ESMA Consultation on Changes to the Format and Content of EU Prospectuses – Impact on non-equity securities

On 28 October 2024 ESMA published a consultation paper proposing amendments to the EU Prospectus Regulation regime with regard to the format and content of EU prospectuses. This is the first consultation from ESMA under the "Listing Act" amending regulation, and more consultations are expected to follow. This briefing explains the implications for issues of non-equity securities.

Key points

• The information in a prospectus in respect of non-equity securities will need to follow a prescribed order, though it is unclear whether this requirement would extend beyond a "standard" series-specific prospectus, registration document or securities note, to a more complex base prospectus that caters for multiple varieties of non-equity securities.
• The separate Annexes to the EU PR Regulation for wholesale and retail non-equity securities are to be merged into one set of Annexes for all "standard" non-equity securities, but as is currently the case certain content requirements will only apply for "retail" securities.
• A prospectus will need to include a cover note describing its subject matter.
• Detailed additional information will need to be included in a prospectus for non-equity securities that are advertised as considering ESG factors or pursuing ESG objectives.
• The requirement that a prospectus contains audited financial statements in respect of the issuer and any guarantor covering the latest two financial years is to be reduced to a single financial year.
• Where an issuer has published KPIs, financial and/or operational, or chooses to include KPIs in a prospectus, a description of the issuer’s KPIs for each financial year for the period covered by the historical financial information will need to be included in the prospectus.
• Competent authorities are to be granted enhanced powers in relation to the scrutiny and approval of prospectuses.
• The Listing Act also requires ESMA to develop guidelines on comprehensibility and on the use of plain language in prospectuses and the template and layout of prospectuses. This will presumably be the subject of a separate ESMA consultation to follow.
• The consultation closes on 31 December 2024 and ESMA expects to publish its final technical advice in the second quarter of 2025.

Background

On 8 October 2024 the Council of the EU formally adopted the package of measures known as the "Listing Act" which includes an amending Regulation which will amend the EU Prospectus Regulation (for more information on the Listing Act, see this Ashurst briefing). The different measures of the Listing Act will now be published in the Official Journal of the EU and will enter into force 20 days later. However, because some provisions of this amending Regulation have a deferred entry into application from 15 to 18 months, it seems likely that the bulk of the amendments to the EU Prospectus Regulation will not apply until July 2026.

This amending Regulation will, amongst other things, require the Commission to adopt various delegated acts to give effect to various of its provisions. As a result, following a formal request from the Commission, on 28 October 2024 ESMA published a consultation paper on draft technical advice under the EU Prospectus Regulation on the standardised format and standardised sequence of the information to be contained in a prospectus, base prospectus and final terms, and the schedules defining the specific information to be included in a prospectus. ESMA is also tasked to develop guidelines on the use of plain language in prospectuses; this will presumably be the subject of a separate ESMA consultation to follow.

Standardisation of prospectuses

Article 13 of the EU Prospectus Regulation tasks the Commission with adopting delegated acts which supplement the overarching requirement of the "necessary information" test by providing specific requirements for the format of the prospectus and for the information to be included in various different types of prospectus. The amending Regulation inserts in Article 13 a requirement that a prospectus must be a document of a standardised format and the information disclosed in a prospectus must be presented in a standardised sequence. The amending Regulation further inserts new Annexes I, II and III into the EU Prospectus Regulation and stipulates that the delegated acts must comply with those Annexes.

As a result, in the consultation paper ESMA proposes amending Commission Delegated Regulation (EU) 2019/980 (widely known as the EU PR regulation) to provide that the information in a "standard" prospectus must be presented in the order set out in those Annexes. This results in the information requirements of many of the Annexes to the EU PR regulation being significantly re-ordered even though in most cases the substance will be little altered.

ESMA explained that it has found making recommendations which balance the precise wording of recitals and provisions in the amending Regulation and the instructions in the Commission’s request for advice "challenging" in this context. The result is that ESMA has followed the strict sequencing of Annexes I, II and III to the EU Prospectus Regulation for the "standard" non-equity Annexes but has not applied it to other Annexes in the EU PR Regulation. ESMA says this strict sequencing may work well for a "standard" non-equity prospectus but it is not clear if such literal sequencing is feasible for a base prospectus that caters for multiple non-equity securities with building blocks, for example. ESMA "strongly encourages" respondents to state whether they disagree with this "very literal" interpretation of the amending Regulation.

Merger of retail and wholesale disclosure

The EU Prospectus Regulation regime refers to non-equity securities which satisfy one of the following conditions as "wholesale securities":

(a) they are to be traded only on a regulated market, or a specific segment thereof, to which only qualified investors have access;

(b) they have a denomination of at least EUR 100 000 (or equivalent),

and it refers to any other non-equity securities as "retail securities".

Currently, the specific requirements of the EU PR Regulation for information items which must appear in a prospectus describing non-equity securities differ depending upon whether the securities are wholesale or retail and these are set out in separate Annexes to the EU PR Regulation. In the consultation paper, ESMA seeks to do away with this distinction and specify one set of information items for all "standard" non-equity securities, albeit certain of the content requirements are specified to apply only to "retail" securities. The requirements for non-equity securities which are exchangeable for, or convertible into, shares or linked to an underlying asset are essentially unchanged.

Cover notes

Currently when stipulating the format of a prospectus, the first item which the EU PR Regulation mentions is a table of contents, followed by a summary if required. In the consultation paper, ESMA proposes to amend this by requiring a prospectus to include a short cover note before the table of contents. The stated intention is merely to ensure that cover notes describing the subject matter of a prospectus are placed prominently at the beginning of the prospectus and are not placed underneath pages of warnings or regulatory statements. We expect that most prospectuses should already comply with this requirement.

Green bond Annex

The Commission’s request for advice asks ESMA to develop a building block of additional information to be included in the prospectus for non-equity securities that are advertised as considering ESG factors or pursuing ESG objectives. Accordingly the consultation paper proposes inserting the following new definitions in the EU PR Regulation:

"Sustainability-linked bond" means non-equity securities for which the financial and/or structural characteristics are conditional on whether the issuer achieves predefined ESG objectives (including bonds defined in Article 2(6) of the EU Green Bond Regulation (Regulation (EU) 2023/2631)); and

"Use of proceeds bond" means non-equity securities whose proceeds are applied to finance or re-finance green and/or social projects or activities.

The consultation paper then goes on to propose a new Annex to the EU PR Regulation setting out the requirements for this new building block. For a use of proceeds bond the issuer will be required to disclose, amongst other things:

• the material risks regarding the allocation, the management of proceeds and the viability and achievement of the sustainable project(s);
• a summary of its framework or an electronic link to the its framework (with an appropriate disclaimer);
• a description of the goals and characteristics of the relevant sustainable projects or the criteria for selecting such projects; and
• whether the proceeds of the bond are ringfenced to sustainable projects or assets.

For a sustainability-linked bond the issuer will be required to disclose, amongst other things:

• the material risks regarding key performance indicators (KPIs) and associated sustainability performance targets (SPTs);
• any financial features of the securities such as interest or premium payments which are influenced by the fulfilment or failure to fulfil sustainability or ESG objectives.

Most of this required information is "Category A" information, which means in the context of an issuance under a programme that this information must appear in the base prospectus and cannot appear in the final terms. However in the case of use of proceeds bonds, the description of the goals and characteristics of the relevant sustainable projects is "Category B" information, which means that any relevant details not known at the date of the base prospectus may be inserted in the final terms. Also, whether the proceeds of the bond are ringfenced is "Category C" information, which means that this information may be inserted in the final terms. In the case of sustainability-linked bonds, information on financial features which are influenced by the fulfilment or failure to fulfil sustainability or ESG objectives is "Category B" information.

In all cases, if the securities are advertised as complying or aligned with a specific market standard, such as the ICMA’s Green Bond Principles, or the EU Taxonomy, or a third country taxonomy, the prospectus must state how the relevant criteria are met and that they are significant in relation to the ESG features.

Finally, the consultation paper notes that the relevant optional disclosures from the voluntary templates set out in the European Green Bond Regulation can be used to satisfy the disclosure requirements in this new Annex.

Historical financial information

Currently a prospectus for non-equity securities must contain audited financial statements in respect of the issuer and any guarantor covering the latest two financial years (at least 24 months) or such shorter period as the issuer or guarantor has been in operation. In the consultation paper, ESMA proposes reducing this requirement to one financial year (at least 12 months) or such shorter period as the issuer or guarantor has been in operation.

Key performance indicators (KPIs)

In the consultation paper ESMA proposes an additional disclosure item for retail non-equity securities. Where an issuer has published KPIs, financial and/or operational, or chooses to include KPIs in a prospectus, a description of the issuer’s KPIs for each financial year for the period covered by the historical financial information must be included in the prospectus. This is in addition to the current requirement in a stand-alone retail prospectus that the summary must include key financial information and in the case of a retail offer under a base prospectus that such information must be included in the issue specific summary.

New powers for competent authorities

Currently there appears to be considerable variation between national competent authorities (NCAs) in their approaches to setting timeframes for the scrutiny and approval of prospectuses. ESMA believes that two amendments to the EU PR Regulation harmonising timeframes during the scrutiny and approval process could help to improve predictability of the approval processes across the EU:

• If an NCA informs an issuer that a draft prospectus does not meet the relevant standards it may impose a deadline for the submission of an updated draft prospectus of at least 10 working days and, if the deadline passes without a fresh submission, the NCA may refuse approval of the prospectus.
• An NCA must take a decision to approve or refuse approval of a prospectus within 120 working days of the receipt of the initial application for approval of a draft prospectus. If the scrutiny of the prospectus exceeds this time period, the NCA must refuse approval of the prospectus. This deadline can be extended once upon application by the issuer for a period of 90 working days.

The consultation paper also proposes amending the EU PR Regulation to provide that, in the case of new types of securities, such as cryptoassets, or structured securities that display features that are comparable to but not the same as securities covered in the Annexes to the EU PR Regulation, the NCA will have the express power to require that the prospectus includes such additional information as is necessary to comply with the "necessary information test" in Article 6(1).

Comprehensibility and use of plain language

The amending Regulation requires ESMA to develop guidelines on comprehensibility and on the use of plain language in prospectuses and technical standards to specify the template and layout of prospectuses, including the font size and style requirements. This is not mentioned in this consultation paper so will presumably be the subject of a separate ESMA consultation which we can expect shortly as ESMA has 12 months from the date of entry into force of the amending Regulation to submit those draft implementing technical standards to the Commission.

Next steps

This consultation closes on 31 December 2024 and ESMA expects to publish its final report containing a final version of ESMA’s technical advice in the second quarter of 2025.