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An amendment to the Czech Capital Market Undertakings Act in the light of the EU prospectus regulation

On February 12, 2019, the amendment to the act no. 256/2004 Coll., Capital Market Undertakings Act (hereinafter referred to as the “Czech CMU Act”) and other related legal acts (hereinafter referred to as the “Prospectus Amendment”) was submitted to the Chambers of Deputies of Parliament of the Czech Republic by the goverment, because of the need to adapt Czech law to the directly applicable prospectus regulation of the European Union[1] (hereinafter referred to as the “Prospectus Regulation”). In this article, we bring you a description of the most relevant changes that will impact the area of public offering of the securities.

The Prospectus Regulation has become the first approved legislation of the European Union in the area of the Capital Markets Union (so called CMU). As of July 21, 2019, the Prospectus Regulation shall be binding in its full extent, directly applicable in every member state, and it shall fully replace the current prospectus directive.[2] Therefore, all the rules for producing, publication and approval of the prospectus of the securities shall be regulated directly by the Prospectus Regulation. In order to avoid the duplicity of the regulation, relevant sections shall be omitted from the Czech CMU Act.

The Prospectus Regulation brings several interesting changes in the area of public offering of the securities. Most important ones include facilitation of the access of issuers of securities to the capital markets, especially for small and medium-sized enterprises. Another objective is to facilitate the conditions for publication and approval of the prospectus, which shall be significant mainly for frequent issuers. In general, more simple formal and content requirements shall be stipulated for the prospectus, including new rules for the summary of the prospectus. Smaller issuers shall now have an opportunity to draw up significantly simpler form of prospects, called EU Growth Prospectus. The time limits for approvals by the relevant authorities empowered with the regulation of the capital market shall be reduced.

The Prospectus Amendment, which will soon be discussed by the Chamber of Deputies, also reacts on some minor insufficiencies of the current legal regulation that occurred from the practice. This includes especially a non-existence of a reliable database of corporate bonds issued in paper form without a prospectus. Another issue is that (less experienced) investors often rely on a supervision of the Czech National Bank (hereinafter referred to as the “CNB”), which, however, does not supervise the area of issuance of bonds. The importance of this topic is also supported by the current public discussions regarding the means of the limitations of the so called “junk bonds”.

New legislation brings the following changes:

No significant changes are in place regarding the exclusion of the rules for the de minimis issuances or other exceptions from the obligation to publish the prospectus. According to the current wording of the Prospectus Amendment, the Czech Republic does not use the opportunity to extend the exception from the obligation to publish a prospectus for issuances of a value up to EUR 8,000,000 for the last twelve consecutive months. Therefore, only the general exception, which exempts the issuances with a consideration of a value up to EUR 1,000,000 for the last twelve consecutive months from the applicability of the regulation, shall apply for the Czech issuances. The list of exceptions is, however, extended by issuances of securities that were admitted to trading on a regulated market. Issuers will definitely appreciate a possibility to combine the individual exceptions, which was not allowed by the current legislation.

Prospectuses shall be shorter, briefer and more understandable. This will undoubtedly make higher demands on issuers and agents of the issuances, who will have to translate the complicated, extensive and technical information on securities, issuer, risk factors and other necessary information to plain and understandable language. For example, the Prospectus Regulation significantly reduces the current concept of the prospectus summary. Under the regulation, it shall only contain key information necessary for investors to understand the nature and risks of the relevant issuance and to help them consider whether to invest in such securities or not.  

A possibility of filing “universal registration document” based on a voluntary registration mechanism is also an interesting change for frequent issuers. Every issuer, who decides to draw up this document every year and whose document is approved by the CNB for two consecutive financial years, shall be deemed to be a frequent issuer. Under stipulated conditions, the frequent issuer will be allowed to take advantage of the faster prospectus approval process, where the time limit for the relevant authority (CNB) to issue a decision is shortened to five working days. A frequent issuer shall be entitled to file another universal registration document to CNB without the necessity of a prior approval. However, they shall lose this advantage once they fail to file the universal registration document for one financial year.

The Prospectus Regulation brings an opportunity to draw up significantly simpler form of prospectus, so called EU Growth Prospectus, for small and middle-sized enterprises, whose securities will not be admitted to trading on a regulated market. In order to minimalize administrative burden and costs of smaller issuers during their access to the capital market and therefore to support the alternative sources of financing, this type of prospectus shall be as simple as possible and easy to fill (in standardized format) and in general less demanding than a standard prospectus.

Another type of significantly simpler prospectus is a prospectus for secondary issuances, drawn up in the simplified disclosure regime. This possibility can be utilized by the issuers whose securities are already listed on a regulated market for at least eighteen months, and therefore the prospectus was already drawn up in the past for these securities. This shall apply for the issuance of substitutional securities with already issued securities (e.g. issuance of another shares) or for issuance of non-equity securities (e.g. bonds).

The suggested changes shall also modify the list of offences and administrative sanctions,[3] which shall be imposable in cases of non-compliance with obligations or restrictions stipulated by the Prospectus Regulation. In case of violation of the Prospectus Regulation, a fine in the amount reaching up to EUR 700,000 might be imposed on individuals. Fines in the amount up to EUR 5,000,000, or up to 3 % of an annual turnover of the legal entity according to its last financial statement, might be imposed on legal entities.

The Prospectus Amendment also affects the Act no. 190/2004 Coll, on bonds. In order to secure the access of investors to reliable data, which could be effectively and duly utilized and analysed, a new obligation to assign an ISIN to every issuance of bonds is stipulated.[4] The objective of the suggested modifications is to secure easier traceability of bond issuances, especially of those to which the prospectus has not been drawn up. Substantial changes are to be made also to the list of obligatory elements of the issuance conditions. A notification about the CNB’s authority of supervision over the issuance of bonds and extent thereof shall be also listed amongst the published information where applicable. In cases where the prospectus is approved by the CNB, information about the fact that the CNB only approves the formal completeness of the prospectus rather than supervising the content accuracy thereof shall also be mentioned.

There will also be a uniform register of all approved prospectuses of securities that shall be maintained by the European Securities and Market Authority. The register shall be published on its website.

The Prospectus Amendment shall become effective as of July 21, 2019. We will inform you about progress of the legislative process.

For further information on the Prospectus Amendment and the Prospectus Regulation and their impact on upcoming transactions, please don’t hesitate to contact our colleague specialized in this area, Andrea Průšová, attorney at law, via her e-mail address prusova@konecna-zacha.com.

[1] Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 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.

[2] Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC.

[3] The list of offences could be found in art. 38 para. 1 of the Prospectus Regulation.

[4] International securities identification number.

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