The new EU Recovery Prospectus
Raising equity capital simplified in times of crisis
A. EU Recovery Prospectus introduced to simplify raising equity capital
After its adoption by the European Parliament on 11 February 2021 and the Council on 15 February 2021, the “EU Recovery Prospectus” will be introduced soon. The recovery prospectus is a kind of short-form prospectus intended to temporarily provide a significant reduction in the current regulatory hurdles to recapitalisation by issuers. In the light of the wave of shutdowns in Europe in response to the Covid-19 pandemic, this creates an interesting additional option for issuers to raise equity capital more easily via secondary issuances of shares.
B. The EU Recovery Prospectus
The European Commission’s goal in introducing the EU Recovery Prospectus is to encourage issuers who had been deterred by the time and expense typically involved in drawing up a prospectus to raise equity capital. The prospectus is aimed in particular at issuers who need a quick and inexpensive option to raise new capital due to financial difficulties. Issuers are to be given an incentive to primarily strengthen their equity capital base and improve their debt-to-equity ratio instead of falling back on the option of borrowing outside capital, e.g. in the form of loans from the German state development bank, KfW (Kreditanstalt für Wiederaufbau), to avert (potential) liquidity shortages. This is why the European Commission believes that the requirement to draw up a prospectus should not be a barrier to companies wishing to raise equity capital by means of secondary issuance of shares.
To remove this (supposed) barrier, the European Commission included in its Proposal dated 24 July 2020 for an amendment to the Prospectus Regulation ("Commission Draft") the EU Recovery Prospectus, a kind of “short-form prospectus” to be facilitated by an (initially temporary) amendment to the current Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 ("EU Prospectus Regulation"). On 11 February 2021, the European Parliament adopted a modified version of the Commission Draft ("Parliament Draft"). The Council’s approval was given on 15 February 2021. The amendment to the EU Prospectus Regulation is expected to be published in the Official Journal by the end of February and will then enter into force on the 20th day following its publication (see the Council’s press release dates 15 February 2021, available at Capital Markets Recovery Package: Council adopts first set of measures to help companies access funding - Consilium (europa.eu)).
The new prospectus form will probably be available for use until 31 December 2022 (Recital 4 of the Parliament Draft. The European Commission had previously proposed a period of 18 months as of introduction of the EU Recovery Prospectus.). (The Committee on Economic and Monetary Affairs of the European Parliament ("ECON") has already indicated that it considers it conceivable to offer a simplified prospectus form for established issuers to continue to mitigate the administrative burden for secondary issuances of shares in the future. Consequently, in the course of the planned review of the Prospectus Regulation until 21 July 2022, the European Commission is to submit an analysis of whether an extension of the EU Recovery Prospectus rules would be appropriate.).
I. Prospectus users
In general, the EU Recovery Prospectus is to be available for secondary issuances of shares by issuers that have had shares admitted to trading on a regulated market or traded on an SME growth market continuously for at least 18 months if the new shares are fungible with existing shares which have been previously issued. In Germany, this enables even issuers whose shares have been traded in the Scale segment of the Open Market of the Frankfurt Stock Exchange to draw up an EU Recovery Prospectus (The Scale segment has only been registered as an SME growth market since 16 December 2019, which means that the time period of 18 months would not expire until 16 June 2021. However, it is probably adequate that the shares of the issuer have been traded in the Scale segment continuously for 18 months without the segment itself having been registered as an SME growth market for 18 months.).
The EU Recovery Prospectus is to be used not only to publicly offer new shares but also to have them admitted to trading on a regulated market. However, the new type of prospectus cannot be used for issuing corporate notes or other financial instruments (see recital 8 of the Parliament Draft).
II. Scope of the issuance
The total number of shares that can be issued in twelve months on the basis of an EU Recovery Prospectus is limited to a maximum of 150% of the shares admitted to trading on the date of the approval of the EU Recovery Prospectus.
III. Length of the prospectus
Compared to a customary prospectus, which is usually well over 100 pages, the length of the EU Recovery Prospectus has been significantly reduced, and is not permitted to exceed 30 DIN A4 pages. The summary, which is not permitted to be more than two DIN A4 pages, is not to be included in this.
The content of the EU Recovery Prospectus is to be presented in an easy-to-analyse, concise and comprehensible form, the order of the contents presented being left to the discretion of those responsible for the prospectus.
IV. Content of the prospectus
To comply with the length restrictions, substantial reductions are allowed, including in comparison to the simplified prospectus regime for secondary issuances under Article 14 of the EU Prospectus Regulation. Thus, the EU Recovery Prospectus is only to contain abridged information, to include especially:
- a description of the material risks specifically affecting the issuer and the shares,
- financial statements (annual and semi-annual financial statements) published in the twelve months preceding approval of the EU Recovery Prospectus,
- information on trends, especially on the issuer’s short- and long-term financial and non-financial business strategy and objectives, including, if applicable, a specific reference of not less than 400 words to the business and financial impact of the Covid-19 pandemic on the issuer and the anticipated future impact of the same,
- a declaration on receiving state aid in connection with the economic recovery and
- a statement of capitalisation and indebtedness that is not permitted to be older than 90 days.
According to the Parliament Draft – as opposed to the Commission Draft – a final offer price is no longer to be included in the EU Recovery Prospectus. Such a rule could have been (mis)understood to mean that an EU Recovery Prospectus can only be used for secondary issuances with a predetermined subscription price.
V. Approval of the prospectus
The scrutiny period for review of the EU Recovery Prospectus by the competent authorities is no longer to be generally ten but now only seven working days. However, the issuer must inform the competent authority at least five working days before the date envisaged for the submission of an application for approval. However, the actual duration of the proceedings in an individual case will ultimately depend on the procedural practice and work load of the regulatory authorities such as the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin).
It will not be long until the EU Recovery Prospectus gives issuers an option under prospectus law to quickly raise equity capital with a light administrative burden until 31 December 2022. Issuers who fall under the scope of applicability and intend to increase their capital should definitely consider using the new prospectus regime if they (urgently) need capital. This is because the imminent introduction of the EU Recovery Prospectus will significantly decrease the hurdles involved in drawing up a prospectus, making it possible in particular to quickly implement capital increases (subject to pre-emptive rights).
Any questions? Please contact: Dr Julian Schulze De la Cruz, Dr Stephan Schulz, Dr Philip M. Schmoll or Thomas Thies
Practice Group: Capital Markets