The EU Prospectus Regulation (EU) 2017/1129

11 min readMar 27, 2019

When I published my book A Guide to Financial Regulation for Fintech Entrepreneurs (Wiley 2018) I left out two important regulations: the EU Prospectus Regulation 2017/1129 because it was published only after I submitted manuscript to the publisher, and the Central Securities Depositories Regulation 909/2014 because I felt at the time it was rather technical and not of general interest. Now in the context of Security Token Offerings (“STOs”) both regulations became rather important, and I decided to write two additional tear sheets on those regulations to supplement those already present in Part II of the book. To not inconvenience all those who bought the book I decided to publish those two chapters for free. The first on the ProspR is here, and the second one on CSDR is forthcoming.

Prospectus Regulation

The regulation describing the prospectus requirements, where a prospectus is the document that issuers must provide when they offer securities to the public, or have them admitted to trading.

Summary

Most companies issuing securities to the public or having them admitted to trading have to issue a prospectus. The prospectus is a document whose content is described in this regulation, and it has to be approved by the relevant regulator of the Member State where the prospectus is published. A typical prospectus consists of a registration document which describes the issuing company, a securities note that describes the details of the security, and a prospectus summary.

A prospectus that is written in the appropriate language allows an issuer to issue securities across the entire Single Market without further approval, with only the summary having to be translated into the local languages.

Relevance for Fintech Companies

The Prospectus Regulation is highly relevant for all companies raising funds on their own account, be it from equity or other securities, with the exception of very early stage companies that are very small, or have fewer than 150 investor, and of companies that only issue to qualified investors.

It is also highly relevant for all Fintech companies that are operating in the capital raising space, be it in the more traditional crowdfunding area, or for companies that are attempting to help other companies raising funds via the issue of security tokens or tokenised securities.

References

The Prospectus Regulation is 2017/1129 and it is replacing the directive 2003/71/EC. Directive 2014/65/EU is Mifid 2, Regulation EU 600/2014 is the associated Mifir. Those two regulations are dealing with financial instruments. Directive 2014/91/EU is UCITS 5 and it is dealing with investment funds. The PRIIP Regulation is EU 1286/2014. Directive 2004/109/EC is about Transparency in financial reporting, Directive 2013/34/EU is about financial statements, and Recommendation 2003/361/EC is about the definition of SMEs.

Background

When securities are either offered to the public or admitted to the trading on a regulated market then the issuer has to draw up a prospectus unless those securities are open ended funds (which are regulated under UCITS), securities issued in relation to ownership and occupation of of an apartment, or relate to a number of specified public or non-profit issuers (Art 1, 3).

Issuers who only issue up to €1m per year can be exempt, or subjected to less onerous reporting and disclosure requirements at the behest of the implementing Member State (Art 1.3). There are a number of important exemptions for securities issued to the public (but not for securities admitted to trading), for example (Art 1.4):

securities that are only offered up to 150 investors per member state, excluding qualified investors
securities whose denomination amounts to at least €100k, or where investors have to acquire at least €100k worth of securities
securities offered to existing or former directors or employees under certain conditions

Additionally there are a number of exemptions for both securities issued to the public and admitted to trading that relate to corporate actions like mergers and acquisitions, scrip dividends, as well as debt securities issues by banks in relatively small volumes. For securities being listed on an exchange the same exceptions apply, except for those under the points (1) and (2) above.

In this context, securities are essentially defined as transferable securities under Mifid 2 (Art 2.a). Note that this is a subset of all financial instruments under Mifid2, ie not every regulated financial instrument requires drawing up of a prospectus. Qualified investors here are either professional investors or eligible counterparties defined according to the classification in Mifid 2 (Art 2.e). Finally, an offer of securities to the public is defined as follows (Art 2.d):

a communication to persons in any form and by any means, presenting sufficient information on the terms of the offer and the securities to be offered, so as to enable an investor to decide to purchase or subscribe for those securities. This definition also applies to the placing of securities through financial intermediaries

Member States may also exempt offers of securities from the public from the obligation to publish a prospectus if they are not subject to notification in accordance with Article 25 and the total consideration is less than €8m per year (Art 3.2). However, this exemption does not carry over to trading on a regulated market, where regulated market is defined according to Mifid 2 and therefore only refers to the major markets, excluding MTFs and OTFs.

A subsequent resale of securities is usually to be considered as a separate offer that may require drafting up of a prospectus. However, no additional prospectus is required as long as a valid prospectus is available. In certain circumstances where no prospectus was required because the securities were only available to qualified investors and they are being made available to a wider public a prospectus has to be drawn up (Art 5).

Prospectus

The prospectus consists of three parts that can be in one combined document, or in multiple documents (Art 10):

prospectus summary
registration document
securities note

In case it consists of multiple documents there are relatively complex but logical rules about which documents can be reused, and when and how updates have to happen (Art 10). One key requirement however is that a document can never be changed once it has been approved (Art 21.10). Instead updates must be published in prospectus supplements, or in new consolidated documents (Art 9.9).

This regulation defines a specific set of information that has to be present in a prospectus (Art 6). A template is provided in Annex I.

In some circumstances where an issuer’s security has been trading for already 18 months or more, follow-on issuances of the same or some different securities can be done using a simplified prospectus (Art 14).

SMEs and other small companies (below €500m in market capitalisation) and some small issuers (below €20m in annual issuance in the EU; also below 500 employees and not traded on an MTF) can use an EU growth prospectus instead of a full prospectus (Art 15).

Prospectus Summary

The prospectus summary is, as the name implies, a summary of the entire information that is contained in all parts of the prospectus, in a highly restricted format that must be produced unless an exemption applies (Art 7). In some cases where the PRIIP Regulation requires a Key Information Document, a prospectus summary can be provided instead (Art 7.12).

Registration document

The (universal) registration document is a document describing the company’s organisation, business, financial position, earnings and prospects, governance and shareholding structure. Issuers admitted to trading on a regulated market or and MTF/OTF can choose to draw up one every year. Once two consecutive registration documents have been approved, further approvals are not normally necessary anymore. The registration documents has to comply with the usual language requirements (see section below) and information can be incorporated by reference (see section below). Usually registration documents only need to be updated once per year, except in case of material issues or when it is part of a new prospectus. The registration document can in some instances serve as an annual financial report (Art 9).

A template for the regular registration document is provided in Annex II; that for the registration document of the EU Growth Prospectus in in Annex IV.

Securities Note

A template for a regular securities note is provided in Annex III; that for the securities not of an EU growth prospectus is in Annex V.

Base prospectus

In cases the issuer issues multiple different (non-equity) securities they can choose to draw up a base prospectus that contains the information that is common amongst those different securities, as well as a template entitled form of the Final Terms and that is filled out for each individual issue and indicating the available options with regard to the information to be determined in the final terms of the offer. The base prospectus must also indicate the web address where the final terms of each security can be found, and the final terms must be prepared in an easily analysable and comprehensible form (Art 8).

The base prospectus must contain the information that would otherwise be contained in the registration document or the universal registration document as well as that usually contained in the securities note. A summary should only be drawn up once the final terms are included in the base prospectus, or in a supplement, or are filed, and that summary shall be specific to the individual issue (Art 8).

Requirements

As a common theme within the regulation, obligations can often be fulfilled by either the issuer (ie the entity which issues the securities), or the offeror (ie the entity or individual that offers securities to the public), or the person asking for admission to trading on a regulated market.

Approval

A prospectus shall not be published unless the relevant competent authority has approved it, or all of its constituent parts. Usually approval should be completed within 10 working days (20 for first time issuers, 5 for some regular issuers). However, not adhering to that deadline can not be deemed to constitute approval. The regulator approving the process can ask for additional information or changes, in which case the timeline starts anew when the information has been provided / the amended prospectus has been submitted (Art 20).

Offerors who offer securities on a regulated market and are exempt from providing a prospectus can voluntarily chose to draft a prospectus and have it approved (Art 4).

Content

Under certain circumstances (public interest; serious detriment to issuer; of minor importance) the regulator approving the prospectus can approve to omit certain information (Art 18).

The risk factors should be limited to risks which are specific to the issuer and/or to the securities and which are material for taking an informed investment decision. Each risk factor must be adequately described and they shall be presented in a limited number of categories depending on their nature with the most material risk factors appearing first (Art 16).

If the final offer price / amount is not included in the prospectus then either investors who have already subscribed to or purchased securities must be given at least two working days to withdraw their offer, or the maximum price / amount and the method calculating it must be disclosed in the prospectus (Art 17).

Publication

A prospectus must be made available to the public, without requirement of prior registration, acceptance of a legal disclaimer, or payment of a fee. It should be available in advance of the the offer to the public or the admission to trading of the securities it relates to on at least one of a number of specified websites (eg that of the issuer). It must be downloadable, printable and in searchable electronic format that cannot be modified. Upon request it must be provided on a durable medium free of charge (Art 21).

A list of all approved prospectuses during the last 10 years together with all prospectuses and other notifications received can be found on the website of the regulator who approved it. For prospectuses approved for use in multiple jurisdictions also ESMA maintains a public database (Art 21).

All approved documents, including documents included by reference, have to remain available for at least 10 years (Art 21.7).

Updates

A prospectus remains valid for 12 months, as do registration documents, and there are specific rules how to deal with documents drawn up at different points in time (Art 12).

In case of a significant new factor, material mistake or material inaccuracy relating to the information included in a prospectus that arises between the approval of a prospectus and when the offer is closed a supplement to the prospectus must be prepared without undue delay. This supplement must be approved, the timeline for that usually being 5 days. Whenever a supplement is published, investors who have already agreed to purchase securities but to whom those securities have not yet been delivered have the right to withdraw their acceptances (Art 23).

Incorporation by reference

Information can be included by reference into a prospectus, provided it is within a specific list of documents. If information is provided by reference, hyperlinks to the location of the document must be provided, and accessibility to those documents must be assured. If only parts of a document are meant to be included by reference this has to be made clear (Art 19). The referenced documents must remain available for at least as long as the documents referencing them (Art 21.7).

Passporting and third country issuers

A prospectus approved in one Member State is valid in all Member States provided that ESMA and the relevant host regulator has been notified (Art 24–26). In this case there are certain language requirements (Art 27; see subsection below).

There are a number of rules how to treat third country issuers who can either issue under a prospectus drawn up in accordance with this regulation, or under a prospectus drawn up under their own regulations provided equivalence has been granted (Art 28-30).

Language requirements

A prospectus that is only used in one Member State shall be drawn up in one of the languages accepted by the regulator of that Member State. Where it is used in multiple languages it shall either be translated into the languages accepted by the respective regulators, or it can be drawn up in a language customary in the sphere of international finance, at the option of the entity preparing the prospectus. The prospectus summary has to be translated into the various languages accepted by the respective regulators. They however can not demand other parts of the prospectus to be translated (Art 27).

Regulatory Powers

The regulators are granted a number of specific regulatory powers under this regulation, including suspending a securities offer, admission to trading, trading, or an advertisement for up to 10 working days and prohibiting a securities offer or an admission to trading (Art 32). They can also impose administrative fines of up to twice the profits gained or losses avoided, €5m, or 3% of total annual turnover, whatever is larger (Art 38).

Advertisement must be clearly recognisable as such, and shall not be inaccurate or misleading. Advertisement and any other information disclosed shall be consistent with the information contained in the prospectus. If material information is disclosed is must be disclosed to all investors, which means it must be included in the prospectus or a supplement if a prospectus is required (Art 22).

Stefan Loesch a managing partner at LexByte, an advisory firm specialising on tokenised investments. He has more than 20 years experience in financial markets, and his previous roles include advisory at J.P. Morgan and McKinsey and quant development at Paribas. He is the author of “A Guide to Financial Regulation for Fintech Executives” (Wiley 2018).