What’s the Prospectus Directive?

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The EU’s prospectus directive established a uniform capital market by changing the definition of a prospectus and simplifying the process of buying and selling shares. It requires a home state for the company issuing the prospectus and has exceptions for qualified investors and small transactions. Non-compliance can result in securities being listed in a foreign currency.

The prospectus directive is a mandate issued by the European Union. Generally, a prospectus is a legal document that explains the details of a stock or equity fund that is sold to the public. The prospectus directive was constructed by EU member states to establish a uniform capital market across Europe. The prospectus directive changed the definition of a prospectus and how it should be delivered to potential investors and customers. It simplifies the process of buying and selling shares, requiring only the relevant regulator to oversee specific transactions.

Although the prospectus directive came into effect on December 31, 2003, each EU state had until July 1, 2005 to implement the necessary laws. The additional time allowed member states to develop the infrastructure to enforce the newly created regulations. Companies also used the time to produce prospectuses that adhered to the new laws.

Initially, the directive was designed around the notion of European solidarity. It was a communication to the public to inform them about the specifics of a company. It was believed that the facts and figures of the company’s performance were important enough to allow the consumer to make an informed decision about purchasing the financial product.

The purpose of the prospectus directive was to establish a new regulatory system that would oversee the process and lending of prospectus shares throughout the European Union. If a regulator in one country approves a prospectus, it is valid in all other member states. The company would not need to issue a different prospectus for each EU state.

For this process to work, the company that issued the prospectus must establish a home state. That is, it must have headquarters in a European Union country and be available to answer questions from the country’s regulators. In addition to EU companies, companies outside the European Union can also have their prospectus approved in a member state.

There are several exceptions to the prospectus directive. For example, if the individual to whom the prospectus is offered is a qualified investor or if the prospectus is offered to fewer than 100 individuals, the company need not involve the member state regulator. Other exemptions involve the dollar value of transactions.

If a company does not follow the prospectus directive guidelines, its stocks and bonds will not be listed in the European Union. Instead, the securities must be listed in a foreign currency. This can cause the stock to lose value and force the issuer to provide additional information to potential investors.

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