Earlier this year, the crowdfunding sector represented by the European Crowdfunding Network (ECN) the UK Crowdfunding Association, Financement Participatif France and Nederland Crowdfunding had called on the Parliament and the European Council to be very ambitious with the planned revision of the Prospectus Directive.
The Parliament listened to their arguments. With great satisfaction, the sector recently acknowledged the amendments to the Prospectus directive proposed by the Parliament Committee on Economic and Monetary Affairs (ECON). Not only do these amendments double the thresholds of Prospectus exemptions proposed by the Commission (which were already much higher than the current thresholds), they also remove a clause which would have restricted national Prospectus exemptions to domestic offers.
Why it matters
The importance of the Prospectus Directive cannot be underestimated. The Prospectus Directive determines the information that companies must disclose when making a public offer of securities or being admitted to trading on a regulated market. The prospectus is at the same time a registration document and a securities note. Once an EU-Prospectus has been approved by the regulator of the issuer’s Member State, this issuer may raise capital across the European Economic Area (EEA) thanks to the “single passport” principle.
The revision of the Prospectus Directive is one of the main building blocks of the larger European project of Capital Markets Union (CMU) which aims at giving European businesses easier access to capital across borders – in the hope to catch up with the US where businesses raise 3 times more funding from capital markets.
This revision is conducted as a democratic process in which individuals, businesses, associations and national government bodies can and do participate. So far, this process seems to be guided by a spirit of pragmatism and simplification, embodied by Commissioner Jonathan Hill, and to deliver forward-looking proposals that are favorable to the emergence of crowdfunding and other forms of alternative finance. The lobbying of industry associations like the above mentioned certainly plays a crucial part in this orientation. However, it is important to stay on the ball as there will be further debates and amendments in the run up to the final approval the new Prospectus Directive by the Parliament, which will hopefully take place later this summer.
Below, I summarize the main issues raised in the elaboration of the new Prospective Directive. This summary is by no means complete and cannot substitute for the official documents, but it should give the reader an indication of the substantial regulatory changes that are at stake.
Cheaper, faster, easier and more proportionate disclosure
In addition to the overarching goal of harmonizing capital market rules and easing cross-border transactions, the overhaul of the directive has two more specific twin goals of bringing the Prospectus Directive in line with the needs of both the issuers of securities and the investors in those securities. The adjective used is that regulation must be “proportionate” in order to:
- Provide companies of all sizes with cheaper, faster and easier ways to meet disclosure requirements by making sure that these requirements are proportionate to the changing needs of companies as they evolve from startups, to growth SMEs, to mid-caps and to large corporations that frequently issue debt securities,
- To provide investors, including retail investors, with material, clear and comparable information that protects them and truly helps them make informed investment decisions.
Current prospectus requirements are a far cry from these goals. Designed with large corporate issuers in mind, current prospectuses are million-dollar compilations of legalistic jargon, mostly intended to prevent disclosure liability.
“Most industry practitioners acknowledge that a modern day prospectus is designed for the legal advisers of professional investment firms, not [to meet] the needs of the retail investor”.
The Commission proposed substantial simplifications
The current version of the Prospectus Directive –Directive 2003/71– was issued in 2003 and amended in 2010. Early 2015 the European Commission launched consultations in view of a complete overhaul of the Prospectus Directive in the context of the Capital Markets Union.
After these consultations, the Commission drafted a revision proposal which includes major simplifications. As summarized in the European Commission’s Fact Sheet, the draft proposed to:
- Increase the EU-wide prospectus exemption threshold. The issuance value under which Member States should not require a prospectus should be raised from €100,000 to €500,000.
- Raise the upper threshold of national prospectus exemption by EU Member States. Member States are currently allowed to set national exemptions from EU-Prospectus for issuances between the first level of exemption, i.e. currently €100,000, and €5 million. The commission proposed to increase the upper threshold of these national exemptions to €10 million but to restrict national exemptions to domestic offers made in the member state of the issuer.
- Simplify the disclosure regime for SMEs. The Commission proposed a new disclosure format, including an optional Q&A. It also proposed to raise the level of market capitalization below which unlisted SMEs can benefit from lighter disclosure from €100 million to €200 million.
- Simplify disclosure for multiple issuances. To avoid duplicate disclosure and cut costs, repeat offers (such as secondary offers within 18 months; offers by frequent issuers having submitted a yearly universal registration document or repeat offers of debt securities by an issuer having submitted a base prospectus) should benefit from simplified disclosure.
- Allow tri-partite filing of a prospectus. In the same vein, the three parts of the prospectus: company information, securities note and summary could be filed separately.
- Refocus disclosure on material information and material risk factors. Risks presented in prospectuses should be material to the particular issuer, as opposed to generic risk factors.
- Allow electronic publication and incorporation by reference. Prospectuses could reference documents that have already been approved, such as other prospectuses.
- Shorten prospectus summary and Key Information Document (KID). Summaries that are often the only documents read by retail investors should be clearly structured and short (for example: maximum 6 pages for summaries).
- Provide a free and searchable database of all prospectuses. The European Securities and Markets Authority (ESMA) should be in charge of a public database referencing issues by internationally agreed standards such as the International Securities Identification Number (ISIN) and the global Legal Entity Identifier (LEI).
The Commission proposal was then passed on to the Council of the European Union for discussion at the ECOFIN, in which the 28 EU Member States are represented through their Finance Ministry or relevant experts. While a number of smaller changes were proposed during these discussions, they did not provide inroads for the crowdfunding sector.
Crowdfunding associations asked to remove the limitation to domestic offers
The above-mentioned crowdfunding associations welcomed the reform of the EU prospectus directive. They dedicated a task force to participate in the consultations about this topic. Paul Massey, Crowdcube’s General Counsel and task force lead felt that their message was heard:
“We have had positive discussions with EU and national officials and many recognize that crowdfunding platforms play a vital role in the funding escalator for European SME’s. Platforms are subject to a number regulatory requirements for investor protection meaning there is scope to extend exemptions under the Prospectus regime.”
However, one of the main areas of contention expressed in the response by the crowdfunding associations to the Commission’s proposal concerned the restriction that national exemptions from EU-Prospectus for issuances between €500,000 under €10,000,00 should only apply to domestic offers, i.e. “offers made only in that member state”.
In their response to the Commission’s draft, the associations argued against this restriction, pointing out, among others, that:
- The notion of “domestic offer” as “made only in that member state” is legally uncertain as crowdfunding is an online activity and offers are accessible from anywhere.
- Limiting the prospectus exemption to domestic offers is contrary to the goals of the Capital Markets Union which is to foster cross-border transactions.
- The simplified prospectuses of crowdfunding platforms are in line with the twin goals of the Prospectus Directive of fostering SME investment and protecting investors in a way that is proportionate to the maturity of the issuing company and the needs of retail investors.
The Parliament committee upped the ante
In parallel to the Council, the Committee on Economic and Monetary Affairs (ECON) of the European Parliament published its proposed amendments to the revised Prospectus Directive drafted by the Commission.
The crowdfunding associations were very pleased upon reading that ECON proposed to completely remove the ‘domestic offer’ limitation. The Parliament committee stressed the need to support cross-border transactions and create a level-playing field for growth companies to source capital from alternative channels in Europe.
The amendments proposed by ECON literally raised the bar as it proposed to increase the two thresholds of Prospectus Exemption:
- The upper threshold for Prospectus Exemption at European level would increase from currently €100,000 to €1,000,000 issuance over 12 months (against €500,000 proposed by the commission).
- The upper threshold for Prospectus Exemption at Member State level would increase from currently €5 million to €20 million (against €10 million proposed by the Commission).
- ECON’s proposal is much more inclusive of all growth companies. Next to SMEs, it emphasizes the needs of mid-caps that are not yet listed on regulated markets. The simplified prospectus required from these companies when issuing securities would be called EU-Growth Prospectus.
- To accommodate the needs of these growth companies, ECON focuses on rules that facilitate listings on junior markets, the Multilateral Trading Facilities (MTFs).
- Last but not least, ECON’s proposals strengthen the role of ESMA.
As mentioned above, this short summary should give the reader an indication of the substantial regulatory changes that are at stake in the revision of the Prospectus Directive.
There still is plenty of opportunities to participate in shaping these changes as the review process continues in both the Council and the Parliament until the revised Prospectus Directive is finalized, around this summer.
Therese Torris is an entrepreneur and consultant in eFinance and eCommerce based in Paris. She has covered crowdfunding and P2P lending since the early days when Zopa was created in the United Kingdom. She was a director of research and consulting at Gartner Group Europe, Senior VP at Forrester Research and Content VP at Twenga. She publishes a French personal finance blog, Le Blog Finance Pratique.