04/11/2020

LuxSE Webinar: One year of Prospectus Regulation

Executive Summary

It has been over a year since the Prospectus Regulation came into effect on 21 July 2019. The new Prospectus Regulation, along with the global COVID-19 pandemic, means that many issuers had to navigate the creating or updating of prospectuses under the new regime. This, while not transformational, always implies certain changes, adjustments and uncertainties.

The Prospectus Regulation has been identified as a key part of the Capital Markets Union and LuxSE, being the leading venue for the listing of international securities, is well positioned to monitor the implementations of this new regime. That is why, on 24 September 2020, LuxSE took the opportunity to virtually gather experts from the legal and banking sectors to discuss challenges and opportunities that presented themselves over the last year, and what still needs to be done moving forward in an hour-long webinar entitled ‘One year of Prospectus Regulation.

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Highlights

1. Additional time is needed to create a full assessment of the main challenges and opportunities of the regime. Bearing in mind the grandfathering regime provided under the Prospectus Regulation, which meant that the majority of issuers, in particular with debt programmes, only started to look into the new regime for the 2020 update season, we will only gain a full understanding of the main impacts and concerns about the new regime as we move into 2021. That being said, it is expected that a greater uniformity in the preparation, updating and approval processes by National Competent Authorities (NCAs) will be observed.

2. Risk factors are so far the most challenging aspect of the new regime. The Prospectus Regulation brought, amongst other aspects, a limit to the number of risk factors in the prospectuses, as well as in the summary, along with the materiality assessment obligation by issuers. ESMA published comprehensive guidelines on the topic, which aimed to bring clarification and harmonisation in the way market participants construe the new provisions. However, in general terms, risk factors were still a challenge for issuers as NCAs have different approaches and interpretations. A full ‘level playing field’ has not been reached yet.

3. Reliance on stock exchanges to meet publication requirements. Reliance of issuers on stock exchanges, such as LuxSE, has grown in light of new prospectus publication requirements with many issuers lacking the infrastructure when it comes, for instance, to guaranteeing hyperlink validity for 10+ years on their own.

4. Number of listings on MTFs is increasing. Over the years, the legal and regulatory regime as well as market practices have pointed issuers in the direction of MTFs, which in turn prompted investors to be more accepting of securities on MTFs rather than on Regulated Markets.

5. Professional segments are showing-up (but slowly). The new regime brought the possibility of creating professional segments from which only issuers targeting professional investors can benefit from. Some market infrastructures have already launched these segments, including LuxSE. However, professional segments are still a niche market.

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Annual number of prospectus approvals from 2016 to 2018 (ESMA website)

As expected, the impact of the Prospectus Regulation was felt most at the beginning of 2020, with entities preparing for the year ahead. The market already noticed discrepancies in the way NCAs approach the new regime, but more time is needed to make a full assessment of the main impacts, concerns and opportunities. It is interesting to note that, since 2007, the number of prospectuses approved under the Prospectus Directive, and now under the Prospectus Regulation, has decreased significantly.

Among numerous points raised by the webinar’s participants, the topic of risk factors disclosure requirements emerged as one of the biggest hurdles brought about by the Prospectus Regulation. Issuer-specific risk factors topped the list, with participants also noting that risk factors relating to securities, especially those relating to securities’ programmes, mainly given the uncertain nature of COVID-19 related events.

Another topic of discussion was the new requirements for prospectus publication that came into force with the new regime including documents incorporated by reference and hyperlinks. Seeing the possible blocker that this element of prospectus creation could cause, with the need for a precise, long-life hyperlink to documents incorporated by reference within a prospectus, the conversation highlighted the proactivity and success of LuxSE’s Perma Link Upload Service (PLUS).

PLUS guarantees that issuers have direct hyperlinks, stored on LuxSE databases with a validity of 10+1 years. When outlines of the Prospectus Regulation were first released, many did not realise exactly how precise these hyperlinks needed to be. Therefore, issuers and investors now rely on stock exchanges, such as LuxSE, to aid in the publication of documents under the Prospectus Regulation.

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While it was agreed that there is a lot of scope for improvement over the next twelve months, one advantage that was highlighted during the webinar was the fact that programme summaries are no longer needed. This has proven to be hard to get off the ground, with challenges for issuers and legal advisors becoming evident since July of last year.

Will there be room for any “green chapter” under the Prospectus Regulation? This point was raised due to the 2018 European Commission Action Plan on Financing Sustainable Growth, which included a proposal to specify prospectus content for green bond issuances. In the meantime, there were no concrete developments. However, this topic was included in the Public Consultation launched by the European Commission on a Renewed Strategy on Sustainable Finance. Results are expected by end of 2020. It will be interesting to assess what the outcome of this discussion is and the steps forward. 

The conclusion voiced by the webinar’s participants was that while the Prospectus Regulation is not perfect, it is a start in the right direction. While the Prospectus Regulation has not yet brought the ‘level playing field’ that it initially promised, a twelve-month period is not a long enough period of time to allow this uniformity to be created. This has prompted a need to step up harmonisation efforts, and with guidance already being created by market associations such as ICMA, as well as by authorities, such as ESMA, we can expect further dialogue between all market participants and different stakeholders on the matter as the regime continues to gain its footing. 

Although there was no immediate harmonisation, participants were optimistic that a ‘level playing field’ will be achieved once this regime becomes fully familiar to issuers and NCAs. In this context, it was highlighted that the proposals discussed in 2018 and 2019 to transfer some competences from NCAs to ESMA in terms of approval of prospectuses were, and are, not justified. These proposals could have a negative impact on the efficiency of the current prospectus’ approval process, in particular in terms of speed, predictability and costs. 

Last but not the least, a word of concern regarding Brexit and the passporting regime. With the UK’s withdrawal from the European Union, the ability of issuers to passport their prospectuses between the EU27 and the UK will be impacted. This is certainly a point of concern and to be closely monitored.