Is a prospectus required?

Question 1

Purpose of prospectus

Answer 1

A prospectus has 2 primary purposes:

i) Ensure that the company complies with its regulatory requirements under FSMA and the PRs
ii) Market the issue to investors

• Note that there is a slight tension in that the prospectus is a disclosure document that is legally required but also attempts to market the company in the best possible light.

Question 2

What are the tests?

Answer 2

Arts. 3(1) and (3) of the Prospectus Regulation apply with direct force in the UK, and provide that a prospectus is required where:

1. Transferable securities are being offered to the public: Test 1; AND/OR
2. Transferable securities are being admitted to trading on a regulated market: Test 2.

EXAM NOTE: even if one test is satisfied, always consider whether the other test is also satisfied

Question 3

Question 1 - to what securities does it apply?

Answer 3

Question 1 – are the shares transferable securities?
- This regime only applies to securities which qualify as “transferable securities”.
- PRR 1.2.2 – Equity securities are transferable securities.
• Can it be transferred i.e. traded or sold.
- Certain “transferable securities” then fall out of scope of the requirement for a prospectus under both Tests – see PRR 1.2.2EU/Art. 1(2), Prospectus Regulation, which is also referred to in ss. 85(5) and (6) FSMA.
- However, for the purposes of the Equity Finance module, the key point to retain is that equity shares fall within the definition of “transferable securities”, and do not fall out of scope as a result of PRR 1.2.2EU/Art. 1(2), Prospectus Regulation

Question 4

Question 2 = Test 1

Answer 4

Offer of transferable securities to the public

• PRR 1.2.1/s. 85 FSMA: Test 1
• An “offer of transferable securities to the public” for the purposes of Test 1 is very broadly defined.
• Definition in Prospectus Regulation copied out in PRR Appendix 1, Relevant definitions and also the definition in s.102B FSMA.
• The definition of what is an “offer of transferable securities to the public” for these purposes includes:
  a) a communication in any form, by any means; which
  b) presents sufficient information on the transferable securities to be offered and the terms on which they are offered to enable an investor to decide to buy the securities in question (see the Prospectus Regulation definition set out in PRR, Appendix 1 (Relevant definitions) and also the definition in s.102B(1) FSMA).
• s.102B(2) FSMA also states that for the purposes of Part 6 of FSMA, to the extent that an offer of transferable securities is made to a person in the UK, it is an offer of transferable securities to the public in the UK. Both definitions also specifically provide that this includes the placing of securities through a financial intermediary.
• Can cover any form of communication, provided that the communication presents sufficient information on the terms of the offer and the securities to be offered to enable an investor to decide to buy or subscribe for those securities.

Question 5

Exemptions to Test 1

Answer 5

i) Offers addressed solely to “qualified investors” (PRR 1.2.3/Art.1(4)(a), Prospectus Regulation)
The definition of “qualified investor” is set out in Art. 2(e) of the Prospectus Regulation and covers various types of professional investor. The key point for students is that this exemption would be relevant to most, if not all, investors in a placing.
ii) Offers addressed to fewer than 150 natural or legal persons per EEA State (Art.1(4)(b), Prospectus Regulation)
This exemption can be combined with the exemption above (see PRR 1.2.5EU/Art. 1(6), Prospectus Regulation). This means that an offer can be made to up to 149 non-qualified investors in each EEA State (which can be in addition to qualified investors) without the issuer needing to prepare a prospectus.
iii) Securities offered to directors or employees, or former directors or employees (Art.1(4)(i), Prospectus Regulation).
- Neither exemption would be relevant to a flotation.

• Note, even if an exemption applies, no conclusion about whether a prospectus is required can be drawn until Test 2 has been considered.

Question 6

Question 3 – Test 2

Answer 6

Admission of securities to trading on a regulated market

• PRR 1.2.1/S. 85 FSMA – Admission of securities to trading on a regulated market.
• The Main Market of the London Stock Exchange (“LSE”) is a regulated market and, therefore, any securities admitted to the Main Market of the LSE will be caught by Test 2.
• N.B. AIM, however, is not a regulated market. Consequently, the only time a prospectus may be required for an AIM company is where an offer of transferable securities is made to the public (Test 1).

Question 7

Exemptions to test 2

Answer 7

i) Securities fungible with securities already admitted to trading on the same regulated market (i.e. certain secondary issues of shares) (Art. 1(5)(a), Prospectus Regulation)
This is an exemption for the admission of securities that are fungible with (i.e. are the same class as) securities already admitted to trading on the same regulated market, provided that they represent, over a period of 12 months, less than 20% of the number of securities already admitted to trading on the same regulated market.
This means that a listed company can issue new shares equalling less than 20% of its existing listed share capital without having to produce a prospectus, so long as the offer of shares does not fall within Test 1 (i.e. shares are not being offered to the public or the offer falls within a Test 1 exemption).
NOTE: this exemption is not available on an IPO, as there will be no shares that are already admitted to trading at that point.
n.b. make sure to conclude e.g. although the offer may fall within an exemption to Test 1 under PRR 1.2.3EU/Art. 1(4), Prospectus Regulation (because the offer is being made to qualified investors), it will not fall within an exemption to Test 2.

Question 8

Consequences of breach

Answer 8

• Breaches of the Prospectus Regulation and the PRRs allow the FCA to impose penalties on the person who has committed the breach under s. 91 FSMA, but do not constitute a criminal offence.
• However, the Prospectus Regulation specifically envisages that member states may provide for and impose their own criminal sanctions - which is where the provisions of s. 85 FSMA come in. Ss. 85(1) and (2) FSMA create their own version of Tests 1 and 2, and provide that breach of these tests will cause a person to be guilty of an offence under s. 85(3) FSMA, and liable to imprisonment or a fine