The Prospectus Directive is EU legislation requiring companies and funds structured as unregulated collective investment schemes to prepare a prospectus when they offer transferable securities to the public (raise money!). Within the UK, the prospectus directive has been made law through certain sections of the Financial Services & Markets Act, through Treasury Orders, and through the FSA’s ‘Prospectus Rules’. These lay out the circumstances in which a prospectus is needed and also define what it must contain.
The advantage of preparing a prospectus is that it can be used across European countries with relatively few alterations. The disadvantages are that it is time consuming and expensive to create a prospectus, it is likely to involve professional advisors, and it must be approved by the FSA. For most smaller companies and funds looking to raise money, a full prospectus is an unnecessary complication. For this reason, there are various exemptions to the prospectus rules and so the requirement to prepare a prospectus does not apply to (among other things):
1. “open-ended” funds;
2. funds or companies raising less than €2,500,000 or equivalent;
3. funds or companies using a minimum total consideration per investor of €50,000; or
4. funds or companies issuing fewer than 100 offers (per EEA member state)
Less than €2,500,000
If the fundraising is for less than €2.5m, it is exempt from the requirement to prepare a prospectus, however the fundraising total must include any other amounts raised in the preceeding 12 months. For example, if a fund or company is looking to raise €2m having raised €1m six months earlier, it is unlikely that they can rely on this exemption.
Minimum Investment of €50k
If the fund or company will not accept an investment of less than €50k from any investor, it is exempt from the requirement to prepare a prospectus. It will be necessary to ensure that this lower limit is not breached because that would mean that the entire fundraising would become subject to the prospectus rules and the issuer of the security, along with the person who makes the offer on their behalf will be responsible for providing a satisfactory prospectus.
Restricted to fewer than 100 offers
If fewer than 100 potential investors receive an offer, the fund or company is exempt from the requirement to prepare a prospectus. It is not relevant from whom the approach comes, whether directly from the company or through any other route and it is the total number of end recipients which must be counted.
Investors can be excluded from the total if, at the time of the approach, they were a Qualified Investor registered with the FSA, an authorised person, or a High Net Worth Company (as defined by the FSA and EU rules).
It should be noted that the the Prospectus Rules apply to closed-ended funds and certain other vehicles like partnerships and companies. If another vehicle is used, different rules may apply. For instance, a open-ended fund is likely to fall outside the Prospectus Directive but will still be governed by the rules applying to Unregulated Collective Investment Schemes, Financial Promotions and Regulated Activity.
With experience of the prospectus directive within both corporate finance and fund establishment, StypersonPOPE can help you plan which exemptions to use. For an initial discussion, please call or e-mail Simon Webber, StypersonPOPE‘s Managing Director.