From 1 July 2012, changes have been made to the prospectus requirements when securities are either offered to the public, or are to be admitted to trading on a regulated market such as the main market of the London Stock Exchange. This update focuses on the key changes for companies on the main market and on AIM which are issuing shares, rather than debt or other securities.
Summaries - format and content
Changes have been introduced to strengthen the format, content and comparability of summaries in prospectuses.
The general requirement is that summaries must "convey concisely, in non-technical language and in an appropriate structure, the key information relevant to the securities which are the subject of the prospectus and, when read with the rest of the prospectus, must be an aid to investors considering whether to invest in the securities".
In order to make the summary more useful and to facilitate comparability between prospectuses, the format and content of the summary must conform to a standard layout consisting of five tables. These tables will cover the following: introduction and warnings; the company and any guarantor; the shares; risks; and the offer. The order of the sections and elements within each section is mandatory, and if any item is not applicable, this must be expressly stated.
Summaries must not exceed 15 pages, or 7% of the length of the prospectus if this is longer: the old maximum of 2,500 words no longer applies. Cross references to other parts of the prospectus are not permitted.
Summaries will therefore become longer than was previously the case, and their format and content is likely to be more standardised.
Summaries - liability
Companies and their directors are liable to compensate investors if a prospectus summary is misleading, inaccurate or inconsistent when read with the rest of the prospectus. Under the new regime, they are also liable if the summary does not provide the key information required by FSMA.
FSMA defines "key information" as the information which is essential to enable investors to understand the shares to which the prospectus relates and to decide whether to consider the offer further. It must include:
- the essential characteristics of, and risks associated with, the company, including its assets, liabilities and financial position
- the essential characteristics of, and risks associated with, investment in the shares, including any rights attaching to the shares
- the general terms of the offer, including an estimate of the expenses charged to an investor by the company
- details of the admission to trading
- the reasons for the offer and proposed use of the proceeds
Proportionate disclosure for pre-emptive offers
Under the new proportionate disclosure regime, less information will be required to be included in prospectuses published by a main market or AIM company in connection with rights issues and some open offers.
In order to fall within the regime, the rights issue or open offer must be made to existing shareholders in accordance with their statutory rights, or where statutory rights have been disapplied but replaced with "near identical rights" to deal, for example, with overseas shareholders and fractional entitlements.
Where statutory rights are disapplied, the "near identical rights" must be negotiable and transferable, or the shares not taken up by existing shareholders must be sold for their benefit.
A rights issue (where existing shareholders have the right to subscribe in proportion to their holdings, can sell their rights to subscribe and any rights that are not taken up are sold in the market on their behalf) will therefore fall within the proportionate disclosure regime. An open offer will only do so if it is made in accordance with statutory rights or, where statutory rights are disapplied, if it is a compensatory open offer (in which rights that are not taken up by a shareholder are sold in the market on its behalf).
Where a company takes advantage of the proportionate disclosure regime, a statement at the beginning of the prospectus must indicate clearly that the offer is addressed to shareholders of the company and that the level of disclosure of the prospectus is proportionate to that type of issue.
Proportionate disclosure for SMEs
Reduced disclosure will also be permitted where prospectuses are issued by:
- small and medium-sized enterprises, having less than 250 employees and either or both of: a total balance sheet of €43m or less and annual net turnover of €50m or less
- companies with reduced market capitalisation, being main market companies with an average market capitalisation of less than €100m over the last three years
Employee share schemes
In practice, many employee share plans can be structured so as to avoid the need to publish a prospectus (e.g. where the offer is made to fewer than 150 persons per EEA state). However, where it is not possible to rely on one of the general exemptions, it may be possible to rely on a specific exemption in the Prospectus Rules.
Under the previous regime, main market companies (but not AIM companies) were exempt from the requirement to produce a full prospectus where shares were being offered to their employees. The new rules permit AIM companies to take advantage of the exemption provided their head office or registered office is in the EU.
Where a company relies on the employee share scheme exemption, it must provide a short document to employees containing information about the offer, the shares being offered and the number of shares available to each employee.
Profit forecasts and estimates
Where a prospectus includes a profit forecast or estimate, an independent accountants' or auditors' report is required. There will be an exemption from this requirement where the forecast or estimate relates to the previous financial year and a number of specified statements are included in the prospectus. These include a statement that independent accountants or auditors have agreed that the information is substantially consistent with the final figures to be published in the next annual audited financial statements.
Supplementary prospectuses and right to withdraw
Companies must issue a supplementary prospectus if, during the relevant period, any significant new factor, material mistake or inaccuracy comes to light. The "relevant period" begins when the prospectus is approved and ends when the offer closes or, for main market companies, when trading in the new shares starts. It has now been clarified that, where a prospectus relates both to an offer and to the admission of those shares to the main market, the relevant period ends on the later of those two dates.
Previously, an investor was entitled to withdraw any agreement to buy or subscribe for shares if a supplementary prospectus was published. The right to walk away now only applies where an offer is made to the public (and not where a prospectus is required solely because shares are to be admitted to the main market).
Further, the investor has no right to withdraw if a significant new factor, material mistake or inaccuracy arises after delivery of the shares, but a supplementary prospectus is required because admission of the shares to trading on the main market will take place at a later date.
Companies may give investors longer than the minimum period of two working days to exercise their right to withdraw.
Exemptions and thresholds
FSMA sets out a number of exemptions from the requirement to produce a prospectus.
One exemption applies where an offer is made to or directed at qualified investors only. The definition of qualified investor for this purpose has been amended to include only persons who are "eligible counterparties" or "professional clients" as defined in the Markets in Financial Instruments Directive.
Another exemption applies to an offer where the minimum consideration which may be paid by a single person for shares under the offer is at least €50,000, on the assumption this means the offer will be targeted at sophisticated professional investors. This minimum consideration threshold has been increased to €100,000 to avoid retail investors inadvertently being treated as professionals.
Click here for the amended Prospectus Rules.
Click here for the FSA's Prospectus Rules Checklists to be used on or after 1 July 2012, including new checklists for prospectus summaries and proportionate disclosure for rights issues and for SMEs and companies with reduced capitalisation.
For further information, please contact:
020 7634 8818
Professional Support Lawyer
020 7002 8542
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This briefing is written as a general guide only. It is not intended to contain definitive legal advice which should be sought as appropriate in relation to any particular matter.