Listing Act: expanded prospectus exemptions

On 24 April 2024, the European Parliament adopted the EU Listing Act, a legislative package that includes changes to the Prospectus Regulation, the Market Abuse Regulation, MiFID II and MIFIR. The package aims to make the EU's public capital markets more attractive. The Listing Act has yet to be adopted by the EU Council and is expected to come into force in the next few months. This article is the first in a series of articles on some of the key changes the Listing Act is set to bring.

The "sub-20" prospectus exemption will become the "sub-30"exemption

There are going to be changes to various parts of the PR, including the prospectus exemptions. We won't go through all the changes to the exemptions here, but we will focus on a few specific ones.

The current PR has an important exemption for new admissions of securities of the same type as those already listed on the same market, up to 20% (over a 12-month period) of the number of securities already listed (Art. 1(5)(a) PR). The Listing Act makes this exemption more generous by setting the exemption threshold at 30%. This "sub-30 exemption" will be available for both public offers and admissions (new Art. 1(4)(da) PR), unless the issuer is going through an insolvency process or restructuring. If you use the exemption for a public offer, you'll need to publish a short form document (up to 11 pages). This is a new feature of the Listing Act. You don't need to obtain regulatory approval for this short form document, but you do need to file it with the relevant regulator (in the Netherlands this is the AFM) as soon as it is published. 

The original EC proposal for the Listing Act set the threshold for this exemption at 40%. During the consultation process, concerns were raised about investor protection and the liability of issuers and underwriters, including by the International Capital Markets Association (ICMA) and Eumedion, a Dutch representative of institutional investors. This may have prompted the European Parliament to put forward a counter-proposal to raise the threshold no further than 30%, which is now part of the final text of the Listing Act. This makes it seem like the 30% threshold is more of a compromise than the result of robust economic analysis. Still, 30% is higher than 20%, so it's fair to say that the increase reduces disclosure requirements to some extent.

New exemption for follow-on offerings and admissions by established issuers

The Listing Act also introduces a new prospectus exemption for follow-on offerings and admissions of securities that are fungible with securities that have already been listed on a regulated market for at least 18 months (new Art. 1(4)(db) and 1(5)(ba) PR). This follow-on exemption can't be used in connection with a takeover by means of an exchange offer, a merger or a division, and it's not available to issuers subject to an insolvency process or restructuring. The new short form document discussed above must also be published and filed with the regulator when this exemption is used. The exemption makes the existing exemption for second and subsequent listings redundant (Art. 1(5)(j) PR), so it will be deleted.

So, what do these expanded exemptions add?

If we've got the follow-on exemption, do issuers still need the sub-30 exemption? For established issuers (i.e. those that pass the 18-month test), the sub-30 exemption may not seem as relevant. However, for admissions only, the sub-30 exemption has the advantage of allowing a fully undocumented transaction, as it doesn't require issuers to publish the short form document. This advantage doesn't apply if there is a public offer element to the transaction, as in that scenario the short form document is still required if the sub-30 exemption is used. Less established issuers whose securities have been listed for less than 18 months don't get to choose between the sub-30 exemption and the follow-on exemption: for them, the sub-30 exemption is the only one available of the two. 

Both exemptions have their limits, though. They can only be applied to offers or admissions of securities that are fungible with securities already listed. This makes them suitable for accelerated book-build offerings (i.e. a private placement with selected qualified investors that is executed within a short timeframe), but not for rights issues (i.e. a pre-emptive grant of rights to existing shareholders that can be exercised for shares on payment) where rights giving access to newly issued shares are listed for a short period of time so they can be traded and the overall take-up of the rights issue is boosted. 

The speed at which an issuer can execute a capital raise isn't just down to whether or not a prospectus is needed. It also depends on other things, like whether the company can issue new shares without having to go through a lengthy corporate approvals process. If you want to know more, then see our recent article about Equity raises: prospectus exemptions and share issuance approvals.

Other things that could slow down the process are the risk appetite of issuers, underwriters and investors to engage in undocumented or lightly documented equity offerings, especially the larger ones. For larger offerings, we might still see a preference for more substantial disclosure that has been approved by a regulator. An issuer can always choose to go for a voluntary prospectus that has been approved by the regulator, even if they can use a prospectus exemption. 

Alternative: the EU follow-on prospectus

Another new feature of the Listing Act is the EU follow-on prospectus. This will be available from H2 2025 (i.e. 15 months after the Listing Act comes into effect). Is this really new? Not quite. It's actually the successor to the EU Recovery Prospectus that was introduced during the pandemic but has now expired.

It's a prospectus and not an exemption, but it could be a solution for some of the potential concerns market participants may have about applying the exemptions we've discussed above. 

The EU follow-on prospectus is a shorter version of the usual prospectus, with a maximum of 50 pages (for equity transactions). It has to be approved by the relevant regulator before it's published. It can be used by companies that have had securities listed on a regulated market for at least 18 months. This might sound familiar from the follow-on exemption we talked about earlier, but there's one key difference. The securities covered by the follow-on prospectus don't have to be the same as the ones already listed. So, the prospectus can be used for an initial public offering or admission of a new type of securities. 

This means that the EU follow-on prospectus can be used for rights issues by established issuers, even though the rights are new securities that have not previously been listed. And it's even allowed for distressed rights issues, since there's no restriction for issuers that are going through an insolvency process or restructuring, as there is for the follow-on exemption. But in any distressed situation it's worth thinking about whether such a shorter prospectus will be appropriate disclosure towards investors and also a good idea from a liability perspective.

It's even possible that this EU follow-on prospectus will be used by issuers on a voluntary basis in certain cases where they could rely on an exemption and don't have to publish a prospectus at all. After all, Article 4 PR allows for a voluntary prospectus, which includes the EU follow-on prospectus. This could be a solution to think about for larger transactions. The EU follow-on prospectus is more substantial than the short form document and could give investors the added reassurance of being approved by a regulator, without the full burden of a regular prospectus.