The EU’s Prospectus Directive is flailing because every state has interpreted it differently. And other directives close to their implementation deadlines, such as the Capital Requirements Directive and the Markets in Financial Instruments Directive (MiFID), may suffer the same fate, writes Michael Imeson.

What is it?

The European Commission’s Prospectus Directive, which came into force in July 2005. The directive harmonised the prospectus requirements for firms raising equity and debt capital, so that just one set of documents is needed throughout the EU.

A prospectus is the disclosure document that issuers give to investors when they want to raise capital or admit securities to trading. Under the directive, once a prospectus is authorised by one EU member state, it can be used in all the others, cutting red tape and costs for issuers. But there is a serious problem: a year after implementation, there is still uncertainty about how the directive should be interpreted and applied.

Member states are taking different approaches in many areas, and often adding extra requirements. Typical areas of doubt are how to delineate between a “supplementary prospectus”, which needs regulatory approval, and “final terms”, which do not? And the scope of the right of investors to withdraw their acceptances of an offer is unclear.

Who dreamed it up?

The Internal Market and Services Directorate-General of the European Commission.

What are its main provisions?

The directive (was supposed to have) defined clear conditions for offering securities to the public and harmonised essential definitions to avoid loopholes and different approaches. It also introduced higher disclosure standards, concentrated responsibilities on the home country regulator, and created a “single passport” that allows a prospectus approved in one member state to be used in all others.

What’s in the small print?

The implementation uncertainties derive from the large print of the directive, not the small print of the regulation.

The large print (the key rules, basic concepts and principles) is in the “framework directive”, which member states have transposed into their national laws. The small print (such as rules on how prospectuses are approved, published and advertised) is a “technical regulation” that applies directly in all EU states.

What does the industry say?

The International Capital Market Association (ICMA), which represents firms in more than 50 countries, is worried. It has just highlighted the fact that non-EU issuers can use non-international financial reporting standards financial statements in their prospectuses only until the end of 2006, and the ICMA fears that some non-EU issuers have switched issuance to outside the EU as a result. Unless the EC quickly extends the deadline, business will continue haemorrhaging.

How much will it cost?

Impossible to say. But if non-EU issuers of international securities are switching to issuance outside the EU – caused by just one area of uncertainty – then that is a lot of lost business.

What do the regulators say?

The European Commission describes the directive as “a cornerstone of the creation of the single market for financial services and the completion of the Financial Services Action Plan”. But hang on. If each country is applying the directive differently, surely it is a seriously defective cornerstone?

The law of unintended consequences

No matter how many rules there are, people will find a way round them. Ironically, it is national regulators and finance ministers who are doing the circumventing. It is an example of the problems that will afflict the Capital Requirements Directive and MiFID.

Could we live without it?

No. Prospectus harmonisation is vital for efficient capital markets in Europe.

Rating: 5...but implementation inconsistencies need to be sorted out.

Rating scale: 5 = Essential;4 = Useful; 3 = Neutral;2 = Unnecessary; 1 = Waste of time.

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