New ESMA Guidelines on Prospectus Disclosure

Alert

21 August 2020

5 min read

Inigo Esteve |

Jonathan Parry |

Andrew Scott |

Josh Hirschowitz

Prospectus Regulation

ESMA publishes Final Report on prospectus disclosure guidance to replace CESR Recommendations

Background

On 15 July 2020, ESMA published its Final Report¹ on guidelines for disclosure requirements under the Prospectus Regulation², containing the final version of the guidelines (the "ESMA Guidelines"). The Final Report follows responses received on ESMA's July 2019 Consultation Paper³.
The ESMA Guidelines included in the Final Report substantially update and will replace the existing guidance provided in the CESR Recommendations⁴, originally adopted in 2005 by ESMA's predecessor, CESR and most recently updated by ESMA in 2013.
While the CESR Recommendations provided guidance in relation to disclosure requirements under the old Prospectus Directive⁵ and related legislation, the ESMA Guidelines provide guidance on the prospectus disclosure requirements under the Commission Delegated Regulation⁶ supplementing the Prospectus Regulation which came into force on 21 July 2019.
The ESMA Guidelines have been drafted pursuant to Article 16(3) of the ESMA Regulation⁷ and, in accordance with that article, competent authorities and financial market participants in EEA member states must make every effort to comply with the guidelines. Under the ESMA Regulation's 'comply or explain' regime, competent authorities must notify ESMA whether or not they comply within two months of publication of the guidelines on ESMA's website.
The ESMA Guidelines will also be applicable in the UK provided they come into force during the post-Brexit transition period which expires on 31 December 2020.

Content of ESMA Guidelines and key changes from CESR Recommendations

The ESMA Guidelines largely follow the same order and carry over the content of the CESR Recommendations with some simplifying drafting changes. In some areas, ESMA has added new guidelines and has also amended or added new content in the explanatory text. The changes made by ESMA were either proposed in the Consultation Paper or were included based on respondents' reactions to the consultation.
Guidance from a number of the disclosure-related responses in ESMA's Questions and Answers on prospectuses⁸ (last updated in April 2019) have also been carried across to the ESMA Guidelines.
While the majority of changes are non-substantive amendments, the ESMA Guidelines include the following key changes:

Pro forma financial information	ESMA now requires disclosure of aggregated pro forma information for multiple transactions that individually do not, but collectively do, meet the 25% threshold unless the issuer can explain why such disclosure would be unduly burdensome. ESMA considers this to be an important policy change from an investor protection perspective.
Working capital statements	ESMA has replaced the previous CESR Recommendation wording on inclusion of assumptions in working capital statements ("not normally acceptable") with more restrictive guidance stating that where an issuer finds it necessary to include assumptions, it should provide a qualified working capital statement. It is currently unclear whether this will affect the FCA's position on COVID-19 related assumptions under its 8 April 2020 statement of policy and related technical supplement. ESMA has also included a new guideline to clarify that proceeds from an offer should only be counted for working capital purposes to the extent they are underwritten on a firm commitment basis (i.e. underwritten at a fixed or minimum price) or covered by irrevocable undertakings, and that issuers should also consider the credit risk associated with the parties providing such commitments.
Capitalisation and indebtedness	The required contents of the statement of indebtedness and related explanatory notes have been amended to align with IFRS.
Profit forecasts and estimates	ESMA has included more extensive guidance for issuers on making profit forecasts and estimates easily comparable with historical financial information in the prospectus, including where forecasts are based on pro forma information, where subsequent events have arisen and where changes have occurred in the issuer's accounting policies.
Credit institutions/ insurers	In a number of areas ESMA has added new guidance for credit institutions and insurers/re-insurers to consider and reflect their specific business models, including relevant prudential ratios, when preparing OFR, working capital and capitalisation and indebtedness disclosures.

The following items from the CESR Recommendations have not been carried over to the ESMA Guidelines:

Specialist Issuers	The CESR Recommendations for mineral companies, property companies and other specialist issuers (paragraphs 128-145) are not currently being updated or replaced, although ESMA plans to address this area in the future. ESMA will not rescind these paragraphs of the CESR Recommendations so issuers and their advisers can continue to apply them for the time being.
Selected Financial Information	The CESR Recommendations relating to selected financial information (paragraphs 20-26) have not been converted into guidelines because selected financial information is no longer required under the Prospectus Regulation.
Financial Data not Extracted from Issuer's Audited Financial Statements	The relevant CESR Recommendations (paragraphs 95-97) have also not been converted into guidelines.

Next Steps

The final ESMA Guidelines will be translated into the official EU languages and published on ESMA's website. They will become effective two months after publication on ESMA's website in all the official languages. There is currently no indication from ESMA on timing for publication of the guidelines.

Conclusion

We believe the ESMA Guidelines will add clarity. They largely maintain the existing guidance under the CESR Recommendations (which is well understood by market participants and their advisers), but where relevant provide helpful updates to simplify drafting, align with IFRS and to reflect changes between the old disclosure requirements under the Prospectus Directive and the current requirements under the Prospectus Regulation, which should make the guidance easier to navigate.

_{1 Final Report: ESMA Guidelines on disclosure requirements under the Prospectus Regulation of 15 July 2020

2 Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017

3 ESMA's 12 July 2019 consultation paper on the draft guidelines

4 ESMA update of the CESR recommendations: The consistent implementation of Commission Regulation (EC) No 809/2004 implementing the Prospectus Directive of 20 March 2013

5 Prospectus Directive (2003/71/EC)

6 Commission Delegated Regulation (EU) 2019/980 of 14 March 2019

7 Regulation (EU) 1095/2010

8 Questions and Answers Prospectuses 30th updated version – April 2019}