage.aspx?id=MP_FAQ1 (both confirming the possibility of drafting prospectuses in English). 28

  The use of English is stated in Article 5:19, Financial Market Supervision law (Wet op het financieel toezicht), https://www.afm.nl. 29

  Article 25, Prospectus Directive had only two paragraphs stating that (i) without prejudice to the right of Member States to impose criminal sanctions and without prejudice to their civil liability regime, Member States should ensure, in conformity with their national law, that the appropriate administrative measures (to be effective, proportionate and dissuasive) could be taken or administrative sanctions be imposed against the persons responsible in case of noncompliance, and that (ii) Member States should provide that the NCAs could disclose to the public every measure or sanction they imposed, unless disclosure would seriously jeopardize the financial markets or cause disproportionate damage to the parties involved. 30

  Articles 3, 5, 6, 7(1)–(11), 8, 9, 10, 11(1)–(3), 14(1) and (2), 15(1), 16(1), (2), and (3), 17, 18, 19(1)–(3), 20(1), 21(1)–(4) and (7)–(11), 22(2)–(5), 23(1), (2), (3), and (5), and 27. 31

  An order requiring the natural person or legal entity responsible to cease the conduct constituting the infringement. 32

  At least twice the amount of the profits gained or losses avoided because of the infringement, where those can be determined. 33

  In the case of a natural person, maximum administrative pecuniary sanctions shall be of at least EUR 700,000. 34

  In the case of a legal person, maximum administrative pecuniary sanctions shall be of at least EUR 5,000,000, or 3 per cent of the total annual turnover of the individual or, where existing, consolidated accounts. 35

  ECJ, C-410/13, Baltlanta, 3 September 2014, para. 64; C‑322/88, Grimaldi, 13 December 1989, para. 18; C‑207/01, Altair Chimica, 11 September 2003, para. 41. 36

  See e.g. Carmine di Noia and Matteo Gargantini, ‘Issuers at Midstream. Disclosure of Multistage Events in the Current and in the Proposed EU Market Abuse Regime’, European Company and Financial Law Review (2012) 9, 484, 488–9. 37

  An interesting case recently occurred in Italy which may shed light on the powerful incentive case law may exert on NCAs and their employees. In July 1983, the Italian Financial Conduct Authority (Consob) approved a prospectus for a public offering of shares that, as subsequently emerged, contained some false information. After complex procedural developments that lasted for years, the Court of Cassation paved the way to supervisory liability in case of gross negligence (Court of Cassation, 3 March 2001, 3132). On the basis of this interpretation, the Court of Appeal of Milan deemed the late chairman of Consob and two civil servants to be personally liable for damages towards the investors on the basis of gross negligence (Milan Court of Appeal, 21 October 2003, 127 Il Foro Italiano 583 (2004)). In May 2016, the decision was upheld by the Court of Cassation and became res judicata against the heir of the chairman and the two civil servants (Court of Cassation, Section I

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Civ., 23418, 18 May 2016). See also Paolo Giudici, Chapter 22 ‘Italy’, this volume, section V ‘Persons Liable for Misleading Prospectus Information’ (para. 22. 16). 38

  European Commission, ‘Proposal for a Regulation of the European Parliament and of the Council’, COM(2017) 536 final, Brussels, 20 September 2017, 7–8 (European Union, Proposal for Regulation of European Parliament) (ESMA peer review efforts highlighted divergent practices among Member States in prospectus approval). 39

  For an analysis, see Robert ten Have, Chapter 12 ‘The Summary and Risk Factors’, this volume. 40

  See n. 4 above and accompanying text.

41

  For currencies other than the euro, a criterion of equivalence applies.

42

  Dirk van Gerven, ‘The General Provisions of Community Law relating to the Prospectus to be Published When Securities Are Offered to the Public or Admitted to Trading’, in: Dirk van Gerven, (ed.), Prospectus for the Public Offering of Securities in Europe (Cambridge: CUP, 2008), 27–8 ff. 43

  Only some plain vanilla derivatives fall into the scope of application of the Prospectus Regulation. These are securities giving the right to acquire or sell bonds and shares or determining a cash settlement based on transferable securities, currencies, interest rates or yields, commodities, or other indices or measures (Art. 4(1)(44), Directive 2014/65/EU (MiFID II). 44

  No such principle underlies the regime for non-equity securities above the EUR 1,000 threshold (ii). For this reason, this regime applies to both European and non-European issuers, with no distinction (see immediately below, in the text). 45

  This regime is defined by reference to Article 2(1)(i)(iii), Directive 2004/109/EC (Transparency Directive). 46

  Similarly, the conflict-of-law regime of the Transparency Directive links the NCA and the applicable substantive law for equity securities to the issuer’s registered office (Art. 2(1)(i)). Governance practices are disclosed in the annual financial report under Article 4, Transparency Directive and Article 20, Directive 2013/34/EU on annual financial statements (also applicable to listed companies: European Commission, ‘Comments concerning Certain Articles of the Regulation (EC) 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards and the Fourth Council Directive 78/660/EEC of 25 July 1978 and the Seventh Council Directive 83/349/ EEC of 13 June 1983 on Accounting’, Brussels, November 2003, 10. 47

  Information on compliance with the main principles of the Code and a statement of compliance or an explanation for non-compliance of other principles is included in the annual financial report (UK Listing Rules 9.8.7R and 9.8.6R(5) and (6)). 48

  London Stock Exchange, A Guide to Listing on the London Stock Exchange (London: London Stock Exchange, 2010), 16. 49

  See Luca Enriques and Tobias Tröger, ‘Issuer Choice in Europe’, Cambridge Law Journal (2008) 67, 521, 536–40. 50

  ECJ, C‑378/10, Vale, 12 July 2012.

51

  An oft-mentioned example was the (now liquidated) Germany-based airline Air Belrin, which reincorporated in the UK as a plc through a reverse merger and was later on listed on the Frankfurt stock exchange (see e.g. Simon Deakin, ‘Reflexive Governance and European Company Law’, European Law Journal (2009) 15, 224, 240; Holger Fleischer, ‘A Guide to German Company Law for International Lawyers—Distinctive Features, Particularities, Idiosyncrasies’, in: Holger Fleischer et al. (eds), German and Nordic

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Perspectives on Company Law and Capital Markets Law (Tübingen: Mohr Siebeck, 2015), 11. 52

  This can be inferred in particular from ECJ, C-210/06, Cartesio, paras 99–124 (confirming that Member States whose law applies to a company may determine the connecting factors needed to recognize that company). 53

  An example is aptly mentioned by Enriques and Tröger (n. 49), 536 (referring to the listing on the Milan stock exchange of the Luxembourg-based D’Amico International Shipping SA, a newly incorporated parent company holding a controlling stake in the Italian operating subsidiary). 54

  Once again, this mechanism is mentioned by Enriques and Tröger (n. 49), 538.

55

  ESMA, ‘Q&A on Prospectus Directive’, ESMA31-62-780, 8 April 2019, No. 39 (Qb) (ESMA Q&A Prospectus). 56

  Recital (10) Prospectus Regulation is silent on the qualification of depositary receipts as equity or non-equity securities. Article 2(1)(44), MiFID II groups depositary receipts of shares with shares, and depositary receipts of bonds with bonds. 57

  Enriques and Tröger (n. 49), 539.

58

  Fiat SpA, ‘Information Document Prepared in Accordance with Article 57, Paragraph 1, Letter (d) of Consob Regulation No. 11971 of 14 May 14, 1999, as subsequently amended relating to the Cross-Border Merger of Fiat SpA with and into Fiat Investments NV (to be Renamed “Fiat Chrysler Automobiles N.V.”)’, 11 October 2014, 97–109 (on applicability of Dutch law and supervision to matters including company law, periodic financial reporting, major shareholding disclosure, and takeover bids). 59

  The IPO of Fiat Chrysler Automobiles NV relied on the exemption based on the availability of a merger document containing information recognized as equivalent to that of a prospectus by the NCA (former Art. 4(1)(c) and (2)(d), Prospectus Directive): ibid. (equivalence assessed by Consob). In the Prospectus Regulation, merger documents are no longer subject to ex ante equivalence scrutiny by NCAs (Art. 1(4)(g) and (5)(f), Prospectus Regulation). Fiat Chrysler Automobiles NV is also listed on the New York Stock Exchange (NYSE). 60

  Fiat Chrysler Automobiles NV and Fiat Chrysler Finance Europe SA, EUR 20,000,000,000 Euro Medium Term Note Programme Base Prospectus, 14 March 2018 (approved by the Central Bank of Ireland as NCA). 61

  Ferrari NV, Prospectus for the Admission to Listing and Trading on the Mercato Telematico Azionario Organized and Managed by Borsa Italiana SpA of Common Shares, 3 January 2016 (approved by the Dutch AFM as NCA). Just like Fiat Chrysler Automobiles NV, Ferrari NV is also listed on the New York Stock Exchange (NYSE). 62

  ‘Simultaneously or within a short interval’, to avoid circumventions of the rule (Art. 37, Listing Directive). 63

  For an overview of the implications, see also Enriques and Tröger (n. 49), 529–30; Marcello Bianchi et al, ‘The EU Securities Law Framework for SMEs: Can Firms and Investors Meet?’, in: Colin Mayer et al. (eds), Finance and Investment: The European Case (Oxford: OUP, 2018), 264–6. 64

  This is the rule we labelled as ‘(ii)’ in section VII.

65

  More information on the preparatory work before and after the adoption of the Prospectus Directive in Schammo (n. 3), 328–41.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

66

  Committee on Economic and Monetary Affairs (Rapporteur: Wolf Klinz), ‘Report on the proposal for a directive of the European Parliament and of the Council amending Directives 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading and 2004/109/EC on the harmonization of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market’, COM(2009)0491—C7-0170/2009—2009/0132(COD)) (A7-0102/2010, 26 March 2010, 7. 67

  Committee on Economic and Monetary Affairs (Rapporteur: Phillipe de Backer), ‘Draft Report on the proposal for a regulation of the European Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading ’, COM(2015)0583—C8-0375/2015—2015/0268(COD), 16 March 2016, 9, 31. 68

  ESMA, ‘Securities and Markets Stakeholder Group, Helping Small and Medium Sized Companies Access Funding’, ESMA/2012/SMSG/59, 12 October 2012, 17. 69

  See again Enriques and Tröger (n. 49) for a convincing analysis.

70

  See Carmine Di Noia and Matteo Gargantini, ‘Unleashing the European Securities and Markets Authority: Governance and Accountability after the ECJ Decision on the Short Selling Regulation (Case C-270/12)’, European Business Organization Law Review (2014) 15, 1. 71

  A reasoned and detailed proposal in this sense can be found in Emilios Avgouleas and Guido Ferrarini, ‘A Single Listing Authority and Securities Regulator for the CMU and the Future of ESMA. Costs, Benefits, and Legal Impediments’, in: Danny Busch et al. (eds), Capital Markets Union in Europe (Oxford: OUP, 2018), 55. 72

  ibid., 58–9 and 68.

73

  European Commission (n. 38) (see Art. 9(10)).

74

  See the European Parliament, Legislative Resolution, COM(2018)0646—C8-0409/2018— 2017/0230(COD), 16 April 2019, http://www.europarl.europa.eu/doceo/document/ TA-8-2019-0374_EN.html. The Parliament vote was preceded by a provisional agreement between the Council presidency and the Parliament: see European Parliament, Confirmation of the final compromise text with a view to agreement on the Amended proposal for a Regulation of the European Parliament and of the Council (2017/2030(COD)), 7940/19 ADD 1, COM(2018)0646—C8-0409/2018—2017/0230(COD), Brussels, 29 March 2019, http://data.consilium.europa.eu/doc/document/ST-7940-2019-ADD-1/en/pdf. 75

  The proposal to create an additional European regime that provides a further option for market participants, without replacing the existing national system, is not unprecedented. In the field of crowdfunding, see the European Commission, Proposal for a Regulation of the European Parliament and of the Council on European Crowdfunding Service Providers (ESSP) for Business, Brussels, COM(2018) 113 final, 8 March 2018(European Commission Proposal on Crowdfunding). 76

  To be sure, the European Commission Proposal on Crowdfunding had no better fortune than that on centralization of prospectus approval within ESMA’s reform (n. 38), when it comes to the role of ESMA (see European Commission, Proposal for a Regulation of the European Parliament and of the Council on European Crowdfunding Service Providers (ECSP) for Business, COM(2018)0113—C8-0103/2018—2018/0048(COD), Brussels, 27 March 2019. 77

  See ESMA, Report—EEA Prospectus Activity in 2017, ESMA31-62-111, 15 October 2018, 9–13.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

78

  Our analysis is inevitably approximate, based as it is on the numbers of prospectuses rather than on the total value of the securities they accompany. 79

  On the determinants for the creation of competitive financial centres, see in general Thomas Gehrig, ‘Location of and Competition between Financial Centers’, in: Xavier Freixas et al. (eds), Handbook of European Financial Markets and Institutions (Oxford: OUP, 2008), 619.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Part II The New EU Prospectus Rules, 17 The Prospectus Regime and Brexit Simon Gleeson From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

Subject(s): Prospectus — Securities

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 391) 17  The Prospectus Regime and Brexit I.  Introduction 17.01 II.  Brexit and Listing—The UK Position 17.05 III.  How Will Transition Work? 17.07 IV.  Enacting Transition 17.12 V.  Listing Documents and Prospectuses 17.23 VI.  When is a Prospectus Required? 17.27 VII.  A Security 17.28 VIII.  Public Offer 17.29 IX.  Listing Particulars 17.33 X.  Home Member State 17.36 XI.  Reoffers and Cascades 17.38 XII.  Offer Document Content 17.43 1.  The Summary 17.46 2.  The Base Prospectus 17.48 XIII.  Language 17.52 XIV.  Conclusion 17.53

I.  Introduction 17.01  The EU Prospectus Regulation1 is the latest step in a long chain of pieces of legislation designed to harmonize securities issuances throughout the EU.2 Historically, prospectuses were required by exchanges, and the production of a prospectus was a precondition to listing on an exchange. Each exchange had its own requirements—usually idiosyncratic—and negotiation of the content of the listing document was with the exchange authorities. (p. 392) 17.02  The EU system effectively split this structure. The requirement to establish a listing authority was separated from the function of operating the exchange, and effectively made a regulatory function. However, individual national authorities were permitted to retain their national disclosure requirements. This diversity of requirements was not conducive to mutual recognition of offering documents, and it was eventually realized that only a single, centrally determined set of mandatory content requirements would be sufficient to eliminate national eccentricities, and this was created and implemented in the form of the Prospectus Directive of 2003,3 which was accompanied by a Prospectus Regulation4 which set out in detail what the disclosure elements of a prospectus actually were. In effect, this regulation created a single European set of mandatory content requirements for offer documents, and facilitated a genuinely Europe-wide prospectus regime. 17.03  It is fair to say that the result of the implementation of the Prospective Directive and its accompanying Regulation was probably not what was expected. In the equity markets, relatively little changed—small firms continued to list on their local exchanges, large firms continued to raise equity in the US, and those who experimented with the ability to list on a wide variety of other markets tended to find that the costs of maintaining multiple listings

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

outweighed the benefits. In the debt markets, however, firms increasingly listed through the Luxembourg and Dublin listing authorities, passporting to other exchanges if required. The result of this was an increasing separation between the place where the securities were admitted to listing and the place where they were actually traded. In general, listing remained concentrated in the major European centres, whereas trading increasingly occurred in London. 17.04  It is reasonably well known that although admission to listing is a mechanism which permits public offering of securities, many of the securities (particularly debt securities) which are admitted to listing are in fact never offered to the public, but instead are privately placed with a relatively small number of investment institutions. For such offerings, the fact of listing is primarily a third-party ‘kitemark’ for the offering document. This means that there are a number of discontinuities within the system which make analysis of the cross-border impact of Brexit that much more challenging. In particular, we are likely to see the spectacle of offer documents submitted for approval for a process which permits their public offering within the EU, where the common intention of all concerned is that the securities will be privately placed outside the EU.

(p. 393) II.  Brexit and Listing—The UK Position 17.05  There are three relevant pieces of UK legislation as regards Brexit. The first of these, the European Union (Notification of Withdrawal) Act 2017, allowed the UK Government to trigger Article 50 of the Treaty on European Union and start the formal process of withdrawal from the EU. The second, The European Union (Withdrawal) Act 2018, prepares the UK’s statute book for Brexit by incorporating the acquis of EU law into domestic law. The third, the Withdrawal Agreement (Implementation) Bill (the WAIB), will implement the provisions of the withdrawal agreement into UK law. 17.06  The EU and the UK hope to reach an agreement under Article 50 on the terms of the UK’s withdrawal from the EU. The Withdrawal Agreement will provide protections for the rights of EU citizens currently resident in the UK, and vice versa, detail the UK’s financial settlement with the EU, and will set out a backstop mechanism to prevent a hard border between the Republic of Ireland and Northern Ireland. It will also provide for a transition (or implementation) period lasting until the end of 2020, during which, for most purposes, EU law will continue to apply in the UK and in the EU as if the UK were still a Member State. It is this arrangement which the WAIB is required to implement.

III.  How Will Transition Work? 17.07  In March 2018, the EU and the UK agreed on text to be included in the Withdrawal Agreement governing the transition (or implementation) period from the UK’s withdrawal to the end of 2020. This aims to ensure that individuals and businesses can continue to rely on single market rules and other EU law during this period in much the same way as today. Under this text, during the transition period EU law ‘shall be applicable to and in the United Kingdom’ and ‘shall produce in respect of and in the United Kingdom the same legal effects as those which it produces within the [EU]’. Any reference to Member States in EU law, ‘including as implemented and applied by Member States, shall be understood as including the United Kingdom’. 17.08  For these purposes, references to EU law include the EU treaties and all EU legislation, including legislation adopted and coming into effect during the transition period, with only limited exceptions. The UK will cease to have institutional or voting rights in the EU during the transition period.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

17.09  Applicable EU law will be interpreted and applied in the same way as within the EU and the European Court of Justice (ECJ) will have jurisdiction, as it does today. 17.10  The UK will continue to be bound by the EU’s obligations under its international agreements during the transition. The EU will notify other parties that the UK is to be treated as a Member State during the period. The UK may negotiate its own trade agreements (p. 394) during the transition period, but they cannot take effect until the end of the period without EU approval. 17.11  Before UK ratification of the Withdrawal Agreement, there will also be a scrutiny process under the Constitutional Reform and Governance Act 2010. The Government will lay the agreement before both Houses of Parliament for a period of twenty-one sitting days and may only proceed to ratification if neither House has resolved that the agreement should not be ratified (though the Commons can override the Lords). After the Withdrawal Agreement Bill has been enacted and the process under the 2010 Act is completed, the Government can ratify the Withdrawal Agreement, bringing into force the transition period.

IV.  Enacting Transition 17.12  The UK has what is known as a ‘dualist’ system of public international law. Under a dualist system, the state may enter into international treaties, but these treaties only take effect as a matter of domestic law if they are adopted by the national legislature. Consequently, although the UK may have left the EU through the operation of Article 50 of the EU treaty, this will only take effect as a matter of domestic UK law once the Article 50 settlement has been enacted into domestic law by parliament. Consequently, although the UK government has served the Article 50 notice, the question of when EU law ceases to have effect in the UK is determined by UK domestic legislation. The relevant UK legislation is the European Union (Withdrawal) Act 2018, enacted after considerable parliamentary gymnastics in June 2018. This Act repeals the UK act which renders EU law effective in the UK (the European Communities Act 1972) as of the defined ‘exit date’. This was specified in the original Act as 29 March 2019. This has been altered twice, and the exit date as at the time of writing is specified as 31 January 2020. On the exit date, EU law will cease to apply to the UK. 17.13  The question, of course, is as to what happens next. What is currently proposed is that there should be a transition period extending from 31 January 2020 to a date currently expected to be 31 December 20202. During this period the UK will undertake to apply EU law, including new EU legislation, and to recognize the jurisdiction of the Court of Justice of the EU, as if the UK were still a member of the bloc. 17.14  The mechanism for achieving this will be a Withdrawal Agreement Act (currently a bill), which ‘will amend the EU (Withdrawal) Act 2018 so that the effect of the ECA is saved for the time-limited implementation period.’ The Bill will modify the saved provisions of the ECA, so that the UK’s obligations to apply EU law are determined by the Withdrawal Agreement, rather than as a Member State. It will also allow for changes to UK laws during the transition period to reflect the fact that the UK is no longer a Member State (e.g. to read references to Member States as references to Member States and the UK). (p. 395) 17.15  The message from the UK Government is that nothing will change during the transition period. Individuals and businesses will continue to be able to rely on EU law as they did when the UK was a member of the EU. 17.16  But this is contingent on the UK and the EU concluding the Withdrawal Agreement. Until the Withdrawal Agreement is in place, the Government will continue to plan for a ‘no-

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

deal’ scenario by using the powers under the EU (Withdrawal) Act to prepare the UK’s statute book for the UK’s exit from the EU. 17.17  That Act gives the Government wide-ranging powers to remedy deficiencies in UK law arising from the UK’s withdrawal from the EU, where provisions are no longer workable given the UK’s new status outside the EU. The Government has already begun the process of publishing statutory instruments amending the UK statute book and conferring powers on UK regulators to amend their own rulebooks as necessary. These are drafted on the assumption that there is no transition period and the resulting changes to UK law largely take effect on ‘exit day’. 17.18  The Withdrawal Agreement Bill will therefore amend the EU (Withdrawal) Act so that the ‘onshoring’ of EU law into UK domestic law takes place at the end of the transition period (instead of ‘exit day’). It will also allow the Government to correct deficiencies in UK law arising from the transition period coming to an end, as well as those arising from withdrawal itself. 17.19  The EU (Withdrawal) Act includes a sunset clause so that the Government’s powers to amend the UK statute book expire on 29 March 2021. This would only give three months to correct deficiencies that become apparent after the end of the transition period, and the Withdrawal Agreement Bill will therefore extend these powers until the end of 2022. This may be controversial, given Parliament’s reluctance to agree these wide-ranging powers in the first place, and Parliament may seek further oversight or control of these measures. 17.20  Thus, the structure of English law post-Brexit will simply reflect the fact that the EU regulations in place at the time of Brexit will be retained as UK domestic law. The result of this will be the adoption of EU regulations into UK law. Thus, for example, the Markets in Financial Instruments Regulation (MiFIR) will be adopted as a UK law (MiFIR(UK)), subject to such changes as may be necessary—thus, for example, discretions which under MiFIR are exercisable by ESMA will be exercisable under MiFIR(UK) by the Financial Conduct Authority (FCA). Directives, of course, do not need to be adopted in this way, since they should already be implemented into national law. During the transition period, retained UK law will march in step with EU law. However, thereafter the UK and the EU may well amend their laws in different directions. 17.21  The relevant amendments to UK law and retained EU regulations are made by the Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019. These amend those parts of the Financial Services and Markets Act (FSMA) 2000 which implement the Prospectus and Listing Directives. Perhaps (p. 396) surprisingly, these do not make the relevant amendments to the Prospectus Regulation. This is because the Prospectus Regulation is currently ‘in force’ but not ‘in effect’ (Art. 49, Prospectus Regulation)—in July 2017 the Prospectus Regulation came into force, and certain provisions have applied since July 2017 and July 2018, with the remainder of the legislation applying from July 2019. The EU (Withdrawal) Act will only convert EU legislation into UK law that is in force and applies immediately before exit day. Thus, the Prospectus Regulation will be amended at some point between exit day and the day when it commences (21 July 2019).These measures will be introduced under the Financial Services (Implementation of Legislation) Act 2019, which gives the UK authorities the power to introduce and amend EU legislation which comes into effect after exit day but which was ‘in flight’ (i.e. had been formally proposed by the Commission) prior to exit day. 17.22  The key to Brexit in this regard is that from an English law perspective the EU will be treated like any other third country. Thus, for example, the UK rules which permit third-

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

country prospectuses to be approved as a UK prospectus5 will apply equally to EU and nonEU prospectuses.

V.  Listing Documents and Prospectuses 17.23  It is also worth noting at this point the difference between a listing document (sometimes referred to as listing particulars) and a prospectus. A prospectus is the document which is required when securities are offered to the public. A listing document is the document which is required when securities are admitted to listing. Usually the two coincide—thus, where an offeror offers new securities to the public and seeks a listing for those securities, the offering document performs both functions. However, there are cases where new securities can be created without being the subject of a public offer (e.g. where shares are issued to employees under an employee share scheme), and in these cases the document to be prepared functions as a listing document but not as a prospectus.6 Conversely, there are situations where securities are offered to the public without being admitted to listing, and in such cases the document is a prospectus but not a listing document. 17.24  The reason this matters is that both documents are mandatory. It is prohibited to offer securities to the public without preparing a prospectus and having it approved by a relevant competent authority,7 and no securities may be admitted to listing on an EUrecognized investment exchange without a listing document having been approved in the same way.8 (p. 397) 17.25  Thus, there are two functions which are performed by an offering document. One is that securities can only be publicly offered in the EU if an appropriate document is approved by a regulatory authority. The other is that an offering document may be required when new securities are admitted to trading on a regulated securities market. These two functions are independent—it is perfectly possible to offer securities to the public without having them admitted to trading in any regulated exchange, and equally possible to create new securities and admit them to listing without offering them to the public (a bonus share issue by a listed company is an example of this). Technically, a document which permits offer to the public constitutes a prospectus, and a document which relates solely to admission to listing constitutes listing particulars. However, it should be noted that only a security which has been the subject of a prospectus offer may be admitted to trading on a Markets in Financial Instruments Directive9 (MiFID)-recognized exchange. Regulated market for this purpose has the meaning given to it in Article 4(1)(21), MiFID, where it is used in contradistinction to multilateral trading facilities (MTFs). 17.26  This distinction becomes important in the context of Brexit. It is very common for securities listed on EU markets to be placed with UK-based investors (or, more accurately, with investors whose assets are managed in the UK). If (for example) a French issuer wished to list in France and offer in the UK, prior to Brexit a single document would have done both jobs. However, in the post-Brexit world, such an offer would require the French listing document to be filed with the UK authorities as a UK prospectus in order to permit a public offer of securities in the UK. Possibly more importantly, a French offer done under a French programme would require either for there to be a pre-existing UK programme, or for a separate UK document containing both programme and termsheet documents to be created—a task which would obviate the speed advantages obtained by the creation of a programme document in the first place. Since there is currently insufficient liquidity in the EU27 to accommodate such offers, this may result in a reconsideration by issuers of the location of their listings. In this regard, it is important to note that when the UK leaves the

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

EU, there will be no difficulty in managing parallel documents submitted to both UK and EU authorities.

VI.  When is a Prospectus Required? 17.27  One of the more interesting issues surrounding prospectus regulation is the question of which securities require a prospectus to be created in the first place, and when. In broad terms, prospectus requirements apply when a security is offered to the public. This raises three preliminary issues; ‘What is an “offer to the public”?’, ‘What is a “security”?’, and ‘When is one “offered to the public”?’.

(p. 398) VII.  A Security 17.28  A ‘security’ for this purpose means anything which falls within the MiFID definition of transferrable securities and is not a money market instrument (broadly an instrument with a maturity of less than twelve months). However, there is a number of instruments which would conventionally be classed as a security but which are excluded from this definition. The most significant of these is units in collective investment schemes—these are broadly covered by the Undertakings for the Collective Investment in Transferable Securities (UCITS) directive or the Alternative Investment Fund Managers Directive (AIFMD)—and government securities (including government-guaranteed securities and securities issued by regional or local authorities). It is also worth mentioning that the requirement only bites if the security is transferrable. In the UK post-Brexit, this position will remain unchanged, since the transposed Prospectus Regulation will continue to refer to the transposed MiFIR regulation.

VIII.  Public Offer 17.29  The definition of ‘offer to the public’ in EU law is particularly confused. As it stands, it reads ‘a communication to persons in any form and by any means, presenting sufficient information on the terms of the offer and the securities to be offered, so as to enable an investor to decide to purchase or subscribe for those securities’. This definition is a logical nonsense, since it implies that if an offeror deliberately presents investors with a document which is sufficiently lacking in information or does not contain the relevant information, then it will not constitute a prospectus at all, and those preparing it will therefore escape prospectus liability. This definition also applies to the placing of securities through financial intermediaries, which in turn may escape liability of they are insufficiently informative. 17.30  What makes an offer a ‘public’ offer is set out in legislation. There is a de minimis level of offering—EUR 1m in any twelve-month period—below which no prospectus is required (although Member States may regulate such offers in other ways). Member states are also permitted to derogate from the Prospectus Regulation by exempting offers where the total amount of the offer is less than EUR 8m.10 However, the key distinction here is between ‘public’ and ‘private’. A private offer for this purpose is one which is made: –  by a European Economic Area (EEA) Member State; –  to fewer than 150 people per EEA state; (p. 399) –  to an audience composed solely of ‘qualified investors’. For this purpose, qualified investor means (broadly) professional clients and market counterparties as defined under MiFID; 11 –  in denominations of at least EUR 100,000;

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

–  to existing holders of securities issued by the same issuer—this includes substitution issues, share dividends, takeover offers, and shares offered in connection with a merger or division; –  to employees of the issuer. 17.31  The effect of the UK leaving the EU is that the UK test will no longer consider offerings outside the UK in determining whether an offer is a public offer for UK law purposes. Thus (for example) an offer to 149 people in the UK will not be a public offer in the UK, no matter how many other offerees there may be in the EEA. 17.32  One of the more interesting aspects of the new UK regime is that the UK has extended the exemption afforded by the Prospectus Regulation to EEA Member State offerors to sovereign states generally. This means that non-EEA Member States such as Australia and New Zealand, who previously were required to publish a Prospectus Directive-compliant prospectus in order to obtain a London listing, will now no longer be required to do so.12 The basis for this is reasonably straightforward—the argument that states produce sufficient public information about their own affairs that it is supererogatory to require them to produce a prospectus is clearly as true of non-EEA states as it is of EEA states.

IX.  Listing Particulars 17.33  Finally, going back to the function of a prospectus as a listing document, there are certain situations in which securities are permitted to be admitted to listing on a regulated market without a prospectus being required. These exceptions are, by definition, only relevant where the securities concerned have been privately placed—if they had been publicly offered, then a prospectus would have been required in any event. They are: –  an increase of up to 20 per cent in the number of already listed securities in any twelve-month period, whether arising from new issuance, exchange, the exercise of conversion rights, employee share option schemes, or a write-down of existing (p. 400) bank-issued instruments as part of a resolution under the Bank Recovery and Resolution Directive (BRRD); –  shares issued as part of a takeover offer, merger, or division; –  shares received pursuant to an in specie dividend; –  securities which have been admitted to another EU-regulated market for a period of eighteen months or more and were initially the subject of a prospectus offer. If this approach is taken, a summary (but not a prospectus) must be published at the time of the new offering, directing holders to the most recent prospectus published. Technically, the UK listing authorities will be permitted to deal with such cases in any way that they wish after Brexit. 17.34  It should be noted that it is possible to ‘opt in’ to the prospectus regime even where one of these exemptions applies. If an issuer opts into the prospectus regime, the resulting document creates the same legal rights and obligations as if it were required.13 17.35  Equity securities means shares and any instrument which permits the holder to acquire equity securities either through conversion or through exercise of rights. However, in the latter case only instruments issued by the same issuer are caught—thus, an equity warrant issued by a company (or a member of its group) entitling the holder to acquire shares is ‘equity’ for this purpose, but a warrant issued by a third party is not.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

X.  Home Member State 17.36  The ‘home Member State’ under the Prospectus Regulation is the state where a particular issuer’s offering documents should be submitted unless an exemption applies. For EU equity issuers, the home Member State is simply the state where the issuer has its registered office. For non-equity issuers, however, provided that the denomination is over EUR 1,000 (or equivalent in other currencies), the home Member State may be (i) the Member State where the issuer has its registered office; (ii) the Member State where the public offer was made; (iii) the Member State where the securities concerned are to be admitted to trading on a regulated market, at the election of the issuer. Non-EU issuers are also allocated a ‘home’ Member State; for them, this is the state where securities are intended to be offered to the public for the first time or where the regulated market on which the application for listing is made is located. 17.37  The departure of the UK means that any issuer whose home Member State is the UK will simply lose that designation. It must therefore select a new home Member State from among the EU states. However, this choice is not unconstrained—it may only select from among those states in which it has either made an offer or applied for admission (p. 401) after the withdrawal date, or those states in which it has securities admitted to listing before the withdrawal date and those securities remain listed after the withdrawal date. For an EU issuer who satisfies neither of these criteria, the first EU application which it makes after the withdrawal date will determine its home Member State. An issuer incorporated in the UK, or who has elected for the UK to be its home Member State, has three months after the withdrawal date to notify ESMA of its choice of a new EU home Member State.14

XI.  Reoffers and Cascades 17.38  One of the more complex issues which arises as regards publicly offered or listed securities is as to what the position should be if they are made the subject of a subsequent offer. This could happen if, for example, a corporation which had acquired a significant minority stake in a listed company by buying shares on exchange decided to reverse its strategy and sell the shares it had acquired. Should the resulting public offering be the subject of a prospectus requirement? The Prospectus Regulation is clear that it should —‘Any subsequent resale of securities which were previously the subject of [a prospectus offer] shall be considered as a separate offer.’15 This appears to be a nonsense—if securities are offered to underwriters, who in turn sell them to brokers, who sell them to endinvestors, it would seem a bit odd to require three different prospectuses for what is effectively the same transaction. In practice, this problem is avoided by the use of the provision set out in the last few words of Article 5(1), by which such multi-stage offers can be conducted under the umbrella of a single prospectus provided that the person responsible for the prospectus ‘consents to its use by means of a written agreement’. In practice, this is dealt with by including such consent in the terms of the prospectus itself. 17.39  This definition was adopted against the wishes of the UK, which took the view that the provisions in the previous version of the Prospectus Directive (to the effect that once securities had been the subject of a prospectus offer, no further prospectus was needed for any subsequent offer) were the correct policy approach. However, it seems likely that this definition will be retained by the UK for the immediate future. 17.40  This raises the interesting question as to what should happen if a public offer made in the EU is distributed by distributors in the UK, and vice versa. In theory, this should require the document to be double-recognized by both sets of competent authorities, since

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

a UK distributor will not be able to claim that an EU document satisfies the UK requirements, and vice versa. (p. 402) 17.41  In practice, most offers of debt securities are in practice made only to qualified investors in order to ensure that the prospectus requirement is not triggered. This does, however, lead to a further question—what if the qualified investors subsequently onsell the securities? Ordinarily, the test that would be applied would be applied at the level of each individual on-sale. However, where the qualified investors concerned are financial intermediaries, and the securities are placed with those financial intermediaries for the purpose of on-sale, the entire offering is treated as a single placing. However, the intermediaries are relieved from the necessity of preparing a prospectus themselves, provided that a prospectus has been drawn up and the person responsible for the prospectus consents to its use for this purpose. 17.42  However, in this regard it should be noted that it is only admission to the main list of a recognized exchange which is presumed to be a public offer. The mere admission of securities to an MTF, or the publication of bid and offer prices for the securities by (for example) a systematic internalizer does not automatically constitute an offer of securities to the public,16 and therefore does not automatically trigger a prospectus requirement. Thus, if securities which are offered in the EU are admitted to trading to an MTF in London, that admission will not trigger a prospectus requirement in the UK.17

XII.  Offer Document Content 17.43  It is always difficult to determine what should be in a prospectus—the overriding obligation to include ‘all such information as investors and their professional advisors would reasonably require, and reasonably expect to find there’18 gives an extraordinarily wide discretion to listing authorities to require disclosure. However, it is important to note that this requirement may be fact-specific, but may not be generic—the UK has retained the requirement that the FCA, acting as listing authority, may not require a prospectus to contain information which is not included in Annexes I–XVII or XX–XXX of the Prospectus Regulation.19 17.44  The most important part of the content requirements of any prospectus is the financial accounts presented therein. The EU currently has its own rules both as to the format of accounts20 and as to accounting standards21—the latter are based on, but not identical to, International Financial Reporting Standards (IFRS). The UK will, on exit from the EU, adopt what it describes as UK accounting standards. (p. 403) 17.45  For UK offerings, the UK will cease to refer to EU accounting standards, and will refer to ‘UK-adopted Accounting Standards’, defined as those standards recognised under s. 474(1) of the Companies Act 2006. Again, immediately upon Brexit, these standards will reflect the EU standards. However, if the EU decides to diverge from IFRS on any particular point in the future, it is likely that the UK will follow the IFRS rather than the EU standard.

1.  The Summary 17.46  The Summary is the newest and most controversial part of the offer process. The summary is required to be a short document (no longer than seven sides in printed form), to be ‘written in a concise manner’22 in language which is ‘clear, non-technical, concise and comprehensible for investors’.23 However, it is also required to provide all of the ‘key information that investors need in order to understand the nature and the risks of the issuer, the guarantor and the securities that are being offered or admitted to trading’.24 Given that the section of the Regulation which sets out the headings for this document (Arts 7(4)–(13)) runs to nearly 2,000 words, the scale of the challenge presented by this requirement can be clearly seen. Where a product is subject to PRIIPs,25 the issuer may choose (or the relevant home authority may demand) that the content of the key From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

information document (KID) required by the regulation be substituted for part of the required content of the summary.26 17.47  Again, for the time being the UK will retain the PRIIPs requirements. However, the UK’s dissatisfaction with PRIIPs is well known, and it is not clear that an EU issuer with a PRIIPs-compliant document will necessarily be able to simply use that document in place of a summary in a UK prospectus.

2.  The Base Prospectus 17.48  There are two forms here—base prospectus plus final terms, to be used or debt securities and warrants, and base prospectus plus securities note, to be used for equities. 17.49  The aim of this legislation, when initially enacted, was to replicate the practice which had grown up in the bond markets27 of programme issuance. In a programme issuance, (p. 404) the issuer prepares a programme document which contains details of both the issuer and the general terms of the securities which the issuer may wish to issue under the programme. The programme document was intended to be updated whenever new information became available (and once a year in any event), and to be approved by the authorities on these occasions. This meant that for an actual issue, the only document which required to be created was a short one- or two-page pricing supplement identifying the type of security to be issued and the specific numerical characteristics (term, yield, etc) required. It is fair to say that the attempt was a spectacular failure. This is primarily because the authorities took the view that the pricing supplement should contain sufficient information to be capable of being read in isolation, and inflated its content requirements to the extent that it became almost a fully fledged offer document in its own right. The only vestige of the original concept left in the regulatory system is that listing authorities generally take slightly less time to approve a securities note in relation to an existing base prospectus than it would to approve an entirely new prospectus in respect of such securities. 17.50  Base prospectuses may only be prepared in respect of debt issues,28 although they may be prepared in respect of ‘warrants in any form’. For a base prospectus offering, the base prospectus may contain a form of final terms, setting out all the available options applicable for individual issues under the document. 17.51  The relevance of this as regards Brexit is the relatively straightforward one that for prospectuses passported into the UK before ‘exit day’, the Regulations provide that such prospectuses will be deemed to have been approved by the UK’s FCA on the same date as they were approved by the relevant European competent authority. In this way, any prospectus passported into the UK before ‘exit day’ will be grandfathered for use in the UK until its validity expires. More importantly, any supplements relating to a passported prospectus or drawdown prospectus thereunder to be published after ‘exit day’ will need to be approved by both the competent authority of the relevant EU27 home Member State (which originally approved the prospectus) and by the FCA; and any final terms issued under such passported prospectus after ‘exit day’ will need to be filed and published not only with the competent authority of the home Member State but also with the FCA.

XIII.  Language 17.52  One of the most difficult issues for the European capital markets is the issue of language. A Member State could well argue that investors in its jurisdiction would be at a disadvantage if the prospectus were not available in their language, and that it should not be possible to use a prospectus to distribute securities in a country unless the prospectus (p. 405) had been translated into the language of that country. However, as the Prospectus Regulation observes, ‘The obligation for an issuer to translate the entire prospectus into all the relevant official languages discourages cross-border offers or multiple trading.’29 This issue was dealt with in the Prospectus Directive30 through Article 19, which provides that From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

where an offer is made (or admission to listing is sought) only in one Member State, then the authorities in that Member State should determine the language to be used, but that where an offer is made in more than one Member State, then the offer may be made in ‘a language customary in the sphere of international finance’ (i.e. English), but that the competent authority in any Member State might require that the summary is translated into its official language.31 Consequently, Member State authorities are only permitted to require that the summary is translated into their home language. Some states do impose this requirement, but many do not.32

XIV.  Conclusion 17.53  Post-Brexit, it will no longer be possible to use a UK prospectus for distribution of securities in the EU. However, since the majorities of securities offered on the UK markets are in fact sold to UK or international (non-EU) investors, it is difficult to know whether the consequence of this will be an increase in EU prospectus offerings (in order to maximize the potential investor base) or a decrease (on the basis that the incremental cost of increasing the investor base by 10 per cent or so by incurring the costs of filing an EU prospectus may be uneconomic). In reality, the point is that there is a relatively well-established prospectus orthodoxy in the international securities markets, and as long as the EU regime remains closely aligned with that international orthodoxy, it is likely that the incremental cost of adding an EU limb to a global offering will remain acceptable. However, if EU disclosure standards diverge from international standards, the issue will become more acute, and issuers may find themselves having to choose between a domestic EU offering and an international offering.(p. 406)

Footnotes: 1 

Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 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, [2017] OJ L168/12 (Prospectus Regulation). 2

  This process has been ongoing for a long time. The first European measure in this regard was the Council Directive 79/279/EEC of 5 March 1979 coordinating the conditions for the admission of securities to official stock exchange listing. This was followed by the Council Directive 80/390/EEC of 17 March 1980 coordinating the requirements for the drawing up, scrutiny, and distribution of the listing particulars to be published for the admission of securities to official stock exchange listing, the Council Directive 82/121/EEC of 15 February 1982 on information to be published on a regular basis by companies the shares of which have been admitted to official stock-exchange listing, and Council Directive 88/627/ EEC of 12 December 1988 on the information to be published when a major holding in a listed company is acquired or disposed of. These measures had some coordinating effect, but were broadly unsuccessful in breaking down barriers to cross-listing. The first real progress in this area was the Directive 2001/34/EC of the European Parliament and of the Council of 28 May 2001 on the admission of securities to official stock exchange listing and on information to be published on those securities (Listing Directive) and the Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading (Prospectus Directive). 3 

The Prospectus Directive was the twin of the Directive/34/EC on the admission of securities to official stock exchange listing and on information to be published on those securities.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

4

  Commission regulation 809/2004/EC as regards information contained in prospectuses as well as the format, incorporation by reference and publication of such prospectuses and dissemination of advertisements. 5

  Made under s 84(6), Financial Service and Markets Act (FSMA) 2000.

6

  In such cases, the shares concerned are required to be admitted to listing—Article 64, Listing Directive. 7

  Article 3(1), Prospectus Regulation.

8

  Article 5, Listing Directive.

9

  Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU Text with EEA relevance. 10

  Article 3(2), Prospectus Regulation.

11

  Strictly: persons or entities that are listed in points (1) to (4) of Section I of Annex II to [MiFID], and persons or entities who are, on request, treated as professional clients in accordance with Section II of that Annex, or recognised as eligible counterparties in accordance with Article 30 of [MiFID] unless they have entered into an agreement to be treated as non-professional clients in accordance with the fourth paragraph of Section I of that Annex.

12

  Article 2.23, Prospectus Regulation (UK).

13

  Article 4, Prospectus Regulation.

14

  See ESMA, ‘The European Securities and Markets Authority (ESMA) has issued today three Questions and Answers (Q&As) regarding the Prospectus Directive (PD) and the Transparency Directive (TD)’, 31 January 2019. 15

  Article 5(1), Prospectus Regulation.

16

  Recital (14), Prospectus Regulation.

17

  Section 102B (5)(b), FSMA.

18

  Section 80, FSMA.

19

  Article 3, Prospectus Regulation (UK).

20

  Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings. 21

  Regulation (EC) 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards. 22

  Article 7(3), Prospectus Regulation.

23

  Article 7(3)(b), Prospectus Regulation.

24

  Article (7)(1), Prospectus Regulation.

25

  Regulation (EU) 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs).

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

26

  Article 7(7) first unlettered paragraph, Prospectus Regulation (i.e. immediately after article 7(7)(d)—the logic of paragraph numbering in EU legislation remains an unexplored wilderness). 27

  Even for investment funds who issued listed shares (misleadingly known in the UK as ‘Investment trusts’), the use of programme documents for equity issuance, although permitted, very rarely occurred. 28

  Article 8(1), Prospectus Regulation.

29

  Recital (68), Prospectus Regulation.

30

  Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading. 31

  It should be noted that English will remain the official language of both Ireland and Malta after the UK’s departure, so English will remain an EU language. 32

  For a complete review of language requirements, see ESMA, Information Note ‘Languages accepted for the purpose of the scrutiny of the Prospectus and requirements of translation of the Summary’, ESMA/2014/342, 31 March 2014.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Part III Prospectus Liability and Litigation, 18 The Influence of the EU Prospectus Rules on Private Law Danny Busch From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

Subject(s): Prospectus liability

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 409) 18  The Influence of the EU Prospectus Rules on Private Law I.  Introduction 18.01 II.  Prospectus Regulation and Civil Liability 18.03 1.  Liability of the Persons Responsible for the Prospectus 18.03 2.  Liability for the Summary 18.15 III.  Information Obligations under the EU Prospectus Rules 18.18 1.  The Basic Principle 18.18 2.  Elaboration of the Basic Principle 18.22 3.  Risk Factors 18.24 4.  Summary 18.25 IV.  Unlawfulness and Imputability 18.28 1.  May Civil Courts be More Flexible than the EU Prospectus Rules? 18.28 2.  May Civil Courts be Stricter than the EU Prospectus Rules? 18.42 V.  The Influence of the EU Prospectus Rules on the Relativity Requirement 18.68 VI.  The Influence of the EU Prospectus Rules on the Proof of Causal Link 18.71 VII.  The Influence of the EU Prospectus Rules on Determination of the Extent of the Loss or Damage 18.76 VIII.  The Influence of the EU Prospectus Rules on a Limitation or Exclusion of Liability 18.80 IX.  Assessment by National Courts of their own Motion of Compliance with the EU Prospectus Rules in Cases Involving Private Investors 18.81 X.  The EU Prospectus Rules and Liability of Financial Regulators 18.83 1.  Assessment by the Regulator 18.83 2.  Italy 18.85 3.  Nikolay Kantarev v Balgarska Narodna Banka 18.86 4.  Article 20(9) Prospectus Regulation 18.87 XI.  Conclusion 18.89

I.  Introduction 18.01  The information document (prospectus) that must be published before securities are offered to the public is intended to provide interested investors with the information they need to decide whether or not to purchase them. Once the prospectus has been approved by the competent financial regulator, it serves as a European passport. In other words, the securities to which the offer relates may be offered to the public on the basis of the approved prospectus throughout the EU/European Economic Area (EEA).1

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 410) 18.02  The Prospectus Directive2 was replaced by the Prospectus Regulation, which is directly applicable in all Member States, with effect from 21 July 2019. Like its predecessor, the Prospectus Regulation is primarily regarded as an instrument of EU financial supervision law. In other words, under the Prospectus Regulation the competent financial regulator may enforce information obligations through administrative law in the event of non-compliance, for example by imposing an administrative fine on the issuer. But there is clearly a close link with civil liability law too. This chapter examines the extent to which the civil courts are bound under EU law by the EU prospectus rules when judging issues of liability. The following questions are discussed. (a)  May civil courts be more flexible than the EU prospectus rules? (b)  May civil courts be stricter than the EU prospectus rules? (c)  How do the EU prospectus rules influence the requirement of relativity in the Member States where this is a condition for liability in tort? (d)  How do the EU prospectus rules influence the proof of causal link? (e)  How do the EU prospectus rules influence determination of the extent of the loss or damage? (f)  How do the EU prospectus rules influence a limitation or exclusion of liability? (g)  Should civil courts apply the EU prospectus rules of their own motion? (h)  How do the EU prospectus rules influence the liability of the financial regulator which must approve the prospectus?

II.  Prospectus Regulation and Civil Liability 1.  Liability of the Persons Responsible for the Prospectus (i)  General 18.03  The Prospectus Regulation may be primarily regarded as an instrument of EU financial supervision law, but it also contains rules on civil liability. Article 11(1), Prospectus Regulation provides in this connection as follows: Member States shall ensure that responsibility for the information given in a prospectus, and any supplement thereto, attaches to at least the issuer or its administrative, management or supervisory bodies, the offeror, the person asking for the admission to trading on a regulated market or the guarantor, as the case may be. The persons responsible for the prospectus, and any supplement thereto, shall be clearly identified in the prospectus by their names and functions or, in the case of legal persons, their names and registered offices, as well as declarations by them that, to the best of their knowledge, the information contained in the prospectus is (p. 411) in accordance with the facts and that the prospectus makes no omission likely to affect its import.3 18.04  It is apparent from Article 11(2), first sentence, Prospectus Regulation that it must be possible for the information included in the prospectus to result in liability, in accordance with national law on civil liability: Member States shall ensure that their laws, regulations and administrative provisions on civil liability apply to those persons responsible for the information given in a prospectus.4

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

18.05  In my view, these provisions mean that the situation is as follows.

(ii)  Does responsibility rest with the issuer or with the administrative, supervisory, or management body? 18.06  The Member State may evidently choose whether the party to be held responsible for the information contained in the prospectus is the issuer or the issuer’s administrative, supervisory, or management body. Under national law on liability, the issuer itself is normally held responsible for the content of the prospectus,5 rather than one or more of the bodies of the issuer as listed in the Prospectus Regulation. Besides the issuer, it is usually quite conceivable that directors or, for example, members of the supervisory board of an issuer may be liable, but in such cases a raised liability threshold must usually be met.6

(p. 412) (iii)  Offeror of the securities 18.07  I interpret Article 11(1) and (2), Prospectus Regulation as meaning that a Member State can choose to hold not only the issuer, but also the offeror of the securities responsible and hence potentially liable for the content of the prospectus. If only new shares are issued, the offeror of the securities is naturally the issuer itself. In such cases, it makes no difference whether a Member State provides only for the issuer to be responsible and have potential liability or extends this to the offeror of the securities as well. But often existing securities too (or even existing securities alone) are offered to the public by the current shareholders or major shareholders. In short, if not only the issuer but also the offeror of the securities can be held responsible and hence potentially liable for all or part of the content of the prospectus, the focus will not only be on the issuer itself. Instead, the shareholders or major shareholders who offer their securities to the public may be held responsible and hence also potentially liable for all or part of the content of the prospectus.7

(iv)  Person asking for admission to trading on a regulated market 18.08  Like its predecessor, the Prospectus Regulation distinguishes between (i) an offer of securities to the public; and (ii) an admission to trading on a regulated market.8 These activities can be combined. An example is an initial public offering (IPO). But this need not be the case. A stock exchange listing can also be requested on its own, without being accompanied by the offering of securities to the public. But even then, there is an obligation to publish a prospectus.9 18.09  It goes without saying, therefore, that Article 11(1) and (2), Prospectus Regulation means that a Member State is obliged to designate a party who is responsible and hence potentially liable for the content of the prospectus both where (i) securities are offered to the public; and (ii) there is admission to trading on a regulated market. 18.10  As already apparent, where securities are offered to the public, the Member State must provide that responsibility attaches to the issuer (or to the issuer’s administrative, management, or supervisory bodies), and may also choose, in certain circumstances, to hold the offeror of the securities (not being the issuer) responsible and hence also potentially liable for the content of the prospectus (or possibly only part of the prospectus). (p. 413) 18.11  As regards admission to trading on a regulated market, the Member State must provide that responsibility for the content of the prospectus and hence also potential liability, attaches to the applicant for the admission. The applicant for admission will normally be the issuer itself.

(v)  Guarantor

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

18.12  Finally, I turn to the guarantor. Often a financially strong guarantor is involved, particularly in the case of offers of newly issued bonds to the public (e.g. through a specialpurpose vehicle (SPV)). I interpret Article 11(1) and (2), Prospectus Regulation as meaning that in such cases national law on civil liability may provide that the guarantor, rather than the issuer, is responsible and hence potentially liable for the information contained in the prospectus.10

(vi)  Minimum harmonization 18.13  The use of the phrase ‘at least’ in Article 11(1), Prospectus Regulation makes clear that this is a minimum requirement. Individual Member States may go further by holding other parties involved in the preparation of a prospectus responsible and hence potentially liable for all or part of the content of the prospectus, such as the lead manager (i.e. the bank acting as lead party for the prospectus) and the issuer’s auditor. For example, they may also choose to hold the issuer and the board responsible together and hence potentially jointly and severally liable for the information contained in the prospectus.

(vii)  Provisions of national law governing civil liability 18.14  In some Member States, there are specific statutory provisions governing liability for prospectuses.11 In others, the general provisions of civil liability are applicable in such cases.12 And between these two ‘extremes’, there are also ‘mixed forms’ in which liability for an incorrect or incomplete prospectus is based on a combination of general liability law and special legislation.13 This is immaterial from the (p. 414) perspective of Article 11(2), first sentence, Prospectus Regulation, provided that national civil law makes it possible for the persons responsible for the prospectus to be held liable for an incorrect or incomplete prospectus, within the fairly broad parameters laid down by Article 11(1) and (2), Prospectus Regulation (see sections (i)–(vi) above).

2.  Liability for the Summary 18.15  Civil liability solely for the summary of the prospectus is expressly excluded in Article 11(2), first part of the second sentence, Prospectus Regulation: However, Member States shall ensure that no civil liability shall attach to any person solely on the basis of the summary pursuant to Article 7 or the specific summary of an EU Growth prospectus pursuant to the second subparagraph of Article 15(1), including any translation thereof ( . . . ). 18.16  Nonetheless, the principle that no civil liability attaches to any person on the basis of the summary is subject to two exceptions (Article 11(2), second sentence at (a) and (b)), namely where the summary: (a)  is misleading, inaccurate or inconsistent, when read together with the other parts of the prospectus; or (b)  does not provide, when read together with the other parts of the prospectus, key information in order to aid investors when considering whether to invest in the securities. 14 18.17  It must therefore be possible for the persons responsible for the prospectus to be held liable under civil law on the basis of the summary, read in conjunction with other parts of the prospectus.15

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 415) III.  Information Obligations under the EU Prospectus Rules 1.  The Basic Principle 18.18  The following basic principle governs the information that must be included in a prospectus, according to the Prospectus Regulation (Article 6 (1)): Without prejudice to Article 14(2) [concerning the simplified prospectus that may be published in the case of secondary issuances] and Article 18(1) [under which the competent authority may authorize the omission of certain information from the prospectus], a prospectus shall contain the necessary information which is material to an investor for making an informed assessment of: (a)  the assets and liabilities, profits and losses, financial position, and prospects of the issuer and of any guarantor; (b)  the rights attaching to the securities; and (c)  the reasons for the issuance and its impact on the issuer. That information may vary depending on any of the following: (a)  the nature of the issuer; (b)  the type of securities; (c)  the circumstances of the issuer; (d)  where relevant, whether or not the non-equity securities have a denomination per unit of at least EUR 100 000 or are to be traded only on a regulated market, or a specific segment thereof, to which only qualified investors can have access for the purposes of trading in the securities. 16 18.19  The Prospectus Regulation also sets requirements for the use of language and the manner of presentation. See Article 6(2), Prospectus Regulation: The information in a prospectus shall be written and presented in an easily analysable, concise and comprehensible form, taking into account the factors set out in the second subparagraph of paragraph 1.17 18.20  Although this does not strictly follow from Article 6(1) and (2), Prospectus Regulation, it is apparent from Recital (27), preamble to the Regulation that the application of the rule is influenced by the type of investor to whom the offer is addressed. If the offer is intended solely for qualified (i.e. wholesale) investors, the language used may presumably be rather more specialized than if the securities are being offered solely or partly to retail investors. (p. 416) 18.21  Finally, it is worthwhile noting that it is apparent from Recital (27), preamble to the Prospectus Regulation that a prospectus should not contain information which is not material or specific to the issuer and the securities concerned. This could obscure the information relevant to the investment decision and thus undermine investor protection.

2.  Elaboration of the Basic Principle

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

18.22  The basic principle in Article 6, paragraph 1, Prospectus Regulation has been elaborated in detail in the various Annexes to Delegated Regulation (EU) 2019/980.18 See Article 13(1), first sentence, Prospectus Regulation: Minimum information and format 1. The Commission shall adopt delegated acts in accordance with Article 44 to supplement this Regulation regarding the format of the prospectus, the base prospectus and the final terms, and the schedules defining the specific information to be included in a prospectus, including LEIs [Legal Entity Identifiers] and ISINs [International Securities Identification Numbers], avoiding duplication of information when a prospectus is composed of separate documents.19 18.23  Delegated Regulation (EU) 2019/980 is based on the standards governing financial and non-financial information drawn up by international securities regulators, in particular by the International Organization of Securities Commissions (IOSCO), and on Annexes I, II, and III to the Prospectus Regulation (see Art. 13(3), Prospectus Regulation20). These annexes provide for a detailed structure with headings, which are then elaborated in the various annexes to Delegated Regulation (EU) 2019/980. This distinguishes between various types of issuance (primary/secondary issuances, type of securities, offers to wholesale/retail). To ensure that Delegated Regulation (EU) 2019/980 is applied uniformly as far as possible, the European Securities and Markets Authority (ESMA) draws up guidelines defining and interpreting the information obligations under Delegated Regulation (EU) 2019/980.21

(p. 417) 3.  Risk Factors 18.24  In practice, prospectuses contain so many risk factors that it is hard to identify the most relevant. This market practice is intended to protect issuers and their advisers from civil liability, but is detrimental to investor protection. According to the Prospectus Regulation, risk factors should in future be limited to those risks which are material and specific to the issuer and its securities. The issuer must present the risk factors in a limited number of categories, based on the probability of their occurrence and the expected magnitude of their negative impact (Art. 16(1), Prospectus Regulation). This is intended to give investors a better understanding of the potential risks when making their investment decision. The European Securities and Markets Authority has published guidelines which provide a detailed explanation of how regulators that have to approve prospectuses should apply these new rules in practice.22

4.  Summary 18.25  As noted in paragraph 18.17 above, civil liability on the basis of the summary, when read together with other parts of the prospectus, is not excluded (Art. 11(2), second paragraph, Prospectus Regulation). It is therefore necessary to briefly consider the requirements which a summary must satisfy. A summary must contain the key information that investors need in order to understand the nature and the risks of the issuer, the guarantor, and the securities that are being offered or admitted to trading on a regulated market, and is intended to be read together with the other parts of the prospectus to aid investors when considering whether to invest in such securities (Art. 7(1), first sentence, Prospectus Regulation).23 18.26  The content of the summary must be accurate, fair, and clear and must not be misleading. It is to be read as an introduction to the prospectus and must be consistent with the other parts of the prospectus (Art. 7(2), Prospectus Regulation). The summary must be drawn up as a short document written in a concise manner and of a maximum length of seven sides of A4-sized paper when printed. The summary must be presented and laid out in a way that is easy to read, using ‘characters of readable size’. In addition, it must be written From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

in a language and a style that facilitate the understanding of the (p. 418) information, in particular, in language that is clear, non-technical, concise, and comprehensible for investors (Art. 7(3), Prospectus Regulation). 18.27  The summary must consist of the following four sections: (i) an introduction, containing warnings:24 (ii) key information on the issuer; (iii) key information on the securities; (iv) key information on the offer of securities to the public and/or the admission to trading on a regulated market (Art. 7(4), Prospectus Regulation). Only the most important risk factors may be mentioned in the summary. The maximum is fifteen (Art. 7(10), Prospectus Regulation).25 The key financial information about the issuer to be included in the summary has been specified in Delegated Regulation (EU) 2019/980 (on the basis of Art. 7(13), Prospectus Regulation).26

IV.  Unlawfulness and Imputability 1.  May Civil Courts be More Flexible than the EU Prospectus Rules? (i)  General 18.28  The first question that arises in view of the foregoing is whether a breach of the information obligations under the Prospectus Regulation (see section III ‘Information Obligations under the EU Prospectus Rules’, para. 18.18 above) constitutes, by definition, an unlawful act, which is also imputable to the person responsible for the content of the prospectus.27 Or may the civil courts also be more flexible?

(ii) European principle of effectiveness 18.29  This question must be answered by reference to the European principle of effectiveness (also known as effet utile). Naturally, Article 11(2), first sentence, Prospectus Regulation, as discussed in section II.1.(vii) ‘Provisions of national law governing civil liability (para. 18.14) above (which provides that Member States must ensure that their laws, regulations, and administrative provisions on civil liability apply to the persons (p. 419) responsible for the information given in a prospectus) itself expresses this principle, but the European principle of effectiveness has been defined in more detail by the Court of Justice of the European Union (CJEU) in recent years.28 18.30  The Austrian case of Immofinanz29 concerned the private law consequences of rules from the Prospectus Directive, the Transparency Directive, and the Market Abuse Directive (MAR). The CJEU held as follows in paragraph 40 of the judgment: While it is true that, unlike Article 25(1), of the Prospectus Directive, Article 28(1), of the Transparency Directive and Article14(1), of the Market Abuse Directive do not expressly refer to the civil liability regimes in the Member States, the fact remains that the Court has previously ruled that, in respect of the award of damages and the possibility of an award of punitive damages, in the absence of European Union rules governing the matter, it is for the domestic legal system of each Member State to set the criteria for determining the extent of the damages, provided that the principles of equivalence and effectiveness are observed (see, by analogy, the judgments of 13 July 2006, Manfredi and Others, C-295/04-C-298/04, Court Reports. p. I-6619, paragraph 92, and 6 June 2013, Donau Chemie and Others, C-536/11, not yet published in the Court Reports, paragraphs 25–27. 18.31  The CJEU had previously taken a similar line in relation to the Markets in Financial Instruments Directive (MiFID) in the Spanish case of Genil v Bankinter.30 In that judgment, the CJEU had held that in the absence of EU legislation it was for the Member States themselves to determine the contractual consequences of non-compliance with the knowyour-customer (KYC) rules under MiFID, but that the principles of equivalence and effectiveness had to be observed (para. 57).31 The CJEU referred in this connection to

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

paragraph 27 of a judgment of 19 July 2012 concerning a tax matter (Littlewoods Retail and Others, Case C-591/10) and the case law cited there. This paragraph reads as follows: In the absence of EU legislation, it is for the internal legal order of each Member State to lay down the conditions in which such interest must be paid, particularly the rate of that interest and its method of calculation (simple or compound interest). Those conditions must comply with the principles of equivalence and effectiveness; that is to say that they must not be less favourable than those concerning similar claims based on provisions of national law or arranged in such a way as to make the exercise of rights conferred by the EU legal order practically impossible (see, to that effect, previously (p. 420) cited cases San Giorgio, paragraph 12; Weber’s Wine World and Others, paragraph 103; and the judgment of 6 October 2005 in the case of MyTravel, C 291/03, Court Reports p. I 8477, paragraph 17) [emphasis added]. 18.32  The principle of effectiveness therefore means that the conditions which an investor must fulfil in order to bring a civil liability action may not be such that success is difficult, if not impossible to achieve. The judgment appears to mean that civil courts may not be more flexible than is possible under the EU prospectus rules. Where, in a specific case, information which should be included in a prospectus according to the EU prospectus rules is missing or incorrect and the aggrieved investors bring a civil action for damages, the civil courts may not dismiss this claim by holding that in the particular circumstances the rule applied in private law is more flexible. If this were not the case, the principles of legal certainty, investor protection, and the European level playing field would be put in considerable jeopardy. All this is even more true under the current Prospectus Regulation than under its predecessor, the Prospectus Directive. For the sake of legal certainty, uniform investor protection, and a European level playing field, the instrument of a directly applicable regulation has been explicitly chosen.32 For the record, from the perspective of European financial supervision law, the stricter information obligations under the Prospectus Regulation would, of course, continue to apply in any event, even if a civil court were to apply a more flexible criterion contrary to the European principle of effectiveness. Naturally, this does not detract from the requirements that European financial supervision law sets for the prospectus. Only if the prospectus meets the requirements of the EU prospectus rules will a regulator be able to approve the prospectus, despite the adoption of a more flexible attitude by a civil court.

(iii)  Materiality criterion? 18.33  Should the information which is required by the Prospectus Regulation and is specified in detail in implementing acts always be treated as information ‘which is material to an investor for making an informed assessment’ as referred to in the principal standard included in Article 6(1), Prospectus Regulation? Or, to put it another way, if a mandatory item of information has not been included or is incorrect, does it necessarily follow that information which is of material importance for investors in making an informed decision is missing? If that is the case, a defence by the issuer and, for example, the lead manager to the effect that the non-recorded or incorrectly displayed information item is not material would always have to be rejected by a civil court in view of the European principle of effectiveness. We could call this a ‘settled’ materiality criterion. In a Dutch context, this would mean that once it has been established that a certain information item prescribed by the EU prospectus rules has not been included or is incorrect, the unlawfulness on account of a breach of a statutory duty is a given, with the (p. 421) possible exception of cases where there is a ground of justification (see section IV.1.(iv) ‘Grounds for justification’, para. 18.36 below).33

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

18.34  However, the question is whether this is the correct interpretation in view of Article 18(1), Prospectus Regulation. Article 18(1) provides that the competent authority which must authorize the prospectus may (but not must) authorize the omission from the prospectus, or constituent parts thereof, of certain information to be included therein, where it considers that any of the following conditions is met. The following conditions are mentioned at (b) and (c): (b)  disclosure of such information would be seriously detrimental to the issuer or to the guarantor, if any, provided that the omission of such information would not be likely to mislead the public with regard to facts and circumstances essential for an informed assessment of the issuer or guarantor, if any, and of the rights attached to the securities to which the prospectus relates; (c)  such information is of minor importance in relation to a specific offer or admission to trading on a regulated market and would not influence the assessment of the financial position and prospects of the issuer or guarantor, if any. 34 18.35  Evidently, the system of EU prospectus rules leaves some scope for a defence that an item of information not included for investors in the specific case was not material in making an informed investment decision. Even if one assumes that a non-materiality defence can succeed in the system of the EU prospectus rules only if the competent authority has allowed the omission of information in a specific case on the basis of (b) or (c) of Article 18(1), Prospectus Regulation, the failure of a non-materiality defence in other cases does not, by definition, result in liability. After all, an issuer or lead manager can always argue that there is no causal link, because whatever is incorrect or incomplete in the prospectus is not material and the investor could not therefore have suffered any damage as a result of the missing or incorrect information. For more information, see section VI ‘The Influence of the EU Prospectus Rules on the Proof of Causal Link’ (para. 18.71) below.

(iv)  Grounds of justification 18.36  In Dutch tort law, an act may cease to be unlawful if a ground of justification exists.35 It has to be asked to what extent this escape route is still available in view of the EU prospectus rules and the European principle of effectiveness. In my view, the answer is that this is the case only if the Prospectus Regulation itself allows this. Article 18(1), opening words and (a), provides that the competent authority which must authorize (p. 422) the prospectus may (but not must) authorize the omission from the prospectus of certain information to be included therein where it considers that disclosure of such information would be contrary to the public interest.36 Where information that is material to investors is thus omitted from the prospectus with the blessing of the competent authority, I believe that the issuer or lead manager who is held liable on this basis by aggrieved investors may be able, in principle, to hide behind the opinion of the regulator. In the Dutch context, this defence seems to be capable of being classified as reliance on a ground of justification that invalidates the unlawfulness of the conduct.

(v)  Soft law 18.37  Where there has been an infringement of information obligations that can be found in the Prospectus Regulation itself and in implementing acts, this will, in principle, constitute an unlawful act on account of a breach of a statutory duty (see section IV.1.(iii) ‘Materiality criterion?’, para. 18.33 above), at least in the Dutch context. As noted in section III.2 ‘Elaboration of the Basic Principle’ (para. 18.22) above, to ensure uniform application of Delegated Regulation (EU) 2019/980 as far as possible, ESMA draws up guidelines

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

defining and interpreting the information obligations under Delegated Regulation (EU) 2019/980.37 In practice, ESMA guidelines are, of course, authoritative, but, strictly speaking, lack statutory status. These guidelines are often described rather vaguely as ‘soft law’. I would assume that the civil courts must not ignore them and should therefore take them into account, but strictly speaking they are not bound by them unless ESMA guidelines can be regarded as unwritten law, where appropriate. The latter may be appropriate if guidelines reflect a specific market practice. Under Dutch law at least, acting contrary to unwritten law (like acting in breach of a statutory duty) is also a ground for holding that the act is unlawful.38

(vi)  Imputability 18.38  Article 11(1), Prospectus Regulation provides that a prospectus must contain a declaration by the persons responsible for the prospectus that: to the best of their knowledge the information contained in the prospectus is in accordance with the facts and that the prospectus makes no omission likely to affect its import [emphasis added]. (p. 423) 18.39  Does this mean, for example, that the issuer or the lead manager can successfully defend a claim for liability brought by aggrieved investors by contending that it did not know (i) that the information contained in the prospectus was not in accordance with the facts; and/or (ii) that the prospectus made no omission likely to affect its import? I would answer this question in the affirmative. However, I believe that in view of the objective of investor protection and the European principle of effectiveness, the words ‘did not know’ should include ‘was not required to know’. If this were not the case, investor protection would indeed be in a bad way. 18.40  It would generally be hard for the issuer to show that it did not know or was not required to know (i) that the information contained in the prospectus was not in accordance with the facts; and/or (ii) that the prospectus made no omission likely to affect its import. After all, this is information about its own business. 18.41  In any event, this approach means that there is scope for a due diligence defence by the lead manager. In other words, if the lead manager adequately investigated the issuer, but certain information did not emerge during the due diligence process, the lead manager can defend a claim for liability by arguing that he did not know and was not required to know (i) that the information contained in the prospectus was not in accordance with the facts; and/or (ii) that the prospectus made no omission likely to affect its import. In the Dutch context, this defence will mean that the unlawful act cannot be imputed to the lead manager in the absence of fault.39

2.  May Civil Courts be Stricter than the EU Prospectus Rules? (i)  Immofinanz and Genil v Bankinter 18.42  The judgments of the CJEU in the Immofinanz and Genil v Bankinter cases do not seem to provide a definitive answer to the question of whether civil courts may apply stricter standards than the European prospectus rules.40 If, for example, a civil court imposes stricter information obligations than those resulting from the European prospectus rules, this does not in any event appear to be at odds with the principle of effectiveness as formulated by the CJEU in Immofinanz and Genil v Bankinter. It should be noted, however, that the question whether civil courts may apply stricter standards than the (p. 424) European rules was not at issue in the Immofinanz and Genil v Bankinter cases, and was

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

therefore not answered explicitly. These judgments were solely about the private law consequences of a breach of European rules. 18.43  However, none of this precludes the possibility that it could be argued on the basis of other principles of EU law that civil courts may not apply stricter standards than the EU prospectus rules. Some pointers can be found in the CJEU’s judgment in the case of Nationale-Nederlanden v Van Leeuwen, concerning exorbitant management costs charged in connection with life insurance policies.41

(ii)  Nationale-Nederlanden v Van Leeuwen (a)  Legal framework 18.44  Article 31, Third Life Assurance Directive42 (now repealed and replaced by more recent versions) plays a crucial role in this dispute and provides as follows: 1.  Before the assurance contract is concluded, at least the information listed in point A of Annex II shall be communicated to the policyholder. 2.  The policyholder shall be kept informed throughout the term of the contract of any change concerning the information listed in point B of Annex II. 3.  The Member State of the commitment may require assurance undertakings to furnish information in addition to that listed in Annex II only if it is necessary for a proper understanding by the policyholder of the essential elements of the commitment. 4.  The detailed rules for implementing this Article and Annex II shall be laid down by the Member State of the commitment. 18.45  The obligation to furnish the policyholder with the information listed in Annex II, Third Life Assurance Directive was transposed into Dutch law in Article 2, 1998 Regulation on the Furnishing of Information to Policyholders (the 1998 Regulation). In view of the text of the 1998 Regulation, the Netherlands did not at that time make use of the possibility of imposing a duty to furnish additional information under Article (3), Third Life Assurance Directive. 18.46  It has been established that Nationale-Nederlanden, in compliance with Article 2(2) (q) and (r), 1998 Regulation, furnished the policyholder with information about how the costs and risk premiums would affect the return. However, the policyholder did not receive a summary or full overview of the actual and/or absolute costs and their composition. Nor was this obligatory under the 1998 Regulation. In short, it has been established that Nationale-Nederlanden furnished the policyholder with all information it was obliged to provide under the 1998 Regulation. (p. 425) 18.47  Nonetheless, in its interim judgment Rotterdam District Court held as follows about the fact that Nationale-Nederlanden had not sent the policyholder a summary or full overview of the actual and/or absolute costs and their composition: Although Nationale-Nederlanden fulfilled the requirements referred to in Article 2(2)(q) and (r) of the 1998 Regulation regarding the provision of information to policyholders, it nonetheless infringed the open rules (including, in this legal action, the general and/or special duty of care owed by Nationale-Nederlanden to Van Leeuwen in the context of their contractual relations, pre-contractual good faith and/or requirements of reasonableness and fairness) by confining the information it

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

furnished to information about the effect of costs and risk premiums on the return.43 18.48  Nationale-Nederlanden argued that it could not be required to furnish additional information on the basis of open and/or unwritten rules.

(b)  Questions referred for a preliminary ruling 18.49  The District Court referred the following two questions to the Court of Justice for a preliminary ruling: (1)  Does EU law, and in particular Article 31(3), Third Life Assurance Directive, preclude an obligation on the part of a life assurance provider on the basis of the open and/or unwritten rules of Dutch law— such as the reasonableness and fairness which govern the contractual and pre-contractual relationship between a life assurance provider and a prospective policyholder, and/or a general and/or specific duty of care— to provide policyholders with more information on costs and risk premiums of the insurance than was prescribed in 1999 by the provisions of Dutch law implementing the Third Life Assurance Directive (in particular, Art. 2(2)(q) and (r), 1998 Regulation)? (2)  Are the consequences, or possible consequences, under Dutch law of a failure to provide that information relevant for the purposes of answering question 1?

(c)  Duties to furnish additional information on the basis of reasonableness and fairness? 18.50  The first question referred for preliminary ruling was answered in the affirmative. In short, the civil courts may, by reference to the requirements of reasonableness and fairness under Articles 6:2 and 6:248, Dutch Civil Code,44 impose duties to furnish (p. 426) information additional to that required under the 1998 Regulation, provided that three cumulative conditions are fulfilled (this is a matter for the referring court to decide): (1)  the information required must be clear and accurate; (2)  the information required must be necessary to enable the policyholder to understand the essential elements of the commitment; (3)  legal certainty for the insurer is sufficiently safeguarded (paras 21, 29, 30, 31, and 33). 18.51  The first two conditions follow from the express wording of Article 31(3), Third Life Assurance Directive, Annex II and Recital (23), preamble to the Third Life Assurance Directive (para. 21). The third condition expresses the principle of legal certainty under EU law. The CJEU held that the legal basis for the use by the Member State concerned of the possibility provided for in Article 31(3), Third Life Assurance Directive must be such that, in accordance with the principle of legal certainty, it enables the insurer to identify with sufficient foreseeability what additional information it must furnish and the policyholder may expect (para. 29). An additional duty to provide information based on the requirements of reasonableness and fairness under Article 6:2, Dutch Civil Code would not seem at first sight to fulfil this requirement, since this rule is extremely vague and has little, if any, predictive value. So that seemed to be good news for Nationale-Nederlanden. 18.52  But the Court of Justice then went on to formulate two arguments that were favourable to the policyholder and unfavourable to Nationale-Nederlanden. It held that when deciding whether the legal certainty principle had been fulfilled, the national court may (not ‘must’) take into consideration the fact that it is for the insurer to determine the type and characteristics of the insurance products which it offers, so that, in principle, it should be able to identify the characteristics of its products offered and which are likely to From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

justify a need to provide additional information to policyholders (para. 30). In short, the ball was played back into the insurer’s court. It knew best what information it should furnish to its clients in order to ensure that they understood the insurance product. What perhaps played a role in this connection was that, according to the CJEU, the fact that the policyholder should receive a summary or full overview of the actual and/or absolute costs and their composition to be able to understand the operation of the product was so apparent that the insurer itself should have realized it was necessary to furnish this information to the policyholder. The CJEU added in this connection that, in accordance with the description of the grounds of the 1998 Regulation, its application was governed, in particular, by the national private law in force, ‘including the requirements of reasonableness and fairness’ set out in Article 6:2, Dutch Civil Code (para. 31). In short, the CJEU clearly considered that Nationale-Nederlanden could (p. 427) and should have known that its responsibility did not begin and end with literal compliance with the 1998 Regulation.

(iii)  Consequences of Nationale-Nederlanden v Van Leeuwen 18.53  It seems to follow from the Nationale-Nederlanden judgment that EU law is blind to the distinction between public and private law when it comes to implementing rules of EU law.45 After all, in the Nationale-Nederlanden case, the CJEU had no problem with the fact that Annex II, Third Life Assurance Directive46 was transposed into Dutch law in Article 2, 1998 Regulation on the Furnishing of Information to Policyholders (the 1998 Regulation) (public law), whereas the Member State option in Article 31(3), Third Life Assurance Directive to furnish additional information may be implemented by means of the requirement of reasonableness and fairness under Article 6:2, Dutch Civil Code (private law). 18.54  If it is indeed true that EU law is blind to the distinction between public and private law, this also has an important bearing on whether civil courts may impose stricter standards than the information obligations under the EU prospectus rules. These rules provide for maximum harmonization. If EU law is truly blind to the distinction between public and private law when it comes to the transposition of EU legal rules, the maximum harmonization standard will also apply to the civil courts. They may not therefore impose stricter information obligations than those that result from the EU prospectus rules, regardless of whether these are included in a directive or a regulation. In the abovementioned Immofinanz judgment (section IV.2(i) ‘Immonfinanz and Genil v Bankinter’, para. 18.42) about the private law impact of, for example, the EU prospectus rules, the CJEU admittedly noted that in the absence of EU legislation it was for the Member States themselves to determine what effect a breach of these rules had under private law, provided that it was not impossible or extremely difficult to recover compensation for the loss or damage suffered, but this referred to the sanction and not to the legal rule itself. 18.55  If this line of reasoning is rejected because it is considered that the civil courts may in certain circumstances be stricter than the EU prospectus rules, the present judgment in any event showed that legal certainty was an important factor that the civil courts had to take into consideration in deciding whether they may impose stricter criteria than apply under the rules of EU financial supervision. To prevent the EU passport function of the prospectus from being undermined, the civil courts should, in my view, in any event attach extra importance to the EU principle of legal certainty (see section IV.2(v) ‘The operation of the prospectus as a European passport’, para. 18.58 below).

(p. 428) (iv)  Article 6(1), Prospectus Regulation and Delegated Regulation (EU) 2019/980

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

18.56  The Prospectus Regulation contains the basic rule that a prospectus must contain the necessary information which is material to an investor for making an informed assessment of the issuer and the securities (Article 6(1), Prospectus Regulation). As noted previously in section III.2 ‘Elaboration of the Basic Principle’ (para. 18.22), this basic rule has been elaborated in detail in the various Annexes to Delegated Regulation (EU) 2019/980. The statutory basis for this is Article 13, Prospectus Regulation, which is entitled ‘Minimum information and format’. In my view, the use of the term ‘minimum information’ should not be read as meaning that the general rule allows scope for additional information obligations. Instead, I interpret the heading ‘Minimum information and format’ as meaning that the drafter of the prospectus is, in principle, free to include more information than the information required by law. This interpretation is supported by Recital (2) in the preamble to Delegated Regulation (EU) 2019/980: The content and the format of a prospectus depend on a variety of factors, such as the type of issuer, type of security, type of issuance as well as the possible involvement of a third party as a guarantor and the question of whether or not there is an admission to trading. It is therefore not appropriate to lay down the same requirements for all types of prospectuses. Specific information requirements should be laid down instead and should be combined depending on those factors and the type of prospectus. This should however not prevent an issuer, offeror or person asking for admission to trading on a regulated market to provide in the prospectus the most comprehensive information available [emphasis added]. 18.57  In short, the drafter of a prospectus is, in principle, free to include extra information, but the competent authority cannot compel this by withholding approval of the prospectus. The reason why the qualification ‘in principle’ is added is because this power to include extra information may no longer be construed as a licence to swamp investors with information. As previously noted in section III.1 ‘The Basic Principle’ (para. 18.18), Recital (27), preamble to the Prospectus Regulation provides that a prospectus should not contain information which is not material or specific to the issuer and the securities concerned. This could otherwise obscure the information relevant to the investment decision, and thus undermine investor protection. Indeed, if this is the case, the competent authority may not approve the prospectus as there would otherwise be a breach of the rule in Article 6(2), Prospectus Regulation, to the effect that the information in a prospectus must be written and presented in an easily analysable, concise, and comprehensible form.

(v)  The operation of the prospectus as a European passport 18.58  It is also important to consider for a moment the practical consequences of a decision by a civil court in a given Member State to impose stricter information obligations than (p. 429) the detailed obligations set out in the Annexes to Delegated Regulation (EU) 2019/980. If it is desired to offer securities to the investing public in the relevant jurisdiction, it will, after all, be necessary to take into account the stricter information obligations under private law in order to prevent liability. In such a jurisdiction, it will no longer be sufficient to draw up a prospectus in accordance with the detailed information obligations included in the Annexes to Delegated Regulation (EU) 2019/980, and allowance will have to be made for stricter information obligations under private law. This would seriously undermine the functioning of the prospectus as a European passport. After all, the idea behind the EU prospectus rules is that a prospectus that has been approved by the competent authority in one Member State can also be used to offer securities to investors in all other Member States. Prospectuses could no longer adequately fulfil this function if it were necessary when drawing them up to take into account stricter information obligations under private law, possibly even varying from one Member State to another.47 Such a situation would be at odds with the concepts of the level playing field, legal certainty, and maximum harmonization underlying the Prospectus Regulation. All this is even more true From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

under the current Prospectus Regulation than under its predecessor, the Prospectus Directive. After all, the instrument of a directly applicable regulation was expressly chosen for the sake of legal certainty, uniform investor protection, and a European level playing field. See Recital (5), preamble to the Prospectus Regulation: It is appropriate and necessary for the rules on disclosure when securities are offered to the public or admitted to trading on a regulated market to take the legislative form of a regulation in order to ensure that provisions directly imposing obligations on persons involved in offers of securities to the public and in admissions of securities to trading on a regulated market are applied in a uniform manner throughout the Union. Since a legal framework for the provisions on prospectuses necessarily involves measures specifying precise requirements for all different aspects inherent to prospectuses, even small divergences on the approach taken regarding one of those aspects could result in significant impediments to cross-border offers of securities, to multiple listings on regulated markets and to Union consumer protection rules. Therefore, the use of a regulation, which is directly applicable without requiring national law, should reduce the possibility of divergent measures being taken at national level, and should ensure a consistent approach, greater legal certainty and prevent such significant impediments. The use of a regulation will also strengthen confidence in the transparency of markets across the Union, and reduce regulatory complexity as well as search and compliance costs for companies.48

(p. 430) (vi)  Example 1 18.59  An example may help to clarify this. According to the Prospectus Regulation, risk factors should in future be limited to those risks which are material and specific to the issuer and its securities (Art. 16(1), Prospectus Regulation). A situation may not arise in which an issuer or, for example, a lead manager incurs civil liability because a court holds that the prospectus wrongly failed to mention a risk which, although it has materialized, cannot be classified as a risk that is not material and specific to the issuer and its securities. After all, under Article 16(1), Prospectus Regulation, the inclusion of risk factors that are not material and specific to the issuer and its securities is no longer permissible and would have meant that the competent authority would have refused to approve the prospectus.49

(vii)  Example 2 18.60  Let us now consider another example. A civil court holds that a prospectus has wrongly failed to mention a certain risk that has materialized, and that this risk should be considered material and specific to the issuer and its securities. Naturally, the possibility of such a finding can never be entirely excluded, but there is real danger of hindsight bias. The civil court must really give proper consideration to whether it was reasonable for the person who drew up the prospectus to believe that the risks then classified as material and specific to the issuer and its securities had been included. To prevent hindsight bias, the civil courts would therefore do well to exercise restraint in this regard.

(viii)  Securities not covered by the Annexes to Delegated Regulation (EU) 2019/980 18.61  Naturally, it is always possible that at some point securities are offered that are not covered by the Annexes to Delegated Regulation (EU) 2019/980. This situation is addressed in Recital (24), preamble to Delegated Regulation (EU) 2019/980:

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Due to the rapid evolution of securities markets, there is the possibility that certain types of securities that are not covered by the Annexes to this Regulation will be offered to the public or admitted to trading. In such a case, to enable investors to make an informed investment decision, competent authorities should decide in consultation with the issuer, offeror or person asking for admission to trading on a regulated market which information should be included in the prospectus.

(ix)  Investor protection and a European capital market 18.62  In view of what has been said above, it seems to me that investor protection is adequately guaranteed by the information obligations under the EU prospectus rules and that consequently civil courts do not actually have a good reason to impose (p. 431) stricter information obligations under private law than those arising from the EU prospectus rules. In addition, investor protection is admittedly a key objective of the EU prospectus rules, but it is not the only one. Another key objective is the creation of a European capital market. See Recital (4), preamble to the Prospectus Regulation: Divergent approaches would result in fragmentation of the internal market since issuers, offerors and persons asking for admission to trading on a regulated market would be subject to different rules in different Member States and prospectuses approved in one Member State could be prevented from being used in other Member States. In the absence of a harmonised framework to ensure uniformity of disclosure and the functioning of the passport in the Union it is therefore likely that differences in Member States’ laws would create obstacles to the smooth functioning of the internal market for securities. Therefore, to ensure the proper functioning of the internal market and improve the conditions of its functioning, in particular with regard to capital markets, and to guarantee a high level of consumer and investor protection, it is appropriate to lay down a regulatory framework for prospectuses at Union level.50

(x)  Differentiation between retail and wholesale investors? 18.63  Nor should the fact that an offer of securities is directed solely at retail investors be a reason for the civil courts to impose stricter information obligations than those arising from the EU prospectus rules. As Delegated Regulation (EU) 2019/980 explicitly differentiates between offers to retail investors and offers to wholesale investors in the case of non-equity securities, this distinction has already been incorporated in the EU prospectus rules. See also Recital (7), preamble to Delegated Regulation (EU) 2019/980: The information contained in prospectuses for non-equity securities should be adapted to the level of knowledge and expertise of each type of investor. Prospectuses for non-equity securities in which retail investors can invest should therefore be subject to more comprehensive and distinct information requirements than prospectuses for non-equity securities that are reserved to qualified investors. 18.64  Delegated Regulation (EU) 2019/980 does not make this distinction where the offer relates to equity securities. In those cases, the European legislator apparently saw no reason to differentiate between information obligations on the basis of whether the offer relates to retail or wholesale investors. The civil courts should consider themselves bound by this. In short, the civil courts should, in my view, differentiate between retail and wholesale investors with regard to the content of the information obligations only in so far as the EU prospectus rules do the same.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 432) (xi)  Use of language 18.65  The Prospectus Regulation also sets requirements for the use of language and the manner of presentation. See Article 6(2), Prospectus Regulation: The information in a prospectus shall be written and presented in an easily analysable, concise and comprehensible form, taking into account the factors set out in the second subparagraph of paragraph 1. 18.66  As noted previously in section III.1 ‘The Basic Principle’ (para. 18.18), although this does not strictly follow from Article 6(1) and (2) of the Prospectus Regulation, it is apparent from Recital (27) in the preamble to the Regulation that the application of the rule is influenced by the type of investor to whom the offer is addressed. It may be assumed that the language used in a prospectus will have to be somewhat less specialized (i.e. less technical) in the case of an offer of securities addressed solely or partly to retail investors than if the offer is addressed solely to wholesale investors. In short, the civil courts may, in my view, differentiate between retail and wholesale investors with regard to the language requirements. For example, a civil court may hold that a prospectus addressed partly to retail investors may contain all the information items that are required under the EU prospectus rules, but that Article 6(2), Prospectus Regulation has nevertheless been infringed because the information has been formulated in such technical terms that it misleads retail investors.

(xii)  Inclusion of non-material information 18.67  The same applies if a prospectus contains all kinds of information which is not material or specific to the issuer and the securities concerned. This could otherwise obscure the information relevant to the investment decision and thus undermine investor protection (see Recital (27), preamble, Prospectus Regulation). In short, a civil court will be able to hold, for example, that although a prospectus contains all the information items required under the EU prospectus rules, these rules have nonetheless been infringed because the prospectus contains too much superfluous information. This will probably mainly play a role if an offer is wholly or partly aimed at retail investors, but even where an offer is intended solely for wholesale investors, it is quite conceivable that a large amount of superfluous information would violate the EU prospectus rules (Art. 6(2)).

V.  The Influence of the EU Prospectus Rules on the Relativity Requirement 18.68  In some jurisdictions, the principle of proximity or relativity must be fulfilled in order to bring a successful action in tort.51 In so far as relevant here, this means that the information obligation that has been infringed under the EU prospectus rules must be (p. 433) intended in part to offer protection against the loss suffered by the investor. Although the Immofinanz judgment admittedly appears to show that, in the absence of a European regulation, it is up to the Member States themselves to determine the private law consequences of an infringement of, inter alia, the EU prospectus rules, other considerations such as the principle of effectiveness must always be taken into account.52 18.69  In this connection, the principle of effectiveness means that the conditions to be fulfilled by an investor in bringing a civil action against an issuer or lead manager may not be such as to exclude or virtually exclude the possibility of success. In my opinion, the European principle of effectiveness means that a claim for damages on account of an infringement of the EU prospectus rules may not fail by virtue of the requirement of

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

relativity. After all, these rules are expressly intended to provide investor protection (besides creating a European capital market).53 18.70  This is in keeping with what can be found in Explanatory Memorandum to the Dutch Financial Supervision Act (Wet op het financieel toezicht, or ‘Wft’), where it is stated that all provisions of the Wft are intended in part to protect the clients’ financial interests. The same applies to other private law relationships of the firm, for example with shareholders and bondholders.54 Although the prospectus rules have now disappeared from the Wft and are now contained in a directly applicable EU regulation, the scope of their protection has naturally not changed.

VI.  The Influence of the EU Prospectus Rules on the Proof of Causal Link 18.71  Another interesting question about the effect of the Prospectus Regulation on civil liability concerns its influence on proving causal link. To answer this question, it is necessary first of all to consider the judgment of the Dutch Supreme Court in the leading World Online case in 2009, where the European principle of effectiveness was applied in relation to proof of causal link in the context of prospectus liability under the predecessor of the Prospectus Regulation, namely the Prospectus Directive.55 18.72  That case concerned loss allegedly suffered by investors in internet company World Online as a consequence of, among other things, a misleading prospectus published on the occasion of the company’s flotation. In brief, the Supreme Court held as follows. As it was often hard to prove a condicio sine qua non link (a ‘but for’ link) in relation to liability for a prospectus, the investor protection which the EU Prospectus Directive was intended to provide could prove illusory in practice. Although this Directive admittedly contained detailed provisions about what information must be included in the (p. 434) prospectus, it did not regulate liability for the prospectus. It did, however, require the Member States to ensure that their laws, regulations, and administrative provisions on civil liability applied to those persons responsible for the information given in a prospectus (Art. 6(2), first paragraph, Prospectus Directive). According to the Supreme Court, this meant that effective legal protection had to be provided in accordance with the rules of national law. The basic principle applied by the Supreme Court was that a condicio sine qua non link (‘but for’ link) must exist between the incorrect prospectus and the decision to invest. In the case of professional investors, however, a court may well be justified in concluding that, in view of their knowledge and experience, they were not actually influenced by it in making their investment decision. The Supreme Court held that in such cases it is possible to revert to the basic rule that the investor bears the burden of proving the causal link.56 18.73  The distinction that the Supreme Court makes with regard to the proof of the causal link between retail and wholesale investors does not always seem to me to be consistent with the EU prospectus rules. As mentioned previously in section IV.2(x) ‘Differentiation between retail and wholesale investors? (para. 18.63), Delegated Regulation (EU) 2019/980 explicitly differentiates between offers to retail investors and wholesale investors in respect of non-equity securities. If certain information items are to be included in a prospectus intended for wholesale investors, the basic assumption should be that the wholesale investor also needs this information in order to make an informed investment decision. If information items that are mandatory in a wholesale prospectus are missing or incorrect, the basic assumption (as in relation to retail investors) should be that a condicio sine qua non link (‘but for’ link) exists between the incorrect prospectus and the investment decision of the wholesale investors. This basic assumption can then be challenged by the defendant.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

18.74  The distinction made by the Supreme Court with regard to the proof of the causal relationship between retail and wholesale investors may, however, be consistent with the EU prospectus rules where a prospectus used to offer securities to both retail and wholesale investors is admittedly both correct and complete, but is couched in very technical terms. As wholesale investors may presumably be expected to understand this language, they will have the burden of proving or showing that they were misled by the prospectus. 18.75  Finally, other approaches that help investors to prove causal link may also, of course, be consistent with the European principle of effectiveness.57

(p. 435) VII.  The Influence of the EU Prospectus Rules on Determination of the Extent of the Loss or Damage 18.76  Another intriguing question is what influence the Prospectus Regulation has on determining the extent of the loss or damage. The European principle of effectiveness means that the conditions to be fulfilled by an investor in bringing a civil action against an issuer or lead manager may not be such as to exclude, or virtually exclude, the possibility of success. I would assume that this means that claims for damages for an infringement of the EU prospectus rules should not be excluded or significantly restricted. 18.77  Merely awarding nominal damages is, in my opinion, contrary to the European principle of effectiveness. In any case, it is apparent that not only damages for tort or nonperformance are consistent with the European principle of effectiveness. A claim for undue payment after an underlying contract has been set aside with retroactive effect may also be compatible with this principle.58 The Member States seem to have a degree of autonomy in this respect, provided they do not exclude or significantly restrict claims for damages for an infringement of the EU prospectus rules. 18.78  This is not a purely theoretical problem, as can be seen from section 21 of the German Wertpapierprospektgesetz (WpPG). This statutory provision substantially limits investors’ rights to compensation. For example, under the WpPG an investor who has bought securities on the basis of an incomplete or incorrect prospectus and still holds them can never claim more than the introductory price of the security, in exchange for the security, even though the investor has a paid a lot more for it. Whether this statutory provision is consistent with the principle of effectiveness is doubtful, because it substantially limits the loss or damage eligible for compensation (see also section VIII ‘The Influence of the EU Prospectus Rules on a Limitation or Exclusion of Liability’, para. 18.80 below).59 18.79  Finally, the European principle of effectiveness does not prevent the amount of damages from being reduced by reference to doctrines such as contributory negligence and an investor’s duty of mitigation. These doctrines can, after all, be regarded as general principles of EU law.60

(p. 436) VIII.  The Influence of the EU Prospectus Rules on a Limitation or Exclusion of Liability 18.80  The European principle of effectiveness means that the national conditions to be fulfilled by an investor in bringing a civil action against an issuer or lead manager for breach of information obligations under the Prospectus Regulation may not be such as to exclude or virtually exclude the possibility of success. It could be argued that this also means that clauses in the prospectus (or elsewhere) that exclude or substantially restrict liability for infringement of the information obligations under the Prospectus Regulation are contrary to the principle of effectiveness. An issuer or lead manager is not bound by the European principle of effectiveness, but the civil courts are. A case can therefore be made for saying that in civil proceedings, for example against an issuer or lead manager, the civil From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

courts should ignore clauses in so far as they purport to exclude or substantially limit liability for breach of the EU prospectus rules. In my view, the same should apply to national laws that exclude or substantially limit liability for infringement of the EU prospectus rules. Consider section 21, WpPG, as discussed in section VII ‘The Influence of the EU Prospectus Rules on Determination of the Extent of the Loss or Damage’ (para. 18.76). Whatever the case, it makes no difference from the perspective of the European principle of effectiveness how the civil courts ensure that claims for damages for breach of the EU prospectus rules are not excluded or substantially limited.61

(p. 437) IX.  Assessment by National Courts of their own Motion of Compliance with the EU Prospectus Rules in Cases Involving Private Investors 18.81  Another intriguing question that has an important bearing on the extent to which the EU prospectus rules impact civil liability is whether the civil courts are obliged to assess of their own motion whether the information obligations under the EU prospectus rules have been infringed. I would certainly not exclude that possibility. It is clear from settled case law of the CJEU that the European principle of effectiveness requires the national courts to assess of their own motion whether clauses in contracts between traders and consumers are unreasonably onerous and therefore ‘unfair’ within the meaning of Directive 93/13/EEC. The CJEU can also instruct the civil courts to investigate of their own motion whether the arrangement is applicable.62 The CJEU seems to extend the protection to the entire field of consumer protection guidelines. For example, it has also held that national courts should assess of their own motion whether there has been compliance with the Consumer Sales Directive (CSD).63 18.82  The information obligations under the European prospectus rules should, in my view, be regarded as consumer protection provisions in so far as they relate to private investors.64 In that case, national civil courts should assess of their own motion whether there has been an infringement of the information obligations under the European Prospectus Rules in disputes between private investors and parties responsible for the content of the prospectus, such as the issuer and the lead manager.

X.  The EU Prospectus Rules and Liability of Financial Regulators 1.  Assessment by the Regulator 18.83  A prospectus requires the approval of the competent authority (i.e. the financial regulator) before it can be used to offer securities to the public (Art. 2(r) and 20(4), Prospectus Regulation). To harmonize as far as possible the manner in which financial regulators approve prospectuses, these criteria are specified in more detail in Chapter V, Delegated Regulation (EU) 2019/980, and ESMA too needs to develop guidelines.65 (p. 438) It goes without saying that the regulator is not responsible for checking whether all information in the prospectus is correct. After all, that would require the regulator to conduct a due diligence investigation into the issuer, which would naturally be going much too far. Moreover, the due diligence investigation is the task of the lead manager. 18.84  Nonetheless, a liability claim could conceivably be brought by aggrieved investors against a regulator which approves or rejects a prospectus in contravention of the Prospectus Regulation and Delegated Regulation (EU) 2019/980. As noted previously in section III.3 ‘Risk Factors’ (para. 18.24), according to the Prospectus Regulation, prospectuses should in future include only risks that are material and specific to the issuer and its securities (Art. 16(1), Prospectus Regulation). The European Securities and Markets Authority has published guidelines which provide a detailed explanation of how regulators that have to approve prospectuses should apply these new rules in practice.66 It is evident From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

from these guidelines that these authorities are expected to adopt a fairly proactive and critical approach. If a risk factor is not material and specific to the issuer and its securities, the regulator should press for the risk factor to be modified or removed. Suppose that the persons who have drawn up the prospectus agree to this. And next, suppose that the issuer and lead manager, as the persons who have drawn up the prospectus, are held liable by investors who consider that the prospectus wrongly fails to mention a given risk that has materialized and which the investors consider should be classified as material and specific to the issuer and the securities. The parties held liable by the investors then refer them to the regulator, which has expressly pressed for removal of the corresponding risk factor.

2.  Italy 18.85  Whatever may be the case, the highest civil court in Italy has held in a case of this kind that the Italian regulator was liable in tort, as it was abundantly clear that the information contained in the prospectus was incorrect and incomplete.67 In response to this case, the liability of the regulator in Italy is now limited to intent and gross negligence.68

3.  Nikolay Kantarev v Balgarska Narodna Banka 18.86  Recently, the CJEU held that national legislation on liability which required that the financial regulator must have acted intentionally, went further than the sufficiently serious breach which EU law sets as a condition for the liability of national government (p. 439) bodies—including financial regulators—which act in breach of EU rules.69 From previous case law of the CJEU on the liability of other national government bodies for an infringement of EU law, it can be deduced that the condition of ‘gross negligence’ also goes beyond the requirement of a sufficiently serious breach.70 Generally speaking, therefore, it seems that national laws that limit the liability of financial regulators to intent or gross negligence are contrary to EU law in so far as liability is based on acts in breach of EU law.

4.  Article 20(9), Prospectus Regulation 18.87  However, there is an exception to the above rules regarding the liability of financial regulators for approving or rejecting a prospectus. Article 20(9), Prospectus Regulation provides in this connection as follows: This Regulation shall not affect the competent authority’s liability, which shall continue to be governed solely by national law [the competent authority is the financial regulator]. ( . . . ).71 18.88  This provision leaves little room for misunderstanding. In so far as it concerns liability of the financial regulator for wrongfully approving or rejecting a prospectus, national liability limitations may go beyond the ‘sufficiently serious breach’ criterion of EU law.

XI.  Conclusion 18.89  The influence of the EU prospectus rules on private law is potentially considerable, but the subject is unfortunately surrounded by much uncertainty. EU legislation on prospectus liability would be the best solution, not only for reasons of legal certainty, but also for the sake of uniform investor protection and a truly level playing field in Europe. However, in the current political climate (less rather than more Europe), that is likely to be a non-starter for the time being. Our hopes must therefore be pinned on the CJEU, which will hopefully provide more clarity in the years ahead. But to achieve this, the CJEU is dependent on the willingness of national civil courts to submit preliminary rulings with precisely formulated questions that give it sufficient insight into the facts of the case. Otherwise, there is a considerable risk of abstract judgments capable of (p. 440) varying interpretations, which are of little help in developing either theory or practice. It is an open secret that supreme court judges are sometimes reluctant to refer questions to the CJEU for From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

a preliminary ruling. They would rather not have their freedom curtailed. Moreover, they are well aware that it is better not to ask a question if the answer may well not be to their liking. Naturally, however, the litigants and their lawyers can urge the civil court to refer questions for a preliminary ruling.

Footnotes: *  I am indebted to Victor de Serière, Arthur Hartkamp, and Jan Paul Franx for valuable comments on a previous version of this chapter. 1

  See Article 24, Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 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, [2017] OJ EU L168/12 (Prospectus Regulation). 2

  Directive 2003/71/EC of the European Parliament and the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC, OJ 2003, L345/64 (Prospectus Directive). 3

  Article 6(1), Prospectus Directive contained a similar provision.

4

  Article 6(2), first paragraph, Prospectus Directive contained the same provision.

5

  In this sense, for example, Germany, French, Italian, Spanish, Luxembourg, and Dutch law. See S. Mock, Chapter 20 ‘Germany’, this volume, section V.1.(i) ‘Issuer’ (para. 20.14); T. Bonneau, Chapter 21 ‘France’, this volume, section V ‘Persons Liable for Misleading Prospectus Information’ (para. 21.19); P. Giudici, Chapter 22 ‘Italy’, this volume, section V ‘Persons Liable for Misleading Prospectus Information’ (para. 22.16); J. Redonet Sánchez del Campo, Chapter 23 ‘Spain’, this volume, section V ‘Persons Liable for Misleading Prospectus Information’ (para. 23.21); V. Hoffeld, Chapter 25 ‘Luxemburg’, this volume, section V ‘Persons Liable for Misleading Prospectus Information’ (para. 25.37); J. P. Franx, Chapter 24 ‘The Netherlands’, this volume, section V ‘Persons Liable for Misleading Prospectus Information’ (para. 24.19). 6

  Under, e.g., German law, French law, and Dutch law, a raised threshold for director liability must be met. See S. Mock, Chapter 20 ‘Germany’, this volume, section XIII ‘Directors’ Liability’ (para. 20.65); T. Bonneau, Chapter 21 ‘France’, this volume, section V ‘Persons Liable for Misleading Prospectus Information’ (para. 21.19); J. P. Franx, Chapter 24 ‘The Netherlands’, this volume, section XIII ‘Directors’ Liability’ (para. 24.40). Under Italian law, it seems possible, at least theoretically, to hold directors liable on the basis of the ordinary rules of tort, evidently without a raised liability threshold being applicable. See P. Giudici, Chapter 22 ‘Italy’, this volume, section X ‘Evidence’ (para. 22.33). Under Spanish law, simple fault seems sufficient. See J. Redonet Sánchez del Campo, Chapter 23 ‘Spain’, this volume, section XIII ‘Directors’ Liability’ (para. 23.58). Under Luxembourg law, directors can theoretically be held liable under ordinary tort law, but in practice the civil courts are unlikely to grant such claims. They generally assume that if third parties (investors) suffer damage as a result of the actions of a director, they must submit a claim to the company itself. See V. Hoffeld, Chapter 25 ‘Luxembourg’, this volume, section IX ‘Causation and Damages’ (para. 25.70). In the UK, in 5.3.2R, Prospectus Regulation under (b)(i) and (iii), it is mentioned that each person who is a director of the equity (not nonequity) issuer and each person who is a senior executive of the equity (not non-equity) issuer is a responsible person (see G. McMeel, Chapter 26 ‘United Kingdom’, this volume, section IV ‘Persons Responsible for the Prospectus’ (para. 26.37)). In Chapter 26, section V ‘Persons Liable for Misleading Prospectus Information’ (para. 26.44), it is stated that ‘under UK law it is clear that the persons who are liable for misleading prospectus information are those identified in PRR 5.3’. In Chapter 26, section VIII ‘Fault of the Party Who Is Sued’ (para. 26.49), it is stated that there is a fault requirement. From the foregoing, it From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

seems to follow that under UK law and within the context of prospectus liability, directors of equity issuers and each person who is a senior executive of the equity issuer can be held liable based on a simple fault requirement. 7

  Under Italian law, for instance, major and other shareholders who are selling shares are responsible only for the information about their identity. See P. Giudici, Chapter 22 ‘Italy’, this volume, section IV ‘Persons Responsible for the Prospectus’ (para. 22.15). In the Netherlands, the liability of a selling shareholder who is a major shareholder, or even 100 per cent shareholder of the issuer, is not excluded because in such cases the transaction will normally also be initiated and coordinated by that shareholder. See J. P. Franx, Chapter 24 ‘The Netherlands’, this volume, section V ‘Persons Liable for Misleading Prospectus Information’ (para. 24.19). 8

  See Article 1(1) of both the old Prospectus Directive and the current Prospectus Regulation. 9

  There are exceptions to the prospectus obligation with regard to both the offering of securities to the public and the admission to trading on a regulated market. See K. Lieverse, Chapter 7, ‘The Obligation to Publish a Prospectus and Exemptions’, this volume. 10

  At least in Dutch practice, the guarantor will as a rule be liable for investor claims pursuant to the guarantee itself. However, it is interesting to note that the term ‘guarantor’ is not defined, which raises the question of whether the term should also include parent companies that have only undertaken a ‘keep well’ obligation towards the issuer. 11

  This is the case, for instance, under German, Italian, Spanish, and UK law. See S. Mock, Chapter 20 ‘Germany’, this volume, section II ‘The Legal Basis for Prospectus Liability’ (para. 20.02); P. Giudici, Chapter 22 ‘Italy’, this volume, section II ‘The Legal Basis for Prospectus Liability’ (para. 22.03); J. Redonet Sánchez del Campo, Chapter 23 ‘Spain’, this volume, section II ‘The Legal Basis for Prospectus Liability’ (para. 23.06); G. McMeel, Chapter 26 ‘United Kingdom’, this volume, section II ‘The Legal Basis for Prospectus Liability’ (para. 26.15). 12

  This is the case, for for instance, under French law. See T. Bonneau, Chapter 21 ‘France’, this volume, section II ‘The Legal Basis for Prospectus Liability’ (para. 21.05). 13

  As under Luxembourg law, but also in fact under Dutch law, where, however, the scope of the special legislation is not confined to liability for the prospectus. See V. Hoffeld, Chapter 25 ‘Luxembourg’, this volume, section II ‘The Legal Basis for Prospectus Liability’ (para. 25.08); J. P. Franx, Chapter 24 ‘The Netherlands’, this volume, section II ‘The Legal Basis for Prospectus Liability’ (para. 24.06). 14

  Article 11(3), Prospectus Regulation includes some details about the situation that occurs where a registration document or universal registration document has been used as a constituent part of an approved prospectus. The provision reads as follows: The responsibility for the information given in a registration document or in a universal registration document shall attach to the persons referred to in paragraph 1 only in cases where the registration document or the universal registration document is in use as a constituent part of an approved prospectus. The first subparagraph shall apply without prejudice to Articles 4 and 5 of Directive 2004/109/EC [i.e. the Transparency Directive] where the information under those Articles is included in a universal registration document. 15

  Article 6(2), second paragraph, Prospectus Directive contained a provision which was admittedly less detailed, but had the same tenor.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

16

  Article 5(1), Prospectus Directive contained a provision which was admittedly less detailed, but had essentially the same tenor. 17

  Article 5(1), Prospectus Directive contained a comparable provision, although it did not contain the word ‘concise’. 18

  [2019] OJ EU L166/26. Delegated Regulation (EU) 2019/980 replaces Regulation (EU) 809/2004, [2004] OJ EU L149/1. 19

  Article 7(1), Prospectus Directive contained a similar provision.

20

  Article 7(3), Prospectus Directive contained a similar provision, although it referred to ‘the indicative Annexes to this Directive’. The word ‘indicative’ has been omitted in Article 13(3), Prospectus Regulation. This suggests that the Prospectus Regulation aims for a higher degree of harmonization than existed under the Prospectus Directive. 21

  Drafts of these guidelines are now available: ESMA, Consultation Paper, Draft Guidelines on disclosure requirements under the Prospectus Regulation, ESMA31-62-1239, 12 July 2019. This power is based on Article 16(3), Regulation (EU) 1095/2010 [2010] OJ EU L331/84 (ESMA Regulation). 22

  ESMA, Final Report—ESMA Guidelines on risk factors under the Prospectus Regulation, ESMA31-62-1217, 29 March 2019 (ESMA, Final Report). ESMA’s obligation to adopt guidelines in relation to risk factors is based on Article 16(4), Prospectus Regulation. Under Article 16(5), the Commission is empowered (but not obliged) to adopt delegated acts in accordance with Article 44 to supplement the Prospectus Regulation by specifying criteria for the assessment of the specificity and materiality of risk factors and for the presentation of risk factors across categories, depending on their nature. The Commission has not yet exercised this power. 23

  However, no summary is required where the prospectus relates to the admission to trading on a regulated market of non-equity securities provided that: (i) such securities are to be traded only on a regulated market, or a specific segment thereof, to which only qualified investors can have access for the purposes of trading in such securities; or (ii) such securities have a denomination per unit of at least EUR 100,000. See Article 7(2), Prospectus Regulation. 24

  The summary must contain the following warnings: (i) the summary should be read as an introduction to the prospectus; (ii) any decision to invest in the securities should be based on a consideration of the prospectus as a whole by the investor; (iii) where applicable, the investor could lose all or part of the invested capital and, where the investor’s liability is not limited to the amount of the investment, a warning that the investor could lose more than the invested capital and the extent of such potential loss; (iv) where a claim relating to the information contained in a prospectus is brought before a court, the plaintiff investor might, under national law, have to bear the costs of translating the prospectus before the legal proceedings are initiated; (v) civil liability attaches only to those persons who have tabled the summary, including any translation thereof, but only where the summary is misleading, inaccurate, or inconsistent, when read together with the other parts of the prospectus, or where it does not provide, when read together with the other parts of the prospectus, key information in order to aid investors when considering whether to invest in such securities; (vi) where applicable, the comprehension alert required in accordance with point (b) of Article 8(3), Regulation (EU) 1286/2014 (PRIIPs) (PRIIPS stands for ‘Packaged Retail Investment and Insurance-Based Products’). 25

  The predecessor of Article 7, Prospectus Regulation regarding the summary was Article 5(2), Prospectus Directive.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

26

  [2019] OJ EU L166/1.

27

  Or possibly non-performance.

28

  For a general consideration of the European principle of effectiveness, see e,g, A. S. Hartkamp, European Law and National Private Law. Effect of EU Law and European Human Rights Law on Legal Relationships between Individuals, 2nd edn (Intersentia, 2016), nos 109–30. For a consideration of the European principle of effectiveness specifically in relation to MiFID II, see V. P. G. de Serière, Mr. C. Asser’s Handleiding tot de beoefening van het Nederlands Burgerlijk Recht. 2. Rechtspersonenrecht. Part IV. Effectenrecht [Securities Law] (Wolters Kluwer, 2018), nos 745 ff. 29

  Alfred Hirmann v Immofinanz AG, CJEU 19 December 2013, C-174/12, ECLI:EU:C: 2013:856. 30

  Genil 48 SL and Others v Bankinter SA and Others, CJEU 30 May 2013, C-604/11, ECLI:EU:C:2013:344. 31

  ibid.

32

  See Recital (5) in the preamble, Prospectus Regulation.

33

  In so far as relevant here, Article 6:162, Dutch Civil Code provides as follows: ‘2. Except where there are grounds of justification, the following are deemed tortious: an infringement of a right and an act or omission in breach of a statutory duty or a rule of unwritten law about generally accepted standards [emphasis added].’ 34

  Article 8(2), opening words and (b) and (c), Prospectus Directive contained provisions of a similar nature. 35

  See n. 34.

36

  Article 8(2), opening words and (a), Prospectus Directive contained the same provision.

37

  Drafts of these guidelines are now available: ESMA, Consultation Paper, Draft Guidelines on disclosure requirements under the Prospectus Regulation, ESMA31-62-1239, 12 July 2019. This power is based on Article 16(3), Regulation establishing ESMA. 38

  Article 6:162(2), Dutch Civil Code reads as follows: ‘Except where there are grounds of justification, the following are deemed tortious: an infringement of a right and an act or omission in breach of a statutory duty or a rule of unwritten law about generally accepted standards’ [emphasis added]. For a recent consideration of the influence of ESMA guidelines on private law, with particular reference to MiFID II, see Federico Della Negra, MiFID II and Private Law. Enforcing EU Conduct of Business Rules, dissertation European University Institute, Florence (Hart/Bloomsbury, 2019), 84 ff. 39

  A due diligence defence is accepted under Dutch law. See J. P. Franx, Chapter 24 ‘The Netherlands’, this volume, section VIII ‘Fault of the Party Who Is Sued’ (para. 24.33). In so far as relevant here, Article 6:162, Dutch Civil Code provides as follows: 1. A person who commits a tort against another which is imputable to him [DB’s italics] must repair the damage suffered by the other in consequence thereof. [ . . . ] 2. A tort can be imputed to the tortfeasor if it is due to his fault [DB’s italics] or to a cause for which he is accountable by law or by generally accepted principles. A due diligence defence is also available under Spanish law. See J. Redonet Sánchez del Campo, Chapter 23 ‘Spain’, this volume, section VIII ‘Fault of the Party Who Is Sued’ (para. 23.47).

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

40

  Alfred Hirmann v Immofinanz AG, CJEU 19 December 2013, C-174/12, ECLI:EU:C: 2013:856; Genil 48 SL and Others v Bankinter SA and Others, CJEU 30 May 2013, C-604/11, ECLI:EU:C:2013:344. 41

  Nationale Nederlanden v Van Leeuwen, CJEU 29 April 2015, C-51/13, ECLI:EU:C: 2015:286. 42

  Directive 92/96/EEC, OJ L360/1.

43

  Rotterdam District Court, 28 November 2012, ECLI:NL:RBROT:2012:BY5159, para. 2.9.

44

  Article 6:2, Dutch Civil Code reads as follows: 1. Creditor and debtor are obliged to act towards each other in accordance with the requirements of reasonableness and fairness. 2. A rule that would be binding on them by virtue of law, usage or juristic act does not apply if this would be unacceptable according to the criteria of reasonableness and fairness.

Article 6:248, Dutch Civil Code reads as follows: 1. A contract has not only the legal consequences agreed by the parties but also those consequences which, by virtue of the nature of the contract, follow from the law, usage or the requirements of reasonableness and fairness. 2. A rule that would be binding on the parties as a consequence of the contract does not apply if this would be unacceptable according to the criteria of reasonableness and fairness. 45

  But see M. W. Wallinga, ‘EU Investor Protection Regulation and Private Law. A Comparative Analysis of the Interplay between MiFID and MiFID II and Liability for Investment Losses’, dissertation, University of Groningen, 2018, 69. 46

  Directive 92/96/EEC, OJ EU L360/1. This has now been repealed and replaced by more recent versions. See Nationale Nederlanden v.Van Leeuwen, CJEU 29 April 2015, C-51/13, ECLI:EU:C:2015:286, para. 3. 47

  See also P. O. Mülbert, ‘EU-rechtliche Kapitalarkinformationsvorschriften und mitgliedstaatliche Haftungsregeln—Möglichkeiten und Grenzen am Beispiel der Prospektverordnung (EU) 2017/1129’, in: M. Dreher, I. Drescher, P. O. Mülbert, and D. A. Verse (eds), Festschrift für Alfred Bergmann zum 65. Geburtstag am 13. Juli 2018 (De Gruyter, 2018), 529–40, 538–9. 48

  See also Recitals (27) and (60) in the preamble, Prospectus Regulation.

49

  cf. Mülbert (n. 47), 537–38.

50

  See also Recital (1), preamble, Prospectus Regulation.

51

  See e.g. Article 6:163 DCC (the Netherlands) and para. 823 BGB (Germany).

52

  Alfred Hirmann v Immofinanz AG, CJEU 19 December 2013, C-174/12, ECLI:EU:C: 2013:856, para. 40. 53

  See also Recital (3), preamble, Prospectus Regulation.

54

  See Parliamentary Papers II 2005/2006, 29 708, No. 19, 393.

55

  Dutch Supreme Court 27 November 2009, ECLI:NL:HR:2009:BH2162.

56

  ibid., paras 4.11.1 and 4.11.2.

57

  On this point, see C. J. M. Klaassen, ‘Bewijs van causaal verband tussen beweerdelijk geleden beleggingsschade en schending van informatie- of waarschuwingsplicht’, in: D. Busch, C. J. M. Klaassen, and T. M. C. Arons (eds), Aansprakelijkheid in de Financiële Sector, OO&R-reeks No. 78 ( Deventer: Kluwer, 2013), 151. In such cases, the French courts apply the theory of loss of opportunity or the theory of loss or damage suffered as a

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

consequence of a limitation of freedom of choice, whereas under German, Italian, and Spanish law there is a rebuttable presumption that an incorrect or incomplete prospectus has led to the investment decision. According to Luxembourg law, however, investors still seem to have the full burden of proving a causal link between the incorrect or incomplete prospectus and their investment decision. See: T. Bonneau, Chapter 21 ‘France’, this volume, section IX ‘Causation and Damages’ (para. 21.33); S. Mock, Chapter 20 ‘Germany’, this volume, section IX ‘Causation and Damages’ (para. 20.46); P. Giudici, Chapter 22 ‘Italy’, this volume, section IX ‘Causation and Damages’ (para. 22.27); J. Redonet Sánchez del Campo, Chapter 23 ‘Spain’, this volume, section IX ‘Causation and Damages’ (para. 23.50); V. Hoffeld, Chapter 25 ‘Luxembourg’, this volume, section IX ‘Causation and Damages’ (para. 25.70). 58

  For instance, see Alfred Hirmann v Immofinanz AG, CJEU 19 December 2013, C-174/12, ECLI:EU:C:2013:856, para. 19. 59

  According to S. Mock, Chapter 20 ‘Germany’, this volume, section IX.2.(i) ‘Purchaser is still the holder of the securities’ (para. 20.53). 60

  See Hartkamp (n. 28), nos 134–5 (with further references).

61

  Under German, Italian, and Luxembourg law, provisions that exclude or limit the liability of persons responsible for a prospectus are invalid. See S. Mock, Chapter 20 ‘Germany’, this volume, section XI ‘Disclaimers’ (para. 20.63); P. Giudici, Chapter 22 ‘Italy’, this volume, section XI ‘Disclaimers’ (para. 22.34); V. Hoffeld, Chapter 25 ‘Luxembourg’, this volume, section XI ‘Disclaimers’ (para 25.77). Under French law, a limitation or exclusion of liability will have only limited effect, since (i) it only applies between contracting parties and not in relation to third parties in tort claims; and (ii) it may not relate to essential contractual clauses. Moreover, it will have no effect if there has been intent or gross negligence. See T. Bonneau, Chapter 21 ‘France’, this volume, section XI ‘Disclaimers’ (para. 21.39). In the Netherlands, the Supreme Court held in the case of Coop (HR 2 December 1994, ECLI: NL: HR: 1994: ZC1564) that an issuer may legitimately include a provision in the prospectus to the effect that it does not accept responsibility for certain parts of the prospectus that relate to information provided by third parties (e.g. its accountant). Nonetheless, disclaimers of this kind have not become commonplace in the Dutch market, and the author of the Dutch chapter doubts (rightly in my opinion) whether such disclaimers are consistent with the European principle of effectiveness. Finally, it is noted in the Dutch chapter that it is not unusual in international practice and also in the Netherlands for a general disclaimer to be included in a prospectus for the benefit of the underwriters, to the effect that ‘no representation or warranty whatsoever is made by them as to the accuracy and completeness of the information in the entire prospectus’. The author of the Dutch chapter observes (rightly in my view) that it is doubtful whether a Dutch court would permit such a far-reaching disclaimer, at least in relation to the underwriters who were actively involved in drawing up the prospectus. See J. P. Franx, Chapter 24 ‘The Netherlands’, this volume, section XI ‘Disclaimers’ (para. 24.37). This will particularly apply to the lead manager. In the UK, the matter would appear to be one for the general law, whereby any exemption in a contract or a notice of disclaimer is subject to restrictions on excluding or restricting liability in the Unfair Contract Terms Act 1977, s3(1) of the Misrepresentation Act 1967 and Pt 2 of the Consumer Rights Act 2015. See G. McMeel, Chapter 26 ‘United Kingdom’, this volume, section XI ‘Disclaimers’ (para. 26.57). Customary disclaimers are typically included in Spanish prospectuses and are found acceptable by the Spanish financial regulator Comisión Nacional del Mercado de Valores (CNMV), including on forward-looking statements, reliance by the managers on information delivered by the issuer, etc., provided that disclaimers may not seek to exonerate a person responsible for the content of the prospectus of its liability under the Securities Market Act and Royal Decree 1310/2005, as these are mandatory provisions of imperative law which are meant to protect investors and which may not be waived or overridden by the parties. From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

See J. Redonet Sánchez del Campo, Chapter 23 ‘Spain’, this volume, section XI ‘Disclaimers’ (para. 23.54). 62

  See CJEU 26 October 2006, C-168/05; CJEU 4 June 2009, C-243/08; CJEU 6 October 2009, C-40/08; CJEU 30 May 2013, NJ 2013/487; CJEU 28 July 2016, C-168/15. 63

  See CJEU 3 October 2013, C-32/12; CJEU 4 June 2014, C-497/13. See also A. Ancery and B. Krans, ‘Ambsthalve toepassing van consumentenrecht: grensbepaling en praktische kwesties’, Ars Aequi (2016), 825–30. See also A. G. F. Ancery, ‘Ambtshalve toepassing van EU-recht: ook financieel toezichtrecht?’, MvV (2018) 3, 94–9. (It should be noted that Ancery is less optimistic about an obligation of the courts to assess their own motion whether terms are compliant with EU financial supervision law.) For a general consideration of assessment by the courts of their own motion by reference to European law, see Hartkamp (n. 28), nos 124–30. 64

  One of the key aims of the Prospectus Regulation is investor protection (see Recital (3), preamble, Prospectus Regulation). 65

  The power of the Commission and ESMA to do this is based on Article 20(11) (Commission) and (12) (ESMA). 66

  ESMA, Final Report.

67

  Court of Cassation, 3 March 2001, No. 3132. See P. Giudici, Chapter 22 ‘Italy’, this volume, section V ‘Persons Liable for Misleading Prospectus Information’ (para. 22.16). 68

  See: P. Giudici, Chapter 22 ‘Italy’, this volume, section V ‘Persons Liable for Misleading Prospectus Information’ (para. 22.16). 69

  Ars Aequi Maandblad, CJEU, 4 October 2018, ECLI:EU:2018:80 (2019), 59, with annotation by D. Busch and S. A. M. Keunen (also available in English, https:// papers.ssrn.com/sol3/papers.cfm?abstract_id=3346240); Nederlandse Jurisprudentie 2019/28, with annotation by V. P. G. de Serière; Maandblad voor Vermogensrecht 2019/04, with annotation by R. Meijer (Nikolay Kantarev v Balgarska Narodna Banka). 70

  The CJEU has already held in respect of national legislation limiting the liability of the highest Italian court to cases of gross negligence and bad faith that this goes beyond sufficiently serious breach (Traghetti, CJEU 13 May 2006, ECLI:EU:C:2006:391 and Commission v Italy, CJEU 24 November 2011, ECLI:EU:C:2011:775). As it makes no difference for the purposes of this principle what government body is responsible for the breach, it seems likely that the CJEU will extend this reasoning to other government bodies, such as financial regulators. 71

  Article 13(6), first para., Prospectus Directive contained the same provision.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Part III Prospectus Liability and Litigation, 19 Prospectus Liability: Competent Courts of Jurisdiction and Applicable Law Matteo Gargantini From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

Subject(s): Prospectus

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 441) 19  Prospectus Liability Competent Courts of Jurisdiction and Applicable Law I.  Why do Jurisdiction and Applicable Law Matter? An Introduction 19.01 II.  The Default Jurisdictional Regime for Prospectus Liability 19.10 1.  Cross-Border Prospectus Liability and the Brussels I-bis Regime 19.11 2.  An Overview of the European Court of Justice Case Law 19.18 III.  The Default Regime on Applicable Law for Prospectus Liability 19.30 IV.  Taking Stock of Default Rules: A System in Need of Reform 19.39 V.  Deviating from Default Rules: The Issuer Choice Regime 19.50 1.  Jurisdictional Agreements in Securities Litigation 19.52 2.  Remaining Issues in Issuer Choice Regime 19.61 VI.  Conclusion 19.66

I.  Why do Jurisdiction and Applicable Law Matter? An Introduction 19.01  This chapter addresses the European legal framework for cross-border disputes arising from alleged violations of prospectus rules. It deals with the identification of both jurisdiction and applicable law in cases where litigation involves transnational elements, so that a conflict may arise about who is the judge having jurisdiction and what law is this judge bound to apply.1 Crucial in both respects are, in the first place, the connecting factors to which EU law refers (see sections II ‘The Default Jurisdictional Regime for Prospectus Liability’, para. 19.10 and III ‘The Default Regime on Applicable Law for Prospectus Liability’, para. 19.30) and, in the second place, the rules concerning issuers’ and investors’ ability to deviate from such rules (see section V ‘Deviating from Default Rules: The Issuer Choice Regime’, para. 19.50). The importance of these rules can hardly be overestimated. Obviously, not all courts are equal, and neither are national laws. (p. 442) 19.02  Let us take jurisdiction first. Certain judicial systems may facilitate specialization, de jure or de facto, or can ensure a high level of predictability, especially when courts may rely on a sufficiently broad and consistent case law. Other judicial systems may lack one or the other feature, or both, thus increasing the costs of the uncertainty that surrounds disputes. This equally applies to the notorious fact that some jurisdictions are quicker than others in reaching res judicata. Not only does judicial inefficiency inflate litigation costs in some countries, but it also increases the risk of strategic exploitation by litigants that have an interest in postponing the outcome of the dispute—typically the prospective defendants. 19.03  For instance, a well-known litigation strategy by prospective defendants consists in filing a request for negative declaratory relief, thus assuming the formal role of plaintiffs. This action—sometimes referred to as ‘torpedo’—is normally brought before a convenient court, such as the one at the plaintiff’s domicile, or in a jurisdiction that has notoriously lengthy proceedings. This technique exploits the strict priority principle of the lis pendens rule of Article 29, Regulation (EU) 1215/2012 (Brussels I-bis), which requires the court where the subsequent affirmative action is filed to stay its proceeding. By filing this kind of action, the potential defendant can either try to establish jurisdiction in the desired forum, From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

especially when the location of jurisdiction is not clear-cut,2 or delay the potential plaintiff’s action for the large amount of time the seized court needs to decline jurisdiction.3 19.04  In the field of prospectus liability, this strategy may also rely on the European Court of Justice (ECJ) case law, which facilitates it to some extent. First, the effectiveness of a torpedo action crucially depends on the extent to which two different actions may be regarded as overlapping, so that the second proceeding is stayed. To avoid conflicting judgments (Art. 45(1)(c), Brussels I-bis Regulation), the ECJ applies an autonomous and broad interpretation of the ‘same cause of action’,4 which is deemed to exist whenever the central issue in the two proceedings is the same. As a consequence, pendency is deemed to occur if the claim for specific performance, on the one side, and the contrasting negative action for a declaratory judgment, on the other, are in opposition to each other.5 The role of the parties as claimant or defendant in the proceedings is irrelevant in this respect. The fact that a plaintiff in one proceeding is the defendant in the (p. 443) other and vice-versa, does not preclude lis pendens. Second, the ECJ case law allows bringing actions for a negative declaration before the court of the place where the alleged tort was committed.6 In the case of prospectus litigation, this will easily be the issuer domicile. 19.05  Identifying the applicable national law is equally crucial, of course. To begin with, different laws can bring along different qualifications of prospectus liability as contractual or tortious. This has broad implications in terms of available remedies, liability standards, and scope of liable persons. But even when the law or the case law of different jurisdictions adopts the same label—for instance, by referring to non-contractual liability—these elements may diverge. As for the remedies, some national regimes on tortious liability allow plaintiffs to claim compensation for the loss they suffered,7 some others enable rescission (or restitution),8 and yet other ones allow for both.9 As for the standard of liability, some jurisdictions deem negligence sufficient, while others require gross negligence.10 Finally, in spite of the (admittedly limited) harmonization under Article 11, Prospectus Regulation, countries diverge not only on the choice of whether corporate bodies or issuers (or both) should be liable, but also on the extension of their regimes for prospectus liability to other entities, such as underwriters.11 19.06  As this brief introduction demonstrates, determining the competent court of jurisdiction and the applicable law is a crucial precondition for legal certainty. Clear and efficient rules on cross-border prospectus disputes may reduce the cost of private enforcement, to the benefit of issuers and investor alike. However, this chapter will show that the legal framework for jurisdiction and applicable law in the context of prospectus liability is rather complex. This depends in part on the highly technical nature of conflict-oflaw rules, and in part on the fact that those rules leave room for interpretation when applied to securities offerings. As the drafters of those rules do not seem to have had primary market transactions in mind, the ECJ plays a fundamental role in providing clarifications. However, many questions remain on the proper interpretation of EU law, and even the available answers—however well grounded on the existing rules—do not always deliver a predictable outcome. 19.07  These issues may affect a broad range of securities disputes, and they have different consequences, depending on the disputed matter. With some inevitable simplifications, one can distinguish four different settings, only one of which is addressed here. In the (p. 444) first scenario, litigation may concern the allocation of securities’ ownership, as is the case when two parties claim incompatible rights on a share, or when they litigate about the existence of a lien on the share or about whether such lien is effective against third parties. These disputes concerning the ‘proprietary’ aspects of securities normally involve the negotiable character thereof.12 In a second scenario, litigation may concern the contract whereby a party acquired the relevant securities, and may, for instance, address the validity of such transfer between the two parties of that contract or the voidability of the same contract.13 In the third setting, the plaintiff may claim that the issuer is not complying with From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

the security’s terms and condition, and may file an action to enforce her rights vis-à-vis the issuer.14 This kind of litigation is particularly relevant in claims arising from frauds, and in particular when these involve debt instruments, because the issuer or the offeror that allegedly provided false or misleading information will have violated the issuance terms and conditions as well.15 The fourth and last setting is the one where one or more investors claim restitution and damages for an allegedly false or misleading prospectus.16 In the remainder of the chapter, reference will be made, unless otherwise specified, to this last setting alone.17 19.08  In practice, litigation may involve a number of defendants, including the issuer, any other responsible person identified as such in the prospectus, the auditors that audited the financial information, members of banking syndicates, global coordinators, lead managers and, in some countries, financial supervisors that vetted and approved the information (Art. 11(1), Prospectus Regulation; see also e.g. Annex I, section 2, Regulation (EU) 2019/980).18 However, issuers are most often challenged in this kind of dispute, so we will consider them as the archetypical defendants. Furthermore, the analysis will refer, unless otherwise specified, to individual or multiple claims that do not fall into the scope of collective redress tools (such as class actions and others), as these raise specific problems that cannot be dealt with in this chapter. (p. 445) 19.09  The remainder of the chapter is organized as follows. Sections II ‘The Default Jurisdictional Regime for Prospectus Liability’ (para. 19.10) and III ‘The Default Regime on Applicable Law for Prospectus Liability’ (para. 19.30) deal with the default regimes for jurisdiction and, respectively, applicable law. Section IV ‘Taking Stock of Default Rules: A System in Need of Reform’ (para. 19.39) highlights the shortcomings of such regimes, and section V ‘Deviating from Default Rules: The Issuer Choice Regime’ (para. 19.50) explores to what extent private ordering solutions may address them. Section VI (para. 19.66) concludes.

II.  The Default Jurisdictional Regime for Prospectus Liability 19.10  This section addresses the default jurisdictional regime for matters pertaining to prospectus liability. It first summarizes the applicable legal framework (section II.1 ‘CrossBorder Prospectus Liability and the Brussels I-bis Regime’, para. 19.11) and then moves on to analyse the most relevant judicial decisions pertaining to the localization of financial damages (section II.2 ‘An Overview of the European Court of Justice Case Law’, para. 19.18).

1.  Cross-Border Prospectus Liability and the Brussels I-bis Regime 19.11  To put the analysis in context, one should first consider that the general connecting factor for establishing international jurisdiction in cross-border disputes on civil and commercial matters is the defendant’s domicile (Art. 4 Brussels I-bis). 19.12  In the most typical setting of an alleged prospectus fraud, the issuer will play the role of defendant, shareholders or other investors being the plaintiff instead.19 The general rule of Article 4 would therefore, as a matter of principle, facilitate some concentration of litigation in a single country,20 with a partial21 limitation due to the fact that, for the purposes of Article 4, issuers could alternatively be sued, depending on the plaintiff’s choice, in the country where the issuer has either its registered office, or its central administration, or the principal place of business (Art. 63 Brussels I-bis). However, the relevant head of jurisdiction in prospectus litigation is rarely the defendant’s domicile, because plaintiffs often refer to other criteria.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 446) 19.13  The most common legal basis for determining jurisdiction (and applicable law22) in cross-border disputes involving issuer prospectus liability is indeed tortious (or non-contractual) liability (Art. 7(2)). This also applies when legal qualifications may diverge under national substantive laws,23 because tortious liability is normally regarded as the relevant criterion under the autonomous interpretation of Brussels I-bis.24 19.14  The reasons why prospectus liability qualifies as non-contractual under EU law are manifold.25 In the first place, this seems to be the most common qualification among EU Member States.26 Second, it is a widely shared view that the prospectus as such is not addressed to each investor individually, but rather to the market as a whole, so that a fraud would breach the general trust of market participants. To some extent, this approach seems to echo the ‘fraud on the market theory’, which is grounded on the assumption that misstatements affect investors because they primarily distort pricing mechanisms.27 Third, while a contractual relationship may occur between issuers and investors on the primary market, this is often not deemed to be the case on the secondary market and—so the argument goes—there is no reason not to treat investors equally in the two cases. While not all these justifications seem equally convincing, it seems indeed reasonable to qualify prospectus liability as tortious under the Brussels I-bis Regulation. 19.15  From the plaintiff’s perspective, grounding a claim on tortious liability gives the opportunity of bringing action before the courts where the harmful event has occurred.28 Moving jurisdiction away from the defendant’s domicile may in this case, according to the traditional view, facilitate sound administration of justice and the efficacious conduct of proceedings,29 in particular for the taking of evidence.30 Under the ECJ case law, the place of the harmful event can be either the place where the wrongful conduct took (p. 447) place (Handlungsort) or, at the choice of the plaintiff, the place where the damage itself occurred (Erfolgsort).31 While the wrongful conduct may easily have occurred in the Member State where the issuer is established,32 the place of the damage may facilitate the establishment of jurisdiction in the country where the plaintiff has her domicile.33 19.16  Unfortunately, these criteria have proven unable to ensure legal certainty. To be sure, the ECJ has conveniently curtailed the possibility that jurisdiction be established in places where only indirect damages are suffered. For this reason, the plaintiff cannot establish jurisdiction at her domicile on the mere basis that this is where her financial assets are concentrated.34 However, it remains quite unclear, in the light of the EJC case law, where exactly the place of the damage should be located. Plaintiffs have invoked multiple connecting factors in this respect, sometimes combining them in variable fashions. On its turn, the ECJ has progressively clarified its interpretation as long as it dealt with specific requests for a preliminary ruling, but it also inevitably fell short of providing a clear set of criteria that issuers and investors can rely upon in future disputes. 19.17  The most recurring connecting factor in the ECJ case law on disputes involving tortious liability in securities frauds is the investor’s account. However, this criterion seldom appears on its own, being often combined with other connecting factors. Furthermore, what is exactly meant by ‘investor’s account’ might also be quite uncertain, in particular as regards the alternative between the securities account where the financial instruments are registered or the bank account where the invested money originates. A brief overview of the most important ECJ decisions will clarify these aspects.

2.  An Overview of the European Court of Justice Case Law 19.18  This subsection provides a synthetic overview of ECJ decisions on cross-border disputes concerning securities liability. While not all the cases reported deal with prospectus frauds, they all contribute to clarifying what the connecting factors are for the identification of the place where a financial damage occurred. At the same time, the

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

analysis omits other cases where the claimant invoked prospectus liability, to the extent that such cases did not address issues on the localization of financial damages. 19.19  The leading case of our analysis is Kronhofer.35 This dispute originated from a claim filed with an Austrian court by an Austrian investor against a group of German defendants. The investor sought to recover damages for financial losses he suffered because of his investment in some call options having shares as their underlying asset. In the (p. 448) plaintiff’s view, the defendants (all employees of a German investment firm) had failed to warn him of the risks of option trading. To pursue its investments, the investor had opened an ‘investment account’ with the same German investment firm, while the call options were bought on the London Stock Exchange. In the plaintiff’s view, the place where the damage occurred had to be located at his domicile. However, the Austrian courts stayed proceedings and referred a request for a preliminary ruling to the ECJ with a view to ascertaining whether the ‘place where the harmful event occurred’ also includes the place where the injured party is domiciled, even if the investment was carried out in another Member State. 19.20  The ECJ ruling in Kronhofer was consistent with the previous case law, as it deemed insufficient for the plaintiff to refer, to establish jurisdiction at his domicile, to the place where his assets were concentrated. In the Court’s view, referring to the plaintiff’s domicile would undermine predictability of jurisdiction. Rather, the ECJ considered that Germany was the place where both the event giving rise to the damage and, most importantly, the place where the damage occurred were located. 19.21  While not expressly stating that the ‘investment account’ was to be regarded as the key connecting factor, the ECJ decision was quite clear in considering this account as the relevant criterion for the identification of the place where the financial damage occurred. What remained unclear, however, was the precise meaning of the expression ‘investment account’, as this might have referred to either the bank account opened with a view to performing the specific investment on call options (brokerage account)36 or to the security account where these options were subsequently registered.37 Furthermore, one could perhaps infer from the Court’s reasoning that the investor’s bank account where the invested money originally came from was irrelevant, instead, as the investor had apparently opened his investment account in Germany in the vicinity of the disputed investment, with the specific purpose to buy the call options. Not all these doubts have been dispelled by subsequent case law, as the remainder of this subsection demonstrates. 19.22  An important ECJ decision that took up again these questions on the determination of the place where financial damages occur was Kolassa. The dispute in Kolassa arose out of a financial scam uncovered in Germany in 2009. In 2005, a large British bank allotted through its German branch some certificates—qualified as bearer securities under paragraphs 793 ff. of the German BGB (Civil Code)—to a limited number of institutional investors. These sold the certificates on to the public at large through a base prospectus— which shows the non-equity nature of such securities.38 The prospectus was approved by the national competent authority in Germany and subsequently (p. 449) published in other countries, including Austria, under the passport regime of Directive 2003/71/EC. A German bank bought some of the certificates and endorsed them in favour of its Austrian subsidiary. In turn, this subsidiary entered into a contract with a retail investor domiciled in Austria, who thereby had the right to receive payments based on the certificates’ cash flow. The Austrian subsidiary held the certificates in its own name on a securities account opened in Munich, operating as a trust in favour of the Austrian investor, who had the right to receive the securities’ cash flow.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

19.23  As the value of the assets underlying the bearer securities plummeted, the Austrian investor filed a lawsuit in Austria against the British bank, claiming damages on the basis of both contractual and tort liability. In this analysis, we will only focus on prospectus liability, which in the plaintiff’s view resulted from false information and breach of control obligations. Once again, the plaintiff sought to establish jurisdiction at his own domicile, on the basis that this was the place where the damage had occurred under Article 7(2) Brussels I-bis. The ECJ answered that the courts where the plaintiff has his domicile can have jurisdiction only when this is the place where the loss occurred, and ‘in particular when that loss occurred itself directly in the applicant’s bank account held with a bank established within the area of jurisdiction of those courts’.39 To strengthen this result, the ECJ also stressed that this interpretation of Article 7(2) Brussels I-bis Regulation enables the issuer to foresee in which court it may be sued, because the decision to notify a prospectus in a certain Member State allows such issuer to anticipate the risk of being sued in that Member State by investors that, having incurred a loss, may claim they have not been adequately informed.40 19.24  Kolassa generically referred to the investor’s ‘bank accout’ when locating financial damages, bit it did not openly address whether this was to be considered as the bank account (in a narrow sense) where the invested money originated from or the account where the purchased securities were registered (a securities account). However, as the ECJ seems to have conceded that Austrian tribunals had jurisdiction, one can assume that the bank account in a narrow sense was the relevant one, as the securities were held in a German securities account while the money paid for consideration was probably transferred out of an Austrian bank account.41 Unfortunately, Kolassa fell short of providing other key answers, and possibly raised new questions that the subsequent case law could only partially address. As opposed to Kronhofer, nothing in Kolassa hints to the fact that a distinction existed between the generic bank account of the retail investor and a separate brokerage account.42 Is Kolassa then to be regarded as a partial (p. 450) revirement of Kronhofer in this respect, due to its focus on the investor’s generic bank account as a basis for jurisdiction? Furthermore, the ECJ itself seemed to consider the bank account alone as a weak legal basis for jurisdiction. Not only did the Court pay some consideration to the claimant’s domicile (perhaps due to the way the referring judge framed the question43), but it also added the further requirement of the passport notification in the Member State of the investor—this last requirement being, remarkably, the only reason why the head of jurisdiction was deemed predictable. What would then happen if an investor domiciled in a country not included in the offer decided to purchase the relevant securities? 19.25  Shortly after Kolassa, another dispute was brought before the ECJ that involved the identification of the place where financial damages occur. In the Universal Music case,44 a Dutch court submitted a request for a preliminary ruling addressing the distinction between the initial (or direct) financial damage and the consequential (or derived) financial damage. In the facts of the case, a Dutch company had committed to purchase a controlling stake in a Czech company, but due to a clerical error by a law firm in the Czech Republic the contract eventually signed reported an inflated price for the Czech company’s shares. The buyer and the seller settled the dispute out of court, for a price that fell in between the original price and the price actually appearing in the signed contract. The Dutch company then claimed redress from the Czech lawyers (and apparently the Dutch)45 on the basis of non-contractual liability, and tried to establish jurisdiction in the Netherlands on the basis that it had suffered a financial damage at its domicile.46 Although the buyer of the shares brought action only against the law firm, and therefore the dispute involved neither the

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

issuer nor the seller directly, the ruling is based on Article 7(2) Brussels I-bis and is therefore important for prospectus liability as well. 19.26  The Court’s decision in Universal Music is remarkable in many respects. First, the ECJ stressed that the whole series of events leading to the final damage—the precontractual negotiations, the signing of the contract, the subsequent out-of-court settlement—occurred in the Czech Republic. Interestingly enough, some of these events would seem to pertain to the place of the wrongful conduct, rather than to the place where the damage occurred, but the Court seemed to consider them as relevant to assess whether, overall, establishing jurisdiction in the Netherlands might have made the collection of evidence more complex. Second, the ECJ confirms that Kolassa made reference to the bank account of the claimant from which the investment was made—as opposed, therefore, to the securities account. (p. 451) However, and most importantly, Universal Music pointed out in the third place that, in Kolassa, other circumstances (such as the notification of prospectus) contributed to establishing jurisdiction at the claimant’s domicile, so that the place of the bank account cannot, on its own, be considered as a relevant connecting factor under Article 7(2) Brussels I-bis Regulation.47 Grounding jurisdiction on the sole basis of the bank account—so the Court’s reasoning goes—would make the outcome unpredictable, as claimants could have accounts in different countries with no special connection with the facts of the dispute. As a consequence, the place where the bank account is located plays a role in defining jurisdiction only when accompanied by other concurring circumstances.48 19.27  To some extent, the Universal Music strengthened what one may define a ‘holistic approach’ to the identification of jurisdiction in non-contractual matters. Just like in Kolassa, but this time more openly, the ECJ considered the relevant facts as a whole, rather than focusing on a single connecting factor, with the aim of establishing jurisdiction in the most convenient forum in the light of the specific circumstances. This approach was later confirmed by the last case we consider in our analysis: Löber. 19.28  The dispute in Löber49 originated from the same fraud that triggered the trial in Kolassa, and was equally (but this time exclusively) based on prospectus liability. Unsurprisingly, the outcome of the case is also aligned with Kolassa, as the ECJ deemed Austria to be the country of jurisdiction. What is relevant, however, is the reasoning of the Court, which stresses once again that the applicant’s bank account where the financial losses materialize does not suffice, on its own, to establish jurisdiction. Other factors to be considered include the clearing accounts intended for the execution of the transaction, the place where the secondary market purchase of the securities occurred, the place where the investment contract is signed and—what the ECJ particularly emphasizes for its ability to ensure predictability50— the notification of prospectus in the country of the defendant’s domicile.51 19.29  This is perhaps the most complete list of relevant factors the ECJ has fleshed out, to date, when deciding on the place where purely financial damages occurred under Article 7(2) Brussels I-bis Regulation. Remarkably, the ECJ clearly states that these factors should be ‘taken as a whole’52 to determine jurisdiction, which confirms that the approach of the Court is to consider the global features of each specific case, in line with the ‘holistic approach’ sketched out above.

(p. 452) III.  The Default Regime on Applicable Law for Prospectus Liability 19.30  Just like under the Brussels I-bis legal framework on international jurisdiction, prospectus liability equally qualifies as tortious under the European regime on the determination of applicable law, and is therefore subject to the Rome II Regulation (Regulation (EC) 864/2007), whether the securities have been acquired on the primary or on the secondary market.53 This qualification is substantially undisputed in the literature

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

and it hinges upon reasons that largely overlap with those recollected in paragraph 19.14 for jurisdiction, with the addition of the policy-oriented argument that labelling prospectus liability as ‘contractual’ would drag along the regime of the Rome I Regulation (Regulation (EC) 593/2008). This regime is normally deemed to be too permissive for investor protection needs, as it would in principle enable issuers to select the applicable law.54 Furthermore, even pre-contractual liability falls into the scope of Rome II, which further contributes to reducing the relevance of the Rome I framework (Art. 1(2)(i) Rome I Regulation; Art. 12 Rome II Regulation).55 19.31  As opposed to the tortious liability regime in Brussels I-bis regulation, which offers the claimant the opportunity of suing the alleged tortfeasor before the court of the place where the wrongful conduct occurred or before the court of the place where the damage occurred, the legal framework on the law applicable to non-contractual obligation relies only on the place where the damage occurred (Art. 4(1) Rome II Regulation).56 19.32  While this principle has been applied discontinuously, most scholars agree that Brussels I-bis and the Rome I and II Regulation should be interpreted in parallel, so that equivalent statements should be given equivalent meanings in all those statutes (see also, to this effect, Recital (7), Rome II Regulation). As a consequence, the case law summarized in section II.2 ‘An Overview of the European Court of Justice Case Law’ (para. 19.18) above inevitably influences the interpretation of the regime on the applicable law.57 19.33  Defining the law applicable to prospectus liability on the basis of the place where the damage occurred, as interpreted under the ECJ case law summarized above, is widely considered a suboptimal outcome. The reason is quite intuitive, as that interpretation determines the applicability of as many national laws58 as are the places where jurisdiction can be established. However, there is no evident reason why investors should (p. 453) enjoy different levels of protection, when they have all subscribed or purchased securities within the same issuance, nor why issuers should be subject to an equally broad number of divergent regimes.59 As section II.2 has shown, the ECJ has recently emphasized the importance of prospectus notification in establishing the place of damage, which may partially make the interpretation of conflict-of-law rules more predictable. While this might make some concerns less pressing, the fact remains that making the same issuance subject to different tortious law inevitably increases complexity. 19.34  For this reason, scholars have made various attempt to streamline the identification of the applicable law, and to possibly concentrate the applicable regimes into one, and one only, national law. Remarkably, while the majority of scholars have explored alternative interpretations de lege lata or have submitted proposals de lege ferenda, no solution has individually emerged as dominant. Out of the many hypotheses that have been tested in the literature, four are worth mentioning here. All of them have their merits and their drawbacks, of course, but what is important to highlight is that they altogether show an overall lack of satisfaction with the current system, combined with the inability to agree on how an ideal system should look like. 19.35  The first alternative interpretation that is meant to determine the applicable law without referring to the place where the damage occurred relies on the so-called ‘escape clause’ of Article 4(3) Rome II Regulation. Under this rule, when the facts of the case clearly show that the tort is ‘manifestly more closely connected’ with a country other than that where the damage occurred, then the law of such country should apply. This provision provides potentially valuable room for flexibility, and has been considered by some scholars as the legal basis for various proposals. For instance, some suggest that the applicable law should be the law of the country where the issuer has its registered office.60 Others recommend applying the law of the place where the relevant market is located.61 And still others refer to the home country as defined under the rules for prospectus approval.62 While most scholars consider the escape clause of Rome II Regulation as having a lot of

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

potential to deliver an efficient outcome, the very fact that so many divergent opinions exist as to the applicable law demonstrates how problematic it might be to identify a ‘manifest’ close connection to a specific country. 19.36  The second alternative that scholars have explored is the qualification of prospectus liability as precontractual liability (culpa in contrahendo; Art. 12 Rome II Regulation).63 This interpretation would lead to determining the applicable law on the basis of the (p. 454) rules for contractual obligations, an outcome that even some authors that are sceptical on its viability deem positive.64 To some extent, Recital (30), Rome II would seem to support precontractual liability, as this latter is said to include the violation of disclosure duties. However, the majority of scholars believe that reference to ‘dealing’ in Article 12 Rome II restricts its application to precontractual bargaining, and therefore exclude that such provision may address standardized communications like prospectuses.65 Furthermore, applicability of Article 12 may be questionable between issuers and secondary market investors, as no contacts occurred between them during the period preceding the publication of the prospectus.66 19.37  The third alternative relies on the Rome II regime on ‘rules of safety and conduct’ (Art. 17). The rule, whose wording may appear obscure at first sight, in practice requires that once a certain law has been deemed applicable on the basis of the place where the damage occurred, account should nonetheless be taken of the rules of conduct that were applicable in the place where the harmful behaviour occurred (Recital (34), Rome II). This provides a remedy to the risk of conflicting requirements between the applicable tortious law and the conduct-of-business regime to which the alleged tortfeasor is subject in its own jurisdiction. However, in the field of prospectus liability, Article 17 is less relevant than it might appear at first sight. First, harmonization of the prospectus regime has reduced the divergences among Member States on the standards of conduct issuers have to comply with when drafting a prospectus. Second, Article 17 does not address the remaining building blocks of tortious liability regimes, such as the burden of proof, the negligence standard, the quantification of damages, and so on. Third, the same provision applies only ‘as a matter of fact’ and ‘in so far as is appropriate’, which inevitably makes the court assessment a matter of discretion and consequently reduces legal certainty and predictability. 19.38  Fourth and final, consideration has been given to the possibility that the prospectus regime may pre-empt the Rome II framework according to the principle ‘lex specialis derogat legi generali’, which also applies to conflict-of-law rules on non-contractual obligations (Art. 27, Rome II Regulation). This might be the case if the prospectus regime contained its own conflict-of-law rule(s), which some authors identified in (what is now) Article 11(2), Prospectus Regulation. This requires Member States to ensure that their national provisions on civil liability apply to those responsible for the information given in a prospectus. Some authors consider this to be a conflict-of-law rule, which would make civil (tortious) liability subject to the same connecting factors that are applicable to the identification of the home Member State (and the national competent authority) under the Prospectus Regulation (Art. 2(m)). After all—so the argument goes—Article 27, Rome II is meant to safeguard instruments aimed at fostering (p. 455) the ‘proper functioning of the internal market’ (Recital (35(2)), Rome II), which is precisely the ambition of Prospectus Regulation (Recitals (3) and (4)). As a consequence, the applicable law would be, in a nutshell, that of the Member State of the issuer registered office for non-equity securities whose face value is below EUR 1,000 and for all equity securities, and either the state of the issuer’s registered office or the state where admission to trading is sought or where the offer is made—at the choice of the issuer—for the other non-equity securities. While this would allow having one single applicable rule for all the tortious claims, most scholars tend

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

to disagree with this interpretation, mainly because they do not consider Article 11(2), Prospectus Regulation as a conflict-of-law provision.

IV.  Taking Stock of Default Rules: A System in Need of Reform 19.39  The brief overview of the ECJ case law on the identification of the place where financial damages occur should have made clear that predicting jurisdiction and applicable law may be a difficult exercise for investors and issuers alike. As the ECJ does not rely on a single connecting factor, gauging the relative weight of the relevant circumstances may easily become a matter of discretional assessment. Take the list of connecting factors in Löber, for instance. While these elements offer perhaps the full menu of potential criteria that a court might want to adopt when interpreting Article 7(2), Brussels I-bis (and, consequently, Art. 4(1), Rome II), they do not appear to be hierarchically coordinated, so that the question remains what the identification of jurisdiction (and of applicable law, respectively) should look like in case one or more of these factors were missing, or were pointing to a different direction. 19.40  The divergent outcomes in Kolassa and Löber, on the one hand, and in Universal Music, on the other, are a case in point. The cases led to opposite results, as jurisdiction was established at the claimants’ domicile in Kolassa and Löber, and at the defendant’s domicile in Universal Music. The reasons for this differential treatment can be understood as a consequence of the overall stronger connection of the disputed facts with the investors’ domiciles in Kolassa and Löber, while in Universal Music all the relevant activities on the side of both the claimant and the defendant took place in the defendant’s country of domicile. 19.41  Overall, these decisions seem to strike a fair balance between the interest of the disputants. For instance, the ECJ recognizes that grounding jurisdiction and applicable law on the sole basis of the investors’ bank accounts would not ensure predictability. As a matter of fact, adopting bank accounts as the exclusive connecting factors might disperse jurisdiction and may lead to establishing litigation even in Member States where issuers carried out no activity whatsoever.67 (p. 456) 19.42  In spite of these attempts to foster predictability, it remains difficult on the basis of the case law to date, to draw a precise dividing line that could shed light on future litigation.68 To some extent, the plaintiff’s conduct in the facts that led to the dispute seems to play a role in the assessment, as a more active behaviour of this party in the defendant’s Member State—including wiring money to such Member State69—could facilitate the determination of jurisdiction and applicable law at the defendant’s domicile. However, the ECJ also attaches great importance to the defendant’s conduct, and in particular to the decision to take advantage of the prospectus passport with a view to offering financial instruments in the investors’ country. Absent such a notification, one may doubt that the ECJ would determine jurisdiction and applicable law at the defendant’s domicile, even if the defendant did not directly transfer money abroad to purchase securities (as in Kolassa and Löber). 19.43  Furthermore, whether an investment requires a direct transfer of money in the defendant’s country of domicile may depend on the technical devices adopted to perform the investment—out of the issuer’s control and likely unbeknownst to retail investors like the plaintiffs in Kolassa and Löber. In these two disputes, for instance, no such direct transfer occurred for the mere reason that in both cases—not coincidentally originating from Austria70—the intermediaries located in the investors’ Member State were acting in a trustee-like capacity on behalf of their clients. But what if the investors held securities

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

abroad in direct form (as in Kronhofer), after having purchased them with the intermediation of national investment firms? 19.44  On the basis of these concerns, one may consider anchoring jurisdiction to the securities account where the investor’s securities are registered.71 This would avoid some drawbacks that arise from the need to ‘follow the money’ used to pay the securities, but an agreement should first be found on the place where securities accounts should be located. Absent a special regime,72 this place might be difficult to determine, as securities are usually held in an immobilized or dematerialized form. Normally, such place is considered to be the place where the first intermediary from the point of view of the investor is located, a criterion known as ‘place of the relevant intermediary approach’ (PRIMA) or, with some slight variations, ‘Place of the relevant account approach’ (PRACA).73 However, many uncertainties remain as to whether this criterion can apply across the board, and as to its implications in specific circumstances. (p. 457) 19.45  While the analysis looks quite intricate for jurisdiction, uncertainties are even worse for the identification of the applicable law. On top of the concerns that surround the localization of financial damages, the debate on prospectus liability under Rome II shows that, in this case, there is no agreement even on the proper EU provision that should determine applicable law. 19.46  For both jurisdiction and applicable law, a thorough reflection should be undertaken on the role of the general principle that enables claimants to bring action where the alleged damaged occurred. This principle is usually justified on the basis that it may favour proximity between the judge and the evidence concerning occurrence and magnitude of the damage.74 However, ascertaining the size of the damage occurring as a consequence of securities’ depreciation does not normally require physical proximity, as a certificate by the relevant bank or securities custodian will often suffice. 19.47  Various proposals have been devised to solve these issues. For instance, some authors have suggested adopting as connecting factor the place of the venue where securities are admitted to trade or offered to the public.75 Most of these proposals are submitted de lege ferenda and rely on policy considerations that are inevitably subjective. However, they shed light on another drawback of the current regime: its lack of centralization, which is perceived to be problematic, especially for jurisdiction. Remarkably, this fragmentation is at odds with one of the main reasons why scholars deem prospectus liability as tortious, namely that prospectus frauds affect the market as a whole rather than each investor individually.76 19.48  Concentration of litigation is particularly relevant for collective redress, as the former is a precondition for the latter. Whether the Brussels I-bis regime is compatible with collective redress is a long-debated topic that cannot be addressed here. However, it is worth mentioning that some attempts have been made, at national level, to foster concentration and attract collective litigation. The most famous example is the Dutch Act on Collective Settlements (WCAM), which provides a particularly attractive mechanism for collective actions.77 The WCAM relies on an opt-out system for binding settlement agreements approved by the courts. When granting such approval, Dutch judges have adopted a generous approach in retaining jurisdiction, as shown by the prominent Shell78 and Converium79 cases. This case law relies on Articles 4(1) and (p. 458) 8(1), Brussels I-bis Regulation, which link jurisdiction to the defendant’s domicile and, respectively, allow suing multiple defendants in the courts for the place where any one of them is domiciled whenever separate proceedings may deliver irreconcilable judgments.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

19.49  Article 4(1) plays a role in the Dutch system for collective settlements because class members qualify as defendants in a procedure initiated by the (alleged) debtor with the aim of binding all the interested counterparties to give away their rights to initiate an individual claim. Article 8(1), at the same time, ensures that action can be brought in the Netherlands for all the parties, to the extent that at least one among the co-defendants has a Dutch domicile.80 Hence, those who hold a substantial claim play the defendant’s role, while potential debtors take on the plaintiff’s position. This system resembles a request for a negative declaratory relief, whose legitimacy—including its ability to switch plaintiff’s and defendant’s positions—has been recognized by the ECJ.81 At the same time, this mechanism substantially allows for taking jurisdiction away from consumer’s domicile, which is at odds with Articles 17 and 18, Brussels I-bis Regulation.82 On this basis, for instance, the ECJ has denied that assignments of claims from one consumer to another can move jurisdiction from the transferor’s to the transferee’s domicile.83

V.  Deviating from Default Rules: The Issuer Choice Regime 19.50  The previous analysis has shown that the EU legal framework for the determination of jurisdiction and applicable law does not always ensure predictability. Nevertheless, issuers and investors might manage these drawbacks if they were allowed to contract out of default rules and devise contractual clauses that best suit them. 19.51  However, no optional regime is in principle available for the determination of the law applicable to tortious liability. The Rome II system only allows to tailor the applicable law regime after the dispute has arisen or where all the parties involved are pursuing a commercial activity, but in this second case the requirement that the agreement be ‘freely negotiated’ does not seem to fit standardized transactions, as those involving a prospectus (Art. 14, Rome II Regulation).84 At the same time, restrictions to parties’ freedom of choice are one of the reasons why scholars tend to classify prospectus (p. 459) liability as noncontractual. The remainder of this section therefore concentrates on the regulatory framework for choice-of-court agreements.

1.  Jurisdictional Agreements in Securities Litigation 19.52  In Brussels I-bis, jurisdiction agreements are a particularly powerful tool. Their effects go beyond contractual relationships, as they involve ‘any disputes which have arisen or which may arise in connection with a particular legal relationship’ (Art. 25, Brussels I-bis )—and for this reason they are also relevant for tortious liability such as that stemming from prospectus frauds.85 Furthermore, jurisdictional agreements grant priority to the selected court, even in cases where the validity or the scope of the agreement is challenged (Art. 31(2) and (3); Recital (22)),86 which incidentally reduces the likelihood of torpedo actions that issuers might instrumentally bring before other courts of their own choice.87 19.53  However, and perhaps because of these significant effects, jurisdiction agreements are also subject to some stringent limits. First, they face severe limitations when involving consumers (Art. 19, Brussels I-bis). Second, even when they are not addressed to consumers, they still require an agreement, subject to special formal requirement, between the parties (Art. 25, Brussels I-bis). 19.54  For consumers, prorogation of jurisdiction may deviate from the special protection regime by way of an agreement entered into after the dispute has arisen (Art. 19, Brussels I-bis), which makes preventive choice-of-court agreements of little help. For this reason, classifying investors as consumers may have an impact on the effects, towards them, of jurisdiction agreements within a company’s charter (if shareholders) or securities terms and conditions (if bondholders or parties to derivative contracts). Whether investors can qualify as consumers under Article 17, Brussels I-bis when holding financial instruments outside their trade or profession remains partially an open question. However, with some simplifications, one can conclude, in the light of the scholarly literature and the case law to From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

date, that as a matter of principle shareholders are not consumers,88 while holders of (p. 460) securities other than shares may qualify as such, as long as they satisfy all the other requirements.89 19.55  The question therefore arises whether a contractual relationship exists and the required formalities are satisfied for investors that are not consumers (Art. 25, Brussels I-bis). For shareholders, the ECJ case law provides a sufficiently solid ground for jurisdictional agreements. In Powell Duffryn, the ECJ qualified company’s charters as contracts,90 and stated that jurisdiction clauses inserted in the company’s charter bind shareholders.91 In the Court’s view, when investors decide to become (and, subsequently, to remain) shareholders, they agree to be subject to all the provisions appearing in the statutes of the company (and to their subsequent amendments), which include jurisdictional agreements. 19.56  Things are more complex for bondholders (and in general for those who have invested in securities other than shares) that do not qualify as consumers.92 As the protective measures for consumers do not apply, these investors may be bound by jurisdiction agreements that predate litigation, but only to the extent that these arise out of an agreement that is either in writing (or evidenced in writing, including in electronic form through a durable medium) or in a form which complies with international trade usages (Art. 25(1)(a) and (c)).93 The source of complexity lies with the common understanding that these formal requirements are a legal device aimed at ensuring an actual and genuine agreement between the parties.94 As a consequence, the standard the ECJ has traditionally applied is stricter than—for instance—the standard normally deemed sufficient for establishing jurisdiction in contractual matters (Art. 7(1), Brussels I-bis), where an obligation ‘freely assumed’ by the defendant is normally deemed sufficient.95 Therefore, limitations may occur either because there is no agreement whatsoever between an issuer and its investors, or because an agreement lacks the required formalities (and might consequently not be genuine). 19.57  In its decision on Kolassa summarized in para. 19.22, the ECJ excluded that the Austrian investor had a contractual relationship with the issuer, as the formal bearer of (p. 461) the bonds was indeed the Austrian bank of which the investor was a client. In spite of some uncertainties,96 the decision is based on the holding technique typically adopted by Austrian banks for foreign securities, which is a sufficient (albeit formalistic) reason to exclude applicability of Article 17, Brussels I-bis.97 While in some countries intermediaries holding securities on behalf of the account holder often operate as mere custodians without any property interest in the registered securities, in other jurisdictions they may have some legal entitlements on securities held on behalf of investors, so that the holding chain creates multi-tiered entitlements on the same financial instruments. This latter is especially the case when the legal regime governing the relationship between custodians (or between the investor and a custodian) follows the rules of trust as inspired by the common law tradition.98 In this context, while the beneficial owner retains the equitable interest linked to her economic exposure, the custodian at the top of the chain has the formal legal ownership vis-à-vis third parties, including the issuer (indirect holding system99). Although the custodian model prevails in continental Europe, the holding-in-trust model may also be adopted in civil law countries on a case-by-case basis, as Kolassa shows. For this reason, the ECJ deemed that there was no legal obligation freely consented to by the issuer with respect to the Austrian investor.100 19.58  When accountholders qualify as the holders of securities vis-à-vis their issuers (direct holding system), the question remains whether a jurisdictional agreement fulfils the formalities required by Article 25, Brussels I-bis. The ECJ has recently tried to clarify this matter in Profit SIM, a decision originating from a request for preliminary ruling that concerned, among other matters, whether a choice-of-court agreement included in the terms and conditions of non-equity financial instruments could be binding on investors.101 From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

In the facts that led to the dispute, a German bank had issued, in the form of notes, credit derivatives linked to underlying bonds issued by an entity incorporated in Luxembourg. An Italian investment firm purchased such credit linked notes through a UK-based investment firm.102 The terms and conditions of the notes contained a clause stating that the UK court had jurisdiction over every dispute concerning, or arising out (p. 462) of, the notes themselves. Following the default of the Luxembourg-based vehicle, the Italian investment firm challenged before the Milan court the validity of the notes for lack of consideration. The German bank contested that such court had jurisdiction, and invoked the choice-ofcourt agreement. The seized judge stayed the proceeding and referred a request for a preliminary ruling to the ECJ in order to ascertain whether the requirement that a jurisdiction agreement be in written form (Art. 25(1)(a), Brussels I-bis) is satisfied where such an agreement is inserted into an offering document unilaterally created by a bond issuer, so that the prorogation of jurisdiction be made applicable to disputes involving future purchasers. The same court also asked whether, in case this question was answered in the negative, the insertion of a choice-of-court agreement into the offering document can be considered as a form which accords with usages in international trade or commerce under Article 25(1)(c), Brussels I-bis. 19.59  To answer these questions, Profit SIM distinguishes between primary and secondary market. As for primary market transactions, a jurisdictional clause written in a prospectus is binding on investors (under Art. 25(1)(a), Brussels I-bis) if the contract between the issuer and the underwriter ‘expressly mentions the acceptance of that clause or contains an express reference to that prospectus’.103 As for the secondary market, such clause is binding for subsequent buyers if all the three following conditions are met: (i) the clause was valid between the issuer and its counterparty on the primary market (underwriter or first buyer); (ii) the subsequent buyers succeeded to the primary market counterparty’s position under the applicable law, thereby acquiring the rights and obligations of that party; (iii) the subsequent buyers had ‘the opportunity to acquaint’ themselves with the prospectus containing the jurisdiction clause, ‘which implies that the prospectus is readily accessible’.104 19.60  When one or more of these requirements are missing, jurisdiction agreements retain validity only if they accord with a usage in international trade or commerce (Art. 25(1)(c), Brussels I-bis) This is in turn subject to strict requirements, namely that (i) such conduct is regularly followed by market participants for that specific kind of contract; and that either (ii.a) the parties had previously had commercial relations between themselves or with other parties operating in the sector in question, or (ii.b) recourse to jurisdiction agreements is sufficiently well known to be considered an established practice.105

2.  Remaining Issues in Issuer Choice Regime 19.61  In the light of the intricacies of the choice-of-court legal framework, it comes as no surprise that the current regime is widely deemed as inadequate.106 To begin with, one (p. 463) may wonder whether the distinction between direct and indirect securities holding systems—which Kolassa implicitly relies upon—justifies a different regime for jurisdiction agreements. The technicalities of holding systems are highly dependent on legal qualifications under the applicable law and might therefore cause jurisdiction to be established along different criteria, depending on the national context. Not only does this prevent equal treatment of substantially identical situations, but it also jeopardizes the autonomous interpretation of the Brussels I-bis Regulation, together with the need for uniformity it reflects.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

19.62  As for the effectiveness of jurisdiction agreements in cases where a contractual relationship can be established, the requirements set out in Profit SIM also raise some concerns. The requirement that the clause be valid between the parties on the primary market (i) seems to neglect that syndicates of financial intermediaries often facilitate securities placement by way of firm commitment, which entails underwriting (or buying) securities from the issuer (or the seller) and subsequently reselling them to the investors that have placed their orders on the primary market.107 These securities are therefore reaching their final purchasers after subsequent resales in the proximity of the primary market transactions, as is the case with retail cascades (Art. 5, Prospectus Regulation). Distinguishing between primary and secondary markets, as Profit SIM does, increases the legal risk for investors on the secondary market, as one does not see why bondholders’ rights and obligations should depend on the validity of a clause that they are not able to ascertain. 19.63  As for the need that subsequent buyers succeed to the primary market counterparty’s position under the applicable law (ii), the ECJ position has the merit of getting rid of interpretations that excluded enforceability of choice-of-courts clauses on the secondary market, but the reference to national laws in order to ascertain whether the initial bondholders’ rights and obligations pass on to subsequent buyers may be problematic. In some jurisdictions, rights on securities are originally created when credited on the purchaser’s account rather than derived from the previous owner and, even in the same jurisdiction, whether the one or the other form of transfer applies may depend on the circumstances.108 There is no evident reason, however, not to enforce jurisdiction agreements against new bondholders, whichever is the case. Finally, accessibility of prospectus (iii) is a vague concept, and it might remain under the control of the issuer (Art. 21, Prospectus Regulation). 19.64  One wonders whether these limitations are always justified. Securities are structurally aimed at allowing assignment of legal entitlements with no requirement of further approval by their issuers. As the ECJ puts it in Tilly Russ (a case referring to bills of lading), allowing the holder of the bill to remove herself from the compulsory jurisdiction as (p. 464) established by the same document would be alien to the purpose of Article 25, Brussels I-bis, which is to neutralize jurisdiction clauses that might pass unnoticed in contracts. Therefore, the ECJ correctly states that holders of bills of lading become vested with all the rights and subject to all the obligations mentioned in the document, including those relating to the agreement on jurisdiction.109 The reason why an identical reasoning should not apply to jurisdiction agreements within securities’ terms and conditions is unclear. 19.65  Relying on usages will not help too much either. First, ascertaining whether the form expressing a contractual clause corresponds to a well-established usage may not be easy.110 Although the ECJ has stated that repeated challenges to the validity of such forms do not necessarily mean a usage is no longer in force,111 assessing through litigation whether a practice is regularly observed would easily be prone to circularity. Second, market usages are not a reliable source: they do not favour incorporation by reference of jurisdiction agreements in securities112 and, unsurprisingly, are rarely referred to in international market practices.113

VI.  Conclusion 19.66  This chapter has analysed the current EU regime for the determination of courts of jurisdiction and applicable law in cross-border disputes concerning prospectus liability. In doing so, it has described the connecting factors EU law and case law refer to when identifying jurisdiction and applicable law in disputes on non-contractual matters involving financial damages, and has highlighted the drawbacks of the current regime. Overall, relying on the place where the damage occurred as an anchor leads to fragmentation of From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

litigation and reduces predictability. The recent ECJ efforts to adopt a more flexible (‘holistic’) approach have ensured fair results in specific disputes, but have not yet delivered clear guidelines for future cases. The chapter has then considered whether the EU regime on choice of law and jurisdiction may help address some of these drawbacks. While issuers (and investors) can have no choice on the applicable law, jurisdiction agreements offer some room for flexibility. However, the requirements these agreements are made subject to are not meeting issuers’ (and investors’) needs.

Footnotes: *  The author wishes to thank Tomas Arons and Burkhard Hess. All errors remain the sole responsibility of the author. 1

  The two may not coincide, of course, so that judges may have to apply foreign laws. See e.g. Andrew Scott, ‘The Scope of Non-Contractual Obligations’, in: John Ahern and William Binchy (eds), The Rome II Regulation on the Law Applicable to Non-Contractual Obligations (Leiden: Brill–Nijhoff, 2009), 63 (jurisdictional issues and choice-of-law issues have no necessary connection; cases where the European Court of Justice (ECJ) has expressed preference for a coincidence of jurisdiction and applicable law are exceptional). 2

  The stratagem is far from exceptional in practice. For instance, it was used in the Porsche SE/Volkswagen dispute. By lodging a negative declaratory action in Stuttgart, Porsche preempted a parallel claim by investors in London. The UK court suspended as per (now) Article 29, Brussels I-bis Regulation, and later on dismissed the trial as soon as the court in Stuttgart retained jurisdiction. Thomas Möllers, ‘The Takeover Battle Volkswagen/Porsche: The Piëch-Porsche Clan-Family Acquires a Majority Holding in Volkswagen’, Capital Markets Law Journal (2015) 10, 410, 427. 3

  A frequent form of this second version of the strategy is the so-called ‘Italian torpedo’, due to the sadly proverbial slowness of some Italian courts. 4

  Gubisch, ECJ, C-144/86, 8 December 1987, paras 11, 16, 18–19; Tatry, C-406/92, 6 December 1984, paras 45, 48; Gasser, C-116/02, 9 December 2003, paras 41–2; Folien Fischer and Fofitec, C-133/11, 25 October 2012, para. 49; Nipponkoa Insurance Co., C-452/12, 19 December 2013, para. 42. 5

  Negative declarations are also used to prevent collective claims, see McGraw Hill International (UK) Ltd v Deutsche Apotheker und Arztebank eG [2014] EWHC 2436. The announcement of bringing (a future) action may trigger an action for a negative declaration against (potential) lead plaintiffs. 6

  Folien Fischer and Fofitec, C-133/11, 25 October 2012, paras 21 and 52.

7

  This is the case with the UK: Paul Davies, ‘Damages Actions by Investors on the Back of Market Disclosure Requirements’, in: Danny Busch et al. (eds), Capital Markets Union in Europe (Oxford: OUP, 2018), 325–9. 8

  This is the case with Germany; ibid.

9

  This is the case with Italy; ibid.

10

  While the UK and Italy adopt a negligence standard, in Germany plaintiffs normally have to demonstrate gross negligence: ibid.; Martin Gelter, ‘Global Securities Litigation and Enforcement’, in: Pierre-Henri Conac and Martin Gelter (eds), Global Securities Litigation and Enforcement (Cambridge: CUP, 2019), 74–5. See also Eilís Ferran, ‘Cross-Border Offers of Securities in the EU: The Standard Life Flotation’, European Company and Financial Law Review (2007) 4, 461, 476–82.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

11

  Both the UK and Italy, for instance, extend liability to underwriters: Davies (n. 7).

12

  It is in this sense that, for instance, Regulation (EC) 593/2008 (Rome I Regulation) is made inapplicable to negotiable instruments, ‘to the extent that the obligations under such ( . . . ) negotiable instruments arise out of their negotiable character’ (Art. 1(2)(d)). See e.g. Matthias Lehmann, ‘Financial Instruments’, in: Jurgen Basedow et al. (eds), Encyclopedia of Private International Law (Cheltenham: Edward Elgar, 2017), 742. 13

  In this respect, for instance, the Rome I Regulation clarifies that when a contract is concluded on a trading venue, the law governing that contract is the law that governs such trading venue (Art. 4(1)(h)). For an example involving jurisdictional issues see, instead, Profit SIM, ECJ, C‑366/13, 20 April 2016. 14

  The dispute concerns, in this case, the ‘rights and obligations which constitute a financial instrument and rights and obligations constituting the terms and conditions governing the issuance or offer to the public’ of a financial instrument (see e.g. Art. 6(4)(d), Rome I Regulation, which excludes applicability of the general consumer regime). 15

  See e.g. Kolassa, ECJ, C-375/13, 28 January 2015, where the claim involved both contractual and non-contractual claims. 16

  This is the setting to which Article 11, Prospectus Regulation refers.

17

  For a broader analysis of litigation concerning claims based on securities’ terms and conditions (the third setting sketched out in the text), see Matteo Gargantini, ‘Jurisdictional Issues in the Circulation and Holding of (Intermediated) Securities: The Advocate General’s Opinion in Kolassa v Barclays’, Rivista di diritto internazionale private e processuale (2014) 50, 1095; Matteo Gargantini, ‘Capital Markets and the Market for Judicial Decisions: In Search of Consistency’, MPILux Working Paper Series (2016). 18

  Supervisors’ liability is in any event subject to the law of the home Member State (Art. 20(9), Prospectus Regulation). 19

  Exceptions are the so-called torpedo actions (para. 19.05 above) and the Dutch system for collective redress (paras 19.48 and 19.49 below). 20

  As opposed to other jurisdictional rules (see e.g. Art. 18 on consumers), Article 4, Brussels I-bis refers to the courts of a Member State, rather than to the courts of a specific place, thus apparently leaving to each Member State the identification of the competent court within its territory. 21

  The three connecting factors will often be located in the same Member State, although issuers may decide to have the real seat and the legal seat in different countries when their company law allows it—typically as a consequence of the incorporation doctrine: see e.g. Frank Wooldridge, ‘Uberseering: Freedom of Establishment of Companies Affirmed’, European Business Law Review (2003) 14, 227; Justin Borg-Barthet, The Governing Law of Companies in EU Law (Oxford: OUP, 2012), 50. 22

  See section III ‘The Default Regime on Applicable Law for Prospectus Liability’ (para. 19.30) below. 23

  See para. 19.05 above. On the effects of the autonomous interpretation of the Brussels I-bis Regulation on contractual and non-contractual basis for jurisdiction, see Tacconi, ECJ, C-334/2000, 17 September 2002, para. 19 (where a dispute based on contractual liability under national law is qualified as non-contractual under Brussels I-bis). 24

  This qualification is quite undisputed. For jurisdictional matters, see e.g. Matthias Lehmann, ‘Where Does Economic Loss Occur?’, Journal of Private International Law (2011) 7, 527, 529 (although referring to secondary market purchases alone); Matthias Lehmann, ‘Prospectus Liability and Private International Law—Assessing the Landscape after the

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

CJEU’s Kolassa Ruling (Case C-375/13)’, Journal of Private International Law (2016) 12, 318, 325–6 (more broadly) ; Gelter (n. 10), 100. 25

  For a more extensive analysis of the following reasons, see Francisco Garcimartín, ‘The Law Applicable to Prospectus Liability in the European Union’, Law and Financial Markets Review (2011) 5, 449, 451 (referring to applicable law, but with statements that can equally apply to jurisdictional issues). 26

  This seems also justified by the ECJ (autonomous) interpretation of Brussels I-bis concerning the violation of the duty to act in good faith during the negotiations: Tacconi, ECJ, C-334/00, 17 September 2002, paras 25 ff. Supporting such interpretation, Matthias Lehmann, ‘Special Jurisdiction’, in: Andrew Dickinson and Eva Lein (eds), The Brussels I Regulation Recast (Oxford: OUP, 2015), 146 (also in the light of Art. 12 and Recital (30), Rome II Regulation: see para. 19.36 below); critically Peter Mankowski, ‘Art. 5’, in: Ulrich Magnus and Peter Mankowski (eds), Brussels I Regulation (Munich: Sellier, 2012), 138–9. 27

  e.g. Jonathan Macey and Geoffrey Miller, ‘Good Finance, Bad Economics: An Analysis of the Fraud on the Market Theory’, Stanford Law Review (1990) 42, 1059, 1060. 28

  Article 7(2) refers to the courts ‘for the place where the harmful event occurred’, thus apparently restricting Member States’ discretion on the identification of the competent court within their territories. 29

  Henkel, ECJ, C-167/00, 1 October 2002, para. 46; Coty Germany, C-360/12, 5 June 2014, para. 47. 30

  Universal Music, ECJ, C-12/15, 16 June 2016, para. 27.

31

  Mines de Potasse d’Alsace, ECJ, 21-76, 30 November 1976, para. 17.

32

  See e.g. Kolassa, ECJ, C-375/13, 28 January 2015, para. 53; Gelter (n. 10), 100.

33

  For this reason, plaintiffs tend to refer to the place where the damage occurred. This is not without exceptions, however: see Melzer, ECJ, C‑228/11, 16 May 2013, para. 19. 34

  Marinari, ECJ, C-364/93, 19 September 1995; see also Dumez, C-220/88, 11 January 1990. 35

  Kronhofer, ECJ, C-168/02, 10 June 2004.

36

  See e.g. Lehmann, ‘Where Does Economic Loss Occur?’ (n. 24), 545. Apparently, A. G. Opinion, Melzer, case C-228-11, 29 November 2012, paras 31–2; Matthias Haentjens and Dorine Verheij, ‘Finding Nemo: Locating Financial Losses after Kolassa/Barclays Bank and Profit’, Journal of International Banking Law and Regulation (2016) 31, 346, 347. 37

  See e.g. Garcimartín (n. 25), 452–3.

38

  Article 5(4), Directive 2003/71/EC.

39

  Kolassa, ECJ, C-375/13, 28 January 2015, paras 55 and 57.

40

  ibid., para. 56.

41

  This is far from clear, as some authors suggested, at the time the decision in Kolassa was released, that the expression ‘bank account’ might just be an inaccurate wording for ‘securities account’: Tomas Arons, ‘On Financial Losses, Prospectus, Liability, Jurisdiction (Clauses) and Applicable Law’, Nederlands Internationaal Privaatrecht (2015) 377, 380; Gargantini, ‘Capital Markets’ (n. 17); Haentjens and Verheij (n. 36), 352. 42

  In the case of Kolassa, the Austrian bank formally held the securities in a trustee-like position in a German securities account on behalf of the retail investor, who only had claims against the Austrian banks and did not formally qualify as the owner of those securities

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(Kolassa, ECJ, C-375/13, 28 January 2015, para. 15). For this reason, no specific brokerage account needed to be opened in Germany. 43

  ‘Is the wording “the place where the harmful event occurred or may occur” in Article 5(3), Regulation No. 44/2001 to be interpreted as meaning that, when a security is purchased on the basis of deliberately misleading information, the place where the damage occurred is taken to be the domicile of the person suffering the loss, being the place where his assets are concentrated?’ (ECJ, Kolassa, ECJ, C-375/13, 28 January 2015, para. 19(3)(b)). 44

  Universal Music, ECJ, C-12/15, 16 June 2016.

45

  It remains unclear why the applicant did not try to establish jurisdiction in the Netherlands also on the basis of the domicile of codefendants (Art. 8(1), Brussels I-bis Regulation). 46

  It was undisputed that the place of the alleged wrongful conduct was the Czech Republic (ibid., para. 29). 47

  Universal Music, ECJ, C-12/15, 16 June 2016, para. 38.

48

  ibid., para. 39.

49

  Löber, ECJ, C-304/17, 12 September 2018.

50

  ibid., para. 35.

51

  ibid., paras 32–3.

52

  ibid., para. 31.

53

  See e.g. Garcimartín (n. 25), 451. This does not exclude that contractual claims may arise from primary market transactions (such as a request to rescind the purchase agreement: ibid.), but these claims fall out of the scope of this chapter (nn. 13 and 14 above, and accompanying text). 54

  Garcimartín (n. 25).

55

  This is relevant, of course, to the extent that one believes that Article 1(2)(i), Rome I Regulation applies in the absence of individual bargaining, which is far from being a unanimous interpretation: see para. 19.36 below. 56

  To further clarify that the country of the place where the damage occurred has no alternative, the same provision states that that connecting factor applies ‘irrespective of the country in which the event giving rise to the damage occurred and irrespective of the country or countries in which the indirect consequences of that event occur’. 57

  Lehmann, ‘Prospectus Liability’ (n. 24), 336–7.

58

  Note that ‘national laws’ may include laws of non-EU Member States (Art. 3, Rome II Regulation). 59

  Lehmann, ‘Prospectus Liability’ (n. 24), 337.

60

  Wolf-Georg Ringe and Alexander Hellgardt, ‘The International Dimension of Issuer Liability—Liability and Choice of Law from a Transatlantic Perspective’, Oxford Journal of Legal Studies (2011) 23, 31, 33. 61

  Tomas Arons, ‘“All Roads Lead to Rome”: Beware of the Consequences! The Law Applicable to Prospectus Liability Claims under the Rome II Regulation’, Nederlands Internationaal Privaatrecht (2008) 26, 481, 485. 62

  For a synthesis of these opinions see Lehmann, ‘Prospectus Liability’ (n. 24), 338–9.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

63

  An extensive analysis in Michel Tison and Fran Ravelingien, ‘Roma Locuta, Causa Finita? Conflictenrechtelijke Capita Selecta Inzake Bancaire Aansprakelijkheid Na De Rome II-Verordening’, in: Johan Erauw and Piet Taelman (eds), Nieuw Internationaal Privaatrecht: Meer Europees, Meer Globaal (Mechelen: Kluwer, 2009), 239. 64

  Lehmann, ‘Prospectus Liability’ (n. 24), 338.

65

  ibid.; Ivo Bach, ‘Art. 12 Rome II’, in: Peter Huber (ed.), Rome II Regulation (Munich: Sellier, 2011), 318 (also for further references). 66

  ibid.; Andrew Dickinson, The Rome II Regulation. The Law Applicable to NonContractual Obligations (Oxford: OUP, 2008). 67

  See more broadly Gargantini, ‘Capital Markets’ (n. 17).

68

  Financial law is not the only area struggling with these issues. See the dispute recently brought before the ECJ on the localization of the place of the harmful event in connection with the German emission scandal: Verein für Konsumenteninformation, ECJ, C-343/19, still pending. 69

  See in this sense Johannes Ungerer, ‘Pure Financial Loss and International Jurisdiction for Tort under the Brussels I (Recast) Regulation’, Maastricht Journal of European and Comparative Law (2017) 24, 448, 452. 70

  On the role of the Austrian holding system for foreign securities see Gargantini, ‘Jurisdictional Issues’ (n. 17). 71

  In favour of establishing jurisdiction on the basis of the place where securities accounts are held, Arons, ‘On Financial Losses’ (n. 41), 380; Haentjens and Verheij (n. 36), 352; Giorgio Risso, ‘Financial Torts and Investor Protection: Is the Europeanisation of Third State Cases a Viable Solution?’, Netherlands International Law Review (2016) 63, 313, 322. Contra Lehmann, ‘Where Does Economic Loss Occur?’ (n. 24). 72

  For examples of special regimes, see e.g. Article 9(2), Directive 98/26/EC (on settlement finality) and Article 9(1), Directive 2002/47/EC (on financial collaterals). 73

  Matthias Haentjens, Harmonisation of Securities Law (Alphen aan den Rijn: Kluwer Law International 2007) 38–9 and 240; Philip Paech, ‘Market Needs as Paradigm—Breaking Up the Thinking on EU Securities Law’, in: Pierre-Henri Conac, Ulrich Segna, and Luc Thévenoz (eds), Intermediated Securities (Cambridge: CUP, 2013), 36–7. 74

  Zuid-Chemie, ECJ, C-189/08, 16 July 2009.

75

  Garcimartín (n. 25), 453; Arons, ‘ “All Roads Lead to Rome” ’ (n. 61), 486. See also Mankowski (n. 26), 255 (market values may be considered as the primary damage). 76

  See text accompanying n. 27 above.

77

  Ianika Tzankova and Deborah Hensler, ‘Collective Settlements in the Netherlands: Some Empirical Observations’, in: Christopher Hodges and Astrid Stadler (eds), Resolving Mass Disputes. ADR and Settlement of Mass Claims (Cheltenham: Edward Elgar, 2013), 91. 78

  Shell Petroleum N.V. v Dexia Bank Nederland N.V, Amsterdam Court of Appeal, 29 May 2009, NJ 2009, 506. 79

  Scor Holdings AG (f/k/a Converium Holdings AG), Amsterdam Court of Appeal, 12 November 2010, NJ 2010/683, LJN: BO3908 and 17 January 2012, LJN: BV1026.20. 80

  For an analysis, see Xandra Kramer, ‘Securities Collective Action and Private International Law Issues in Dutch WCAM Settlements: Global Aspirations and Regional Boundaries’, Global Business & Development Journal (2014) 27, 235.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

81

  See n. 4 above.

82

  Burkhard Hess, ‘Collective Redress and the Jurisdictional Model of the Brussels I Regulation’, in: Arnaud Nuyts and Nikitas Hatzimihail (eds), Cross-Border Class Actions. The European Way (Munich: Sellier, 2014), 65. 83

  Schrems II, ECJ, C-498/16, 25 January 2018, para. 49. The decision follows the Opinion rendered by the Advocate General (14 November 2017, paras 121–3, observing that the Brussels I-bis regulation is an insufficient basis for cross-border EU collective actions). 84

  See text accompanying n. 94 below on the necessity to have a genuine consent for jurisdiction agreements. 85

  Haentjens and Verheij (n. 36), 355.

86

  This regime was introduced in the Brussels I recast as a remedy to the opposite stance taken by the ECJ in its previous case law, which confirmed jurisdiction of the court first seized on the existence of a choice-of-court agreement (Gasser, ECJ, C-116/02, 9 December 2003) and excluded anti-suit injunction could interfere with the decision of such court (Turner, ECJ, C-159/02, 27 April 2004): see Ilaria Queirolo, ‘Prorogation of Jurisdiction in the Proposal for a Recast of the Brussels I Regulation’, in: Fausto Pocar et al. (eds), Recasting Brussels I (Padua: Cedam, 2012), 191. 87

  See Xandra Kramer and Erlis Themeli, ‘The Party Autonomy Paradigm: European and Global Developments on Choice of Forum’, in Vesna Lazić and Steven Stuij (eds), Brussels Ibis Regulation. Changes and Challenges of the Renewed Procedural Scheme (The Hague/ Heidelberg: Asser Press–Springer, 2019), 27. A proper use of jurisdiction agreement could therefore protect investors (including, ironically, consumers). This would depend, of course, on the bargaining power of larger investors on the primary market: Gargantini, ‘Capital Markets’ (n. 17). 88

  Peter Mülbert, ‘Gerichtsstandsklauseln als materielle Satzungsbestandteile’, Zeitschrift für Zivilprozess (2005), 118, 313, 332; Rainer Hausmann and Ilaria Queirolo, ‘Art. 23’, in: Thomas Simons, Rainer Hausmann and Ilaria Queirolo (eds), Regolamento ‘Bruxelles I’ (Munich: IPR Verlag, 2012), 481. Overall, the reason behind this interpretation seems to rely on the residual nature of the claims shareholders are entitled to, and on the powers they enjoy in the company’s governance. 89

  See Kolassa, ECJ, C-375/13, 28 January 2015, paras 23–4.

90

  Powell Duffryn, ECJ, C-214/89, 10 March 1992, paras 16 and 19. See also Martin Peters, ECJ, 34/82, 22 March 1983, para. 13. 91

  Powell Duffryn, ECJ, C-214/89, 10 March 1992, paras 17 ff.

92

  Note that a prospectus is necessary when the offer is not limited to qualified investors, provided that it is addressed to at least 150 non-qualified investors (Art. 1(4), Prospectus Regulation). As not all retail investors under the Prospectus Regulation are consumers under the Brussels I-bis regime (Art. 2(e), Prospectus Regulation, which refers to the MiFID II classification), jurisdiction agreements retain their utility in prospectuses accompanying offerings of securities other than shares. This also applies to listing prospectuses in general. 93

  Less relevant for this analysis is the possibility for the parties to set, by way of a framework contract, the form for future jurisdiction agreements (Art. 25(1)(b), Brussels I-bis Regulation). 94

  Elefanten, ECJ, C-150/80, 24 June 1981. Hausmann and Queirolo (n. 88), 480–1; Ulrich Magnus, ‘Art. 23’, in: Magnus and Mankowski (eds) (n. 26), 480.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

95

  See e.g. Kolassa, ECJ, C-375/13, 28 January 2015, para. 41.

96

  See in particular the Opinion of the Advocate General in Profit SIM, ECJ, C-366/13, 20 April 2016, para. 56, that reads Kolassa in the sense that a direct contact be needed between issuers and investors for a contract to arise between them, and states that transfers taking place on the secondary market prevent such a direct contact, even when investors do not hold financial instruments in an (intermediated and) indirect form. For a critique, see Gargantini, ‘Capital Markets’ (n. 17); Donny Surtani, ‘Prospectus Liability: Bracing for Parallel Claims in Multiple Jurisdictions’, Butterworths Journal of International Banking and Financial Law (2015) 30, 284–5. The ECJ did not follow the Opinion (Profit SIM, ECJ, C‑366/13, 20 April 2016, paras 32–4). 97

  European Commission, ‘EU Clearing and Settlement. Legal Certainty Group— Questionnaire. Horizontal Answers’, Brussels (2006) 458. 98

  For an analysis of the UK system, see Eva Micheler, Property in Securities. A Comparative Study (Cambridge: CUP, 2007), 119. 99

  See in general Philip Paech, ‘Market Needs as Paradigm— Breaking Up the Thinking on EU Securities Law’, in: Pierre-Henri Conac et al. (eds), Intermediated Securities (Cambridge: CUP, 2013) 50–1. 100

  Kolassa, ECJ, C-375/13, 28 January 2015, para. 40.

101

  See more broadly Matteo Gargantini and Verity Winship, ‘Private Ordering of Shareholder Litigation in the EU and the US’, in: Sean Griffith et al. (eds), Research Handbook on Representative Shareholder Litigation (Cheltenham: Edward Elgar, 2018), 451–2. 102

  The description of the facts does not clearly determine whether the Italian investment firm was operating as a broker or as a dealer. 103

  Profit SIM, ECJ, C-366/13, 20 April 2016, para. 29.

104

  ibid., paras 36–7.

105

  ibid., paras 48–50.

106

  See e.g. Gargantini, ‘Capital Markets’ (n. 17); Haentjens and Verheij (n. 36).

107

  Stefano Lombardo, ‘The Stabilisation of the Share Price of IPOs in the United States and the European Union’, European Business Organization Law Review (2007) 8, 526 ff. 108

  European Commission, ‘EU Clearing and Settlement’ (n. 97), 165–71.

109

  Tilly Russ, ECJ, 71/83, 19 June 1984, paras 24 ff.

110

  Mainschiffharts-Genossenschaft eG (MSG), ECJ, C-106/95, 20 February 1997.

111

  Castelletti, ECJ, C-159/97, 16 March 1999, para. 29. Remarkably, the case concerned jurisdiction clauses in bills of lading, and the Italian Court of Cassation held, on reconsideration of the case after the ECJ decision, that no international market practice could be invoked because there was no evidence that the parties regarded the relevant jurisdictional clauses as binding (Alexander Layton and Hugh Mercer, European Civil Practice (London: Sweet & Maxwell, 2004), 732). 112

  Incorporation by reference is not deemed sufficient for jurisdictional agreements to circulate with bills of lading in international market practices: Hausmann and Queirolo (n. 88), 505–6.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

113

  Gilles Cuniberti, ‘Three Theories of Lex Mercatoria’, Columbia Journal of Transnational Law (2014) 52, 101 (modern lex mercatoria hardly meets the needs of international merchants, and empirical evidence shows that these rarely choose its application).

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Part III Prospectus Liability and Litigation, 20 Germany Sebastian Mock From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

Subject(s): Prospectus liability — Securities

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 465) 20  Germany I.  Introduction 20.01 II.  The Legal Basis for Prospectus Liability 20.02 1.  Historical Development of the Regulation of Prospectus Liability 20.02 2.  The Legal Nature of Prospectus Liability 20.05 III.  Definition of ‘Prospectus’ 20.06 1.  Statutory Prospectus Liability 20.07 2.  Civil Law Prospectus Liability 20.10 IV.  Persons Responsible for the Prospectus 20.11 V.  Persons Liable for Misleading Prospectus Information 20.12 1.  Persons Assuming Responsibility for a Defective Prospectus (Section 21, Subs. 1, Sent. 1, No. 1, Securities Prospectus Act) 20.13 2.  Persons Initiating the Issuance of the Defective Prospectus (Section 21, Subs. 1, Sent. 1, No. 2, Securities Prospectus Act) 20.22 3.  Failure to Publish a Prospectus 20.26 VI.  Persons Who Can Sue for Damages Caused by a Misleading Prospectus 20.27 1.  Purchasers of Securities 20.27 2.  Limitation to Purchases within the Six Months after the Public Offering 20.28 3.  Requirement of a Genuine Link to Germany 20.29 4.  No Relevance of the Level of Sophistication of the Purchasers 20.30 VII.  Defectiveness of Prospectus Information 20.33 1.  Standard of an Average Investor 20.34 2.  Incorrect or Incomplete Information 20.37 3.  Materiality of the Information to the Assessment by an Average Investor 20.38 4.  Failure to Update Information in the Prospectus 20.39 5.  Failure to Publish a Prospectus 20.40 VIII.  Fault of the Party Who is Sued 20.41 1.  Fault of the Issuer 20.42 2.  Fault of the Offeror 20.43 3.  The Issuing Consortium 20.44 4.  Failure to Publish a Prospectus 20.45

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

IX.  Causation and Damages 20.46 1.  Causation 20.47 2.  Damages 20.52 3.  Absence of Causation 20.58 X.  Evidence 20.62 XI.  Disclaimers 20.63 XII.  Prospectus Summary 20.64 XIII.  Directors’ Liability 20.65 XIV.  Annex—Sections 21–5, German Securities Prospectus Act (Wertpapierprospektgestz—WpPG) 490

I.  Introduction 20.01  In Germany, prospectus liability is part of the general legal concept of capital market information liability. Although statutory prospectus liability is extensively regulated, prospectus liability is generally of minor importance, since cases involving the direct liability (p. 466) of the issuer are rather rare for securities admitted to trading on organized markets. In contrast, the number of cases of prospectus liability for other securities is much higher, probably due to the fact that in this part of the capital market more dubious issuers and offerors exist. The rather small number of cases involving securities admitted to trading on organized markets is also due to the fact that German statutory prospectus liability states some major limitations, especially regarding the amount of damages the plaintiff can claim.1 This contribution will mainly focus on the prospectus liability for securities traded on organized markets and will only refer to the other instruments if necessary.

II.  The Legal Basis for Prospectus Liability 1.  Historical Development of the Regulation of Prospectus Liability 20.02  The specific regulation of prospectus liability has a long history in German law, dating back to the late nineteenth century.2 The rationale for the legislator in creating such a specific liability were basically the experiences after the unification of the German Reich in 1871 (Reichsgründung). The unification was followed by an enormous economic boom (so-called Gründerboom), in which especially shares of newly founded stock corporations were issued, although the stock corporations were based on no or weak business models. In the later 1870s, the boom was followed by a severe economic downturn (so-called Gründerkrach), in which many stock corporations went bankrupt, causing huge losses for private investors. As a consequence, the German legislator undertook a major reform of the stock corporation law in 1884, establishing a rather strict regime with more state control. Also, the legislator began to work on a specific stock exchange act (Börsengesetz3). In this context, prospectus liability was also addressed in order to create a reliable basis for liability of the issuer. However, before the stock exchange act (Börsengesetz) the Imperial Court of Justice (Reichsgericht) had already begun to develop a case law-based concept of prospectus liability, which was originally founded on the concept of culpa in contrahendo (today based on sections 280, subs. 1 and 311, subs. 3, German Civil Code4).5 (p. 467) By enacting the first regulation on stock exchanges in 1896, the German legislator adopted this case law and created a specific regulation on prospectus liability in sections 43 ff, German Stock Exchange Act (Börsengesetz). Due to the fact that this liability was limited to prospectuses for securities traded on a stock exchange, the courts continued to apply the old case law based on culpa in contrahendo to all other cases where a prospectus was issued voluntarily for securities not being traded on a stock exchange but distributed mostly

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

to (small) private investors by banks or sales agents.6 In this regard, the courts basically closed a gap left by the limited approach of the statutory prospectus liability. This legal regime of prospectus liability being based on the concept of culpa in contrahendo was commonly referred to as civil law prospectus liability (bürgerlich-rechtliche Prospekthaftung). 20.03  However, in the past two decades, the German legislator has begun to introduce a legal regime also covering these so-called grey market securities (Graumarktprodukte).7 Also in this context, a statutory prospectus liability was created in sections 20 ff, Investment Products Act (Vermögensanlagengesetz), leaving almost no scope of application for the civil law prospectus liability. In 2005, the German legislator undertook a major reform of the law on prospectuses by creating a new code dealing specifically with prospectuses for securities traded on organized markets (Securities Prospectus Act—Wertpapierprospektgesetz8). In 2011, the law on prospectus liability was completely rearranged, establishing the structure that still exists today. Consequently, in German capital market law, basically9 three legal regimes for prospectus liability exist, given in Table 20.1. Table 20.1  The three legal regimes for prospectus liability in German capital market law Statutory prospectus liability for securities traded on organized markets

Statutory prospectus liability for all other securities

General civil prospectus liability

Sections 21 ff, Securities Prospectus Act (Wertpapierprospektgesetz)

Sections 20 ff, Investment Products Act (Vermögensanlagengesetz)

Civil law prospectus liability (bürgerlichrechtliche Prospekthaftung)

See 5.13 for an English translation of sections 21 ff, Securities Prospectus Act.

(sections 280, 311, III German Civil Code [culpa in contrahendo])

20.04  However, it has to be noted that the two different statutory prospectus liability regimes are almost identical.10 Also, these statutory provisions on prospectus liability are not exclusive. In fact, section 25, subs. 2, Securities Prospectus Act and section 20, subs. 6 sent. 2, Investment Products Act both state that further claims which may be asserted pursuant to civil law provisions on the basis of a contract or of prohibited acts shall remain unaffected. However, the practical scope of application for this civil law prospectus liability is rather limited and remains (p. 468) important only in the context of public announcements or advertisements outside of prospectuses.11

2.  The Legal Nature of Prospectus Liability 20.05  Since major parts of prospectus liability are governed by a specific regulation, the legal nature of the prospectus liability is not of general concern. However, the legal nature of the specific prospectus liability becomes relevant if certain aspects of the liability are not addressed in the Securities Prospectus Act or the Investment Products Act. In this regard, it is generally accepted by legal scholars and established by case law that prospectus liability has its origin in a pre-contractual relationship and is therefore basically contractual.12 This is especially the case for the civil law prospectus liability (bürgerlich-rechtliche Prospekthaftung).

III.  Definition of ‘Prospectus’

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

20.06  The current German law does not provide a specific definition of a prospectus, since the statutory prospectus liability follows a rather formalistic approach. Only in the context of civil law prospectus liability the case law provides such a definition.13

1.  Statutory Prospectus Liability 20.07  The provisions on prospectus liability for securities traded on organized markets can only be applied if the securities were admitted to trading on a stock exchange (p. 469) on the basis of a prospectus (section 21, subs. 1 sent. 1, Securities Prospectus Act). Consequently, prospectus liability is based on the prospectus that was approved by the Federal Financial Supervisory Authority (BaFin). Such an approval is suitable for a regular prospectus (Vollprospekt—sections 5, 7, Securities Prospectus Act; Art. 6 Prospectus Regulation (EU/2017/1129)), a simplified prospectus (verkürzter Prospekt— sections 5, 8, subs. 2, Securities Prospectus Act—Art. 6 subs. 1, 14 subs. 2, 18, Prospectus Regulation (EU/2017/1129)), and a base prospectus (Basisprospekt—section 6, Securities Prospectus Act, Art. 8, Prospectus Regulation (EU/2017/1129)). Also, a supplement of a prospectus is considered as a prospectus under section 21, Securities Prospectus Act, since the supplement also needs approval by the BaFin.14 Finally, also a voluntary prospectus (Art. 4, Prospectus Regulation (EU/2017/1129)) is considered a prospectus under section 21, Securities Prospectus Act.15 20.08  In addition, section 21, subs. 4, Securities Prospectus Act states that all written disclosure statements, the publication of which releases the issuer from the publication of a prospectus (Art. 1, subs. 5, Prospectus Regulation (EU/2017/1129)), shall also be deemed equal to a prospectus. Although section 21, subs. 4, Securities Prospectus Act makes a general reference to all publications which release the issuer from the publication of a prospectus, the reference is limited to the documents in accordance with Art. 1, subs. 5, lit. e) and f), Prospectus Regulation (EU/2017/1129).16 20.09  All other documents not being approved are not covered by the statutory prospectus liability. This applies to publications pursuant to Article 17, Market Abuse Regulation (MAR), financial reports (sections 114 ff., Securities Trading Act; Art. 4 ff. Transparency Directive), press releases,17 or public research analyses.18 Advertisements (Art. 22, Prospectus Regulation (EU/2017/1129)) are generally not considered as a prospectus under section 21, Securities Prospectus Act. Also, other forms of liability for advertisements do not exist, although in this context probably the principles of civil law prospectus liability19 apply.20 (p. 470) In this context it has to be noted that the statutory prospectus liability regime will probably cover these cases.21 If the (misleading) advertisement has been made before the issuance of the prospectus, the prospectus would have to be considered as being misleading since it does not include all necessary information (= false information made during the advertisement) for the investors. If the (misleading) advertisement is made together with the prospectus, a supplement of the prospectus has to be published in order to correct this false information of the prospectus.

2.  Civil Law Prospectus Liability 20.10  In the context of the civil law prospectus liability, the case law follows a much broader approach, under which all market-related written statements which contain relevant information for the evaluation of the investment or give such an impression and which seem to be a fundamental description of the investment are considered as a prospectus.22 In applying this definition, the Federal Court of Justice extended the civil law prospectus liability even to public statements of prominent persons advertising certain From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

investments. In the Rupert-Scholz decision of 2011, the Federal Court of Justice held a former minister of the federal government and well-known politician liable, since he advertised a later failed investment by especially underlining the seriousness of the investment due to the fact that he was a member of the supervisory board. Although this case law is a rather broad extension of the concept of prospectus liability, no further cases have been reported since 2011.

IV.  Persons Responsible for the Prospectus 20.11  Pursuant to section 5, subs. 3, sent. 1, Securities Prospectus Act the prospectus has to be signed by the offeror. If the securities are to be admitted to trading on an organized market, the applicant for admission also has to sign the prospectus (section 5, subs. 3, sent. 2, Securities Prospectus Act). Moreover, all persons or entities being responsible for the contents of the prospectus must be clearly identified in the prospectus by their names and function or, in the case of legal entities or companies, their company names and registered office (section 5, subs. 4, sent. 1, Securities Prospectus Act). These persons or entities must also declare that, to the best of their knowledge, the information contained in the prospectus is accurate and does not contain material omissions (p. 471) (section 5, subs. 4, sent. 1, Securities Prospectus Act). In contrast, the rules on prospectus liability follow a broader approach, also covering the persons assuming responsibility for a defective prospectus23 and the persons initiating the issuance of the defective prospectus.24

V.  Persons Liable for Misleading Prospectus Information 20.12  Under the provisions for prospectus liability for securities traded on organized markets, three different scenarios have to be distinguished regarding the persons being responsible for the prospectus. In the case of the issuance of a defective prospectus, the persons assuming responsibility (see section V.1) and the persons initiating the issuance of the prospectus (see section V.2) can be held liable. In the case of the failure to publish a prospectus, only the issuer and the offeror are responsible (see section V.3). Considering the fact that German law follows a rather broad approach regarding the persons being responsible for the prospectus so far, the principle of effectiveness (effet utile) as stated by Article 11, paragraphs (1) and (2), Prospectus Regulation (EU/2017/1129), became irrelevant. However, this aspect is relevant in the context of damages.25

1.  Persons Assuming Responsibility for a Defective Prospectus (Section 21, Subs. 1, Sent. 1, No. 1, Securities Prospectus Act) 20.13  Pursuant to section 21, subs. 1, sent. 1, No. 1, Securities Prospectus Act, any person assuming responsibility for the defective prospectus can be held liable. This includes every person signing the prospectus and therefore taking publicly responsibility for its content. Moreover, every person signing the prospectus voluntarily and not being obliged to do so can be held liable.26

(i)  Issuer 20.14  Consequently, section 21, subs. 1, sent. 1, No. 1, Securities Prospectus Act covers the issuer, since he is legally obliged to sign the prospectus (section 5, subs. 4, Securities Prospectus Act). Also, all board members—of the board of directors (Vorstand) or the supervisory board (Aufsichtsrat)—signing the prospectus personally can be held liable pursuant to section 21, subs. 1, sent. 1, No. 1, Securities Prospectus Act.27

(p. 472) (ii)  Offeror

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

20.15  Furthermore, the offeror28 is covered by section 21, subs. 1, sent. 1, No. 1, Securities Prospectus Act, since he is also legally obliged to sign the prospectus (section 5, subs. 4, sent. 3, Securities Prospectus Act).

(iii)  Issuing consortium 20.16  An issuing consortium cannot be considered as a person assuming responsibility for a defective prospectus, although it usually constitutes a civil partnership in which the members are jointly and severally liable. However, single members of the issuing consortium can be persons assuming responsibility for a defective prospectus if they also sign the application to list the securities on an organized market.29 Therefore, any agreement between the members of an issuing consortium is of no relevance for the question whether a single member of the issuing consortium has to be considered as a person assuming responsibility for a defective prospectus.30 In this context only the signing of the prospectus or the assumption of responsibility in the prospectus is relevant. However, the members of an issuing consortium are free to agree on an internal distribution of the consequences of prospectus liability.

(iv)  External experts 20.17  External experts (lawyers, tax consultants, auditors, or accountants) are generally not covered by section 21, subs. 1, sent. 1, No. 1, Securities Prospectus Act, since they do not sign the prospectus and therefore do not assume responsibility.31 However, it seems that this principle might not be prevailing law any more, especially for auditors. In this context, a distinction has to be made between the historical (financial) information (see section V.1.(iv)(a)) and the forecasts and estimates (see section V.1.(iv)(b)).

(a)  Historical information 20.18  In the case of historical (financial) information, it is doubtful whether this limited approach is still prevailing law, since the prospectus must include historical annual and semi-annual accounts, which usually include an audit report (Art. 6, Annex I, No. IX, Prospectus Regulation (EU/2017/1129)). For securities not traded on an organized market, the Federal Court of Justice held that accountants, lawyers, and other experts mentioned in a (voluntary) prospectus can be held liable, since the fact that they are mentioned in the prospectus creates a particular trust for investors in the correctness of (p. 473) the prospectus.32 However, in a recent case the Federal Court of Justice held that auditors can only be held liable if they do not merely act as (mandatory) auditors but also explicitly guarantee the correctness of the (financial) information in the prospectus.33 Besides the remaining uncertainties which expert can be held liable this case law was (so far) not extended to prospectuses of securities traded on an organised market. Several legal scholars argue in favour of such a liability especially since the Prospectus Regulation requires the issuer to especially name the persons being responsible for auditing the financial statements (Annex I no. II. Prospectus Regulation (EU/2017/1129)).34 Others deny such a liability since the concept of the statutory prospectus liability of section 21 ff. Securities Prospectus Act is based on the idea of a responsibility for the whole prospectus and not only parts of it.35 These scholars also claim that the auditor is only responsible for the financial statements but would in fact be liable for the complete prospectus since all liable persons are jointly and severally liable.36 Moreover, these scholars doubt whether the fact that the persons being responsible for auditing the financial statements have to be mentioned in the prospectus according to the Prospectus Regulation (EU/ 2017/1129) is a sufficient basis for such a liability. They also claim that this aspect can be determined by the legislators of the Member States.37 Finally, these scholars also claim that section 21 subs. 1 sent. 1 no. 1, Securities Prospectus Act offers the

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

possibility to sign the prospectus voluntarily and to assume responsibility by signing it. By introducing this option, the German legislator— according to these scholars38 —made clear that other persons not signing the prospectus cannot be held liable. If the experts are not mentioned in the prospectus at all it is generally accepted that they cannot be considered as persons being covered by section 21 subs. 1 sent. 1 no. 1, Securities Prospectus Act under any circumstances.39 Finally, experts can be held liable under tort law which however requires that the experts acted intentionally in a manner contrary to public policy (section 826 German Civil Code40).

(p. 474) (b)  Profit forecasts and estimates 20.19  Regarding forecasts and estimates the Federal Court of Justice is less reluctant to hold accountants liable. In 2014, the Federal Court of Justice held that an accountant can be held liable for approving profit forecasts and estimates in a prospectus as required by Article 3, Annex I, No. 13.2, Prospectus Regulation (EC/809/2004).41 In this case the court based the liability on a de facto contractual relationship. Under German law a third party can be included in a contract between two other persons (Vertrag mit Schutzwirkung zugunsten Dritter) if the third person is usually affected by the contractual performance by one party and needs to be protected. In the case of accountants, the application of this principle is highly controversial and not clearly settled in case law. Regarding profit forecasts and estimates in a prospectus as required by Art. 3, Annex I no. 13.2, Prospectus Regulation (EC/ 809/2004) the court held that the investors strongly rely on this information and that the accountants know that their approval of these estimates will be included in the prospectus.42

(c)  General liability for external experts in the case of mandatory prospectus information? 20.20  This case law started a discussion in Germany as to whether prospectus liability of external experts generally has to be assumed if the external experts provide mandatory content for the prospectus.43 The major argument in this context is the fact that the external experts know in these cases that the information provided by them will be part of the prospectus and therefore will be used to provide information for investors.

(v)  BaFin and stock exchange management 20.21  Neither the BaFin nor the stock exchange management assume responsibility for a defective prospectus under section 21, subs. 1, sent. 1, No. 1, Securities Prospectus Act by approving it.44 The BaFin can also not be held liable as the supervising state entity since— according to German law—the BaFin exercises its competences only in public and not in the interest of the single investors.45

(p. 475) 2.  Persons Initiating the Issuance of the Defective Prospectus (Section 21, Subs. 1, Sent. 1, No. 2, Securities Prospectus Act) 20.22  Also, any person who initiated the issuance of the prospectus can be held liable (section 21, subs. 1, sent. 1, No. 2, Securities Prospectus Act). In contrast to section 21, subs. 1, sent. 1, No. 1, Securities Prospectus Act, where persons are covered who publicly assumed responsibility for the prospectus, section 21, subs. 1, sent. 1, No. 2, Securities

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Prospectus Act addresses the initiator or creator of the prospectus. These are persons with a specific economic interest, and who had a major influence on the prospectus.46 20.23  These conditions are met by a controlling (majority) shareholder ordering a subsidiary to issue securities47 and a major shareholder issuing his or her shares if he or she had an influence on the creation of the prospectus.48 However, the application of section 21 subs. 1 sent. 1 no. 1, Securities Prospectus Act to controlling (majority) shareholder in a group of companies remains unsettled since the leading case of the Federal Court of Justice involved securities not admitted to trading on an organised market. Also, some scholars claim that the mere influence of the controlling (majority) shareholder cannot be sufficient to create a prospectus liability but that the controlling shareholder must have an own specific economic interest.49 Others claim that there has to be a specific influence of the controlling (majority) shareholder on the creation of the prospectus.50 Also—theoretically—a financial institution can be considered as a person initiating the issuance of the defective prospectus if they use another less solvent financial institution to issue the shares.51 20.24  External experts such as lawyers, tax consultants, accountants, or auditors are generally not covered by section 21, subs. 1, sent. 1, No. 2, Securities Prospectus Act, since they usually lack a specific economic interest. In particular, the remuneration for their services is not considered as a sufficient economic interest.52 20.25  The BaFin and the stock exchange management do not initiate the issuance of the defective prospectus pursuant to section 21, subs. 1, sent. 1, No. 2, Securities Prospectus Act by approving it.53

(p. 476) 3.  Failure to Publish a Prospectus 20.26  In the case of failure to publish a prospectus, only the issuer and the offeror can be held liable (section 24, subs. 1, sent. 1, Securities Prospectus Act).

VI.  Persons Who Can Sue for Damages Caused by a Misleading Prospectus 1.  Purchasers of Securities 20.27  Pursuant to section 21, subs. 1, sent. 1, Securities Prospectus Act, the purchaser of a security is entitled to damages. However, a distinction has to be made between purchasers of securities in the primary market and in the secondary market. While it is generally accepted that each purchaser of securities in the primary market is covered by these provisions, it is still not decided by the Federal Court of Justice—but generally accepted by legal scholars54—whether a purchaser in the secondary market can also claim damages. However, this aspect might be more difficult, since the persons being liable could be confronted with numerous purchasers and consequently numerous claims which could—in the case of the issuer—exceed the capital originally raised with the issuing of the securities. This can be illustrated with the following example: Example 1:The stock corporation X issues securities for an issuing price of EUR 50. A buys one share—in the primary market—for EUR 50. A few days later, A sells this share to B for EUR 50. Shortly after that, the market price for the shares drops to EUR 40 and B sells the share for this price to C. After that, the market rises to EUR 55 and C sells the share to D for EUR 55. Then the market price drops to EUR 30 and D sells the share to E for EUR 30. A few days later, the market price increases

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

to EUR 55 again and E sells the share to F. Then it becomes public that the prospectus contained some misleading information and the market price drops to EUR 30. F still holds the share. In this case, assuming the prospectus liability also applies to purchasers in the secondary market, the followings claims exist: A against X: No claim. B against X: Claim for EUR 10 (purchase price [EUR 50] minus selling price [EUR 40]). (p. 477) C against X: No claim, since C made a profit of EUR 15 (selling price [EUR 55] minus purchase price [EUR 40]). D against X: Claim for EUR 25 (purchase price [EUR 55] minus selling price [EUR 30]). E against X: No claim, since E made a profit of EUR 25 (selling price [EUR 55] minus purchase price [EUR 30]). F against X: Claim of F for redemption of the securities against reimbursement of EUR 55. Total amount of claims against X: EUR 90 (= EUR 10 [B] + EUR 25 [D] + EUR 55 [F]). Consequently, X faces not only a liability in general, but also a liability that clearly exceeds the amount of capital raised by the public offering. However, it has to be noted that this problem is limited in German law, since only the persons who purchase within the first six months after the public offering are entitled to damages (see section VI.2).

2.  Limitation to Purchases within the Six Months after the Public Offering 20.28  A major limitation for the persons who can sue for damages caused by a misleading prospectus is the condition that the purchase has to be made within the first six months after the public offering (section 21, subs. 1, sent. 1, Securities Prospectus Act). This limitation—only introduced by the German legislator in 199855—is based on the idea that the prospectus is only used as a basis for a decision by investors for a limited period of time after the public offering.56 By introducing a strict time limit of six months, the purchasers and all persons potentially being held liable have legal certainty that after the period of six months new claims against these persons cannot be based on the defective prospectus.57 Moreover, this limitation is considered—by the German legislator—as a compensation for the fact that the liability of the issuer could exceed the amount of capital raised by the public offering.58 Also, the German legislator assumed that after six months a causation between the defective prospectus and the decision of the investor to buy the securities can usually not be proved any more.59 Finally, the German legislator made an explicit reference to Article 11, US Securities Act 1933, stating a limitation of twelve months, and claimed that the shorter period of six months would better suit the needs of the German capital markets.60 (p. 478) Although stating a rather important limitation for prospectus liability, section 21, subs. 1, sent. 1, Securities Prospectus Act is hardly criticized among legal scholars.61 This is surprising, especially since the statutory liability for securities not admitted to trading on an organized market does not apply a similar strict limitation. In fact, in these cases all

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

transactions within the first two years (!) are covered (section 20, subs. 1, sent. 1, Investment Products Act).

3.  Requirement of a Genuine Link to Germany 20.29  As another requirement, section 21, subs. 1, sent. 1, Securities Prospectus Act states that the securities have to be admitted to trading on a stock exchange in Germany. A prospectus liability for securities admitted to trading on a stock exchange outside Germany requires that the securities were acquired pursuant to a transaction executed in Germany or a securities service rendered either partially or fully in Germany (section 21, subs. 3, Securities Prospectus Act). This requirement basically serves to establish a genuine link to Germany in order to avoid lawsuits against non-German persons without a further link to Germany.

4.  No Relevance of the Level of Sophistication of the Purchasers 20.30  Since section 21, subs. 1, sent. 1, Securities Prospectus Act refers only to purchasers of the securities in general, it is of no relevance whether the purchaser is a consumer or exceeding a certain level of sophistication as an investor. Neither the Directive 2006/114/EC on misleading advertising (see section VI.4(i)) nor Directive 2005/29 on unfair commercial practices (see section VI.4(ii)) is of relevance in this context.

(i)  No application of Directive 2006/114/EC (former Directive (84/450) on misleading advertising) 20.31  Neither the German courts nor legal scholars have so far referred to the Directive 2006/114/EC (former Directive (84/450)) on misleading advertising) in the context of prospectus liability. Also, the legislative materials of the reform implementing 2006/114/EC (former Directive (84/450)) into German law do not refer to prospectus liability. This is probably the case, since prospectus liability is traditionally explicitly codified, giving no need for applying the law on misleading advertisement.

(p. 479) (ii)  No application of Directive 2005/29 (unfair commercial practices) 20.32  The same applies for the Directive 2005/29 on unfair commercial practices. In the context of prospectus liability, neither the courts nor legal scholars referred to the law on unfair commercial practice. However, the legislative materials on the implementation of the Directive 2005/29 on unfair commercial practices state that the requirements of Article 7, subs. 5, Annex II are already implemented in German law in the Securities Prospectus Act.62 In this context, a shifting of the burden of proof to the defendant, as stated by Article 12, Directive 2005/29 on unfair commercial practices has not been discussed in Germany, resulting in the general assumption that the plaintiff has the burden of proof for the defectiveness of information in the prospectus.

VII.  Defectiveness of Prospectus Information 20.33  According to section 21, subs. 1, sent. 1, Securities Prospectus Act, the purchaser of securities is entitled to damages if the prospectus contains incorrect or incomplete information which is material to the assessment of such securities. Consequently, the defectiveness of prospectus information requires two conditions to be met, determined in accordance with a standard of an average investor (Durchschnittsanleger).

1.  Standard of an Average Investor 20.34  The general standard of the prospectus liability in Germany is an average investor, with the consequence that the individual standard of the investor is not relevant (e.g. her or his experience with the trading of securities, knowledge of the sector, etc.). According to

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

the case law, this means that an investor has no superior knowledge and is not familiar with specific terms, but is able to understand an annual financial statement.63 The last aspect in particular was heavily criticized by legal scholars.64 However, in a more recent case, the Federal Court of Justice only stated that an average investor has no superior knowledge and does not have the ability to understand financial statements.65 Although the Federal Court of Justice applied a less strict approach in this (p. 480) case, it has to be noted that in this case the securities were not admitted to trading on a stock exchange but were sold especially to (small) inexperienced investors. Therefore, it is not absolutely clear whether this aspect still has to be applied if the securities are admitted to trading on a stock exchange. Among legal scholars, it is heavily criticized that the Federal Court of Justice (probably) introduced two different standards for an average investor, depending on which investors the issuer addresses.66 20.35  Despite this dispute about whether an average investor is able to understand a financial statement or not, it is generally accepted that the investor must be able to understand the prospectus without consulting other documents (e.g. prospectuses of other issuers),67 and that the investor does not have to be able to understand technical (economical or judicial) terms.68 In contrast, the persons being responsible for the prospectus can expect that the investors read the prospectus carefully.69 Also, the purpose of the prospectus is not to replace (professional) investment advice.70 20.36  Finally, it is doubted by legal scholars whether this standard can still be defined by national law. In fact, some scholars argue that the standard has to be determined by European law and especially by the Article 7, subs. 2, Prospectus Regulation (EU/ 2017/1129) (‘The summary shall be accurate, fair and clear and shall not be misleading.’) and Article 5, subs. 1, sent. 2, Prospectus Directive (2003/71/EC) (‘This information shall be presented in an easily analysable and comprehensible form’).71 Also, it seems doubtful that the development of a standard in the national law of the Member States is consistent with the union scope of approvals of prospectuses (Art. 24, Prospectus Regulation (EU/ 2017/1129)).72

2.  Incorrect or Incomplete Information 20.37  Information is incorrect if it is not supported by facts or commercially justifiable.73 The same applies to predictions and forecasts,74 where also their probability has to be (p. 481) mentioned.75 Incomplete information is information missing in the prospectus, although being required by the Prospectus Regulation (EU/2017/1129).76 However, additional information can be necessary if this information is important for an average investor to make an investment decision.77 The same applies if the mere presentation of the facts in the prospectus is not sufficient but additional illustrations or explanations are necessary in order to understand these facts.78 These principles were accepted by courts in the case of an extensive use of permissible accounting techniques,79 discrepancies between different parts of the prospectus,80 or transactions that were merely made within a group of companies.81 Finally, it is generally accepted in the case law that incorrect or incomplete information can also be based on the overall impression (Gesamteindruck) of the prospectus, which is the case if positive information is exaggerated and negative information is suppressed, or the structure of the prospectus is misleading.82

3.  Materiality of the Information to the Assessment by an Average Investor 20.38  The incorrect or incomplete information must be material. This is the case if an average investor would probably change her or his investment decision if she or he knew the correct information.83 Therefore, materiality of incorrect or incomplete information has to be denied if an average investor would probably not consider the correct information in her or his decision.84 Generally, this is the case if the information has a direct impact on the From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

profitability of the issuer.85 In the case law so far, aspects like business outlooks,86 information about the development of a new product,87 and the value of real estate (if it has a significant impact on the profitability of the issuer)88 (p. 482) were considered as being material. However, aspects like minor positions in the financial statements89 or mere formal information90 are generally not considered as being material.

4.  Failure to Update Information in the Prospectus 20.39  The prospectus must include contemporary information. Old information or not updated information can be considered as incorrect or incomplete information.91 This has also been provided by Article 23, Prospectus Regulation (EU/2017/1129). Consequently, a violation of the requirements set by Article 23, Prospectus Regulation (EU/2017/1129) constitutes an incorrect or incomplete information.

5.  Failure to Publish a Prospectus 20.40  In the case of a failure to publish a prospectus, section 24 Securities Prospectus Act states a specific liability for the issuer and/or the offeror. However, it remains unclear in the current case law whether a failure to publish a prospectus has also occurred if a prospectus was published but not approved by the BaFin.92 Some scholars claim that such a formalistic approach cannot be applied in the context of civil liability, since an official approval by the BaFin does not change the fact that the investors received the prospectus and its information and based their investment decision on it. This becomes especially obvious when a complete and correct prospectus is published but not approved by the BaFin. In this case, it does not make any sense to impose a liability on the issuer or the offeror.93

VIII.  Fault of the Party Who is Sued 20.41  In German law, prospectus liability requires fault, although this is not explicitly addressed in the statutory prospectus liability. In fact, absence of fault serves only as an exclusion for the liability. Pursuant to section 23, subs. 1, Securities Prospectus Act, any person who can prove that they were not aware of the incorrectness or (p. 483) incompleteness of the information in the prospectus (fehlende Kenntnis) and that this lack of awareness was not due to gross negligence (grob fahrlässige Unkenntnis) cannot be held liable. Consequently, the person being held liable has the burden to proof to show that he or she acted without fault. Since this principle is explicitly stated in section 23, subs. 1, Securities Prospectus Act, there is no strict liability in German prospectus liability law.

1.  Fault of the Issuer 20.42  In the case of the issuer, a rather strict due diligence standard applies, since usually the issuer has all necessary information. The issuer must acquire any information—if not available within the company94—necessary to be included in the prospectus or provide a third person with this information if this person prepares the prospectus.95 Regarding the persons initiating the issuance of the prospectus,96 this standard is more difficult, since these persons do not necessarily have all information about the issuer. In this context, it is generally accepted that these persons must consider all information they already have and must obtain all information legally available.97

2.  Fault of the Offeror 20.43  The offeror98 usually has no information about the issuer but needs to acquire it. In this context, it is generally accepted that the offeror does not have to review any information provided by the issuer, but only those where considerable doubts exist.99 However, it is general practice to document the whole process of drafting and examining the prospectus and—in the case of the offeror—to require a comfort letter.100 Incorrect or incomplete information provided by external experts (e.g. lawyers, accountants, etc.) is From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

generally not the fault of the offeror.101 Nevertheless, it is generally assumed that the offeror has to make a plausibility check in these cases.102

(p. 484) 3.  The Issuing Consortium 20.44  In the case of an issuing consortium, each member is separately responsible, since each member acts on his or her own behalf.103 However, it is not finally settled whether this releases the (other) members of any fault. Also, it remains unclear in German law whether a higher standard has to be applied for the leader of the issuing consortium.104

4.  Failure to Publish a Prospectus 20.45  Finally, also in the case of a failure to publish, a prospectus fault is (probably105) necessary, although section 24, Securities Prospectus Act does not state the requirement of fault. However, since gross negligence would mean in this context that the issuer or the offeror were not aware of the fact that they had to publish a prospectus, fault can usually be assumed due to the fact that German law is rather restrictive in denying fault for not knowing the current law.

IX.  Causation and Damages 20.46  Probably the most controversial requirements of prospectus liability are causation (see section IX.1) and damages (see section IX.2). Both aspects are expressly addressed in German law, creating a sufficient level of legal certainty. However, German law follows a rather restrictive approach, especially in the context of damages. Besides these two aspects, German law also states three more reasons for an exclusion of the liability (see section IX.3).

1.  Causation 20.47  In general, German law requires a causal link between a breach of a contract or a tort and the damages of the plaintiff. This principle also applies to the law on prospectus liability. In fact, section 23, subs. 2, Nos 1 and 2, Securities Prospectus Act requires two different aspects of causation as elements of prospectus liability.

(i)  Securities were not acquired on the basis of the prospectus 20.48  Pursuant to section 23, subs. 2, No. 1, Securities Prospectus Act, prospectus liability is excluded if the securities were not acquired on the basis of the prospectus. Therefore, (p. 485) causation is assumed106 and the defendant has to prove that the plaintiff purchased the securities without knowing that the prospectus contained incorrect or incomplete information. This principle stated in section 23, subs. 2, No. 1, Securities Prospectus Act was originally developed by case law. This case law was based on the so-called Anlagestimmung, which meant that a causal link between the defective prospectus information and the decision of the investor to buy the securities was assumed if the prospectus created a positive reception of the securities on the market. In the reform of prospectus liability in 1998, the German legislator implemented this case in—the old version of—section 23, subs. 2, No. 1, Securities Prospectus Act.107 20.49  Such a rebuttal of the assumption by section 23, subs. 2, No. 1, Securities Prospectus Act is possible if the defendant can prove that the plaintiff never received the prospectus. Especially in online acquisitions, it is nowadays common that the bank or the financial institute requires the purchaser to download the prospectus or to explicitly declare that he or she does not want to receive the prospectus. Although such a declaration does not necessarily mean that the plaintiff purchased the securities not on a basis of the prospectus,

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

since the prospectus is usually free available in the internet, the declaration will probably rebut the assumption established by section 23, subs. 2, No. 1, Securities Prospectus Act. 20.50  In contrast, merely negative press reports about the issuer cannot rebut this assumption by section 23, subs. 2, No. 1, Securities Prospectus Act.108 However, if the public opinion about the issuer turns generally negative and is supported by massive (negative) press reports and even public statements by the issuer, the assumption is deemed to be rebutted.109

(ii)  Incorrect or incomplete information did not contribute to a reduction in the exchange price of the securities 20.51  Prospectus liability also does not exist if the facts about which the prospectus contains incorrect or incomplete information did not contribute to a reduction in the exchange price of the securities (section 23, subs. 2, No. 2, Securities Prospectus Act). Consequently, German law does not apply the fraud on the market theory from US securities law, but developed a similar concept. (p. 486) Before the enactment of section 23, subs. 2, No. 2, Securities Prospectus Act, the courts had already established a similar principle in case law.110

2.  Damages 20.52  Regarding damages, German law distinguishes between the situation where the purchaser is still the holder of the securities (see section IX.2(i)) and where the purchaser is no longer the holder of the securities (see section IX.2(ii)).

(i)  Purchaser is still the holder of the securities 20.53  If the purchaser is still the holder of the securities, the purchaser can claim—from the persons being liable111—redemption of the securities against reimbursement of the purchase price (section 21, subs. 1, sent 1, Securities Prospectus Act). However, the purchase price is pursuant to section 21, subs. 1, sent 1, Securities Prospectus Act, limited by the initial issuing price112 of the securities, and the costs customarily involved in the purchase of securities. Consequently, the purchaser cannot claim his or her purchase price for the securities, but only the issuing price if the issuing price is lower than the purchase price. Example 2: A buys one security of the issuer X at the issuing day for the issuing price of EUR 15. However, the real value (considering a correct prospectus) is EUR 10. Pursuant to section 21, subs. 1, sent 1, Securities Prospectus Act, A can claim EUR 15 plus costs, but has to transfer the security to the issuer. 20.54  By implementing this limitation, the rights of the purchaser are severely restricted. This is illustrated by the following example: Example 3: A buys one security of the issuer X at the issuing day for EUR 25, which was issued (the same day) with an issuing price of EUR 15. However, the real value (considering a correct prospectus) is EUR 10. Pursuant to section 21, subs. 1, sent 1, Securities Prospectus Act, A can claim only EUR 15 plus costs, but has to transfer the security to the issuer. Consequently, A makes a loss of EUR 10, since he bought the securities for EUR 25 and received only EUR 15 from X.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

The reason for this limitation of the purchase price by the issuing price is—according to the legislative materials—that the information in the prospectus is only the basis for the issuing price, and that every change in the market afterwards is not necessarily related to the prospectus and its information.113 Moreover, the German legislator considers (p. 487) this limitation as a strengthening factor to the German capital market and a help for issuers to raise capital.114 From an European law perspective, these limitations seem to be doubtful, since they might violate the principle of effectiveness (effet utile) as stated by Article 11, paragraphs (1) and (2), Prospectus Regulation (EU/2017/1129). However, so far this issue has not been discussed in German legal literature. 20.55  Also, the purchaser can only claim redemption of the securities against reimbursement of the purchase price. She or he is not entitled to keep the securities and to claim damages.115

(ii)  Purchaser is no longer the holder of the securities 20.56  In the case that the purchaser has already sold the securities, she or he can claim payment of the difference between the purchase price and the selling price of the securities and payment of the costs customarily involved in the purchase and sale of securities (section 21, subs. 2, Securities Prospectus Act). However, also in this case the rights of the purchaser are pursuant to section 21, subs. 2, Securities Prospectus Act, restricted since the purchase price is limited by the issuing price. Example 4: A buys one security of the issuer X at the issuing day for the issuing price of EUR 15. However, the real value (considering a correct prospectus) is EUR 10. A sells the security a few months later a)  at the price of EUR 7 and claims damages. A can claim EUR 8 plus costs, since the difference between the issuing price (EUR 15) and ‘his’ selling price (EUR 7) is EUR 8; b)  at the price of EUR 12 and claims damages. A can claim EUR 3 plus costs, since the difference between the issuing price (EUR 15) and ‘his’ selling price (EUR 12) is EUR 3. Example 5: A buys one security of the issuer X at the issuing day for EUR 25, which was issued (the same day) with an issuing price of EUR 15. However, the real value (considering a correct prospectus) is EUR 10. A sells the security a few months later at the price of EUR 10 and claims damages. A can only claim EUR 5 plus costs, since the difference between the issuing price (EUR 15) and ‘his’ selling price (EUR 10) is EUR 5. The fact that he bought the securities for EUR 25 is not relevant, since the purchase price is limited by the issuing price since. The reasons for this limitation of the purchase price by the issuing price are the same as in the case that the purchaser is still the holder of the securities.116 (p. 488) 20.57  Furthermore, it is generally accepted that the damages in the case that the purchaser is still the holder of the securities can be reduced due to contributory negligence (section 254, German Civil Code117) of the purchaser if the purchaser sells the securities for a price lower than the market price.118 However, the purchaser has no obligation to keep the securities in order to limit the damage as long as she or he sells them for a price higher than the market price.119

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

3.  Absence of Causation 20.58  In addition to a missing causation (see sections IX.1(i) and IX.1(ii)), the German law on prospectus liability states three more defences based on the absence of causation.

(i)  Awareness of the incorrectness or incompleteness of the information in the prospectus at the time of the purchase 20.59  First, the prospectus liability is excluded if the purchaser of the securities was aware of the incorrectness or incompleteness of the information in the prospectus at the time of the purchase (section 23, subs. 2, No. 3, Securities Prospectus Act). Such a knowledge of the purchaser destroys the causal link assumed by section 23, subs. 2, Securities Prospectus Act.

(ii)  Correction of the incorrect or incomplete information before the purchase 20.60  Causation—and consequently prospectus liability—also does not exist if a clear correction of the incorrect or incomplete information was published in Germany in the annual financial statements, in the interim report of the issuer, or in a publication pursuant to Article 17, MAR (section 23, subs. 2, No. 4, Securities Prospectus Act).

(iii)  Claims solely based on the information contained in the summary or a translation 20.61  Finally, prospectus liability does not exist if the claims are based solely on the information contained in the summary or a translation (section 23, subs. 2, No. 5, Securities Prospectus Act). In such a case, liability can only be based on the fact that the summary is misleading, inaccurate, or inconsistent when read together with the other parts of (p. 489) the prospectus, or if the summary does not provide, when read together with the other parts of the prospectus, all of the key information.

X.  Evidence 20.62  The statutory prospectus liability is based on a clear distinction regarding the burden of proof. While the plaintiff (= purchaser of the securities) must prove the defectiveness of information120 and the damages he or she suffered, the defendant (= person held to be liable) must prove his or her missing fault and the missing causal link. These rules of evidence can be derived from the structure of section 23, Securities Prospectus Act, since it states that the liability exists if the defendant can prove these aspects.

XI.  Disclaimers 20.63  According to section 25, subs. 1, Securities Prospectus Act, any agreement by which a claim for prospectus liability is limited or excluded in advance is invalid. Consequently, a disclaimer would have no effect on potential prospectus liability. Moreover, the BaFin has the power to deny the approval of a prospectus if the prospectus contains a disclaimer.

XII.  Prospectus Summary 20.64  In general, the prospectus summary can also be a basis for prospectus liability. However, section 23, subs. 2, No. 5, Securities Prospectus Act states that prospectus liability cannot solely be based on the information contained in the summary or a translation. Liability only exists if the summary is misleading, inaccurate, or inconsistent when read together with the other parts of the prospectus, or if the summary does not provide, when read together with the other parts of the prospectus, all of the key information.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

XIII.  Directors’ Liability 20.65  The statutory prospectus liability does not provide the possibility for investors to hold directors of the issuer liable for a defective prospectus. Board members—of the board of directors (Vorstand) or the supervisory board (Aufsichtsrat)—are only covered by section 21, subs. 1, sent. 1, No. 2, Securities Prospectus Act (persons initiating the issuance (p. 490) of the defective prospectus121 ) if they also have a specific economic interest and had a major influence on the prospectus, which can be the case if the board member intentionally created a defective prospectus because of a personal interest.122 Moreover, a liability can be based on tort law. This would require that the directors acted intentionally in a manner contrary to public policy (section 826, German Civil Code123). Besides, the directors can be held liable by the issuing corporation for a violation of their duties as board members (section 93, German Stock Corporation Act).

XIV.  Annex—Sections 21–5, German Securities Prospectus Act (Wertpapierprospektgestz—WpPG) 1.  Section 21, Liability for an Incorrect Listing Prospectus (1)  1Purchasers of securities admitted to trading on a stock exchange on the basis of a prospectus containing incorrect or incomplete information which is material to the assessment of such securities have a claim against 1.  the persons who assumed liability for the prospectus and 2.  the persons who initiated the issue of the prospectus on a joint and several basis, for redemption of the securities against reimbursement of both the purchase price, to the extent that said price does not exceed the initial issue price of the securities, and the costs customarily involved in the purchase of securities, provided that the purchase transaction was concluded after the publication of the prospectus and within six months after the securities being introduced to trading. 2If an issue price has not been determined, the first exchange price determined or established after the securities have been introduced to trading shall be deemed the issue price, or, in the event that the price is determined or established on several domestic exchanges at the same time, the highest first exchange price. 3Sentences 1 and 2 shall apply mutatis mutandis to the purchase of securities of the same issuer that do not differ from the securities specified in sentence 1 in terms of their features or in any other way. (2)  If the purchaser is no longer the holder of the securities, they may claim payment of the difference between the purchase price, to the extent that said price does not exceed the initial issue price, and the selling price of the securities and payment of the costs customarily involved in the purchase and sale of securities. Subsection (1) sentences 2 and 3 shall apply. (3)  If the securities of an issuer domiciled outside Germany are also admitted to trading on a stock exchange outside Germany, a claim pursuant to subsections (1) or (2) shall only exist if the securities were acquired pursuant to a transaction (p. 491) executed in Germany or a securities service rendered either partially or fully in Germany.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(4)  A written disclosure statement, the publication of which releases the issuer from the publication of a prospectus, shall be deemed equal to a prospectus.

2.  Section 22, Liability for Other Incorrect Prospectuses If a prospectus issued pursuant to section 3(1) sentence 1, which does not act as a basis for admission of securities to trading on a stock exchange in Germany, contains incorrect or incomplete information which is material to the assessment of such securities, section 21 shall apply mutatis mutandis, subject to the proviso that 1.  in applying section 21 (1) sentence 1 for the calculation of the period of six months, the date of the first public offer in Germany shall be controlling instead of the date of the introduction of the securities to trading and 2.  section 21 (3) shall apply to those issuers domiciled outside Germany whose securities are also offered to the public outside Germany.

3.  Section 23, Exclusion of Liability (1)  Any person who can prove that they were not aware of the incorrectness or incompleteness of the information in the prospectus and that this lack of awareness was not due to gross negligence shall not be liable pursuant to sections 21 and 22. (2)  Claims under sections 21 and 22 do not exist if 1.  the securities were not acquired on the basis of the prospectus; 2.  the facts about which the prospectus contains incorrect or incomplete information did not contribute to a reduction in the exchange price of the securities; 3.  the purchaser of the securities was aware of the incorrectness or incompleteness of the information in the prospectus at the time of the purchase; 4.  prior to the execution of the purchase transaction, a clear correction of the incorrect or incomplete information was published in Germany in the annual financial statements or the interim report of the issuer, in a publication pursuant to Article 17 of Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC and 2004/72/EC (OJ L 173 of 12 June 2014, p. 1) as amended or in a comparable announcement; or 5.  the claims are based solely on the information contained in the summary or a translation, unless the summary is misleading, inaccurate or inconsistent when read together with the other parts of the prospectus, or if the summary does not provide, when read together with the other parts of the prospectus, (p. 492) all of the key information required pursuant to section 5(2) sentence 1 in conjunction with (2a).

4.  Section 24, Liability for Failure to Publish a Prospectus (1)  1If a prospectus has not been published in contravention of section 3(1) sentence 1, purchasers of the securities have a claim against the issuer and offeror on a joint and several basis for redemption of the securities against reimbursement of the purchase price, to the extent that said price does not exceed the initial purchase price, and the costs customarily involved in the purchase of securities, provided that the purchase transaction was concluded prior to the publication of a prospectus and From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

within six months after the initial public offer in Germany. 2Sentence 1 shall apply mutatis mutandis to the purchase of securities of the same issuer that do not differ from the securities specified in sentence 1 in terms of their features or in any other way. (2)  1If the purchaser is no longer the holder of the securities, they may claim payment of the difference between the purchase price and the selling price of the securities and payment of the costs customarily involved in the purchase and sale of securities. 2Subsection (1) sentence 1 shall apply mutatis mutandis. (3)  If the securities of an issuer domiciled outside Germany are also offered to the public outside Germany, a claim pursuant to subsections (1) or (2) shall only exist if the securities were acquired pursuant to a transaction executed in Germany or a securities service rendered either partially or fully in Germany. (4)  Claims under subsections (1) to (3) do not exist if the purchaser was aware of the obligation to publish a prospectus at the time of purchase.

5.  Section 25, Invalid Limitation of Liability: Other Claims (1)  An agreement by which a claim pursuant to sections (21), (23) or (24) is limited or excluded in advance is invalid. (2)  Further claims which may be asserted pursuant to civil law provisions on the basis of a contract or of prohibited acts shall remain unaffected.

Footnotes: *  All translation of German law provisions are based on the official translation provided by the German Federal Ministry of Justice, http://www.gesetze-im-internet.de/ Teilliste_translations.html. 1

  See section IX.2.

2

  For a historical overview, see Assmann, in: Assmann, Schlitt, and von Kopp-Colomb (eds), WpPG, VermAnlG, 3rd edn (2017), paras 21–3, WpPG, n. 1 ff. 3

  ‘Börsengesetz’, Imperial Law Gazette, 22 June 1896, 157.

4

  Paragraph 280, subs. 1, German Civil Code states: If the obligor breaches a duty arising from the obligation, the obligee may demand damages for the damage caused thereby. This does not apply if the obligor is not responsible for the breach of duty.

Paragraph 311, subs. 3, German Civil Code states: An obligation with duties under section 241(2) may also come into existence in relation to persons who are not themselves intended to be parties to the contract. Such an obligation comes into existence in particular if the third party, by laying claim to being given a particularly high degree of trust, substantially influences the pre-contract negotiations or the entering into of the contract. 5

  See e.g. Emmerich, in: München Kommentar zum BGB, 8th edn (2019), para. 311, n. 94 ff. with an overview of this concept. See also Hopt, ‘Kapitalmarktrecht (mit

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Porspekthaftung) in der Rechtsprechung des Bundesgerichtshofs’, in: Heldrich and Hopt (eds), Liber Amicorum 50 Jahre BHG (2000), 496 ff. 6

  See e.g. Emmerich, in München Kommentar zum BGB, 8th edn (2019), para. 311, n. 94 ff. and also Hopt, ‘Kapitalmarktrecht (mit Porspekthaftung) in der Rechtsprechung des Bundesgerichtshofs’, in: Heldrich and Hopt (eds), Liber Amicorum 50 Jahre BHG (2000), 496 ff. 7

  The grey market is a non-regulated market with no general oversight by capital market authorities. This term evolved from the fact that the white market is the regulated market on a stock exchange and the black market is basically the illegal market. By using the term ‘grey market’ (Graumarkt), it is pointed out that this market is generally legal, but not regulated. 8

  ‘Gesetz über die Erstellung, Billigung und Veröffentlichung des Prospekts, der beim öffentlichen Angebot von Wertpapieren oder bei der Zulassung von Wertpapieren zum Handel an einem organisierten Markt (Wertpapierenprospektgesetz—wpPG)’, Federal Law Gazette I, 22 June 2005, 1698. 9

  There is also a specific regulation on prospectus liability for investment produces in Capital Investment Code (Kapitalanlagegesetzbuch), para. 306. 10

  See e.g. Mülbert and Steup, ‘Haftung für fehlerhafte Kapitalmarktinformationen’, in Habersack, Mülbert, and Schlitt (eds), Unternehmensfinanzierung am Kapitalmarkt, 4th edn (2019), n. 41.19 for a short comparative overview of both regimes. 11

  See section III.2.

12

  See Assmann (n. 2), paras 21–3, WpPG, n. 2, with further references.

13

  See section III.2.

14

  Groß, Kapitalmarktrecht, 6th edn (2016), para. 21, n. 64; Habersack, in: Habersack, Mülbert, and Schlitt (eds), Handbuch der Kapitalmarktinformation, 2nd edn (2013), para. 29, n. 12; Mülbert and Steup (n. 10), n. 41.33. 15

  Assmann (n. 2), paras 21–3, WpPG, n. 12; Mülbert and Steup (n. 10), n. 41.22.

16

  See Mülbert and Steup (n. 10), n. 41.31, with further details.

17

  Higher Regional Court of Frankfurt as of 14 May 1997—21 U 117/96, NJW-RR 1998, 122. 18

  See Mülbert and Steup (n. 10), n. 41.23.

19

  See section III.2.

20

  Federal Court of Justice as of 11 November 2011, III ZR 103/10, BGHZ 191, 310—NJW 2012, 758, stating that the advertisement can to be considered within the framework of civil law prospectus liability; dissenting Hebrant, ‘Schadensersatzhaftung für mangelhafte Wertpapier-Produktflyer außerhalb einer vertraglichen Sonderverbindung’, ZBB (2011) 451, 453 ff; Klöhn, ‘Die Ausweitung der bürgerlich-rechtlichen Prospekthaftung durch das “Rupert Scholz” ’, in Urteil des BGH—zugleich Besprechung von BGH, WM (2012) 19, 97, 106; Mülpert and Steup (n. 10), n. 41.34; Seiler and Singhof, in: Berrer, Schnorbus, Meyer, Müller, Wolf, and Singhof (eds), WpPG and EU-ProspektVO, 2nd edn (2017), para 21, n. 16. However, so far this is not established by case law. 21

  See Mülpert and Steup (n. 10), n. 41.34 for further details.

22

  Federal Court of Justice as of 11 November 2011, III ZR 103/10, BGHZ 191, 310 n. 21 = NJW 2012, 758.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

23

  See section V.1.

24

  See section V.2.

25

  See section IX.2

26

  Mülpert and Steup (n. 10), n. 41.71.

27

  ibid., n. 41.91.

28

  The offeror is defined in section 2 no. 10, Securities Prospectus Act as a person or company which offers securities to the public. In contrast, the issuer is a person or company which issues or proposes to issue securities (section 2 no. 9, Securities Prospectus Act). 29

  Legislative materials for the Drittes Finanzmarktförderungsgesetz (BT-Drucks) 13(8933), 78; Mülbert and Steup (n. 10), n. 41.71, 41.77. 30

  Legisaltive materials for the Drittes Finanzmarktförderungsgesetz (BT-Drucks) 13(8933), 78; Lenenbach, Kapitalmarktrecht, 2nd edn (2010), n. 11.480. 31

  Assmann (n. 2), paras 21–3, WpPG, n. 84 ff.; Mülbert and Steup (n. 10), n. 41.85 ff.

32

  Federal Court of Justice as of 22 May 1980, II ZR 209/79, BGHZ 77, 172, 176 ff. = NJW 1980, 1840 (liability of a lawyer); Federal Court of Justice as of 31 May 1990, VII ZR 340/88, BGHZ 111, 314, 319 ff. = NJW 1990, 2461 (liability of a accountant); Federal Court of Justice as of 1 December 1995, III ZR 93/93, NJW 1995, 1025 (liability of a lawyer); Federal Court of Justice as of 11 November 2011, III ZR 103/10, BGHZ 191, 310 = NJW 2012, 758 (liability of a well-know politician). 33

  Federal Court of Justice as of 21 November 2018, VII ZR 232/17, NJW-RR 2019, 345 n. 19. 34

  Groß (n. 14), para 21, n. 36 ff.; Hopt (n. 5), 496, 529; Kumpan, in: Banbauch and Hopt (eds), HGB, 38th edn (2018), para. 21, WpPG, n. 4; Lenenbach (n. 30), n. 11.493; Schwark, ‘Kapitalmarktbezogene Informatizonshaftung’, in: Hadding (ed.), Liber Amicorum (2004), 1117, 1126 ff. 35

  Mülbert and Steup (n. 10), n. 41.86.

36

  Habersack (n. 14), para. 29, n. 30; Mülbert and Steup (n. 10), n. 41.88.

37

  See Habersack (n. 14), para. 29, n. 30; Mülbert and Steup (n. 10), n. 41.88.

38

  See Habersack (n. 14), para. 29, n. 30; Mülbert and Steup (n. 10), n. 41.88.

39

  Mülbert and Steup (n. 10), n. 41.86; see also Federal Court of Justice as of 4 April 1986, II ZR 123/85, NJW-RR 1986, 1158, 1159. 40

  Paragraph 826, German Civil Code states: A person who, in a manner contrary to public policy, intentionally inflicts damage on another person is liable to the other person to make compensation for the damage.

41

  Federal Court of Justice as of 24 April 2014, III ZR 156/13, NJW 2014, 2345; for an analysis of this decision, see Schlitt and Lanschein, ‘Prospekthaftung—Aktuelle Entwicklungen’, ZBB (2019) 103, 107; Seiler and Singhof (n. 20), para. 21, WpPG, n. 101. 42

  Federal Court of Justice as of 24 April 2014, III ZR 156/13, NJW 2014, 2345; for an analysis of this decision, see Schlitt and Lanschein, ‘Prospekthaftung—Aktuelle Entwicklungen’, ZBB (2019) 103, 107; Seiler and Singhof (n. 20), para. 21, WpPG, n. 101. 43

  See especially Schlitt and Landschein (n. 41), 108 ff.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

44

  Mülbert and Steup (n. 10), n. 41.92.

45

  Higher Regional Court of Frankfurt as of 15 December 2005—I U 129/05, AG 2005, 377, 378; Regional Court of Frankfurt as of 3 September 2003, 2/4 O 435/02, WM 2004, 2155, 2157; Habersack, (n. 14), para. 29, n. 29; Mülbert and Steup (n. 10), n. 41.93. 46

  Federal Court of Justice as of 18 September 2012, XI ZR 344/11, BGHZ 195, 1, n. 19 = NJW 2013, 539; Mülbert and Steup (n. 10), n. 41.80; see also legislative materials for the Drittes Finanzmarktförderungsgesetz (BT-Drucks) 13(8933), 78. 47

  Federal Court of Justice as of 18 September 2012, XI ZR 344/11, BGHZ 195, 1, n. 17 ff. = NJW 2013, 539 (in a case involving securities not admitted to trading on an organized market); Mülbert and Steup (n. 10), n. 41.81. 48

  Mülbert and Steup (n. 10), n. 41.81; Wieneke, ‘Haftung der Konzernspitze für die (unrictige) Darstellung des Unternehmensvertrags im Wertpapierprospekt der Konzerntochter’, NZG (2012) 1420, 1422. 49

  Schlitt and Landschein (n. 41), 105.

50

  Beck, ‘Kapitalmarktrechtliche Prospekthaftung im Konzern’, NZG (2014) 1410, 1412; Seiler and Singhof (n. 20), para. 21, n. 93. 51

  Mülbert and Steup (n. 10), n. 41.81.

52

  Groß (n. 14), para. 21, n. 64; Habersack (n. 14), para. 29, n. 12; Lenenbach (n. 30), n. 11.493; Mülbert and Steup (n. 10), n. 41.86; Singhof, in: Münchner Kommentar zum HGB, 4th edn (2018), Emissionsgeschäft n. 275. 53

  Mülbert and Steup (n. 10), n. 41.92.

54

  See Mock and Fuhrmann, ‘Prospekthaftung im Sekundärmarkt’, ZFR (2019) 108 ff.; Assmann (n. 2), paras 21–3, nn. 88 ff; Bergholdt, in: Heidel (ed.), Aktienrecht, 4th edn (2014), para. 21, WpPG, n. 1; Groß (n. 14), para. 21, n. 70; Habersack (n. 14), para. 29, n. 34; Hauptmann, in: Vortmann (ed.), Prospekthaftung und Anlageberatung, (2000), para. 3, n. 123; Heidelbach, in: Schwark and Zimmer (eds), Kapitalmarktgesetze, 4th edn (2010), para. 13, VerkProspG n. 21; Kumpan (n. 34), para. 21 WpPG Rz, 7; Kort, ‘Neuere Entwicklungen im Recht der Börsenprospekthaftung’, AG (19999) para. 45 ff. BörsG; Kort, ‘Der Unternehmensberichtshaftung’, AG (1999) 9, 12 ff. BörsG; Mülbert and Steup (n. 10), n. 41.94; Seiler and Singhof (n. 20), para. 21, WpPG, n. 29, 110; Wackerbarth, in: Holzborn (ed.), WpPG, 2nd edn (2014), paras 21–3, WpPG, n. 56. 55

  ‘Law for the Further Development of the German Capital Markets (Gesetz zur weiteren Fortentwicklung des Finanzplatzes Deutschland [Drittes Finanzmarktförderungsgesetz])’, Federal Law Gazette I, 24 March 1998, 529. 56

  Legislative materials for the Drittes Finanzmarktförderungsgesetz (BT-Drucks) 13(8933), 76 ff. 57

  ibid.

58

  ibid.

59

  ibid.

60

  ibid.

61

  See e.g. Assmann (n. 2), paras 21–3, WpPG, n. 90 ff.; Mülbert and Steup (n. 10), n. 41.95, without questioning this limitation.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

62

  Official reasoning for the first law changing the law on unfair commercial practices (Erstes Gesetz zur Änderung des Gesetzes gegen den unlauteren Wettbewerb (BR-Drucks) 345/08, 55). 63

  Federal Court of Justice as of 12 July 1982, II ZR 172/81, NJW 1982, 2827; Higher Regional Court of Frankfurt as of 6 July 2004, 5 U 122/03, AG 2004, 510; Higher Regional Court of Frankfurt as of 17 March 1999, 21 U 260/97, AG 1999, 325, 326; Higher Regional Court of Frankfurt as of 1 February 1994, 5 U 213/92, AG 1994, 182; Higher Regional Court of Duesseldorf as of 5 April 1984, 6 U 239/82, AG 1984, 188. 64

  Groß (n. 14), para. 21, n. 41; Mülbert and Steup (n. 10), n. 41.37; Mülbert, ‘EUrechtliche Kapitalmarktinformationsvorschriften und mitgliedstaatliche Haftungsregeln— Möglichkeiten und Grenzen am Beispiel der Prospektverordnung (EU) 2017/1129’, in: Festschrift für Alfred Bergmann (2018), 529, 532 ff. 65

  Federal Court of Justice as of 18 September 2012, XI ZR 344/11, BGHZ 195, 1, n. 25 = NJW 2013, 539. 66

  Mülbert and Steup (n. 10), n. 41.38.

67

  Federal Court of Justice as of 6 February 2006, II ZR 329/04, NJW 2006, 2042; Higher Regional Court of Frankfurt as of 28 May 2008, 23 U 63/07, juris; Mülbert and Steup (n. 10), n. 41.39; Seiler and Singhof (n. 20), para. 21, n. 41. 68

  Federal Court of Justice as of 18 September 2012, XI ZR 344/11, BGHZ 195, 1, n. 35 = NJW 2013, 539; Higher Regional Court of Frankfurt as of 21 June 2011—5 U 103/10, AG 2011, 920; Mülbert and Steup (n. 10), n. 41.39; dissenting Lenenbach (n. 30), n. 11.462. 69

  Federal Court of Justice as of 6 March 2008, III ZR 298/05, NJW-RR 2008, 1365; Federal Court of Justice as of 13 December 2011, II ZB 6/09, NJW-RR 2012, 491; Federal Court of Justice as of 23 April 2012, II ZR 75/10, NJW-RR 2012, 1312; Mülbert and Steup (n. 10), n. 41.39. 70

  Assmann (n. 2), paras 21–3, WpPG, n. 39; Habersack (n. 14), para. 29, n. 15; Mülbert and Steup (n. 10), n. 41.39. 71

  Assmann (n. 2), paras 21–3, WpPG, n. 39; Mülbert and Steup (n. 10), n. 41.39; Mülbert (n. 64), 533; see also Higher Regional Court of Frankfurt as of 21 June 2011—5 U 103/10, AG 2011, 920; dissenting Federal Court of Justice as of 18 September 2012, XI ZR 344/11, BGHZ 195, 1, n. 27 = NJW 2013, 539 dealing with a case on which the Prospectus Directive (2003/71/EC) was not applicable, since it took place before the directive was enacted into German law. 72

  Mülbert (n. 64), 533 ff., 537 ff.

73

  Mülbert and Steup (n. 10), n. 41.43.

74

  Federal Court of Justice as of 12 July 1982, II ZR 175/81, NJW 1982, 2823; Federal Court of Justice as of 23 April 2012, II ZR 75/10, NJW-RR 2012, 1312; Mülbert and Steup (n. 10), n. 41.43. 75

  Groß (n. 14), para. 21, n. 52; Mülbert and Steup (n. 10), n. 41.46.

76

  Mülbert and Steup (n. 10), n. 41.44.

77

  ibid.

78

  Higher Regional Court of Frankfurt as of 1 February 1994, 5 U 213/92, AG 1994, 184; Lenenbach (n. 30), n. 11.453; Mülbert and Steup (n. 10), n. 41.45.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

79

  Federal Court of Justice as of 12 July 1982, II ZR 175/81, NJW 1982, 2823; Higher Regional Court of Duesseldorf as of 5 April 1984, 6 U 239/82, AG 1984, 188; Groß (n. 14), para. 21, n. 50; Mülbert and Steup (n. 10), n. 41.46. 80

  Mülbert and Steup (n. 10), n. 41.46.

81

  Federal Court of Justice as of 21 October 2014, XI ZB 12/12, BGHZ 203, 1 = NJW 2015, 236; Mülbert and Steup (n. 10), n. 41.46. 82

  Mülbert and Steup (n. 10), n. 41.47.

83

  Legisaltive materials for the Drittes Finanzmarktförderungsgesetz (BT-Drucks) 13/8933, 34; Federal Court of Justice as of 18 September 2012, XI ZR 344/11, BGHZ 195, 1, n. 34 = NJW 2013, 539; Mülbert and Steup (n. 10), n. 41.52. 84

  Federal Court of Justice as of 22 November 2016, XI ZB 9/13, BGHZ 213, 65, n. 57 = NZG 2017, 378; Federal Court of Justice as of 21 October 2014, XI ZB 12/12, BGHZ 203, 1, n. 74 = NJW 2015, 236; Assmann (n. 2), paras 21–3, WpPG, n. 46; Mülbert and Steup (n. 10), n. 41.52; Seiler and Singhof (n. 20), para. 21, n. 74. 85

  Mülbert and Steup (n. 10), n. 41.53; Seiler and Singhof (n. 20), para. 21, n. 75.

86

  Legisaltive materials for the Drittes Finanzmarktförderungsgesetz (BT-Drucks) 13/8933, 76; Mülbert and Steup (n. 10), n. 41.53. 87

  Lenenbach (n. 30), n. 11.465; Mülbert and Steup (n. 10), n. 41.53.

88

  Mülbert and Steup (n. 10), n. 41.53; Seiler and Singhof (n. 20), para. 21, n. 75.

89

  Groß (n. 14), para. 21, n. 68; Mülbert and Steup (n. 10), n. 41.54; Seiler and Singhof (n. 20), para. 21, n. 75. 90

  Mülbert and Steup (n. 10), n. 41.54.

91

  Federal Court of Justice as of 12 July 1982, II ZR 175/81, NJW 1982, 2823; Higher Regional Court of Frankfurt as of 1 February 1994, 5 U 213/92, AG 1994, 182; Mülbert and Steup (n. 10), n. 41.56; Seiler and Singhof (n. 20), para. 21, n. 78. 92

  Higher Regional Court of Munich as of 2 November 2011, 20 U 2289/11, juris; Assmann (n. 2), para. 24, WpPG, n. 7; Groß (n. 14), para. 24, n. 4; Lenenbach (n. 30), n. 11.433; Seiler and Singhof (n. 20), para. 22, n. 2; dissenting Fleischer, ‘Zür Haftung bei fehlendem Verkaufsproospekt im deutschen und US–amerikanischen Kapitalmarktrecht’, WM (2004), 1897, 1902ff; Mülbert and Steup (n. 10), n. 41.63. 93

  Mülbert and Steup (n. 10), n. 41.63.

94

  See e.g. Regional Court of Frankfurt as of 7 October 1997, 3/11 O 44/96, AG 1998, 488, duty to obtain information about another company due to an intended takeover. 95

  Mülbert and Steup (n. 10), n. 41.110.

96

  See section V.2

97

  Groß (n. 14), para. 21, n. 78; Habersack (n. 14), para. 29, n. 39; Mülbert and Steup (n. 10), n. 41.110. 98

  For a definition of the offeror, see section V.1(ii)

99

  Legisaltive materials for the Drittes Finanzmarktförderungsgesetz (BT-Drucks) 13/8933, 80; Groß (n. 14), para. 21, n. 79; Mülbert and Steup (n. 10), n. 41.113; Seiler and Singhof (n. 20), para. 23, n. 14.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

100

  Köhler and Weiser, ‘Die Bedeutung von Comfort Letters im Zusammenhang mit Emissionen’, DB (2003), 565; Mülbert and Steup (n. 10), n. 41.140; Schlitt and Landschein (n. 41), 105 ff.; see especially for comfort letters Seiler, in: Münchener Kommentar zum HGB, 3rd edn (2014), Emissionsgeschäft, n. 212 ff. 101

  Groß (n. 14), para. 21, n. 79; Mülbert and Steup (n. 10), n. 41.118; Seiler and Singhof (n. 20), para. 23, n. 16. 102

  Mülbert and Steup (n. 10), n. 41.120; dissenting Groß (n. 14), para. 21, n. 81.

103

  Groß (n. 14), para. 21, n. 83; Mülbert and Steup (n. 10), n. 41.122; Seiler and Singhof (n. 20), para. 23, n. 23. 104

  See for this discussion e.g. Groß (n. 14), para. 21, n. 83; Mülbert and Steup (n. 10), n. 41.122. 105

  Assmann (n. 2), para. 24, WpPG, n. 20 ff.; Mülbert and Steup (n. 10), n. 41.123; Seiler and Singhof (n. 20), para. 24, n. 15; dissenting Higher Regional Court of Munich as of 2 Noveber 2011, 20 U 2289/11, juris; Habersack (n. 14), para. 29, n. 66; Fleischer (n. 92), 1901 ff. 106

  Legislative materials for the Drittes Finanzmarktförderungsgesetz (BT-Drucks) 13/8933, 76. 107

  ibid.

108

  Higher Regional Court of Duesseldorf as of 5 April 1984, 6 U 239/82, AG 1984, 188; Higher Regional Court of Bremen as of 21 May 1997, 1 U 132/96, AG 1997, 420, 421; Groß (n. 14), para. 21, n. 70; Mülbert and Steup (n. 10), n. 41.103. 109

  Higher Regional Court of Duesseldorf as of 5 April 1984, 6 U 239/82, AG 1984, 188; Higher Regional Court of Bremen as of 21 May 1997, 1 U 132/96, AG 1997, 420, 421; Groß (n. 14), para. 21, n. 70; Mülbert and Steup (n. 10), n. 41.103. 110

  See section IX.1.i.

111

  See section V.

112

  If an issue price has not been determined, section 21, subs. 1 sent 2 Securities Prospectus Act states that the first exchange price determined or established after the securities have been introduced to trading shall be deemed the issue price. 113

  Legislative materials for the Drittes Finanzmarktförderungsgesetz (BT-Drucks) 13/8933, 76. 114

  ibid., 78.

115

  Mülbert and Steup (n. 10), n. 41.133.

116

  See section IX.2.i.

117

  Section 254, German Civil Code states: (1)  Where fault on the part of the injured person contributes to the occurrence of the damage, liability in damages as well as the extent of compensation to be paid depend on the circumstances, in particular to what extent the damage is caused mainly by one or the other party. (2)  This also applies if the fault of the injured person is limited to failing to draw the attention of the obligor to the danger of unusually extensive damage, where the obligor neither was nor ought to have been aware of the danger, or

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

to failing to avert or reduce the damage. The provision of section 278 applies with the necessary modifications.

118

  Mülbert and Steup (n. 10), n. 41.135, 41.139; see also Legislative materials for the Drittes Finanzmarktförderungsgesetz (BT-Drucks) 13/8933, 79. 119

  Habersack (n. 14), para. 29, n. 47; Mülbert and Steup (n. 10), n. 41.139.

120

  In this context, German law does not provide a shifting of the burden of proof to the defendant. So far, especially the application of Article 12, Directive 2005/29 on unfair commercial practices has not been discussed in Germany. 121

  See section V.2.

122

  Federal Court of Justice as of 5 July 1993, II ZR 194/92, BGHZ 123, 106, 110 = NJW 1993, 2865; Habersack (n. 14), para. 29, n. 29; Mülbert and Steup (n. 10), n. 41.91. 123

  See n. 40.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Part III Prospectus Liability and Litigation, 21 France Thierry Bonneau From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

Subject(s): Prospectus — Misleading impressions — Misleading statements

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 493) 21  France I.  Introduction 21.01 II.  The Legal Basis for Prospectus Liability 21.05 III.  Definition of ‘Prospectus’ 21.11 IV.  Persons Responsible for the Prospectus 21.12 V.  Persons Liable for Misleading Prospectus Information 21.19 VI.  Persons Who Can Sue for Damages Caused by a Misleading Prospectus 21.24 VII.  Defectiveness of Prospectus Information 21.26 VIII.  Fault of the Party Who is Sued 21.30 IX.  Causation and Damages 21.33 X.  Evidence 21.38 XI.  Disclaimers 21.39 XII.  Prospectus Summary 21.42 XIII.  Directors’ Liability 21.43

I.  Introduction 21.01  Financial operations triggering the obligation to draw up a prospectus (offers of securities to the public and admission to trading on a regulated market) are common in France. By contrast, there is no judicial decision holding people accountable for infringing the prospectus legislation. It doesn’t mean that there are no decisions concerning prospectuses or, more generally, financial information. These decisions exist. However, in these decisions, either provisions other than provisions of the prospectus legislation are applied to prospectuses, or the document of information is other than the prospectus. 21.02  More often, the decisions are about people who are accused of having spread false or misleading information.1 From this point of view, these decisions are relevant regardless of the context2 and the document used in order to disseminate such (p. 494) information.3 The solutions resulting from these decisions are applicable to difficulties concerning information included in a prospectus.4 21.03  The quality of information is not the only issue. The volume of information may be also a problem. One might think that this question is on the table when information required by the prospectus legislation is not given in its entirety. However, no court of justice has dealt with this aspect until now. 21.04  These aspects (quality and volume of information) are the only ones that are relevant for prospectus liability. With listings and offers of securities to the public, there are other services or activities that are performed by some professionals, in particular for the placing of securities and the success of the financial operation. There, services and activities may be a source of responsibility.5 However, this issue is not covered by this chapter, which deals only with prospectus liability.

II.  The Legal Basis for Prospectus Liability

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

21.05  No legal text introduces general rules about the liability of people infringing the prospectus legislation. There is only a specific rule concerning the liability solely on the basis of the summary. This rule is laid down in Article L 412-1 of the financial and monetary code. According to the second paragraph of the text: No action for civil damages may be brought solely on the basis of the summary, including its translation, unless its content is misleading, inaccurate or in contradiction with the information contained in the other parts of the document referred to in the first paragraph or unless it does not provide, read in combination with the other parts of the document referred to in the first paragraph, the vital information helping investors when they consider to invest in financial securities. The inclusion of this provision in the financial and monetary code is rational. This Code is the legal support for the prospectus legislation. 21.06  Prospectus liability is necessarily based on the general provisions that require, in principle, to prove fault, damage, and causation. According to an author, the Courts of Justice don’t apply strictly the principles and take into account the specificity of transparency on financial markets.6 (p. 495) 21.07  One might hesitate before determining the basis of this responsibility: tortious liability7 or contractual liability.8 21.08  The prospectus must be drawn up in accordance with the law. Therefore, it seems difficult to give a contractual nature to this document. However, one is aware of the fact that in some circumstances, some legal obligations have a contractual scope. 21.09  There is no judicial decision about this issue. The option is not without consequences. In particular, if the responsibility is contractual, it implies that only the first subscriber is covered by such responsibility. The sub-buyers should base their claims on tort. In addition, it creates a distinction between the contracting parties and the issuer who is responsible for disseminating information.9 21.10  It must be added, in order to be totally clear, that a breach of the prospectus legislation is sanctioned by invalidity. It does not render the financial operation invalid.10

III.  Definition of ‘Prospectus’ 21.11  The French legislation doesn’t provide a definition of ‘prospectus’. Article L 412-1 of the financial and monetary Code nevertheless indicates the objective of this document: ‘a document designed to inform the public of the content and terms and conditions of the transaction and of the issuer’s organization, financial position and business development and those of any guarantor of the financial securities concerned, as determined in the General Regulation of the Autorité des Marchés Financiers’. This point must be put in perspective because neither does the EU legislation provide for a definition of ‘prospectus’. Article 2, paragraph 1, point r), Directive of 4 November 2003 and Article 2, s), Regulation of 14 June 2017 only define the phrase ‘ base prospectus’. Article 212-32, AMF General Regulation, without providing a definition, takes into account the text by mentioning that the base prospectus gives some information: ‘a base prospectus containing all relevant information about the issuer and the securities being offered to the public or admitted to trading on a regulated market’.

IV.  Persons Responsible for the Prospectus

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

21.12  The AMF General regulation has a paragraph entitled ‘Responsibility attaching to participants: issuers, statutory auditors and investment services providers’. This paragraph is made up of three Articles. (p. 496) 21.13  According to Article 212-14,11 ‘The persons responsible shall be clearly identified in the prospectus by their names and functions or, in the case of legal persons, their business names and registered offices.’ In addition, still according to this text: The signature of the persons or entities responsible for the prospectus or registration document and for the updates and corrections thereto shall be preceded by a declaration confirming that, to the best of their knowledge, the information contained therein is in accordance with the facts and makes no omission likely to affect its import. This declaration shall also state that the issuer has obtained a completion letter from its statutory auditors confirming that they have applied their professional standard for checking prospectuses, which consists in examining the entire document. Where appropriate, the issuer shall mention any material observations made by the statutory auditors. The provisions of the third paragraph of this Article shall not apply to prospectuses prepared for a public offering or admission of debt securities to trading on a regulated market, provided that the securities do not give holders access to equity, or for admission of financial securities to the compartment referred to in Article 516-18. 21.14  Article 212-15 lays down provisions concerning the statutory auditors. In particular, according to point 1 of the text: The statutory auditors shall state whether the interim, consolidated or annual financial statements that have undergone an audit or a limited review and that are presented in a prospectus, a registration document or, where such is the case, the updates or corrections thereto, give a true and fair view of the issuer. Where the interim financial statements are summary versions, the statutory auditors shall give their opinion on whether those statements comply with generally accepted accounting principles. They shall declare that any provisional information, whether estimated or pro forma, presented in a prospectus, registration document or, where such is the case, the updates or corrections thereto, has been properly prepared in accordance with the indicated basis and that the accounting basis is consistent with the issuer’s accounting policies.12 (p. 497) 21.15  Article 212-16 is about the investment services providers. In particular, according to point 1 of the text: Where one or more investment service providers take part in the first admission to trading on a regulated market of equity securities, or in any public offer or admission of such securities during the first three years after the first admission of equity securities, such investment service provider(s) shall certify to the AMF that they have exercised customary professional diligence and found no inaccuracies or material omissions likely to mislead investors or affect their judgement. During the three years following the first admission to trading of an issuer’s securities, where the prospectus prepared for the public offer or admission comprises a registration document or a recent prospectus and a securities note, the investment service provider(s) shall certify only the information in the securities note, provided the information in the registration document or recent prospectus From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

has been certified by such provider(s) or another investment service provider, exercising customary professional diligence, before the offer or admission. After three years, the investment service provider(s) shall certify only the details of the offer or admission and the characteristics of the relevant securities, as described in the prospectus or the securities note, as the case may be.13 (p. 498) 21.16  These Articles are compliant with Article 6, Directive of 4 November 2003, whose provisions are now in Article 11, Regulation of 14 June 2017. Therefore, it doesn’t seem necessary to consider the European directive in order to make these provisions effective, which might explain why there is no judicial decision in this direction. 21.17  These Articles do not limit their provisions to mentioning the people who are responsible. They also mention the faults that can be held against them: inaccuracies and omissions, and the honest representation of the issuer. 21.18  They do not make any distinction between the civil responsibility and the administrative responsibility. People mentioned in the AMF General Regulation can certainly be administratively sanctioned. They can also be sanctioned on the basis of civil law. However, these texts are not an obstacle to holding persons liable on the basis of civil law other than those mentioned in the AMF General Regulation. If one can prove that a person is to blame for having provided misleading information, he or she can be held liable.

V.  Persons Liable for Misleading Prospectus Information 21.19  The offerors or the issuers whose securities are listed on the regulated market are civilly liable for misleading prospectus information. When it comes to a legal entity, the question of the responsibility of their managers is at stake. The provisions of company law must be considered. 21.20  For instance, according to Article L 225-251 (para. 1) of the Commercial Code, ‘The directors and managing director shall have individual or solidary responsibility to the company or third parties either for infringements of the laws or regulations applicable to sociétés anonymes, or for breaches of the constitution, or for tortious or negligent acts of management’: this text should not mislead. The managers’ liability is not as extensive as it may seem when reading the text; it is much more limited. 21.21  According to the Commercial Chamber of the French Supreme Court,14 managers are only responsible if they committed a personal fault separable from their functions.15 It implies that the manager intentionally commits a fault of a particular gravity incompatible with the normal accomplishment of his or her functions.16 For instance, the (p. 499) manager who premeditatedly misleads a provider on the solvability of the company commits a personal fault separable from his or her functions. 21.22  If the condition required by the High Court is met, the manager can be held liable. That can be an in solidum liability.17 Both the legal entity and the manager can be held liable, and each of them can be sentenced to pay for all damages on a joint and several basis. By contrast, if the class of faults above mentioned can’t be proved, third parties can only sue the legal entity.18 21.23  The issuer’s auditor can be also held liable. It implies that proof is needed that he or she breached his or her legal duties. His or her liability can be an in solidum liability.

VI.  Persons Who Can Sue for Damages Caused by a Misleading Prospectus

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

21.24  French law makes a distinction between investors when it comes to informing them or when it comes to warning them about some risks.19 By contrast, there is no distinction as far as the liability for misleading information is concerned. No difference is made between consumers/private investors and professional investors. The legal framework is the same. The regime of liability is uniform. 21.25  It should be noticed that Articles L 121-2–L 121-7, Consumer Code, dealing with deceptive and aggressive marketing practices, do not refer to the prospectus legislation. It is different to the Directive 2005/29,20 which mentions the Prospectus Directive of 4 November 2003 in its Annex 2. Likewise, there is no mention of Directive 84/45021 in the Consumer Code.

VII.  Defectiveness of Prospectus Information 21.26  Information is defective if the piece of information is false, misleading, incomplete, or insincere. Defectiveness may lie in a positive act, as well as a failure to deliver the pieces of information required by the prospectus legislation.22 (p. 500) 21.27  In some situations, there is no difficulty establishing that information is defective. In other situations, it is much more difficult. It is a question of fact for the national court to decide in the light of the circumstances of each case. However, whatever the situation, the proof of the defectiveness must be provided. 21.28  The yardstick for establishing which information is defective doesn’t depend on the category of investors. In particular, there is no distinction between retail clients and professional clients. According to certain legal authors, it seems rational to also take the investor’s own fault into consideration, such as his or her decision not to diversify his or her portfolio, or the fact that they were not aware of publicly available information.23 21.29  In line with the prospectus, defectiveness of information must concern the issuer and/or the financial instruments involved. It is clear that the fact of not mentioning a material risk connected to the operation should be treated as civilly wrong.

VIII.  Fault of the Party Who is Sued 21.30  Any fault can be taken into account; a slight negligence is enough. It is not required to establish a serious misconduct. However, whatever the degree of fault, the proof must be provided. In the field of prospectus liability, there is no strict liability and no objective liability, namely a responsibility without fault. This requirement is the consequence of the fact that the liability is necessarily based on the general provisions.24 21.31  The above is applicable to any offeror or issuer whose securities are listed on a regulated market. When the offeror or the issuer is a legal entity, it is also possible to sue managers and directors. However, they are only responsible if they committed a personal fault separable from their functions.25 21.32  The offeror or issuer whose liability is at stake cannot defend themselves by insisting on the fact that they were passive or that they used pieces of information given by other people. As responsible for the prospectus, they are necessarily liable in case of defectiveness of information.

IX.  Causation and Damages 21.33  More often than not, investors who were defrauded by the lack of information or by false and insincere information are deprived of the opportunity to buy, sell, keep, or not keep their securities. When it comes to prospectuses, it is no different. On the basis of (p.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

501) defective information resulting from the prospectus, investors bought or decided not to buy the financial instruments offered to them. 21.34  This explanation shows one approach that is concrete. In addition, because we can’t be sure that investors would have taken a decision different from the decision taken, their damage lies in a loss of opportunity: the loss of opportunity to have been capable of taking a particular decision, namely the decision whether or not to buy the financial instruments.26 This approach is not, however, the only one that must be considered. 21.35  The second approach is more abstract. The damages are embodied in the general restriction of freedom of choice:27 the general and abstract loss of opportunity to have been capable of taking the right decision in an environment of reliable information.28 This approach is abstract because there is no reference to any fact or to a particular decision of the investor. 21.36  The first approach doesn’t imply any presumption, even if it is commonly underlined that the use of the concept of loss of opportunity makes the proof of the causal link easier. By contrast, the second approach has two important consequences. Two presumptions are the result of this approach. There is a presumption of a causal connection as well as a presumption of prejudice.29 The last point is important to underline because the concrete result is that investors can only get a fixed compensation.30 21.37  The French courts used the notion of loss of opportunity, for the first time,31 in the judicial case called Flammarion.32 In this case, the approach is concrete: it is the loss of opportunity to be capable of taking a particular decision. The more recent decisions handed down by the French Supreme Court refer to the abstract approach: the general restriction of freedom of choice. This approach was announced by the Sidel33 (p. 502) case,34 was established,35 first in the Gaudriot case36 by the French Supreme Court in a decision handed down in 201037 and again in the Marionnaud case38 in a decision of the French Supreme Court of 2014:39 ‘and taking into account the fact that the company Esca had certainly been deprived of the opportunity to take the well-informed investment decision and to carry out informed arbitrages, in particular by giving up already-made investments’.40

X.  Evidence 21.38  Investors claiming damages must prove the fault of people who were responsible. Once this has been demonstrated, no additional evidence is required. The investor take advantage of presumptions of causation and prejudice.

XI.  Disclaimers 21.39  French law has no provision concerning disclaimers in the prospectus. It doesn’t mean that such disclaimers are banned. However, it must be emphasized that disclaimers in prospectuses would have limited effect. 21.40  First, disclaimers are only efficient between parties to contracts. Parties are not entitled to use disclaimers against third parties acting on the basis of tortious liability.41 (p. 503) (p. 504) 21.41  Second, disclaimers can’t concern essential contractual obligations and are inefficient in case of serious misconduct or willful misconduct.42

XII.  Prospectus Summary 21.42  According to the EU legislation, the monetary and financial Code has special statutory rules for liability for the prospectus summary. There is no judicial decision about these provisions.43

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

XIII.  Directors’ Liability 21.43  Managers are only responsible if they committed a personal fault separable from their functions.44

Footnotes: 1

  Article 223-1, Réglement general de l’Autorité des marches financiers (RG AMF) (AMF General Regulation): ‘Information provided to the public must be accurate, precise and fairly presented.’ 2 

J. Prorok (‘La responsabilité civile sur les marches financiers’, Ph.D. thesis (Paris, 2016) , under the supervision of H. Synvet, esp. No. 24) mainly studies, in his thesis, the responsibility encountered when trading orders on the market and stresses that financial operations triggering the drawing up of prospectuses are not at the core of his work. He even decides to exclude these operations from his thesis. One of the reasons lies in the procedure to be followed in accordance with the prospectus legislation. This exclusion is not, in our opinion, convincing, because the difficulties are similar whatever the context and the operations carried out. Information might be defective. 3

  In his thesis, (ibid., esp. No. 39 et seq.), Johan Prorok underlines that there are mainly two categories of fault: misleading information and fraud. Only the first class of fault is studied in this chapter. 4

  See, Cass. Com. (20 September 2017), No. 15-29.144, Revue Sociétés (June 2018), 383, note E. Dezeuze and J. Bianchi: a prospectus that didn’t mention a piece of information and administrative liability of people responsible for the prospectus. 5 

See E. Chvika, ‘La responabilité des intervenants dans le cadre d’une introduction en bourse (bilan des decisions récentes de l’AMF sur les banquiers, émetteurs, et commissaires aux comptes’, Review Droit Bancaire et Financier (September/October 2008) 19, 16 ff. 6

  Prorok (n. 2).

7

  Article 1240 and following, Civil Code.

8 

Articles 1217 and 1231-1, Civil Code.

9

  See, H. Letréguilly, ‘La responabilité des émetteurs en matière d’information financiére’, Review Droit Bancaire et Financier (November/December 2004) 448 ff., 450. 10

  ‘Mémento pratique Francis Lefebvre sociétés commerciales’, (2018), No. 63072.

11

  Article 212-14, AMF General Regulation.

12

  Also, the other points of Article 212-15, AMF General Regulation: II.—They shall examine all the other information in a prospectus, registration document or, where such is the case, the updates or corrections thereto. This overall examination and any special verifications shall be carried out in accordance with a standard issued by the national institute of statutory auditors (Compagnie Nationale des Commissaires aux Comptes) on prospectus verification. They shall draw up a completion letter for their work on the prospectus, in which they inform the issuer about the reports appearing in the prospectus, registration document or, where such is the case, the updates or corrections thereto. Upon completion of their overall examination and any special verifications that may have been made in accordance with the aforementioned professional standard, they shall

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

state their observations, if any. The issue date of this completion letter must coincide as closely as possible with the date of the expected AMF approval. The issuer shall forward a copy of the completion letter to the AMF before the AMF issues its approval or before the registration document or the updates and corrections thereto are filed or registered. If the letter contains observations, the AMF shall take appropriate action when scrutinizing the prospectus. In case of difficulty, the statutory auditors of a French issuer can approach the AMF with any questions about financial information in a prospectus, a registration document or, where such is the case, the updates or corrections thereto. III.—The provisions of Section II shall not apply to prospectuses prepared for a public offering or admission of debt securities to trading on a regulated market, provided that the securities do not give holders access to equity, or for admission of financial securities to the compartment referred to in Article 516–18. 13

  Article 212-16, AMF General Regulation: II.—Where one or more investment service providers take part in any public offer of equity securities that are not admitted to trading on a regulated market, such investment service provider(s) shall certify to the AMF that they have exercised customary professional diligence and found no inaccuracies or material omissions likely to mislead investors or affect their judgement. III.—Where one or more entities, whether investment service providers or not, are authorised by a market operator or an investment service provider that operates an organised multilateral trading facility (MTF) within the meaning of Article 524-1, take part through that MTF in a public offer of equity securities, such entities shall certify to the AMF that they have exercised customary professional diligence and found no inaccuracies or material omissions likely to mislead investors or affect their judgement. In the case referred to in the above paragraph, where customary professional diligence is exercised by persons or entities that are not accredited as investment service providers, the investment service providers that are likely to take part in the public offer are not required to certify to the AMF that such diligence has been exercised. The certification shall be submitted to the AMF before its issues its approval. IV. - This article does not apply to prospectuses prepared for admission of financial instruments to the compartment referred to Article 516–18.

These articles don’t make a distinction between civil responsibility and administrative responsibility. 14

  Cass. Com. (20 May 2003), Bulletin of Joly Sociétés (2003) para. 167, 786, note H. Le Nabasque; D. (2004) 2623, note B. Dondero; Cass. Com. (8 November 2017), Review Sociétés (June 2018) 357, note J. Porok. 15

  The Criminal Chamber of the French Supreme Court (Cass. Com. (5 April 2018), Journal of Consumer Policy (2018) ed. G, 644, note J.-H. Robert) takes the opposite position. It refuses to take into account the fact that the fault is separable from the managers’ functions and approves the Courts of Justice that order criminally prosecuted managers to pay civil damages. Also see R. Salomon, ‘Faute du dirgeant détatachable de ses fonctions et autonomie du droit pénal’, Droit des Sociétés (June 2018) 6.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

16

  Cass. Com. (20 May 2003), Bulletin of Joly Sociétés (2003) para. 167, 786, note H. Le Nabasque and Cass. Com. (8 November 2017), Review Sociétés (June 2018) 357, note J. Porok. 17

  See A. Bénabent, ‘Droit des Obligations’, LGDJ (2016) 15, 671, 755.

18

  ‘Mémento pratique Francis Lefebvre sociétés commerciales’, (2018), No. 14300 ff.

19

  See Thierry Bonneau, ‘France’, in: Danny Busch and Cees Van Dam (eds), A Bank’s Duty of Care (Oxford/Portland, OR: Hart, 2017), 109 ff. 20

  Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market and amending Council Directive 84/450/EEC, Directives 97/7/EC, 98/27/EC, and 2002/65/EC of the European Parliament and of the Council and Regulation (EC) 2006/2004 of the European Parliament and of the Council. 21

  Council Directive of 10 September 1984 relating to the approximation of the laws, regulations and administrative provisions of the Member States concerning misleading advertising. 22

  Prorok (n 2), No. 39 ff.

23

  ibid., No. 424.

24

  ibid., No. 5.2.

25

  ibid., No. 5.5.

26

  ibid., No. 235, 236.

27

  ibid., No. 224, 232.

28

  ibid., No. 235, 236.

29

  ibid., No. 228.

30

  ibid., No. 232, 243.

31

  ibid., No. 218.

32

  T. G. I. Paris, 5e Ch. 2e section 15 (15 November 2001) No. 2000/18125, Flammarion, unpublished; C. A. Paris, 25e Ch. section B (26 September 2003) No. 2001/21885, Flammarion; C. A. Paris, 25e Ch. section B (26 September 2003) No. 2001/21885, Flammarion, JurisData No. 2003-224156; RTD com. (2004), No. 2, 316, n. C. Champaud et D. Danet ; Bulletin of Joly Bourse (2004) 1, para. 4, 43, note E. Dezeuze; Dr et Patr (November 2004) 131, 93, note D. Poracchia; D. (2004), No. 25, 1802, note Y. Reinhard; RTD com. (2004) 1, 132, note N. Rontchevsky; JCP E (May 2004) 19, 695, 769, note G. de Vries. 33

  T. corr Paris, 11e ch. 1, section 12 (September 2006) No. 0018992026; Sidel, Bulletin of Joly Sociétés (2007) 1, 119, note J.-F. Barbièri; Review Sociétés (2007) 102, note J.-J. Daigre; Review Lamy dr aff (May 2007) 16, note A; Dethomas and M. Aubert, Bulletin of Joly Bourse (2007) 1, 37, note E. Dezeuze; RTDF (2006) 3, 162, note E. Dezeuze; L’Agefi hebdo, O. Dufour; Lexbase news, No. N3852ALA, editorial F. Girard de Barros; D. (2007) 2418, B. Le Bars et S. Thomasset-Pierre; Lexbase hebdo, ed. private general (11 October 2006) 231, note J.-B. Lenhof, 1st and 2nd parties (No. A7599DRU); D. (2006) 2522, note D. Schmidt; Banque et Droit (November/December 2006) 110, 35, note H. de Vauplane, J.-J. Daigre, B. de Saint Mars, and J.-P. Bornet; RJDA (2007/3) 269, 262; C. A. Paris, 9e ch. corr. section B (31 October 2008), No. 06/09036; Sidel, Bulletin of Joly Sociétés (2009) 2, 143, note J.-F. Barbièri; Review Sociétés (2009) 121, note J.-J. Daigre; Review Lamy dr. aff. (February 2009) 35, note A. Dethomas; Bulletin of Joly Bourse (2009) 1, 28, note E. Dezeuze; RTDF (2008) 4, 137, note E. Dezeuze; JCP E (30 April 2009) 18, 1431, Y. Sexer and N. du Chaffaut; Lexbase hebdo, ed. private general, No. 333, No. Lexbase N9211BHM, with Me F.-K. Canoy, From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

representative of the civil parties (No. A5109EBT); D. (2008) 2867; RJDA (January 2009) 35, 37; Banque et Droit (January 2009) 123, 28; BRDA (19 November 2008)—Cass. Crim. (18 November 2009), No. 08-88.078, Sidel, JurisData No. 2009-050618. 34

  Prorok (n. 2), No. 226, 236: La perte de chance indemnisée dans l’affaire Sidel se distingue radicalement de cette approche. Il ne s’agit pas, en effet, de la perte de chance concrète d’avoir pris une autre décision précisément déterminée—en l’occurrence, par exemple, la décision de ne pas acheter ou bien de ne pas conserver des titres Sidel, l’évaluation de la perte de chance nécessitant d’estimer la probabilité que, correctement informés, les investisseurs n’aient pas acheté ou conservé lesdits titres –, mais de la perte de chance abstraite et générale de n’avoir pu prendre, dans un environnement d’informations fiables, des décisions plus profitables, de n’avoir pas pu mieux arbitrer leurs investissements, dont on voit mal à l’aide de quel coefficient de probabilité elle pourrait être évaluée.

35

  ibid., No. 235.

36

  On this case, see ibid., No. 247 ff.

37

  Cass. Com. (9 March 2010), Nos 08-21.547 and 08-21.793; Gaudriot, Bulletin Civil IV, No. 48, JurisData No. 2010-001500; Dr. Sociétés (2010) 6, comm. 109, M.-L. Coquelet; RTDF (2010) 2, 129, N Rontchevsky; D. (2010) 2797, J.-C. Hallouin; RTD Civ. (2010) 575, note P. Jourdain; RTD com. (2010) 374, note P. Le Cannu and B. Dondero; Review Sociétés (2010) 230, note H. Le Nabasque; Lexbase hebdo ed. private, No. 390, No. N7363BNZ, note J.-B. Lenhof; D. (2010) 761, obs. A Lienhard; JCP E (9 September 2010) 36, 1777, note D. Martin; LPA (19 November 2010) 231, 9, note A.-M. Romani; RTD com. (2010) 407, note N. Rontchevsky; Bulletin of Joly Bourse (2010) 4, para. 41, 316, note N. Rontchevsky; JCP E (2010) 20, 1483, comm. S. Schiller; Bulletin of Joly Sociétés (2010) 6, 537, note D. Schmidt; RTDF (2010) 2, 60, note N. Spitz; RSC (2011) 1, 110, note F. Stasiak; Option Finance (22 February 2010) 1075, 30, B. Zabala. 38

  On this case, see Prorok (n. 2), No. 255 ff.

39

  Cass. Com. (6 May 2014) 13-17632 and 13-18473, Société Marionnaud parfumeries et autres c/Société AFI ESCA, JurisData No. 2014-009959; Bulletin of Joly Bourse (July 2014) 7–8, 340, note A. Gaudemet; RDBF (2014), comm. 156, note P. Pailler; RTD com., (2014) 829, obs. N. Rontchevsky; Review Sociétés (2014) 579, note E. Dezeuze and J. Trèves; Bulletin of Joly Sociétés (2014) 449, note S. Torck. 40

  Cass. Com. (6 May 2014): ‘et retenu que la société Esca avait été, de manière certaine, privée de la possibilité de prendre des décisions d’investissement en connaissance de cause et de procéder à des arbitrages éclairés’. 41

  Bénabent (n. 17), 429.

42

  ibid., 431.

43

  ibid., 5.2.

44

  ibid., 5.5.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Part III Prospectus Liability and Litigation, 22 Italy Paolo Giudici From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

Subject(s): Prospectus liability — Securities — Misleading statements — Financial regulation

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 505) 22  Italy I.  Introduction 22.01 II.  The Legal Basis for Prospectus Liability 22.03 III.  Definition of ‘Prospectus’ 22.12 IV.  Persons Responsible for the Prospectus 22.15 V.  Persons Liable for Misleading Prospectus Information 22.16 VI.  Persons Who Can Sue for Damages Caused by a Misleading Prospectus 22.22 VII.  Defectiveness of Prospectus Information 22.24 VIII.  Fault of the Party Who is Sued 22.26 IX.  Causation and Damages 22.27 X.  Evidence 22.33 XI.  Disclaimers 22.34 XII.  Prospectus Summary 22.35 XIII.  Directors’ Liability 22.36

I.  Introduction 22.01  The word ‘prospetto’ comes from Latin ‘prospectus’ and from the verb ‘prospicere’, which means to look ahead. It is a word commonly used in Italian law in many different contexts, with regard either to documents that contain information to be used for decisions to be taken, as in the case of offer documents, or to documents that contain condensed information regarding the past.1 With regard to capital markets, the term was used in the past, well before any specific regulation, in order to describe the offering document that underwriters distributed to their customers to promote new issuances of shares and bonds. 22.02  Prospectus liability is today governed by specific rules that incorporate many of the issues that were debated by scholars and courts before the enactment of those specific statutory rules. Currently, the main issue seems to be whether those statutory rules express principles to be applied to all forms of material misstatements or omissions to the market, or whether they are just a part of the general framework concerning liability to the market.

(p. 506) II.  The Legal Basis for Prospectus Liability 22.03  Prior to the statutory intervention that in 2007 enacted specific rules concerning prospectus liability, there were two different lines of reasoning in order to argue that civil liability could stem from a defective prospectus. 22.04  The first one was grounded in principles of pre-contractual liability and in Article 2339, section 1, No. 3, of the Civil Code (concerning company promoters’ liability) with regard to misstatements in the placing of securities accompanied by a prospectus prepared by the issuer and the underwriters. The argument was that the relationship between the investor and whoever had prepared the prospectus and was soliciting the investment through the prospectus was pre-contractual in nature, even though there was not a real one-to-one negotiation between the seller and the buyers as a class.2

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

22.05  It has to be noted that, at the time, the mainstream view was that pre-contractual liability was applicable only to cases where a party abandoned the negotiations after having induced the other party to rely on the signature of the contract. Therefore, precontractual liability had no role in situations where a contract had actually been entered into. The scholars who were in favour of prospectus liability as a form of pre-contractual liability, by contrast, held that pre-contractual liability was applicable also to situations where an investor had been induced to rely on untrue information concerning the issuer and had therefore entered into a valid investment contract.3 22.06  The second view argued, instead, that when the parties enter into a contract there cannot be a case of pre-contractual liability, or that pre-contractual liability is a case of liability in tort or, finally, that prospectus liability entailed no real precontractual relationship between the seller and the purchaser, falling therefore straightforwardly in the realm of tort law. Thus, prospectus liability should be considered a case of tort under Article 2043, Civil Code.4 22.07  In theory, the two positions should lead to very different results in terms of burden of proof and statute of limitations. Indeed, scholars that were in favour of pre-contractual liability argued that pre-contractual liability has a contractual nature, which entails the need to call for the application of principles concerning evidence and statute of limitations that are more favourable to investors than tort rules.5 The scholars who were (p. 507) in favour of tort law, however, smoothed the path to increased investor protection by arguing that—at least with regard to evidence—courts could adopt standards more favourable to investors than in usual tort cases, accepting a wider recourse to presumptions. In the end, the difference between the two theories was less important than it can appear and had a real point of distinction with regard to statute of limitations only, which is five years in tort and ten years in contract (the statutory provisions concerning prospectus liability have today opted for a five-year statute of limitations). 22.08  Initially, court cases followed the precontractual theory that considers precontractual liability a form of contractual liability.6 However, the Cassation Court did not endorse this position. In the most famous decision concerning prospectus liability, the Court held that prospectus liability is a case of tort, on the assumption that precontractual liability is a case of tort.7 Yet, the debate concerning the nature of precontractual liability is far from closed. In a subsequent case concerning a completely different matter, the Cassation Court held that precontractual liability is a case of ‘social interaction’ (‘contatto sociale’), which is governed by contractual liability, re-opening the discussion.8 The discussion is still open, even though it has lost a great deal of normative value because of the specific provisions that today govern the matter. 22.09  A specific prospectus liability regime has been inserted in 2007 in the Consolidated Financial Services Act (CFSA),9 largely to implement Article 6, Prospectus Directive (Directive 2003/71/EC).10 Article 94, CFSA states at section 8 that the issuer, the offeror, the guarantor, and any person that contributes to the information contained in the prospectus is liable for the information provided towards any investor who reasonably relied on this information, unless it can be proved that sufficient due diligence was performed in order to ascertain that the information was true and there were no significant omissions. This regime is applicable also to listing prospectuses, under Article 113, CFSA. 22.10  Under section 9, the lead manager is also liable unless due diligence can be demonstrated. The statute of limitation is five years. Accordingly, the two main issues that draw the discussion concerning the nature of prospectus liability—namely the burden of proof and statute of limitation—have been sorted out by the law. By the way, the law now explicitly considers the Key Investor Information Document of Directive 2009/65/EC on Undertakings for Collective Investment in Transferable Securities (UCITS) IV (and therefore, by analogy, the prospectus) a precontractual document (Article 98-ter, s3), even

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

though it does not clarify whether precontractual liability claims are based in tort or in contract. (p. 508) 22.11  As mentioned, prospectus claims are subject to a five-year statute of limitation, which starts with the prospectus publication, unless the investor can show that she discovered the fraudulent information or the omission in the two years before the action started.

III.  Definition of ‘Prospectus’ 22.12  Italian securities law refers to the prospectus as the document that has to be published when there is an offer to the public of transferable securities and units issued by collective investment undertakings of the closed-end type, an offer of any other type of financial product or, finally, a request for admission to trading on a regulated market. The prospectus is the document that is drafted in accordance with the EU Prospectus Regulation or, when it concerns financial products that fall outside the provisions of this regulation, that is drafted in accordance with the securities authority’s indications (Article 94, s6). Indeed, Italian law extends the prospectus obligation to any offer that concerns whatever type of financial product, a category that goes beyond the one of security referred to by Article 2, Prospectus Regulation. The scope of Italian prospectus regulation is therefore wider than the scope of the EU Prospectus Regulation. 22.13  Italian securities regulation uses the term ‘prospectus’ also in the context of proxy solicitations. Any person who wants to collect proxies has to distribute a prospectus, drafted in accordance with the rules posed by the securities regulator.11 The law does not specify in detail the liability rules governing this special type of prospectus. It simply provides that the prospectus has to provide information sufficient for the shareholder to make an informed decision, that the proxy promoter is liable for the information contained in the prospectus, and that the promoter bears the burden of proving that it acted with the required due diligence.12 22.14  There are other documents that are functionally equivalent to a prospectus but are not mentioned like this by Italian law. The offer document of takeover bids13 is similar to a prospectus, but prospectus regulation is not explicitly applicable to it and therefore it should be discussed, for instance, whether prospectus liability rules should attach to it by analogy. Italian rules on related party transactions asks for ad hoc disclosure of major related party transactions through an information document. An information document also has to be made public in case of major merger and acquisition transactions, or raising of new capital. There are many other examples in capital markets law of prospectus-like documents, and to a certain extent also a Markets in Financial Instruments Directive (MiFID) document by which a bank or an investment firm has to provide the client or potential client with information regarding the investment firm and its services, the financial instruments and proposed investment strategies, (p. 509) execution venues, and all costs and related charges (Article 24, s4, MiFID II), might be considered functionally equivalent to a prospectus. The Cassation Court held that this type of document has a precontractual nature,14 and therefore there are clear similarities with prospectuses. Of course, the relevant issue for all these prospectus-like documents is whether prospectus liability rules might be applicable to them, and how.

IV.  Persons Responsible for the Prospectus 22.15  In virtually all prospectuses, the responsibility section states that the listing firm is held liable for all the information in the prospectus, whereas the selling shareholders are responsible only for information related to their identity, and underwriters for information in specific, well-identified sections. The underwriters that are mentioned as responsible are those that usually assume the functions of listing partner, sponsor, global coordinator, or the

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

one which is responsible for share allocations. As to other intermediaries mentioned by the prospectus, their name is usually not indicated among the responsible parties.

V.  Persons Liable for Misleading Prospectus Information 22.16  Civil liability for misleading information contained in the prospectus attaches to the issuer, the offeror, the guarantor, and any person that contributes to the information contained in the prospectus. This liability, however, is limited to the parts of the prospectus for which the providers of the information are competent. This several liability regime is an exception to the general provision of law that liability is joint and several. However, the responsabile del collocamento’s liability concerns the whole prospectus (Article 94, s9). The responsabile del collocamento, according to the law, is the intermediary that organizes and establishes the consortium, the coordinator, or the single underwriter (Article 93-bis, lett. e (TUF) (Testo Unico Finanza, the Italian name of CFSA)). According to the Italian provisions, therefore, each party takes several liability for the information it provided, whereas the responsabile del collocamento takes liability for the overall prospectus. Under the contract terms that are used in Italy, however, the issuer takes contractual liability towards the responsabile del collocamento in relation to any information or omission contained in the prospectus, and as a consequence it takes full liability for all the information provided in the prospectus, even though some of the information concerns issues (e.g. the bookbuilding procedure) that are outside the sphere of control of the issuer.15 (p. 510) 22.17  Under Italian market practices, the responsabile del collocamento is not the only financial intermediary that is actively involved in the offer. Many more banks and underwriters are usually involved, and usually the prospectus refers to many different roles attributed to different financial institutions, with terms that are not always clearly defined in the offer documents.16 The global coordinator (coordinatore globale) is the bank responsible for overseeing the global public offering. Indeed, Italian initial public offerings (IPOs) are made by a global offering divided into a public offering for retail investors and a private offering for institutional investors. Underwriters acting in the two offerings report to the global coordinator, which is also responsible for coordinating the activities of all the lead managers and underwriters. There can also be different global coordinators for the public and institutional offerings. Then there can be the sponsor, which is the bank that guarantees the viability of the company’s business and takes care of compliance with IPO listing rules and promotes the firm among local investors and analysts. There can be a listing partner, which is the bank that liaises with the regulatory bodies and stock exchange authorities, takes care of the IPO prospectus, and in general assists the firm in the whole process of going public. There can be the specialist (specialista), which is the bank that conducts the market-making activities for the IPO’s stocks, and the financial advisor (advisor finanziario), which is the bank that advises the listing firm on all stages of IPO preparation, such as assisting in underwriters’ selection, acting as a consultant to the listing firm in negotiations with chosen underwriters, and so on. Then there is the lead manager or lead underwriter, the bank that creates the syndicate, negotiates the terms with the issuer, and assesses market conditions. Finally, there is the book-runner (book-runner), which runs the books and takes the offers coming from institutional investors which form the basis of the final price of the public offer. 22.18  The Italian rules on prospectus liability, however, do not contain any provision concerning all the financial intermediaries, different from the responsabile del collocamento, which are involved in the IPO process. Scholars tend to agree that liability can be attached to any institution that has de facto taken a role equivalent to the one usually discharged by the responsabile del collocamento, and therefore might be extended to banks and investment firms that are not mentioned in the area of the prospectus

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

dedicated to the responsible persons but which have been involved in the typical activity of the responsabile del collocamento.17 22.19  A further issue concerns the securities watchdog’s liability for negligence in the prospectus authorization process. The law makes it clear that the authorization process does not require to provide the regulator with a deep analysis of the prospectus contents and an assessment of the merits of the prospectus. However, according to some decisions of the Cassation Court, the securities regulator can be held liable in tort when (p. 511) the misstatements and omissions in the prospectus were so patent that any reader would have spotted them.18 Following those decisions, a specific statutory provision established that independent authorities’ liability can exclusively be based on gross negligence and willful intention, i.e. standard negligence is not sufficient to support a claim of tort liability against the supervisor.19 22.20  Another issue is whether prospectus liability rules govern liability towards secondary market investors. It has been mentioned that prospectus liability rules concern both prospectuses used in public offers and prospectuses issued on the occasion of a request for admission to trading on a regulated market. Since listing prospectuses contain information addressed to secondary market investors, as they concern securities that have been already offered to primary market investors (at least when the offer and the listing request are not made at the same time), it has been argued that the prospectus liability regime governs any kind of liability to market investors and therefore that prospectus liability is today applicable to any claim concerning material misstatements or omissions in information to the market.20 Accordingly, the prospectus liability regime would also apply, as a general regime, to those prospectus-like documents that are not governed by specific liability rules: offer documents, informative documents, and the like. 22.21  A final issue might be whether prospectus liability rules might be applied to initial coin offering (ICO) white papers in which the offer concerns tokens that are not to be characterized as financial products (otherwise, prospectus regulation would certainly apply). This area is still unexplored. In the case of a negative answer, the discussion will return to the nature of liability. If the liability is precontractual and therefore contractual, the burden of proof should be reverted. If liability is in tort, directly or by considering precontractual liability as a form of tort, the plaintiff should show that there was a relevant misstatement that should not have been made or that the document contained relevant omissions, offering evidence that this was due to the negligence of the drafter.

VI.  Persons Who Can Sue for Damages Caused by a Misleading Prospectus 22.22  The liability regime does not distinguish between retail investors and professional investors. The distinction between the two types of investors was in theory very important with regard to class actions. Under the previous provisions concerning class actions, contained in consumer law,21 exclusively consumers had a right to aggregate their claims through class-action-like mechanisms. Some court decisions held that (p. 512) shareholders are not consumers.22 More importantly, class actions were not available for claims in tort. The class action mechanism covered claims concerning unfair commercial practice and misleading advertising. Some writers had argued that prospectus liability can also be grounded on the law of unfair commercial practices.23 However, as we have seen, the tradition is that prospectus liability claims are grounded in tort law or pre-contractual liability. Thus, up to now, investors have not been able to bring a securities class action in cases concerning misstatements to the market.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

22.23  At the time of writing, however, the Italian Senate has approved an amendment to the Code of Civil Procedure that enlarges the scope of class actions. The action is not restricted any more to some limited types of claims, thereby extending the possibility of aggregated limitation to tort cases. Moreover, the action is now a general instrument, open to any class of damaged parties. Accordingly, it is not now limited to consumers.

VII.  Defectiveness of Prospectus Information 22.24  The investor is entitled to rely on the ‘completeness and truthfulness’ of the prospectus. The law does not offer any adjunctive criteria to describe the materiality element. It is, however, clear that any information or omission that an investor would have cared about is material. Accordingly, materiality can be reasonably inferred from the change of stock price that occurs when the truth about the company is disclosed. 22.25  More specifically, in the leading case concerning prospectus liability,24 the Cassation Court held that the law requires that the interaction of supply and demand on the market is driven by information that has to be carefully and truthfully released by the issuer or the offeror to the market. In the case of misstatements, proper interaction is affected. Supply and demand interact at a different price level from the one they would have if the information were true. This creates damage, and damaged parties have a claim in tort.25 Accordingly, any misstatement or omission that creates an alteration of the price is material. This definition is not focused on the investor, but on the market. As a consequence, scholars and courts have not commented particularly on the law’s reference to the fact that the investor should have reasonably relied on the truthfulness and completeness of the information.26

(p. 513) VIII.  Fault of the Party Who is Sued 22.26  As mentioned in section V ‘Persons Liable for Misleading Prospectus Information’ (para. 22.16), both the parties that provide the information mentioned in the prospectus and the responsabile del collocamento can benefit from a due diligence defence, according to which they can show they have adopted every kind of diligence (‘ogni diligenza’) in order to avoid the misrepresentation or the omission. The precise limits and contours of the due diligence defence have not been properly investigated in cases concerning prospectus liability. In particular, it has not been investigated in courts whether ‘every kind of diligence’ means the maximum diligence level in absolute terms or the standard that could have been required in the circumstances.27

IX.  Causation and Damages 22.27  The reliance element attaches to the prospectus liability regime. However, courts have always been very easily induced to establish an inference of reliance from the facts. In all the main Italian cases concerning investors’ claims for inaccurate or false disclosure, either in a prospectus liability context or in secondary market liability cases, proving reliance was not an obstacle.28 Basically, courts ascertained that there was a misstatement or an omission in a situation where the issuer had a duty to disclose. Then the courts observed that without the misstatement or the omission, the plaintiff would have purchased at a different value because the true information would have had an impact on prices. Evidence that the investor had actually acquired the wrong information has not been considered an issue, since courts constantly presume that the wrong information reached the investor through financial advisors or other financial intermediaries, or that the market price reflected the lack of right information. Italian courts have been wary not to conceptualize this point too much, and they avoid any reference to the fraud-on-the-market theory (FOTM). When non-institutional investors are concerned, there has probably been more influence from the old German doctrine of ‘investment atmosphere’, which asserts

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

that misstatements can generate a sort of investment euphoria that is independent of specific reliance on the misrepresented facts. 22.28  In the 2010 leading case that has been already mentioned, the Cassation court has fully embraced the approach that eliminates any need for proof of reliance.29 The Court noted that the statutory and regulatory framework concerning public offers, which assigns to the prospectus an essential role for the offer and subjects the (p. 514) prospectus to regulatory approval, indicates that the prospectus is a key element in the information due to the investors. Accordingly, an untrue prospectus creates an artificial and unlawful alteration in the decision sphere of solicited investors. Thus, unless the misstatements or omissions are immaterial, there is a rebuttable presumption that they have influenced investor decisions. Hence, individualized proof of reliance cannot be required. 22.29  Following cases have fully endorsed the Cassation’s approach, dispensing investors from the burden of proving reliance also with regard to secondary market transactions, adopting what is, in fact, a US-style rebuttable presumption.30 22.30  As to quantification of damages, the loss is the difference in value between the inflated price and the value of the securities at the moment the truth made its way into the marketplace. Since it can be difficult to understand what part of the depreciated value is attributable to the emergence of the truth rather than to market conditions, Italian courts are usually prepared to adopt quantifications in equity. Usually, Italian courts accord some interest on the amount of the recognized loss. 22.31  If there was a sale before the truth emerged (sales ‘during the class period’), theoretically the investor cannot claim damages. In at least one case, however, the court accorded damages nevertheless.31 As mentioned, if the sale followed the rectification of information, the investor can bring an action for damages. 22.32  There are no direct cases on whether the plaintiff can claim damages for losses attributable to the decision not to sell the shares at a certain point in time on the grounds of the positive, misleading information provided for by the issuer at that moment in time. However, if the plaintiff can show that there was a decision process to keep the shares, and this process was causally influenced by the information set, loss causation can be proven and damages can be awarded. The Tribunal of Milan in the 1999 Fin.Ge.M. case32 briefly touched on this point. Indeed, the Court held that the right to damages is also connected to the decision to keep the shares, where this decision had been induced by inaccurate or false information.

X.  Evidence 22.33  It is for the claimant to prove the loss in respect of securities purchased or sold. This is the loss causation requirement. In the more common cases, the plaintiff must prove the purchase at an inflated price and, if there was a sale after the truth emerged, the sale at a loss. In theory, proof can be provided with any available evidence. However, a recent decision of the Court of Milan argued, in a case concerning purchases on the secondary (p. 515) market, that evidence of purchase is subject to restricted admissible evidence, meaning that it must be supported by certifications coming from the intermediaries that are part of the central depository system (CDS) national network. Therefore, documentary evidence from the books of the collective investment undertakings custodians was not considered sufficient evidence of the purchases.33 It is hard to predict whether this decision will survive the appeal and, more important, whether it would be considered applicable also in cases concerning pure prospectus liability.

XI.  Disclaimers

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

22.34  Disclaimers are not used in the Italian market, because the common view is that they would be null and void since the responsibility regime cannot be opted out voluntarily.34

XII.  Prospectus Summary 22.35  Italian law states that liability cannot be asserted exclusively on the basis of the prospectus summary, and that this should be mentioned in the summary. However, if the summary is misleading, inaccurate, or contradictory if read together with the prospectus, liability can stem from the summary. Liability can also stem from lack of key information that can help investors in assessing whether or not to invest in the financial products, but once again, the contents of the summary prospectus are to be considered in the light of the other parts of the prospectus.

XIII.  Directors’ Liability 22.36  With regard to the persons that can be held liable for the prospectus, a relevant matter is whether the issuer’s directors can be held liable to investors because of misstatements or omissions contained in the information provided for by the legal entity. Pursuant to Article 2395, Civil Code, indeed, directors and statutory directors are liable under general tort law principles for damages that they directly caused on shareholders and third parties. One of the most significant areas in which this provision applies, according to a well-established tradition, is the liability for misstatements contained in financial statements and other information to shareholders or the market in general.35 Accordingly, it would be possible for an investor to assert that directors are personally (p. 516) liable under general tort rules together with the issuer, which is liable under the more specific rules concerning prospectus liability. 22.37  Scholars have not properly investigated how these two different claims can proceed together yet, but the interrelation between prospectus liability, liability for misstatements to the market, and direct directors’ liability has in the meantime created some confusion with regard to proof of damages (see section X).

Footnotes: 1

  For instance, under Article 220 of the new insolvency law (Legislative Decree No. 14, 2019) the insolvency liquidator sends to creditors every four months a ‘prospetto’ concerning the available cash. 2

  Guido Ferrarini, La Responsabilità da Prospetto. Informazione Societaria e Tutela degli Investitori (Milano: Giuffrè, 1986). See also Giuseppe Portale, ‘Informazione Societaria e Responsabilità degli Intermediari’, in: P. Alvisi, P. Balzarini, and G. Carcano (eds), L’Informazione Societaria (Milano: Giuffré, 1982) 18–22. 3 

This position has been abandoned by the Cassation Court in 2005: Cassation Court, 29 September 2005, No. 19024. 4 

Guido Alpa, ‘Curcikazuibe di Valori Mobiliari e Responsabilità Civile degli Intermediari’ (1987) Corr. guir. 1200. A third proposal concerning prospectus liability held that it should be treated as a form of sale warranty: Andrea Perrone, Informazione al Mercato e Tutele dell’Investitore (Milano: Giuffrè, 2003) 84 ff. This position, however, has not been supported by other researchers. 5

  Ferrarini (n. 2).

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

6

  See Milan Tribunal, 11 January 1988, II Giur. comm. 585; Milan Court of Appeal, 2 February 1990, II Giur. comm. 755. 7

  Cassation Court, 11 June 2010, No. 14056.

8

  Cassation Court, 12 July 2016, No. 14188.

9

  The amendment was effected through Legislative Decree No. 51 of 2007.

10

  Paolo Giudici, La Responsabilità Civile nel Diritto dei Mercati Finanziari (Milano: Giuffré, 2008) 225 ss; Sabrina Bruno, ‘La (Nuova?) Responsabilità da Prospetto verso il Pubblico’ Banca Borsa (2008) I, 758. 11

  Articles 143 and 144, CFSA.

12

  Article 143(3), CFSA.

13

  Duccio Regoli, Offerte Pubbliche di Acquisto e Comunicato agli Azionisti (Milano: Giappichelli, 1996). 14

  This issue has been covered by two important decisions of the Joint Sections of the Cassation Court: 19 December 2007, Nos 26724 and 26725. 15

  Paolo Giudici, ‘Mercato Finanziario’, in: V. Roppo and A. M. Benedetti (eds), Trattato dei Contratti, V, Mercati Regolati, Vol. V (Milano: Giuffré, 2014), 911–38; Dmitri Boreiko and Stefano Lombardo, ‘Prospectus Liability and the Role of Gatekeepers as Informational Intermediaries: An Empirical Analysis of the Impact of the Statutory Provisions on Italian IPOs’, European Business Organization Law Review (2019). 16

  See Boreiko and Lombardo (n. 15), from where the description that ensues in the text is drawn. 17

  Boreiko and Lombardo’s paper analyses whether prospectus liability rules had effects on the assumption of the role of ‘responsabile del collocamento’: Boreiko and Lombardo (n. 15). 18

  Cassation Court, 3 March 2001, No. 3132.

19

  Article 24, Law No. 262, 2005.

20

  Giudici, La Responsabilità Civile (n. 10), 276 ff.

21

  Article 140-bis, Consumer Code.

22

  Florence Tribunal, 15 July 2014, Foro it., 2015, I, 2782. The decision concerned the issuance of new equity by Monte dei Paschi di Siena, a consumer association which brought a claim on behalf of shareholders who were not professional investors. Those shareholders had exercised their pre-emptive rights and had purchased new shares of the bank relying on the information contained in the prospectus, which was allegedly false. The Florence Tribunal decided in favour of the bank, dismissing the class action on the ground that shareholders are not consumers and that the action was in tort, thereby falling outside the boundaries of the class action instrument. 23

  See discussion in Paolo Giudici, ‘L’Azione de Classe e la Responsabilità Civile nel Diritto dei Mercati Finanziari’, in: Class Action: Il Nuovo Volto della Tutela Collettiva in Italia (Milano: Giuffrè, 2011), 191.. 24

  Cassation Court, 11 June 2010, No. 14056.

25

  ibid.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

26

  See Filippo Sartori, Informazione Economica e Responsabilità Civile (Padova: Cedam, 2011) 239–42, who points out that reference to the reasonable investor is not really relevant, since the true reference point is the material impact on market prices. 27

  See Giudici, La Responsabilità Civile (n. 10) 231–5.

28

  See Milan Tribunal, 11 January 1988, II Giur. comm. 585; Milan Court of Appeal, 2 February 1990, II Giur. comm. 755; Milan Tribunal, 21 October 1999, FIN.GE.M. v Price Waterhouse and Others, Giur. it., 2000, 554; Milan Tribunal, 25 July 2008, Freedomland; Milan Tribunal, 22 July 2010, Italease, Giurisprudenza italiana, 2011, 1079. 29

  Cassation Court, 11 June 2010, No. 14056.

30

  Milan Court of Appeal, 15 January 2014 and Milan Tribunal, 17 January 2014, Le Società, 2015, 849. 31

  Milan Tribunal, 25 July 2008, Freedomland.

32

  Milan Tribunal, 21 October 1999, FIN.GE.M. v Price Waterhouse and Others, Giur. it., 2000, 554. 33

  Milan Tribunal, 9 November 2019, Saipem.

34

  The possibility of a disclaimer is not even discussed in the most important Italian essays covering the issue. 35

  Cassation Court, 28 February 1998, No. 2251; Ferrarini (n. 2), 150 ss.; Ugo Carnevali, ‘La Responsabilità Civile degli Amministratori per Danno ai Risparmiatori’ (1999) Contratto e Impresa 83.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Part III Prospectus Liability and Litigation, 23 Spain Javier Redonet Sánchez del Campo From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

Subject(s): Prospectus liability — Securities — Financial regulation

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 517) 23  Spain I.  Introduction 23.01 II.  The Legal Basis for Prospectus Liability 23.06 1.  Statutory Provisions on Prospectus Liability 23.06 2.  The Nature of Prospectus Liability 23.10 III.  Definition of ‘Prospectus’ 23.14 IV.  Persons Responsible for the Prospectus 23.16 V.  Persons Liable for Misleading Prospectus Information 23.21 1.  The Issuer of the Securities 23.21 2.  The Seller of the Securities 23.23 3.  The Person Seeking Admission to Listing of the Securities 23.25 4.  The Directors of the Issuer, the Seller of the Securities, or the Person Seeking Admission to Listing 23.26 5.  The Guarantor of the Securities 23.27 6.  The Lead Managers of the Placement of the Securities 23.29 7.  The Persons Accepting Liability on the Prospectus or any Portion Thereof 23.33 8.  The Persons Who Have Authorized the Prospectus 23.35 9.  Identification of Persons Responsible for the Prospectus 23.36 10.  Joint and Several Nature of the Liability of the Parties Responsible for the Content of the Prospectus 23.37 VI.  Persons Who Can Sue for Damages Caused by a Misleading Prospectus 23.38 VII.  Defectiveness of Prospectus Information 23.42 VIII.  Fault of the Party Who is Sued 23.47 IX.  Causation and Damages 23.50 X.  Evidence 23.52 XI.  Disclaimers 23.54 XII.  Prospectus Summary 23.56 XIII.  Directors’ Liability 23.58

I.  Introduction 23.01  Historically, and unlike other European Union jurisdictions, before the enactment of Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC (the ‘Prospectus Directive’), Spain lacked any explicit regulation on the civil liability arising from the defective content of prospectuses for securities offerings and listings in regulated markets. Nevertheless, legal authors, having

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

researched on the matter, had expressed the view that liability attached to prospectuses on the basis of the general principles of tort liability. 23.02  The provision in Article 6, Prospectus Directive mandating EU Member States to ensure that that their laws, regulation, and administrative provisions on civil liability applied to those persons responsible for the information given in a prospectus prompted (p. 518) an amendment of Spanish law to provide, for the first time, a legal regime governing the civil liability arising from prospectuses in an effort to provide legal certainty on the matter. This was achieved by way of Royal Decree-Law 5/2015, of 11 March, on urgent reforms to support productivity and the enhancement of public procurement, which implemented the Prospectus Directive in Spain, operating a substantive and broad reform of then-current Law 24/1988, dated 28 July, on the Securities Markets (the ‘Repealed Securities Market Act’), including the insertion of a newly drafted Article 28 on the civil liability attached to the prospectus. 23.03  The provisions of the Repealed Securities Market Act on prospectus liability were further developed by secondary legislation, namely Royal Decree 1310/2015, dated 4 November, partially developing Law 24/1988, dated 28 July, on the Securities Markets, regarding admission of securities to listing in regulated markets, public offers for the sale or subscription of securities, and the prospectus required for such purposes (‘Royal Decree 1310/2005’), completing the basic provisions of the Repealed Securities Market Act on the subject. These provisions have remained substantially unchanged since then, except that the Repealed Securities Market Act was repealed by Royal Legislative Decree 4/2015, dated 23 October, approving the restated text of the Securities Market Act (the ‘Securities Market Act’). However, the recent entry into force in full of Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 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 Regulation’) will likely require slight changes to the existing regulation to address the specific provisions of Article 11, Prospectus Regulation, which differ from those of Article 6, Prospectus Directive. 23.04  The legal regime of prospectus liability enshrined by the Securities Market Act and Royal Decree 1310/2005 is not fully comprehensive, though, and is completed with the general principles of civil liability contained in the Spanish Civil Code, as construed by case law stemming from the Spanish Supreme Court. 23.05  As a concluding introductory remark, despite the existence of a modern and articulated legal regime governing the civil liability for material misstatements or omissions in prospectuses, there is no case law yet on the matter, given that in the massive litigation following the leading cases of Bankia1 and Banco Popular (p. 519) Español,2 plaintiffs have overwhelmingly chosen to enforce general contractual nullification remedies of the Spanish Civil Code on the basis of fraud seeking the unwinding of the subscription or purchase of the securities acquired by the investor through the reciprocal restitution of the shares subscribed or purchased by the investor and the consideration received by the issuer as opposed to demanding a compensation from those responsible for the content of the prospectus for the losses and damages suffered. Nonetheless, important conclusions may be drawn from the case law stemming from the Bankia and Banco Popular Español leading cases, which should apply to claims for prospectus liability.

II.  The Legal Basis for Prospectus Liability 1.  Statutory Provisions on Prospectus Liability

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

23.06  The statutory provision establishing the fundamental principle of civil liability for the content of the prospectus is Article 38, Securities Market Act, which holds the persons listed therein responsible for all the losses and damages caused to holders of securities acquired as a result of the false information or of the omission of relevant information in either the prospectus or the document to be produced by the guarantor in accordance with the conditions determined by secondary legislation. Article 38, Securities Market Act goes on to provide the persons responsible for the content of the prospectus, the statute of limitation of the action to claim prospectus liability, and regulates the responsibility for the summary note in terms consistent with Article 6, Prospectus Directive. 23.07  As discussed in section I ‘Introduction’ (para. 23.01), Article 38, Securities Market Act is further developed by Royal Decree 1310/2005, which governs—among other things— the specific features of the liability for the various persons responsible for the content of the prospectus, the persons eligible to bring an action to claim responsibility for the prospectus, and the burden of proof of the misstatements or omissions in the prospectus. 23.08  The choice by the Spanish rule makers of the Securities Market Act as the legislative instrument to regulate prospectus liability, as opposed to the Civil Code, as is the case for other EU jurisdictions, derives from the regulatory approach to have a single consolidated legal text, which contains the comprehensive regulation of the securities markets, including the civil liability and the civil offences arising for breaches thereof, and (p. 520) is consistent with the treatment of the liability of issuers for other mandatory regulatory disclosures such as the annual and semi-annual financial reports. 23.09  Having said that, as pointed out by legal scholars, the legal regime contained in the Securities Market Act and Royal Decree 1310/2005 is not holistic and, thus, due regard must be given to certain provisions and general principles of the Spanish Civil Code on civil liability for aspects not expressly regulated therein.3

2.  The Nature of Prospectus Liability 23.10  Scholars having researched and written on the subject of prospectus liability have drawn a distinction between two different sets of disclosures in a prospectus.4 (a)  On the one hand, there is information relating to the specific features of the securities offered or for which admission to listing is sought (their nominal value, the rights attached thereto, etc.) and, where applicable, the terms of the offering itself (offer period, rules for submitting orders and for allocation, etc.). (b)  On the other hand, there is qualitative and quantitative information on the issuer of the securities (risk factors, discussion of financial condition and results of operation, principal shareholders and management, etc.) which is designed to allow investors to make an informed assessment of the investment opportunity presented to them and of the inherent value of the securities offered or listed. 23.11  In the case of an offering prospectus, the first set of information is clearly contractual in nature, as it relates to the specific terms of the offer (regardless of whether the transaction is structured as a true offer to enter into a contract, where all the terms are defined at the outset, or a reverse offer or invitatio ad offerendum, where definitive terms are fixed following the offering period, based on feedback received from investors). As such, investors having purchased securities in the offering may enforce ordinary contractual remedies vis-à-vis the issuer for breaches of the terms disclosed in the prospectus in that regard.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

23.12  In contrast, the second set of information is framed within the bona fide duty of the issuer or seller of the securities the subject of the offering to provide fair, complete, accurate, and not misleading information to prospective purchasers of the securities and, accordingly, has been widely held by scholars to be pre-contractual. Legal authors have traditionally debated at length in the past whether a breach of pre-contractual duties would give rise to contractual or tort liability, without there being a conclusive, prevailing view. Accordingly, the nature of the remedies available for investors having (p. 521) purchased securities vis-à-vis the issuer in the event of material misstatements or omissions in the disclosure regarding the issuer itself, is still at stake. 23.13  Moreover, there are many instances where there is no underlying contractual relationship between the issuer of the securities and the investor (e.g. where the prospectus relates to an admission to listing of securities not preceded by a public offering thereof or where the investor purchases the securities from a party other than the issuer in the secondary market). In addition, in most of the cases there will not be any contractual relationship between the purchaser of the securities and the persons responsible for the content of the prospectus other than the issuer (e.g. the guarantor of the securities, any placement agents, or any experts). In such circumstances, the appropriate conclusion would seem to be that the liability should be held to be in tort.

III.  Definition of ‘Prospectus’ 23.14  Spanish law (namely, Article 38, Securities Market Act) does not provide a definition of ‘prospectus’ for the purposes of the application of its provisions regarding prospectus liability. Nevertheless, it is clear by the context that it applies only to prospectuses in the sense of the Prospectus Directive, as it is contained in the chapter regulating—among other things—to public offers of securities, offerings exempted from the obligation to publish a prospectus, the prospectus itself, and the liability arising from its content.5 Accordingly, the Spanish legal regime on prospectus liability only applies to prospectuses for the purposes of the current Prospectus Regulation regarding public offerings and/or admissions to listing on a regulated market in the EU. 23.15  Despite certain authors6 having held such provisions as applicable to other disclosure documents different from prospectuses (e.g. the offering memorandum or listing particulars required to be published by issuers in connection with admission to trading of securities on the Spanish alternative markets, namely the Spanish Alternative Stock Market or Mercado Alternativo Bursátil and the Spanish Alternative Fixed-Income Market or Mercado Alternativo de Renta Fija7), disregarding the fact that they fall outside of the scope of the Prospectus Regulation, we do not concur with such analysis, and are rather of the view that liability arising from such disclosure documents not constituting a prospectus for the purposes of the Prospectus Regulation is not governed by Article 38, Securities Market Act, but may arise on the basis of general principles of contractual or tort liability consistently with the traditional position of scholars on (p. 522) the responsibility for the content of the prospectus before the enactment of Article 28, Repealed Securities Market Act in 2005.

IV.  Persons Responsible for the Prospectus 23.16  According to Article 38(1), Spanish Securities Market Act and Articles 32 et seq., Royal Decree 1310/2005, the following persons are—or may be, depending on the specific circumstances involved—responsible for the content of the prospectus: (a)  the issuer of the securities; (b)  the seller of the securities;

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(c)  the person seeking admission to listing of the securities; (d)  the directors of the persons referred to in paragraphs (a), (b), and (c); (e)  the guarantor of the securities; (f)  the lead managers of the placement of the securities, with respect to the verifications carried out by them; (g)  any other parties who have accepted liability on the prospectus or any portion thereof, provided that such consent is mentioned in the document; (h)  any other parties different from the foregoing who have authorized the prospectus, provided that such authorization is mentioned in the document. 23.17  Article 33.4, Royal Decree 1310/2005 goes on to clarify specifically that the regime on prospectus liability does not apply to those who render their professional advice to the issuer or seller of the securities, having drafted the prospectus. This comprises legal counsel, financial advisors, and any other consultants to the extent that they assist the issuer or seller of the securities in producing the disclosure contained in the document. The foregoing does not preclude the possibility, though, that such advisors and consultants incur professional liability vis-à-vis their clients to the extent that they provide defective advice to the issuer or seller of the securities, resulting in the causation of damages, with such potential liability being governed by the contractual terms of their engagement. 23.18  As the law provides for the comprehensive list of persons which are, or may be, held responsible for the content of the prospectus, no legal author having researched on the subject following the enactment of the Spanish prospectus liability regime has interpreted that there are persons other than those specifically identified by regulation which should be held liable for the prospectus, nor have the Spanish courts sought to apply the principle underlying the ruling issued by the EU Court of Justice (First Chamber) on 5 July 2007, Case 430/05 (Pikoulas)8 to predicate the liability of other persons different from those listed in paragraph 23.16 above for the content of the prospectus. (p. 523) 23.19  Similarly, given that following the enactment of Article 28, Repealed Securities Market Act (currently contained in Article 38, Securities Market Act), there is an explicit and detailed regime governing the liability for the defective content of prospectuses, the Spanish courts have not felt it necessary to invoke the EU principle of effectiveness (effet utile) to adjudicate cases of prospectus liability. 23.20  A different thing, though, is that, as some authors have underlined,9 there might be other persons liable for specific documents contained or incorporated by reference in the prospectus, such as, for example, the auditors of the issuer with respect to the audited financial statements included in the prospectus. This liability would be concurrent with that of the persons responsible for the content of the prospectus per se and would be in tort.

V.  Persons Liable for Misleading Prospectus Information 1.  The Issuer of the Securities 23.21  The issuer of the securities is the person primarily and fundamentally responsible for the content of the prospectus as a whole, given that it is the subject of the disclosure required to be provided therein, except in the very rare cases where it has not been involved in the drafting thereof, nor in the offering or admission to listing of the securities to which the prospectus relates.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

23.22  Pursuant to Article 33(3), Royal Decree 1310/2005, the issuer may not object vis-àvis bona fide investors facts which are not expressly disclosed in the prospectus, including for such purposes the documents incorporated by reference therein.

2.  The Seller of the Securities 23.23  As a general rule, the seller of the securities, and not the issuer, is responsible for the content of the prospectus for a public offering of securities and, as such, all provisions relating to the liability of the issuer for the prospectus, including Article 33(3), Royal Decree 1310/2005 apply mutatis mutandis to the seller of the securities, as if it was the issuer. (p. 524) 23.24  However, conscious that there might be instances where the seller or sellers of the securities comprised in the offering prospectus may not be involved in the management of the issuer and, accordingly, may have limited knowledge of the affairs of the issuer, Article 33(2), Royal Decree 1310/2005 allows the issuer to accept liability for the prospectus for a public offering of securities in lieu of the seller or sellers of the securities where the prospectus has been effectively drafted by it. This possibility is commonly used in practice such that sellers of securities customarily bear no responsibility for the content of the prospectus, or only accept liability for specific information contained in the securities note relating to the public offering of the securities.

3.  The Person Seeking Admission to Listing of the Securities 23.25  Where the person seeking admission to listing of the securities the subject of the prospectus without a preceding public offering is different from the issuer (e.g. a financial intermediary promoting the listing), then such person will be responsible for the prospectus. While the law does not so provide explicitly, it should be possible for an issuer to accept liability for a listing prospectus where it was prepared by it, thereby exonerating the person seeking admission to listing of the securities from responsibility regarding the prospectus. In any event, it is extremely unusual in practice for a person other than the issuer to seek admission to listing of securities on a Spanish regulated market.

4.  The Directors of the Issuer, the Seller of the Securities, or the Person Seeking Admission to Listing 23.26  The responsibility of the directors of the issuer, the seller of the securities, or the person seeking admission to listing is discussed in section XIII ‘Directors’ Liability’ (para. 23.58) below.

5.  The Guarantor of the Securities 23.27  The law extends the liability of the issuer for the content of the prospectus to the guarantor of the securities, provided that the responsibility of the guarantor is restricted to the information contained in the prospectus to be produced by it (cf. Article 38(1)(a), Securities Market Act and Article 34, Royal Decree 1310/2005). In particular, this information is that provided in Annex 21 of Commission Delegated Regulation (EU) 2019/980 of 14 March 2019 supplementing Regulation (EU) 2017/1129 of the European Parliament and of the Council as regards the format, content, scrutiny and approval of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Commission Regulation (EC) 809/2004 (p. 525) (‘Regulation 980/2019’), and comprises both the information on the nature and scope of the guarantee and the information on the guarantor itself, as if it was the issuer of the securities.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

23.28  The responsibility regime of the guarantor gives rise to the following additional considerations: (a)  On the one hand, given that there are instances where the issuer is not responsible for the content of the prospectus (namely, where the prospectus has been published for the purposes of a public offering of securities or an application for admission to listing of the securities by a person other than the issuer, in which case the liability for the prospectus lies with the seller of the securities or the person seeking admission to listing of the securities), it seems fair to conclude that in such circumstances the guarantor should not be held responsible for the disclosure in the prospectus relating to the guarantee, or of itself either. (b)  On the other hand, despite the fact that the legal regime restricts by default the guarantor’s responsibility for the prospectus to the specific information addressing the nature and scope of the guarantee and the description of the guarantor itself as if it was the issuer of the securities, given that the usual intention is for the guarantor to secure as broadly as possible all of the obligations of the issuer arising from the offering of securities beyond the contractual commitments deriving therefrom, the guarantor may voluntarily accept liability for the content of the prospectus as a whole without carving out the information relating to the issuer and the securities by inserting a specific consent in the prospectus to such effect.

6.  The Lead Managers of the Placement of the Securities 23.29  The lead managers of the placement of the securities are also held responsible for the verifications carried out by them in relation to the content of the prospectus, albeit in contrast with the regulation existing before the enactment of Royal Decree 1310/200510 and the approach followed by other jurisdictions, the scope of their liability is defined very narrowly. (p. 526) 23.30  In essence, as per Article 35, Royal Decree 1310/2005, the lead managers, if any, are only liable for the failure to undertake diligently the verifications which are reasonably necessary, following widely accepted market criteria, to ensure that the information contained in the securities note forming part of the prospectus for the first admission to listing of shares of an issuer preceded by an initial public offering, provided that the prospectus is to be approved by the Spanish National Securities Market Commission (the CNMV), relating to the offering and the securities is not false and that there are no material omissions of information required by applicable law. The law goes on to say that the extent of the verifications may vary, depending on factors such as the features of the transaction, of the issuer, and its business, the quality of the information available or provided by the issuer, and the prior knowledge that the lead manager has of the issuer. 23.31  For these purposes, Article 35(1), Royal Decree 1310/2005 defines lead managers as those to which the issuer or the seller of the securities the subject of the prospectus has engaged to lead the design of the financial, timing, and marketing conditions of the relevant offering or listing, as well as to coordinate the relationships with the supervisory authorities, the operators of the markets, the rest of the underwriters or managers of the proposed transaction, and potential investors. 23.32  The fact that the liability of lead managers for the verification of some portions of the securities note of certain prospectuses is limited to the cases where the prospectus is to be approved by the CNMV raises an interesting conflict-of-law question in cross-border initial public offerings and listings of shares in Spanish regulated markets where the issuer is not incorporated in Spain and the prospectus in question falls to be approved by another competent authority of the EU. In such cases, it would seem that the lead manager would

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

not be required to produce any verification letter, nor to assume any liability on the securities note forming part of the prospectus under Spanish law in such scenario, despite the fact that, as outlined by legal authors,11 conflict-of-law rules would point at Spanish law as the law governing liability for the content of such prospectus, at least with respect to sales to investors resident in Spain (lex loci damni)12 or to securities purchased in the Spanish market (target market test).13

(p. 527) 7.  The Persons Accepting Liability on the Prospectus or any Portion Thereof 23.33  Spanish law contemplates that persons other than the foregoing may accept liability for the content of the prospectus or any portion thereof, provided that such consent is explicitly mentioned in the document, so that prospective investors may legitimately rely on it. This is typically the case of independent experts and other consultants engaged by the issuer to provide ad hoc reports appended or incorporated by reference to, or otherwise transcribed in, the prospectus. These include the valuation reports of real estate assets comprised in the portfolio of property issuers and of portfolio companies held by investment companies, the reserves reports of oil and gas companies, and other equivalent reports. 23.34  According to Article 33(2), Royal Decree 1310/2005, where a person accepts liability for the content of the prospectus, it may restrict its responsibility only to specified portions of, or language in, the document, in which case it will only be liable for such portions or language and provided that such portions or language were included in the form agreed with the issuer.

8.  The Persons Who Have Authorized the Prospectus 23.35  Finally, any other person other than the foregoing who has expressly authorized the prospectus and has consented for such authorization to be mentioned in the prospectus will also be responsible for the content of the prospectus. Article 33(2), Royal Decree 1310/2005 on the ability to restrict the liability for the prospectus specified portions of, or language in, the document, also apply to persons having authorized the prospectus. For the avoidance of doubt, this provision does not affect the CNMV, as the competent authority responsible for approving the prospectus given that, as provided by Article 24(1), Royal Decree 1310/2005, the approval of the prospectus by the CNMV only entails the conclusion that the prospectus is complete, comprehensible, and that the information contained herein is consistent, but does not imply any opinion on the quality of the issuer or of the securities. Notwithstanding the foregoing, as noted by certain authors, the provisions of Law 40/2015 on the Legal Regime of the Public Sector governing the civil liability of the Spanish administration for damages caused by the normal or abnormal operation of the public services and which the aggrieved parties are not under a legal obligation to bear, should apply where the CNMV has not (p. 528) displayed an appropriate degree of diligence in their supervisory review of the prospectus.14

9.  Identification of Persons Responsible for the Prospectus 23.36  Article 38(2), Securities Market Act provides that the persons responsible for the information contained in the prospectus will be clearly identified in the document with their name and position, in the case of natural persons, or with their full corporate name and registered office, in the case of legal entities. Moreover, such persons are required to include a statement to the effect that, to their belief, the information contained in the prospectus is accurate and that there are no omissions likely to affect its import.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

10.  Joint and Several Nature of the Liability of the Parties Responsible for the Content of the Prospectus 23.37  Article 38(3), Securities Market Act holds all of the persons listed in Article 38(1) (or those of such persons which apply to the specific case at hand) as liable for the losses and damages suffered by investors as a result of the false information or the omission of material information in the prospectus or the portion thereof to be prepared by the guarantor. Although the law does not mention it specifically, this liability is believed to be joint and several among all of the relevant parties, without prejudice to the different scope of the liability applicable (which may be on the entire prospectus or only on certain portions thereof) and the diverse defences that may be available to each of them.

VI.  Persons Who Can Sue for Damages Caused by a Misleading Prospectus 23.38  By the same token, the holders who have acquired in good faith the securities the subject of the prospectus have, as per Article 38(3), Securities Market Act and Article 36, Royal Decree 1310/2005, legal standing to seek compensation from the persons responsible for the content of the prospectus for the losses and damages suffered as a result of the false information or the omission of material information in the prospectus or the portion thereof to be prepared by the guarantor. Accordingly, persons who did not invest in the securities in good faith (e.g. directors or officers of the issuer who knew about the relevant inaccuracy or omission of information in the prospectus) would not be entitled to sue the persons responsible for its content. (p. 529) 23.39  Article 36 clarifies that this applies not only to investors having acquired the securities the subject of the prospectus in the public offering encompassed in the document, where applicable, but also to investors having purchased the securities in the secondary market during the period in which the prospectus remained valid (i.e. the twelve months following its approval according to Article 12(1), Prospectus Regulation) or, where appropriate, before the inaccuracy or omission of relevant information was either corrected via a prospectus supplement or has otherwise been disseminated to the market. While this is not entirely consistent with the principle enshrined in Article 33(3), Royal Decree 1310/2005 referred to in section V.1 ‘Persons Liable for Misleading Prospectus Information’ (para. 23.22) above to the effect that the issuer may not object vis-à-vis bona fide investors facts which are not expressly disclosed in the prospectus, including for such purposes the documents incorporated by reference therein, it seems reasonable not to extend the legal standing to claim for losses and damages to investors who acquired the securities after the inaccurate or omitted information was released to the market such that it was (or could have been known) by investors, even if that information was not the subject of a prospectus supplement and also in light of the restrictive regulatory approach regarding the timing for publication of a supplement for material mistakes or omissions in a prospectus.15 23.40  Although the legal regime of prospectus liability regulated by the Securities Market Act and Royal Decree 1310/2015 is uniform and does not establish a different treatment for private investors versus professional investors, as discussed in section VII ‘Defectiveness of Prospectus Information’ (para. 23.42) onwards, recent case law on financial and securities litigation suggests that the courts would apply a diverse standard to claims filed by private investors and professional investors in demand for prospectus liability if they were required to hear the matter.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

23.41  On a related topic, as regards the applicability of legislation on consumer protection to and despite the divided opinions of legal authors that first considered the matter in (p. 530) the years immediately following the enactment of the predecessor consumer protection legislation dated 1984,16 certainly Spanish legislation on the protection of consumers, namely the Restated Text of the General Law for the Defence of Consumers and Users, approved by Royal Legislative Decree 1/2007, of 16 November, applies to investors in securities and financial instruments. Importantly, Article 19(4), General Law for the Defence of Consumers and Users, consistently with Article 7(5) and Annex II, Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market, provides that breaches of the substantive rules governing the marketing of public offers or admission to listing of securities will be held as misleading commercial practices under Article 19(2), Law 3/1991, of 10 January, on Unfair Competition (the ‘Law on Unfair Competition’), and as such subject to the legal remedies available thereunder, which include the action to seek compensation for the losses and damages suffered for unfair practices carried out wilfully or negligently by the responsible party. Nonetheless, the remedies of the Law on Unfair Competition have not been commonly used in Spain in practice in financial and securities litigation.

VII.  Defectiveness of Prospectus Information 23.42  As indicated in section VI ‘Persons Who Can Sue for Damages Caused by a Misleading Prospectus’ (para. 23.38) above, according to Article 38, Securities Market Act and Article 35, Royal Decree 1310/2005 damages and losses are only indemnifiable if those result from the inclusion of false information or the omission of material information in the prospectus or the portion thereof to be prepared by the guarantor necessary for it not to be misleading. 23.43  With regard to false information, authors have stressed that such term must be interpreted broadly and independently from the intention of those responsible as covering not only untrue information but also merely inaccurate information, information not up to date, or information not properly and sufficiently substantiated or supported or lacking a reasonable basis. 23.44  As regards the information omitted from the prospectus, it should be information the omission of which causes the prospectus to convey an overall view of the issuer and its (p. 531) business or of the securities offered, or for which admission to listing is sought which is not fair and in accordance with reality.17 23.45  In both cases, the false or inaccurate information included or the information omitted must be material enough as to defeat the ultimate purpose of the prospectus, which is to provide information which, according to the nature of the issuer and of the securities, is necessary to enable investors to make an informed investment decision.18 While the law does not require a specific test in that respect, scholars have sustained that, in light of the fact that public offerings and admission to listings of securities generally target retail investors, the applicable standard should be that of the reasonable average investor. 23.46  In the case law stemming from the leading cases of Bankia and Banco Popular Español, it was held that the defective financial information contained in the prospectuses of both institutions, which allegedly misrepresenting the financial position and profitability of the business of the issuer, was sufficient to hold that the consent of retail investors to subscribe the securities was delivered in error on the fundamental features of the issuer and the proposed investment and to nullify and declare void the subscription of new shares

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

by such investors. In contrast, similar claims brought by qualified, professional investors were dismissed.

VIII.  Fault of the Party Who is Sued 23.47  While Article 38, Securities Market Act stays silent regarding the fault of the person responsible for the prospectus, Article 37, Royal Decree 1310/2005 clarifies that it is necessary for a degree of fault by the person responsible for the content of the prospectus when including or tolerating the insertion of false, inaccurate, or misleading information in the prospectus or omitting or accepting the omission of material information necessary to make the prospectus not misleading. However, as further discussed in section 9, Article 37, Royal Decree 1310/2005 reverses the burden of the proof of the fault for the benefit of investors, by presuming that there was such a fault unless the person liable for the prospectus evidences its diligence in preparing or reviewing (p. 532) the document to ensure that information was true or the material information missing was correctly omitted. 23.48  Accordingly, the due diligence defence is available, at least in theory, given that the liability of the issuer and the guarantor is likely to be enforced by courts in practice as if it was a strict liability. In the specific case of lead managers, as mentioned in section V.5 ‘The Guarantor of the Securities’ (para. 23.27), the law acknowledges that the scope and extent of the due diligence investigation to be conducted may vary depending on factors such as the features of the transaction, of the issuer and its business, the quality of the information available, or information provided by the issuer and the prior knowledge that the lead manager has of the issuer. 23.49  Finally, Article 37, Royal Decree 1310/2005 goes on to say that the due diligence defence will not be available to those who, after the approval of the prospectus, realized of the inaccuracy or omission in the prospectus and did not take appropriate steps to report the correct or omitted information diligently to the investors during the period where the prospectus remained valid.

IX.  Causation and Damages 23.50  Spanish general principles on contractual and tort liability require there to be a causal link between the defective prospectus information and the damages and losses suffered by the investor. While this causal link is twofold (the first being the reliance by the investor in the defective information contained in the prospectus as a fundamental or decisive factor in his investment decision and the second one being the link between the defective information itself and the alleged damages and losses), legal authors have opined that the burden of proof of reliance of the investor in the defective prospectus should be reversed, and case law has confirmed that it is not necessary to establish reliance of the investor in the prospectus to satisfy the causation test.19 23.51  As regards the damages that can be claimed by the investor who has purchased securities relying on a defective prospectus, these will depend on whether the prospectus liability is held to be contractual or in tort. While in both cases indemnifiable damages would comprise both actual damages suffered (damnum emergens) and the loss of profit (lucrum cessans), in the case of contractual liability the courts may moderate the responsibility arising from mere negligence.

(p. 533) X.  Evidence 23.52  In terms of the position of the investor claiming damages as a result of a defective prospectus, the law, legal authors, and case law have sought to facilitate the position of the

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

investor lessening the burden of proof, conscious that there is a fundamental asymmetry between the relative positions of the issuer or the seller of the securities and the investors. 23.53  In that regard, as discussed, the approach of law and case law to evidence of the various items necessary to establish a successful prospectus liability is as follows: (a)  Material misstatement or omission in the prospectus: while this is for the investor to evidence, the Spanish Supreme Court has upheld rulings of lower courts in the case of Bankia applying the legal doctrine whereby notorious facts (e.g. the fact that the financial statements included in the prospectus for its initial public offering allegedly did not give a fair view of the financial position and results of operations of the entity in light of the bail-out of the bank less than twelve months following consummation of the offering) do not require any evidence by the plaintiff (notoria non egent probatione). 20 (b)  Fault of the person liable for the prospectus: as mentioned in section VIII ‘Fault of the Party Who is Sued’ (para. 23.47), the burden of proof that they diligently reviewed the information to be contained in the prospectus to ensure that it was true, accurate, and not misleading and that there was no information the omission of which could cause the disclosure contained in the prospectus to be misleading lies with the persons responsible for the content of the prospectus. (c)  Damages: it is for the plaintiff to evidence the damages and losses suffered, but in the case of securities traded on a regulated market this is considerably facilitated by market trading such that investors may proof and quantify them by reference to the difference between the subscription price, acquisition price, or market price of the securities prevailing before the material misstatement or omission in the prospectus was noted and the market price of the securities after release of the corrected or omitted information. (d)  Causal link: as discussed in section IX ‘Causation and Damages’ (para. 23.50), case law stemming from the Bankia leading case has concluded that non-professional investors are not required to evidence reliance on the defective information in the prospectus as a fundamental reason of the investment decision to establish a successful prospectus liability claim. Moreover, legal authors have maintained that in case of traded securities, the burden of proof of causation should be reversed such that it should be for the person liable for the content of the prospectus to evidence that the defective information contained in the prospectus did not cause the damages alleged by the plaintiff.

(p. 534) XI.  Disclaimers 23.54  While the Prospectus Regulation and its developing regulations require, on certain occasions, that specific disclaimers be included in prospectuses,21 there are no specific rules under Spanish law either prescribing or disapproving the insertion of disclaimers in the prospectus more generally. 23.55  Nevertheless, customary disclaimers are typically included in Spanish prospectuses and found acceptable by the CNMV, including on forward-looking statements, reliance by the managers on information delivered by the issuer, etc., provided that disclaimers may not seek to exonerate a person responsible for the content of the prospectus of its liability under the Securities Market Act and Royal Decree 1310/2005, as these are mandatory provisions of imperative law which are meant to protect investors and which may not be waived or overriden by the parties.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

XII.  Prospectus Summary 23.56  As discussed in section II ‘The Legal Basis for Prospectus Liability’ (para. 23.06), Spanish law regulates the liability of persons responsible for the content of the prospectus in connection with the summary note, in terms consistent with those provided in Article 6, former Prospectus Directive and Article 11, Prospectus Regulation. In particular, Article 38(4), Securities Market Act provides that no liability may be sought from the persons responsible for the content of the prospectus on the basis of the summary note or the translation thereof except where the summary is misleading, inaccurate, or inconsistent when read together with the other parts of the prospectus or does not provide, when read together with the other parts of the prospectus, key information in order to aid investors when considering whether to invest in the securities. 23.57  There is no case law whatsoever on the application of the specific rules governing the civil liability for the summary note of the prospectus.

XIII.  Directors’ Liability 23.58  As mentioned in section IV ‘Persons Responsible for the Prospectus’ (para. 23.16), pursuant to Article 38, Securities Market Act and Article 33, Royal Decree 1310/2005, the directors of the issuer, the seller of the securities, or the person seeking admission to listing are held by law as personally liable for the content of the prospectus in (p. 535) accordance with the terms of the applicable corporate law. Such responsibility is joint and several with that of the issuer, the seller of the securities, or the person seeking admission to listing, as appropriate. 23.59  This provision, which mirrors other equivalent provisions regarding the responsibility of directors of issuers for the content of regulated information disseminated in discharge of ongoing disclosure obligations applicable to them, including annual and interim financial statements and inside information notices, seeks to ensure that members of the management body of the person primarily responsible for the prospectus, whose fiduciary duties comprise the supervision of the management of the entity, are accountable for the accuracy and completeness of the information contained in the document. 23.60  As indicated above, the liability of the directors of the person responsible for the prospectus is governed by the terms of the relevant corporate law applicable. In the vast majority of cases, this will be the restated text of the Spanish Capital Companies Act approved by Royal Legislative Decree 1/2010, dated 2 July (the ‘Spanish Capital Companies Act’). According to Article 236, Spanish Capital Companies Act, directors are liable vis-à-vis the company, the shareholders, and the company’s creditors for the damages caused by actions or omissions against the law or the by-laws or breaching their fiduciary duties inherent to their position as such, either wilfully or negligently. The liability of directors extends to natural persons acting as permanent representatives of corporate directors,22 to shadow directors23 and, where the board has not appointed one or more executive directors, to the person discharging the most senior management position in the company. Moreover, as per Article 237, Spanish Capital Companies Act, all directors having taken the resolution or participated in the relevant act or omission will be jointly and severally liable except for those who, not having participated in the approval and implementation of the relevant decision, ignored it or, if they were knowledgeable about it, they did everything in their hand to avoid the damage or, at the very least, they expressly objected the decision for the records. 23.61  On a related note, it is noteworthy that, unlike the case of the issuer, the seller of the securities or the person seeking admission to listing, the law does not impose on the directors of the guarantor of the securities joint and several liability with the guarantor itself for the information contained in the prospectus relating thereto. This creates an unjustified difference in treatment between the directors of the issuer and the guarantor, From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

being the two most relevant parties in virtually all public offerings and listings of guaranteed securities, which does not seem warranted by any substantive reason and which deserves criticism.(p. 536)

Footnotes: 1

  Bankia, S.A. is a Spanish bank formed via the merger of seven regional savings banks which conducted its initial public offering (IPO) in July 2011 to retail and qualified investors via a share capital increase pursuant to a prospectus approved by the Comisión Nacional del Mercado de Valores (CNMV) and which was rescued in May 2012 concurrently with its parent company Banco Financiero y de Ahorros, S.A. through a bail-out by the Orderly Bank Resolution Fund, receiving EUR 24 billion of new equity. Given Bankia, S.A.’s reorganization immediately preceding the initial public offering, the prospectus contained only combined financial statements aggregating those of its seven constituent regional banks for 2010 under a dispensation from the requirement to produce audited financial statements for the past three years available to newly formed companies. As such, Bankia’s financial statements included in the prospectus were not restated, although in its audited financial statements for fiscal year 2011 it recorded losses of EUR 3 billion, and in its audited financial statements for fiscal year 2012 (the first annual statements following the bail-out) it recorded losses of EUR 19 billion. There is an ongoing criminal procedure against Bankia and certain of its directors and officers charged with fraud. 2

  Banco Popular Español, S.A. was a Spanish listed bank which conducted a EUR 2.5 billion share capital increase by way of a rights offering in May 2016 and which subsequently collapsed in June 2016, being the first and sole bank having ever been resolved by the European Union Single Resolution Board. The audited financial statements of Banco Popular Español for 2015, 2014, and 2013 contained in the prospectus for Banco Popular Español’s 2016 rights issue were not restated. There is an ongoing criminal procedure against certain of the directors and officers of Banco Popular Español charged with fraud. 3

  See Sara Sánchez Fernández, ‘The Prospectus in Public Offerings for the Sale of Securities and Civil Liability. Applicable law’, La Ley (2015) 91. 4

  Among other authors supporting this view, Luis De Carlos Beltrán, ‘Legal Regime of Public Offerings for the Subscription or Sale of Securities’, Civitas (1998) 5(1), 441; Sánchez Fernández (n. 3), 89 et seq. 5

  This chapter will need to be reviewed in its entirety in light of the overriding provisions of the Prospectus Regulation. 6

  Namely, Claro Fernando, ‘Civil Liability for the Content of the Disclosure Document for Admission to Trading on the MAB and Insurance Coverage Thereof’, Spanish Private Equity Review (2010) 4, 46–8. 7

  Both of them qualify as multilateral trading facilities and not as regulated markets for the purposes of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU. 8

  The case relates to the referencing by the Greek State Council by way of preliminary ruling to the EU Court of Justice of the case relating to a fine imposed on Mr Ioannis Mikhail Pikoulas by the Hellenic Capital Markets Authority for the commission of a civil offence regarding the inaccurate information contained in the prospectus for the capital increase and admission to listing of the new shares issued by Greek issuer Ntionik AE, of which Mr Pikoulas was one of the directors, on the basis of domestic legislation, despite the fact that his name was not specifically mentioned in the prospectus as a person responsible for its content. The EU Court of Justice (First Chamber) held that Member States were free to enact legislation providing for the possibility of imposing sanctions on persons other than From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

those specifically mentioned as responsible for the prospectus in case the information included in the document proved to be inaccurate or misleading. 9

  De Carlos Beltrán (n. 4), 465 et seq.; Sánchez Fernández (n. 3), 129 et seq.

10

  While before 2005 there was no explicit regime for prospectus liability in Spain, Royal Decree 291/1992, of 27 March, on issues and public offerings of securities, which was repealed by Royal Decree 1310/2005, did regulate the content of the verification letter to be delivered by lead managers of the placement of the securities the subject of the prospectus and to be appended thereto. In particular, as per Article 18.3, Royal Decree 291/1992, the lead managers were required to execute and deliver a verification letter representing that they had carried out the verifications necessary to check the accuracy and completeness of the information contained in the prospectus and that, as a result, there were no facts inconsistent with the information disclosed in the prospectus, nor did it omit any relevant facts or data which could be material to investors. Lead managers were allowed to carve out from their representations in their verification letters any information derived from the audited financial statements of the issuer. 11

  See Sánchez Fernández (n. 3), 273 et seq.

12

  This was the approach followed by the EU Court of Justice (Fourth Chamber) in Kolassa (Case C-375/13) involving a request for a preliminary ruling under Article 267, Treaty on the Functioning of the European Union (TFEU) from the Handelsgericht Wien (Austria) in the proceedings involving Harald Kolassa versus Barclays Bank plc, regarding an action for the compensation of the damages sustained by Mr Kolassa as a result of its investment in certificates issued by Barclays Bank plc pursuant to a prospectus approved by the competent authority of the United Kingdom and passported and distributed in Austria, with the permission of the issuer, which he purchased from an online Austrian broker, direktanlage.at, which resulted in a complete loss of the capital invested. Mr. Kolassa sued Barclays Bank plc before the Austrian courts, claiming a compensation for—among other things—prospectus liability, and Barclays Bank contested their jurisdiction. The EU Court of Justice concluded that Article 5(3) of Council Regulation (EC) 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, which establishes in matters relating to tort, delict, or quasi-delict, the jurisdiction of the courts of the Member State where the harmful event occurred or may occur, determined that the Austrian courts (being the courts of the Member State where Mr Kolassa was domiciled) had jurisdiction to hear the case and settle the dispute on the basis of the place where the loss occurred, given that the damage alleged occurred directly in the applicant’s bank account held with a bank established within the area of jurisdiction of those courts. 13

  In Löber, C-304/17, a case also involving an Austrian investor as plaintiff and Barclays Bank plc as defendant, and bearing many factual similarities with Kolassa, the EU Court of Justice (First Chamber) seemed to shift from a pure lex loci damni approach to a more elaborate target market test approach, weighing additional factors to those considered in Kolassa, such as the investor’s domicile, the place where the prospectus was distributed, the place where payments were made by the investor, and the place of acquisition of the securities. 14

  Currently contained in Law 40/2015, on the Legal Regime of the Public Sector. See De Carlos Beltrán (n. 4), 438 et seq. 15

  Pursuant to Article 23(1), Prospectus Regulation, every significant new factor, material mistake, or material inaccuracy relating to the information included in a prospectus which may affect the assessment of the securities and which arises or is noted between the time when the prospectus is approved and the closing of the offer period or the time when trading on a regulated market begins, whichever occurs later, shall be mentioned in a supplement to the prospectus without undue delay. The supplement triggers the right of From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

investors having agreed to purchase or subscribe for the securities before the supplement is published, exercisable within two working days after the publication of the supplement, to withdraw their acceptances, provided that the significant new factor, material mistake, or material inaccuracy arose or was noted before the closing of the offer period or the delivery of the securities, whichever occurs first, which explains why only omissions arising or becoming apparent before the end of the offer period or the commencement of the trading are considered relevant for the purposes of a prospectus supplement. Moreover, Article 13, Commission Delegated Regulation (EU) 2019/979 of 14 March 2019 supplementing Regulation (EU) 2017/1129 of the European Parliament and of the Council with regard to regulatory technical standards on key financial information in the summary of a prospectus, the publication and classification of prospectuses, advertisements for securities, supplements to a prospectus, and the notification portal, and repealing Commission Delegated Regulation (EU) 382/2014 and Commission Delegated Regulation (EU) 2016/301, regulating the situations where a supplement to the prospectus is warranted, does not contemplate a material mistake or omission noted after the offer period closes or trading on the securities commences among the list of cases when a supplement must be prepared. Accordingly, the ability for an issuer to produce a supplement to cure the defective information in the prospectus in such circumstances is unclear. 16

  In that regard, while certain authors (including notably chaired professor of Commercial Law and CNMV’s first general counsel Aníbal Sánchez Andrés and fellow professors Reyes Palá Laguna and Francisco José Alonso Espinosa) considered that investors in securities did not fit the legal concept of consumers, as by definition investors apply towards their investments in financial instruments the part of their income, savings, or wealth that they do not expend as consumers and are not the final users of the securities, as they frequently buy them with the intention not to hold them, but to trade them in the secondary market to realize a gain, other authors (such as Alberto Alonso Ureba, Luis de Carlos Beltrán, and Rodrigo Bercovicz) were of the view that investors in securities should be treated as consumers for all relevant purposes of consumer protection legislation. 17

  It should be borne in mind that Article 18, Prospectus Regulation contemplates instances where information may legitimately be omitted from the prospectus with the consent of the competent authority, with legal authors highlighting that no liability should arise for such omissions where they have been approved by the regulator. 18

  Article 6, Prospectus Regulation. Article 6, para. 1 (d), Prospectus Regulation illustrates that the appropriateness of the information disclosed in the prospectus depends in part on the nature of the target investors when it acknowledges that the information to be contained in the prospectus may vary depending on whether or not, in the case of nonequity securities, they are either (i) high-denomination securities equal to or greater than EUR 100,000 euro per unit or have a denomination per unit of at least EUR 100,000; or (ii) are to be traded only on a regulated market, or a specific segment thereof, to which only qualified investors can have access for the purposes of trading in the securities. Consistently with such approach, Regulation 980/2019 contemplates separate Annexes for registration documents and securities notes in respect of retail and wholesale non-equity securities, with the level of information required being greater for the former than for the latter. 19

  Ruling of the First Chamber (Civil Jurisdiction) of the Spanish Supreme Court dated 3 February 2016 (24/2016), where in relation to a claim brought by a retail investor who subscribed for newly issued Bankia shares in the IPO in July 2011, it held the causation test satisfied, despite the fact that the investor had acknowledged in cross-examination during the first-instance procedure that he had not read the prospectus of the offering. In reaching such a conclusion, the Supreme Court weighed that the information contained in the prospectus had been publicly disseminated and had been echoed by the press and relied on

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

by opinion makers, creating a positive perception in the market, and leading retail investors to subscribe shares in the offering. 20

  Ruling of the First Chamber (Civil Jurisdiction) of the Spanish Supreme Court dated 3 February 2016 (24/2016). 21

  See Article 7, Prospectus Regulation on the warnings to be contained by the introductory section of the summary note concerning the risk or partial or total loss of capital, the fact that introduction of the prospectus as evidence in a court procedure may require under the national laws of the relevant Member State that the document be translated into an official language of the relevant jurisdiction, and that liability only arises from the summary note if it is misleading, inaccurate, or inconsistent, when read together with the other parts of the prospectus. 22

  Pursuant to the Spanish Capital Companies Act, a legal entity may be appointed as a director of a company, provided that it appoints a natural person as permanent representative for the purposes of the exercise of their functions as such. 23

  The Spanish Capital Companies Act defines shadow directors as those persons (i) who in the course of business perform the functions pertaining to directors with no title, a null or lapsed title or any other title; or (ii) under which instructions the directors perform their duties.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Part III Prospectus Liability and Litigation, 24 The Netherlands Jan Paul Franx From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

Subject(s): Prospectus liability — Misleading statements

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 537) 24  The Netherlands I.  Introduction 24.01 II.  The Legal Basis for Prospectus Liability 24.06 III.  Definition of ‘Prospectus’ 24.09 IV.  Persons Responsible for the Prospectus 24.11 V.  Persons Liable for Misleading Prospectus Information 24.19 1.  The Issuer 24.21 2.  The Lead Manager 24.22 3.  The Co-Managers 24.23 4.  The Selling Shareholder 24.24 5.  The Issuer’s Auditor 24.25 6.  Joint and Several Liability? 24.26 VI.  Persons Who Can Sue for Damages Caused by a Misleading Prospectus 24.29 VII.  Defectiveness of Prospectus Information 24.31 VIII.  Fault of the Party Who is Sued 24.33 IX.  Causation and Damages 24.34 X.  Evidence 24.36 XI.  Disclaimers 24.37 XII.  Prospectus Summary 24.39 XIII.  Directors’ Liability 24.40

I.  Introduction 24.01  The history of the present statutory rules on prospectus liability in the Netherlands dates back to 1928, the year in which Dutch corporate law was codified. Like the annual report which companies had to publish on a yearly basis, the Dutch legislator considered the prospectus as a corporate document and therefore was of the opinion that a statutory rule on prospectus liability should be issued together with the Companies Act. Codification of prospectus liability was effected by formulating it as a special category of tort in the Dutch Civil Code (DCC). The act of 1928 provided that managing and supervisory directors of the issuer would be jointly and severally liable with the issuer itself for misleading statements in the prospectus. This had to do with the view of the legislator, that the decision of investors to invest in a company was to a large extent based on the reputation of management. As a result of this joint and several liability of directors, the first Dutch legislation on prospectus liability can be considered as being particularly investor friendly. 24.02  In the 1970s and 1980s, the European Union (EU) gradually began to focus more on consumer protection, inter alia against misleading advertising. Ultimately, this resulted in the enactment of EU Directive 84/450 on Misleading Advertising. In anticipation of this directive, the Dutch legislator enacted national rules on misleading advertising (p. 538) in 1980. Misleading advertising was qualified as a special form of tort. The aim of a prospectus being the sale of securities to the investing public, the prospectus was

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

considered to be a form of advertising. This is probably the most typical aspect of the Dutch approach of prospectus liability. 24.03  With the enactment of statutory rules on misleading advertising, the legislator considered the 1928 statutory rules on prospectus liability as more or less superfluous and abolished these rules in 1980. This means that from 1980 prospectus liability in the Netherlands has been a matter of consumer law. Contrary to many other jurisdictions, the Dutch statutory rules on prospectus liability are not included in the securities legislation, but are codified as a special form of tort in the DCC, protecting consumers against misleading sales-related statements in general. 24.04  In 2005, the Unfair Commercial Practices (UCP) Directive 2005/29 was issued, which directive was implemented in the Netherlands in 2008. Since the implementation of the UCP Directive, a dual-track system has existed: investors who are consumers should base their claims on Articles 6:193a, et seq.,, DCC (implementing UCP Directive 2005/29), whilst all other investors should resort to Articles 6:194, et seq.,, DCC (implementing Misleading Advertising Directive 84/450). A ‘consumer’ is defined as a natural person not acting in the exercise of a profession or business. 24.05  As prospectus liability in the Netherlands is ultimately based on EU consumer law, the case law of the Court of Justice of the European Union (CJEU) on general consumer law may be relevant in matters of interpretation. An important judgment of the CJEU is the judgment in Re Gut Springenheide,1 setting out which level of sophistication the average investor is supposed to have and ruling that this level of sophistication should be used as a yardstick for determining whether prospectus statements are misleading or not. By far the most important judgment of the Dutch Supreme Court on prospectus liability is the landmark decision in Re World Online,2 resulting from the bursting of the internet bubble in the year 2000 and the chaotic initial public offering (IPO) of World Online International N.V. on Euronext Amsterdam in the same year.

II.  The Legal Basis for Prospectus Liability 24.06  The usual basis for claims of investors for prospectus liability is tort. It is in the interest of the investor that he can base his claim on the special regime of Articles 6:193a/ 194, DCC—rather than on the general tort provision of Article 6:162, DCC—as these provisions provide for a double reversal of the burden of evidence to his advantage.3 (p. 539) 24.07  Investors acquiring securities in a primary market transaction, such as an IPO, are considered to have a contractual relationship with the seller of the securities. Depending on the structure of the transaction, this can either be the lead manager as leader of the bank syndicate responsible for the transaction (firm commitment underwriting) or the issuer itself, respectively a selling shareholder (standby underwriting). Conceptually, claims by primary market investors based on prospectus liability can therefore also be based on contract. However, in the Netherlands few attempts have been made so far by primary market investors to hold the issuer/selling shareholder or the lead manager responsible for misleading statements in a prospectus on the basis of contract. In one of the court proceedings triggered by the World Online IPO, a group of primary market investors attempted to unwind their sale-and-purchase transaction with the bank syndicate and to reclaim the purchase price based on error (dwaling). For several procedural reasons, that claim was rejected in two instances.4 In addition to error, other contractual remedies which may conceptually be at the disposal of primary market investors are breach of contract, non-conformity of the securities purchased with the contract of sale and purchase, or the special nullification action of Article 6:193j(3), DCC, enabling consumers to nullify a transaction ensuing from an unfair commercial practice. No published case law has come to

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

my attention in which these contractual remedies have been used in matters of prospectus liability. 24.08  The concept of contractual prospectus liability implies that the prospectus is regarded as embodying a sale-and-purchase contract between the lead manager, issuer, and/or selling shareholder on the one hand, and the investor on the other hand. Subsequently, this would mean that also other concepts of contract law may apply to the relationship between parties involved, such as (unwritten) rules governing pre-contractual negotiations, rules of interpretation, stipulations for the benefit of a third party (derdenbeding), contractual disclaimers of liability, and the prospectus viewed as a set of general conditions. There is hardly any theory and no case law on these matters in connection with prospectus liability under Dutch law.

III.  Definition of ‘Prospectus’ 24.09  As in Prospectus Directive 2003/71 and the new Prospectus Regulation 2017/1129, the concept of ‘prospectus’ is not defined in Dutch law. Some legal authors have engaged in formulating a definition of the concept of prospectus. These definitions have as common characteristics that the prospectus is a document which (i) includes an offer or an invitation to make an offer; (ii) to the public. A sufficiently specific offer submitted to more than one person can already be considered as an offer to the public. Usually, the purport of a prospectus will not be to submit a complete offer for the sale of securities, (p. 540) including price and quantity, to the investor for his acceptance. Rather, the aim of the prospectus will be to invite the investor to submit an offer for the purchase of securities, indicating the desired quantity and price he is prepared to pay. The bookbuilding process managed by the lead manager preceding an IPO essentially implies the gathering of the various purchase offers submitted by investors and, after closing of the subscription period, the allocation thereof. In Dutch legal literature, this allocation is generally considered to be the point in time on which the sale-and-purchase contract between the issuer, selling shareholder, or lead manager on the one hand and the investor on the other hand is deemed to be concluded.5 24.10  In practice, the term ‘prospectus’ is reserved for information documents which are obligatory under the Prospectus Directive (respectively, the new Prospectus Regulation) when an issue of securities to the public is made and which should be approved by the competent national regulator. In the event that the group of investors targeted in the issue is restricted and an information document is produced on a voluntary basis, this information document is referred to as a private placement memorandum. However, for purposes of the Dutch statutory rules on prospectus liability, the distinction between a prospectus accompanying an offer to the public and a private placement memorandum accompanying an offer to a restricted circle of investors is irrelevant. The special tort regime of Articles 6:193a/194, DCC applies to misleading statements respectively misleading commercial practices as such. Both a ‘fully fledged’ prospectus and a private placement memorandum may contain misleading statements or commercial practices which are tortious under the statute.

IV.  Persons Responsible for the Prospectus 24.11  Article 11(1) of the new Prospectus Regulation provides that responsibility for the information in a prospectus attaches at least to the issuer or its administrative, management, or supervisory bodies, the offeror, the person asking for the admission to trading on a regulated market, or the guarantor, as the case may be. The names of the persons responsible must be clearly set out in the prospectus, as well as a statement by them that, to the best of their knowledge, the information contained in the prospectus is in

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

accordance with the facts and that the prospectus makes no omission likely to affect its import. This is generally referred to as the responsibility statement in the prospectus. 24.12  Article 11(2), Prospectus Regulation provides that the provisions of national law of the Member States on civil liability should apply to the persons responsible for the (p. 541) information in the prospectus.6 This provision may be considered to encompass a specific elaboration of the principle of effectiveness (effet utile) of EU law. Investors relying on the responsibility statement made in the prospectus should be able to address the respective persons in proceedings before the national courts in the event that the information in the prospectus turns out to be misleading. It should not be impossible, or even extremely difficult, for them to realize their claims before the national courts. In fact, Article 11(2), Prospectus Regulation confirms that civil liability is the concluding piece of adequate investor protection. 24.13  The structure of Article 11 is such that prospectus responsibility can be seen as a step up to prospectus liability. This is also the way in which some Dutch legal authors view the relationship between responsibility and liability in general. Under Dutch civil law, responsibility does not automatically entail liability. In order to establish liability, certain additional criteria should be fulfilled, such as fault (culpa) of the person acting tortuously.7 24.14  Who are the persons referred to in Article 11.1, Prospectus Regulation as persons responsible for the information in the prospectus? As it has appeared in the above, the provision leaves ample choice: inter alia the issuer itself, its managing and supervisory directors, as well as the lead manager are candidates for the formal position of responsible person(s). In prospectuses issued in connection with securities transactions taking place on the markets of Euronext Amsterdam, it is generally the issuer itself which is referred to as the responsible person and which makes the responsibility statement in the prospectus. Other persons, such as managing and supervisory board members of the issuer, are usually not referred to in the prospectus as being formally responsible, in an attempt to protect these persons from potential liability as much as possible.8 Although this practice is understandable, it could be argued that it reduces the concept of prospectus responsibility to an empty shell. In the event of a prospectus being misleading, the issuer can already be held liable anyway, being the party who (in terms of Directive 80/450) is publishing misleading statements or (in terms of UCP Directive 2005/29), committing a misleading commercial practice. The issuer is already in the front line in the event of potential liability. Referring in the prospectus to the issuer as the sole responsible party does not provide any background information as to which persons have been involved in drawing up the prospectus. 24.15  A source of interpretation of the responsibility concept in the Prospectus Regulation is provided by the judgment of the CJEU in Re Ntionik and Pikoulas/CMC.9 The matter (p. 542) concerned legal proceedings before the courts of Greece initiated by the company Ntionik AE and its managing director Mr Ioannis Mikhail Pikoulas against the Greek Capital Market Commission (CMC). Based on a Greek national decree, the CMC had imposed fines on Ntionik and Pikoulas for including inaccurate information in a prospectus published in connection with an increase of Ntionik’s capital. Ntionik and Pikoulas brought actions before the competent administrative court seeking annulment of the CMC’s decision. The Greek court submitted to the CJEU the question whether administrative penalties can be imposed for including misleading information in a prospectus, not only upon the persons expressly referred to in the prospectus as being responsible, but also upon the issuer of the securities and the members of its board of directors, regardless of whether they have been referred to in the prospectus as being responsible for the information. The CJEU answered the question in the affirmative, ruling inter alia that the enumeration of potentially responsible persons in the directive10 is not exhaustive and indicating that ‘the true economic and organisational circumstances of the share issue’ should be taken into account when determining which persons can be held responsible for prospectus information. This From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

judgment of the CJEU could form a basis for national courts in matters of prospectus liability to investigate which persons were specifically involved in drawing up the prospectus and in verifying the underlying documents, and subsequently to determine whether these persons can be held responsible, regardless of whether they have been referred to in the prospectus as responsible persons. 24.16  Support for the position that the circle of potentially responsible persons for the contents of the prospectus is wider than only those explicitly referred to in the prospectus can also be derived from the landmark decision of the Dutch Supreme Court in respect of the IPO of World Online International N.V. on Euronext Amsterdam, referred to in section I ‘Introduction’ (para. 24.05). In this matter, initiated by the Dutch Association of Investors (VEB) against World Online and the two lead managers, investors requested the court to render a declaratory judgment that the prospectus was misleading. One of the issues which the Supreme Court had to deal with was that the investor is in a structurally problematic position to render the required evidence of the causal link between the misleading information in the prospectus and his own decision to invest in the securities. In order to facilitate the investor’s position, the court—referring to the principle of effective legal protection of investors11—ruled that once it has been established that certain information in the prospectus is misleading, there is a rebuttable presumption that such information caused the investor to take his decision to purchase the securities. 24.17  In the prospectus of World Online, the only party referred to as being responsible for the prospectus information was, in accordance with usual practice, the issuer itself. (p. 543) However, the Supreme Court does not restrict the presumption of the causal link to claims of investors against the issuer. The presumption should also be deemed to apply to claims instituted against the parties which acted as lead managers in the World Online IPO, although these parties were not referred to in the prospectus as being responsible for the information contained thereby. 24.18  From the above, it follows that under Dutch civil law prospectus responsibility may indeed be viewed as a step up to prospectus liability. Based on the EU principle of effectiveness, it should not be made extremely difficult or impossible for investors to hold the responsible persons liable for misleading information in the prospectus. Overcoming the most serious hurdle—i.e. rendering evidence of causation— has been facilitated by the Supreme Court by creating a rebuttable presumption that the misleading prospectus information caused the investor to take his investment decision. The question which persons are responsible for the prospectus information can be approached in two ways: a formal approach, attaching responsibility only to persons who have been referred to in the prospectus as being responsible; and a wider approach, including the possibility that other persons who have been involved in drawing up the prospectus can also be held responsible. Between the two approaches, there is a certain tension. In the case of Ntionik and Pikoulas/ CMC, which related to a matter of administrative law, the CJEU indicated that other persons than those referred to in the prospectus can also be held responsible and that the economic and organizational circumstances of the transaction should be taken into account when identifying the responsible persons. The judgment of the Dutch Supreme Court in Re World Online also seems to support a wider approach to prospectus responsibility. The future will learn whether this line of reasoning will penetrate on a wider scale to case law of the national courts in the EU Member States.

V.  Persons Liable for Misleading Prospectus Information 24.19  As has been remarked in section I ‘Introduction’ (para. 24.01) above, prospectus liability under Dutch law is mainly based on the special tort regime codified in Book 6 DCC, which is the implementation of EU Directive 84/450 on Misleading Advertising and Directive 2005/29 on unfair commercial practices. This has resulted in a dual-track system with, on the one hand, Article 6:193a, DCC providing that it is a tort vis-à-vis consumers to From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

perform as a trader in the exercise of a profession or business a misleading commercial practice (as defined in the UCP Directive); and on the other hand Article 6:194, DCC providing that it is a tort vis-à-vis traders/non-consumers to make public or to have someone else make public a misleading statement relating to the sale of goods or services in the exercise of a profession or business. 24.20  As a result, in order to sue a party for prospectus liability under the special tort regime of book 6 DCC, it should be possible to qualify the defendant as someone publishing a (p. 544) misleading sales-related statement (if the claimant is a trader/non-consumer) or committing an unfair commercial practice (if the claimant is a consumer) in the exercise of a profession or business.

1.  The Issuer 24.21  A condition for a defending party to qualify as a publisher of misleading statements (Art. 6:194, DCC) or a trader performing a misleading commercial practice (Art. 6:193a, DCC) is that such party is acting in the exercise of a profession or business. The fact that the issuer of the securities is acting in the exercise of its own business is generally not contested. Normally, the issuer participates in the distribution of the prospectus by making hard copies available to investors (who are invited in the prospectus to obtain a hard copy at the registered office of the issuer) and by publishing a digital copy of the prospectus on its own website.12 The proceeds of the offering are for the benefit of the issuer’s business. Based on the foregoing, it can be concluded that when a misleading prospectus has been distributed and investors have incurred damages, they will generally be in a position to uphold that the issue took place in the context of the business of the issuer and to sue the issuer under the special tort regime of Articles 6:193a/194, DCC.

2.  The Lead Manager 24.22  The lead manager is mandated by the issuer to participate in offering the securities and drawing up the prospectus. By doing so, the lead manager—as a mandatee of the issuer —may be deemed to act in the exercise of the issuer’s business. An alternative analysis, which is in my view also valid, could be that the lead manager is acting in the exercise of its own business (being, inter alia, the offering of securities to investors and advising issuers with respect thereto). The lead manager participates in the distribution of the prospectus by handing over copies thereof to investors upon request, by sending copies by the mail to institutional investors who are his clients or by distributing copies physically to investors during the road show of approximately two weeks preceding the first day of trading of the securities offered. The lead manager typically organizes the road show and has the relevant network and expertise to select the appropriate investors to be addressed during the road show. In view of the foregoing, there can be little doubt that in the event of the distribution of a misleading prospectus, the lead manager is a party publishing misleading statements (Art. 6:194, DCC) or performing a misleading commercial practice as a trader (Art. 6:193a, DCC) in the conduct of either the issuer’s business or his own business (or both). Generally speaking, the lead (p. 545) manager can therefore be sued by investors under the special tort regime of Articles 6:193a/194, DCC.

3.  The Co-Managers 24.23  Like the lead manager, the co-managers should also be deemed to act in the exercise of a business, i.e. the business of the issuer (as its mandatees) and/or their own businesses, being the distribution of securities to investors. By making hard copies of the prospectus available to investors at their own offices, the co-managers may be qualified as parties ‘publishing (misleading) statements’ (Art. 6:194, DCC) and performing a

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(misleading) commercial practice (Art. 6:193a, DCC). Consequently, the co-managers may be sued by investors under the special tort rules.

4.  The Selling Shareholder 24.24  A securities offering can have a combined character, to the extent that part of the securities is newly issued by the issuer and part of the offering consists of existing securities offered by one or more shareholders of the issuer. It also happens that a securities offering consists entirely of the offering of existing shares by one or more shareholders of the issuer. A shareholder offering securities is acting in his own economic interest. The respective part of the proceeds of the offering inure to the benefit of the selling shareholder. If the selling shareholder is a majority or 100 per cent shareholder of the issuer, the transaction will generally be initiated and co-ordinated by him. These circumstances being taken together, it should be assumed that the sale of existing shares by a shareholder of the issuer takes place in the exercise of the business of this shareholder. Thus, the basic requirement for applicability of the special tort rules of Articles 6:193a/194, DCC is fulfilled. Can the selling shareholder also be considered as a party publishing the prospectus and performing a commercial practice vis-a-vis investors? Generally, this question is answered in the affirmative.13 It follows that generally speaking it should be possible to address the selling shareholder under the special tort rules of Articles 6:193a/ 194, DCC.

(p. 546) 5.  The Issuer’s Auditor 24.25  The prospectus contains financial information, usually the annual accounts of the issuer over the past three financial years. In addition to these accounts, the respective auditor’s statements are usually also included in the prospectus, with the consent of the issuer’s auditor. In the event that an auditor would have provided an unqualified statement, confirming that the accounts provide a true and fair view of the financial condition of the issuer, and this would turn out not to be the case, the auditor’s statement could be seen as misleading. The question is, whether the inclusion of a misleading auditor’s statement in a prospectus is covered by the special tort rules of Articles 6:193 8/194, DCC. In Dutch legal literature, a debate has been held as to whether an auditor who does not object to the inclusion of his statement in a prospectus has given sufficient mandate to the issuer for the ‘publication’ of his statement in terms of Article 6:194, DCC. Although initially several authors have contended that this is not the case, the matter should in my view be reconsidered after the enactment of Article 6:193a, DCC in 2008, implementing the UCP Directive. Under this provision, the question arises whether the auditor who does not object to inclusion of his statement in a prospectus performs a commercial practice vis-à-vis investors. Given the broad definition of commercial practice in the UCP Directive—which includes any act, omission, or behaviour—the issuer’s auditor should in my view be deemed to perform a commercial practice. From a perspective of legal uniformity, it is desirable that Article 6:194, DCC leads to the same result. Consequently, it seems arguable that the auditor can be sued under both sets of rules forming part of the special tort regime.14

6.  Joint and Several Liability? 24.26  Generally speaking, several parties are involved in drawing up and/or publishing the prospectus. As an example, one could think of the inclusion of misleading annual accounts accompanied by an auditor’s statement in the prospectus, pulling not only the issuer and the lead manager, but also the auditor within the reach of potential prospectus liability. In that type of situation, the question arises whether each party should be held separately liable for the part of the damages corresponding with its own involvement or whether all parties involved can be held jointly and severally liable by investors for any and all damages incurred by them. In the Netherlands, this is essentially a question of general liability law,

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

which not only applies to prospectus liability specifically, but also to any type of civil liability. (p. 547) 24.27  Under Netherlands liability law, the approach in this type of situation would generally be to determine to which extent (in the form of a certain percentage) each defendant has contributed to the causation of the damages. The percentages may not necessarily be complementary, in the sense that they may not add up to exactly 100 per cent. For example, two different parties may each be held responsible for causing 80 per cent of the damages, in which case they can be held jointly and severally liable for such percentage.15 24.28  Another potential basis under Netherlands civil law to create joint and several liability specifically relates to parties cooperating with each other in a group. In a securities issue, cooperation in a group is a typical characteristic of the syndicate of underwriters involved in the transaction. If a person forming part of a group of persons causes damages, all members of the group may be held jointly and severally liable, subject to the fulfilment of certain conditions.16 Although concrete precedents are not known to me, it cannot be excluded that this provision of liability law may be applied to the members of the underwriting syndicate, depending on the exact circumstances and the roles fulfilled by each of them in the context of the securities transaction. The amount to be contributed to the total damages by each individual syndicate member is usually agreed upon in advance in an agreement among underwriters. The question of which part of the damages should ultimately be borne by each individual syndicate member concerns the internal relationships within the syndicate and should be seen separately from liability of the syndicate towards investors.

VI.  Persons Who Can Sue for Damages Caused by a Misleading Prospectus 24.29  Any investor can sue for damages. Generally, investors will (strongly) prefer to use the special tort regime of Articles 6:193 a/194, DCC as a basis for their claims, thus benefiting from the reversal of evidence as to both the misleading character of the prospectus statements and the accountability of the issuer. As has been explained,17 under the special tort regime it is possible to address any party publishing a misleading salesrelated statement (if the claimant is a trader/non-consumer) or committing an unfair commercial practice (if the claimant is a consumer) in the exercise of a profession or business. 24.30  A party who suffered damages as a result of misleading prospectus information can also choose to sue the issuer, the lead manager, and/or other parties involved on the defending side under the general tort provision of Article 6:162, DCC. However, when doing so a claimant does not benefit from the double reversal of evidence provided by (p. 548) the special regime of Articles 6:193a/194, DCC. Therefore, suing under the general tort provision of Article 6:162, DCC is not the preferred option for investors. It should be seen as an ultimate fall-back position, for instance when suing directors of the issuer for damages resulting from misleading prospectus information.18

VII.  Defectiveness of Prospectus Information 24.31  The question of when exactly a statement or commercial practice is misleading has been left open by the Dutch legislator in view of the many variations which can occur in practice. This has been left to the judgement of the courts, which have produced substantial case law on the matter over the years. In a landmark decision in Re Gut Springenheide (1998)19 the CJEU ruled that national courts, in order to determine whether a statement is liable to mislead the purchaser, must take into account the presumed expectations which the statement evokes in an average consumer who is reasonably well informed and reasonably observant and circumspect. Based thereon, the Dutch Supreme Court applied From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

the criterion of a reasonably well-informed, observant, and circumspect average investor to whom the information is addressed, to determine whether prospectus statements are misleading. This average investor is an abstraction which was used for the first time by the Dutch Supreme Court in its landmark decisions in Re De Boer/TMF (2008)20 and World Online (2009).21 In the World Online decision, the Dutch Supreme Court ruled inter alia that prospectus information will be misleading if the information is materially inaccurate or incomplete to such an extent that the misleading information can influence the economic behaviour of the average investor. 24.32  Instead of to the investing public in general, offerings of securities can also be made to a limited circle of investors by providing them with a private placement memorandum (PPM). Provided that this PPM exclusively reaches and is exclusively addressed to a limited circle of investors having a certain level of experience and sophistication, it should be assumed that the yardstick for determining whether the PPM is misleading is influenced by this level of sophistication. This principle is generally deduced from Dutch parliamentary history, and the aforementioned decision of the Dutch Supreme Court in Re De Boer/TMF.22 For example, a limited group consisting of investors who regularly invest in real estate is deemed to be less easily misled by a PPM or brochure relating to a real estate investment opportunity than the general public.

(p. 549) VIII.  Fault of the Party Who is Sued 24.33  Prospectus liability under Dutch law is principally liability based on fault, leaving the possibility of exculpation for the defendant. For the issuer, exculpation will generally not be possible. For the lead manager, the principal route leading to exculpation is the due diligence defence. The lead manager who has performed an adequate due diligence investigation with respect to the issuer and its business will generally not be held liable in tort, in view of the absence of fault. Indications as to the prevailing standards for performing a proper due diligence investigation have been given by the Supreme Court in its landmark decision in Re Coop (1994).23 One of the key points of attention for the lead manager is to ask supplementary in-depth questions when there is any reason to do so on the basis of the results of initial due diligence, even when the ensuing information is expertized.

IX.  Causation and Damages 24.34  A requirement for obtaining compensation of damages in tort is that causation between the misleading prospectus information and the damages should be established. There should be a causal link, such that the investor has effectively been induced by the misleading information to invest in the securities. The burden of evidence as to causation rests on the investor. This, however, may make the investor’s position in legal proceedings too problematic, which would be contrary to the principle of effective investor protection laid down in Article 6(2), Prospectus Directive 2003/71 (the current Art. 11(2), new Prospectus Regulation). For that reason, the Dutch Supreme Court has ruled in Re World Online (2009)24 that the causal link is presumed in the event that prospectus information is misleading. The issuer and the lead manager may rebut this presumption by submitting sufficient evidence to the contrary. 24.35  The so-called fraud-on-the-market theory (FOTM, known from US law)—which is based on the presumption that all relevant information with respect to the issuer has been published and is reflected in the share price, and that it is sufficient for the investor to establish causation by asserting that he has relied on the integrity and truthfulness of the share price—has been proposed by certain authors in the Netherlands but has not been adopted by the Dutch Supreme Court. Reliance by the investor on the prospectus

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

information when making his investment decision remains a requirement for establishing the causal link as one of the elements of liability in tort.

(p. 550) X.  Evidence 24.36  As it has been observed in section II ‘The Legal Basis for Prospectus Liability’ (para. 24.06), under the special tort rules of Articles 6:193a/194, DCC on unfair commercial practices and misleading statements the investor has the advantage of a reversal of the burden of proof as to the misleading character of the prospectus information and the accountability of the defendant. With respect to causation, the burden of proof remains with the investor, but is facilitated by the court presuming a causal link in the event that prospectus information is misleading.25 This presumption may be rebutted by the defendant.

XI.  Disclaimers 24.37  In its decision in Re Coop (1994),26 the Dutch Supreme Court has ruled that it is possible for the issuer to publish a prospectus in which it is expressly stated that no responsibility is assumed for certain parts of the information which have not been provided by himself, but by third parties. In particular, one should think of information provided and verified by experts such as the issuer’s auditor. However, the inclusion of this type of disclaimer in prospectuses has not become common practice in the Netherlands. Also, it is questionable whether the inclusion of such a disclaimer would not be contrary to the obligation to include a responsibility statement in the prospectus and, in connection therewith, the principle of effective investor protection provided by Article 11(2), new Prospectus Regulation.27 24.38  In the international capital markets, and also in the Netherlands, it is not unusual for the underwriters to include a general disclaimer in the prospectus that no representation or warranty whatsoever is made by them as to the accuracy or completeness of the information in the entire prospectus. It is questionable whether such a far-reaching disclaimer would be sanctioned by the Dutch courts with respect to underwriters who have been actively involved in drafting the prospectus.

XII.  Prospectus Summary 24.39  Article 7, new Prospectus Regulation provides that the prospectus must include a summary which provides the key information that investors need in order to understand the investment proposition. Strict requirements for drawing up a summary are provided, in order to accomplish a certain EU-wide standard for prospectus summaries. (p. 551) Article 7(5)(e), Prospectus Regulation provides that civil liability will attach only to the persons who have tabled the summary and only when the summary is misleading, inaccurate, or inconsistent when read together with the other parts of the prospectus. This strongly reduces the possibility of investors suing for damages merely on the basis of the summary alone.

XIII.  Directors’ Liability 24.40  A possible reason for investors to resort to the general tort provision of Article 6:162, DCC as a basis for their claim may be that the defendant himself is not the person who published misleading sales-related statements (Art. 6:194, DCC) or the person who committed an unfair commercial practice (Art. 6:193a, DCC). As a result, the criteria for applicability of the special tort regime do not apply. For instance, assuming that directors of the issuer do not personally qualify as parties who published the misleading prospectus information or performed an unfair commercial practice—as they only represented the issuer in doing so—these directors cannot be sued under the special tort regime. If investors wanted to hold them personally liable for damages incurred, which is in fact a

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

form of piercing the corporate veil in a situation of prospectus liability, investors should base their claims on the general tort provision of Article 6:162, DCC. In that case, investors will have to uphold (and prove) that the director acted in violation of unwritten rules of prudent behaviour, failing a concrete statutory rule which has been breached. Failing the availability of the double reversal of evidence of the special tort regime of Articles 6:193a/ 194, DCC, the burden of proof with respect to the misleading character of the information and the accountability of the defendant would remain with the investor. Additionally, directors’ liability under Dutch law will only be assumed if the director can be seriously blamed (ernstig verwijt) for his behaviour, which is a heavier criterion than ordinary fault. There will be serious blame if the director knew, or should reasonably have known, that the information provided by him (or under his responsibility) for inclusion in the prospectus was materially inaccurate or incomplete. 24.41  In certain situations, it might be argued that information is provided to investors by a director personally, rather than acting on behalf of the issuer. This may, for instance, apply to information provided by a director in the context of a personal interview with the press or a speech held during an investors meeting. In this type of situation, it cannot be excluded that a director, when providing misleading information, can be held liable on the basis of the special tort rules of Articles 6:193a/194, DCC as a person committing an unfair commercial practice or publishing a misleading statement. If that would be the case, the double reversal of evidence would work against him.(p. 552)

Footnotes: 1

  EU CJ 16 July 1998, C-210/96 (Gut Springenheide).

2

  Supreme Court, 27 November 2009, NJ 2014, 201; JOR 2010/43 (World Online).

3

  See in particular Articles 6:193j and 6:195 DCC.

4

  District Court Amsterdam, 7 May 2003, JOR 2003/174 (Stichting Lipstick Effect/ABN AMRO); Court of Appeals Amsterdam, 7 October 2004, JOR 2004/329 (Stichting Lipstick Effect e.a./ABN AMRO). 5

  A. E. van der Pauw and T. M. Stevens, ‘Bookbuilding op de Nederlandse Markt’, Ondernemingsrecht (1999), 73–8; J. P. Franx, ‘Prospectusaansprakelijkheid uit onrecthmatige daad en contract (Prospectus Liability in Tort and Contract)’, Ph.D. thesis, Erasmus University Rotterdam (2017) 664, published in Wolters Kluwer series Recht en Praktijk Financieel Recht, vol. FR15), para. 3.2.2.8; V. P. G. de Serière, Effectenrecht, Asserseries vol. 2-IV, No. 449 (Wolters Kluwer, 2018). 6

  Article 11 of the new Prospectus Regulation is virtually equal to Article 6, Prospectus Directive 2003/71. 7

  Franx (n. 5), para. 5.5.5.2; L. Timmerman, ‘De Aansprakelijkheid van de Syndicaatsleider voor een Misleidend Prospectus’, in: Ontwikkelingen in het Effectenverkeersrect, Serie vanwege het Van der Heijden Instituut, vol. 50 (Deventer: Kluwer, 1996), 84. 8

  Interestingly, the amended draft Prospectus Directive dated 9 August 2002 (COM (2002) 460 definitive) still provided that the board members of the issuer should be referred to as the responsible persons for prospectus information. Apparently, later on in the process the EU legislator abandoned this principle. 9

  EU CJ 5 July 2007, C-430/05, JOR 2007/210 (Ntionik and Pikoulas/CMC).

10

  It concerned Directive 2001/34, one of the predecessors of the Prospectus Regulation.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

11

  Codified in Article 6(2), Prospectus Directive 2003/71, which has been transposed into Article 11(2), Prospectus Regulation 2017/1129. 12

  Publishing an electronic prospectus on the ’issuer’s website has been obligatory in the Netherlands since 2012. 13

  The selling shareholder mandating the issuer and/or the lead manager to publish the prospectus, i.e. the indirect participation by the selling shareholder in the publication process, is viewed by several Dutch legal authors as being covered by the text of Article 6:194 DCC, see B. J. de Jong, ‘Aansprakelijkheid’, in: B. Bierens et al. (eds), Handboek Beursgang, Serie Onderneming en Recht, Vol. 68 (Deventer: Kluwer 2011), 527–8; L. Timmerman, ‘Enkele Kanttekeningen bij de Civielrechtelijke Buitencontractuele Prospectusaansprakelijkheid’, in: D. Busch, C. J. M. Klaassen, and T. M. C. Arons (eds), Aansprakelijkheid in de Financiële Sector, Serie Onderneming en Recht, Vol. 78 (Deventer: Kluwer 2013), 652; J. W. P. M. van der Velden, ‘Gronden van Prospectusaansprakelijkheid’, in: C. J. M. Klaassen et al. (eds), Aansprakelijkheid in Beroep, Bedrijf of Ambt, Serie Onderneming en Recht, Vol. 25 (Deventer: Kluwer 2003), 679; Franx (n. 5), para. 13.6.4. Additionally, in my view it is defendable that indirectly approaching investors should also qualify as performing a commercial practice under Article 6:193a, DCC vis-à-vis such investors. 14

  For comments and debate on the position of the auditor, see Franx (n. 5), para. 13.6.5; M. A. Blom, ‘Prospectusaansprakelijkheid van de Lead Manager’, Ph. D. Thesis, Tilburg, Serie Vanwege het Van der Heijden Instituut, Vol. 53 (Deventer: Kluwer, 1996), 71; J. M. van Dijk, ‘Aansprakelijkheidsvragen rond Fairness Opinions’, TVVS (1998) 153, para. 3.4; J. W. P. M. van der Velden, ‘Gronden van Prospectusaansprakelijkheid’, in: C. J. M. Klassen et al. (eds), Aansprakelijkheid in Beroep, Bedrijf of Ambt, Serie Onderneming en Recht, Vol. 25 (Deventer: Kluwer, 2003), 689; A. G. Maris and S. A. Boele, ‘Prospectusaansprakelijkheid’, TVVS (1994) 145. 15

  For causation involving more than one party, see Articles 6:99, 101, and 102, DCC.

16

  Article 6:166, DCC.

17

  See section V ‘Persons Liable for Misleading Prospectus Information’, para. 24.19.

18

  See below, section XIII ‘Directors’ Liability’, para. 24.40.

19

  EU CJ 16 July 1998, C-210/96 (Gut Springenheide).

20

  Supreme Court, 30 May 2008, NJ 2010, 622; JOR 2008/209 (De Boer c.s./TMF Financial Services). 21

  Supreme Court, 27 November 2009, NJ 2014, 201; JOR 2010/43 (World Online).

22

  Franx (n. 5), para. 7.4; C. M. D. S. P‘villon, ‘Open Normen in het Europees Consumentenrecht’, Ph.D. thesis, Groningen (Deventer: Kluwer, 2011), 361, n. 127; H.M. Vletter-van Dort and A.C.W. Pijls, Annotation to Supreme Court, 30 May 2008, LJN: BD2820 (De Boer c.s./TMF), Ondernemingsrecht 2008/104, para. 1. 23

  Supreme Court, 2 December 1994, NJ 1996, 246 (Coop).

24

  Supreme Court, 27 November 2009, NJ 2014, 201; JOR 2010/43 (World Online).

25

  Supreme Court, 2 December 1994, NJ 1996, 246 (Coop); see section IX ‘Causation and Damages’, para. 24.34. 26

  Supreme Court 2 December 1994, NJ 1996, 246 (Coop).

27

  See section IV ‘Persons Responsible for the Prospectus’, para. 24.11.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Part III Prospectus Liability and Litigation, 25 Luxembourg Veronique Hoffeld From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

Subject(s): Prospectus liability — Misleading statements

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 553) 25  Luxembourg I.  Introduction 25.01 II.  The Legal Basis for Prospectus Liability 25.08 III.  Definition of ‘Prospectus’ 25.29 IV.  Persons Responsible for the Prospectus 25.30 V.  Persons Liable for Misleading Prospectus Information 25.37 VI.  Persons Who Can Sue for Damages Caused by a Misleading Prospectus 25.56 VII.  Defectiveness of Prospectus Information 25.64 VIII.  Fault of the Party Who is Sued 25.67 IX.  Causation and Damages 25.70 X.  Evidence 25.76 XI.  Disclaimers 25.77 XII.  Prospectus Summary 25.78 XIII.  Directors’ Liability 25.79

I.  Introduction 25.01  As the EU Regulation 2017/1129 does not establish a harmonized civil liability regime with regards to information provided in a prospectus, it requires the EU Member States to apply their national provisions on civil liability to those persons responsible for the information given in a prospectus. 25.02  This chapter focuses on the Luxembourg civil liability regime, which applies to information given in a prospectus. 25.03  According to Article 4.1, Regulation (EC) 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations, in case of a conflict of laws, the applicable law is the ‘law where the damage occurs’. 25.04  According to the conclusions made by the European Court of Justice in the Kolassa case,1 the Luxembourg courts would have jurisdiction, if a loss was to be incurred in Luxembourg due to inaccurate or misleading information or due to the omission to include material information in a prospectus. According to the Court’s reasoning, the ‘place where the harmful event occurred’ within the meaning of Article 5(3), Regulation (p. 554) 44/2001, must be interpreted as encompassing the place in which the claimant is domiciled. 25.05  Luxembourg has implemented certain specific provisions on prospectus liability; however, these do not constitute an entirely autonomous civil liability regime on prospectus liability as such. Most aspects with regards to a person’s liability must be determined in accordance with the general Luxembourg provisions on civil liability from the Luxembourg Civil Code. 25.06  No questions have yet arisen before the Luxembourg courts on the liability regime which applies to those persons responsible for the information given in a prospectus. There is therefore no established Luxembourg case law complementing the provisions currently in place.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

25.07  This chapter is limited to those situations where a prospectus contains misleading information or omits to include material information infringing the requirements of the Luxembourg legal provisions on prospectuses. However, civil liability could also arise if a public offer was to be made without a duly approved prospectus.

II.  The Legal Basis for Prospectus Liability 25.08  The EU Regulation 2017/1129 has not yet been implemented into Luxembourg law. A new proposed law2 (projet de loi) was introduced on 29 June 2018, but has not yet been voted by Parliament. 25.09  The current Luxembourg legal basis for prospectus liability is provided by the law of 10 July 2005 on prospectuses for securities, as amended (Law of 10 July 2005 or the Luxembourg Prospectus Law). The law transposes into Luxembourg law the EU Directive 2003/71 of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC (Directive 2003/71/EC), now repealed by the EU Regulation 2017/1129. 25.10  With respect to the new requirements, clarifications, and terminology introduced by the new EU Regulation 2017/1129, Luxembourg decided for the sake of clarity that a new law should be adopted that shall implement the new EU Regulation 2017/1129. This new law will thus replace the law of 10 July 2005 on prospectuses for securities which is currently in place. (p. 555) 25.11  The new proposed law (projet de loi) therefore does not only contain technical changes with regards to the current statutory provisions, but will also implement a new legal framework which will entirely replace the legal framework that is currently in place. 25.12  The Luxembourg Prospectus Law establishes two regimes. The first regime governs offers of securities to the public and admissions of securities to trading on a regulated market, subject to the EU Law harmonization regime under the Directive 2003/71/EC. The second regime governs offers of securities to the public that fall outside the scope of the abovementioned Community harmonization and requires in those cases only a ‘simplified prospectus’ to be established.3 25.13  This chapter will only analyse the first regime provided by the Law of 10 July 2005, which is subject to the EU Law harmonization under the Directive 2003/71/EC, now repealed by the EU Regulation 2017/1129. 25.14  Article 9 of the Law of 10 July 2005, as amended, provides as follows: (1)  Responsibility for the information given in a prospectus attaches to the issuer, the offeror, the person asking for the admission to trading on a regulated market or the guarantor, as the case may be. The persons responsible shall be clearly identified in the prospectus by their names and functions or, in the case of legal persons, their names and registered offices, as well as declarations by them that, to the best of their knowledge, the information contained in the prospectus is in accordance with the facts and that the prospectus makes no omission likely to affect its import. (2)  No civil liability shall attach to any person solely on the basis of the summary or of the translation thereof, unless it is misleading, inaccurate or inconsistent, when read together with the other parts of the prospectus, or it does not provide, when read together with the other parts of the prospectus,

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

key information in order to aid investors when considering whether to invest in such securities. The summary shall contain a clear warning to that effect. 4 25.15  The new proposed law, which was introduced on 29 June 2018 provides under Article 5 that: (1)  Responsibility for the information given in a prospectus and in any supplement thereto attaches to the issuer, the offeror, the person asking for the admission to trading on a regulated market or the guarantor, as the case may be. The persons responsible shall be clearly identified in the prospectus and, where applicable, any supplement thereto, by their names and functions or, in the case of legal persons, their names and registered offices, as well as declarations by them that, to the best (p. 556) of their knowledge, the information contained in the prospectus is in accordance with the facts and that the prospectus makes no omission likely to affect its import. (2)  No civil liability shall attach to any person solely on the basis of the summary referred to in article 7 of the EU Regulation 2017/1129 or the specific summary established within the framework of a European Union growth prospectus referred to in the second subparagraph of article 15 (1) of the EU Regulation 2017/1129 including its translation, except: 1)  if its content is misleading, inaccurate or inconsistent, when read together with the other parts of the prospectus; or 2)  if it does not provide, when read together with the other parts of the prospectus, key information in order to aid investors when considering whether to invest in such securities. (3)  The responsibility for the information provided in a registration document or a universal registration document shall be attributed to the persons referred to in paragraph 1 only in cases where the registration document or the universal registration document is used as a constituent part of an approved prospectus. Paragraph 1 shall apply without prejudice to Articles 4 and 5, Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonization of transparency requirements concerning information on issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34 /EC, where the information referred to in those articles is included in a universal registration document.5 25.16  When comparing Article 5 of the new proposed law with Article 9 of the Law of 10 July 2005, the essential elements do not change. Paragraph 3 of Article 5 of the new proposed law gives specifications on the liability which shall be incurred for a registration document. 25.17  In Luxembourg, a combination of specific provisions supported by the general Luxembourg provisions on civil liability form the civil liability regime for prospectuses. The Luxembourg Prospectus Law does not as such establish an autonomous civil liability regime. It simply provides that civil liability shall apply with regards to the information provided in a prospectus, and also defines the relevant persons who may incur such liability. In principle, all other aspects with regards to that person’s liability (in particular the determination of fault, the resulting damage, and the causal link between the fault and the

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

damage) must thus be determined in accordance with the general Luxembourg provisions on extra-contractual liability (liability in tort) from the Luxembourg Civil Code.6 (p. 557) 25.18  When the Law of 10 July 2005 was first introduced on 22 February 2005 as a proposed law,7 the following comments were presented by the Luxembourg government with regards to Article 9: Article 9 lays down the guiding principles with regards to the liability which applies when information is provided and published in a prospectus.( . . . ) The general Luxembourg provisions on civil liability apply with regards to persons responsible for the information provided in prospectuses for public offerings of securities in Luxembourg or for the admissions of securities on a regulated market located or operating in Luxembourg. By way of derogation, no liability can be sought in relation to the production and translation of a prospectus summary unless the content is misleading or inaccurate.8 25.19  The general Luxembourg provisions on civil liability are set out in Articles 1382 and 1383 of the Luxembourg Civil Code (Civil Code). 25.20  According to Article 1382 of the Civil Code, any act of man which causes damage to another obliges that person who committed the fault, to repair it (‘Tout fait quelconque de l’homme, qui cause à autrui un dommage, oblige celui par la faute duquel il est arrivé, à le réparer’). 25.21  Article 1383, Civil Code provides that everyone is responsible for the damage that he causes not only due to an act he committed, but also due to his negligence or imprudence (‘Chacun est responsable du dommage qu’il a causé non seulement par son fait, mais encore par sa négligence ou par son imprudence’). 25.22  In the absence of any specific provision regulating the compensation regime of a certain damage, recourse to Articles 1382 and 1383, Civil Code is always possible, unless otherwise provided. The provisions are therefore considered as general law (droit commun) on civil liability. 25.23  It should be noted that, depending on the specific circumstances and facts of the case, misleading information or the omission to include material information in a prospectus could also potentially constitute an infringement to certain other Luxembourg statutory regimes giving rise to civil liability,9 for example: –  the Consumer Code provisions in relation to unfair commercial practices;

10

or

(p. 558) –  the financial sector law dated 5 April 1993 in relation to the conduct of business rules when providing investment services to clients. 11 25.24  These provisions give protection from a consumer law perspective; however, they do not in any way implement the Directive 2003/71/EC or establish a specific civil liability regime for prospectuses. 25.25  According to the consumer code, unfair commercial practices are punished by a fine between EUR 251 and 120,000. 25.26  Despite there being no case law on the civil liability regime for prospectuses, certain general case law principles could potentially be relied upon before the courts. 25.27  Within the context of general consumer law and misleading advertisements, Luxembourg case law has held that, for example, when failing to indicate in a brochure that a statutory guarantee should apply, this should be considered as misleading a normal, careful, and diligent consumer, who is made to believe that he can only benefit from the commercial guarantee as stated in the brochure and that once this guarantee has expired,

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

no further guarantee shall apply. The courts held that, within the context of misleading advertising, it is not necessary to prove that the consumer specifically purchased the product due to the information contained in the brochure, in this case the guarantee. It is sufficient to demonstrate that the illegal advertising was likely to affect the consumer’s behaviour.12 25.28  Another case has held that for erroneous information to qualify as misleading advertising, it is sufficient that it potentially affected the economic behaviour of the public or that it is prejudicial to a competitor. The court also held that in order for erroneous information to qualify as misleading advertising, it did not have to have the deliberate intention to mislead.13

III.  Definition of ‘Prospectus’ 25.29  Neither the Law of 10 July 2005 nor the new proposed law defines the term ‘prospectus’.

IV.  Persons Responsible for the Prospectus 25.30  When issuing a prospectus, Article 9, Luxembourg Prospectus Law provides that the issuer, the offeror, the person asking for the admission to trading on a regulated market, (p. 559) or the guarantor, as the case may be, shall be responsible for the information given in the prospectus by declaring that, to the best of their knowledge, the information contained in the prospectus is in accordance with the facts and that the prospectus makes no omission likely to affect its import. 25.31  One of the abovementioned persons must accept full responsibility for all the information contained in the prospectus, unless different persons agree to accept responsibility for individual parts of the prospectus, which would entail that a person’s responsibility is thus limited to that specific part of the prospectus. In practice, however, this is rare, since in contrast to other competent authorities, the financial regulator in Luxembourg, the Commission de Surveillance du Secteur Financier (CSSF), requires the responsibility statement in a prospectus to be made by the legal entity acting as the issuer, and not the individual directors of that legal entity.14 25.32  When the Law of 10 July 2005 was first introduced on 22 February 2005 as a proposed law, the following comments were provided by the Luxembourg government with regards to Article 9: The legal entity acting as the issuer and/or the guarantor remains solely responsible for the information provided in a prospectus, except when the legal entity is not responsible for the proposed financial transaction (for example the offeror is a natural person). The option provided for by the EU Directive to include other persons (such as administrative or management bodies) within the potential scope of responsibility was not chosen to apply.15 ( . . . ) Persons seeking admission to trading on a regulated market should not be confused with listing agents who submit applications for admission acting as an agent of the issuer or the person requesting admission. This differentiation is made within the context of Article 22 (3) (c) which distinguishes between the persons who the supervisory authority may request information from, the person applying for admission and the financial intermediaries responsible for submitting the application for admission to the regulated market. Agents acting in that capacity who introduce such an application shall incur no liability for the content of the prospectus.16

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

25.33  On 14 June 2005, the Luxembourg Chamber of Commerce consequently provided the following parliamentary opinion (avis parlementaire) with regards to Article 9: This article aims at making not only the issuer and the person applying for admission to trading on a regulated market but also the offeror responsible for the information contained in the prospectus. The Chamber of Commerce is of the opinion that only (p. 560) the issuer must be held responsible for the contents of the prospectus, except in the case where the issuer has not himself written the prospectus. The words ‘as the case may be’ at the end of the sentence seem to have that meaning. 25.34  On 14 June 2005, the State Council (Conseil d’Etat) provided a similar parliamentary opinion with regards to Article 9 (avis parlementaire): The provisions on liability for prospectuses follow the general Luxembourg rules on civil liability, in that they attribute the responsibility to the legal person, if the issuer, the offeror, the person requesting the admission to trading on a regulated market or the guarantor is a legal person. There is therefore no automatic extension of the legal person’s responsibility to natural persons acting on its behalf. Individuals are only responsible if they themselves exercise one of the abovementioned roles. However, in order to avoid any doubt as to the possible responsibility of the operators offering securities without having themselves drawn up the prospectus, the Conseil d’Etat suggests to rephrase the first sentence as follows,: ‘Responsibility regarding the information provided in a prospectus is attached to the issuer, or, where the issuer does not draft it, to the offeror, to the person seeking admission to trading on a regulated market or to the guarantor, where such persons have drafted the prospectus on behalf of the issuer.’ 25.35  In principle, when drafting a prospectus in Luxembourg, the issuer is referred to as being the responsible person for the information contained in the prospectus, which is always the company itself, unless a natural person is exercising one of the above-mentioned roles. 25.36  The person who is responsible for the drafting of the prospectus, whoever it may be, is responsible for the content of the document throughout the entire period of validity of the prospectus and must continue to make the required additional publications in order for the prospectus to be kept up to date.17

V.  Persons Liable for Misleading Prospectus Information 25.37  The Luxembourg Prospectus Law expressly lists the different actors which may be responsible for the information contained in a prospectus. When drafting a prospectus, Article 9 of the Luxembourg Prospectus Law requires the responsible person to provide its identity and declare that to the best of its knowledge, all information contained in the prospectus is in accordance with the facts and that it makes no omission likely to affect its import. Such a person shall thus incur liability in case the declaration made in the prospectus is not upheld. (p. 561) 25.38  According to the Luxembourg Prospectus Law, the person who declares itself responsible for the information contained in the prospectus, whether a legal person or a natural person, will be liable for any inaccuracies or misleading information contained in the prospects. If a legal person declares itself responsible for the information provided in the prospectus, the legal person alone will be held liable for any erroneous or missing

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

information. No person which acts on behalf of the legal person can be held liable by automatic extension of the legal person’s responsibility. 25.39  That being said, on the basis of the general Luxembourg provisions on civil liability, depending on the specific circumstances of the matter, one cannot exclude that other persons can be held liable. Even if the issuer is identified under the responsibility statement as assuming responsibility for the information given in the prospectus, other persons involved in drawing up the prospectus, such as directors or accountants of the issuer, could also be held liable on the basis of the said general Luxembourg provisions on civil liability. As said in section IV ‘Persons Responsible for the Prospectus’ (para. 25.30) above, this does not consist in an automatic extension of the company’s liability. The claimant would have to demonstrate that the director acting on behalf of the issuer committed a fault and that the damage incurred by the claimant is causally linked to the director’s fault or breach. 25.40  For example, in the case of an underwriting bank, an investor would have to prove that the underwriting bank committed a fault in that they knew that substantial material information in the prospectus was missing or was inaccurate, that the investor suffered a loss, and that there is a causal link between the fault and the incurred loss. 25.41  In order to avoid liability, the defendant must demonstrate that one of the three following elements has not been met, i.e. (i) the existence of a fault (or negligence); (ii) that damages have resulted; and (iii) that there is a causal link between the fault and the damages. 25.42  However, if these elements are met, liability could be avoided if the defendant were able to prove that the claimant is partially responsible for the financial loss, for example that the investor was negligent or that the investor knew about the inaccuracy or incompleteness of the information in the prospectus. The defendant could also avoid responsibility if he were able to prove that the missing information could not be considered as important for a reasonable investor when making an investment decision, or that the missing information in the prospectus was not material and would not have had any influence on the investor’s decision or on the price of the securities. In this case, the defendant bears the burden of proof. 25.43  If multiple persons are considered liable for the content of the prospectus and the damage resulted therefrom, the Luxembourg Prospectus Law does not specify whether liability should apply on a joint and/or several liability basis. This aspect is therefore determined in accordance with the general Luxembourg provisions on civil liability. (p. 562) 25.44  Considering that in principle, in Luxembourg, the responsibility statement is made by the legal entity acting as the issuer and not the individual directors, there are usually not multiple persons declared responsible for the content of the prospectus. However, if, for example, the claimant is able to prove that other persons than the issuer contributed to the claimant’s loss due to the misleading content of the prospectus, according to the general Luxembourg provisions on civil liability, the issuer and the other persons having contributed to the claimant’s loss will be held jointly and severally liable (responsabilité in solidum) towards the claimant. This, however, only applies when the claimant has incurred one single damage. If this is not the case and the damage caused by each individual defendant can be precisely determined, the issuer and the other persons having contributed to the claimant’s loss are not held jointly and severally liable.18 25.45  In the case of one single damage, the issuer and the other persons having contributed towards the claimant’s loss, will remain jointly and severally liable towards the claimant. The issuer cannot claim exoneration from its liability due to the third party’s fault that contributed towards the damage, even if the issuer is able to clearly prove the causal link between the third party’s fault and the loss incurred by the claimant. Vis-à-vis the claimant, the issuer will nevertheless be held responsible for the entire damage incurred by the claimant. The issuer will in that case have to take legal action (action récursoire) From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

against those persons having contributed towards the claimant’s loss in order to determine the proportional amount of liability each one of them should incur.19 25.46  The issuer who takes responsibility for the content of a prospectus may, for example, argue that there is no fault on his part, since he carried out an adequate due diligence investigation. However, the issuer will remain nevertheless liable towards the claimant and will have to take legal action against the person who provided him with inaccurate information. 25.47  The application of joint and several liability in such a context was a jurisprudential creation in order to protect the claimant against insolvency of the defendants. However, this principle works to the detriment of a defendant who only has a secondary role or who only contributed in a very small way towards the production of the damage. Such a person remains nevertheless liable for the entire loss suffered by the claimant. The only way for such a person to exclude the application of joint and several liability is to demonstrate that the loss can be broken down and that certain parts can be exclusively attributed to one or the other person’s fault. The principle of jointly and severally liable (responsabilité in solidum) therefore only applies in the event of a single damage. If it is possible to divide the damage and clearly identify the individual damage caused by each of the defendants, joint and several liability no longer applies. 25.48  Joint and several liability, for example, does not apply to a person who has only declared himself responsible for a specific part of the prospectus. (p. 563) 25.49  In order for the prospectus to be reused in a different context, the person responsible for the drafting of the prospectus has to provide a written consent. This would allow the prospectus to be reused, for example, by a financial intermediary within the context of reoffering the securities on the secondary market.20 The responsibility of the financial intermediary operating in the secondary market will diminish due to the consent it will have obtained for the content of the prospectus, however without its liability being automatically entirely excluded within the context of the reissuing of the securities.21 25.50  If, for example, the same prospectus is reissued by the financial intermediate in the exact same form and containing the same content, without the financial intermediate having the option to verify the accuracy of the given information, he shall bare no liability with regards to any inaccuracies or missing information. On the contrary, if the financial intermediate amends the prospectus or is aware of inaccuracies or missing information, he could be held liable and, depending on the circumstances, potentially even jointly and severally liable with the initial issuer. 25.51  This is also clearly explained in Recital (10), Directive 2010/73/EU of the European Parliament and of the Council of 24 November 2010 amending Directives 2003/71/EC: In the event that consent to use the prospectus has been given, the issuer or person responsible for drawing up the initial prospectus should be liable for the information stated therein and in case of a base prospectus, for providing and filing final terms and no other prospectus should be required. However, in case the issuer or the person responsible for drawing up such initial prospectus does not consent to its use, the financial intermediary should be required to publish a new prospectus. In that case, the financial intermediary should be liable for the information in the prospectus, including all information incorporated by reference and, in case of a base prospectus, final terms. 25.52  In principle, investors can also claim compensation from the CSSF on a civil liability basis if the claimant is able to prove that during the performance of its duties at approving the prospectus, the CSSF did not perform such duties in accordance with the Luxembourg Prospectus Law. No specific rules are set out under the Luxembourg Prospectus Law on this

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

matter. The law of 23 December 1998 establishing the CSSF in conjunction with Articles 1382 and 1383 of the Civil Code are applicable in such a case. 25.53  The civil liability regime applicable with regards to the CSSF is, however, slightly derogatory to the general civil liability regime. In order for the CSSF to be held liable for damage incurred by third parties, Article 20.2 of the law of 23 December 1998 establishing the CSSF provides that ‘it must be demonstrated that the damage was caused through gross negligence in the choice and implementation of the means used by the CSSF in furtherance of its mission’.22 (p. 564) 25.54  As opposed to the general Luxembourg civil liability regime, which solely requires the claimant to prove that the loss was caused by the defendant’s negligence, when invoking the CSSF’s liability, the claimant must demonstrate that the claimant’s loss was caused through gross negligence in the CSSF carrying out its duties. 25.55  In practice, it is very unlikely that an investor would claim compensation from the CSSF. The CSSF cannot be held liable for untrue or misleading information in the prospectus, since this is not something the CSSF can verify.

VI.  Persons Who Can Sue for Damages Caused by a Misleading Prospectus 25.56  The Luxembourg Prospectus Law does not determine who should be entitled to sue for damages. 25.57  In principle, any person who is able to prove a fault or negligence, a damage and a direct link between this fault or negligence and the damage, is entitled to claim compensation on the basis of liability in tort (extra-contractual liability). 25.58  In accordance with Article 50 of the Luxembourg New Code of Civil Procedure, in order to bring a claim before the Luxembourg courts, the claimant must demonstrate that he has sufficient standing (‘qualité d’agir’) and a legitimate and direct interest (‘intrérêt à agir’). 25.59  Offers of securities which are addressed solely to qualified investors are exempted from the requirement to publish a prospectus. In principle, a prospectus will define the type of investors to whom the securities are going to be offered. 25.60  The Law of 10 July 2005 provides that ‘qualified investors’ means: persons or entities that are described in points (1) to (4) of Section I of Annex II to Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments, and persons or entities who are, on request, treated as professional clients in accordance with Annex II to Directive 2004/39/EC, or recognised as eligible counterparties in accordance with Article 24 of Directive 2004/39/EC unless they have requested that they be treated as nonprofessional clients. Investment firms authorised to continue considering existing professional clients as such in accordance with Article 71(6) of Directive 2004/39/ EC shall be authorised to treat those clients as qualified investors under this law.23 25.61  Under the Luxembourg Prospectus Law, natural persons and small-to-medium-sized enterprises are able to register in a special register in order to be considered as qualified investors. The Luxembourg Prospectus Law defines small and medium-sized (p. 565) enterprises as being ‘companies, which, according to their last consolidated or nonconsolidated published annual accounts, meet at least two of the following three criteria: an average number of employees during the financial year of less than 250, a total balance

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

sheet not exceeding EUR 43,000,000 and an annual turnover not exceeding EUR 50,000,000’. 25.62  A prospectus is issued when securities are offered solely to private investors, but also when offered to both private and qualified investors. In principle, the liability regime does not differ if the securities are offered to both private and qualified investors or if they are solely offered to private investors. However, general Luxembourg case law has held that in a banker and client relationship, the banker’s obligation to inform (obligation d’information et de conseil) varies depending on the technical understanding and experience of the client.24 It is likely that this principle, which also applies in a precontractual phase between banker and client, would also apply with regards to prospectus liability. The appreciation of the issuer’s fault differs if the investor is a professional investor (or qualified investor) as opposed to a private investor, since a professional investor is supposed to have a greater understanding and experience on the subject matter than a private investor. In principle, a private investor would be easier to mislead or would require more extensive information in a prospectus than a professional investor. 25.63  In principle, anyone is entitled to sue for damages, provided that the damage that person incurred can be causally linked to the misleading or incorrect information or the omission of material information in a prospectus. First and foremost, investors would be entitled to claim for damages, but depending on the circumstances, in principle, also other parties having suffered a financial loss are entitled to sue as long as they are able to prove that there is a causal link between the fault (inaccurate information in the prospectus) and their financial loss. Depending on the circumstances, this could potentially be a managing company who loses clients if these decide to withdraw their investments or the issuer of securities if this is a different entity than the person issuing the prospectus.

VII.  Defectiveness of Prospectus Information 25.64  A person who declares to be responsible for the information included in a prospectus incurs liability when the prospectus does not comply with the declaration made. 25.65  According to Article 8.1, Luxembourg Prospectus Law read in conjunction with Article 9 of the same law, the responsible person incurs civil liability as a result of the following breaches: (p. 566) –  untrue information issued in the prospectus; or –  the omission to include material information which affects the import of the prospectus, i.e. information which would have had an influence on the investor’s decision and would have allowed the investor to make a more informed assessment of the assets and liability, financial position, profit and losses, prospects of the issuer and of any guarantor, and of the rights attaching to the securities. 25 25.66  The Luxembourg Prospectus Law does not define the concept of untrue information or the omission of material information, nor does it determine the degree of fault or negligence which must be demonstrated.

VIII.  Fault of the Party Who is Sued 25.67  The assessment of a fault or an act of negligence lies within the discretion of the judges, who have the liberty in assessing what act or omission shall constitute a ‘fault’ within the meaning of the Luxembourg Prospectus Law or within the meaning of Articles 1382 and 1383, Civil Code. The judges take into account all the facts and circumstances and will assess what a normal, careful, diligent, and informed person would have done in

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

the same position (le bon père de famille). The fault is assessed in an abstract (in abstracto) and objective manner. 25.68  Despite the differentiation made between the concept of fault (Art. 1382) and negligence (Art. 1383), there is no difference in the conditions which must be fulfilled in order for the one or the other article to be applied. Neither have the articles different consequences when being applied which means that they can be (and usually are) invoked simultaneously. Within the context of civil liability, negligence is therefore assimilated to a fault. The degree of fault required for civil liability to apply is at least negligence. 25.69  No difference is made between a minor fault or a gross fault. Liability is not proportionate to the degree of severity of the committed fault. The obligation to repair a caused damage even applies in the case of slight negligence.

IX.  Causation and Damages 25.70  Considering that no specific provisions are provided under the Luxembourg Prospectus Law, the general Luxembourg provision on civil liability applies with regards to the resulting damage and the causal link between the fault and the damage. (p. 567) 25.71  Whether or not the claimant is invoking the liability of the person having declared itself responsible for the content of the prospectus or some other person’s liability, according to the general Luxembourg provisions on civil liability, the claimant must demonstrate (i) the existence of a fault (an act or omission); (ii) the identity of the person responsible for the fault; (iii) that a damage has resulted; and (iv) that there is a causal link between the fault and the damage. 25.72  The claimant must thus demonstrate that he has suffered a loss due to the inaccurate information or the non-inclusion of material information in the prospectus. 25.73  According to the general Luxembourg provisions on civil liability, when a person incurs a loss, in order to claim compensation the claimant must prove that the loss is certain. A person’s claim which is based on a loss which is still uncertain will not be taken into account by the courts. If the loss will occur in the future, the claimant must prove that that future loss is nevertheless certain and not solely hypothetical.26 25.74  According to the general Luxembourg provisions on civil liability, the claimant can only claim damages equivalent to the loss the claimant actually incurred. The claimant is not able to claim higher damages than the loss it incurred, but will not obtain any less. Compensation of damages must be sufficient to put the claimant into the position it would have been in if the fault had never been committed by the defendant. The courts apply a concrete (in concreto) analysis of the situation in order to assess the loss incurred by the claimant. The courts cannot take into account the degree of severity of the committed fault in order to determine the amount of damages the claimant shall obtain. 25.75  First and foremost, material damages can be compensated. However, Luxembourg courts also consider that in certain circumstances a loss of opportunity can be compensated, such as a loss of income or loss of profit.27 In principle, moral damage cannot be obtained before the Luxembourg courts for a financial loss.

X.  Evidence 25.76  The investor’s or claimant’s position in evidence is not facilitated in any way, since it must demonstrate that the defendant committed a fault, that a loss was incurred by the claimant, and that there is a causal link between that fault and the loss that the claimant incurred.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 568) XI.  Disclaimers 25.77  Under the Luxembourg Prospectus Law, no disclaimers can be made, excluding or limiting in any way any person’s responsibility with regards to the information provided in the prospectus. Such disclaimers shall be considered as null.

XII.  Prospectus Summary 25.78  The second paragraph of Article 9, Law of 10 July 2005, as amended, provides that: No civil liability shall attach to any person solely on the basis of the summary or of the translation thereof, unless it is misleading, inaccurate or inconsistent, when read together with the other parts of the prospectus, or it does not provide, when read together with the other parts of the prospectus, key information in order to aid investors when considering whether to invest in such securities. The summary shall contain a clear warning to that effect.28 The CSSF accepts prospectuses drafted in English, French, German, and Luxembourgish. If the summary to the prospectus is provided to the CSSF in one of these languages, according to Luxembourg law, no translation is needed.29

XIII.  Directors’ Liability 25.79  The general Luxembourg provisions on civil liability may be relied upon when seeking a director’s liability with regards to the information contained in a prospectus. The director’s fault will need to be demonstrated, as well as the loss suffered and the causal link between the fault and the loss. The courts assess what a reasonable, cautious, and diligent director would have done under the specific circumstances.30 25.80  In practice, the Luxembourg courts are, however, reluctant to uphold directors’ liability towards third parties on the basis of the general principles of civil liability. They generally consider that third parties who suffer a loss due to a director’s management mistake should, in principle, bring proceedings against the company itself. 25.81  The law of 10 August 1915 on commercial companies, as amended, (the Company Law) provides that a company shall assume liability towards third parties for the mistakes committed by its directors. In principle, directors of a company should therefore not incur personal liability for the mistakes they commit when carrying out their (p. 569) functions. A third party should therefore only take legal actions against a director on the basis of the general principles of civil liability if the director’s fault constituted more than a simple management mistake. The burden of proof is thereby heavier for a claimant when bringing a claim against a director on the basis of Articles 1382 and 1383, Civil Code than if the claimant brings an action against the company itself. 25.82  However, directors remain accountable for management errors they commit. They are liable towards the company for the performance of their mandate and for any shortcomings in the performance of their duties. Their liability, however, is sought on a contractual basis, and not on a tort basis.(p. 570)

Footnotes: 1

  Case C-375/13, Harald Kolassa v Barclays Bank plc, 28 January 2015, http:// curia.europa.eu/juris/document/ document.jsf;jsessionid=B79F77512F1F59A868C131E00C024DEF? text=&docid=161845&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=1431853

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

2

  Projet de loi 7328, 1 relative aux prospectus pour valeurs mobilières; 2 portant mise en œuvre du règlement (UE) 2017/1129 du Parlement européen et du Conseil du 14 juin 2017 concernant le prospectus à publier en cas d’offre au public de valeurs mobilières ou en vue de l’admission de valeurs mobilières à la négociation sur un marché réglementé, et abrogeant la directive 2003/71/CE, https://www.chd.lu/wps/portal/public/Accueil/ TravailALaChambre/Recherche/RoleDesAffaires?action=doDocpaDetails&backto=/wps/ portal/public/Accueil/Actualite&id=7328. 3

  ‘Luxembourg Prospective Directive Options’, Bulletin Droit et Bancaire 38, 9.

4

  A coordinated and translated (FR–EN) version of the law of 10 July 2005 drawn up by the Commission de Surveillance du Secteur Financier (CSSF), http://www.cssf.lu/fileadmin/files/ Lois_reglements/Legislation/Lois/L_100705_prospectus_upd_100516_eng.pdf. 5

  Free translation.

6

  Loyens and Loeff, ‘Getting the Deal Through—Debt Capital Markets’ (2018).

7

  Projet de loi 5444 relative aux prospectus pour valeurs mobilières, dépôt: 22 February 2005, commentaires des articles, https://www.chd.lu/wps/portal/public/Accueil/ TravailALaChambre/Recherche/RoleDesAffaires?action=doDocpaDetails&backto=/wps/ portal/public/Accueil/Actualite&id=5444. 8

  Free translation.

9

  ESMA, ‘Comparison of Liability Regimes in Member States in Relation to the Prospectus Directive’, Report, ESMA 2013/619, Annex III (30 May 2013), 175. 10

  Article L-122.3 under title II concerning unfair commercial practices, subsec. 2 misleading omissions read together with its implementing regulation dated 19 May 2011, and more precisely Article R-121-1, subparas 9) and 10) provide that the omission of information required under Articles 8 and 10 of the Prospectus Law and under chapters II and III of the Prospectus Regulation EC 809/2004 should be considered as a misleading omission and should hence qualify as a misleading commercial practice. 11

  Article 37-3(2) of the financial sector law dated 5 April 1993 provides that all information, including marketing communications, addressed by a credit institution or investment firm to clients or potential clients shall be fair, clear, and not misleading. 12

  Cour d’appel (référé commercial), 13 June 2007, Book 34 (2008–2010), 30.

13

  Cour d’appel, 02 February 2011, Bulletin d’Information sur la Jurisprudence, 6/201127, September 2011. 14

  ‘Luxembourg Prospective Directive Options’, Bulletin Droit et Bancaire 38, 9.

15

  Projet de loi 5444 relative aux prospectus pour valeurs mobilières, dépôt: le 22 February 2005, commentaires des articles, https://www.chd.lu/wps/portal/public/Accueil/ TravailALaChambre/Recherche/RoleDesAffaires?action=doDocpaDetails&backto=/wps/ portal/public/Accueil/Actualite&id=5444. 16

  Free translation.

17

  I. Lux and S. Rezhi, ACE Comptabilité, Fiscalité, Audit, Droit des Affaires au Luxembourg, 2012/7, Loi ud 3 Juillet 2012: Changements au Régime Prospectus Existant ou Nouveau Régime? (Deventer: Kluwer, 2012), 17. 18

  G. Ravarani, ‘La Responsabilité civile’, Lux (4 November 2004) 259/2004 IX.

19

  Cass. 26 June 1975, Pas. 25, 116.

20

  Lux and Rezhi (n. 17), 17.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

21

  ibid.

22

  ESMA, ‘Comparison of Liability Regimes in Member States in Relation to the Prospectus Directive’, Report, ESMA 2013/619, Annex III (30 May 2013), 189. 23

  Law of 3 July 2012 aligning the terms such as ‘qualified investor’ with the new provisions of the MIFID law. 24

  Cour d’appel, 8 June 2005, 28667 du rôle.

25

  ESMA, ‘Comparison of Liability Regimes in Member States in Relation to the Prospectus Directive’, Report, ESMA 2013/619, Annex III (30 May 2013), 175. 26

  Cour d’appel, 12 January 2007, 29446 du rôle.

27

  ESMA, ‘Comparison of Liability Regimes in Member States in Relation to the Prospectus Directive’, Report, ESMA 2013/619, Annex III (30 May 2013), 14. 28

  A coordinated and translated (FR–EN) version of the law of 10 July 2005, drawn up by the CSSF, http://www.cssf.lu/fileadmin/files/Lois_reglements/Legislation/Lois/ L_100705_prospectus_upd_100516_eng.pdf. 29

  ‘Luxembourg Prospective Directive Options’, Bulletin Droit et Bancaire 38, 9.

30

  See https://www.agefi.lu/mensuel/Article.asp?NumArticle=9646.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Part III Prospectus Liability and Litigation, 26 United Kingdom Gerard McMeel From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

Subject(s): Prospectus — Financial regulation

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 571) 26  United Kingdom I.  Introduction: The Prospectus Regulation and ‘Brexit’ 26.01 1.  The Scenarios 26.06 2.  The Withdrawal Act 26.09 3.  UK Financial Services Legislation 26.12 4.  The Role of the Financial Services Authority/Financial Conduct Authority 26.14 II.  The Legal Basis for Prospectus Liability 26.15 1.  An Historical Excursus 26.15 2.  Civil Liability under the Prospective Directive in the UK 26.17 3.  Civil Liability under the Prospective Regulation in the UK 26.21 4.  The Tiers of Provision 26.22 5.  Statutory Rule-Making Powers 26.23 6.  The Consultation Process 26.24 7.  The Principal Changes from Directive to Prospectus 26.27 8.  The New Financial Conduct Authority Rules 26.29 9.  The Statutory Base 26.31 10.  Threshold Causes of Action 26.32 11.  The Principal Provision: Section 90 of the Financial Services and Markets Act 2000 26.34 III.  Definition of ‘Prospectus’ 26.36 IV.  Persons Responsible for the Prospectus 26.37 V.  Persons Liable for Misleading Prospectus Information 26.44 VI.  Persons Who Can Sue for Damages Caused by a Misleading Prospectus 26.45 VII.  Defectiveness of Prospectus Information 26.48 VIII.  Fault of the Party Who is Sued 26.49 IX.  Causation and Damages 26.51 1.  Causation 26.51 2.  Measure of Compensation 26.52 3.  Other Forms of Liability 26.55 X.  Evidence 26.56 XI.  Disclaimers 26.57 XII.  Prospectus Summary 26.58

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

XIII.  Directors’ Liability 26.59 1.  The Royal Bank of Scotland Rights Litigation 26.60 2.  The Brexit Scenarios Revisited 26.62 3.  The Future UK Financial Regulatory Framework 26.70

I.  Introduction: The Prospectus Regulation and ‘Brexit’ 26.01  The timing of the coming into force in EU Member States of the Prospectus Regulation on 21 July 20191 posed some problems of exposition of the law in the United Kingdom of liability for information in prospectuses.2 The date of the Regulation coming into (p. 572) force was after the date, 29 March 2019, when it was originally intended that the UK would leave the EU. When the date for ‘Brexit’ was extended initially to 31 October 2019, the Regulation automatically came into force in accordance with orthodox EU and UK arrangements because the UK remained a Member State.3 The original Withdrawal Agreement negotiated by the UK Government led by then Prime Minister Theresa May with the other remaining twenty-seven Member States and the European Commission failed to garner sufficient Parliamentary support on three separate occasions. Mrs May resigned as leader of the Conservative Party on 24 July 2019, and was replaced as Prime Minister by her former Foreign Secretary, and prominent ‘Brexiteer’, Boris Johnson. Subsequently Mr Johnson negotiated a revised Withdrawal Agreement with the EU, but amidst unprecedented Parliamentary divisions, was unable to secure the passage of the Withdrawal Agreement Bill before the 31 October deadline. He was forced to seek a further extension to 31 January 2020. The UK held a General Election on 12 December 2019, and Mr Johnson secured a commanding majority. Accordingly at the proof stage it looked highly likely that the UK would leave the EU on 31 January 2020 on the basis of the revised Withdrawal Agreement.4 26.02  The United Kingdom had become a Member State of the then European Communities on 1 January 1973 under UK primary legislation, the European Communities Act 1972. Under the Treaty on the European Union (‘TEU’) and the Treaty on the Functioning of the European Union (‘TFEU’) (collectively ‘the Treaties’), the European Communities evolved into the European Union. Under the European Union Referendum Act 2015 a national referendum held on 23 June 2016 resulted in a victory for those who wished the UK to leave the EU. Article 50, TEU had created a mechanism whereby a Member State could withdraw from the EU under sub-article (1) ‘in accordance with its own constitutional arrangements’.5 In sub-article (2), provision was made for an agreement between the EU and the departing Member State, setting out ‘arrangements for withdrawal, taking account of the framework for its future relationship with the Union’.6 If notification is given under sub-article (3), the Treaties cease to apply on the date of the withdrawal agreement coming into force, or failing that, two years after notification, unless the European Council unanimously decides to extend the period.7 As a matter of (p. 573) EU law and public international law, the Treaties would cease to apply after the default period in Article 50(3) without more.8 26.03  Her Majesty’s Government originally took the position that it could itself make an Article 50 notification, without primary legislation, using that remnant of common law executive power known as the Royal Prerogative. The UK Supreme Court disagreed.9 Accordingly, the European Union (Notification of Withdrawal) Act 2017 conferred on the Prime Minister the power to make a notification under Article 50(2) of the UK’s intention to withdraw from the EU, and Theresa May duly made an Article 50 notification in March 2017, with the intention that 29 March 2019 should be the day on which the UK left the EU. In the meantime, the UK Parliament passed the European Union (Withdrawal) Act 2018 (‘the Withdrawal Act’), a major constitutional measure providing for the repeal of the From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

European Communities Act 1972 on ‘exit day’,10 and the future role of existing EU-derived measures in the UK. The Withdrawal Agreement negotiated by Mrs May’s Government with the EU was endorsed by EU leaders at a special meeting of the European Council on 25 November 2018 (‘the Withdrawal Agreement’).11 The Withdrawal Agreement provided for a transition or implementation period to 31 December 2020, during which period EU law would continue to apply in the UK.12 It should also be noted that the Court of Justice of the European Union (CJEU) has held that the UK’s notice under Article 50(2) may be unilaterally withdrawn by the UK at any point prior to the application of Article 50(3).13 26.04  The original expectation of the UK’s financial conduct regulator, the Financial Conduct Authority (‘FCA’) was that the Prospectus Regulation, whilst not existing EU law in force at the original exit date of 29 March 2019, would fall within the implementation period under the Withdrawal Agreement. It would have taken effect pursuant to the Withdrawal Agreement with its transitional or implementation period, during which period EU law would continue to apply in the UK. If there was to be no transitional or implementation period, the Prospectus Regulation was included in a Financial Services (Implementation of Legislation) Bill, which was introduced to the House of Lords, giving the UK the power to adopt the measure.14 26.05  As stated in paragraph 26.01 above the negotiated Withdrawal Agreement failed to garner sufficient Parliamentary support. The European Council decided on 22 March 2019 to grant the UK an extension under Article 50, to 31 October 2019. By the very (p. 574) short European Union (Withdrawal) Act 2019, the Withdrawal Act was amended, permitting a statutory instrument to amend the definition of exit day in the Withdrawal Act to 31 October 2019.15 As a result, the Prospectus Regulation came into force in the UK on 21 July 2019 in the same way as other Member States, as directly applicable EU law in the usual way. Due to the uncertainties of the legal and political environment, the principal secondary legislation integrating the Prospectus Regulation into UK law was only enacted in late June 2019.16 The FCA’s principal regulatory rules in support of the Prospectus Regulation were only made in the second week of July.17 As stated above the UK, under Mr. Johnson, did secure a new Withdrawal Agreement18 and a revised Political Declaration in October 2019,19 but was unable to obtain Parliamentary support to enact the Withdrawal Agreement Bill by 31 October 2019. Rather under the European Union (Withdrawal) (No 2) Act 2019 the Prime Minister was forced to seek a further extension of ‘exit day’ to 31 January 2020. In the light of the December 2019 General Election result it is now highly likely that the UK will leave under the terms of the new Withdrawal Agreement at the end of January 2020. The transitional or implementation period for the future trading relationship at present remains 31 December 2020.20 In discussing civil liability under the Prospectus Regulation, it is proposed to address the three broad scenarios which the future may in theory hold.

1.  The Scenarios (i)  Scenario (1): ‘no deal’ 26.06  The UK leaves the EU without a deal and Article 50(3) takes effect. This now appears unlikely, but remains the default position under the Withdrawal Act.

(ii)  Scenario (2): a ‘withdrawal agreement’ 26.07  The UK leaves the EU with a withdrawal agreement under Article 50(2), being the new Withdrawal Agreement concluded between the EU and the UK on 19 October 2019. This now appears to be the likely outcome.

(p. 575) (iii)  Scenario (3): no Brexit

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

26.08  The UK withdraws its notification under Article 50(2) before the deadline under Article 50(3) takes effect. The UK therefore remained at all times a Member State of the EU, and the position is essentially the same as in all other Member States. In the wake of the 2019 General Election this now appears to be highly unlikely.

2.  The Withdrawal Act 26.09  The Withdrawal Act provides by section 1 that the European Communities Act 1972 is repealed on exit day. The scheme of the Act, to ensure legal continuity, is to ensure that existing EU legislation be retained as part of UK law, which is called ‘retained EU law’.21 ‘Exit day’ was defined by sections 20(1) and (2) of the Withdrawal Act originally to mean 11.00pm on 29 March 2019. That was subsequently amended under section 20(4) to 11.00pm on 31 October 2019,22 and then to 11.00 pm on 31 January 2020.23 26.10  Under section 2 of the Withdrawal Act, EU-derived domestic legislation, such as statutory instruments giving effect to EU Directives made under section 2 of the European Communities Act 1972, are retained as domestic law despite the repeal of the 1972 Act. By section 3(1) of the Withdrawal Act: ‘Direct EU legislation, so far as operative immediately before exit day, forms part of domestic law on and after exit day.’ This obviously includes directly applicable EU regulations, subject to some carve-outs.24 So had the definition of exit day not been modified in accordance with the European Union (Withdrawal) Act 2019 and secondary legislation made under the Withdrawal Act, the Prospectus Regulation would not have fallen within section 3 of the Withdrawal Act. 26.11  The result of the extension under Article 50 initially to 31 October 2019, and subsequently to 31 January 2020, is that the Prospectus Regulation falls within section 3(1) of the Withdrawal Act and will be incorporated into UK domestic law on the revised exit day. ‘No deal’ is effectively the default position under the Withdrawal Act. It is important to note that its rules will no longer have effect because they are EU laws, but because they have been incorporated into domestic UK law by section 3 of the Withdrawal Act. Section 4 deals with accrued rights under section 2(1) of the European Communities Act 1972, so that if any claim based on a misleading prospectus arose between 21 July 2019 and exit day, it could still be vindicated in the UK courts. The Withdrawal Act provides that a UK court or tribunal ‘is not bound by any principles laid down, or any decisions made, on or after exit day by the [CJEU]’ (s 6(1)(a)). Furthermore, a UK court or tribunal ‘cannot refer any matter to the [CJEU] on or after exit day’ (s 6(1)(b)). Therefore, given that the Prospectus Regulation would have been ‘domesticated’, it (p. 576) will not necessarily be the case that it will be interpreted and applied by UK courts consistently with the approach of the CJEU or of the courts of Member States. Section 8 confers on Ministers very wide powers (usually dubbed by reference to the notorious English Tudor monarch, ‘Henry VIII clauses’) to amend retained EU law. Section 13 makes provision for the ratification of a withdrawal agreement and provides for further primary legislation to implement it. Critically, section 13 required the House of Commons to ratify the Withdrawal Agreement and political declaration, which is what it failed to do on three occasions. A revised European Union (Withdrawal Agreement) Bill was introduced in December 2019.

3.  UK Financial Services Legislation 26.12  Turning now to UK financial legislation, the principal enactment is the Financial Services and Markets Act 2000 (‘FSMA’), in its original incarnation very much the creation of Gordon Brown, Chancellor of the Exchequer (Minister of Finance) in Tony Blair’s New Labour Government elected in 1997. It is a UK enactment encompassing the three jurisdictions of England and Wales, Scotland, and Northern Ireland.25 The Financial Services and Markets Act 2000 came into force on 1 December 2001. It has since provided the overall legislative framework for UK financial services regulation, with more detailed legislative and regulatory rules to be found in instruments made under it, such as statutory instruments or in regulatory rulebooks. Nevertheless, important provisions such as the From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

imposition of criminal and civil penalties and provisions providing for civil liability or compensation are to be found in FSMA itself (even if the detailed rules are to be found elsewhere). The Financial Services and Markets Act 2000 has been heavily amended over the course of the past two decades by both primary and secondary legislation. It gave centre-stage to a single regulator in the shape of the Financial Services Authority (‘FSA’), which was also the UK Listing Authority under Part VI of the Act. The process of regular amendment of FSMA accelerated in the wake of the Global Financial Crisis of 2007–2008 with the Banking Act 2009, the Financial Services Act 2010, the Financial Services Act 2012, and the Financial Services (Banking Reform) Act 2013 all significantly amending it. 26.13  The Coalition Government of Conservatives and Liberal Democrats formed in 2010 decisively rejected the single regulator model and embraced the ‘twin peaks’ approach to financial regulation, but retained FSMA as the principal legislative measure, albeit heavily amended. It oversaw the creation under the Financial Services Act 2012 of two new regulators, the Financial Conduct Authority (‘FCA’) and the Prudential Regulation Authority (‘PRA’), achieved through amendments to FSMA.26 This is premised on (p. 577) prudential regulation and conduct of business regulation being such different activities that specialist regulators are required for each. Implementation basically involved responsibility for macro-prudential regulation of the largest, and systemically most significant, financial firms (such as banks and large insurance companies) being allocated to the PRA, under the aegis of the Bank of England, leaving conduct of business and micro-prudential regulation of systemically less significant firms to the FCA. The FCA was launched a change of name: it is the ‘body corporate previously known as the Financial Services Authority’.27 The formal demerger between the FCA and PRA took place on 1 April 2013. As the conduct regulator, the FCA stepped into the shoes of the FSA as UK Listing Authority.

4.  The Role of the Financial Services Authority/Financial Conduct Authority 26.14  Originally the London Stock Exchange was the UK Listing Authority under Part IV of the Financial Services Act 1986, but as it began to pursue a more commercial path in the late 1990s it was decided to transfer that responsibility to the recently formed FSA (the successor to the Securities and Investments Board, the investment regulator under the Financial Services Act 1986), and that took effect on 1 May 2000.28 The nascent FSA took over the mantle of UK Listing Authority from the London Stock Exchange and began integrating Listing Rules, Prospectus Rules, and Disclosure Rules into its Handbook.29 From 1 April 2013, the FCA became responsible for these rules. When exercising powers under Part 6 of FSMA30 the FCA may use the name ‘UK Listing Authority’. The FCA has now been named the competent authority for the purposes of the Prospectus Regulation.31

II.  The Legal Basis for Prospectus Liability 1.  An Historical Excursus 26.15  Liability for misleading prospectuses in the UK is based on statutory provisions which are essentially tortious or delictual in nature. The liability of company promoters and (p. 578) directors has long been a concern of English law since at least the 1860s, soon after the introduction of easier corporate registration and limited liability.32 Statutory liability dates back nearly 130 years to the Directors’ Liability Act 1890. The reason for legislation was the insistence of the House of Lords (the precursor to the UK Supreme Court) in the leading case of Derry v Peek33 that liability for misrepresentation at common law required either intentional fraud or recklessness as to the truth or falsity of what was stated. Liability lay in the tort of deceit, which required clear proof, and mere negligence, in the sense of failing to take reasonable care and skill on an objective test, did not suffice. Derry v Peek held back the common law generally on negligent misrepresentations until it

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

was eventually recognized as a distinct cause of action by the same tribunal in Hedley Byrne & Co Ltd v Heller & Partners Ltd.34 26.16  The immediate legislative response to Derry v Peek was the Directors’ Liability Act 1890 imposing statutory liability for negligent misrepresentations, described by Gower as ‘an advanced piece of legislation for its time and [it] significantly influenced the US Securities Act 1933’.35 In addition to imposing civil liability on a negligence standard, the Act also reversed the burden of proof in favour of the investor. The editors of Gower note that the preponderant approach across jurisdictions to prospectus and related regimes since the 1930s has been disclosure-based, rather than merit-based in orientation.36 Subsequently the relevant legislation migrated to the companies’ legislation. In turn it became Part IV of the Financial Services Act 1986, and in particular sections 150, 151, 154A, 156A, and 156B. The modern incarnation of the 1890 Act is section 90, FSMA.

2.  Civil Liability under the Prospectus Directive in the UK 26.17  As stated in section II.1 ‘An Historical Excursis’ (para. 26.15) above, civil liability in the UK for misleading prospectuses has had a statutory basis since 1890. Essentially, the same regime was carried on by the Financial Services Act 1986, especially sections 150, 151, and 154A.37 The modern incarnation is section 90, FSMA, which continued the statutory liability on a negligence model. Despite the increasing encroachment of EU measures, the basic structure and rules of section 90 liability have remained consistent, with minor amendments to integrate the relevant EU regulatory rules. It is proposed to review section 90 in detail in its latest incarnation, alongside the Prospectus Regulation, discussed below. (p. 579) 26.18  The major step in increasing EU dominance in this field was the Prospective Directive,38 which was part of the EU’s Financial Services Action Plan. This sprang from the invitation issued by the European Council in Cardiff, Wales, in June 1998, to the European Commission to prepare a framework for developing a single market in financial services. The Financial Services Action Plan was formally announced in May 1999, proposing integration of both wholesale and retail financial markets.39 Characteristically, the UK was heavily involved in promoting the single market in financial services,40 as it had been in respect of goods in the 1980s and 1990s. The Prospectus Directive was a key element in integrating wholesale capital markets. It was implemented in the UK by the FSA, and later FCA, in its Handbook, and in particular in its Prospectus Rules, which sat in the block of the Handbook which also included the Listing Rules and its Disclosure Rules for securities admitted to regulated markets. 26.19  Under the Prospectus Directive regime in force from 1 July 2005, the operative documents were: (a)  Part 6 of FSMA; (b)  the Prospectus Directive Regulation;

41

(c)  the FSA/FCA’s Prospectus Regulation rules (‘PR’); and (d)  various European Securities and Markets Authority (ESMA) recommendations and opinions. 42 26.20  Chapter 2 of the PR provided the rules on drawing up a prospectus, including general contents, format, minimum information, incorporation by reference and omission of information. Chapter 3 provided the rules for the approval and publication of prospectuses. Whilst the Prospectus Directive was a maximum harmonization Directive, meaning that EU law occupied the space for detailed regulation in this field, the remedies for breaches of those rules were still a matter for Member States.43 Article 6 of the Directive provided that Member States should apply ‘their laws, regulations and administrative provisions on civil

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

liability’ to those responsible for the information in a prospectus. Accordingly, section 90, FSMA remained the basis of civil liability, albeit the detail of what the prospectus was required to contain was spelt out in PR 2, implementing the Directive’s provisions. The range of persons responsible was to be found in the FSA/FCA Handbook, PR 5.5, again implementing the provisions of the Directive.

(p. 580) 3.  Civil Liability under the Prospectus Regulation in the UK 26.21  We turn now to the detail of the UK regime as in force since 21 July 2019. The starting point is Article 11(2), Prospectus Regulation, which requires Member States to ensure their laws, regulations, and administrative provisions on ‘civil liability’ to the persons responsible for the information given in a prospectus.44 Civil liability is still determined under Part VI (now Part 6), FSMA, headed ‘Official Listing’, and in particular section 90, FSMA.

4.  The Tiers of Provisions 26.22  The usual ‘wedding cake’ of at least three tiers of UK financial legal and regulatory measures comprises now in this context principally: (a)  Part 6, FSMA (as amended, in particular by the next instrument); (b)  the Financial Services and Markets Act 2000 (Prospectus) Regulations 2019; (c)  the FCA Handbook: Prospectus Regulation Rules Sourcebook (‘PRR’).

45

46

5.  Statutory Rule-Making Powers 26.23  Section 73A(1) and (5), FSMA confers power on the FCA to make ‘Part 6 rules’ and in particular prospectus rules, and section 84, FSMA makes provisions for matters which may be dealt with by prospectus rules, both now amended to make reference to the Prospectus Regulation.47 The Part 6 definitions in section 103, FSMA now define ‘prospectus regulation’ and provide a revised definition of supplementary prospectus. There are transitional provisions to provide for the validity of prospectuses issued before 21 July 2019.48

6.  The Consultation Process 26.24  The FCA is designated the competent authority for the purposes of the Prospectus Regulation.49 (p. 581) 26.25  The FCA has now recast the relevant component of its Handbook in the light of the Prospectus Regulation. In doing so, it followed its usual statutory consultation process. The relevant publications are: (a)  FCA, Changes to align the FCA Handbook with the EU Prospectus Regulation (CP19/6) (January 2019); (b)  FCA, Changes to align the FCA Handbook with the EU Prospectus Regulation: Feedback to CP19/6 (PS19/12) (May 2019). 26.26  At the time of the Consultation Paper in January 2019, the FCA was working on the assumption that the Regulation would come into force as a result of the transitional period under the original Withdrawal Agreement.50 That expectation was falsified by the extension to ‘exit day’ arranged in late March, so that at the date of the Policy Statement it was clear that the Prospectus Regulation would become directly applicable in the usual way.51

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

7.  The Principal Changes from Directive to Prospectus 26.27  The FCA’s consultation paper includes a useful summary of the changes, and the UK’s approach to the exemption threshold for small offerings: a.  Exempting the smallest capital raisings—Members States can choose to increase the public offer threshold, below which a prospectus does not need to be published, to a maximum of 8m from July 2018. The UK put in place an EUR 8m threshold on 20 July 2018. b.  Admissions threshold raised—since July 2017, issuers have been able to issue up to 20% of securities of the same class already admitted to trading over a period of 12 months without needing a fresh prospectus. This is an increase from 10% of shares only under the PD. c.  Creating a lighter prospectus for smaller companies—the aim of this measure is to allow SMEs [small and medium-sized enterprises] to benefit from a new proportionate disclosure regime. The SME market capitalisation threshold has also been raised, from EUR 100m to EUR 200m. d.  Shorter prospectuses and better investor information—the prospectus summary will become a shorter, 7-page document based on a small number of key questions. e.  Simplifying secondary issuance for listed issuers—a simplified prospectus can be drawn up by issuers, who are admitted to trading on a regulated market, or who have been admitted to a SME growth market for 18 months. (p. 582) f.  Fast track and simplified frequent issuer regime—a new Universal Registration Document (URD) is introduced, described by the Commission as a type of ‘shelf registration’. It aims to support quicker scrutiny and approval of prospectuses. It is similar to a document already widely used by French listed companies. g.  Single access point for all EU prospectuses—although ESMA already has a Prospectus Register, a new portal will be available to provide searchable online access to all prospectuses approved in the EEA [European Economic Area]. When a National Competent Authority (NCA) approves a prospectus, it will have to send an electronic copy, together with specified information, to ESMA. 52

26.28  The first of these measures—the EUR 8 million threshold—was introduced in the UK from July 2018.53

8.  The New Financial Conduct Authority Rules 26.29  Following this consultation process (to which there were a mere three respondents) on 11 July 2019, the FCA issued a rule-making instrument54 which completely replaced the old Prospectus Rules (PR) with a new component entitled Prospectus Regulation Rules sourcebook (PRR, with the additional ‘R’ differentiating it from the old regime) in the Listing, Prospectus, and Disclosure block of its Handbook.55 The FCA has largely copied out the underlying EU rules in the PRR so that the regime is available in one place for those preparing prospectuses.56 That does not affect the reality that it is the Prospectus Regulation which is the legally operative instrument in the UK. However, in the event of a

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

‘no deal’, from exit day the rules under the Regulation will be operative as retained EU law under section 3 of the Withdrawal Act. 26.30  In initial guidance, the FCA considers that the following documents are relevant to the prospectus regime: (a)  the Prospectus Regulation; (b)  Part 6, FSMA; (c)  the PR Regulation 2019/980 of the European Commission; (d)  the PRR themselves; (e)  the ESMA Prospectus Recommendations (to the extent applicable); (f)  the ESMA PD Prospectus Questions and Answers (to the extent applicable); (p. 583) (g)  the ESMA PR Prospectus Questions and Answers; (h)  the ESMA Prospectus Opinions (to the extent applicable); and (i)  the Prospectus Regulatory Technical Standards (RTS) Regulation.

57

9.  The Statutory Base 26.31  The principal bases of civil liability for misleading prospectuses or for omissions in the UK has been provided for in FSMA from its original enactment, and its coming into force on 1 December 2001. Whilst EU law has provided the underpinnings, the domestic statutory law has remained largely consistent, even as the reach of EU law increased with the maximum harmonization Prospective Directive, and now the directly applicable Prospectus Regulation. The statutory rules are very much in the tradition of the 1890 legislation, effectively resulting in a negligence standard, with a reversed burden of proof.

10.  The Threshold Cause of Action 26.32  In terms of civil liability the first significant provision in section 85(1), FSMA makes it unlawful for transferable securities to be offered to the public in the UK unless an approved prospectus had been made available to the public before the offer was made. Section 85(2) makes it unlawful to request the admission of transferable securities to a regulated market unless an approved prospectus had been made available to the public before the request was made.58 These provisions make the availability of a prospectus mandatory, which is reinforced by civil liability. So, section 85(4) provides: A contravention of subsection (1) or (2) is actionable, at the suit of a person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty. 26.33  This is reminiscent of section 138D(2), FSMA (formerly section 150), which makes breach of FCA rules actionable by analogy with the tort (civil wrong) of breach of statutory duty. The reference to that tort makes clear that general principles of causation, quantification of loss, and potentially a reduction in damages (compensation) may be made because of the claimant’s contributory fault under the Law Reform (Contributory Negligence) Act 1945. The tort is one of strict liability. The range of potential claimants embraces all persons (including companies), unlike the general provision in section 138D(2), which is generally confined to private persons, principally individuals.59

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 584) 11.  The Principal Provision: Section 90 of the Financial Services and Markets Act 2000 26.34  Section 90, FSMA remains the crucial provision, and has now been amended to cross-reference to the Prospectus Regulation. It will be noted that liability for misleading statements and omissions is imposed in a somewhat indirect way by reference to liability for misleading listing particulars. It provides (as amended60): Compensation for statements in listing particulars or prospectus (1)  Any person responsible for listing particulars is liable to pay compensation to a person who has— (a)  acquired securities to which the particulars apply; and (b)  suffered loss in respect of them as a result of— (i)  any untrue or misleading statement in the particulars; or (ii)  the omission from the particulars of any matter required to be included by section 80 or 81. (2)  Subsection (1) is subject to exemptions provided by Schedule 10. (3)  If listing particulars are required to include information about the absence of a particular matter, the omission from the particulars of that information is to be treated as a statement in the listing particulars that there is no such matter. (4)  Any person who fails to comply with section 81 is liable to pay compensation to any person who has— (a)  acquired securities of the kind in question; and (b)  suffered loss in respect of them as a result of the failure. (5)  Subsection (4) is subject to exemptions provided by Schedule 10. (6)  This section does not affect any liability which may be incurred apart from this section. (7)  References in this section to the acquisition by a person of securities include references to his contracting to acquire them or any interest in them. (8)  No person shall, by reason of being a promoter of a company or otherwise, incur any liability for failing to disclose information which he would not be required to disclose in listing particulars in respect of a company’s securities— (a)  if he were responsible for those particulars; or (b)  if he is responsible for them, which he is entitled to omit by virtue of section 82. (9)  The reference in subsection (8) to a person incurring liability includes a reference to any other person being entitled as against that person to be granted any civil remedy or to rescind or repudiate an agreement. (10)  ‘Listing particulars’, in subsection (1) and Schedule 10, includes supplementary listing particulars.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

(p. 585) (11)  This section applies in relation to a prospectus as it applies to listing particulars, with the following modifications— (a)  references in this section or in Schedule 10 to listing particulars, supplementary listing particulars or sections 80, 81 or 82 are to be read, respectively, as references to a prospectus, supplementary prospectus and Articles 6 and 14(2), Article 23 and Article 18 of the prospectus regulation; (b)  references in Schedule 10 to admission to the official list are to be read as references to admission to trading on a regulated market; (c)  in relation to a prospectus, ‘securities’ means ‘transferable securities’. (11A)  In subsection (11)(a) ‘supplementary prospectus’ includes, where final terms (see Article 8 of the prospectus regulation) are contained in a separate document that is neither a prospectus nor a supplementary prospectus, that separate document. (12)  A person is not to be subject to civil liability solely on the basis of a summary in a prospectus unless the summary, when read with the rest of the prospectus— (a)  is misleading, inaccurate or inconsistent; or (b)  does not provide key information (specified by Article 7 of the prospectus regulation), and in this subsection a summary includes any translation of it. 26.35  As said, this is roundabout piece of drafting making liability for misleading statements and omissions parasitic upon liability for misleading listing particulars, which is the primary focus of the section’s drafting.61 Two separate provisions would have been clearer and more elegant. However, this is what the draftsperson and Parliament has done. Section 90(11) is the subsection extending the statutory liability from listing particulars to prospectuses with adjustments. We have to read listing particulars and supplementary listing particulars as references to prospectuses and supplementary prospectuses.

III.  Definition of ‘Prospectus’ 26.36  UK law has never had a formal definition of a prospectus, which as a matter of common law has simply been treated as a potential source of misleading statements or omissions which may ground civil liability, as with any other communication in a business context. The mandatory requirement for such documents lay in exchange and regulatory rules prescribing their content. Therefore, the meaning, or rather prescribed content, of a prospectus or a base prospectus is now taken from the Prospectus Regulation. As stated in section II.5 ‘Statutory Rule-Making Powers’ (para. 26.23) above, FSMA section 103 (as amended in 201962) now provides a revised definition of supplementary prospectus.

(p. 586) IV.  Persons Responsible for the Prospectus 26.37  This is determined by the Prospectus Regulation for the purposes of section 90, FSMA. Prospectus Regulation Rule 5.3 provides for the persons responsible for a prospectus, implementing the minimum requirements of Article 11.1, Prospectus

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Regulation, and determining which persons are responsible and potentially civilly liable in the UK.63 In relation to equity issues or transferable securities, PRR 5.3.2R provides: Each of the following persons are responsible for the prospectus: (a)  the issuer of the transferable securities; (b)  if the issuer is a body corporate: (i)  each person who is a director of that body corporate when the prospectus is published; (ii)  each person who has authorised themselves to be named, and is named, in the prospectus as a director or as having agreed to become a director of that body corporate either immediately or at a future time; and (iii)  each person who is a senior executive of any external management company of the issuer; (c)  each person who accepts, and is stated in the prospectus as accepting, responsibility for the prospectus; (d)  in relation to an offer: (i)  the offeror, if this is not the issuer; and (ii)  if the offeror is a body corporate and is not the issuer, each person who is a director of the body corporate when the prospectus is published; (e)  in relation to a request for the admission to trading of transferable securities: (i)  the person requesting admission, if this is not the issuer; and (ii)  if the person requesting admission is a body corporate and is not the issuer, each person who is a director of the body corporate when the prospectus is published; and (f)  each person not falling within any of the previous paragraphs who has authorised the contents of the prospectus. 64 26.38  The liability of directors in equity issues is a longstanding feature of the UK approach to responsibility for misleading prospectuses, as reflected in the title of the original 1890 legislation, reversing the effect of Derry v Peek. It was clearly utilized in the RBS Rights Litigation (described in section XIII.1 ‘The Royal Bank of Scotland Rights Litigation’, para. 26.60 below) to target Fred Goodwin and others personally. A director will not be responsible if it is published without his knowledge or consent, and if, on becoming (p. 587) aware of the publication, gives reasonable public notice it was published without his knowledge or consent.65 26.39  It is further provided in PRR 5.3.3R that in relation to (b)(iii) an external management company is ‘a person who is appointed by the issuer (whether under a contract of service, a contract for services or any other commercial arrangement) to perform functions that would ordinarily be performed by officers of the issuer and to make

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

recommendations in relation to strategic matters’. This may embrace a lead manager, such as an advising bank which takes principal responsibility for drafting a prospectus. 26.40  For all other securities, PRR 5.3.5R provides: Each of the following persons are responsible for the prospectus: (a)  the issuer of the transferable securities; (b)  each person who accepts, and is stated in the prospectus as accepting, responsibility for the prospectus; (c)  in relation to an offer, the offeror of the transferable securities, if this is not the issuer; (d)  in relation to a request for an admission to trading of transferable securities, the person requesting admission, if this is not the issuer; (e)  if there is a guarantor for the issue, the guarantor in relation to information in the prospectus that relates to the guarantor and the guarantee; and (f)  each person not falling within any of the previous paragraphs who has authorised the contents of the prospectus.

26.41  Directors are therefore not caught in respect of non-equity issues unless they fall within one of the other categories. The reason for the omission appears to be historical, with the personal liability of directors having been imposed in respect of equity issues in the late nineteenth century and not been expanded further. Offerors are not responsible in circumstances where the issuer was primarily responsible for drawing up the prospectus.66 In respect of both types of issue, there are potential restrictions on the liability of particular persons otherwise prima facie responsible, such as accepting responsibility for part only of the prospectus.67 26.42  In terms of others who have contributed to the prospectus, and especially legal and other professional advisers, they are entitled to rely on the exclusion in PRR 5.3.10R: Nothing in the rules in this section is to be construed as making a person responsible for any prospectus by reason only of the person giving advice about its contents in a professional capacity. 26.43  The understanding is that a sponsoring bank would be able to take advantage of this exemption in the UK. Beyond these express statutory impositions of liability, it is highly (p. 588) likely that UK courts would not impose liability on any other person. There has been no reference to the EU principles of effectiveness (effet utile) in the limited number of reported decisions on the Prospectus Directive regime.

V.  Persons Liable for Misleading Prospectus Information 26.44  Under UK law, it is clear that the persons who are liable for misleading prospectus information are those identified in PRR 5.3 (quoted above). On ordinary principles of English civil liability, the liability of each defendant would be joint and several to the extent that they fall within the criteria for statutory liability. As between multiple defendants, ancillary proceedings may result between them to establish their respective blameworthiness and the share of the damages for which they are ultimately responsible under the Civil Liability (Contribution) Act 1978. As stated above, given the express

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

statutory imposition of liability on particular persons, it is highly likely that UK courts would not impose liability on any other person, such as a shareholder selling his or her securities.

VI.  Persons Who Can Sue for Damages Caused by a Misleading Prospectus 26.45  Section 90(1)(a), FSMA is very broad. It lays down a uniform regime for professional investors and private investors, and draws no distinction between individual and legal persons. This is in contrast to the principal statutory mechanism for civil liability under section 138D(2), FSMA, where liability is generally confined to private individuals.68 Concerns have been expressed that the holders of intermediated securities may not have standing to bring claims as a matter of English law.69 As that would embrace all investors in listed securities that would create a major hole in the regulatory and civil law protections afforded to investors in securities held in that form. The English Law Commission recently issued a call for evidence.70 Most recently a test case in the Financial List based on an analogous claim under section 90A and schedule 10A of FSMA in respect of the disclosure of information in respect of shares in leading supermarket group, Tesco, determined pragmatically that holders of intermediated securities did have sufficient interest to bring a claim.71 Hildyard J construed the phrase ‘any interest in securities’ as capable of extending to the ultimate beneficial owner of shares under the standard custody chain.72 The same argument must apply to the broad (p. 589) phrase ‘the acquisition by a person of securities . . . or any interest in them’ in section 90(7) of FSMA. 26.46  Claimants embrace any person who acquires the securities, whether directly from the company or its agents, or on the ‘after market’.73 The rationale is that prospectuses are intended to influence not just applications, but also initial dealings on the market. In contrast, liability at common law may be limited to initial subscribers, but not those who purchase on the market.74 Section 90(1)(b) requires the investor to have suffered a loss as a result of any misstatement or omission, entailing a causal requirement. Therefore, it is likely only to be initial rather than later dealings on the market which are affected. 26.47  Directive 84/450 on misleading advertising and Directive 2005/29 on unfair commercial practices are regarded as establishing public regulatory standards and have not to date been considered as applicable to prospectus liability under UK law. There is no reason in principle why a court may not take them into consideration as relevant to civil liability, but they are not a basis of liability in themselves.

VII.  Defectiveness of Prospectus Information 26.48  The misstatements and omissions by reference to which there may be liability are now defined by reference to the Regulation, and not by reference to other provisions in FSMA, and in particular Articles 6 (the prospectus), Article 14(2) (simplified prospectuses), Article 23 (omission of information), and Article 18 (supplements to the prospectus) of the Prospectus Regulation. By section 90(3), the failure includes particulars about a matter which is required information and is converted into a positive statement that there is no such matter.

VIII.  Fault of the Party Who is Sued 26.49  Schedule 10 is the mechanism whereby what looks like a tort of strict liability on the face of section 90 is transmuted into a negligence-based liability. Schedule 10 has not changed since it was originally enacted. As the editors of Gower state, whilst it is expressed to concern ‘exemptions’, in reality it sets out defences. The overall result is to impose liability for misstatements and relevant omissions on the basis of a negligence standard, but with a reversed burden of proof. Section 90 does not resemble other (p. 590) statutory causes of action in FSMA by making a direct analogy with the common law action for breach of statutory of duty. Where that is done, as in section 138D(2), FSMA, the intention From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

is to import common law tortious or delictual rules on causation, quantification of loss, and the statutory power to reduce damages on the basis of contributory fault.75 It is probable that the omission is deliberate, and it is Schedule 10 which provides the limits on the duty to compensate under section 90, including rules analogous to common law ones of causation. 26.50  Therefore if a defendant satisfies the court that he reasonably believed, having made any reasonably necessary enquiries, that (i) the statement was true and not misleading; or (ii) the matter whose omission caused the loss was properly omitted, and that his belief continued until the securities were acquired, or they were acquired before it was reasonably practicable to bring a correction to the attention of persons likely to acquire them, or he had otherwise taken reasonable steps and they were acquired after such a lapse of time that he ought in the circumstances to be reasonably excused, he will not be liable.76

IX.  Causation and Damages 1.  Causation 26.51  Causation is required under section 90, FSMA in an indirect fashion. Under Schedule 10 of FSMA, if the defendant can prove that the claimant who suffered loss knew that the statement was false or misleading, or of the omitted matter, he will also be exonerated.77 That would be a situation where a claimant would be unable to maintain a claim at common law for lack of a causal link between his acquisition of securities and his losses. This is the only requirement of causation, but with the burden being reversed. Further provision is made for reasonable reliance on the statements of experts,78 and exemption is provided for official statements.79 There is also potential exemption where there have been timely corrections.80

2.  Measure of Compensation 26.52  Neither section 90 nor Schedule 10 provide explicit guidance on the measure of compensation under the statutory liability. The measure is presumably intended to be the same as the common law tort measure, namely, to put the claimant back in the situation (p. 591) as if the wrong (the misstatement or omission of information) had not occurred; that is, to restore the status quo. In this context, if the claimant would not have bought the securities had the information been fairly presented, that may be the difference between the price paid for the securities and the value of the securities. The analogy with damages in the tort of deceit, in which a defendant is liable in the tort measure, and for all the direct consequences of the wrong has been adopted at the highest level in Clark v Urquhart,81 a case on the predecessor legislation. In a case on section 84 of the Companies (Consolidation) Act 1908 (the successor to the 1890 Act, and the predecessor to section 90, FSMA, Viscount Sumner held that the measure of damages in the tort of deceit and under the statutory right to compensation were the same: That liability gives rise under the section to a right to ‘compensation.’ With great respect to the Lords Justices, who held otherwise, I cannot hold that compensation here is, either as to the amount recoverable or the mode of measuring it, something different from and even greater than damages. Very shortly after the Directors Liability Act of 1890 was passed, which is reproduced in s. 84 of the Act of 1908, it was stated on high authority that the object of it was to give, as against persons who came within its terms, the remedy which the final decision in Derry v Peek in this House, had limited to those who could prove a case of deceit, and this has since been generally adopted, and in my opinion is correct. I can understand that the Legislature deemed it necessary, as a matter of policy, to make certain persons liable for false statements in a prospectus, even though they did not know them to

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

be false. I can understand that the word ‘compensation,’ which has no technical significance to the contrary, was selected because it represented the difference between the actual value of the debentures taken and the sum paid for them on the face of the prospectus, and at the same time avoided the invidious association of damages with dishonesty in such a connection. What I cannot understand is how the Legislature should have thought fit to impose on a director, who has authorized a misstatement innocently, a larger liability than falls on one who has done it in order to cheat, or to put it in the power of a plaintiff to get more money by omitting a charge of fraud than he could get by proving it. Again, if for some inscrutable reason such was the policy adopted, I cannot see why this gross difference was made to lurk in the use of a colourless and inoffensive word like ‘compensation.’ Great as is the difference between the elements, which constitute the two causes of action, the injury to be made good to the plaintiff is the same, and I see no reason for measuring it in one way in the one case and in a different way in the other.82 26.53  To like effect, Lord Atkin stated: As far as the claim on s. 84 is concerned, I am of opinion that the measure of damages on such a claim is precisely the same as in an action of deceit . . . In my judgment the effect of the section in the original Directors Liability Act was merely to eliminate (p. 592) the element of fraud from the cause of action based on misrepresentation in a prospectus, and to give the same remedy in the statutory conditions for an untrue misrepresentation as for a fraudulent misrepresentation.83 26.54  Pursuing the analogy with the tort of deceit,84 and a controversial extension of it to the statutory tortious claim for negligent misrepresentations,85 it may extend to factors affecting the value of the securities not attributable to the lack of fair presentation, because the claimant will say there would have been no acquisition but for the misstatement or omission. The direct consequences test applies, and there would be no restriction of recoverable losses to those which were reasonably foreseeable by the wrongdoer at the time of tort (the latter being the test for remoteness of damage under English law).

3.  Other Forms of Liability 26.55  By section 90(6), any liability at common law, such as in the tort of deceit or for negligent misstatement, or under section 2(1), Misrepresentation Act 1967, is preserved.86 The latter is limited to a claimant who directly contracts with the maker of misrepresentation,87 limiting its utility in this context.

X.  Evidence 26.56  As stated in section VIII ‘Fault of the Party Who Is Sued’ (para. 26.49) above, the exemptions in Schedule 10 have the effect of reversing the burden of proof on the issues of fault, where he has made reasonably necessary enquiries as to the information included or omitted,88 and causation, where the defendant can prove that the claimant who suffered loss knew that the statement was false or misleading, or of the omitted matter.89

XI.  Disclaimers 26.57  There is no express provision permitting or restricting the use of disclaimers (which go beyond the rules which permit persons to restrict the extent to which they accept responsibility under the PRR). There is no equivalent to the FCA rule in Conduct of (p. 593) Business Sourcebook (COBS) 2.1.2R restricting investment firms from seeking to exclude or limit their duties or liabilities under the regulatory system, largely based on EU measures in that context. The matter would appear to be one for the general law whereby any exemption in a contract or a notice of disclaimer is subject to restrictions on excluding or

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

restricting liability in the Unfair Contract Terms Act 1977, s3(1), Misrepresentation Act 1967,90 and Part 2, Consumer Rights Act 2015.

XII.  Prospectus Summary 26.58  Save as provided for in the Prospectus Regulation, UK law does not have any special statutory rules for liability for the prospectus summary.

XIII.  Directors’ Liability 26.59  Alongside statutory liability under section 90, FSMA for those persons identified in PRR 5.3, which include directors in respect of equity issues, as responsible for the contents of the prospectus, UK law has a long tradition of common law claims for fraud and misrepresentation against directors, although the limitations on the common law claims make the statutory claim more effective in most cases.

1.  The Royal Bank of Scotland Rights Litigation 26.60  Traditionally, there have been few reported cases (and none where a claimant succeeded at an eventual trial) or cases of public note concerning prospectus liability in the English courts, and this—together with presumably a high rate of settlement of such claims —has been attributed to the stringency and effectiveness of the statutory liability claim.91 However, the global financial crisis of 2007/2008 led to one of the largest pieces of litigation in recent years in the English courts, with claims for compensation in the hundreds of millions of pounds sterling arising out of a controversial capital-raising exercise by a UK bank on the eve of the collapse of Lehman Brothers. The principal modern litigation premised on section 90, FSMA was the RBS Rights Litigation, a Group Litigation Order (GLO), under the English Civil Procedure Rules, concerning a rights issue by what was at the time the world’s largest bank, the Royal Bank of Scotland. It was succinctly described by Hildyard J in an early interlocutory skirmish: The actions before the court, and those which it is anticipated may be issued, all of which are subject to a GLO, concern a Rights Issue of shares in the Royal Bank of (p. 594) Scotland (‘RBS’) which was taken up between 15 May 2008 and 6 June 2008 (‘the Rights Issue’). The Rights Issue price was 200p. The rump placement price announced on 9 June 2008 for the shares not taken up in the Rights Issue was 230p. In October 2008, and in the wake of the financial crisis presaged in this country by the earlier collapse of Northern Rock plc and triggered globally by the failure of Lehman Brothers, RBS failed and required emergency public support. By 3 November 2009 it had effectively been nationalised with 84% of its shares owned by the UK Government. The RBS share price has deteriorated very considerably. Many of those who had subscribed for shares pursuant to the Rights Issue have suffered losses amounting to most of the value of their investment in the Rights Issue shares. By the various actions, shareholders seek recovery of their investment losses on the grounds that the prospectus for the Rights Issue was not accurate or complete. They seek to invoke statutory remedies against RBS under s 90 of the Financial Services and Markets Act 2000 (‘FSMA’); and some also, further or in the alternative, seek or may seek recovery against certain of the key RBS directors responsible for that prospectus.92

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

26.61  That last sentence makes clear that the claimants also made claims against the directors personally, including former RBS Chairman, Fred Goodwin. After lengthy case management and interlocutory skirmishing, the claims settled after the trial started in May 2017.93 This entailed that Mr Goodwin was spared giving evidence. It is only this early case management judgment which even articulated the statutory basis of this major piece of group litigation arising from the global financial crisis. Presumably, the clear statutory framework was ultimately a factor in the parties reaching an accommodation, which it is understood was at a figure of £0.82 per share. It is likely that the claims articulated against the directors were based on common law claims.

2.  The Brexit Scenarios Revisited (i)  Scenarios (1): ‘no deal’ 26.62  On this scenario, the UK leaves the EU without a deal and Article 50(3) takes effect on (i) 31 January 2020; or (ii) some later date reflecting a further extension unanimously agreed by the European Council. This is the default position under the Withdrawal Act. HM Treasury has been undertaking an ‘onshoring’ project in respect of financial (p. 595) services legislation and regulation pursuant to the Withdrawal Act 2018 which is intended to ensure a functioning financial services regime at the point where the UK leaves the EU.94 This will require some fifty-three statutory instruments (SIs) made under the Withdrawal Act. Each will amend existing EU financial services legislation, which will be incorporated into UK law by the Withdrawal Act, and also amend related domestic legislation, to ensure that it continues to function effectively after exit day.95 26.63  In respect of the Prospectus Regulation, the UK made a statutory instrument, namely the Official Listing of Securities, Prospectuses and Transparency (Amendment) (EU Exit) Regulations 2019, on 27 March 2019.96 The timing is noteworthy because the extension to Article 50 was only agreed on 22 March, and the Regulations appear to be based on exit day taking place on the original date of 29 March.97 These Regulations are made under section 8(1) and of Schedule 7, paragraph 21, of the Withdrawal Act. The regulations come into force on ‘exit day’.98 In the case of a ‘no-deal’ scenario, the intention was to replicate so far as possible the prospectus regime but make the following changes: •  In the future, prospectuses for use in UK would need to be approved by the FCA even if already approved by an EEA competent authority. •  Prospectuses passported from an EEA State into the UK before exit day may be used until validity expires. 99 •  Technical assessments of prospectus regimes of (other) third countries would be undertaken by the FCA, and equivalence decisions made by HM Treasury. 100 •  Existing (EEA) equivalence decisions will be ‘domesticated’. 26.64  However, this instrument is explicitly based on the Directive regime and it would need to be updated to reflect the introduction of the Prospectus Regulation. In the light of the result of the 2019 General Election it appears highly unlikely this ‘no deal’ Brexit contingency planning will be necessary.

(ii)  Scenario (2): a ‘withdrawal agreement’ 26.65  The UK leaves the EU with a withdrawal agreement under Article 50(2), now being the new withdrawal agreement concluded between the EU and the UK on 19 October 2019. 26.66  In the event of no deal, section 6 of the Withdrawal Act removed the jurisdiction of the CJEU altogether. In contrast, both the original and the revised Withdrawal Agreement (p. 596) provides for the continued jurisdiction of the CJEU during the transition period, including: the continuing binding nature of the CJEU’s decisions; the ability in the UK to make preliminary references pursuant to Article 267, TFEU; and the CJEU’s jurisdiction to From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

determine such preliminary rulings.101 This, among other reasons, necessitates further primary legislation in the shape of the European Union (Withdrawal Agreement) Bill which was re-introduced in December 2019. 26.67  If the Withdrawal Agreement is implemented, the status quo carries on until 31 December 2020, during which period it is envisaged that the EU and the UK will negotiate their future relationship, including a free trade arrangement as sketched out in the Political Declaration for goods and services, including financial services. The Political Declaration, which appeared to envisage a future trading relationship in relation to services which was more ambitious than that required under the parties’ World Trade Organization, whilst short on specific commitments, did state: The Parties should conclude ambitious, comprehensive and balanced arrangements on trade in services and investment in services and non-services sectors, respecting each Party’s right to regulate. The Parties should aim to deliver a level of liberalisation in trade in services well beyond the Parties’ World Trade Organization (WTO) commitments and building on recent Union Free Trade Agreements (FTAs). In line with Article V of the General Agreement on Trade in Services, the Parties should aim at substantial sectoral coverage, covering all modes of supply and providing for the absence of substantially all discrimination in the covered sectors, with exceptions and limitations as appropriate. The arrangements should therefore cover sectors including professional and business services, telecommunications services, courier and postal services, distribution services, environmental services, financial services, transport services and other services of mutual interest.102 And specifically with respect to financial services: The Parties are committed to preserving financial stability, market integrity, investor and consumer protection, and fair competition, while respecting the Parties’ regulatory and decision-making autonomy, and their ability to take equivalence decisions in their own interest. This is without prejudice to the Parties' ability to adopt or maintain any measure where necessary for prudential reasons. The Parties agree to engage in close cooperation on regulatory and supervisory matters in international bodies. Noting that both Parties will have equivalence frameworks in place that allow them to declare a third country's regulatory and supervisory regimes equivalent for relevant purposes, the Parties should start assessing equivalence with respect to each other under these frameworks as soon as possible after the United Kingdom’s withdrawal from the Union, endeavouring to conclude these assessments before the end of June 2020. The Parties will keep their respective equivalence frameworks under review.(p. 597) The Parties agree that close and structured cooperation on regulatory and supervisory matters is in their mutual interest. This cooperation should be grounded in the economic partnership and based on the principles of regulatory autonomy, transparency and stability. It should include transparency and appropriate consultation in the process of adoption, suspension and withdrawal of equivalence decisions, information exchange and consultation on regulatory initiatives and other issues of mutual interest, at both political and technical levels.103 26.68  That was certainly understood by Philip Hammond, Theresa May’s Chancellor of the Exchequer (Minister of Finance) to offer a future trading relationship with the EU in respect of financial services which went beyond the existing equivalence arrangements for

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

third countries.104 At the time of writing, it is not possible to say with much certainty what that future trading relationship will be.

(iii)  Scenario (3): no Brexit 26.69  The UK withdraws its notification under Article 50(2) before the deadline under Article 50(3) takes effect. The UK therefore remained at all times a Member State of the EU, and the position is essentially the same as in all other Member States. On that basis, the position will be as described, with the Prospectus Regulation directly applicable at all times, and FSMA and the FCA Handbook—in particular PRR—as amended in July 2019. This now appears to be highly unlikely.

3.  The Future UK Financial Regulatory Framework 26.70  In his final Mansion House speech on 20 June 2019 Philip Hammond, Theresa May’s Chancellor of the Exchequer (Minister of Finance) launched the Future Regulatory Review, a review of the UK’s future financial services regulatory framework, one which he said would recognize that the EU would remain one of the UK’s major trading partners, whilst also recognizing the more global nature of the UK financial services industry’s future.105 In July 2019, just before the departure of Philip Hammond as Chancellor of the Exchequer, HM Treasury published the first document under the Review, being a call for evidence into the UK’s Financial Services Future Regulatory Framework.106 The future of the UK’s financial regulatory system is therefore again up for consideration.(p. 598)

Footnotes: 1 

Article 49(2), Prospectus Regulation. As a regulation, the instrument is directly applicable in Member States, without the need for domestic implementation. 2 

Compare the approach of the judge in the first major case on Brexit and private law in Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch) (2019) 183 Con LR 167 (Canary Wharf), considering pre-emptively the question whether the EU agency’s twenty-five-year lease of premises in London would remain valid or would be discharged by a supervening change of circumstances—namely Brexit—under the English law doctrine of frustration of contracts. In the course of doing so, Marcus Smith J provided a valuable analysis of the legal aspects of Brexit, both domestically and in terms of EU law and public international law. 3

  For further consideration of the impact of Brexit, see Simon Gleeson, Chapter 17 ‘The Prospectus Regime and Brexit’, this volume. 4

  HM Government, Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community (19 October 2019): https://assets.publishing.service.gov.uk/government/ uploads/system/uploads/attachment_data/file/840655/ Agreement_on_the_withdrawal_of_the_United_Kingdom_of_Great_Britain_and_Northern_Ireland_from_t 5

  Article 50(1), TEU.

6 

Article 50(2), TEU.

7

  Article 50(3), TEU.

8

  Canary Wharf, para [14(4)].

9

  R (on the application of Miller) v Secretary of State for Exiting the European Union [2017] UKSC 5, [2017] AC 61. 10

  Section 1, Withdrawal Act.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

11

  Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community, as endorsed by leaders at a special meeting of the European Council on 25 November 2018, 12

  Article 126, Withdrawal Agreement.

13

  Wightman v Secretary of State for Exiting the European Union, Case C-261/18, [2019] 1 QB 199. 14

  Financial Conduct Authority (FCA), Changes to Align the FCA Handbook with the EU Prospectus Regulation (CP19/6) (January 2019), paras 1.4, 1.5, and 2.1–2.5. 15

  European Union (Withdrawal) Act 2018 (Exit Day) (Amendment) (No. 2) Regulations 2019, SI 2019/859. 16

  Financial Services and Markets Act 2000 (Prospectus) Regulations 2019, SI 2019/1043, 24 June 2019; laid before Parliament 25 July 2019. 17

  FCA, Prospectus Regulation Rules Instrument (FCA 2019/80), 11 July 2019.

18

  HM Government, Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community (19 October 2019) https://assets.publishing.service.gov.uk/government/uploads/ system/uploads/attachment_data/file/840655/ Agreement_on_the_withdrawal_of_the_United_Kingdom_of_Great_Britain_and_Northern_Ireland_from_t 19

  HM Government, Political Declaration setting out the framework for the future relationship between the European Union and the United Kingdom (19 October 2019): https://assets.publishing.service.gov.uk/government/uploads/system/uploads/ attachment_data/file/840656/ Political_Declaration_setting_out_the_framework_for_the_future_relationship_between_the_European_U 20

  Article 126 of the new Withdrawal Agreement.

21

  Section 6(7), Withdrawal Act.

22

  By European Union (Withdrawal) Act 2018 (Exit Day) (Amendment) (No. 2) Regulations 2019, SI 2019/859. 23

  As a result of the European Union (Withdrawal) (No 2) Act 2019; implemented by the European Union (Withdrawal) Act 2018 (Exit Day) (Amendment) (No. 3) Regulations 2019, SI 2019/1423. 24

  Section 3(2), Withdrawal Act.

25

  Section 430(1), FSMA. See also s 121, Financial Services Act 2012.

26

  Collectively, the ‘regulators’: s 3A(2), FSMA 2000, as substituted by s6(1), FSA 2012.

27

  Section 1A(1), FSMA 2000, as substituted by s6(1), FSA 2012.

28

  Official Listing of Securities (Change of Competent Authority) Regulations 2000, SI 2000/968. 29

  FSA Policy Statement, Proposed changes to the Listing Rules: feedback on CP 81 and ‘made’ text (July 2001). For the consultation process see: FSA Consultation Paper, The Transfer of the UK Listing Authority to the FSA—the Draft Listing Rules (December 1999); FSA, Response to CP 37: The Transfer of the UK Listing Authority to the FSA (April 2000); FSA Consultation Paper 81, Proposed Changes to the Listing Rules (January 2001); and FSA Consultation Paper 100, UKLA: information dissemination (June 2001).

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

30

  When originally enacted, FSMA used Roman numerals for parts of the statute, whereas more recent amendments use Arabic numerals. Accordingly, FSMA is now a mix of the two, with the heading of the Official Listing section being Part VI, and s. 73A, FSMA referring to ‘Part 6 rules’. 31

  Financial Services and Markets Act 2000 (Prospectus) Regulations 2019, SI 2019/1043, reg 2. 32

  William Cornish, J. Stuart Anderson, Ray Cocks, Michael Lobban, Patrick Polden, and Keith Smith, The Oxford History of the Laws of England Volume XII: Private Law (Oxford: OUP, 2010), 638–47. 33

  (1889) 14 App Cas 337.

34

  [1964] AC 465.

35

  Paul L. Davies and Sarah Worthington, Gower [—] Principles of Modern Company Law, 10th edn (London: Sweet & Maxwell, 2016) (Gower), para. 25-10. 36

  Gower, para. 25-3.

37

  The latter inserted by the Public Offer of Securities Regulations 1995, SI 1995/1537.

38

  Directive 2003/71/EC.

39

  European Commission, ‘Financial Services: Implementing the Framework for Financial Markets: Action Plan’, COM (1999) 252 (May 1999), attaching the Financial Services Action Plan. 40

  See e.g. HM Treasury, Financial Services Authority and Bank of England, The EU Financial Services Action Plan: Delivering the FSAP in the UK (May 2004) and HM Treasury, Financial Services Authority and Bank of England, After the EU Financial Services Action Plan: A new strategic approach (London: HM Treasury, May 2004). 41

  2004/809/EC.

42

  PR 1.1.6G. See Prospectus Regulations 2005, SI 2005/1433 and successors.

43

  Gower, para. 25-10.

44

  The persons identified in Article 11(1), Prospectus Regulation.

45

  SI 2019/1043, 24 June 2019, coming into force on 21 July 2019.

46

  FCA, Prospectus Regulation Rules Instrument (FCA 2019/80), 11 July 2019, coming into force on 21 July 2019. 47

  Financial Services and Markets Act 2000 (Prospectus) Regulations 2019, SI 2019/1043, regs 4 and 5. 48

  Financial Services and Markets Act 2000 (Prospectus) Regulations 2019, SI 2019/1043, reg 40. 49

  Financial Services and Markets Act 2000 (Prospectus) Regulations 2019, SI 2019/1043, reg 2. 50

  FCA, Changes to align the FAC Handbook with the EU Prospectus Regulation (CP19/6) (January 2019), paras 1.4, 1.5, and 2.1–2.5. 51

  FCA, Changes to align the FCA Handbook with the EU Prospectus Regulation (CP19/6) (PS19/12) (May 2019), para. 1.3. 52

  FCA, Changes to Align the FAC Handbook with the EU Prospectus Regulation (CP19/6) (January 2019), para. 3.3.

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

53

  Financial Services and Markets Act 2000 (Prospectus and Markets in Financial Instruments) Regulations 2018, SI 2018/786., reg 2(2) amending FSMA s86(1)(e) from ‘100,000’ to ‘8,000.000’. 54

  Made under FSMA, s84, as amended by Financial Services and Markets Act 2000 (Prospectus) Regulations 2019, SI 2019/1043, regs 4 and 5. 55

  This was done by FCA, Prospectus Regulation Rules Instrument (FCA 2019/80), Annex A; made under various rule-making powers including FSMA s73A (Part 6 Rules) and FSMA s137A (general rule-making power). 56

  FCA, Changes to Align the FAC Handbook with the EU Prospectus Regulation (CP19/6) (PS19/12) (May 2019), paras 1.11 and 4.3. 57

  PRR 1.1.5G.

58

  Section 85, FSMA is amended by reference to the Prospectus Regulation by Financial Services and Markets Act 2000 (Prospectus) Regulations 2019, SI 2019/1043, reg 6. 59

  As defined in Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001, SI 2001/2256. Regulation 3(1). For the other statutory claims under FSMA, see G McMeel and J Virgo (eds), McMeel and Virgo on Financial Advice and Financial Products, 3rd edn (Oxford: OUP, 2014) (McMeel and Virgo), ch. 6. 60

  In particular, by Financial Services and Markets Act 2000 (Prospectus) Regulations 2019, SI 2019/1043, reg 25. 61

  For a case on what constitutes listing particulars under s90: Hall v Cable and Wireless plc [2009] EWHC 1793 (Comm), [2010] 1 BCLC 95. 62

  Financial Services and Markets Act 2000 (Prospectus) Regulations 2019, SI 2019/1043, reg 32(b). 63

  PRR 5.3.1R–PRR 5.3.10R.

64

  In the FCA Handbook, including PRR, italicized words and phrases are further defined in the Handbook Glossary. 65

  PRR 5.3.7R.

66

  PRR 5.3.8R.

67

  PRR 5.3.9R.

68

  As defined in Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001, SI 2001/2256, reg 3(1). For the other statutory claims under FSMA, including s138D, see McMeel and Virgo, ch. 6. 69

  L. Gullifer and J. Payne (eds), Intermediation and Beyond (Oxford: Hart, 2019).

70

  Law Commission, Intermediated Securities [-] Call for Evidence (August 2019).

71

  The Persons Identified in Schedule 1 of the Claim Form v Tesco plc [2019] EWHC 2858 (Ch). 72

  [2019] EWHC 2858(Ch), paras [79–85] in respect of the phrase in Schedule 10A.

73

  Sections 90(1)(a), 90(4)(a), and (7), FSMA.

74

  Al-Nakib Investments Ltd v Longcroft [1990] 1 WLR 1390. The writ also included a claim under s67, Companies Act 1985 (a predecessor to s90, FSMA), which was not part of the strike-out application: [1990] 1 WLR 1390, 1391. Contrast Possfund Custodian Trustees Ltd v Diamond [1996] 1 WLR 1351, where a claim by purchasers in the after-market was held to

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

be arguable and permitted to go to full trial. Lightman J’s judgment contains a useful history of the topic of prospectus liability: [1996] 1 WLR 1351, 1358–61. 75

  McMeel and Virgo, ch 4.

76

  Schedule 10, para. 1(2) and (3), FSMA.

77

  Schedule 10, para. 6, FSMA.

78

  Schedule 10, paras 2, 3, 4, and 8, FSMA.

79

  Schedule 10, para. 5, FSMA.

80

  Schedule 10, paras 3 and 4, FSMA.

81

  [1930] AC 28.

82

  Clark v Urquhart [1930] AC 28, at 56–57.

83

  ibid., at 67.

84

  See the important case of Smith New Court Securities Ltd v Citibank NA (on appeal from Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd) [1997] AC 254, concerning a deceitful stockbroker. 85

  Royscot Trust Ltd v Rogerson [1991] 2 QB 297 on s2(1), Misrepresentation Act 1967.

86

  As to which, see Gower, paras 25-36–25-40.

87

  Taberna Europe CDOII plc v Selskabet AF1 (formerly Roskilde Bank A/S) [2016] EWCA Civ 1262, [2017] QB 633. 88

  Schedule 10, para. 1(2) and (3), FSMA.

89

  Schedule 10, para. 6, FSMA.

90

  As to which, see First Tower Trustees Ltd v CDS (Superstores International) Ltd [2018] EWCA Civ 1396, [2019] 1 WLR 637. 91

  Eilis Ferran, Principles of Corporate Finance Law (2008), 445–60.

92

  Greenwood v Goodwin [2014] EWHC 227 (Ch), paras [3–7].

93

  Available judgments include Greenwood v Goodwin [2014] EWHC 227 (Ch); In re RBS Rights Litigation [2015] EWHC 3433 (Ch) (expert evidence); In re RBS Rights Litigation [2016] EWHC (Ch), [2017] 1 WLR 1991 (disclosure and legal professional privilege); In re RBS Rights Litigation [2017] EWHC 463 (Ch), [2017] 1 WLR 3539 (disclosure of funders); In re RBS Rights Litigation [2017] EWHC 1217 (Ch), [2017] 1 WLR 4635 (security for costs). 94

  For the principal measure amending FSMA and various significant secondary instruments, see Financial Services and Markets Act 2000 (Amendment) (EU Exit) regulations 2019, SI 2019/632. 95

  HM Treasury, Financial Services (Implementation of Legislation) Bill [—] Updated Policy Note (February 2019), para. 1.3, https://assets.publishing.service.gov.uk/government/ uploads/system/uploads/attachment_data/file/780759/ FS__IoL__Bill_Revised_Policy_Note_web__2_.pdf. 96

  SI 2019/707.

97

  See the definition of ‘qualifying prospectus legislation’ in the regulations, especially reg 10(5). 98

  SI 2019/707, para. 1(2).

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

99

  SI 2019/707, reg 73.

100

  SI 2019/707, schedule 2.

101

  Articles 7(1), 86, 87, 127(1), 127(3), 127(6), 158, 160, and 161, revised Withdrawal Agreement. 102

  Political Declaration, paras 35–36 (in the same terms as paras 27 and 28 in the original Political Declaration). 103

  Revised Political Declaration, paras 32–34 (in the same terms as paras 37–39 in the original Political Declaration). 104

  See https://www.gov.uk/government/speeches/mansion-house-dinner-speech-2019philip-hammond. 105

  ibid.

106

  HM Treasury, Financial Services Future Regulatory Framework Review [—] Call for Evidence: Regulatory Coordination (London: HM Treasury, July 2019).

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Index Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx From: Prospectus Regulation and Prospectus Liability Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx Content type: Book content Product: Financial Law [FBL] Series: Oxford EU Financial Regulation Published in print: 20 March 2020 ISBN: 9780198846529

(p. 599) Index ABN AMRO initial public offering (IPO) 1.06–1.07 ABS (asset-backed securities) 1.17 automobile leases 5.38, 5.41 financial sector issuers, prospectuses for 4.70–4.73 loan-level data 5.39 pool assets 5.36, 5.37 and pure information 5.35–5.45 waterfall code 5.45 accessibility principle 15.49 accounts Accounting Directive 8.30–8.31 accounting standards 8.21–8.22 annual and interim financial reports 8.14–8.20 change of accounting framework 8.23–8.27 IAS 8, impact 8.23–8.27 pro forma adjustments to historical accounting 8.58–8.62 see also financial information Action Plan on Building a Capital Markets Union see CMU (Capital Markets Union) admittance to trading liability of person asking for 18.08–18.11 trigger for publication of prospectus 7.12–7.15 advertisements, new regime 1.26 background 14.03–14.07

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Commission Delegated Regulation 14.21–14.45 amendments and supplements 14.37–14.43 identifying/referencing prospectus 14.23–14.28 security offers, requirement to align information 14.44–14.45 specific content to be included (retail only) 14.29–14.36 cooperation between competent authorities 14.49–14.50 grandfathering, lack of 14.54 IPO prospectuses 2.60 next steps 14.51–14.53 Prospectus Regulation from ‘announcement’ to ‘communication’ 14.11–14.19 general 14.08–14.10 Level 1 requirements 14.20 supervision of regime 14.46–14.48 AFME (Association for Financial Markets in Europe) 9.09, 11.52 AIFMD (Alternative Investment Fund Managers Directive) 1.20, 7.52 AIFs (alternative investment funds) 1.16 allotment concept, stabilization 3.28–3.32 Alternative Investment Fund Managers Directive (AIFMD) 1.20, 7.52 alternative investment funds (AIFs) see AIFs (alternative investment funds) alternative performance measures (APMs) see APMs (alternative performance measures) AMF (Autorité des Marchés Financiers) 13.13, 16.59, 21.15 General Regulation 21.11, 21.12, 21.18 AML Directive (Anti Money Laundering Directive) 12.38 ancillary stabilization concept 3.27 substantive rules for 3.43 Anti Money Laundering Directive see AML Directive (Anti Money Laundering Directive) APMs (alternative performance measures) 1.16, 4.39–4.44, 12.17 applicable law/jurisdiction default jurisdictional regime, rules applicable law for prospectus liability 19.30–19.38 CJEU case law 19.18–19.29 cross-border liability and Brussels I-bis regime 19.11–19.17 deviation from 19.50–19.65 prospectus liability 19.10–19.29 reform, need for 19.39–19.49 importance, reasons for 19.09–19.09 (p. 600) issuer choice regime 19.50–19.65 jurisdictional agreements in securities litigation 19.52–19.60 remaining issues in 19.61–19.65 prospectus contents 9.62–9.71 approval of prospectus 1.28 completeness 16.27–16.28 comprehensibility 16.30–16.34 consistency 16.29 definitions 16.20–16.22 initial public offering (IPO) 2.46 national competent authorities, role 16.04–16.46 scrutiny 16.23–16.38 Single Market of Financial Services 16.12

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

stocktaking 16.35–16.38 timing and procedure 16.39–16.46 transfer of approval 16.10–16.19 arbitrage equity markets 16.102–16.109 Fiat Chrysler example 16.108, 16.109 in prospectus regime 16.85–16.89 ASIC (Australia Securities and Investments Commission) 15.09 asset-backed securities (ABS) see ABS (asset-backed securities) audit requirement 8.63, 8.78–8.84 Australia Securities and Investments Commission see ASIC (Australia Securities and Investments Commission) average investor contents of prospectus 9.22–9.24 Germany 20.34–20.36, 20.38 materiality of information to assessment by 20.38 BaFin (Federal Financial Supervisory Authority), Germany 16.60, 20.07, 20.20, 20.25, 20.40 bail-innable securities 4.14–4.16, 4.74–4.77 Bank Recovery and Resolution Directive (BRRD) see BRRD (Bank Recovery and Resolution Directive) bank regulator public disclosure system 5.97–5.109 Basel Committee on Banking Supervision 5.98, 5.100 base prospectus formats, final terms and supplements 13.15–13.16 offer document content and Brexit 17.48–17.51 summary and risk factors 12.48–12.55 Benchmarks Regulation (BMR) 4.49–4.55 Bonneau, Thierry 1.33 Brexit adoption of EU regulations into UK law 17.20 complications arising from 1.33 enacting transition 17.12–17.22 EU (Withdrawal) Act 2018 17.14, 17.16, 17.19, 26.09–26.11 exit day 17.14, 17.17, 17.51 hard 1.16, 4.79, 4.80, 4.83 listings 17.05–17.06 listing documents and prospectuses 17.23–17.26 listing particulars 17.33–17.35 offer document content 17.43–17.51 base prospectus 17.48–17.51 summary 17.46–17.47 and prospectus regime 17.01–17.17–53 EU approach 4.79–4.80 home Member State 17.36–17.37 language 17.52 listings see above offer document content 17.43–17.51 Prospectus Regulation 26.01–26.14 public offers 17.29–17.32 reoffers and cascades 17.38–17.42 securities 17.28

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

UK approach 4.81–4.83 when prospectus required 17.27 Prospectus Regulation 26.01–26.14 civil liability under 26.21 role of FSA/FCA 26.14 scenarios 26.06–26.08 UK financial services legislation 26.12–26.13 referendum of 2016, impact on the EU 1.02, 1.10 scenarios directors’ liability 26.62–26.69 Prospectus Regulation 26.06–26.08 third-country regime 1.29 transition process enacting 17.12–17.22 method of action 17.07–17.11 Withdrawal Agreement 17.05, 17.06, 17.07 concluding 17.16 see also United Kingdom BRRD (Bank Recovery and Resolution Directive) 1.16, 4.14–4.16 bail-innable securities 4.14–4.16, 4.74–4.77 Brussels I-bis regime 19.11–19.17 Bundesanstalt für Finanzdienstleistungsaufsicht see BaFin (Federal Financial Supervisory Authority), Germany Busch, Danny 1.31 (p. 601) Capital Markets Commission (CMC) 24.15 Capital Markets Union (CMU) see CMU (Capital Markets Union) Capital Requirements Directive/Capital Requirements Regulation (CRD/CRR) see CRD/ CRR (Capital Requirements Directive/Capital Requirements Regulation) cascades and reoffers 17.38–17.42 causation, prospectus liability absence of 20.58–20.61 France 21.33–21.37 Germany 20.47–20.51, 20.58–20.61 Italy 22.27–22.32 Luxembourg 25.70–25.75 the Netherlands 24.34–24.35 Spain 23.50–23.51 United Kingdom 26.51 CBI (Central Bank of Ireland) 15.47, 16.17 CDR (Commission Delegated Regulation) 1.15, 2.04, 3.02, 4.62, 9.32, 9.51, 9.72, 14.21– 14.45 advertisements, new regime 14.01, 14.07, 14.21 amendments and supplements 14.37–14.43 Annexes 2.31, 2.41, 4.58, 8.02 ‘light’ disclosure regimes 11.37, 11.45 secondary offerings/listings 11.45–11.46 securities not covered 18.61 audit requirement 8.63 contents of prospectus 8.02, 8.08–8.13, 8.44 disclosure regime 8.75 draft 8.45, 8.83, 12.16, 12.66, 12.68 formats, prospectuses 2.05

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

historical financial information 8.15 identifying/referencing prospectus 14.23–14.28 IPOs (initial public offerings) 2.61, 2.69, 3.39 key financial information 12.16 ‘light’ disclosure regimes 11.10, 11.45–11.56 materiality 9.13, 9.25 materiality not defined in 9.18–9.19 obligation to publish prospectuses 7.14 profit forecasts and estimates 8.68, 8.70 pro forma financial information 8.37, 8.39, 8.41, 8.43–8.44, 8.45, 8.47 prospectus contents 8.02, 8.12 prospectus formats 13.03 Prospectus Regulation 4.58 secondary offerings/listings 11.01 security offers, requirement to align information 14.44–14.45 and Spain 23.27, 23.39 specific content to be included (retail only) 14.29–14.36 stabilization, in IPOs 3.02, 3.39 summary and risk factors 12.16 see also DCR (Delegated Commission Regulations) CDS (credit default swaps) 1.17, 5.67–5.77 Norske Skog example 5.73 positions 5.74, 5.75 Windstream Services example 5.71–5.72 central securities depository (CSD) 9.62 centralization versus competition 16.115–16.123 Centre for Research in Security Prices (CRSP) 10.11 CESR (Committee of European Securities Regulators) 9.05, 15.11 approval of prospectus 16.13, 16.14 prospectus contents 8.08, 8.22, 9.05 CFSA (Consolidated Financial Services Act) 22.09, 22.13 CIUs (collective investment units) 4.68 civil liability principle 23.06 CJEU (Court of Justice of the European Union) prospectus liability 1.31 CMC (Capital Markets Commission) 24.15 CMU (Capital Markets Union) Action Plan 1.01, 11.05 information document 1.03 plans 1.10 SME financing 10.02, 10.03, 10.05 supervisory convergence 1.09 unified, lack of harmonization issue 1.21 competent authorities 16.01 secondary offerings/listings 11.02–11.06 CNMV (Spanish National Securities Markets Committee) 1.37, 16.61, 18.80, 23.05 disclaimers 23.55 entitlement to sue 23.41 misleading information, persons liable 23.30, 23.32, 23.35 COBS (Conduct of Business Sourcebook) 26.57 collective investment units (CIUs) 4.68 co-managers, liability of

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

the Netherlands 24.23 Comisión National del Mercato de Valores see CNMV (Spanish National Securities Markets Committee) Commission Delegated Regulation see CDR (Commission Delegated Regulation) Committee of European Securities Regulators (CESR) see CESR (Committee of European Securities Regulators) company law, tying prospectus regime to 16.98–16.101 (p. 602) competent authorities 1.28 competition versus centralization 16.115–16.123 Conduct of Business Sourcebook (COBS) 26.57 conflict mineral rule 5.81 conflict-of-law rule 1.32, 19.38 contents of prospectus alternative performance measures (APMs) 4.39–4.44 applicable law/jurisdiction 9.62–9.71 average investor 9.22–9.24 Benchmarks Regulation (BMR) 4.49–4.55 beyond the Prospectus Regulation 4.31–4.77 Commission Delegated Regulation 8.08–8.13 CPD 9.22, 9.23, 9.37 Credit Rating Agencies (CRA) Regulation 4.56–4.58 ESMA Recommendations 8.08–8.13 EU Growth Prospectus 10.20–10.25 exculpations 9.53–9.61 financial sector issuers 4.67–4.77 funding needs 9.39–9.41 historical financial information accounting standards 8.21–8.22 annual and interim financial reports 8.14–8.20 change of accounting framework 8.23–8.27 equity and retail non-equity issuers, removal of requirement for 8.32–8.33 IAS 8, impact 8.23–8.27 incorporation by reference 8.28–8.29 Operating and Financial Review requirement 8.30–8.31 joint and several liability for the Netherlands 24.26–24.28 Spain 23.37 legal background 8.08–8.13 Market Abuse Regulation 4.45–4.48 materiality test see materiality MiFID II and MiFIR 4.32–4.38 principal rule 9.03–9.05 pro forma financial information 8.34–8.64 adjustments to historical accounting 8.58–8.62 audit requirement 8.63 issuers required to provide 8.36–8.41 preparation and presentation 8.50–8.57 relating to an entity other than the issuer 8.42–8.49 profit forecasts and estimates audit requirements, deletion 8.78–8.84 definitions 8.68–8.73

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

disclosure requirements 8.74–8.77 equity and retail non-equity issuers 8.65–8.67 relevance 8.65–8.67 Prospectus Regulation 8.08–8.13 Q&As 8.08–8.13 Securitization Regulation 4.59–4.62 sensitive information, possibilities for omitting 9.42–9.52 Take-over Bid Directive 1.16, 4.63–4.66 transparency on financial information 4.39–4.44 Court of Justice of the European Union see CJEU (Court of Justice of the European Union) courts, civil assessment of own compliance with EU prospectus rules 18.81–18.82 compared with EU prospectus rules 18.28–18.67 effectiveness (effet utile) principle 18.29–18.32 general 18.28 justification grounds 18.36 materiality 18.33–18.35 soft law 18.37 flexibility 18.28–18.41 private investors, cases involving 18.81–18.82 strictness, level of 18.42–18.67 Immofinanz and Genil v Bankinter 18.42 Nationale-Nederlanden v Van Leeuwen 18.44–18.55 CRA (Credit Rating Agencies) Regulation 4.56–4.58 CRD/CRR (Capital Requirements Directive/Capital Requirements Regulation) 1.16, 4.14 regulatory capital 4.67–4.69 credit default swaps (CDS) see CDS (credit default swaps) Credit Rating Agencies (CRA) Regulations 4.56–4.58 criminal and administrative sanctions 16.67–16.71 cross-border prospectus liability 19.11–19.17 CRSP (Centre for Research in Security Prices) 10.11 CSD (central securities depository) 9.62 CSSF (Commission de Surveillance du Secteur Financier), Luxembourg incorporation by reference 15.47 linguistic regime 16.65 misleading information, persons liable 25.52–25.25 persons responsible for the prospectus 25.31 summary 25.78 (p. 603) damages, prospectus liability entitlement to sue France 21.24–21.25 Germany 20.27–20.32 Italy 22.22–22.23 the Netherlands 24.34–24.35 purchasers of securities 20.27 Spain 23.38–23.41 time limits and limitation of liability 20.28–20.32 United Kingdom 26.45–26.47 France 21.24–21.25, 21.33–21.37 Germany 20.27–20.32, 20.52–20.57

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Italy 22.22–22.23, 22.27–22.32 Luxembourg 25.56–25.63, 25.70–25.75 misleading information, persons liable France 21.24–21.25 Germany 20.27–20.32 Italy 22.22–22.23 Luxembourg 25.56–25.63 the Netherlands 24.29–24.30 Spain 23.38–23.41 United Kingdom 26.45–26.47 the Netherlands 24.29–24.30, 24.34–24.35 Spain 23.38–23.41, 23.50–23.51 United Kingdom entitlement to sue 26.45–26.47 measure of compensation 26.52–26.54 DAO (decentralized autonomous organization) 6.19, 6.22 DCC (Dutch Civil Code) 7.11, 18.53, 24.01 private law, influence of EU prospectus rules on 18.33, 18.41, 18.50–18.53 DCR (debt-service coverage ratio) 9.51 DCR (Delegated Commission Regulation) 9.32 see also CDR (Commission Delegated Regulation) decentralized autonomous organization (DAO) 6.19, 6.22 default jurisdictional regime for prospectus liability 19.10–19.29 applicable law 19.30–19.38 CJEU case law 19.18–19.29 cross-border liability and Brussels I-bis regime 19.11–19.17 deviation from 19.50–19.65 reform, need for 19.39–19.49 see also applicable law/jurisdiction delegated acts and New Regulation 13.03–13.06 Delegated Regulation see CDR (Commission Delegated Regulation) directors, prospectus liability France 21.43 Germany 20.65 Italy 22.36 Luxembourg 25.79 Spain 23.26 United Kingdom 26.59–26.70 Brexit scenarios 26.62–26.69 future financial regulatory framework 26.70 Royal Bank of Scotland rights litigation 26.60–26.61 disclaimers, prospectus liability France 21.39–21.41 Germany 20.63 Italy 22.34 Luxembourg 25.77 the Netherlands 24.37–24.38 Spain 23.54–23.55 United Kingdom 26.57 Disclosure and Transparency Rules 13.60 disclosure paradigm (American)

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

decoupling/new extra-company informational asymmetries 5.62–5.77 credit default swaps (CDS) 5.67–5.77 overview 5.62–5.66 defining 5.01 ‘Descriptive Mode’ and ‘Intermediary Depictions’ 5.13–5.18 financial innovation, impact on conventional understandings alternative data 5.46–5.52 asset-backed securities (ABS) 5.35–5.45 complexity and need for a portfolio of information modes 5.19–5.52 decoupling/new extra-company informational asymmetries 5.62–5.77 descriptive mode 5.19–5.25, 5.29 exchange-traded funds (ETFs) 5.53–5.61 hybrid mode 5.28, 5.31 limitations of descriptive mode 5.19–5.25 portfolio approach 5.34 transfer mode 5.28, 5.30, 5.33, 5.40, 5.44 overview 5.10–5.12 SEC’s approach to information 5.13–5.18 Securities Act 1933 5.12 see also ABS (asset-backed securities); disclosure regime; United States disclosure regime 1.20 ‘10b-5 disclosure letter’ 2.38 changing regulatory ends and the SEC 5.78–5.86 ‘light’ see ‘light’ disclosure regime new bank regulator disclosure universe 5.87–5.109 (p. 604) paradigm see disclosure paradigm (American) parallel disclosure and incorporation by reference 15.14–15.26 profit forecasts and estimates 8.74–8.77 proportionate, for statutory rights issues 1.23 stabilization, in IPOs 3.44–3.50 standards 1.29 systemic risk 5.87–5.109 Dombrovskis, Valdis 1.02 ‘draw-down’ prospectus and incorporation by reference 15.46–15.49 DTR (Disclosure and Transparency Rules) 13.60 due diligence, IPOs 2.29–2.38 due process and sanctions 16.72–16.75 Dutch Civil Code (DCC) 7.11, 18.33, 18.41, 18.50–18.53, 24.01 Dutch Financial Supervision Act (Wft) 18.70 EBITDA (earnings before interest, taxes, depreciation, and amortization) 4.39, 8.71, 8.72 ECB (European Central Bank) 1.16, 4.70–4.71 ECSP (European Crowdfunding Service Providers) 10.12, 16.120 EEA (European Economic Area) 1.25 advertisements, new regime 14.04 Brexit and prospectus regime 17.31, 17.32 directors’ liability, UK 26.63 geographical validity of prospectuses 16.47 legal basis for liability, UK 26.27 materiality 9.15 private law, influence of EU prospectus rules on 18.01

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

prospectus formats 13.30, 13.39, 13.81 Prospectus Regulation compared with other EU legislation 4.49, 4.79 effectiveness (effet utile) principle 9.57 effective legal protection of investor 24.16, 24.34, 24.37 Germany 20.12, 20.54 the Netherlands 24.12, 24.18 private law, influence of EU prospectus rules on 18.75–18.81 relativity requirement 18.68, 18.69, 18.71 unlawfulness and imputability 18.29, 18.32, 18.36, 18.39, 18.42 Spain 23.19 EFTA (European Free Trade Association) 4.79 EGC (emerging growth company) 13.29 ejusdem generis rule 6.09, 6.30, 6.31 ELTIF (European long-term investment fund) 10.12 emerging growth company (EGC) 13.29 entitlement to sue, prospectus liability France 21.24–21.25 Germany genuine link to Germany requirement 20.29 no relevance to level of sophistication of purchasers 20.30–20.32 purchasers of securities 20.27 time limits and limitation of liability 20.29–20.32 Italy 22.22–22.23 Spain 23.38–23.41 equity securities 16.97–16.114 alternative connecting factors 16.110–16.114 arbitrage techniques, regulatory 16.102–16.109 equity and retail non-equity issuers profit forecasts and estimates, relevance 8.65–8.67 selected financial information, removal of requirement to include 8.32–8.33 equity securities note 11.55 registration document 11.47–11.53 tying prospectus regime to company law 16.98–16.101 see also securities error doctrine 9.17 ESAs (European supervisory authorities) 16.117 ESG (environmental, social, and governance) 5.09, 5.86 ESMA (European Securities and Markets Authority) competition versus centralization 16.119, 16.121 coordination efforts 1.28 Guidelines, risk factors 1.07, 1.16, 9.28, 12.41–12.42, 12.82 incorporation by reference 15.11, 15.33, 15.35, 15.38 initial coin offerings 6.27 initial public offering (IPO) 2.60, 2.64, 2.69 key financial information 12.16 ‘light’ disclosure regimes 11.44, 11.45–11.56 omission of information 15.53, 15.57 potential reforms 1.10 prospectus contents 8.08, 8.13, 8.15–8.17, 9.05 accounting standards 8.22 audit requirement 8.63 disclosure regime 8.74, 8.77

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

pro forma financial information 8.47 profit forecasts and estimates 8.65, 8.67, 8.71, 8.73 Q&As 1.26, 8.13, 8.17, 14.55, 16.106 Recommendations 8.08–8.13 (p. 605) Risk Factor Final Report 2.64 risk factors 12.40 Securities and Markets Stakeholders’ Group (SMSG) 8.81, 16.114 ETFs (exchange-traded funds) 1.17, 5.53–5.61 EU Growth Prospectus see Growth Prospectus (EU) Eurobonds 16.105 European Banking Union (EBU) see EBU (European Banking Union) European Central Bank (ECB) 1.16, 4.70–4.71 European Crowdfunding Service Providers (ECSP) 10.12, 16.120 European Economic Area (EEA) see EEA (European Economic Area) European Free Trade Association (EFTA) 4.79 European long-term investment fund (ELTIF) 10.12 European Parliament ECON Report 16.114 European Savings and Retail Banking Group see ESMA (European Securities and Markets Authority) European Securities and Markets Authority (ESMA) see ESMA (European Securities and Markets Authority) European Union Brexit see Brexit; United Kingdom financial instruments, coordination with Prospectus Regulation 1.27 bail-innable securities 4.14–4.16, 4.74–4.77 home Member State 4.25–4.27 legal implications 4.06–4.30 PRIIPs Regulation 4.28–4.30 ‘qualified investors’ 4.17–4.20 regulated markets 4.21–4.24 securities 4.07–4.16 initial coin offerings (ICOs) and Securities Regulation current approaches 6.25–6.29 purposive approach 6.37–6.40 risk-based approach 6.30–6.36 Prospectus Regulation see NPR (New Prospectus Regulation); Prospectus Regulation Securities Regulation 6.25–6.40 see also EEA (European Economic Area) evidence, prospectus liability France 21.38 Germany 20.62 Italy 22.33 Luxembourg 25.76 the Netherlands 24.36 Spain 23.52–23.53 United Kingdom 26.56 exchange-traded funds (ETFs) see ETFs (exchange-traded funds) exemptions to obligation to publish prospectuses admittance to trading 7.38–7.46 combination of 7.47 generally 7.18–7.19

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

offer of securities to the public 7.28–7.37 security type 7.20–7.24 small offerings 7.25–7.27 subsequent resale if used 7.55–7.57 see also obligation to publish prospectuses; triggers for publication of prospectuses eXtensive Markup Language (XML) 5.39 FASB (Financial Accounting Standards Board) 9.29 FCA (Financial Conduct Authority), UK Brexit and prospectus regime 17.20, 17.43, 17.51, 26.04 Brexit legislation 4.79, 4.83 IPO process 2.28 new rules 26.29–26.30 prospectus formats 13.13, 13.60 role in Brexit 26.14 see also FCA (Financial Conduct Authority) Ferrarini, Guido 1.18 Filecoin 1.18 Financial Accounting Standards Board (FASB) 9.29 Financial Conduct Authority (FCA), UK see FCA (Financial Conduct Authority), UK financial information accounting standards 8.21–8.22 additional relating to an entity other than the issuer 8.42–8.49 requirement to provide 8.36–8.41 audit requirement 8.63, 8.78–8.84 historical 8.14–8.33 annual and interim financial reports 8.14–8.20 change of accounting framework 8.23–8.27 IAS 8, impact on 8.23–8.27 incorporation by reference 8.28–8.29 issuers of equity and retail non-equity 8.32–8.33 pro forma adjustments to historical accounting 8.58–8.62 profit forecasts and estimates 2.72 initial public offering (IPO) 2.16 Operating and Financial Review see OFR (operating and financial review) (p. 606) pro forma 8.34–8.63 adjustments to historical accounting 8.58–8.62 preparation and presentation 8.50–8.57 profit forecasts and estimates audit requirement, deletion 8.78–8.84 defining 8.68–8.73 disclosure requirements 8.74–8.77 equity vs non-equity issuance 8.65–8.67 relevance 8.65–8.67 reporting 1.25, 2.16, 4.39–4.44 selected, removal of requirement to include for certain issuers 8.32–8.33 Transparency Directive 1.25, 4.39–4.44 uniform registration document (URD) 1.25 financial regulators, liability and EU prospectus rules assessment by regulator 18.83–18.84 Italy 18.85 Nikolay Kantarev v Balgarska Narodna Banka 18.86

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Prospectus Regulation, Art. 20(9) 18.87–18.88 financial sector issuers, prospectuses for 4.67–4.77 asset-backed securities (ABS) 4.70–4.73 CRD/CRR (Capital Requirements Directive/Capital Requirements Regulation) 4.67– 4.69 Financial Services and Markets Act (FSMA), UK see FSMA (Financial Services and Markets Act) 2000, UK Financial Services Authority (FSA), UK 26.14 Financial Services Committee (FSC) 16.12 Financial Stability Oversight Council (FSOC) 5.95, 5.96 FinHub (Strategic Hub for Innovation and Financial Technology) 6.24 formats, prospectuses 1.25 base prospectuses and final terms/supplements 13.15–13.16 initial public offering (IPO) 2.47 new 13.18–13.61 EU Growth Prospectus, introduction of 13.23–13.29 secondary issuances, simplified prospectus for 13.19–13.22 universal registration document 13.30–13.61 practical uses 13.07–13.17 simplified prospectus see simplified prospectus stand-alone prospectuses 13.09–13.10 summary 12.12–12.14, 13.17 tri-partite prospectuses and ‘old’ shelf registration 13.11–13.14 FOTM (fraud-on-the-market theory) 22.27, 24.35 France 1.33, 1.35, 1.36 causation 21.33–21.37 damages 21.24–21.25, 21.33–21.37 defectiveness of information 21.26–21.29 defining ‘prospectus’ 21.11 directors 21.43 disclaimers 21.39–21.41 evidence 21.38 fault of party sued 21.30–21.32 legal basis for liability 21.05–21.10 misleading information entitlement to sue 21.24–21.25 persons liable for 21.19–21.23 responsible persons 21.12–21.18 summary, prospectus 21.42 fraud-on-the-market theory (FOTM) 22.27, 24.35 frequent user status 1.25 frustration of contracts doctrine 26.01 FSMA (Financial Services and Markets Act) 2000, UK and Brexit 17.21, 26.12–26.14 defining ‘prospectus’ 26.36 legal basis for liability 26.16, 26.20–26.22, 26.31–26.34 principal statutory provision under 26.34–26.35 FSOC (Financial Stability Oversight Council) 5.95, 5.96 funding needs 9.39–9.41 GAAP (generally accepted accounting principles) 2.16, 5.109, 8.23, 8.25 geographical demarcation 7.16–7.17

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

geographical validity of prospectuses 16.47–16.53 Germany 1.33, 1.35–1.37 causation 20.47–20.51 absence of 20.58–20.61 civil law 20.10 damages 20.27–20.32, 20.52–20.57 defectiveness of information 20.33–20.40 average investor standard 20.34–20.36, 20.38 failure to publish 20.40 failure to update 20.39 incorrect or incomplete 20.37 materiality of information to assessment 20.38 defining ‘prospectus’ 20.06–20.10 determination of extent of loss or damage 18.78 directors 20.65 (p. 607) disclaimers 20.63 effectiveness (effet utile) principle 20.12, 20.54 entitlement to sue genuine link to Germany requirement 20.29 limitation to purchases within six months after public offering 20.29–20.32 no relevance to level of sophistication of purchasers 20.30–20.32 purchasers of securities 20.27 evidence 20.62 failure to publish 20.26, 20.45 fault of party sued 20.41–20.45 issuer 20.42 issuing consortium 20.44 offeror 20.43 and Federal Financial Supervisory Authority (BaFin) 16.60, 20.07, 20.20, 20.25, 20.40, 20.63 investment atmosphere doctrine 22.27 legal basis for liability 20.02–20.05 historical development 20.02–20.04 nature of prospectus liability 20.05 and materiality 9.29, 9.36–9.38 misleading information, persons liable 20.12–20.27 entitlement to sue for damages caused 20.27–20.32 failure to publish prospectus 20.26 persons assuming responsibility for defects 20.13–20.21 persons initiating the issuance of defective prospectus 20.22–20.25 responsible persons 20.11 Securities Prospectus Act (WpPG) 20.Annex statutory liability 20.07–20.09 summary prospectus 20.64 GFC (global financial crisis) 10.01 Brexit and prospectus regime 26.12 directors’ liability, UK 26.61 disclosure paradigm (American) 5.09, 5.35 parallel disclosure and regulatory ends 5.86, 5.88, 5.89, 5.91 summary 26.60 GLO (group litigation order) 26.60 global financial crisis see GFC (global financial crisis)

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

greenshoe option, stabilization 3.27, 3.33, 3.43 group litigation order (GLO) 26.60 Growth Prospectus (EU) alternative view 10.31 content 10.20–10.25 critical evaluation 10.27, 10.28 exemptions 2.57 introduction of 13.23–13.29 limitations of 1.22 logic of Regulation 10.14–10.16 new prospectus formats 13.01 perimeter of regime 10.17–10.19 summary and risk factors 12.65–12.70 see also ‘light’ disclosure regimes; SMEs (small and medium-sized enterprises) guarantor key financial information 12.16–12.20 responsible persons 18.12 Spain 23.27–23.28 historical financial information accounting standards 8.21–8.22 annual and interim financial reports 8.14–8.20 change of accounting framework 8.23–8.27 equity and retail non-equity issuers, removal of requirement for 8.32–8.33 IAS 8, impact 8.23–8.27 incorporation by reference 8.28–8.29 Operating and Financial Review requirement 8.30–8.31 pro forma adjustments to historical accounting 8.58–8.62 home country control principle 15.76, 16.50, 16.86 home Member State Brexit and prospectus regime 17.36–17.37 references to in the Prospectus Regulation 4.25–4.27 135-day rule 2.20 IAS (international accounting standard) 8.23–8.27 IASB (International Accounting Standards Board) 9.29 ICAEW (Institute of Chartered Accountants in England and Wales) pro forma financial information 8.47, 8.48, 8.50, 8.57, 8.60 ICMA (International Capital Markets Association) 4.37, 4.38, 11.52, 15.18 ICOs (initial coin offerings) 1.18 counter-party risks 6.33 Crypterium (CRPT) case 6.28 and EU Securities Regulation 6.25–6.40 financial risks 6.33 IPOs contrasted 6.39, 6.41 legal issues 6.14–6.16 market risks 6.33 non-financial risks 6.34 (p. 608) PAquarium case 6.27 profit to cryptoasset (PQT) holders 6.27 projects 6.35 purposive techniques 6.37–6.40 token categories 6.17–6.20

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

and US Securities Regulation 6.21–6.24 utility tokens 6.27 IFAC (International Federation of Accountants) 8.63, 8.80 IFRS (international financial information standards) 2.16, 17.44, 17.45 Conceptual Framework 9.29 historical financial information 8.21–8.26 materiality 9.28–9.30 pro forma financial information 8.53 incorporation by reference ‘draw-down’ prospectus 15.46–15.49 flexibility, improving 15.14–15.26 historical financial information 8.28–8.29 inside information, parallel disclosure 15.14–15.26 Market Abuse Regulation (MAR) 15.16, 15.17 national competent authorities (NCAs) 15.45 New Prospectus Regulation (NPR) 15.15, 15.28, 15.33, 15.49 Packaged Retail and Insurance-based Investment Products (PRIIPs) 15.16 Prospectus Directive, under 15.08–15.13 Prospectus Regulation (Art. 19) 15.27–15.45 supplements, assessing need for 15.14–15.26 and URD 13.57–13.61 withdrawal rights 15.24 incorporation doctrine 19.12 information defectiveness of average investor standard 20.34–20.36, 20.38 failure to publish 20.40 failure to update 20.39 France 21.26–21.29 Germany 20.33–20.40 incorrect or incomplete 20.37 Italy 22.24–22.25 materiality of to assessment by average investor 20.38 the Netherlands 24.31–24.32 Spain 23.42–23.45 United Kingdom 26.48 failure to publish 20.40, 20.45 failure to update 20.39 financial see financial information misleading, persons liable entitlement to sue for damages caused see misleading information, persons liable failure to publish prospectus 20.26 France 21.19–21.25 Germany 20.12–20.26 Italy 22.16–22.23 Luxembourg 25.37–25.55 the Netherlands 24.19–24.28 persons assuming responsibility for defects 20.13–20.21 persons initiating the issuance of defective prospectus 20.22–20.25 Spain 23.21–23.37 non-financial 1.21

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

non-material, in private law 18.67 obligations under EU prospectus rules basic principle 18.18–18.21 elaboration of basic principle 18.22–18.23 risk factors 18.24 summary 18.25–18.27 offers of securities, aligning information concerning 14.44–14.45 omission 1.27 material information 15.05–15.07 overview under NPR Art 18 15.50–15.54 sensitive, possibility to omit 9.42–9.52 up-to-date information principle 15.09 see also inside information initial coin offerings (ICOs) see ICOs (initial coin offerings) initial public offering (IPO) see IPO (initial public offering) inside information 15.14–15.26 insider trading 3.17, 3.51–3.53 Institute of Chartered Accountants in England and Wales (ICAEW) see ICAEW (Institute of Chartered Accountants in Wales) international accounting standard see IAS (international accounting standard) International Capital Markets Association (ICMA) 4.37, 4.38, 11.52, 15.18 International Federation of Accountants (IFAC) 8.63, 8.80 International Financial Information Standards) see IFRS (international financial information standards) International Organization of Securities Commissions (IOSCO) 8.10, 10.01, 13.61, 18.23 International Standard on Assurance Engagements 8.63 International Standard on Review Engagements (ISRE) 8.19 investment atmosphere doctrine, Germany 22.27 (p. 609) investment institutions prospectus requirement 7.50–7.54 IOSCO (International Organization of Securities Commissions) 8.10, 10.01, 13.61, 18.23 IPO prospectuses completing 2.58–2.61 drafting 2.40–2.44 drafting sessions 2.45 exemptions 2.53–2.61 cross-listing 2.56 Growth Prospectus (EU) 2.57 qualified investors 2.54 takeover and mergers 2.55 format 2.47 and Prospectus Regulation 2.62–2.73 proceeds, use of 2.67–2.69 profit forecasts and estimates 2.72–2.73 risk factors 2.63–2.66 summary in IPO prospectus 2.70–2.71 publication and reading time 2.51–2.52 retail communication 2.60 review and approval 2.46 review period 2.48–2.50 roadshow presentation 2.59 see also IPOs (initial public offerings) IPOs (initial public offerings)

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

‘144A’ 2.38 ABN AMRO 1.06–1.07 analyst presentation and research reports 2.25–2.29 business and strategy 2.17 Capital Markets Union (CMU) 11.03 complexity 3.01 connected analysts 2.25 corporate governance and pre-IPO restructuring 2.15 disclosure 2.18–2.38 due diligence 2.29–2.38 early-look and pilot fishing meeting 2.24 economics 3.04–3.10 economic theory 1.15 overpricing and stabilization theories 3.10 and underpricing 3.07–3.09 European regulatory regime 3.17–3.53 allotment concept 3.28–3.32 greenshoe option 3.27, 3.33, 3.43 insider dealing and market manipulation 3.17 overallotment facility concept 3.28–3.32, 3.43 stabilization see below execution 2.18–2.38 features 3.01 financial position and prospects procedures (FPPPs) 2.36 financial reporting 2.16 ICOs contrasted 6.39, 6.41 implications of changes 2.65–2.66, 2.73 listing venue 2.13 management presentation 2.23 offer structure 2.14 overallotment facility concept 3.28–3.32 overpricing 3.10 preparation 2.12–2.17 process 1.14 prospectuses see IPO prospectuses readiness 2.12–2.17 reasons for 2.08–2.11 stabilization ancillary 3.27, 3.43 disclosure regime 3.44–3.50 and insider trading 3.51–3.53 notion and purpose 3.21–3.26 period of 3.34–3.41 price conditions 3.42 substantive rules for 3.34–3.43 theories 3.10 structure 3.05–3.06 underpricing 3.07–3.09 United States US regulatory regime 3.11–3.16 US tranche 1.23

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

‘winner’s curse model’ 3.08 ISRE (international standard on review engagements) 8.19 issuer of securities auditor, the Netherlands 24.25 directors 23.26 of equity and retail non-equity 8.32–8.33 financial information relating to entity other than 8.42–8.49 financial sector 4.67–4.77 Germany 20.42 issuer choice regime 19.50–19.65 jurisdictional agreements in securities litigation 19.52–19.60 remaining issues in 19.61–19.65 the Netherlands 24.21, 24.25 Spain 23.21–23.22 WKSIs (well-known seasoned issuers) 13.72, 13.73, 13.74, 13.76 Italy 1.33, 1.35, 1.36, 1.37 causation 22.27–22.32 damages 22.22–22.23, 22.27–22.32 defectiveness of information 22.24–22.25 defining ‘prospectus’ 22.12–22.14 directors 22.36 (p. 610) disclaimers 22.34 evidence 22.33 fault of party sued 22.26 financial regulators, liability and EU prospectus rules 18.85 legal basis for 22.03–22.11 misleading information, persons liable 22.16–22.21 entitlement to sue 22.22–22.23 responsible persons 22.15 summary 22.35 joint and several liability the Netherlands 24.26–24.28 principle of 25.47 Spain 23.37 jurisdiction, applicable see applicable law/jurisdiction key information document (KID) see KID (key information document) KFI (key financial information) 12.16–12.20 KID (key information document), PRIIPs Regulation 1.06, 1.19, 1.24, 7.54, 12.81 and EU legislation 4.28–4.30 summary and risk factors 12.24–12.25, 12.29 KYC (know your customer) 18.31 language Brexit and prospectus regime 17.52 eXtensive Markup Language (XML) 5.39 linguistic regime 16.54–16.65 New Prospectus Regulation (NPR), Art. 27 15.70–15.81 use of 12.77–12.80, 18.65–18.66 lead manager, liability of the Netherlands 24.22 Spain 23.29–23.32 legal certainty principle 18.51, 18.52, 18.55

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Leocani, Paola 1.27 lex specialis derogat legi generali principle 19.38 liability, prospectus 1.21 applicable law, default regime 19.30–19.38 causation absence of 20.58–20.61 France 21.33–21.37 Germany 20.47–20.51, 20.58–20.61 Italy 22.27–22.32 Luxembourg 25.70–25.75 Spain 23.50–23.51 United Kingdom 26.51 civil courts compared with EU prospectus rules effectiveness (effet utile) principle 18.29–18.32 flexibility 18.28–18.41 general 18.28 justification grounds 18.36 materiality 18.33–18.35 soft law 18.37 strictness, level of 18.42–18.67 CJEU case law 19.18–19.29 cross-border liability and Brussels I-bis regime 19.11–19.17 damages France 21.24–21.25, 21.33–21.37 Germany 20.27–20.32, 20.52–20.57 Italy 22.22–22.23, 22.27–22.32 Luxembourg 25.56–25.63, 25.70–25.75 the Netherlands 24.29–24.30, 24.34–24.35 Spain 23.38–23.41, 23.50–23.51 United Kingdom 26.45–26.47, 26.52–26.54 default jurisdictional regime for 19.11–19.29 defectiveness of information France 21.26–21.29 Germany 20.33–20.40 Italy 22.24–22.25 Luxembourg 25.64–25.66 the Netherlands 24.31–24.32 United Kingdom 26.48 defining civil law liability 20.10 statutory liability 20.07–20.09 defining ‘prospectus’ France 21.11 Germany 20.07–20.10 Italy 22.12–22.14 Luxembourg 25.08–25.28 the Netherlands 24.09–24.10 Spain 23.14–23.15 United Kingdom 26.36 deviation from default rules 19.50–19.65 directors

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

France 21.43 Germany 20.65 Italy 22.36 Luxembourg 25.79 the Netherlands 24.40–24.41 Spain 23.26 United Kingdom 26.59–26.70 disclaimers France 21.39–21.41 Germany 20.63 Italy 22.34 Luxembourg 25.77 the Netherlands 24.37–24.38 Spain 23.54–23.55 United Kingdom 26.57 (p. 611) evidence France 21.38 Germany 20.62 Italy 22.33 Luxembourg 25.76 the Netherlands 24.36 Spain 23.52–23.53 United Kingdom 26.56 fault of offeror 20.43 fault of party sued France 21.30–21.32 Germany 20.41–20.45 Italy 22.26 Luxembourg 25.67–25.69 the Netherlands 24.33 Spain 23.47–23.49 United Kingdom 26.49–26.50 of financial regulators and EU prospectus rules assessment by regulator 18.83–18.84 Italy 18.85 Nikolay Kantarev v Balgarska Narodna Banka 18.86 Prospectus Regulation, Art. 20(9) 18.87–18.88 France causation 21.33–21.37 damages 21.24–21.25, 21.33–21.37 defectiveness of information 21.26–21.29 defining ‘prospectus’ 21.11 directors 21.43 disclaimers 21.39–21.41 entitlement to sue 21.24–21.25 evidence 21.38 fault of party sued 21.30–21.32 legal basis for liability 21.05–21.10 misleading information, persons liable 21.19–21.23 responsible persons 21.12–21.18 summary 21.42

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

freedom of choice, limitation of 1.36 Germany 1.33, 1.35, 1.36, 1.37 absence of causation 20.58–20.61 causation 20.47–20.51 civil law liability 20.10 damages 20.27–20.32, 20.52–20.57 defectiveness of information 20.33–20.40 defining ‘prospectus’ 20.06–20.10 directors 20.65 disclaimers 20.63 entitlement to sue 20.27–20.32 evidence 20.62 failure to publish prospectus 20.26 fault of party sued 20.41–20.45 legal basis for liability 20.02–20.05 misleading information, persons liable 20.12–20.27 persons responsible for the prospectus 20.11 responsible persons 20.11 statutory liability 20.07–20.09 summary 20.64 historical development of regulation 20.02–20.04 inaccurate prospectus 1.36 incomplete prospectus 1.36 influence of EU prospectus rules on limitation or exclusion 18.80 Italy causation 22.27–22.32 damages 22.22–22.23, 22.27–22.32 defectiveness of information 22.24–22.25 defining ‘prospectus’ 22.12–22.14 directors 22.36 disclaimers 22.34 entitlement to sue 22.22–22.23 evidence 22.33 fault of party sued 22.26 legal basis for liability 22.03–22.11 misleading information, persons liable 22.16–22.21 responsible persons 21.12–21.18 summary 22.35 joint and several liability for content the Netherlands 24.26–24.28 Spain 23.37 legal basis for France 21.05–21.10 Germany 20.02–20.05 Italy 22.03–22.11 Luxembourg 25.08–25.28 the Netherlands 24.01–24.05 Spain 23.06–23.13 United Kingdom 26.15–26.35 and litigation 1.30–1.38 loss of opportunity 1.36

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Luxembourg causation 25.70–25.75 damages 25.56–25.63, 25.70–25.75 defectiveness of information 25.64–25.66 defining ‘prospectus’ 25.08–25.28 directors 25.79 disclaimers 25.77 evidence 25.76 fault of party sued 25.67–25.69 legal basis for liability 25.08–25.28 misleading information, persons liable 25.37–25.55 responsible persons 25.30–25.36 summary 25.78 (p. 612) materiality test 9.14–9.17 misleading information, persons liable 1.31, 1.32 failure to publish prospectus 20.26 Germany 20.12–20.26 Italy 22.16–22.21 Luxembourg 25.37–25.55 the Netherlands 24.19–24.28 persons assuming responsibility for defects 20.13–20.21 persons initiating the issuance of defective prospectus 20.22–20.25 Spain 23.21–23.37 United Kingdom 26.45–26.47 national law provisions governing 18.14 nature of Germany 20.05 Spain 23.10–23.13 the Netherlands causation 24.34–24.35 damages 24.29–24.30, 24.34–24.35 defectiveness of information 24.31–24.32 defining ‘prospectus’ 24.09–24.10 directors 24.40–24.41 disclaimers 24.37–24.38 entitlement to sue 24.29–24.30 evidence 24.36 fault of party sued 24.33 legal basis for liability 24.01–24.05 misleading information, persons liable 24.19–24.28 responsible persons 24.11–24.18 summary 24.39 persons responsible France 21.12–21.18 general 18.03–18.05 Germany 20.11 guarantor 18.12 identification of 18.06 Italy 22.15 minimum harmonization 18.13 national law provisions 18.14

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

offeror 18.07 person asking for admission to trading 18.08–18.11 and Prospectus Regulation 18.03–18.17 purchasers Germany 20.27–20.32 level of sophistication 20.30–20.32 time limits and limitation of liability 20.28–20.32 reform of default rules, need for 19.39–19.49 responsible persons France 21.12–21.18 Germany 20.11 Italy 22.15 Luxembourg 25.30–25.36 the Netherlands 24.11–24.18 Spain 23.16–23.20 United Kingdom 26.37–26.43 rules 1.31 Spain causation 23.50–23.51 damages 23.38–23.41, 23.50–23.51 defining ‘prospectus’ 23.14–23.15 directors 23.26 disclaimers 23.54–23.55 entitlement to sue 23.38–23.41 evidence 23.52–23.53 fault of party sued 23.47–23.49 legal basis for liability 23.06–23.13 misleading information, persons liable 23.21–23.37 responsible persons 23.16–23.20 summary 23.56–23.57 statutory provisions 1.34 summary 18.15–18.17 France 21.42 Germany 20.64 Italy 22.35 Luxembourg 25.78 the Netherlands 24.39 Spain 23.56–23.57 United Kingdom 26.58 United Kingdom causation 26.51 damages 26.45–26.47, 26.52–26.54 defectiveness of information 26.48 defining ‘prospectus’ 26.36 directors 26.59–26.70 disclaimers 26.57 evidence 26.56 fault of party sued 26.49–26.50 legal basis for liability 26.15–26.35 misleading information, persons liable 26.45–26.47 other forms of liability 26.55

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

responsible persons 26.37–26.43 summary 26.58 unlawfulness and imputability 18.28–18.67 effectiveness (effet utile) principle 18.29, 18.32, 18.36, 18.39, 18.42 ‘light’ disclosure regimes alternative view 10.31–10.34 background 11.08–11.09 Capital Markets Union (CMU) 11.02–11.06 content Commission Delegated Regulation 11.45–11.56 conclusion in context 11.57 (p. 613) ESMA advice 11.45–11.56 information not specifically prescribed 11.39–11.57 Level 1 text 11.39–11.44 Level 2 text 11.45–11.56 critical evaluation 10.26–10.30 Growth Prospectus (EU) contents of 10.20–10.25 limitations of 1.22 logic of Regulation 10.14–10.16 perimeter of regime 10.17–10.19 problems of SME market-based finance 10.07–10.11 Prospectus Directive Review Consultation 11.07 for secondary offerings/listings see secondary offerings/listings for SMEs see SMEs (small and medium-sized enterprises) use in practice 11.58–11.60 linguistic regime 16.54–16.65 listings and Brexit documents and prospectuses 17.23–17.26 listing particulars 17.33–17.35 UK position 17.05–17.06 person seeking admission to Spain 23.25 secondary see secondary offerings/listings litigation, jurisdictional agreements 19.52–19.60 Luxembourg 1.33, 1.37 causation 25.70–25.75 damages 25.56–25.63, 25.70–25.75 defectiveness of information 25.64–25.66 defining ‘prospectus’ 25.08–25.28 disclaimers 25.77 evidence 25.76 fault of party sued 25.67–25.69 legal basis for 25.08–25.28 misleading information, persons liable 25.37–25.55 responsible persons 25.30–25.36 see also CSSF (Commission de Surveillance du Secteur Financier), Luxembourg MAD (Market Abuse Directive) 15.22 MAR (Market Abuse Regulation) exemptions 1.15, 3.02

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

incorporation by reference 15.16, 15.17 initial coin offerings (ICOs) 6.37 initial public offering (IPO) 3.02 inside information, defining 4.45–4.48 insider trading 3.17–3.20, 3.52 ‘light’ disclosure regimes 11.11 prospectus contents 4.45–4.48 regulated markets 4.22 risk factors 12.38 scope of application 3.02 secondary offerings/listings 11.14 sensitive information, possibility to omit 9.49, 9.51 stabilization, in IPOs 3.21, 3.23, 3.34, 3.42 Markets in Financial Instruments Directive II (MiFID II) see MiFID II (Markets in Financial Instruments Directive II) materiality 1.21 distortion 9.19, 9.20 general test 9.13 high-level overview 9.32–9.38 Germany 9.36–9.38 the Netherlands 9.33 United States 9.34–9.35 information, omission of 15.05–15.07 lack of statutory definition 9.18–9.19 objective vs subjective 9.06–9.09, 9.24 prospectus liability context 9.14–9.17 prospectus summary 9.25 risk factors 9.26–9.29, 12.36 thresholds as applied by external auditors 9.30–9.31 MD&A (management discussion and analysis) disclosure paradigm (American) 5.12, 5.15, 5.17 financial innovation, impact on conventional understandings 5.54, 5.55, 5.58, 5.60, 5.61 MDFP (management’s discussion of fund performance) 5.58 MiFID II (Markets in Financial Instruments Directive II) 1.16 definitions 1.18 financial instruments and transferable securities in 6.04–6.10 prospectus contents 4.32–4.38 Prospectus Regulation 4.11, 4.13 ‘qualified investors’ 4.18, 4.20 scope of application 6.07 simplified disclosure regime for secondary issuances 12.63 transferable securities 6.02–6.10 MiFIR (Markets in Financial Instruments Regulation) and Brexit 17.20 prospectus contents 4.32–4.38 misleading information, persons liable 1.31, 1.32 defectiveness of information France 21.26–21.29 Germany 20.22–20.25 (p. 614) Italy 22.24–22.25 Luxembourg 25.64–25.66

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Spain 23.42–23.45 United Kingdom 26.48 France 21.19–21.23 defectiveness of information 21.26–21.29 entitlement to sue 21.24–21.25 Germany 20.12–20.27 defectiveness of information 20.22–20.25 entitlement to sue 20.27–20.32 failure to publish prospectus 20.26 persons assuming responsibility for defects 20.13–20.21 Italy 22.16–22.21 defectiveness of information 22.24–22.25 entitlement to sue 22.22–22.23 Luxembourg 25.37–25.55, 25.64–25.66 defectiveness of information 25.64–25.66 the Netherlands 24.19–24.28 co-managers 24.23 entitlement to sue 24.29–24.30 issuer 24.21 issuer’s auditor 24.25 joint and several liability 24.26–24.28 lead manager 24.22 selling shareholder 24.24 Spain 23.21–23.37 defectiveness of information 23.42–23.45 entitlement to sue 23.38–23.41 guarantor of the securities 23.27–23.28 identifying 23.36 issuer of securities 23.21–23.22 joint and several liability 23.37 lead manager of the placement of the securities 23.29–23.32 person seeking admission to listing 23.25, 23.26 persons accepting liability on prospectus/any portion thereof 23.33–23.34 persons who have authorized the prospectus 23.35 seller of securities 23.23–23.24, 23.26 United Kingdom 26.45–26.47 defectiveness of information 26.48 MREL (minimum requirement for own funds and eligible reliabilities) 4.09 MTF (multilateral trading facility) 1.05, 3.02 admission to trading 7.15 approval of prospectus 16.19 ‘light’ disclosure regimes 11.09, 11.16 regulated markets 4.21, 4.22 universal registration document 12.59 multi-document prospectus 12.56–12.58 multilateral trading facility (MTF) see MTF (multilateral trading facility) NCAs (national competent authorities) 1.28 discretionary powers 12.71–12.74 identifying 16.90–16.96 incorporation by reference 15.45 initial coin offerings (ICOs) 6.27, 6.29, 6.36

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

and prospectus approval 16.04–16.46 definitions 16.20–16.22 scrutiny 16.23–16.38 timing and procedure 16.39–16.46 transfer of approval 16.10–16.19 sanctions see sanctions negative interest rate policy (NIRP) 10.01 Neilson, J 5.41 Netherlands, the Authority for the Financial Markets (AFM) 4.52 causation 24.34–24.35 Dutch Civil Code (DCC) 7.11, 18.33, 18.41, 18.50–18.53, 24.01 Dutch legal doctrine 9.33 effectiveness (effet utile) principle 24.12, 24.18 materiality test 9.16, 9.33 misleading information, persons liable 24.19–24.28 co-managers 24.23 entitlement to sue 24.29–24.30 issuer 24.21 issuer’s auditor 24.25 joint and several liability 24.26–24.28 lead manager 24.22 selling shareholder 24.24 prospectus liability 1.33, 1.35, 1.37 defectiveness of information 24.31–24.32 defining ‘prospectus’ 24.09–24.10 directors 24.40–24.41 disclaimers 24.37–24.38 entitlement to sue 24.29–24.30 evidence 24.36 fault of party sued 24.33 legal basis for 24.01–24.05 persons liable for 24.19–24.28 responsible persons 24.11–24.18 summary 24.39 Supreme Court 9.18 WCAM (Dutch Act on Collective Settlements) 19.48 Wft (Dutch Financial Supervision Act) 18.70 New Prospectus Regulation (NPR) see NPR (New Prospectus Regulation); Prospectus Regulation (p. 615) NIRP (negative interest rate policy) 10.01 NOMAD (nominated advisor) 10.32 non-retail, non-equity prospectus 12.44–12.47 notification requirements 1.28 NPR (New Prospectus Regulation) 1.03–1.12 and delegated acts 13.03–13.06 incorporation by reference 15.15, 15.28, 15.33, 15.49 language (Art. 27) 15.70–15.81 liability and litigation 1.21, 1.30–1.38 omission of information 15.56, 15.58 offer price, yield and amount of securities (Art. 17) 15.55–15.60

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

overview (Art. 18) 15.50–15.54 potential impact 1.08 publication of prospectus (Art. 21) 15.61–15.69 rules 1.18–1.29 scope of prospectus 15.07 see also Prospectus Regulation; prospectuses/prospectus regime obligation to publish prospectuses 1.19 exemptions 7.18–7.47 admittance to trading 7.38–7.46 combination of 7.47 generally 7.18–7.19 offer of securities to the public 7.28–7.37 security type 7.20–7.24 small offerings 7.25–7.27 subsequent resale 7.55–7.57 geographical demarcation 7.16–7.17 investment institutions 7.50–7.54 on a regulated market 7.12–7.15 triggers admittance to trading 7.12–7.15 offer of securities to the public 7.05–7.11 voluntary prospectus 7.48–7.49 OECD (Organization for Economic Cooperation and Development) 10.08 offer of securities to the public Brexit and prospectus regime 17.29–17.32, 17.43–17.51 exemptions specific to 7.28–7.37 fault of offeror 20.43 offer document content and Brexit 17.43–17.51 base prospectus 17.48–17.51 summary 17.46–17.47 prospectus liability, Germany 20.28–20.32 trigger for publication of prospectus 7.05–7.11 OFR (operating and financial review) 1.20, 8.30–8.31 operating and financial review see OFR (operating and financial review) OTC (over the counter) securities 4.68, 6.04, 6.05 OTFs (organized trading facilities) 4.21, 11.16 overallotment facility concept, stabilization 3.27, 3.28–3.32, 3.43 overpricing and IPOs 3.10 Packaged Retail and Insurance-based Investment Products (PRIIPs) see PRIIPs (Packaged Retail and Insurance-based Investment Products Regulation) pay rates rule 5.84 PCAOB (Public Company Accounting Oversight Board) 9.29 place of the relevant intermediary approach (PRIMA) 19.44 PPM (private placement memorandum) 24.32 PRA (Prudential Regulation Authority) 26.13 PRACA (place of the relevant account approach) 19.44 price conditions, stabilization 3.42 PRIIPs (Packaged Retail and Insurance-based Investment Products) disclosure regime 1.16 incorporation by reference 15.16 investment institutions, prospectus requirement for 7.54

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

key information document (KID) 1.06, 1.19, 1.24 references to in the Prospectus Regulation 4.28–4.30 relationship with summary and risk factors 12.07, 12.21–12.26 see also KID (key information document), PRIIPs Regulation PRIMA (place of the relevant intermediary approach) 19.44 private law, influence of EU prospectus rules on 18.01–18.89 civil courts compared with EU prospectus rules effectiveness (effet utile) principle 18.29–18.32 flexibility 18.28–18.41 general 18.28 imputability 18.38 justification grounds 18.36 materiality 18.33–18.35 soft law 18.37 strictness, level of 18.42–18.67 determination of extent of loss or damage 18.76–18.79 differentiation between retail and wholesale investors 18.63–18.64 (p. 616) information obligations basic principle 18.18–18.21 elaboration of basic principle 18.22–18.23 risk factors 18.24 summary 18.25–18.27 investor protection and European capital market 18.62 language, use of 18.65–18.66 limitation or exclusion of liability 18.80 national courts, assessment of own compliance with rules 18.81–18.82 Nationale-Nederlanden v Van Leeuwen 18.44–18.55 additional information 18.50–18.52 consequences 18.53–18.55 legal framework 18.44–18.48 questions referred for preliminary ruling 18.49 non-material information 18.67 proof of causal link 18.71–18.75 prospectus as a European passport 18.58 examples 18.59–18.60 Prospectus Regulation and civil liability liability for summary 18.15–18.17 liability of persons responsible for prospectus 18.03–18.14 Prospectus Regulation and Delegated Regulation 18.56–18.57 relativity requirement 18.68–18.70 securities not covered by Annexes to CDR 18.61 unlawfulness and imputability 18.28–18.67 private placement memorandum (PPM) 24.32 pro forma financial information 8.34–8.64 adjustments to historical accounting 8.58–8.62 audit requirement 8.63 Commission Delegated Regulation 8.37, 8.39, 8.41, 8.43–8.44, 8.45, 8.47 issuers required to provide 8.36–8.41 preparation and presentation 8.50–8.57 relating to an entity other than the issuer 8.42–8.49 profit forecasts and estimates

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

audit requirement, deletion 8.78–8.84 defining 8.68–8.73 disclosure requirements 8.74–8.77 equity vs non-equity issuance 8.65–8.67 relevance 8.65–8.67 prospectus contents see contents of prospectus Prospectus Directive civil liability of the UK under 26.17–26.20 incorporation by reference under 15.08–15.13 principal changes from, to prospectus 26.27–26.28 principles of completeness, accessibility and comprehensibility 15.08–15.13 review 11.07, 15.01–15.04 transferable securities 6.12 Prospectus Regulation advertisements, new regime from ‘announcement’ to ‘communication’ 14.11–14.19 general 14.08–14.10 Level 1 requirements 14.20 amending 1.25 from ‘announcement’ to ‘communication’ 14.11–14.19 bail-innable securities 4.14–4.16, 4.74–4.77 and Brexit 26.01–26.14 civil liability under 26.21 role of FSA/FCA 26.14 scenarios 26.06–26.08 UK financial services legislation 26.12–26.13 contents of prospectus 8.08–8.13 coordination with other EU financial instruments 1.27 bail-innable securities 4.14–4.16, 4.74–4.77 home Member State 4.25–4.27 legal implications 4.06–4.30 PRIIPs Regulation 4.28–4.30 ‘qualified investors’ 4.17–4.20 regulated markets 4.21–4.24 securities 4.07–4.16 definitions 1.26 general 14.08–14.10 geographical demarcation 7.16–7.17 incorporation by reference (Art. 19) 15.27–15.45 IPO prospectuses 2.62–2.73, 2.76 proceeds, use of 2.67–2.69 profit forecasts and estimates 2.72–2.73 risk factors 2.63–2.66 stabilization 3.36, 3.38, 3.39, 3.47 summary in 2.70–2.71 Level 1 requirements 14.20 liability and litigation see liability, prospectus materiality not defined in 9.18–9.19 MiFID II (Markets in Financial Instruments Directive II) 4.11, 4.13 objectives 1.04–1.06, 15.01–15.04 obligation to publish prospectuses 7.01, 7.02

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

risk factors see risk factors (p. 617) scope of application 4.07, 4.12, 4.24 scope of Art 6(1) 9.10–9.12 stabilization, in IPOs 3.36, 3.38, 3.39, 3.45 starting threshold for application to 1.20 subject matter 7.02 transferable securities in 1.18, 4.12, 6.11–6.13 see also NPR (New Prospectus Regulation) prospectuses/prospectus regime approval see approval of prospectus arbitrage 16.85–16.89 base prospectus see base prospectus Brexit legislation EU approach 4.79–4.80 UK approach 4.81–4.83 ‘draw-down’ 15.46–15.49 financial sector issuers 4.67–4.77 formats see formats, prospectuses geographical validity 16.47–16.53 initial public offering (IPO) see IPO prospectuses liability see liability, prospectus misleading prospectus see misleading information, persons liable multi-document prospectus 12.56–12.58 non-financial contents 1.21, 9.01–9.72 non-retail, non-equity prospectus 12.44–12.47 obligation to publish see obligation to publish prospectuses private law see private law, influence of EU prospectus rules on ratio legis 3.51 risk factors 1.07, 1.24 scope 15.05–15.07 separate documents, prospectus containing 12.56–12.58 shelf registration 1.25 simplified see simplified prospectus single-document see single-document prospectus summary see summary; summary, prospectus tying regime to company law 16.98–16.101 voluntary prospectus 7.48–7.49 see also IPO prospectuses; Prospectus Regulation proximity principle 9.58, 18.68 Prudential Regulation Authority (PRA) 26.13 Public Company Accounting Oversight Board (PCAOB) 9.29 publication of prospectuses exemptions to obligation to publish see exemptions to obligation to publish prospectuses failure to publish Germany 20.40, 20.45 IPO prospectuses 2.51–2.52 New Prospectus Regulation (NPR), Art. 21 15.61–15.69 reading time 2.51–2.52 triggers for admittance to trading 7.12–7.15 offer of securities to the public 7.05–7.11

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Q&As 1.26, 8.08–8.13 QIB (qualified institutional buyer) 2.38, 9.08, 11.03 ‘qualified investors’ 4.17–4.20 RCS (risk capital standard) 10.01 REFIT (Regulatory Fitness and Performance Programme) 15.01 regulated markets references to in the Prospectus Regulation 4.21–4.24 Regulatory Fitness and Performance Programme (REFIT) 15.01 Regulatory Technical Standard (RTS) Regulation see RTS (Regulatory Technical Standard) Regulation relativity requirement, influence of EU prospectus rules on 18.68–18.70 reoffers and cascades 17.38–17.42 reporting, financial see financial information review of prospectus 2.46 RG AMF (Réglement general de l’Autorité des Marchés Financiers) 21.02 risk capital standard (RCS) 10.01 risk factors 1.07, 1.24 base prospectus 12.48–12.55 discretionary powers of competent authority 12.71–12.74 ESMA Guidelines 1.07, 1.16, 9.28, 12.41–12.42, 12.82 EU Growth Prospectus 12.65–12.70 general requirements 12.09–12.11 included in summary 12.15 information obligations 18.24 key financial information regarding issuer/guarantor 12.16–12.20 materiality 9.26–9.29, 12.36 non-retail, non-equity prospectus 12.44–12.47 prospectus containing separate documents 12.56–12.58 purpose 12.08 relationship with PRIIPs regulation 12.21–12.26 simplified disclosure regime for secondary issuances 12.63–12.64 single-document prospectus 12.33–12.43 universal registration document 12.59–12.62 see also liability, prospectus; summary (p. 618) RTS (Regulatory Technical Standard) Regulation advertisements, new regime 14.01, 14.07, 14.20 incorporation by reference 15.27 legal basis for liability, UK 26.30 summary and risk factors 12.18, 12.20 SAFT (simple agreements of token sales) 6.23 sanctions 1.28, 16.66–16.84 criminal and administrative 16.67–16.71 decisions, publication of 16.76–16.84 due process 16.72–16.75 menu of 16.72–16.75 publication of decisions 16.76–16.84 SEC (Securities and Exchange Commission), US 5.02 basic approach to information 5.13–5.18 Capital Markets Union (CMU) 11.03 and changing regulatory ends 5.78–5.86 incorporation by reference 15.10 new bank regulator disclosure universe 5.87–5.109

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

potential reforms 1.17 systemic risk 5.87–5.109 secondary offerings/listings applicable securities 11.28–11.38 Capital Markets Union (CMU) 11.02–11.06 defining 11.26–11.27 ‘light’/simplified disclosure regimes 1.23, 11.01–11.60 background 11.08–11.09 content 11.39–11.57 debt securities note 11.56 equity registration document 11.47–11.53 equity securities note 11.55 options for 11.15–11.24 prospectus formats 13.19–13.22 scope 11.25–11.38 summary and risk factors 12.63–12.64 Market Abuse Regulation 11.14 Prospectus Directive Review Consultation 11.07 scope 11.25–11.38 secondary offering of shares (SEO) 3.02 Transparency Directive 11.12–11.13 securities aligning information concerning offers 14.44–14.45 bail-innable 4.14–4.16, 4.74–4.77 and Brexit 17.28 equity see equity securities guarantor see guarantor issuer directors of 23.26 of equity and retail non-equity 8.32–8.33 financial information relating to entity other than 8.42–8.49 financial sector 4.67–4.77 Germany 20.42 issuer choice regime 19.50–19.65 the Netherlands 24.21 Spain 23.21–23.22 WKSIs (well-known seasoned issuers) 13.72, 13.73, 13.74, 13.76 lead manager of the placement of, Spain 23.29–23.32 litigation, jurisdictional agreements 19.52–19.60 offer to the public see offer of securities to the public over the counter (OTC) 4.68, 6.04, 6.05 purchasers Germany 20.27–20.32 level of sophistication 20.30–20.32 time limits and limitation of liability 20.28–20.32 references in the Prospectus Regulation to 4.07–4.13 secondary offerings/listings 11.28–11.38 seller, Spain 20.23–20.24, 23.26 transferable see transferable securities type 7.20–7.24 see also obligation to publish prospectuses; secondary offerings/ listings

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

Securities and Exchange Commission (SEC), US see SEC (Securities and Exchange Commission), US Securities and Markets Stakeholders’ Group (SMSG) 8.81, 16.114 Securities Regulation, and ICOs European Union 6.25–6.40 current approaches 6.25–6.29 purposive approach 6.37–6.40 risk-based approach 6.30–6.36 United States 6.21–6.24 Securitization Regulation 4.59–4.62 sensitive information, possibility to omit 9.42–9.52 separate documents, prospectus containing 12.56–12.58 shareholder, selling 24.24 shelf registration, prospectuses 1.25 overview/evolution 13.67–13.75 tri-partite prospectuses and ‘old’ shelf registration 13.11–13.14 United States comparison with URD 13.78–13.79 overview/evolution 13.67–13.75 timing of filings 13.76–13.77 (p. 619) SIFIs (systematically important financial institutions) 10.01 simple agreements of token sales (SAFT) 6.23 simplified prospectus 1.25 secondary issuances 1.23, 11.01–11.60, 13.19–13.22 background 11.08–11.09 content 11.39–11.57 options 11.15–11.24 prospectus formats 13.19–13.22 scope 11.25–11.38 summary and risk factors 12.63–12.64 summary and risk factors 12.63–12.64 uniform registration document (URD) 1.25, 13.62–13.66 see also ‘light’ disclosure regimes single supervisory mechanism (SSM) 16.116 single-document prospectus risk factors 12.33–12.43 summary 12.09–12.32 SMEs (small and medium-sized enterprises) 1.04–1.05 CMU Action Plan 10.02, 10.03, 10.05 ‘light’ disclosure regime 1.05, 1.22 problems of SME market-based finance 10.07–10.11 Prospectus Regulation 15.03 see also Growth Prospectus (EU) SMSG (Securities and Markets Stakeholders’ Group) 8.81, 16.114 Spain 1.33, 1.36 causation 23.50–23.51 damages 23.38–23.41, 23.50–23.51 defectiveness of information 23.42–23.45 disclaimers 23.54–23.55 evidence 23.52–23.53 fault of party sued 23.47–23.49 legal basis for liability 23.06–23.13

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

nature of liability 23.10–23.13 statutory provisions 23.06–23.09 misleading information, persons liable entitlement to sue 23.38–23.41 guarantor of the securities 23.27–23.28 identifying 23.36 issuer of securities 23.21–23.22 joint and several liability 23.37 lead manager of the placement of the securities 23.29 person seeking admission to listing 23.25, 23.26 persons accepting liability on prospectus/any portion thereof 23.33–23.34 persons who have authorized the prospectus 23.35 seller of securities 23.23–23.24, 23.26 and National Securities Markets Committee (CNMV) see CNMV (Spanish National Securities Markets Committee) responsible persons 23.16–23.20 SPV (special provision vehicle) 9.25, 12.19, 18.12 SSM (single supervisory mechanism) 16.116 stabilization, in IPOs ancillary stabilization concept 3.27, 3.43 defining 3.22 disclosure regime 3.44–3.50 and insider trading 3.51–3.53 notion and purpose 3.21–3.26 overallotment facility concept 3.27, 3.28–3.32, 3.43 penalty bids 3.15 pre-filing period 3.14 pure 3.12 short covering 3.13 significant distribution 3.22 substantive rules for ancillary stabilization 3.43 price conditions 3.42 stabilization period 3.34–3.41 theories 3.10 in the United States 3.12–3.16 waiting period 3.14 see also IPOs (initial public offerings) stablecoins 6.18 stand-alone prospectuses, formats 13.09–13.10 Strategic Hub for Innovation and Financial Technology (FinHub) 6.24 stress-test rule 5.102 strict priority principle 19.03 STS (simple, transparent, and standardized) securitizations 4.59–4.61, 4.69, 4.70 summary, prospectus 1.24 base prospectus 12.48–12.55 discretionary powers of competent authority 12.71–12.74 EU Growth Prospectus 12.65–12.70 format 12.12–12.14, 13.17 general requirements 12.09–12.11 information obligations 18.25–18.27 IPO prospectuses 2.70–2.71

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

key financial information regarding issuer/guarantor 12.16–12.20 language, use of 12.77–12.80 length 12.27–12.32 liability for 18.15–18.17 materiality test 9.25 new requirements 13.17 (p. 620) non-retail, non-equity prospectus 12.44–12.47 offer document content and Brexit 17.46–17.47 prospectus containing separate documents 12.56–12.58 prospectus liability France 21.39–21.41 Germany 20.64 Italy 22.35 Luxembourg 25.78 the Netherlands 24.39 Spain 23.56–23.57 United Kingdom 26.58 purpose 12.06–12.07 relationship with PRIIPs regulation 12.21–12.26 responsibility for 12.75–12.76 risk factors included 12.15 simplified disclosure regime for secondary issuances 12.63–12.64 single-document prospectus 12.09–12.32 universal registration document 12.59–12.62 see also risk factors systematically important financial institutions (SIFIs) 10.01 systemic risk, and SEC 5.87–5.109 bank regulator public disclosure system 5.97–5.109 Systemic Risk Council 5.88 Take-over Bid Directive 1.16, 4.63–4.66 TEU (Treaty on the European Union) 26.02 TFEU (Treaty on the Functioning of the European Union) 23.32, 26.02, 26.66 third-country regime, post-Brexit 1.29 transferable securities concept 1.18 initial coin offerings (ICOs) see ICOs (initial coin offerings) in MiFID II 6.02–6.10 in the Prospectus Regulation 1.18, 4.12, 6.11–6.13 Transparency Directive 1.16 incorporation by reference 15.17, 15.40, 15.41, 15.42 reporting 1.25, 4.39–4.44 secondary offerings/listings 11.12–11.13 Treaty on the European Union (TEU) 26.02 Treaty on the Functioning of the European Union (TFEU) 23.32, 26.02, 26.66 triggers for publication of prospectuses see obligation to publish prospectuses tri-partite prospectuses 13.11–13.14 UCITS (Undertakings for Collective Investment in Transferable Securities Directive, 2009) advertisements, new regime 14.33 Brexit and prospectus regime 17.28 Brexit legislation 4.68 Delegated Commission Regulation 14.33

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

investment institutions, prospectus requirement for 7.52 legal basis for liability 22.10 prospectus contents 4.53 transferable securities 6.12 UCP (unfair commercial practices) 24.04, 24.14, 24.19, 24.25 underpricing and IPOs 3.07–3.09 Undertakings for Collective Investment in Transferable Securities Directive, 2009 see UCITS (Undertakings for Collective Investment in Transferable Securities Directive, 2009) unfair commercial practices (UCP) 24.04, 24.14, 24.19, 24.25 uniform registration document (URD) 1.25 United Kingdom 1.33, 1.35, 1.37 and Brexit see Brexit causation 26.51 Corporate Governance Code 16.99 damages entitlement to sue for 26.45–26.47 measure of compensation 26.52–26.54 defectiveness of information 26.48 defining ‘prospectus’ 26.36 directors 26.59–26.70 Brexit scenarios 26.62–26.69 future financial regulatory framework 26.70 Royal Bank of Scotland rights litigation 26.60–26.61 disclaimers 26.57 evidence 26.56 fault of party sued 26.49–26.50 financial services legislation 26.12–26.13 FSA and FCA, role 26.14 legal basis for liability civil liability under Prospectus Directive 26.17–26.20 civil liability under Prospectus Regulation 26.21 consultation powers 26.24–26.26 historical background 26.15–26.16 new FCA rules 26.29–26.30 principal changes from Directive to prospectus 26.27–26.28 principal statutory provision under FSMA 2000 26.34–26.35 statutory base 26.31 (p. 621) statutory rule-making powers 26.23 threshold causes of action 26.32–26.33 tiers of provision 26.22 listing, approach to 17.05–17.06 misleading information, persons liable entitlement to sue 26.45–26.47 ‘Official Listing’ statutory instrument 4.82 other forms of liability 26.55 responsible persons 26.37–26.43 United States disclosure paradigm see disclosure paradigm (American) Dodd-Frank Act (2010) 5.80, 5.82–5.83, 5.95 Federal Reserve System 5.98

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020

filings, timing of 13.76–13.77 Financial Stability Oversight Council (FSOC) 5.95 initial public offering (IPO) 1.23, 3.11–3.16 materiality test 9.34–9.35 Securities Act 1933 15.10 Securities and Exchange Commission (SEC) see SEC (Securities and Exchange Commission), US Securities Regulation 6.21–6.24 shelf registration, prospectuses comparison with URD 13.78–13.79 overview/evolution 13.67–13.75 timing of filings 13.76–13.77 Supreme Court 9.34 universal registration document 12.59–12.62 uptick rule 5.89–5.90 URD (uniform registration document) amendments to 13.42–13.50 where URD is used as a constituent part of prospectus 13.48–13.50 where URD not used as constituent part of prospectus 13.43–13.47 approval process and passporting 13.35–13.41 compared with US shelf registration 13.78–13.79 content 13.54–13.56 discussion 13.62–13.66 filing 13.41 incorporation by reference 13.57–13.61 new prospectus formats 13.01, 13.30–13.61 and other registration documents/annual reports 13.51–13.53 overview 13.30 and simplified prospectus 1.25, 13.62–13.66 ‘well-known’ issuers 13.31–13.34 VaR (value at risk) 5.17, 5.20, 5.24, 5.105, 5.106 Volcker rule 5.27 voluntary prospectus 7.48–7.49 WAIB (Withdrawal Agreement Implementation Bill) 17.14, 17.18 WCAM (Dutch Act on Collective Settlements) 19.48 Westpapierprospektgesetz see WpPG (German Securities Prospectus Act) Wetophetfinancieeltoezicht (Dutch Financial Supervision Act) 18.70 Withdrawal Agreement, Brexit 17.05, 17.06, 17.07 concluding 17.16 Withdrawal Agreement Implementation Bill, Brexit 17.14, 17.18 WKSIs (well-known seasoned issuers) 13.72, 13.73, 13.74, 13.76 World Savings Bank Institute (WSBI) see WSBI (World Savings Bank Institute) WpPG (German Securities Prospectus Act) 20.Annex XML (eXtensive Markup Language) 5.39

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: The WB National Univ of Juridical Science; date: 09 June 2020