Changes to the Prospectus regime likely to benefit smaller companies

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29 March 2011

On 17 March 2011, HM Treasury published its consultation on the early implementation of two amendments to the Prospectus Directive. This reflects recent developments in Europe.  In late 2010 the European Parliament and Council adopted Directive 2010/73/EU (the “Amending Directive”), which amends the Prospectus Directive 2003/71/EC and the Transparency Directive 2004/109/EC.

The consultation document seeks views on early implementation in the UK of two elements of the Amending Directive and contains a draft statutory instrument which will be used to implement the changes.  A separate consultation will be launched on the remainder of the Amending Directive.

Threshold for an offer of securities for which a prospectus is required will be raised from €2.5 million to €5 million: The intention behind this measure is to reduce the administrative burden on issuers. The Government believes that this will be particularly beneficial for smaller companies as it will widen the existing consideration for which the Prospectus Directive does not apply, enabling companies to raise capital more cost-efficiently as they will be able to raise larger amounts of capital without being required to produce a prospectus.  

AIM companies which continue the current practice of combining:

  • an open offer under the €2.5/5 million exemption to investors who do not constitute "qualified investors" (under the Financial Services and Markets Act 2000); and
  • a placing with institutional investors,

will be able to raise significant amounts of capital without producing a prospectus.  It will be interesting to see whether this regulatory change has any significant impact on market practice.

One point to note is that the draft statutory instrument does not include any provision clarifying that the €2.5/5 million exemption can be used cumulatively with other exemptions.

Increasing the minimum number of investors for which a prospectus is required from 100 to 150 investors:  The Amending Directive increases the number of persons to whom an offer may be directed before it ceases to be an exempt offer (an offer of transferable securities to the public without an approved prospectus first having been made available to the public) from 100 to 150 persons per Member State.  This measure is designed to reduce the administrative burden on issuers. Again the Government believes that this will be particularly beneficial for smaller companies as it will widen an existing exemption, enabling them to raise capital more cost-efficiently as they will be able to use this increase to offer securities to a wider set of investors.

In the context of secondary fundraisings for AIM companies, it is difficult to see how this increase will make a real difference given that most companies will have significantly more than 150 shareholders.  The increase in the financial threshold is likely to have more impact in this context.

The deadline for comments is 9 June 2011.  

We expect that these measures will come into force in the summer of 2011.

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