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

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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.

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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,

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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)

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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)

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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;

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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

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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

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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

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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

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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)

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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)

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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

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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

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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

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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

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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

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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

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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

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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

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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

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(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).

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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

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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

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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

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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

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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

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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

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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.

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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

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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.

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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.

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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

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(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.

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(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.

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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)

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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.

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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),

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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

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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

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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.

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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.

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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)

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(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’.

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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

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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.

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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

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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

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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

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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

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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

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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.

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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

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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.

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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

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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.

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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-

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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

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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)

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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.

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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/

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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.

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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

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(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

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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

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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

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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;

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(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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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(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

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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.

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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.

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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.

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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

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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.

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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).

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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.

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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

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(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

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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

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‘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

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(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

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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’.

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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.

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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.

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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

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–  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

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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

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(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.

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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

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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

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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

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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

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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

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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

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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

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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

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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.

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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

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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.

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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

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(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

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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,

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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

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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

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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

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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.

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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

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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)

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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

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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.

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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/

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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.

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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

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(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

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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

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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

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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.

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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).

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(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.

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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

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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

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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.

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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

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(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

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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

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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

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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.

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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.

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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.

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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.

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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

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(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

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(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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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.

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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.

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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

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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.

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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:

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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.

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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.

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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

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(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

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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

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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.

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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

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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.

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(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

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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

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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

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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

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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

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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

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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

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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

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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 . . .

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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

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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

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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

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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

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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

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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

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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.

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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

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(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

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‘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

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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

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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

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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

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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)

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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).

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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.

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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.

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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.

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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.

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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).

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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

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(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

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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

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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.

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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

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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.

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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

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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

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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

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(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

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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.

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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 Regulati