Summary record. The agenda was adopted. No comments received on the working arrangements.

EUROPEAN COMMISSION Internal Market and Services DG FINANCIAL SERVICES POLICY AND FINANCIAL MARKETS Securities markets Brussels, MARKT/G3/WG D(2005) 3 rd Informal Meeting on Prospectus Transposition 26 January 2005 Summary record 1. Introduction The agenda was adopted. No comments received on the working arrangements. The Commission informed participants about the corrigendum exercise in relation to the Prospectus Regulation ( PR ). The re-publication of the PR has been further delayed due to organisational reasons. The Commission confirmed that the modifications proposed by some MS would be taken into account in the re-publication process. 2. Tour de table: state of play of transposition Up-date (tour de table) on state of play of transposition. 3. Questions raised by delegations The Commission emphasised to MS that all legal interpretations given in the meeting are the informal opinion of the services of the Internal Market Directorate-General and not those of the Commission as such. Only the ECJ is competent to interpret the EC law. Incorporation of Regulation into national legislation The Commission recalled that under the terms of the EC Treaty, regulations are, as such, directly applicable in all MS and come into force solely by virtue of their publication in the Official Journal. Regulations are not, therefore, required to be transposed into national legislation: and transposition is superfluous. In a case on this point, 1 the ECJ stated that all methods of implementation are contrary to the Treaty which would have the result of creating an obstacle to the direct effect of Community regulations and of jeopardizing their simultaneous and uniform application in the whole of the Community. Therefore, MS have to make sure that the Regulation itself is being directly applied by the competent authorities. Recommendations on level 3 1 Case 39-72, Commission of the European Communities v Italian Republic. http://europa.eu.int/comm/internal_market/

In response to a question about how competent authorities intend to require compliance by issuer s with CESR s level 3 recommendations, the Commission recalled that only CESR is competent regarding the binding/non binding character of level 3 recommendations. Article 1 (2) (a) A simplified prospectus, which some MS require when units issued by collective investment undertakings of the closed-end type are offered to the public, can only substituted for the summary of a prospectus if the simplified prospectus meets all formal and substantive criteria set out in the PD for the drawing up of the summary. Article 1 (3) Where an issuer who would otherwise be excluded from the scope of the directive opts in to the regime of the PD by drawing up a prospectus which complies with the requirements of the directive, in accordance with Article 1 (3), the whole directive then applies. In particular, following such an opt-in, the issuer has full passport rights under the directive. However, the right to opt-in is only available in relation to securities covered by the provisions specified in paragraph 3 (that is, those covered by sub-paragraphs (b), (d), (h), (i) and (j) of Article 1(2)). There is nothing to prevent an issuer of securities of a kind mentioned in the other sub-paragraphs of Article 1(2) from drawing up a prospectus in accordance with the PD, but the prospectus would not be subject to mutual recognition and the passport under the directive. Article 2 (1) (a) A question was asked about the operation of the definition of securities in Article 2(1)(a) of PD, which cross-refers to the definition of transferable securities in the Investment Services Directive ( ISD ), with the express exclusion of money market instruments, as defined by the ISD, with a maturity of less than 12 months. The ISD definition of transferable securities includes securitised debt with is negotiable on the capital market, while the ISD definition of money market instrument refers to classes of instrument which are dealt in on the money market. The question asked for clarification about how the two definitions interact, given that each is organised around the concept of class of securities which are traded on a market, but the market is different in each case. Money market instruments may or may not have the nature of transferable securities. If they constitute securitised debt which is negotiable on the capital market, they will also be caught by the ISD definition of transferable securities (as well as falling within the definition of money market instruments). The Commission could not identify those classes of money market instruments which are also transferable securities, because they may not constitute a fixed category, and may change over time and on a case-by-case basis. If money market instruments also fall with the ISD definition of transferable securities, they are nevertheless excluded from the PD definition of securities if they have a maturity of less than 12 months. Article 2 (1) (d) The definition of an offer of securities to the public refers to a communication which presents sufficient information on the terms of the offer and the securities to be offered, so as to enable an investor to decide to purchase or subscribe to these securities. If 2

sufficient information is not provided, a communication will not constitute a public offer for the purposes of the PD. The definition is intended to be broad. The Commission recalled that, under the EC Treaty, the national authorities have a choice as to form and methods when transposing this term into national law. It is therefore left to the discretion of MS as how to transpose the term sufficient information. Article 2 (1) (e) Individuals who are authorised as qualified investors in their State of residence in accordance with Article 2 (1) (e)(iv) should be recognised as qualified investors for the purposes of an offer by any issuer, irrespective of whether or not the home Member State of that issuer authorises individuals (in that State) as qualified investors. The result of this was illustrated by the following example. State A chooses to authorise individuals resident in that State to be considered as qualified investors. State B chooses not to do so. (1) Issuer A, whose home Member State is State A, may offer securities to individuals who are qualified investors in State A, and is not required to produce a prospectus by virtue of Article 3(2)(a). Issuer A cannot offer securities to individuals in State B using the exemption for qualified investors, so must produce a prospectus in order to offer securities to individuals in State B (unless another exemption applies). (2) Issuer B, whose home State is State B, may also offer securities to individuals who are qualified investors in State A, and is not required to produce a prospectus. (It does not matter that State B does not recognise individuals as qualified investors, provided that the offer is made to such individuals in State A). Similarly, issuer B cannot offer securities to individuals in State B using the exemption for qualified investors, so must produce a prospectus in relation to an offer to individuals in State B (unless another exemption applies). This interpretation means that all issuers are treated in the same way when making an offer to qualified investors, irrespective of whether their own home State does or does not authorise individuals to be recognised as qualified investors. Directive 97/9/EC (Investor Compensation Scheme) An individual who is authorised as a qualified investor for the purposes of the PD is not automatically a professional investor, as mentioned in Annex 1 to Directive 97/9/EC on investor compensation schemes. The PD does not expand or otherwise modify the categories of investor mentioned in the list in that Annex. Member States will have to take a view as to whether persons they have authorised as qualified investors can be excluded from cover by an investors compensation scheme, in accordance with Article 4 of Directive 97/9/EC. Article 2 (1) (f) The term companies is to be understood in a wide sense, including all kind of private or public companies, no matter whether they are legal entities or not. It is not restricted to legal entities which are subject to the EC company law directives. Article 2 (1) (k) 3

The directive covers all kinds of warrants, included warrants linked to instruments other than securities, which are traded on a regulated market. Article 2 (1) m) (iii) Paragraph (iii) of Article 2(1) (m) provides for a choice of home Member State by the issuer, offeror or person asking for admission, subject to a subsequent election by issues incorporated in a third country if the home Member State was not determined by their choice. The Commission stated that the right of subsequent election is available under this paragraph to third country issuers only where the securities were offered to the public or admitted to trading, and the home State of the issuer therefore determined, by a person other than the issuer itself. References to directive 93/22/EEC (ISD) in Article 2 definitions The definition of securities makes a reference to the Directive 93/22/EEC. By virtue of Article 69 of the new MIFID Directive 2004/39/EC, the reference to the ISD will be replaced 24 months after the entry into force of the MIFID by a reference to the MIFID itself (30.4.2006- with possible delay). Article 2 (2) (a) The term significant size of transactions is primarily left to the discretion of MS when transposing the Directive into national law. The Commission confirmed that paragraph (2)(a) requires that there should be at least 10 transactions in each quarter over the previous four quarters. Articles 3 and 4 The exemptions of the obligation to publish a prospectus in Article 3 and 4 are automatic exemptions and not related to any formal approval or decision by the competent authority ( CA ). In cases where exemptions in paragraphs (2) and (3) of Article 4 are conditional on the issuer making available a document containing information which is regarded by the competent authority as being equivalent to that of the prospectus (Article 4 (1) (b), (c), and (2) (c-d) and (h) (v)), the CA must exercise a ex ante control whether these requirements as to the equivalence of contents are met. For this, the document must be made available to the CA. However, the exemptions in Article 4 do not require the issuer to file or obtain approval for the document in accordance with the provisions which apply in relation to the prospectus itself. With the exception of the ex ante control of the documents mentioned in Article 4(1) (c),(d) and (2)(e),(f), the CA exercises ex post control over the use of exemptions in its territory: that is, it takes appropriate action if it suspects that an exemption has been misused. This does not preclude cooperation between issuers and the CA where an issue approaches about the CA to determine whether or not a prospectus is required in a particular case. Article 3 (2) The group discussed whether or not the kinds of offer mentioned in Article 3(2) are public offers for the purposes of other provisions of the directive (such as the definition of home Member State in Article 2(1)(m) and the regulation of advertisements in Article 15). The Commission did not state a definite, and suggested returning to the 4

question in the next transposition workshop. The Commission noted the historical background of the wording of that provision (political compromise), but made clear, that the Directive can only be interpreted on the basis of the existing text. Some MS requested a clear answer by the Commission on this, because of the practical relevance of the question Article 3(2) provides that resale shall be regarded and treated as a separate offer. MS may not adopt in their implementing legislation rules in relation to the resale of securities which are inconsistent with this. Exemptions set out in Article 3(2) cannot be made conditional on restrictions on resale. Article 3 (2) (c) The limit of Euro 50.000 is per investor, not per unit. Simultaneous application of Article 3 (2) (e) and Article 1 (2) (h) Article 1(2) lists types of securities which are excluded entirely from the scope of the PD. The regulation of, for instance, offers of these excluded securities are left to the national law (unless covered by EC provision elsewhere). Sub-paragraph (h) of Article 1(2) excludes from the scope of the PD securities included in an offer where the total consideration of the offer is less than 2.5 million, calculated over 12 months. However, Article 3(2)(e) provides that offers with a total consideration of less than 100,000 are exempt from the requirement to publish a prospectus. This prevents MS from requiring a prospectus for offers covered by this exemption. The effect of the interaction of these provisions is that the exemption in Article 3(2)(e) constitutes a restriction on the general ability of MS to regulate offers of securities falling within Article 1(2)(h) at a domestic level. Accordingly, MS may, under a domestic regime, require a prospectus in relation to offers totalling between 100,000 and 2.5 million, but cannot require a prospectus under national law for offers of less than 100,000. Article 3 (3) The exemptions listed in Article 3(2) are not applicable in case of an admission to trading (Article 3(3)). Accordingly, if an offer of securities is exempt from the requirement to produce a prospectus by virtue of Article 3(2), a prospectus will nevertheless be required under Article 3(3) if the same securities are admitted to trading (unless an exemption in Article 4(2) is applies). The term admission of securities to trading on a regulated market refers to the point at which the admission to trading takes place, and not to any earlier stage in the process. Article 4 No implementing measures have been adopted under Article 4(3) in respect of the meaning of equivalence for the purposes of the exemptions in paragraphs (1)(b-c) and (2)(c-d), and the Commission has no immediate plans to do so. Unless such measures are adopted, the relevant CA must decide, on a case by case basis, whether the information in a document is equivalent to that of a prospectus. It is relevant for that purpose that the document which must be made available as a condition of those exemptions is not a prospectus, and is not therefore expected to contain all of the information which is required to be included in a prospectus. 5

The CA responsible for determining whether a document to be made available pursuant to paragraphs (1) (b-c) and (2) (c-d) satisfies the condition of equivalence shall be the CA of the Member State in which the exemption is used (territorial jurisdiction) and not the CA of the home Member State of the issuer. The exemptions in Article 4 do not follow the passport principle of the prospectus. Where the CA in question is the CA of the home Member State, the PD makes this clear; see e.g. Article 13 (1) and 17 (1). By contrast, there is no such reference to the CA of the home Member State in Article 4. If an offer using one of these exemptions takes place in more than one Member State, then more than one CA will need to take a view about whether the document is equivalent. Such duplication of effort, and the potential for different views, are undesirable, but can be dealt with by supervisory cooperation. Article 4 (1) (b) The exemption in Article 4(1)(b) covers offers of all kinds of securities which may be offered in connection with a takeover by means of an exchange offer. Although in practice the securities offered will almost certainly be shares, the scope of the exemption is not restricted to shares, and MS may not narrow the scope of that provision in their implementing legislation. Article 4 (1) (d-e) and (2) (e-f) The document which must be made available in these cases follows a very light touch regime. The only requirement imposed by the directive is that a document made available in accordance with these exemptions must contain information on the number and nature of the securities and the reasons for and details of the offer. The prospectus rules do not apply. MS cannot impose additional requirements in relation to the contents of these documents as a condition of the exemptions from the obligation to publish a prospectus. However, this would not prevent MSs from regulating, for example, the contents of a document which is required to be produced in connection with an offer of shares under an employee share scheme, under national rules relating to employee share schemes. There is no requirement that the documents mentioned in Article 4(1)(d-e) and (2)(e-f) must state the person and persons who are responsible for the information contained in the document. But the fact that a statement of this kind is not required to be included in the document does not mean that no one is legally responsible or liable for its contents. Such liability will be determined in accordance with the normal rules of liability for statements under domestic law. The documents which must be made available as a condition of the exemptions in these sub-paragraphs do not refer to the information which is required to be made available to the entire market in accordance with other directives (such as price sensitive information which must be made public in accordance with the Market Abuse Directive). In particular, these documents do not constitute regulated information within the meaning of Article 2(1)(k) of the Transparency Requirements Directive. There is no obligation under the PD to publish these documents generally. Article 4 (1) (e) and Article 4 (2) (f) The term affiliated undertaking has to be interpreted in a broad way; it includes associated, subsidiary and parent companies. 6

Participants discussed the meaning of paragraph (1)(e) as compared with the meaning of paragraph (2)(f). Although these provisions both allow exemptions from the obligation to publish a prospectus where the securities are offered or allotted to existing or former directors or employees, they are drafted slightly differently. Paragraph (1)(e) refers to an offer of securities by their employer which has securities already admitted to trading on a regulated market or by an affiliated undertaking. By contrast, paragraph (2)(f) exempts securities which have been offered by their employer or an affiliated undertaking, provided that the said securities are of the same class as the securities already admitted to trading on a regulated market. It is clear from the drafting of paragraph (2)(f) that the securities offered (and to be admitted to trading) must be of the same class as securities which are already admitted to trading. However, that is not clear in (1)(e) which, as drafted, requires only that that securities are offered to employees by either their employer or an affiliated undertaking, and that the employer has securities admitted to trading. Participants requested clarification as to whether (1)(e) should be construed, by analogy with (2)(f), as in fact requiring that the securities offered must be of the same class as the securities which are admitted to trading, or whether it should be understood literally as requiring simply that the employer of the person to whom the securities are offered must have securities admitted to trading on a regulated market. The Commission services will provide a view on this matter in due course. Article 4 (2) (h) (ii), (iv) The exemption in Article 4(2)(h) is subject to a number of cumulative conditions including, the condition that admission to trading on the other regulated market was subject to a properly approved prospectus or listing particulars (paragraph (ii) or (iii)), and the condition that the ongoing obligations for trading on the other regulated market have been complied with (paragraph (iv)). The responsibility for ensuring that these conditions are complied with lies with the issuer, or the person seeking admission of the securities to trading. There is no requirement for an ex ante control by the relevant CA that the conditions in paragraphs (ii) or (iii), and (iv) have been satisfied. Similarly, the PD imposes no such requirement on the market in question. Article 40(3) of the MIFID (which provides that MSs must require regulated markets to establish and maintain effective arrangements to verify that issuers of traded securities comply with EC disclosure obligations) is not relevant for this purpose, and will not have the effect of imposing on markets a responsibility under Article 4(2)(h) of the PD. However, this does not prevent the market from requiring confirmation from the issuer or person seeking the admission of securities to trading that the conditions under Article 4(2)(h) have been complied with in a relevant case. Article 4 (2) (h) (vii) Paragraph (vii) of Article 4(2)(h) provides that the content of the summary document required under paragraph (v) must comply with Article 5(2). However, the requirement specified by Article 5(2) that the summary document of a prospectus must contain a warning in the form set out in sub-paragraphs (a) to (d) may not be relevant to, and may be inappropriate for, the summary required under Article 4(2)(h)(v). For example, the warning requires the summary to state that it should be read as an introduction to the prospectus, and that any decision to invest in the securities in question should be based on an assessment of the prospectus as a whole. While Article 4(2)(h)(vii) does require the summary to state where the most recent prospectus may be obtained, it is possible 7

that that prospectus may have been published many years ago and the information contained in that prospectus may be outdated. After discussion in the group, the Commission adopted the general consensus that issuers should take a common sense and purposive approach when applying paragraph (vii) of Article 4(2)(h), and comply with the requirements of Article 5(2) which make sense in the context of the different document required under Article 4(2)(h)(v). This would mean complying with the requirements in the third sentence of Article 5(2) as to the general style and contents of a summary; but, where there is no recent prospectus available, the requirement for a warning may be adapted so as, for example, to advise users that the summary should be read in conjunction with the most recent information disclosed to the market. The most recent prospectus referred to in this paragraph means a prospectus relating to the securities, or securities of the same class, which are mentioned in paragraph (i) of Article 4(2)(h). Article 6(1) Article 6(1) specifies the guarantor in the list of persons whom MS are required to make responsible for the information given in a prospectus. The Commission agreed that the responsibility of the guarantor may be limited to the information required under Annex VI of the Regulation (EC) 809/2004 (the building block on guarantees), provided that the limits on that responsibility are indicated in the prospectus. The provisions in the Annexes to the Regulation which require information on the person responsible anticipate that a person may be responsible only for particular parts of that information. In such cases, the prospectus must indicate which parts each particular person is responsible for. The references in Article 5(1) and (2) and Article 6(1) to a guarantor refer to the same person. Article 9 A prospectus is valid for 12 months after its publication. Article 14(1) requires that a prospectus must be filed and published within a reasonable time after approval. If the period of delay between approval and filing / publication is significant, it would fall to the CA s general supervisory powers functions whether to take any regulatory action in respect of the delay. Article 9 (2) In the case of an offering programme, the base prospectus shall be valid for a period of up to 12 months. This means (a) that the first issue of securities under the offering programme shall be issued within the period of 12 months from the first publication of the base prospectus, and (b) that a new base prospectus must be approved for the purpose of the issuance of new securities after the 12 month period has expired. As an exception to (a), a base prospectus relating to non-equity securities issued in a continuous and repeated manner by credit institutions and which meet the requirements set out in paragraphs (i) and (ii) of Article 5(4)(b), is valid until that end of the programme. Article 9 (4) The reference in Article 9(4) to updating in accordance with Article 10(1) is wrong; it should be read as a reference to updating in accordance with Article 16(1). 8

Article 10 (2) Where an issuer has more than one home Member State, the document required under Article 10(1) must be filed with the competent authorities of each of those States. Article 11 A prospectus approved prior to the transposition of the Directive can be incorporated by reference into a new prospectus approved after 1 July 2005 only if the requirements of Article 11(1) are met. This provides that information can be incorporated by reference either if that information has been approved by the CA of the home MS, or if it has been filed with it in accordance with the PD, or with titles IV and V of CARD. Accordingly, the Commission considered that a prospectus drawn up and approved by the CA under directive 1989/298/EEC could be incorporated by reference. The cross-reference list required by Article 11(2) must present, in one place, a list of all the information which has been incorporated by reference. The purpose of the list is to inform an investor, in a clear and easily accessible manner, whether the prospectus is complete in itself, or whether he will need access to other documents to complete the prospectus. Article 12 CAs may approve a registration document outside the context of a public offer or admission to trading. The registration document, once filed, is then valid for 12 months and, supplemented by a securities note and (where required) a summary note, which have also been approved by the CA, it can be used for a public offer or the admission of securities to trading. Article 12 (2) The term the latest updated registration document refers to the most recent version of the registration document (as opposed to any supplement to that document). Article 13 (1) Where a prospectus consists of separate documents, those component documents may be published separately (Article 14(5)). But there will be no prospectus unless all of the necessary components have been published. Article 13 (5) and Article 12/and Article 16 If the competent authority transfers the approval of a prospectus to the competent authority of another MS, it must transfer the approval of all the component documents in a case where the prospectus consists of separate documents. (Article 13(5) permits a CA to transfer the approval of a prospectus, not its component elements.) The Commission took the view that, in a case where the approval of the prospectus has been transferred to another authority, that same authority should also approve any supplements to the prospectus which may be required under Article 16. This is a matter of practical convenience, rather than an express requirement of the PD. Article 14 (1) Article 14(1), which requires the timely filing and publication of a prospectus which has been approved by the relevant CA, requires, inter alia, that in the case of an initial public offer of a class of shares not already admitted to trading on a regulated market, and 9

which are to be admitted to trading for the first time, the prospectus must be available for at least 6 working days before the end of the offer. The effect of this is that, in a case of the kind described where the offer is open for less than 6 working days, the prospectus must nevertheless be published at least 6 working days before the closing date of the offer which precedes the admission of the shares to trading. Article 14 (5) If a prospectus consists of separate documents, these documents can be published and circulated separately provided that the requirements in Article 14(5) are satisfied. Article 14 (7) Where the prospectus is made available by publication in electronic form, a paper copy must be delivered to the investor upon his request. This means that a paper copy must be sent free of charge to the investor. It is not sufficient for the issuer etc. to allow the investor to inspect a physical copy at a designated premise. Article 15 (5) Paragraph 5 of Article 15 imposes analogous requirements in two distinct situations: (i) where no prospectus is to be published in relation to an offer of securities (because an exemption in Article 3(2) or 4(1) applies); and (ii) where a prospectus is required to be published. The paragraph covers, but is not restricted to, circumstances where material information relating to securities which are the subject of an offer is disclosed in a road show or other presentational event before or during the offer. In the first case, if an issuer or offeror discloses material information to a section of the persons to whom the offer is addressed, that information must be disclosed to all the persons to whom the offer is addressed. This general principle applies, irrespective of whether the offer is addressed to qualified investors (under Article 3(2)(a)), or to fewer than 100 persons in one MS (under Article 3(2)(b)), or any other category of persons to whom securities can be offered without the publication of a prospectus. The principle is that material information which is disclosed to some persons in that category must be disclosed to all such persons. In the second case, material information which is disclosed to a restricted group of persons must also be disclosed generally, in the prospectus or a supplement to the prospectus. Article 19 It is the competent authority who decides which language is customary in the sphere of international finance. The group agreed unanimously that English is a language customary in the sphere of international finance. However, the Commission made clear that the use of the expression a language customary in the sphere of international finance in the directive was deliberate. The reference is open, and is capable of including languages other than English should other languages fit that description. It was noted that Article 19 also gives issuers etc. the right to draw up a prospectus in a language accepted by the relevant CAs. In many cases, that description is likely to include languages which are used customarily for financial transactions within a particular region. Article 19 (2) and Article 5 (2) 10

Article 5(2) states that the summary of the prospectus shall be prepared in the language in which the prospectus was originally drawn up. Article 19(2) states that, in case where the prospectus is used in a host MS, the CA of that host MS may only require that the summary be translated into its official language. There is no inconsistency between these provisions. The first prescribes the language in which the summary must be produced. The second deals with the translation of the summary in cases where the prospectus is to be used in a State other than the home MS of the issuer. Article 21 (3) (c) Article 21(3) (c) requires each MS to ensure that its CA has the power to require auditors of the issuer to provide information. This power should not be subject to or reduced by the auditor s professional confidentiality obligations. The CA must have the power to ask for relevant information, and that power should override professional secrecy. The Commission pointed out that the competent authority itself is bound by professional secrecy (Article 22). Accordingly, if it obtains confidential information from an auditor, it can only use and transfer that information in accordance with Article 22. The powers set out in Article 21(3) specify the minimum powers which each MS must confer on its CA: they do not directly confer powers on the CA. For example, Article 21(3) (a) does not give a CA the power to ask for information which is additional to the information which an issuer etc. is required to include in a prospectus in accordance with the Prospectus Regulation. Similarly, the stipulation in that paragraph that a CA must be able to require the inclusion in a prospectus of supplementary information if necessary for investor protection, does not limit the scope of the actual powers of a CA. Articles 29 and 30 A number of questions were raised in relation to Articles 29 and 30, which were not explored fully during the workshop due to lack of time. These include the meaning of Article 30(1), in conjunction with Article 2(1)(m)(iii). We propose to return to these issues in the next workshop. 11