[co-author: Nick Quarrie]

On 21 July 2019, the remaining provisions of the EU Prospectus Regulation came into force. Since this date, prospectuses for offers of securities to the public or admission to a regulated market in the EU have been required to be drawn up and approved in accordance with the new Prospectus Regulation.

For a summary of the principal changes as a result of the Prospectus Regulation, see Prospectus Regulation: What changes on 21 July 2019? As many issuers sought to update their note programmes and disclosure documents prior to the 21 July 2019 deadline (to take advantage of the previous Prospectus Directive rules), for many, their first experience of the new rules will only come in 2020.

Following the implementation of the Prospectus Regulation, a number of guidelines and other materials have been issued by the European Securities and Markets Authority (ESMA) and other bodies. We summarise in this article certain recent guidance and developments to be aware of:

• ESMA Q&A on the Prospectus Regulation: On 4 December 2019, ESMA published the most recent version of its Q&A on the Prospectus Regulation. The Q&As are intended to “promote common, uniform and consistent supervisory approaches and practices in the day-to-day application of the Prospectus Regulation”. The Q&As cover a range of topics, including (among others) items relating to: grandfathering and implementation of the Prospectus Regulation; updating information in a registration document or universal registration document; public offers; incorporation by reference; financial information; supplements; passporting; prospectus responsibility; final terms and base prospectuses; derivatives, underlyings and related disclosure; and summaries. In its report for the first quarter of 2020, the International Capital Markets Association (ICMA) noted that it was not currently aware of any particular concerns amongst its members with the most recently published form of the Q&As. The most recent amendments to the Q&A (made on 4 December 2019) confirm ESMA’s position that it is not possible to include a pro-forma summary in a base prospectus (Q&A 13.2) and the general position that annexes which apply to existing securities, should be applied to a prospectus for comparable securities (subject to assessing if additional information is needed) (Q&A 14.6).

• Application of ESMA’s Risk Factor Guidelines: Changes to risk factor disclosure under the Prospectus Regulation were one of the key topics of discussion and concern prior to the implementation of the Prospectus Regulation, in particular for corporate issuers. Under the Prospectus Regulation there is an increased emphasis on materiality, magnitude and probability with expected increased scrutiny from the national competent authorities on the risk factor section of a prospectus. With effect from 4 December 2019, ESMA’s guidelines relating to risk factors under the Prospectus Regulation came into force. These guidelines focus on the approach to be taken by national competent authorities in their review of risk factors in accordance with the Prospectus Regulation, particularly the requirements relating to specificity, materiality and the presentation of risk factors. On 13 January 2020, ESMA published a table showing which national competent authorities comply with or intend to comply with ESMA’s risk factor guidelines (with all by Hungary and Iceland currently specified to be complying and Hungary and Iceland listed as “intending to comply”). As a practical matter, issuers should expect to receive comments from the national competent authorities reviewing prospectuses seeking to ensure that the risk factors comply with ESMA’s guidelines. Such comments may address the specificity, materiality, or negative impact of risk factors on the issuer and guarantor, the presentation of risk factors, as well the removal of disclaimers and similar statements from the risk factor section. The number and level of detail of comments to risk factors seen to date from national competent authorities has varied from authority-to-authority.

• Selling Restrictions and Legends: European Economic Area and UK selling restrictions and legends for inclusion in prospectuses are required to be updated to reflect the implementation of the Prospectus Regulation. The principal changes required are to replace references to the Prospectus Directive with the Prospectus Regulation (and the relevant articles thereof). ICMA has noted that it is revising its suggested form of debt selling restrictions and legends, with draft revised language available to ICMA subscribers on request. Such selling restrictions and legends have also been updated in prospectuses approved and published since the implementation of the Prospectus Regulation in July 2019. Attention will also need to be paid to changes required following the UK’s withdrawal from the EU and following the expiration of the transition period at the end of 2020. In particular, references to the United Kingdom are currently being adopted to standard form prohibitions on sales to EEA retail investors. ICMA is also working on suggested updates to the retail cascade legends and associated final terms provisions in relation to the UK’s withdrawal from the EU.

• ESMA Final Report on Regulatory Technical Standards amending Delegated Regulation 2019/979: On 4 December 2019, ESMA published its final report proposing amendments to Delegated Regulation 2019/979 (which relates, inter alia, to the content of key financial information for prospectus summaries, classifications of prospectuses and advertisements). The final report proposes minor modifications to the standards set out in the Delegated Regulation published in June 2019, including (i) replacing the table in Annex I of the Delegated Regulation which sets out the cash flow statement for non-financial entities (equity securities) (Table 3); (ii) removing the requirement for issuers of securities convertible or exchangeable into third party shares to publish a supplement to their prospectus; and (iii) correcting certain typographical errors.

• ESMA report on the use of Alternative Performance Measures (APMs) and compliance with ESMA’s APM Guidelines: On 20 December 2019, ESMA published its report on the use of APMs and compliance with ESMA’s APM Guidelines, which have been in effect since July 2016. The APM Guidelines require issuers that include APMs in prospectuses, management reports and ad hoc disclosures to comply with principles regarding comparatives, consistency, unbiased nature, explanations, reconciliations and definitions of APMs. The principal aims of the APM Guidelines are to improve the comparability, reliability and comprehensibility of financial information, thereby contributing to investor protection, as well as a common basis of enforcement by European authorities.
  
  According to the APM Guidelines, an APM is a financial measure of historical or future financial performance, financial position or cash flows, other than a financial measure defined or specified in the applicable financial reporting framework. Typical examples of APMs include EBITDA, EBIT and Net Debt. ESMA’s report noted that the most commonly used APMs in the non-financial sector were EBIT, Operating Results, EBITDA and Net Debt, while, in the financial sector, the most commonly used APMs were Net Interest Income, Cost to Income Ratio and Return on Equity.
  
  ESMA’s report identified shortcomings in relation to compliance with APM principles regarding explanations, reconciliations and definitions, including in prospectuses, and ESMA encourages issuers to improve the transparency of disclosures provided in relation to APMs. In particular, EMSA has used the report to remind issuers that definitions and reconciliations are two different principles that require different disclosures, to separately identify all material components and/or all material reconciling line items and to provide entity-specific explanations of how and/or why the issuer uses APMs. The reassessment of the usefulness of APMs used by issuers is also encouraged by ESMA.
  
  ESMA has noted that it will continue to monitor developments and market practice with respect to APMs and that it expects that enforcers will take appropriate actions in connection with any material misstatements linked with the applications of APMs. Accordingly, issuers should continue to take care to carefully consider their obligations regarding APMs and compliance with the APM Guidelines and recommendations and conclusions made by ESMA in the December 2019 report and may expect increased scrutiny of the inclusion of APMs in disclosures going forward.

• ESMA’s Technical Advice on General Equivalence Criteria for Prospectuses Drawn Up under Third Country Law: In a letter to the European Commission published by ESMA on 31 January 2020, ESMA set out its technical advice on general equivalence criteria for prospectuses drawn up under the laws of third countries (i.e., non-EU countries) under Article 29(3) of the Prospectus Regulation. The letter requests that the European Commission considers whether an equivalence regime should be pursued given “serious practical challenges” raised by the proposed regime and feedback from national competent authorities and market stakeholders. ESMA highlights in the letter, in particular: (i) the supposed limited added value of the equivalence regime as third country prospectuses drafted in accordance with equivalent disclosure rules would still need to be scrutinised and approved under Prospectus Regulation disclosure rules; (ii) that the list of articles of the Prospectus Regulation set out in Article 29(3) to form the basis of the general equivalence criteria leaves out certain important aspects of the prospectus regime, including the risk factors, and does not clarify central elements of the equivalence regime, such as rights and obligations connected to a third country prospectus in the EU; and (iii) although not adopted, the identification in the European Commission’s 2017 proposal for an amending regulation that indicates that adjustments to Article 29 are required. ESMA also notes that third country issuers have access to EU markets through Article 28 of the Prospectus Regulation, the limited demand for an equivalence regime based on preliminary indications from competent authorities and market participants and the lack of a similar equivalence regime under the Prospectus Directive previously in force.