European Regulatory Approach to Prospectuses

(with special regard on the rules of Commission Regulation (EC) No 809/2004)

The purpose and main features of prospectus documents in IPO transactions

In the course of an initial public offering the prospectus is the primary informational and marketing document for investors. In fact, the issuer tells the story of the company (and that of the security) in this document.[1] It contains all the information that might be necessary for the investors for making a decision regarding the investment.[2] During its preparation it also has to be taken into consideration that the prospectus must comply with the rules of the stock exchange where the securities are to be listed. For issuing shares at foreign markets it is advisable to prepare the prospectus in the language used in the international financial sector.

In principle, each state, securities commission and stock exchange has its own regulation concerning the content of the prospectus. At the same time, each has similar characteristics. In 1998 the International Organization of Securities Commissions (IOSCO) released its own international disclosure standards(International Disclosure Standards) in order to promote cross-border offerings. The standards are meant to guarantee the comparability of information and high levels of investor protection. As content requirements of the prospectus, ten different categories are indicated. The order and organization of information can be changed, but each item has to be incorporated. This is important, because the effective Community regulation on prospectus is also founded on the above standards with regard to the content requirements.[3] In the European Union, Commission Regulation (EC) No 809/2004 lays down the format of prospectus and the minimum information requirements to be included in a prospectus.[4]

The prospectus is indispensable during the transaction for three reasons. Firstly, it is a statutory obligation to prepare one, secondly, it is an essential marketing tool, and thirdly, an accurate prospectus reduces possible liability arising from misleading investors. Thus, it has to fulfil several functions. As it reduces the liability of the company’s management, it should be sufficiently long, yet to-the-point. Nevertheless, its marketing function should not be neglected either during the preparation.[5]

The disclosure of the prospectus provides the investors the necessary data in order to evaluate the securities.[6] It gives an accurate picture of the shares offered for purchase, the financial situation of the company and its capital structure. It contains the description of the company’s business activity, and the presentation of business results from the last period.[7] The composition of these data is primarily the task of the issuer and the investment service provider acting as lead bank. The basis of the prospectus is the information reviewed and compiled in the course of the due diligenceinvestigation. Consultants of investment service providers participating in the transaction also review and complete the prospectus[8], and auditors check all of its statements of financial relevance, and confirm their accuracy (this is the so-calledcomfort letter). Regarding questions of liability, the legal advisor assists in the preparation of the document. However at the end of the day the company is liable for the content and the accuracy of the data.[9]

The legal advisor also reports on whether the prospectus can be regarded as complete, and whether the data included in it are accurate.

On the other hand the prospectus has a significant marketing role as well. It is advisable to make a favourable impact and to promote purchase intentions. Therefore, it contains the strategy of the company and its investment activity; it also indicates the position of the company within the industry. Preparing the prospectus is an important and time-consuming element of the IPO process. The full length of a prospectus might even be 300–400 pages. Accordingly one must devote sufficient time for its preparation in the timetable of the transaction. The preparation might last for one or two months depending on the company and the amount of data to be processed. As it was pointed out previously, the issuer, his legal advisor, the auditors and investment service providers also take part in preparing the prospectus. Conflicts of interest may arise between issuer and the underwriter during an IPO which is why the NASDAQ requires to use independent investment bank as an adviser.[10] The drafting requires considerable experience in order to find the delicate balance between the different functions. On one hand, it has to meet legal requirements and the regulations connected to listing; on the other hand, it has to function as an effective marketing tool as well.[11]

Provisions of Regulation 809/2004/EC on the contents of the prospectus

The preparation of the prospectus is regulated in the European Union by Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC (Prospectus Directive). However, Commission Regulation (EC) No 809/2004 of 29 April 2004 implementing Directive 2003/71/EC of the European Parliament and of the Council as regards information contained in prospectuses as well as the format, incorporation by reference and publication of such prospectuses and dissemination of advertisements contains the exact, detailed and obligatory rules of the content of the prospectus in the European Union.

Pursuant to the Prospectus Directive, Article 25 of the Regulation sets forth that it is possible for an issuer, an offeror or a person asking for the admission to trading on a regulated market to draw up the prospectus as a single document. In this case, it contains the following parts in the following order: clear and detailed table of contents, the summary – provided for in Article 5 (2) of Directive 2003/71/EC -, the risk factors linked to the issuer and the type of security covered by the issue, the other information items included in the schedules and building blocks according to which the prospectus is drawn up.[12]

If an issuer, an offeror or a person asking for the admission to trading on a regulated market chooses – according to Article 5 (3) of Directive 2003/71/EC – to draw up a prospectus composed of separate documents, the securities note and the registration document shall be each composed of the following parts in the following order: a clear and detailed table of contents; as the case may be, the risk factors linked to the issuer and the type of security covered by the issue; the other information items included in the schedules and building blocks according to which the prospectus is drawn up. The order of these parts cannot be altered.[13]

However, the issuer, the offeror or the person asking for admission to trading on a regulated market shall be free in defining the order in the presentation of the required information items included in the schedules and building blocks according to which the prospectus is drawn up.[14] Where the order of the items does not coincide with the order of the information provided for in the schedules and building blocks according to which the prospectus is drawn up, the competent authority of the home Member State may ask the issuer, the offeror or the person asking for the admission to trading on a regulated market to provide a cross reference list for the purpose of checking the prospectus before its approval. Such list shall identify the pages where each item can be found in the prospectus.[15]

The Regulation applies so-called schedules, which mean a list of minimum information requirements adapted to the particular nature of the different types of issuers and/or the different securities involved.[16] A prospectus shall be drawn up by using one or a combination of the schedules and building blocks set out in the Regulation.[17] Building block means a list of additional information requirements, not included in one of the schedules, to be added to one or more schedules, as the case may be, depending on the type of instrument and/or transaction for which a prospectus or base prospectus is drawn up.[18]

Share Registration Document

For the share registration document, information shall be given in accordance with the schedule set out in Annex I of the Regulation.[19] The most important elements of the share registration document are the following:

The share registration document must indicate all persons responsible for the information given in the registration document and, as the case may be, for certain parts of it, (with, in the latter case, an indication of such parts).[20] A declaration must also be attached by those responsible for the registration document that, having taken all reasonable care to ensure that the information contained in the registration document is, to the best of their knowledge, in accordance with the facts and contains no omission likely to affect its import.[21]

It is necessary to introduce the statutory auditors of the issuer. Information must be provided on the names and addresses of the issuer’s auditors for the period covered by the historical financial information (together with their membership in a professional body).[22] If auditors have resigned, been removed or not been re-appointed during the period covered by the historical financial information, details shall be indicated, if material.[23]

Thereafter the registration document includes selected (historical) financial information regarding the issuer, presented for each financial year for the period covered by the historical financial information, and any subsequent interim financial period, in the same currency as the financial information. The selected historical financial information must provide the key figures that summarise the financial condition of the issuer.[24]

The risk factors specific to the issuer or its industry shall be prominently disclosed.[25]

The next part of the registration document is the information about the issuer. This part includes the history and development of the issuer, in which also the important events in the development of the issuer’s business are mentioned. Also some basic information has to be divulged at this point, such as the legal and commercial name and place of registration of the issuer and its registration number; the domicile and legal form of the issuer, the legislation under which the issuer operates, its country of incorporation, and the address and telephone number of its registered office; and the date of incorporation and the length of life of the issuer (except where indefinite).[26]Information about the investments of the issuer can also be read here, which provide a description, (including the amount) of the issuer’s principal investments for each financial year for the period covered by the historical financial information up to the date of the registration document,[27] and also about the issuer’s principal investments that are in progress, or on which its management bodies have already made firm commitments.[28]

In connection with the business overview of the issuer, his principal activities[29] and principal markets[30] must be disclosed.

It is necessary to introduce the organizational structure of the issuer. Within the frame of this – if the issuer is part of a group – a brief description of the group and the issuer’s position therein are needed.[31] A list of the issuer’s significant subsidiaries also has to be included, including name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held.[32]

Property, plants and equipment of the issuer also have to be disclosed, that is information regarding any existing or planned material tangible fixed assets, including leased properties, and any major encumbrances thereon.[33] A description of any environmental issues that may affect the issuer’s utilization of the tangible fixed assets can also be found here.[34]

To the extent not covered elsewhere in the registration document, it is necessary to provide a description of the issuer’s financial condition, changes in financial condition and results of operations for each year and interim period, for which historical financial information is required, including the causes of material changes from year to year in the financial information to the extent necessary for an understanding of the issuer’s business as a whole.[35] Operating results are also important elements of the share registration document which consists of information regarding significant factors, including unusual or infrequent events or new developments, materially affecting the issuer’s income from operations, indicating the extent to which income was so affected. Where the financial statements disclose material changes in net sales or revenues, a narrative discussion has to be provided of the reasons for such changes. Information regarding any governmental, economic, fiscal, monetary or political policies or factors that have materially affected, or could materially affect, directly or indirectly, the issuer’s operations shall also be included.[36]

The capital resources of the company also have to be revealed in the registration document. These include information concerning the issuer’s capital resources (both short and long term), an explanation of the sources and amounts thereof and a narrative description of the issuer’s cash flows, information on the credit needs and funding structure of the issuer, information regarding any restrictions on the use of capital resources that have materially affected, or could materially affect, directly or indirectly, the issuer’s operations.[37]

Information must be included on research and development, patents and licenses. Where material, a description shall be provided of the issuer’s research and development policies for each financial year for the period covered by the historical financial information, including the amount spent on issuer-sponsored research and development activities.[38]

The registration document presents the most significant recent trends in production, sales and inventory, and costs and selling prices since the end of the last financial year to the date of the registration document.[39] Information can also be found there on any known trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on the issuer’s prospects for at least the current financial year.[40]

If an issuer chooses to include a profit forecast or a profit estimate, the registration document must contain the information set out in the Regulation.[41] According to Annex I. point 13.1. – 13.2., a statement shall be provided, setting out the principal assumptions upon which the issuer has based its forecast, or estimate. There must be a clear distinction between assumptions about factors which the members of the administrative, management or supervisory bodies can influence and assumptions about factors which are exclusively outside the influence of the members of the administrative, management or supervisory bodies. The assumptions must be readily understandable by investors, be specific and precise and not relate to the general accuracy of the estimates underlying the forecast.[42] Also a report is necessary, which is prepared by independent accountants or auditors stating that in the opinion of the independent accountants or auditors the forecast or estimate has been properly compiled on the basis stated, and that the basis of accounting used for the profit forecast or estimate is consistent with the accounting policies of the issuer.[43] Further requirements are defined by Annex I. point 13.2. – 13.4.

Administrative, management, and supervisory bodies and senior management (names, business addresses, functions, principal activities performed outside the issuer, management expertise and experience) and their possible conflicts of interests also have to be mentioned.[44] The registration document must provide information on remuneration and benefits[45], as well as board practices.[46]

Important information on employees of the company shall also be disclosed, namely, the actual and average number of employees and – if possible and material – a breakdown of employees by category of activity and geographic location. If the issuer employs a significant number of temporary employees, the number of temporary employees on average during the most recent financial year shall be indicated as well.[47] With respect to administrative, management, supervisory bodies and senior management, information shall be provided as to their share ownership and any options over such shares in the issuer as of the most recent practicable date.[48] A description is needed about any arrangements for involving the employees in the capital of the issuer.[49]

The major shareholders of the issuer must also be revealed. Within the frame of this, – in so far as is known to the issuer, – the name of any person other than a member of the administrative, management or supervisory body who, directly or indirectly, has an interest in the issuer’s capital or voting rights which is notifiable under the issuer’s national law, together with the amount of each such person’s interest. If there are no such persons, an appropriate negative statement is necessary.[50] To the extent known to the issuer, it must be stated whether the issuer is directly or indirectly owned or controlled and by whom.[51] The registration document shall also describe the nature of such control and the measures in place to ensure that such control is not abused.[52]Any possible changes in the control[53] of the issuer shall also be described.[54] The registration document shall include, whether the issuer’s major shareholders have different voting rights.[55]

Details of related party transactions must be disclosed in the registration document in accordance with Regulation (EC) No 1606/2002[56].[57]

The next part of the registration document is the financial information concerning the issuer’s assets and liabilities, financial position and profits and losses. This contains historical financial information[58], pro forma financial information[59], financial statements[60], auditing of historical annual financial information[61], the age of the latest financial information[62], interim and other financial information[63], dividend policy[64], legal and arbitration proceedings[65], and any significant change in the issuer’s financial or trading position[66].

Pro forma financial information is to be presented as set out in Annex II of Commission Regulation (EC) No 809/2004, and must include the information indicated therein. This building block must include a description of the transaction, the businesses or entities involved and the period to which it refers, and must clearly state the following: the purpose to which it has been prepared; the fact that it has been prepared for illustrative purposes only; the fact that because of its nature, the pro forma financial information addresses a hypothetical situation and, therefore, does not represent the company’s actual financial position or results. In order to present pro forma financial information, a balance sheet and profit and loss account, and accompanying explanatory notes, depending on the circumstances may be included. Pro forma financial information must normally be presented in columnar format, composed of: the historical unadjusted information; the pro forma adjustments; and the resulting pro forma financial information in the final column. The sources of the pro forma financial information have to be stated and, if applicable, the financial statements of the acquired businesses or entities must be included in the prospectus. For further information about this building block See. Annex II of Commission Regulation (EC) No 809/2004.[67] Pro forma financial information must be accompanied by a report prepared by independent accountants or auditors.

Subsequently, the registration document must contain additional information on share capital, the Memorandum and the Articles of Association of the company.[68]

In connection with material contracts, a summary of each of them, other than contracts entered into in the ordinary course of business is needed, to which the issuer or any member of the group is a party, for the two years immediately preceding publication of the registration document. It is necessary to provide a summary of any other contract (not being a contract entered into in the ordinary course of business) entered into by any member of the group which contains any provision under which any member of the group has any obligation or entitlement which is material to the group as at the date of the registration document.[69]

In addition, it is necessary to incorporate third party information and statement by experts and declarations of any interest in the registration document. Pursuant, where a statement or report attributed to a person as an expert is included in the registration document, such person’s name, business address, qualifications and material interest in the issuer (if any) shall be indicated. If the report has been produced at the issuer’s request, a statement shall be included to the effect that such statement or report is included, in the form and context in which it is included, with the consent of the person who has authorized the contents of that part of the registration document[70] (see for example, the comfort letter issued by auditors).[71] If information has been sourced from a third party, a confirmation shall be provided that this information has been accurately reproduced and that as far as the issuer is aware and is able to ascertain from information published by that third party, no facts have been omitted which would render the reproduced information inaccurate or misleading. Also the source of the information shall be identified.[72]

At the end of the registration document the documents on display[73] and information on holdings can usually be found. The latter must disclose information relating to the undertakings in which the issuer holds a proportion of the capital likely to have a significant effect on the assessment of its own assets and liabilities, financial position or profits and losses.[74]

Share securities note

In the case of shares, the securities note contains information concerning the securities to be offered and/or admitted to trading.[75] The securities note contains the introduction of the securities to be offered and of the marketing procedure. During its preparation, the schedules and building blocks in relation to a particular security and issuer pursuant to Regulation (EC) No 809/2004 also have to be considered.[76]

The minimum disclosure requirements for the share securities note include the persons responsible for the prospectus: all persons responsible for the information given in the prospectus and, as the case may be, for certain parts of it, with, in the latter case, an indication of such parts. In the case of natural persons including members of the issuer’s administrative, management or supervisory bodies the name and function of the person; in case of legal persons the name and registered office shall be indicated.[77] Also a declaration is needed by those responsible for the prospectus (or for certain parts of the prospectus) that, having taken all reasonable care to ensure that the information contained in the prospectus (or in the part of the prospectus) is, to the best of their knowledge, in accordance with the facts and contains no omission likely to affect its import.[78]

The share securities note must ensure the prominent disclosure of risk factors that are material to the securities being offered and/or admitted to trading in order to assess the market risk associated with these securities in a section headed ‘Risk Factors’.[79]

Under “Essential information” a statement is presented by the issuer that, in its opinion, the working capital is sufficient for the issuer’s present requirements or, if not, how it proposes to provide the additional working capital needed (working capital statement)[80]. A statement of capitalization and indebtedness (distinguishing between guaranteed and unguaranteed, secured and unsecured indebtedness) as of a date no earlier than 90 days prior to the date of the document shall be included (capitalization and indebtedness) must be provided. Indebtedness also includes indirect and contingent indebtedness.[81] A description is provided of any interest, including conflicting ones that is material to the issue/offer, detailing the persons involved and the nature of the interest.[82] Reasons for the offer and use of proceeds shall be detailed: reasons for the offer and, where applicable, the estimated net amount of the proceeds broken into each principal intended use and presented by order of priority of such uses. If the issuer is aware that the anticipated proceeds will not be sufficient to fund all the proposed uses, state the amount and sources of other funds needed. Details must be given with regard to the use of the proceeds, in particular when they are being used to acquire assets, other than in the ordinary course of business, to finance announced acquisitions of other business, or to discharge, reduce or retire indebtedness.[83]

The share securities note must include a description of the type and the class of the securities being offered and/or admitted to trading, including the ISIN (International Security Identification Number) or other such security identification code[84], the legislation under which the securities have been created[85], and also the description of the rights attached to the securities (including any limitations of those rights, and procedure for the exercise of those rights).[86] In the case of new issues, it contains the expected issue date of the securities.[87] A description of any restrictions on the free transferability of the securities[88], and an indication of the existence of any mandatory takeover bids and/or squeeze-out and sell-out rules in relation to the securities are also necessary.[89]

The next part of the securities note is about the terms and conditions of the offer. In this part investors can read about conditions, offer statistics, expected timetable and actions required to apply for the offer. So it includes the conditions, to which the offer is subject. The total amount of the issue/offer, distinguishing the securities offered for sale and those offered for subscription; if the amount is not fixed, description of the arrangements and time for announcing to the public the definitive amount of the offer, as well as the time period, including any possible amendments, during which the offer will be open and description of the application process also belong here. It is also indicated when, and under which circumstances, the offer may be revoked or suspended and whether revocation can occur after the dealing has begun. A description of the possibility to reduce subscriptions and the manner for refunding excess amount paid by applicants are also presented here. Furthermore it is necessary to indicate the details of the minimum and/or maximum amount of application (whether in number of securities or aggregate amount to invest), and the period during which an application may be withdrawn, provided that investors are allowed to withdraw their subscriptions. One can also find a description of the manner and date in which results of the offer are to be made public, and method and time limits for paying up the securities and for delivery of the securities. The procedure for the exercise of any right of pre-emption, the negotiability of subscription rights and the treatment of subscription rights not exercised are also included.[90]

The information on the plan of distribution and allotment also must be included in the conditions of the offer. The various categories of potential investors to which the securities are offered also have to be indicated. If the offer is being made simultaneously in the markets of two or more countries and if a tranche has been or is being reserved for some of these, any such tranche shall be indicated.[91] To the extent known to the issuer, an indication shall be included of whether major shareholders or members of the issuer’s management, supervisory or administrative bodies intend to subscribe in the offer, or whether any person intends to subscribe for more than five per cent of the offer.[92]

In the pre-allotment disclosure several further pieces of information must be disclosed to the investor community. For example, the division into tranches of the offer including the institutional, retail and issuer’s employee tranches and any other tranches, and the allotment method or methods to be used for the retail and issuer’s employee tranche in the event of an over-subscription of these tranches. One can also find here a description of any pre-determined preferential treatment to be accorded to certain classes of investors or certain affinity groups (including friends and family programmes) in the allotment, the percentage of the offer reserved for such preferential treatment and the criteria for inclusion in such classes or groups, and whether the treatment of subscriptions or bids to subscribe in the allotment may be determined on the basis of which firm they are made through or by. A target minimum individual allotment within the retail tranche is presented as well (if there is any), and whether or not multiple subscriptions are admitted, and where they are not, how any multiple subscriptions will be handled.[93]

The securities note also includes the description of the process for notification to applicants of the amount allotted and indication whether dealing may begin before the notification is made.[94] Besides, over-allotment and ‘green shoe’ options are also presented here.[95]

In connection with pricing, the price at which the securities will be offered is indicated. If the price is not known or if there is no established and/or liquid market for the securities, the method for determining the offer price shall be indicated, including a statement as to who has set the criteria or is formally responsible for the determination. Indication of the amount of any expenses and taxes specifically charged to the subscriber or purchaser is also necessary. If the issuer’s shareholders have pre-emptive purchase rights and this right is restricted or withdrawn, the basis for the issue price if the issue is for cash, together with the reasons for and beneficiaries of such restriction or withdrawal shall be specified. Where there is or could be a material disparity between the public offer price and the effective cash cost to members of the administrative, management or supervisory bodies or senior management, or affiliated persons, of securities acquired by them in transactions during the past year, or which they have the right to acquire, a comparison of the public contribution in the proposed public offer and the effective cash contributions of such persons shall be marked.[96]

In connection with investment service providers (placing) and underwriting, the following pieces of information are relevant: the name and address of the coordinator(s) of the global offer and of single parts of the offer and, to the extent known to the issuer or to the offeror, of the investment service providers (placers) in the various countries where the offer takes place, as well as the name and address of any paying agents and depository agents in each country. The name and address of the entities agreeing to underwrite the issue on a firm commitment basis, and name and address of the entities agreeing to place the issue without a firm commitment or under “best efforts” arrangements must also be included. Indication of the material features of the agreements, including the quotas must also be mentioned. Where not all of the issue is underwritten, a statement of the portion not covered is necessary. An indication of the overall amount of the underwriting commission and of the placing commission shall be added too. It also has to be indicated when the underwriting agreement has been or will be reached.[97]

This part is followed by information on admission to trading and dealing arrangements. In connection with this, an indication as to whether the securities offered are or will be the subject of an application for admission to trading, with a view to their distribution in a regulated market or other equivalent markets with indication of the markets in question is needed. This circumstance must be mentioned, without creating the impression that the admission to trading will necessarily be approved. If known, the earliest dates on which the securities will be admitted to trading must also be given. All the regulated markets or equivalent markets shall be specified on which, to the knowledge of the issuer, securities of the same class of the securities to be offered or admitted to trading are already admitted to trading. If simultaneously or almost simultaneously with the creation of the securities for which admission to a regulated market is being sought, securities of the same class are subscribed for or placed privately or if securities of other classes are created for public or private placing, details shall be indicated of the nature of such operations and of the number and characteristics of the securities to which they relate. It is necessary to provide the details of the entities, which have a firm commitment to act as intermediaries in secondary trading, providing liquidity through bid and offer prices. The inclusion of the description of the main terms of their commitment is also needed. With regard to stabilisation – where an issuer or a selling shareholder has granted an over-allotment option or it is otherwise proposed that price stabilising activities may be entered into in connection with an offer – it is necessary to designate the fact that stabilisation may be undertaken, that there is no assurance that it will be undertaken and that it may be stopped at any time. The beginning and the end of the period during which stabilisation may occur shall be specified, as will the identity of the stabilisation manager for each relevant jurisdiction unless this is not known at the time of publication, and the fact that stabilisation transactions may result in a market price that is higher than would otherwise prevail.[98]

If not all of publicly sold shares are newly issued shares, the share securities note shall comprise of the name and business address of the person or entity offering to sell the securities, the nature of any position office or other material relationship that the selling persons has had within the past three years with the issuer or any of its predecessors or affiliates. The number and class of securities being offered by each of the selling security holders, and the content of the lock-up agreements shall also be displayed.[99]

The securities note also contains the total net proceeds and an estimate of the total expenses of the issue/offer.[100] As issuing new securities dilutes holdings of existing securities holders, the amount and percentage of immediate dilution resulting from the offer is included.[101]

Based on the Regulation, it might be reasonable to provide additional information in the securities note with regard to advisors, auditors, experts or information sourced from a third party.[102]

Summary of the provisions in Regulation 809/2004/EC

The issuer, the offeror or the person asking for the admission to trading on a regulated market shall determine the detailed content of the summary in accordance with Article 24 of the Regulation. According to this Article, a summary shall contain the key information items set out in Annex XXII of the Regulation. Where an item is not applicable to a prospectus, such item shall appear in the summary with the mention ‘not applicable’. The length of the summary shall take into account the complexity of the issuer and of the securities offered, but shall not exceed 7 % of the length of a prospectus or 15 pages, whichever is the longer. It shall not contain cross-references to other parts of the prospectus. The order of the sections and of the elements of Annex XXII shall be mandatory. The summary shall be drafted in clear language, presenting the key information in an easily accessible and understandable way. If an issuer is not under an obligation to include a summary in a prospectus pursuant to Article 5(2) of Directive 2003/71/EC, but produces an overview section in the prospectus, this section shall not be entitled ‘Summary’ unless the issuer complies with all disclosure requirements for summaries laid down in Article 24 of the Regulation and in Annex XXII.[103]

The prospectus in the Hungarian Capital Markets Act

In Hungary, the regulations concerning public and private offering of securities are different. The effective Capital Markets Act of Hungary[104] differentiates between the public or private character of offering on the basis of the exemption from the disclosure of the prospectus laid down in Directive 2003/71/EC.[105] The offering of securities, on these grounds, is qualified as private, if the security is offered exclusively to qualified investors[106], or if the offering of securities is addressed to fewer than 150 persons per Member State, besides qualified investors.[107] Offering of securities is also qualified as private, if the securities are offered exclusively to investors, who buy of the offered securities for at least EUR 100,000 or the equivalent in value[108], or if the face value of the security is at least EUR 100,000 or its equivalent.[109] The latter possibility, however, is not characteristic in the case of equities, but it might have relevance in the case of debt securities. Another such case is, when the issue price of all the securities does not exceed EUR 100 000 or its equivalent within twelve months from the offer.[110]Compared to Directive 2003/71/EC, a special element of the Hungarian regulation is the fact that the transformation of a cooperative into a corporation can also be regarded as private offering, and shares are offered exclusively to the members and quota holders of the cooperative in transformation.[111]

Article 4 of the 2003/71/EC Directive expressed further exemptions from the disclosure obligation of the prospectus. The Capital Markets Act of Hungary applies these exceptions in a way that on the basis of the definitions in the Directive further instances are qualified as private offering in the case of securities issued privately earlier. This includes shares issued in substitution for shares of the same type and class already issued, if the issuing of such new shares does not involve any increase in the share capital.[112] A similar case is when the shares of a corporation are offered as part of a takeover bid[113], in connection with the acquisition of a qualified holding, or if they are offered as compensation, in connection with the merger or division of companies.[114] In this circle belong the shares offered, allotted or to be allotted free of charge by the corporation to existing shareholders, and dividends paid in the form of shares of the same type and class as the shares in respect of which such dividends are paid.[115] One must also note the case when securities are offered, marketed or allocated by the issuer or his affiliated undertaking to current or former employees of any of them, executive officers, members of the supervisory board, if some securities of the issuer have already been admitted to trading on a regulated market.[116]However, the cases described above have little relevance in connection with initial public offerings.[117]

In Hungary, based on the regulation of the Capital Markets Act (as the general rule) in the case of public offering of securities or the listing thereof on the regulated market, the issuer, the offeror and the person initiating the listing are obliged to disclose a prospectus and a notice specified in Article 31 of Commission Regulation 809/2004/EC.[118] Article 21 paragraph (2), Article 22 paragraphs (1) and (4) of the effective Capital Markets Act define several exceptions from the disclosure of a prospectus regarding public offering of securities[119] and listing securities on a regulated market[120]. However, basically these are not relevant concerning initial public offering, either.[121]

Pursuant to the Capital Markets Act as a general rule, the issuer or the offeror are obliged to assign an investment service provider with the preparation and performance of the public offering of securities.[122] In Hungary, if a security was publicly offered without a prospectus and notice authorised by the Supervisory Authority[123], and without employing an investment service provider – with the exception of the five cases[124] defined in Article 23 paragraph 1 of the Capital Markets Act[125] – then the subscription to the security and the sales contract are null and void. In this case the issuer, the offeror, and the person initiating the listing of the security to a regulated market and also the broker/dealer bear a joint and several liability for the damage caused to the investor.[126]

Consequently, pursuant to the effective regulation in Hungary – unless otherwise specified in the Capital Markets Act[127] – in the case of public offering of securities and listing to a regulated market, the issuer, the offeror, and the person initiating the listing of securities on a regulated market are obliged to disclose a prospectus and a notice defined in Article 31 of Commission Regulation (EC) No 809/2004.[128]

Based on Article 31 paragraph 3 of Commission Regulation (EC) No 809/2004, the notice shall contain the identification of the issuer, the type, class and amount of the securities to be offered and/or in respect of which admission to trading is sought, (provided that these elements are known at the time of the publication of the notice). The notice shall also contain the intended time schedule of the offer or admission to trading, and a statement that a prospectus has been published and where it can be obtained. If the prospectus has been published in a printed form, it is necessary to indicate the addresses where and the period of time during which such printed forms are available to the public. If the prospectus has been published in electronic form, the addresses to which investors shall refer to ask for a paper copy. The notice also contains the date of the notice.[129]

In Hungary, pursuant to the Capital Markets Act, less strict requirements apply to the case of private placement. In this case, the issuer and the broker/dealer only have to ensure that each investor receives the same substantial information required for making a grounded judgement of their market, economic, financial, legal situation and the probable shaping thereof, as well as the rights connected to the securities.[130]Those pieces of information, which arise in the frame of personal discussions with the investors, also have to be included.[131] The obligation concerning the disclosure of the prospectus does not have to be applied for private offerings.[132] At the same time, the issuer is obliged to inform the Supervisory Authority about the private placement of securities within fifteen days of closing the placement procedure.[133] If the security was not issued in compliance with the rules governing public placement, the Supervisory Authority, in the frame of reporting data required from the issuer or the offeror, may supervise whether the placement is qualified as private placing pursuant to the Capital Markets Act.[134]

The securities sales contract is null and void, if the security was not issued in compliance with the rules governing public placement and if the placement did not fulfil the requirements for private placement. In this case, the issuer and the broker/dealer bear a joint and several liability for the damage caused to the investors.[135]

The intent of this article was to give a detailed analysis about the content of prospectus documents. In practice, the creation of these documents could take several months, and the aligned work of financial advisors, auditors, legal advisors (lawyers) and the managers of the company is needed during this process. As it is obvious from the – above described – content of the prospectus, legal advisors have an important role during its drafting, – and not just in case of certain matters, which require special legal expertise. Initial public offering transactions are of great value, hundred millions or in some cases billions of euros can flow to the company or to the selling shareholders. Because the prospectus is the primary information document on which investors rely, severe liability attaches to its content. Ensuring the completeness, accuracy and reliability of these documents and the diminution of legal risks is also an important role of the legal advisor taking part in the transaction. The content of my Article could serve as a useful fundamental for legal experts intending to take part in these complex capital market businesses.

In point of Hungarian legal regulation, we can also conclude, that it is in line with the European rules. In Hungary, in case of initial public offering transactions, the drafting of prospectus documents is also based on the rules of Commission Regulation (EC) No 809/2004.

References

[1] See Ross Geddes, IPOs and Equity Offerings (Butterworth-Heinemann 2008) 95

[2] See Ross Geddes, IPOs and Equity Offerings (Butterworth-Heinemann 2008) 54

[3]  See Ross Geddes, IPOs and Equity Offerings (Butterworth-Heinemann 2008) 95–97

[4] See András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeover (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 69-71.

[5] See Ross Geddes, IPOs and Equity Offerings (Butterworth-Heinemann 2008) 95–97; András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 69-71.

[6] See James C Spindler, ‘IPO Liability and Entrepreneurial Response’ (2007) U Pa L Rev Vol 155 1187, 1195–1201

[7]  See Ross Geddes, IPOs and Equity Offerings (Butterworth-Heinemann 2008) 95

[8] See Michael Coke, ‘Success in the Form of an IPO: A Brief Case Study of A123 Systems, Inc.’ (2009) Nanotech L & Bus Vol 6 513, 519

[9] See András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 69-71

[10] See Zsolt Bujtár Gondolatok Kecskés András és Halász Vendel „Stock Corporations a Guide to Initial Public Offerings, Corporate Governance and Hostile Takeovers” címû könyvérôl Európai Jog XV. évfolyam 2015. november 34

[11] See András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 69-71

[12] See Commission Regulation (EC) No 809/2004 of 29 April 2004 implementing Directive 2003/71/EC of the European Parliament and of the Council as regards information contained in prospectuses as well as the format, incorporation by reference and publication of such prospectuses and dissemination of advertisements [2004] OJ L 149/1 (Reg 89/2004/EC) art 25 para 1; András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 86

[13] Reg 89/2004/EC art 25 para 2

[14] Reg 89/2004/EC art 25 para 3

[15] Reg 89/2004/EC art 25 para 4; András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 86

[16] Reg 89/2004/EC art 2 para 1

[17] Reg 89/2004/EC art 3

[18] See András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 86-87

[19] Reg 89/2004/EC art 4 para 1

[20] Reg 89/2004/EC Annex I point 1.1

[21] Reg 89/2004/EC Annex I point 1.2

[22] Reg 89/2004/EC Annex I point 2.1

[23] See Annex I point 2.2 of Reg 89/2004/EC; András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 87

[24] Reg 89/2004/EC Annex I. point 3.1

[25] Reg 89/2004/EC Annex I point 4

[26] Reg 89/2004/EC Annex I point 5.1

[27] Reg 89/2004/EC Annex I point 5.2

[28] Reg 89/2004/EC Annex I point 5.2

[29] Reg 89/2004/EC Annex I point 6.1

[30] Reg 89/2004/EC Annex I point 6.2

[31] Reg 89/2004/EC Annex I point 7.1

[32] See Annex I. point 7.2. of Reg 89/2004/EC; András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) pp. 87-88

[33] Reg 89/2004/EC Annex I point 8.1.

[34] Reg 89/2004/EC Annex I point 8.2

[35] Reg 89/2004/EC Annex I point 9.1

[36] See Reg 89/2004/EC Annex I point 9.2; András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 88-89

[37] Reg 89/2004/EC Annex I point 10

[38] See Reg 89/2004/EC Annex I point 11; András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 89

[39] Reg 89/2004/EC Annex I point 12.1

[40] See Reg 89/2004/EC Annex I point 12.2; András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 89

[41] Reg 89/2004/EC Annex I point 13

[42] Reg 89/2004/EC Annex I. point 13.1

[43] Reg 89/2004/EC Annex I point 13.2

[44] Reg 89/2004/EC Annex I point 14

[45] Reg 89/2004/EC Annex I point 15

[46] See Reg 89/2004/EC Annex I. point 16; András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 89-90

[47] Reg 89/2004/EC Annex I point 17.1

[48] Reg 89/2004/EC Annex I point 17.2

[49] See Reg 89/2004/EC Annex I point 17.3; András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 90

[50] Annex I. point 18.1. of Reg 89/2004/EC

[51] Annex I. point 18.3. of Reg 89/2004/EC

[52] Annex I. point 18.3. of Reg 89/2004/EC

[53] Regarding changes of control transactions and takeovers in the European Union see: Vendel Halász, ‘Beveszik-e az amerikai méregpirulát az Európai Unióban?’ (2012) Európai jog Vol 12 3

[54] Reg 89/2004/EC Annex I point 18.4

[55] Reg 89/2004/EC Annex I point 18.2

[56] Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards [2002] OJ L 243/1

[57] See Reg 89/2004/EC Annex I point 19; András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 90

[58] Reg 89/2004/EC Annex I point 20.1

[59] Reg 89/2004/EC Annex I point 20.2

[60] Reg 89/2004/EC Annex I point 20.3

[61] Reg 89/2004/EC Annex I point 20.4

[62] Reg 89/2004/EC Annex I point 20.5

[63] Reg 89/2004/EC Annex I point 20.6

[64] Reg 89/2004/EC Annex I point 20.7

[65] Reg 89/2004/EC Annex I point 20.8

[66] See Reg 89/2004/EC Annex I point 20.9; András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 90-91

[67] Reg 89/2004/EC Annex II

[68] See Reg 89/2004/EC Annex I point 21; András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 91

[69] See Reg 89/2004/EC Annex I. point 22; András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 91.

[70] Reg 89/2004/EC Annex I point 23.1

[71] Reg 89/2004/EC Annex I point 23.2

[72] Reg 89/2004/EC Annex I point 23.2

[73] Reg 89/2004/EC Annex I point 24

[74] See Reg 89/2004/EC Annex I point 25; András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 91-92

[75] Reg 89/2004/EC Annex III point 4

[76] See Erika Tomori dr, Értékpapírjog és a tôkepiac szabályozása (Közép-európai Brókerképzô Alapítvány 2008) 173; András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 92.

[77] Reg 89/2004/EC Annex III point 1.1

[78] Reg 89/2004/EC Annex III point 1.2

[79] Reg 89/2004/EC Annex III point 2

[80] Reg 89/2004/EC Annex III point 3.1

[81] Reg 89/2004/EC Annex III. point

[82] See Reg 89/2004/EC Annex III point 3.3; András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 92-93

[83] See Reg 89/2004/EC Annex III point 3.4; András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 93

[84] Reg 89/2004/EC Annex III point 4.1

[85] Reg 89/2004/EC Annex III point 4.2

[86] Reg 89/2004/EC Annex III point 4.5

[87] Reg 89/2004/EC Annex III point 4.7

[88] Reg 89/2004/EC Annex III point 4.8

[89] See Reg 89/2004/EC Annex III point 4. 9; András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 93

[90] See Reg 89/2004/EC Annex III point 5.1; András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 93-94

[91] Reg 89/2004/EC Annex III point 5.2.1

[92] See Reg 89/2004/EC Annex III point 5.2.2; András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 94

[93] See Reg 89/2004/EC Annex III point 5.2.3; András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 94

[94] Reg 89/2004/EC Annex III point 5.2.4

[95] Reg 89/2004/EC Annex III point 5.2.5

[96] See Annex III. point 5.3. of Reg 89/2004/EC.; András Kecskés and Vendel Halász,Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 94

[97] See Reg 89/2004/EC Annex III point 5.4; András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 95

[98] See Reg 89/2004/EC Annex III point 6; András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 95-96

[99] Reg 89/2004/EC Annex III point 7

[100] Reg 89/2004/EC Annex III point 8.1

[101] Reg 89/2004/EC Annex III point 9.1

[102] See Annex III. point 10. of Reg 89/2004/EC; András Kecskés and Vendel Halász,Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 96

[103] See András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 96-97

[104] Capital Markets Act (Capital Markets Act)

[105] Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC [2003] OJ L 345/64

[106] Capital Markets Act section 14 subsection 1paragraph a

[107] Capital Markets Act section 14 subsection 1paragraph b

[108] Capital Markets Act section 14 subsection 1paragraph c

[109] Capital Markets Act section 14 subsection 1paragraph d

[110] Capital Markets Act section 14 subsection 1paragraph e

[111] Capital Markets Act section 14 subsection (1) paragraph f; See András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013)78-79

[112] Capital Markets Act section 14 subsection (2) paragraph a, cf Directive 2003/71/EC Art 4 para 1 point a

[113] Capital Markets Act section 14 subsection (2) paragraph b, cf Directive 2003/71/EC Art 4 para 1 point b

[114] Capital Markets Act section 14 subsection (2) paragraph c, cf Directive 2003/71/EC Art 4 para 1 point c

[115] Capital Markets Act section 14 subsection (2) paragraph d, cf Directive 2003/71/EC Art 4 para 1 point d

[116] Capital Markets Act section 14 subsection (2) paragraph e, cf Directive 2003/71/EC Art 4 para 1 point e

[117] See András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 79

[118] Capital Markets Act section 21 subsection (1)

[119] See Capital Markets Act section 22 subsection (1) regarding public offering of securities (exceptions from the disclosure of a prospectus and a notice)

[120] See Capital Markets Act section 22 subsection (4) regarding listing securities on a regulated market (exceptions from the disclosure of a prospectus)

[121] See András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 79

[122] Capital Markets Act section 23 subsection (1)

[123] The Supervisory Authority in Hungary is the Magyar Nemzeti Bank, the central bank of Hungary.

[124] Concerning initial public offerings, the only relevant exception is defined in Capital Markets Act section 23 subsection (1) paragraph a)

[125] Capital Markets Act section 25 subsection (1)

[126] Capital Markets Act section 25 subsection (2); See András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 79-80

[127] See Capital Markets Act section 21 subsection (2) and section 22

[128]  See Capital Markets Act section 21 subsection (1); András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 80

[129] See András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 80

[130] See Erika Tomori dr, Értékpapírjog és a tôkepiac szabályozása (Közép-európai Brókerképzô Alapítvány 2008) 156

[131] Capital Markets Act section 16

[132] Pursuant to Capital Markets Act section 18, however, the private nature of offering shall be indicated prominently in any written document prepared in connection with private offering.

[133] of Capital Markets Act section 17 subsection (1)

[134] See András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 80-81; Capital Markets Act section 17 subsection (2)

[135] See András Kecskés and Vendel Halász, Stock Corporations – A Guide to Initial Public Offerings, Corporate Governance, and Hostile Takeovers (Anna Tolnai and others trs, HVG-ORAC-LexisNexis 2013) 78-81; Capital Markets Act section 17 subsection (3)