EU Financial Markets

Introduction
Public offer of Securities
Prospectus requirements
Post-listing Disclosure
Liability for breaches

Introduction
Private vs Public enforcement – clearly evident in pre- and post-listing disclosure requirement rules
Information asymmetry intrinsic to capital markets
Possible civil claims for false representations should suffice
Prospectus requirements ad absurdum

Prospectus Directive
Rules on pre- and post-listing disclosure in VPTS and also Nasdaq OMX Tallinn rules
The source for obligations again stems from EU law
Prospectus directive
Transparency Directive

Prospectus Directive
Prospectus directive:
Single passport regime (passporting)
Definition of notion of public offer of securities
Publication requirements pre-listing
Enhancement of investor protection

Prospectus Directive
Following principles ought to be respected (preamble, recital 43):
Need to provide investors with a wide range of competing investments and a level of disclosure and protection tailored to their circumstances
Need to encourage innovation in financial markets if they are to be dynamic and efficient
Importance of reducing the cost of and increasing access to capital
Balance of costs and benefits to market participants on a long-term basis (SMEs and small investors) in any implementing measures

Prospectus Directive
Following principles ought to be respected (preamble, recital 43):
Need to foster the international competitiveness of EU financial markets without prejudice to a much-needed extension of international cooperation
Need to achieve a level playing field for all market participants by establishing EU-wide regulations every time it is appropriate
Need to respect differences in national markets where these do not unduly impinge on the coherence of the single market

Prospectus Directive
Prospectus Directive (2003/6/EC)
Regulation (EC) No 809/2004 of 29 April 2004 implementing Directive 2003/71/EC
New amendments regarding the contents of the prospectus and publishing requirements in 2011 and 2012 – see http://ec.europa.eu/internal_market/securities/prospectus/index_en.htm for further information

Public offer
Participants to the securities markets (VPTS § 4-7):
Issuer
Offeror
Investor

Public offer
Offer of securities (VPTS § 11):
Communication to persons in any form and by any means
Sufficient information on the terms of the offer and the securities to be offered enabling the investor to decide to purchase or subscribe to these securities

Public offer
Offer is deemed to be public except following circumstances:
addressed solely to qualified investors
addressed to fewer than 99 persons per MS
addressed to investors who acquire securities for a total consideration of at least 50 000 EUR per investor, for each separate offer
an offer of securities with the nominal value or book value of at least 50 000 EUR
an issue or offer of securities with a total consideration of less than 100 000 EUR in a period of 12 months

Public offer
Qualified investor (VPTS § 6):
Credit institution
Investment firm
Fund manager or an investment fund
Insurance undertaking
Or other person under supervision of FSA in Estonia or other MS
a financial institution of Estonia or a foreign state whose only business activity is investment in securities

Public offer
Qualified investor (VPTS § 6):
SME entered into the list of FSA (more than 250 employees, turnover of under 50 MEUR)
States
International organisations (IMF, ECB, EIB)
A natural person if registered by FSA

Public offer
A natural person considered as a qualified investor shall meet at least two of the following requirements (VPTS § 6(4)):
the investor has carried out transactions of a significant size on securities markets at an average frequency of, at least, 10 per quarter over the previous four quarters;
the volume of the securities portfolio of the investor exceeds 500 000 EUR;
the investor works or has worked for at least one year in the financial sector in a professional position which requires knowledge of securities investment;
Registered with the FSA.

Public offer
Following offers are also considered as public offers:
Any subsequent resale of securities considered initially not as a public offer
The placement of securities through financial intermediaries is also deemed to be a public offer of securities if none of the conditions provided previously regarding the circumstances not to consider the offer as public are met for the final placement.

Public offer
Issue of securities (VPTS § 13):
a pool of securities of the same type issued on the basis of a single decision by the issuer
issue of securities on the basis of a single decision but at different times (as a series; considered as one issue)

Public offer
Issue structure:
Shares: existing shares offered vs issue of new shares
Bonds: bonds issued directly to public or through an investment firm
Investment funds: direct offer vs fund-of-funds structures

Prospectus
In the case of public offer a prospectus must be drafted subject to VPTS and Prospectus Regulation rules
If not public offer, then similar listing particulars shall be issued
Listing in primary market vs prospectus not identical

Prospectus
Prospectus Directive underline only principal requirements to the prospectus
The exact requirements on parts and content are stipulated in the Prospectus Regulation:
Schedules
Building blocks
Additional information going beyond the statutory requirements allowed

Prospectus
Schedule – a list of minimum information requirements adapted to the particular nature of the different types of issuers and/or the different types of securities involved
Building block – a list of additional information requirements depending on the type of instrument and/or transaction for which a prospectus is drawn up
See further - http://www.esma.europa.eu/system/files/Implementing_Measure_Prospectus_Directive.pdf
A combination of various schedules and building blocks is inevitable

Prospectus
General requirements (VPTS § 141 and Prospectus Regulation preamble):
Must contain all information
Information must be presented in an easily analysable and comprehensible form
Must always include a summary

Prospectus
General requirements (VPTS § 141 and Prospectus Regulation preamble):
Voluntary disclosure of profit forecasts should be presented in a consistent and comparable manner and accompanied by a statement prepared by independent accountants or auditors
Can refer to previous documents registered with the FSA

Prospectus
The ultimate underlying principle is that the information should be sufficient for an investor to make an informed assessment by the investor on following issues:
Assets and liabilities
Financial position
Profit and loss
future prospects of the issuer and the guarantor (if applicable)
Rights attaching to the securities offered

Prospectus
Taking account the specific nature of the requirements already mentioned before such decision is rather challenging
As a result the requirement of summary has been introduced

Prospectus
Prospectus summary (see mainly VPTS § 14 (3)):
Drafted in the language in which the prospectus was originally drawn up
In a brief manner and in non-technical language
Must convey the essential characteristics and risks associated with:
Securities
Issuer
Guarantor (if any)

Prospectus
Prospectus summary (see mainly VPTS § 14 (3)):
Must contain a clear warning on following:
the summary should be read as an introduction to the prospectus and any decision to invest in the securities should be based on consideration of the prospectus as a whole by the investor;
where a claim relating to the information contained in a prospectus is brought before a court, the plaintiff investor might, under the national legislation of the home Contracting State or host Contracting State, have to bear the costs of translating the prospectus before the legal proceedings are initiated;
no civil liability shall attach to any person solely on the basis of the summary, including any translation thereof, unless it is misleading, inaccurate or inconsistent when read together with the other parts of the prospectus.

Prospectus
Parts of prospectus (VTPS § 141):
Consisting of one document
Consisting of separate documents
Registration document which contains information on the issuer
Securities note which contains information concerning the securities to be offered to the public
Summary
Duplication of information should be avoided as to large extent as possible

Making prospectus public
Rules on advertisements:
A notice in a daily newspaper must be published (see Prospectus Regulation art 31 for further details)
A notice of an offer and any other advertising pertaining to the offer disclosed orally or in writing, including information not disclosed for advertising purposes, may not be incorrect or misleading in character and may only contain information to be found in the prospectus

Prospectus Registration
Prospectus must be registered with the (local) FSA
Additional rules on listing apply – see Nasdaq OMX Tallinn Listing rules clauses 13.2ff - http://www.nasdaqomxbaltic.com/files/tallinn/oigusaktid/alates18082008/NN-09-05-2011-eng-clean.pdf

Prospectus Registration
Application to FSA
Application
Prospectus
Copy of Articles of Association of the issuer (if applicable)
Issuer from other MS than the application can be made by the FSA of the respective MS
FSA can decide to transfer the registration to another FSA

Prospectus Registration
FSA resolution within 10 days
FSA can refuse to register
the conditions of the offer are contrary to legislation in force or the articles of association of the issuer;
the prospectus does not meet the requirements established by legislation and the deficiencies are significant;
the offeror does not, upon application, submit all the documents prescribed by legislation or the documents are contradictory with regard to each other

Passporting
One single approval of the prospectus (namely the approval by the home MS) is “valid for public offer or admission to trading in any number of host Member States” (art 17 of the prospectus directive)
Notification of the home FSA needed
FSA will draw up a certificate to be issued to other FSAs: attesting that the prospectus has been drawn up according to relevant requirements
Translation of the summary needed, the prospectus itself can be also drafted in English (Estonian FSA may require a summary to be published in Estonian)

Prospectus liability
Requirements for civil liability:
Information proves different from actual circumstances or omission of facts
Facts must be significant for the purpose of assessing the value of the securities
Also applies to the summary of a separate prospectus, including any translation thereof, but only if the summary is misleading, inaccurate or inconsistent when read together with the other parts of the prospectus.
Misrepresentation may be caused by third persons but is not relevant regarding possible liability

Prospectus liability
Requirements for civil liability:
Owner of the security can claim damages
Limitation period of five years as of the beginning of the offer of the relevant security on the basis of a prospectus
Damage - by acquiring the security from the person that sustained the damage for the price that the latter paid to acquire the offered security
The liability only arises when the issuer or offeror knew or should have known of the misrepresentation.
Liability excluded if the person that sustained the damage was aware, at the moment of acquiring the security, that the prospectus which was the basis for the offer was incomplete or contained inaccurate information

Post-listing disclosure
Rules stipulated in:
VPTS, largely based on the Directive 2004/109/EC on the harmonization of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market (Transparency Directive)
Nasdaq OMX Tallinn Requirements for Issuers - http://www.nasdaqomxbaltic.com/files/tallinn/oigusaktid/alates18082008/NE-09-05-11-eng-clean.pdf

Post-listing disclosure
Existing Directive 2004/109/EC will be substituted by new directive 2013/50/eu (22.10.2013).

Post-listing disclosure
Annual reports
Within 4 months after the end of financial year
Annual financial report must be public for a period not less than 5 years
Annual financial report shall consist of the audited annual accounts, management report and declaration by the management.

Post-listing disclosure
Half-yearly reports
Issuer of debt securities or shares
Concerning the first six months of the financial year
Without delay but not later than within two months after the end of such period
Available to the public for a period of not less than five years
Interim management report shall set out, as a minimum, the significant events which took place during the first six months of the financial year and their effect to the abridged accounts, and contain a description of the main risks and ambiguities of the remaining six months of the financial year

Post-listing disclosure
Interim management statements
Issuer of shares
interim management statements during the first six-months' period of the financial year
information from the beginning of the relevant six-months period until the date of disclosure of the interim management statement
an explanation concerning the significant events and transactions which took place during the relevant period and the effect thereof on the financial situation of the issuer and the enterprises controlled thereby, and a general description of the financial situation and results of the issuer and the enterprises controlled thereby during the relevant period.

Post-listing disclosure
Ad hoc disclosure
Change in ownership structure (more than 10%)
Changes which occur in the rights represented by different classes of securities or any changes in the total number of voting rights and the size of the capital
Issue of new debt obligations and above all, concerning the information related to any guarantee or security related thereto

You have been approached by a private investor Mr Hans who has invested some 267 000 euros into a bond issue organized by investment firm called Guilt Ltd. No prospectus was published as only certain number of investors had been approached. Mr Hans indicates that his old friend Mr Goodadvice recommended the bonds. Mr Goodadvice and Mr Hans had worked on similar projects before. In the investment instruments Guilt Ltd as issuer promised investors, in 2007, that by purchasing land in Armenia, the money invested would produce a 70 per cent yield. After that, the investors lost all sight of their money.
Mr Hans has read a fresh analysis from local Forbes stating that ’Looking at the Guilt Ltd Armenian scheme in hindsight, it would probably be discarded at once. The idea was to purchase 147 hectares of land in vicinity of Yerevan, build an entire residential district and exit the business in a couple of years, with huge profit. In 2007, however, no-one doubted. Due to the fact, obviously, of Guilt Ltd CEO being a respected banker, founder of Svenska bank local branch.’
Mr Hans is asking Your advice what to do. Please draw up arguments for Mr Hans to issue a claim letter to Mr Goodadvice and also Gulit Ltd.