Katarina Đurđenić:”Rethinking the New EU Prospectus Regime on Croatian Example”

Introductory note: The information that follow have been presented in a research paper of Đurđenić, Krunić and Simić; Prospekt vrijednosnih papira – gdje smo i kamo idemo; Pravo u gospodarstvu; 2016/2; p. 281-305.

 

Prospectus is a document that should provide investors all the necessary information on the company that issues securities in which they plan to invest as well as all the necessary information on these securities. Securities can come in different forms but the most common are stocks and bonds. Prospectus usually needs to be published before offering securities to the public or admitting them to trading.

Till recently, the Directive 2003/71/EC defined when it is necessary to publish a prospectus and what are the exemptions thereof, what is the procedure of its approval and who bares the responsibility for the stated data. In Croatia, this directive has been implemented through the provisions of Capital Markets Act (Zakon o tržištu kapitala). The mere content of the certain prospectus is determined by a special legislative act, namely by Regulation (EC) No 809/2004 that implements the mentioned directive.

However, in May 2017 the Council has adopted a new Regulation of the European Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market that replaced the afore mentioned directive (hereinafter referred to as New Prospectus Regulation). This change has been part of the bigger legal reform aimed at creating a capital market union. It has been also described as a way of facilitating the access to financial markets, especially to small and medium sized companies.

After reading the New Prospectus Regulation and comparing it to the previous one, its main novelties can be summarized as follows:

  • no prospectus if the securities are included in an offer where the total consideration for the offer in the EU is less than EUR 1 000 000, whereas member states can raise this amount up to EUR 8 000 000 (till now the regime exempted the offers up to EUR 5 000 000, but member states could have chosen a lighter prospectus regime for the offers between EUR 100 000 till EUR 5 000 000),
  • less disclosure for secondary issuances in certain cases according to the delegated act that is to be adopted by the Commission,
  • less disclosure for small and medium enterprises according to the delegated act that is to be adopted by the Commission including the new (broader) definition of SME,
  • more simple prospectus summary,
  • universal registration document that should facilitate frequent issuances,
  • more specific risk factors that should not be generic and formulated as disclaimers whereas Commission can choose to adopt delegated acts to specify criteria for this specification.

The full impact of the New Prospectus Regulation in Croatia is still hard to determine since it will largely depend on the Croatian legislature that will have to decide up to which amount can securities be offered to the public without a prospectus. If the legislature chooses to lower the current EUR 5 000 000 threshold, this could enhance the investor protection, but also burden the issuers.

Less disclosure in certain categories like SME-s and secondary issuances are generally to be positively viewed but it is a shame that the New Prospectus Regulation does not already contain details of this regime but leaves it to further delegated acts. Thus, the necessary information will not be composed in the single piece of legislation, but scattered around several regulations and delegated acts which will make it harder for the issuers as well as for the regulating authorities that need to supervise them.

It is plausible that the New Prospectus Regulation aims to summarize the summary even more, but it remains unknown why did it not try to decrease the extensive demand of information for the prospectus in general.

Universal registration document will for sure facilitate the procedure for the frequent issuers. However, in Croatia there is hardly ever a company that had more than one issue in the year so this change will have no major impact there.

Specification of risk factors is to be welcomed.

If we want to show the application of the above stated legislation in Croatia, it is best to take a look at the recent practice of prospectus regime there.[i] In 2015 Croatian Agency for Supervision of Financial Services as a competent authority for the approval of prospectuses has approved 15 prospectuses. In the same year, 57 exemptions from the prospectus regime were announced. Average number of pages in the prospectus was 363.  This means that in almost 4/5 of the cases when securities are offered to public or admitted to trading, there was no need to issue a prospectus whereas in all the other cases the compliance with prospectus regime resulted with documents of several hundred pages.

This leads us to conclusion that there is a very steep line in information requirements when issuing securities which goes from no demand on information at all to hundreds of pages of information. The New Prospectus Regulation as it seems may have reduced disclosure requirements for some of the cases but considering the small number of prospectuses in Croatia in general, these reductions will not be very significant in the practice. This conclusion can apply to other EU member states that share the similar prospectus practice as Croatia.

Furthermore, since the Commission did not try to reduce the scope of information in prospectus in general and has only increased the number of legislative acts that regulate the prospectus, the prospectus regime will still be considered as burdensome and complicated and for that reason it is not sure that the aims of the reform will be fully achieved.