The European Union’s new Prospectus Regulation¹ came into force on 20 July 2017, however the bulk of the changes it brings to the existing prospectus regime were implemented on 21 July 2019.

This article looks at the impact of these changes on AIM listed companies. It does not cover companies whose shares or securities are listed on other markets.

When do AIM companies need a prospectus and has this changed?

Although fundraising transactions on AIM are almost always structured so as to avoid the need for the issuer to produce a prospectus, it pays to be aware of what the rules are to avoid any mishaps.

A prospectus prepared under the prospectus regime differs from an AIM admission document, which is derived from, and its contents prescribed by, the AIM Rules for Companies. AIM companies will usually want to avoid having to produce a prospectus given the extra resource required and the need to have it approved by the FCA.

As was the case under the previous Prospectus Directive², all companies, regardless of the market on which their shares are listed, may be required to produce a full prospectus in certain circumstances:

(1) when applicable transferable securities are being offered to the public in the UK; and/or

(2) when transferable securities are admitted to trading on a regulated market in the UK, which includes the Main Market of the London Stock Exchange, the NEX Exchange Main Board and Euronext London. AIM is not a regulated market.

There are various exemptions to the above prospectus requirements which are beyond the scope of this note, but it is worth noting that AIM companies issuing transferable securities are normally not required to produce a prospectus because AIM is not a regulated market and care is taken to offer the securities to a limited number of investors, rather than to the public in general. AIM companies may sometimes undertake a placing with an open offer element, but that is also typically structured to fall within relevant offer-to-the-public exemption thresholds.

The prospectus regime in the UK was amended with effect from 21 July 2018³ to: (i) remove from the regime entirely offers made at the lower threshold of EUR 1 million (down from EUR 5 million); and (ii) place within the regime, but establish an exemption for, offers to the public of up to EUR 8 million where there is no application to trading on a regulated market.

The new Prospectus Regulation also introduces the concept of an EU Growth Prospectus, allowing for lighter disclosure by eligible issuers in a standardised format. The regime is open to: (i) SMEs; (ii) non-SMEs whose securities are traded on an SME growth market (which includes AIM), provided their average market capitalisation has been less than EUR 500 million in the preceding three years; and (iii) issuers making an offer to the public for securities for a total consideration equal to or less than EUR 20 million (provided their shares are not traded on a MTF i.e. AIM), and further provided that they have had no more than 499 employees on average during the previous financial year. Given AIM companies in effect already benefit from a reduced disclosure regime, it seems likely EU Growth Prospectuses will be of more interest to non-AIM companies meeting these criteria.

Changes to the AIM Rules

The LSE published AIM Notice 56⁴ on 20 June 2019 setting out the changes to the AIM Rules that apply since 21 July 2019, when the new Regulation came into effect. Changes have been made principally to the AIM Rules for Companies (including the annexes specifying which information required for a prospectus need not be included in an AIM Admission Document), the Note for Investing Companies and the Note for Mining, Oil and Gas Companies. The changes are not extensive and are broadly focused on updating cross references to the Prospectus Rules. AIM Notice 56 contains links to blacklines showing the changes.

Admission documents to be published after 21 July 2019 must comply with the updated requirements set out in the amended Schedule Two of the AIM Rules for Companies.

Risk factors

The new prospectus regime requires regulators to place greater pressure on issuers and their advisers to limit risk disclosures in prospectuses to relevant, material and issuer-specific risk factors. Although not directly applicable to AIM admission documents, there is every possibility that developing main market practice may filter through to the way risk factors are prepared and considered by issuers alongside their nominated advisers and other professional advisers.

Under the new Prospectus Regulation, risk factors must be limited to those specific to the issuer or its securities and which are material for an investor to reach an informed investment decision. The materiality of the risk factor, based on both likelihood of occurrence and the impact it would have should it occur, must be clear and issuers may use a qualitative approach, for example by using a low/medium/high scale.

Risk factors must be adequately described, explaining their effect on the issuer or its securities and they should be presented in a limited number of categories depending on their nature. The most material risk factor in each category must be disclosed first. Risks included in the risk factor section must also be corroborated elsewhere in the prospectus.

ESMA has developed guidance to assist the FCA in its review of prospectus risk factors⁵. Nomads may look to the practices and approach of the FCA in this area as informing their own approach.

Reduced disclosure regime

The new Prospectus Regulation provides for a simplified disclosure regime for secondary issues, available to issuers whose securities have been admitted to trading on a regulated market or an SME growth market (which includes AIM) continuously for at least the preceding 18 months. Unlike the “proportionate disclosure regime” in operation to date, there is no requirement that the proposed secondary offer be pre-emptive. Nonetheless, these relaxations will be of most benefit for those wishing to undertake rights issues and open offers.

Historically, smaller companies (particularly those admitted to trading on AIM) had tended to move away from conducting rights issues due to the timing and disclosure implications, instead raising capital through a placing to a limited number of investors to avoid having to produce a full prospectus. When the proportionate disclosure regime was introduced in 2012, authorities hoped that it would bring about change and reduce the administrative burdens and costs associated with raising capital. By taking into account the amount of information on issuers already disclosed to the market, an AIM company undertaking a rights issue could produce a prospectus with reduced disclosure on its business and financial information. It remains to be seen whether the new regime leads to any increased utilisation of larger offerings by AIM companies given historic trends, although it is helpful that the regime has been extended beyond pre-emptive offerings.

Conclusion

The modernisation of the existing prospectus regime through the new Prospectus Regulation forms part of the EU investment plan to build a capital markets union, a single market to mobilise capital, encourage investment and create jobs. The true impact of some of the regime changes on AIM companies will become clearer over the coming months, however it is arguable that the most significant benefit afforded to AIM companies came into effect in July 2018, as the increased threshold of EUR 8 million for offers to the public will provide a useful exemption for many AIM issuers.

If you would like further information on the new Prospectus Regulation regime and the possible impact on your business and transactions, please do not hesitate to contact us.