Mantas Gofmanas: public offering unification on the EU scale – an essential step towards creation of the capital markets union

Author: Mantas Gofmanas, Associate Partner of law firm TGS Baltic

As you may know, though free movement of capital is one of the fundamental EU functioning principles, it is actually not fully implemented in the capital markets for many reasons (different regulatory requirements, taxation aspects in the Member States, etc.). In order to change this situation, on 30 September 2015, the European Commission presented an action plan for creation of the capital markets union.

A breakthrough is expected in this context on 21 July 2019 when Regulation (EU) 2017/1129 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC will come into full force on the EU scale. After the Regulation comes into effect, the procedure of public offering of securities (drafting, approval, publication of the prospectus, as well as exemptions when a prospectus is not necessary, requirements for advertising of securities, many other related issues) will be finally unified on the EU scale, also uniformity of released information will be ensured, at the same time reinforcing the cross-border passporting mechanism operation in the whole of the EU, when after approval of a prospectus in one Member State, public offering of securities and/or their admission to trading on a regulated market can be performed in any other Member State or States.

As currently the said issues are regulated by the Directive and legal acts of each of the Member States implementing the Directive (in Lithuania, by the Law on Securities and other laws to a certain extent), after the directly applicable legal act comes into force in the whole of the EU, national laws must be modified accordingly. Lithuania has already started doing relevant homework, drafting a new version of the Law on Securities, preparing draft amendments to the Law on the Markets in Financial Instruments, the Law on Companies and other related laws.

Thus, the main changes, which will come into force on 21 July 2019, are as follows:

1. Raising the threshold when no prospectus is required for distribution of securities. The EU Member States are given the right to set a threshold of EUR 1–8 million for offering securities for sale in the EU within 12 months in total, until which one may opt for an exemption from the requirement to publish a prospectus. The current threshold applicable in Lithuania is EUR 5 million, however the proposed amendments to laws aim to increase it to the maximum amount of EUR 8 million. Of course, this proposal is useful for the market and, if the amendment is adopted, it could serve as an additional incentive for making the capital markets in Lithuania more active. In its own turn, it could open more possibilities for small and medium-sized enterprises to make public issues and to use this alternative funding possibility.
2. Giving a possibility for small and medium-sized enterprises, as well as low capitalisation enterprises to have a simplified prospectus: an EU Growth prospectus. Again, it could serve as an additional possibility for small and medium-sized enterprises to enter the capital markets. The current requirements, which are actually aimed at larger enterprises or larger securities issues, are hardly adaptable for small and medium-sized enterprises, also for smaller issues, and they become an obstacle and turn into big costs that small and medium-sized enterprises often cannot afford.
3. Raising the threshold when no prospectus is required for admission of shares to trading on a regulated market. It is no longer required to issue a prospectus in case of admitting shares, the number of which makes less than 20 percent of the number of shares of the same class already admitted to trading on the same regulated market within 12 months,to trading on a regulated market. This provision of the Regulation has been effective already since 20 July 2017, however our Law on Securities still indicates the earlier limit of 10 percent. Thus, this amendment expands the possibilities for issuers to make private (non-public) placements, when, after distribution of shares in this way, their admission to trading on a regulated market does not require a prospectus.
4. Refusing the provision that all heads of the issuer are considered acting jointly and having one another’s votes.There is no such provision on the EU scale. This is a peculiarity of our national regulation (the Law on Securities), which also goes against the international practice. Besides, a question arises whether it is really reasonable to hold that all heads of an issuer (members of the Supervisory Board, the Board and the head) always follow the same policy, especially when recently more and more issuers have been appointing independent members to their bodies. Thus, this proposed amendment is also very welcome.