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QCA’s response to Prospectus Directive consultation

The Quoted Companies Alliance (“QCA”) is an independent membership organisation that champions the interests of small to mid-size quoted companies.  Charles Russell Speechlys is an active member of the QCA and our partners and associates sit on a number of the QCA’s Expert Groups, including the Legal and Secondary Markets Expert Groups.  In addition, Tom Shaw, head of Business Services, is on the board of directors of the QCA.

One of the workstreams which keeps the Legal Expert Group busy is looking at European Commission consultations on various pieces of legislation and formulating responses to the extent that is felt that any proposed changes to existing legislation, or entirely new laws, will affect small and mid-sized quoted companies on both AIM and the Main Market.

In this article, we highlight a number of issues discussed in the QCA’s response to the European Commission’s Review of the Prospectus Directive (the “PD”).  The full response paper can be found at www.theqca.com/qca-pd2015

The QCA’s overall take is that the 2015 review of the Prospectus Directive is a great opportunity to improve access to equity financing for small and mid-size quoted companies (“SMEs”) and its response and suggestions are aimed at assisting SMEs and companies with a reduced market capitalisation (so less than EUR100 million) to raise finance more efficiently and effectively, whilst maintaining a high-level of investor protection, and include:

  • Introducing the concept of an IPO and Secondary Public Offer in the Prospectus Directive;
  • Creating a Proportionate Prospectus for Secondary Public Offers on regulated markets;
  • Ensuring that the Proportionate Prospectus for Secondary Offers applies to all types of secondary public offer;
  • Addressing the process of the national competent authority approving a prospectus;
  • Increasing the thresholds under which a prospectus does not have to be produced;
  • Exempting offers carried out under the Takeover Regime from the prospectus regime; and
  • Creating a specific prospectus regime for SME Growth Markets.

Below we highlight the principal issues discussed in the QCA’s response in relation to (i) introducing proportionate prospectuses for secondary offers; (ii) increasing the currently available thresholds and (iii) creating a specific regime for SME Growth Markets.

The Secondary Public Offer

The QCA notes that since the introduction of the Prospectus Directive in 2005, there has been an EU-wide decline in secondary offers because a prospectus is a long and complex document that is expensive to produce and the whole process is made more expensive and time consuming by having to be pre-vetted and approved by the national competent authority (the UK Listing Authority being the national competent authority for the UK).

This has had the effect of shutting retail investors out of secondary issues because the cost of producing a prospectus is simply regarded as too high in proportion to the amount of money that SMEs typically seek to raise and so a limited placing to institutions, therefore often avoiding the need for a prospectus, is the standard way of proceeding.

Therefore the QCA suggests that the Prospectus Directive should be amended to clearly distinguish between the level of information required in a prospectus for an IPO, where little or no information is readily available to potential investors, from that of a secondary offer.  This would allow the Commission to create a proportionate disclosure regime for secondary offers, where there is already a great deal of information available to the public.  The QCA’s response annexes a suggested template for the content requirements of a proportionate prospectus.


The QCA wants to build on the thresholds which act as exceptions to the circumstances in which companies are required to produce a prospectus.

In the last PD review, the QCA, along with other interested parties, successfully campaigned for increases in two key exemptions to having to produce a prospectus for a public offer: (i) the funding threshold (currently EUR 5 million) and the number of persons to whom a fundraise can be aimed at (currently 150).

The QCA response argues for an increase in the funding threshold to EUR 20 million and an increase in the number of persons to 500 (along with clarification that this is per Member State, not in aggregate – this has caused an issue as different competent authorities have interpreted this point in different ways).

The QCA believes these increases will promote better access to a single market for capital (which are aims of the EU’s “Capital Markets Union”) this would encourage greater investment and a wider investor base than the one that exists currently.  The increase in these thresholds would primarily assists SMEs given their fundraisings are often in the single figure millions.

SME Growth Markets – proposal for a new regime

Companies on SME Growth Markets (which includes AIM) which meet certain size requirements and those companies with a market capitalisation under EUR100 million are currently able to use a proportionate regime when preparing a prospectus in connection with an offer of securities to the public or admission to trading on a regulated market, enabling the issuer to omit certain information.  The QCA’s research shows that no UK companies have chosen to use the proportionate disclosure regime for rights issues – the assumption being that is because the reduction in costs and burden is not sufficiently significant as against producing a full prospectus and that the reduction in disclosures does not translate into a faster pre-vetting timetable with the UKLA.  The Commission’s own research also confirms little take up of proportionate disclosure.

The QCA therefore proposes that for SME Growth Markets, a bespoke regime should be introduced which would replace the current requirement for a Prospectus to be produced where an exemption is not available; this would require the production of an “SME Growth Market Prospectus”, the content requirements for which would be principles based, with just minimum required disclosures (much less than the mandated disclosures for a Prospectus under the current regime).  As with the proposals in relation to secondary offers more widely, there would be a clear distinction between the requirements for primary and secondary offers (with far fewer information requirements for the latter). The offer documents would therefore be more relevant and focused on the salient terms of the offer and be clearly distinct from those on a regulated market, which should afford better investor protection.

Chances of success?

The QCA, as noted above, has previously had some success in making the prospectus disclosure regime better for smaller companies.  Given that the Commission’s own view is that it should be “as straightforward as possible for companies (including SMEs) to raise capital throughout the EU” and that SME reliance on bank funding should be reduced, the QCA’s response accords with this ambition and so it is hoped, at least in part, that the QCA’s sensible suggestions are adopted to assist smaller companies in using capital markets to raise funds.  The QCA’s overall take is that the 2015 review of the Prospectus Directive is a great opportunity to improve access to equity financing for SMEs.

This article was written by Paul Arathoon.