The remaining provisions of the European Union Prospectus Regulation (2017/1129) will become effective across the European Union on 21 July 2019 – a  massively important step for the Security Token Offering (STO) sector in Europe as it explicitly includes a prospectus regime with simplified disclosure requirements for SMEs and certain other issuers. 

Steven Maijoor, ESMA Chair, said:

“The Prospectus Regulation, supporting the Capital Markets Union (CMU), aims to make it easier and cheaper for companies, and in particular smaller companies, to access capital and improve their prospectuses accessibility for investors.  ESMA proposes a large number of simplifications and adaptations of the prospectus regime, aimed at maintaining a strong level of investor protection while also opening up new possibilities for companies to diversify their financing.”

The EU aims to use the capital markets union project to help businesses gain access to more diversified sources of funding across the EU. The new regulation on prospect uses simplifies the rules and streamlines related administrative procedures and makes it cheaper and simpler for small businesses to access capital markets.

Perhaps what is most important is EU states have created new regulations which will exempt security issuers from the obligation of drawing up a complex prospectus (a legal document that companies issue to potential investors about the securities they are issuing and about themselves) if the offering is under varying thresholds, depending on each state. Only a much less complex prospectus or memorandum would need to be issued, and interaction with regulators would be minimised in some jurisdictions. 

Andrea Bianconi a lawyer who writes at Tokenizer adds more:

Likely, most SMEs in the EU would fall under the above definition. But the EU legislator has gone further than that. It has opted for extending the benefit of the Growth Prospectus also to non SMEs, in particular to:

• • • any other issuer whose securities are traded or are to be traded on an SME Growth Market (such as MTF — Multilateral Trading Facilities), provided that those issuers had an average market capitalisation of less than € 500 Million on the basis of end-year quotes for the previous three calendar years.
    • any other issuer provided that:
      • the offer of securities to the public is of a total consideration in the EU not exceeding € 20 Million over a period of 12 months, and
      • such issuers have no securities traded on an MTF, and
      • such issuers have an average number of employees during of up to 499.

The specific format and the information content of the Growth Prospectus have been laid out in a delegated act recently adopted by the EU Commission.

Even more, the good news includes a passport system which means that once a Growth Prospectus for an STO is approved in a member state it will be therefore valid for any offer of security tokens to the public across the EU. That means STOs can be listed in multiple markets on STO exchanges in different EU countries without having to start from scratch. 

Bianconi adds more:

Thirdly, also as of 21st of July 2019, the process for obtaining the certificate of approval attesting that the prospectus has been drawn up in compliance with this regulation should become simpler. In particular, the previous Prospectus Directive was implemented differently across the EU. This created a number of frictions with sporadic requirements by certain member states of additional burdens for the issuer — such as the publication of the prospectus on magazines, more publicity requirements, payment of fees and translations. Conversely now — because this is a regulation and not a directive – no implementation is required by member states in their national legislation. This regulation will be therefore automatically enforced in the national legislation, thereby eliminating the risk for the above-mentioned inconsistencies.

Eoghan O’Tuama at William Fry writes:

Issuers that have had debt or equity securities admitted to trading on a regulated market or an SME growth market can enjoy a simplified disclosure regime for secondary issuances. 

There is no requirement to publish a prospectus for the admission to trading of additional securities of the same class as, and amounting to 20% of the number of, those already admitted to the same regulated market over a 12-month period. This threshold is being expanded from the current threshold set at 10%.    

See thresholds here.

Table: Prospectus thresholds and national rules by Member State

2 The main content requirements are basic facts and warnings, main risks of the issuer and the security, information on the issuer/security/offer/guarantor/guarantee, statement that the information in the document is up-to-date, date of publication and validity period of the document and possibility to refer to other sources of information. The latest annual financial statements, articles of association and an extract from the Register of Companies must be kept available on the issuer’s website. 

3 E.g. reasons for the offer, net proceeds and their use, working capital statement, in case of a negative working capital statement an estimate of the working capital shortfall, a statement as to whether the net proceeds of the offer are considered sufficient to rectify such shortfall and if not how the issuer plans to rectify the current shortfall in the working capital, the amount of capital resources needed to finance the issuer’s investments within the next 12 months and the relative sources of funds, in case of a negative working capital how the issuer plans to rectify the current shortfall.

Explanation of symbols in the table:

*    The Member State’s threshold was adopted under the Prospectus Regulation.

∞ The Member State intends to adopt a threshold under Article 3(2) of the Prospectus Regulation, but had not yet done so when this note was finalised. The threshold (and national rules) reflected in the table are those which apply until the Article 3(2) threshold is adopted.

~ Czech Republic’s current legal basis for the 1 million EUR threshold is national legislation adopted in relation to Directive 2003/71/EC. The Czech legislator does not intend to adopt an exemption pursuant to Article 3(2) of the Prospectus Regulation. In July 2019 the national legislation adopted in relation to Directive 2003/71/EC will be repealed, however, the 1 million EUR threshold will continue to apply due to Article 1(3) of the Prospectus Regulation.

^ Romania’s thresholds were not adopted specifically under Article 3(2) of the Prospectus Regulation, but they apply in relation to the new Prospectus Regulation regime. The Romanian legislator does not intend to adopt a threshold specifically under Article 3(2) of the Prospectus Regulation.

× Slovakia’s current legal basis for the 1 million EUR threshold is Article 1(3) of the Prospectus Regulation; as this threshold became applicable on 21 July 2018, it replaces the 100,000 EUR threshold adopted in the Slovakian Act on Securities under the Prospectus Directive. In July 2019, the Act on Securities will be updated to reflect the 1 million EUR threshold from Article 1(3) of the Prospectus Regulation