21 March 2018

ESMA publishes responses to its Consultation on draft RTS under the new Prospectus Regulation

FESE

FESE members believes that, in order to be successful, the review of the Prospectus rules should significantly reduce burdens for companies, and ensure that rules are aligned with the existing framework and not duplicated. Clear rules are more likely to lead to clear reporting, thus ensuring that investors receive comprehensive, concise and consistent information. On the contrary, complexity leads to excessive costs which discourage companies (especially smaller ones) from entering public capital markets, and results in disclosure of an excessive number of risk factors and boiler plate language not helpful to investors.

In particular, FESE would recommend retaining flexibility for companies as this would allow them to better highlight to investors their distinct characteristics and features. Flexibility is also key to avoid duplication of information and make prospectuses more comprehensible. It takes on even more importance in the case of SMEs since they do not have as many resources to spend on disclosing information as large companies.

FESE would also encourage regulators to consider specific regimes currently adopted by the existing markets for growth companies, for example in the case of the approval procedures, and to reuse their features as much as possible. Although many requirements are naturally and still should be harmonised across the EU, there may well be practices which have developed in a local ecosystem and which motivate certain requirements. Especially smaller companies in earlier stages of growth are more dependent on local investors for financing, and thus the room for local adaptation of rules becomes especially important.

Last but not the least, in considering the proposals from the European Commission on the ESAs Review, and in particular on any amendment to the Prospectus Regulation, FESE believes the focus should be on the following high-level principles and objectives:

- Strengthening supervisory convergence within ESMA’s current tools and structures

- Dismiss any unjustified proposals for new direct supervision

- Use the NCAs competence and knowledge to enhance the EU supervision and boost CMU

Full FESE response

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ICMA

Disincentives to retail issuance: ESMA’s approach of using existing Level 2 measures under the Prospectus Directive (PD) as a starting point for the draft RTS, where applicable, is helpful because the current regime is generally well understood by market participants and so avoiding changes to it will minimise disruption, and the costs associated with disruption, for issuers. However, the new provisions relating to key financial information for the summary and advertisements disseminated to retail investors are likely to be viewed as a further disincentive to direct retail issuance of bonds. This is unfortunate, because it may result in a further decline in the availability of bonds that can be bought directly by retail investors (who may need access to fixed income securities e.g. during their retirement) and those retail investors may therefore face increased costs associated with investing via funds.

Key financial information for the summary: The approach to the proposed draft RTS for key financial information in the summary seems relatively prescriptive. Generally speaking, prescriptive requirements can give rise to unexpected results in practice when they are applied to the wide range of prospectuses prepared under the EU prospectus regime. This introduces increased costs for issuers, who need to spend time understanding how best to comply with prescriptive requirements that don’t necessarily fit with their business. An example of the unexpected results of prescriptive rules has been seen outside the prospectus regime in the requirements for KIDs under the PRIIPs Regulation, where concerns have been raised that KIDs may be misleading for investors (prompting the FCA in the UK to issue a statement on this point). Within the prospectus regime, the prescriptive requirements for the current PD summary format are generally acknowledged to have resulted in unclear and unhelpful disclosure for investors in practice. Whilst these have (helpfully) not been replicated under the new Prospectus Regulation, the approach in the proposed draft RTS for key financial information in the summary is still relatively prescriptive.

Full ICMA response

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EuropeanIssuers

EuropeanIssuers, representing the interests of EU publicly quoted companies, welcomes ESMA’s consultation. The main comments are:

Key financial information (KFI) in the prospectus summary

Given the stringent limit of 7 pages imposed on the prospectus summary under the Prospectus Regulation, EuropeanIssuers question the need for the cap on the number of additional line items and APMs to be included in the prospectus summary. Such requirement would be counterproductive and overly prescriptive.

To avoid a one-size-fits all approach, it suggests allowing companies flexibility to:

determine the additional KFI they want to include in the prospectus summary;

to choose the format of presentation of KFI.

Supplements

EuropeanIssuers are supportive of ESMA’s proposed approach, but they believe that issuers should have flexibility whether to include an outstanding profit forecast in a prospectus. Although, if the issuer chooses not to include outstanding profit forecasts, an explanation could be included as to why this was decided. EuropeanIssuers welcome the idea to abandon the requirement to provide the audit /accounting report on profit forecast.

Data and machine readability

EuropeanIssuers agree with ESMA’s proposal to keep XML format as the practical arrangement to ensure that data is machine readable, but they express strong concerns with the proposal to shift the reporting burden to issuers. Any evolution of the current system should be carefully assessed in terms of costs and benefits and should not result in any additional burden on companies.

Publication

Technology and ways of publication and dissemination of information have significantly changed since the adoption of the 2003 Prospectus Directive. Wide-spread electronic dissemination and storage of regulated information raises issues in terms of security and liability that need to be addressed.

Full EuropeanIssuers response

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AFME

AFME urges ESMA to reconsider its prescriptive approach which would restrict issuers by imposing an arbitrary limit on disclosure.  Issuers should be able to disclose the level of information they consider to be appropriate to meet the general disclosure test for the summary, subject to compliance with the seven page length limit.  AFME’s view therefore is that the limit on the number of additional line items or APMs, contemplated at paragraph 58 of ESMA’s paper is removed.

This removal is important because:

Issuers should be able to disclose the level of information they consider appropriate to ensure that the summary is accurate, fair and clear and not misleading and to achieve the standard contemplated at Level 1 (Article 7), subject to the compliance with the seven page length limit. To do so, there will be many occasions where issuers will want to include key information in the summary which is different to that required by ESMA’s draft Annexes I to VI.

It is overly prescriptive to impose an arbitrary limit on disclosure, of three line items or APMs, in addition to the relevant elements of RTS’ Annexes. As a matter of current best practice for offerings inside and outside the EU, summaries will typically contain significantly more than the compulsory line items plus three others, therefore to impose a limit would likely result in poorer disclosure compared to the current requirements in the EU and elsewhere.

Given the requirement for the financial information to be “key information” (which implies materiality), it is unnecessary, as a matter of law, to restrict disclosure by reference to a numerical limit.

The proposed approach is likely to result in numerous requests for waivers for industries where the RTS minimum requirements are not appropriate for the purposes of satisfying the overriding Level 1 Article 7 test, or the exclusion of the line items most material to the relevant business, none of which are in the interests of efficient and well-functioning EU capital markets.

Subject to removal of the limit on the number of additional line items or APMs, AFME’s view is that the approach to disclosure of key financial information which is being suggested for the prospectus summary, of setting out specific line items of financial information or APMs, will be generally workable for issuers.

The Commission and ESMA should also ensure that National Competent Authorities (NCAs) allow issuers to make use of the option to include additional disclosure, where appropriate, or permit derogations, where necessary, including pursuant to the disclosure requirements or practices (or ordering of information) in other markets. For example, in the context of permitted pro forma financial information, we note that, for Rule 144A equity transactions the US Regulation S-X standards will need to be taken into account in determining when pro formas are required and their presentation. The same principle applies to the presentation applicable to issuers with a complex financial history.

Full AFME response

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Consultation Paper

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