Changes to Rights and Duties resulting from prospectus supplements under the EU Prospectus Regulation

Changes to Rights and Duties resulting from prospectus supplements under the EU Prospectus Regulation

Key points

1. The EU Prospectus Regulation has been changed to make recovery from the COVID-19 pandemic easier.
2. For equity securities, a new EU Recovery Prospectus has been issued.
3. Withdrawal privileges have been extended from two to three working days after the release of a prospectus supplement.
4. The duties of financial intermediaries in relation to prospectus supplements have been explained and partially relaxed.
5.  The amendments are time-limited and do not apply to the United Kingdom.

Changing the law

A regulation amending the EU Prospectus Regulation was released in the Official Journal on February 26, 2021, and will take effect on March 18, 2021, in all EU member states. Its stated goal is to make it easier for businesses hit by the COVID-19 pandemic to recapitalize.

On equity instruments, the EU Recovery Prospectus:

The amending regulation's main change is to create a new short-form prospectus (dubbed the "EU Recovery Prospectus") that will be available to any issuer whose shares have been continuously admitted to trading on a regulated market or a SME growth market for at least the last 18 months, and whose prospectus will be used to issue shares that will be fungible with previously issued shares.

Extension of prospectus supplement withdrawal rights

The amending legislation also makes a significant difference to the rights of investors who have already agreed to buy shares prior to the issuance of a prospectus supplement to revoke their acceptances after the supplement is written. Investors who want to exercise these rights have two working days from the date the supplement was published (or any longer time as the issuer can allow) to do so. The amending legislation would increase the time limit for exercising withdrawal privileges from two to three working days.

Clarification of the duties of financial intermediaries in relation to prospectus supplements

The EU Prospectus Regulation regime imposed a new requirement on financial intermediaries to notify investors of the possibility of a prospectus supplement being published, as well as when and when such a supplement would be published, and that the financial intermediary would assist the investors in exercising their right to withdraw from their purchase or subscription acceptances as a result of such publication. More controversially, it required financial intermediaries to reach investors on the same day as the supplement was released. These provisions generated significant confusion over the extent of a financial intermediary's responsibilities in terms of which investors it would notify, as well as operational challenges in ensuring conformity with the same-day supplement notification provision.

Which investors must be informed of the possibility of a prospectus supplement?

The amending law clarifies that financial intermediaries must notify investors of the likelihood of a prospectus supplement only if they intend to buy securities from the financial intermediary between the time the prospectus for such securities is accepted and the end of the initial offer period.

Which investors must be informed of the publication of a prospectus supplement and by when?

When a supplement is written, the amending rule expands the time available for a financial intermediary to reach investors from the same day of publication to the working day after the day of publication.

The amending legislation clarifies that this duty only applies to investors who buy shares from a financial intermediary and who have a right of withdrawal due to the publication of the supplement.

Amendments time-limited

The revisions to the EU Prospectus Legislation made by the amending regulation are intended to aid recovery from the COVID-19 pandemic and are only in force until December 31, 2022. However, the EU Prospectus Regulation regime is due for a regular five-year overhaul on July 31, 2022, so it's unclear if these changes will be permanently adopted in one way or another as a result of this review.

Brexit

These reforms only apply to the EU Prospectus Regulation and have no counterpart in the UK Prospectus Regulation system, nor is there any suggestion that the UK will make any similar changes in the near future.