10 March Dear Sir / Madam, Introduction

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1 10 March 2009 European Commission Directorate-General Internal Market and Services B Bruxelles/Brussels Belgium Via to MARKT-G3@ec.europa.eu Re: Review of 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) Dear Sir / Madam, Introduction The International Bar Association Securities Law Committee is pleased to respond to your consultation launched on January 9, 2009, on the on a draft proposal for a Directive of the European Parliament and of the Council amending Directives 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading (the Prospectus Directive ) and 2004/109/EC on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market (the Transparency Directive ). The International Bar Association, the global voice of the legal profession, includes 30,000 individual lawyers and 195 bar associations and law societies worldwide. We are submitting our comments on behalf of the Securities Committee which has over 900 members from 85 different countries. We would like to thank the Commission for providing an opportunity to discuss potential amendments to the Prospectus Directive, particularly with a view to ensure that the initial goals of the Prospectus Directive to achieve supervisory convergence and mutual recognition of host and home Member States securities regulations are achieved in practice. In the current economic environment, we believe this is of particular importance to enable companies to raise capital in a quick and efficient manner and to have the opportunity to access an investor base across the European Union. We welcome the Commission s proposal. We would particularly like to encourage the Commission to continue working towards simplicity and transparency. In particular, efficiency gains should be achieved by streamlining the prospectus contents without losing relevant substance and by extending the use of already existing disclosure (e.g. under the Transparency Directive) through incorporation by reference. 10th Floor, 1 Stephen Street, W1T 1AT, United Kingdom tel: +44 (0) fax: +44 (0)

2 2 I. General questions raised by the Commission (see press release IP/09/27 of 9 January 2009) 1. Effectiveness of the prospectus summary The prospectus summary is intended to provide useful, summary information, in particular for retail investors, which enables potential investors to understand quickly the essential characteristics and risks associated with the issuer and the securities offered. In addition, when a prospectus is passported into other European Member States, it may be the only document that is available in either a language customary in the sphere of international finance, typically English, or in the host Member State s language. Given its role, it is essential that the summary effectively fulfils its function. However, the competing requirements that the summary contain (i) extensive, enumerated items and (ii) not more than 2,500 words, have resulted in a document that, in many cases, does not fulfil its function. Indeed, confronted with these requirements, some issuers have been forced to produce prospectus summaries that fail to display prominently certain key information, for example the issuer s name and summary description of its business because of the limited word count. No market standard has emerged for the prospectus summary for a variety of reasons, including because regulators have taken different approaches when applying the rules relating to the prospectus summary. A market standard would be welcome in this area because potential investors, their financial intermediaries and financial advisors would be accustomed to a standardized presentation, which would enable them to more easily locate key information specific to a particular transaction. As developed further below (see Section II.2, Item 4.1), our suggestion would not be to eliminate or change significantly the prospectus summary, but rather streamline the relevant requirements; in a second step, we would recommend development of a sample document to assist issuers, particularly small and medium enterprises, and potential investors in developing a market standard. 2. Disclosure requirements for offers with Government guarantee schemes For the purpose of reactivating the market in response to the current global financial crisis, several Member States adopted laws temporarily allowing central Governments to guarantee, under various forms, the issuance of debt by banks. Pursuant to Article 1 (2) (d) of the Prospectus Directive, securities issues unconditionally and irrevocably guaranteed by a Member State (or by one of a Member State's regional or local authorities) fall outside the scope of the Prospectus Directive. As a consequence, such issues are not under an obligation to file a Prospectus Directive-compliant prospectus. However, issuers are entitled, pursuant to Article 1 (3) of the Prospectus Directive, to opt-in the Prospectus Directive, i.e. to prepare a prospectus in accordance with the Prospectus Directive when securities are offered to the public or admitted to trading, in order to be allowed to passport the prospectus, once approved by the home Member State, to all EU Member States while making a pan-european offer. Under the current system, upon

3 3 choosing such option all of the requirements under the Prospectus Directive and Regulation apply, i.e. the prospectus shall include information about the issuer, the securities and the guarantor of the offer (Article 5 (1) of the Prospectus Directive). In particular, pursuant to Article 9 of the Prospectus Regulation, information on the guarantor shall be given in accordance with Annex VI of the Prospectus Regulation, and shall include the nature of the guarantee (item 1.), scope (item 2.), information on the guarantor as if it were the issuer of that same type of security that is the subject of the guarantee (item 3.), and places where the public may have access to documents (item 4.). Annex XVI of the Prospectus Regulation, which sets out the information to be provided in case of securities issued by States, therefore applies if the guarantor is a Member State entity (and it requires disclosure on, inter alia, persons responsible for the information given, risk factors, public finance along the past two fiscal years, significant changes since the end of last fiscal year or appropriate negative statement, pending litigation). Moreover, the existing system allows further flexibility as, in addition to the general exclusion from the Prospectus Directive regime and the full disclosure following to voluntary opt-in, the omission of certain information can be authorized on a case by case basis by the national regulators (Article 8 of the Prospectus Directive). CESR (in Question 70 of the February 2009 version of its Frequently asked questions regarding Prospectuses ) reported that issuers are considering opting-in the Prospectus Directive regime as per Article 1 (3) of the Prospectus Directive but are applying for derogations from some requirements of the Annexes to the Prospectus Regulation, as information on Member States is already in the public domain, and banks are not readily able to obtain the information on the Member States required in the Annexes. In the Commission s background document, it is suggested that Member States should be treated differently from corporate guarantors, as significant information on Member States (including financial information) is already public, and there would be no added value in requiring the information about the State under Annex XVI of the Prospectus Regulation. In light of the purpose to simplify and reduce administrative burden for firms, the Commission s proposal is to exempt issuers from providing additional information in cases where Member States act as guarantors. We partly agree with the Commission s proposal for State-guaranteed securities issues in case of opt-in, subject to the following qualifications. The information about the State (required by Annex XVI of the Prospectus Regulation) may be redundant for the purpose of disclosing relevant information to the public, to the extent that such information (a) is already otherwise displayed in an easily analysable and comprehensible form (in accordance with Article 5 of the Prospectus Directive), and (b) does not exceed the time validity set out by Article 9 of the Prospectus Directive, provided that it is duly updated in accordance with Article 16 of the Prospectus Directive in the event of supervening factors. In addition, assuming that the rationale for the existing general exclusion from the disclosure regime lies in the risk factors being directly linked to the guarantor State s reliability, we suggest that disclosure of the information about the guarantor State could be excluded only subject to disclosure in the prospectus of the rating of the State concerned.

4 4 3. Disclosure requirements for small quoted companies and for rights issues See II. 2 items 4.3 and 4.5 below. II. document Responses to the questions raised in the Commission s background 1. Changes Proposed Item 3.1 Article 2(1)(e) Definition of qualified investors Do you agree with this analysis? Do you agree with the change proposed in Article 2.1(e) of the Prospectus Directive? An alignment of the definition of an institutional or otherwise experienced investor who does not require the protection of a prospectus (under the existing Prospectus Directive qualified investor ) with the client classification under Directive 2004/39/EC (directive on markets in financial instruments MiFID ) by replacing the definition of a qualified investor by a reference to professional investors under MiFID appears to be a useful simplification, particularly with a view to the existing client classification systems within financial institutions following the implementation of MiFID. As Annex II item II of MiFID provides for a procedure to be followed in order to enable financial institutions to treat a retail client as professionals on their request, paragraphs (iii) through (v) of Article 2(1)(e) Prospectus Directive appear to be redundant and should be deleted. Item 3.2 Article 3 Exempt offers Do you agree with this analysis? Do you agree with the change proposed in Article 3.2 of the Prospectus Directive? The activity by which financial intermediaries resell securities to retail investors following the initial issue ( retail cascade ) is very relevant and has significant practical consequences. Therefore, although in principle we do not disagree with the proposal to delete the final sentence in Article 3(2) of the Prospectus Directive, we do not believe that its deletion will help to clarify any of the existing concerns. Given the importance of this matter, we believe that the Prospectus Directive should include specific provisions addressing the issues pointed out in the ESME Report of September 5, Otherwise, the questions the market players raised will remain unanswered. In order to add more clarity to the wording of Article 3(2) of the Prospectus Directive, we would propose that subsequent sellers may rely on the Prospectus published by the issuer so long as such reliance is with the issuer s express consent and, in addition, the Prospectus remains valid pursuant to Article 9 of the Prospectus Directive and, if applicable,

5 5 the necessary supplements have been published pursuant to Article 16 of the Prospectus Directive. Item 3.3 Article 4 Exemptions for Employee Shares Schemes Do you agree with this analysis? Do you agree with the change proposed in Article4(1)(e) of the Prospectus Directive? We suggest distinguishing three different situations regarding Employee Shares Schemes: 1. We agree that the exemption for Employee Shares Schemes should be extended to the offering of shares to employees in the EU by companies listed solely on a government regulated market outside the EU. For this category the same document should be made available as is currently made available for Employee Shares Schemes for companies listed on regulated markets in the EU. We are not in favour, however, of using the current CESR interim short-form disclosure regime as reference for the latter document. Applying the current short form contents to the employee information document as required by Article 4(1)(e) of the Prospectus Directive would increase the time and financial burden for issuers considerably as compared to current practice. It would require the involvement of third parties. This would in our view largely defeat the purpose of the exemption. 2. We would also agree to extend the exemption to the offering of shares to employees in the EU by companies traded on an exchange regulated market. As ongoing disclosure standards in some cases are of a lower standard, we think that for this category the CESR short-form disclosure regime should continue to be used as a suitable reference for establishing the information to be provided to employees following amendment of the directive. 3. Finally, we feel that companies that are not listed or traded and therefore are not subject to disclosure rules save possibly through filing requirements relating to their annual financial information should not be allowed to make exempt offerings to large groups of employees without the prior publication of a prospectus. If the offer is made to less than 100 employees per EU Member State it would of course be nevertheless exempt on the basis of the less than 100 persons exemption. Item 3.4 Article 10 Information Do you agree with this analysis? Do you agree with the removal of Article 10 of the Prospectus Directive? To abolish the requirement to publish the annual document according to Article 10 of the Prospectus Directive seems to be a useful simplification. The proposed deletion of Article 10 should, however, be combined with a requirement to make available all the information that currently needs to be listed in the

6 6 annual document according to Article 10 of the Prospectus Directive in a clearly marked section on the issuer s internet site. To use the internet and in particular the issuer s website as a way to effect publications is already provided for in the Prospectus Directive, see Article 14 (2)(c) of the Prospectus Directive. In the medium term, a central European database on the home member state regulator s or CESR s website seems to be even more preferable to ensure availability of statutory information to be provided to investors equivalent to the EDGAR system in the US. The implementation of such a database could be simplified by allowing a hyperlink to the issuer s own internet site. Although the concept to incorporate by reference information that has already been published by the issuer seems to work efficiently in some of the member states (e.g. in France), this seems not to be the case in other member states. That leads to prospectuses of a size of several hundred pages, thus creating unnecessary costs and distracting (particularly retail) investors from actually reading prospectuses and using them as a basis for their investment decision. Thus, we propose, based on the aforementioned suggestion, to provide for the information that currently has to be listed in the annual document according to Article 10 of the Prospectus Directive rather to be made available on the issuer s website in a clearly marked section instead. Issuers should be entitled to incorporate by reference information published in that manner. Item 3.5 Article 16 Supplement to the prospectus Do you agree with this analysis? We agree that the meaning of "significant new factor" is rather a question of interpretation than of rule setting (in particular at level 1) and should thus be addressed at level 3 instead. As regards the second question, as to whether a supplement should still be published once the trading on a regulated market has already begun, but the offer is not yet closed, we believe that the supplement requirement does not need to be extended to a period when the issuer is already under an obligation to inform the public as soon as possible of any inside information which directly concerns the said issuers as required according to Article 6 of Directive 2003/6/EC on insider dealing and market manipulation (market abuse) (the Market Abuse Directive ). Thus, the requirement to publish a prospectus supplement according to Article 16 (1) of the Prospectus Directive should cease to apply at the earlier of the final closing of the offer to the public or the beginning of trading on a regulated market. Do you agree with this analysis? Do you agree with the change proposed in Article 16.2 of the Prospectus Directive? While the idea to harmonise the withdrawal period after the publication of a prospectus supplement is welcome, it appears doubtful whether the goal of harmonisation

7 7 can be achieved by the proposed wording. To avoid member states imposing withdrawal periods longer than two working days, the words at least should be deleted from the proposal. The requirement to have a prospectus supplement approved by the competent authority and to allow that authority a review period of up to seven working days may expose an offering to unnecessary market risk and should be abolished. Especially, if the issuer is obliged to inform the public as soon as possible of inside information directly concerning itself according to Article 6 of the Market Abuse Directive, it seems not to make sense to require an approval process delaying the publication of material information that is already in the public domain as a result of the issuer s compliance with the aforementioned obligation under the Market Abuse Directive. As the obligation under Article 6 of the Market Abuse Directive starts to apply already when a request for admission to trading of the respective securities has been made (Article 1(3) of the Market Abuse Directive), the aforementioned situation applies not only to issuers of securities already listed on a regulated market, but may also appear in cases of an IPO. The need to require an approval of prospectus supplements has also been questioned by most of the issuers participating in the interview program conducted by the Centre for Strategy and Evaluation Services (CSES) in response to a request by the Commission (see CSES, Study on the Impact of the Prospectus Regime on EU Financial markets of June CSES Study, p. 50). 2. Other issues identified Item 4.1 Disclosure obligations: the prospectus and its summary Do you agree with this analysis? Do you have any suggestion in this regard? We agree that it is useful to analyze whether the prospectus summary is effective and to consider changing the approach taken with respect to this part of the prospectus. We believe that a few minor changes to the current approach would greatly enhance the usefulness and readability of the prospectus summary. We would caution against making significant changes unless absolutely necessary, which may result in regulatory fatigue at a time when many issuers are pre-occupied with fundamental issues in their businesses and regulatory environments. We are cautious with respect to the conclusion that retail investors do not refer to the summary; in any case, in many jurisdictions, such as France, the summary is used as the basis for various communications by financial intermediaries and others who are in contact with retail investors. We would suggest, therefore, that the fundamental approach of the prospectus summary be retained, but that the contents requirements be formulated to follow more closely those of the UCITS IV proposal. Indeed, the main problem with the current practice

8 8 derives, in our experience, from the fact that Annex I of the Directive contains detailed requirements with respect to the contents of the summary, while paragraph 21 of the preamble limits the length to 2,500 words. We believe that a principles based approach to the contents (revised, of course, to reflect the difference between the UCITS regime and securities offerings covered by the Prospectus Directive) would resolve this issue. We disagree, however, with the suggestion that the lack of a word count is the cause for long prospectuses. Indeed, a word count for the entire prospectus seems to be an artificial device that requires issuers to make arbitrary choices, and we would suggest that no word count be imposed with respect to disclosure requirements generally. However, we do understand its utility in the context of the summary. In that case, we suggest clarifying (as suggested in paragraph 21 referred to above) that the word count is not an upper limit, but rather a guide or, alternatively, to allow a word-count range, which would afford some flexibility to issuers. Item 4.2. Disclosure obligations for retail investment products We share the Commission s view that the examination by the Commission of the full picture of existing Directives aimed at protecting investors should not be anticipated. Item 4.3. Disclosure obligations for small quoted companies Two alternative solutions: a) the threshold of 2.5 million could be raised; b) a reduced amount of information could be required for the cases when a small quoted company offers equity to the public. This would result in the creation of a "mini" prospectus which might correspond better to the needs and size of small firms. Do you agree with this analysis? Do you support any of the two alternative solutions mentioned? Do you have any other suggestion? We can understand why small and medium size companies are, in practical terms, constrained in their ability to raise equity capital from the public. The cost of producing a prospectus will likely render any capital raising of below EUR 10 million (assuming a minimum cost of EUR 500,000 in preparing a prospectus) uneconomic (i.e. more than 5% of the proceeds). However, it is more likely that smaller and medium size companies would pose a greater risk to investors than larger issuers, such that it could be argued that the public ought to be protected from making investments in such companies in circumstances where there is no prospectus available to ensure that they have all the information they would need to make a proper assessment of the risks involved. Whilst we recognise that the current threshold of EUR 2.5 million set out in Article 1.2(h) of the Prospectus Directive makes it unlikely that the exemption will often be relied

9 9 upon, we would suggest that such small and medium size companies should look to the exemptions from the obligation to publish a prospectus contained in Article 3.2 of the Prospectus Directive, particularly those in paras (a) and (b) which allow offers to be made to qualified investors and/or fewer than 100 other persons per Member State without the need for a prospectus. Item 4.4. Disclosure requirements and Government Guarantee Schemes Do you agree with this analysis? See above I. 2 Item 4.6. Article 2(1)(d) Definition of offer of securities to the public Do you agree with this analysis? The definition of offer to the public in Article 2(1)(d) Prospectus Directive has been drafted pretty broadly in a sense that it puts the emphasis on information provided to investors enabling him to take an investment decision, but neglects the question as to whether the investor is already in a position to actually purchase securities. While some member states restrict Article 2(1)(d) in a sense that an offer to the public includes the possibility for investors to actually place an order to buy the offered securities, others do not. Shifting the obligation to publish a prospectus to a point in time when securities can not yet be ordered does not appear to provide any additional protection to investors, but creates uncertainty on the side of the offerors of securities, particularly when offering them in several member states with different legal interpretations. Thus, contrary to the analysis in the Commission s background Document (p. 15), it is suggested to add at the end of the first sentence of article 2 (1)(d) Prospectus Directive provided that the offer to the public is not deemed to be made until such time that a binding declaration to purchase or subscribe securities to be offered can actually be made by an investor. Item 4.7. Liability Do you agree with this analysis? While Article 6(2) of the Prospectus Directive requires that the laws of the member states shall ensure that civil liability applies to those persons responsible for the information given in a prospectus, Article 6(1) of the Prospectus Directive leaves it in the discretion of the member state, which actually be will be responsible under national laws. That leads to an uncertainty among market participants as to who will actually be responsible, for example in cross border offerings and to inconsistencies across the EU. Thus, the proposal made by the European Securities Markets Group (ESME) in its report to the Commission of 5 December 2007 (p. 19) should be followed. ESME suggested to clarify that the issuer should primarily be liable for information contained in a prospectus. This would avoid situations like in Sweden where an issuer of shares seems not to be allowed to assume responsibility for a

10 10 prospectus for corporate law reasons despite the fact that at least in the case of a placement of newly issued shares it is economically the primary beneficiary of an offering as it receives the net proceeds arising therefrom. Item 4.8. Equal treatment of shareholders Do you agree with this analysis? Yes, this does not seem to be an issue to be dealt with in the Prospectus Directive. III. Other comments or proposals. Article 18 Passporting The passporting of an approved prospectus into member states other than the home member states is a great achievement of the Prospectus Directive. However, the practice developed thereunder provides some pitfalls nevertheless. While the process of notification has been structured as a mere information of the competent authority in the host member state without requiring them to actually accept the notification or even entering into a new review of a prospectus so notified, there has been some uncertainty in the practice as to whether and when a notification has actually been effected so as to allow the issuer to offer securities to the public. If requested to confirm receipt of the notification, competent authorities tend to refuse official confirmations that a notification was valid. In order to avoid the uncertainty arising therefrom, it is proposed to provide for an (optional) confirmation to be issued by the competent authority of the home member state stating that notification has been effected. That notification shall have binding effect also in the host member state into which the prospectus was notified.

11 11 We appreciate the initiative taken by the Commission to consider concerns raised by market participants and to allow stakeholders to express their thoughts in the course of a consultation. Particularly, the timeframe chosen for the consultation was reasonably determined so that international organisations like the were able to exchange views by their members in several member states in order to be able to provide answers and suggestions based on a pan-european feedback. Sincerely yours /s/ Philip Boeckman Philip Boeckman Co-Chair /s/ Jonathan Ross Jonathan Ross Senior Vice-Chair Auckland /s/ Cecilia Carrera Cecilia Carrera Vice-Chair Rome /s/ David Rockwell David Rockwell Vice-Chair /s/ Linda Hesse Linda Hesse Secretary Paris /s/ Pit Reckinger Pit Reckinger Vice-Chair Luxembourg /s/ Pere Kirchner Pere Kirchner Co-Chair Barcelona /s/ Christian Cascante Christian Cascante Senior Vice-Chair Stuttgart /s/ Florian Giebitz Florian Giebitz Vice-Chair Vienna /s/ Nigel Wilson Nigel Wilson Vice-Chair /s/ Niels Walther-Rasmussen Niels Walther-Rasmussen Conference Coordinator Copenhagen /s/ Thomas Bischof Thomas Bischof Corporate Counsel Forum Liaison Officer and Vice-Chair, Regulation of Market Participants, Brokers, Banks and Exchanges Zurich

12 12 /s/ Derk Lemstra Derk Lemstra Membership Officer /s/ Masayuki Watanabe Masayuki Watanabe Regional Representative Japan Tokyo /s/ Cecilia Maria Mairal Cecilia Maria Mairal Regional Representative Latin America Buenos Aires /s/ Tim Lewis Tim Lewis Vice-Chair, Mergers & Acquisitions /s/ Dean Naumowicz Dean Naumowicz Vice-Chair, Public Company Practice and Regulation /s/ Andreas Meyer Andreas Meyer Chair, Regulatory Affairs Frankfurt /s/ Vincent Pisano Vincent Pisano Chair, Underwriting and Distribution New York /s/ Ashley Alder Ashley Alder Regional Representative Asia General Hong Kong /s/ Philip Moore Philip Moore Regional Representative North America Hong Kong /s/ Ricardo Veirano Ricardo Veirano Chair, Mergers & Acquisitions Rio de Janeiro /s/ Nicholas Eastwell Nicholas Eastwell Chair, Public Company Practice and Regulation /s/ Gregory Astrachan Gregory Astrachan Chair, Regulation of Market Participants, Brokers, Banks and Exchanges /s/ Kartik Ganapathy Kartik Ganapathy Vice-Chair, Regulatory Affairs Bangalore /s/ Cyril Shroff Cyril Shroff Vice-Chair, Underwriting and Distribution Mumbai