8 August 2011
Changes to Prospectus Exemptions
Corporate
The Prospectus Regulations 2011 (2011/1668) have amended certain parts of the Financial
Services and Markets Act 2000 ("FSMA") in relation to prospectus exemptions, with effect from
31 July 2011, as follows:
Capital Markets
AIM
 the number of investors to whom an offer of securities may be made before a prospectus is
required has increased from 100 to 150 investors; and
 the total size of the offer that may be made before a prospectus is required has increased from
€2.5 million to €5 million.
The Government believes that these measures will help businesses (and small businesses in
particular) raise equity finance more efficiently because fewer offers will require the production of
a prospectus.
Legislative Background
The UK implemented the EU Prospectus Directive (2003/71/EC) (the "Prospective Directive")
on 1 July 2005. The aim of the Prospectus Directive is to standardise the requirements for the
disclosure document for a public offer of transferable securities in the EU or for the admission of
such securities to trading on an EU regulated market. Under the Prospectus Directive, a prospectus
that is approved by the relevant EU member state authority (in the UK this is the Financial
Services Authority (the "FSA") may be used for public offers and admissions of securities to
trading on regulated markets throughout Europe.
The Prospectus Directive was implemented in the UK through Part 6 of FSMA (which sets out the
basic requirements for a prospectus, certain exemptions and the process for approving a
prospectus) and the Prospectus Rules (which set out further detailed requirements on prospectuses
and contain additional exemptions).
On 24 September 2009, the European Commission published a proposal to amend the Prospectus
Directive. The stated aims of the proposal were to provide greater clarity to the rules, reduce
administrative burdens for issuers and intermediaries, introduce a more proportionate disclosure
regime and help retail investors analyse the risks posed by a security before investing. On 24
November 2010, the European Parliament and Council adopted Directive 2010/73/EU amending
the Prospective Directive (the "Amending Directive"). Although EU member states have until 1
July 2012 to implement the Amending Directive, the Government has implemented certain aspects
of the directive early.
Legal Background to the Exemptions
Under section 85 of FSMA, the requirement for a company to issue a prospectus approved by the
FSA is triggered by the offer of transferable securities to the public in the UK or by a request for
the admission of transferable securities to trading on a regulated market situated or operating in
the UK. There are exemptions to the prospectus requirements in section 86 of FSMA and also the
Prospectus Rules.
Section 86 of FSMA previously provided that an offer made to or directed at fewer than 100
persons, other than 'qualified investors' (including banks, investment institutions and national and
regional governments), per EEA state, is exempt from the requirement to produce a prospectus.
The Amending Directive increased this threshold to 150 persons per EEA state and this
amendment took effect in the UK from 31 July 2011. 8
Changes to Prospectus Exemptions
Schedule 11A to FSMA previously provided that a public offer will be exempt from the
requirement for a prospectus if the total consideration for the offer is less than €2.5 million. The
Amending Directive increased this threshold to €5 million and clarifies that this limit should be
calculated on an EEA-wide basis. This change was implemented in the UK with effect from 31
July 2011. An issuer will only be able to take advantage of the increased threshold for making
offers into other member states without a prospectus, however, once all member states that are
relevant for the purposes of that offer have implemented the amendment. If one of more relevant
member states has not done so, the offer will need to fall below the €2.5 million threshold in order
to take advantage of the exemption.
The remaining provisions of the Amending Directive have to be implemented into UK law by no
later than 1 July 2012. These will include further significant reforms such as amending the
definition of a qualified investor and altering various other financial thresholds. Care is needed on
multi-jurisdictional transactions in the meantime, since other EEA member states may wait until
the 2012 deadline to introduce the two changes above alongside the other reforms.
It is also worth remembering that both of these changes are only relevant to the 'public offer'
element of the Prospectus regime - they do not affect the position of a company that applies for its
shares to be admitted to trading on a regulated market.
Conclusion
The intention of the two measures introduced by the new Prospectus Regulations is to reduce the
administrative burdens on issuers. Although the Prospectus Regulations will not affect companies
seeking admission to the Official List (which is a regulated market) nor many companies on AIM
(because they are likely to want to raise funds primarily from 'qualified investors' and such
fundraisings already fall within an exemption from the prospectus requirement), the amendments
should make it easier for smaller companies to gain access to capital because offers of securities
are less likely to require a prospectus in the future.
Authors:
James Green
james.green@klgates.com
+44.(0)20.7360.8105
Lucy Strauss
lucy.strauss@klgates.com
+44.(0)20.7360.8175
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