The Prospectus Requirement of the Future: Stricter, but with more Exceptions
Whenever shares or bonds are offered publicly or listed on the stock exchange a prospectus must be drawn up. This principle known as the prospectus requirement is being revised and aligned with European standards with the forthcoming Swiss Financial Services Act (FinSA). The Swiss Federal Council's draft (D-FinSA) shows that there will be a noticeable increase in requirements for prospectuses. Conversely, it also envisages a variety of exceptions in which there is no need for a prospectus. The exact scope of these exceptions is somewhat contentious and subject to parliamentary debate in the course of this year.
The General Rule: one Prospectus Requirement for all Securities Whenever securities are publicly offered for sale in or from Switzerland or admitted to trading on a trading venue a prospectus must first be published. This is the new principle pursuant to the D-FinSA. The few selective rules in the Swiss Code of Obligations (CO) are thus replaced by a generally uniform prospectus requirement for all securities, i.e. all securities, security rights, derivatives and book-entry securities that are standardised and suitable for mass trading. As a general rule, all negotiable equity and debt securities are thus captured.
Wherever there is a general rule there is (at least) one exception and this will also be true for the FinSA. We will get back to this point.
Noticeably Increased Requirements for Prospectuses If the prospectus requirement applies, a variety of obligations follow suit which are overall markedly stricter than under the current law. Aside from the key information sheet for certain financial instruments (which will not be covered herein) the following new features in the Swiss Federal Council's draft stand out in particular:
Content specifications: The prospectus must contain the information on the issuer (as well as a potential guarantor or collateral provider), the securities, and the offer that is material for an investment decision. In addition, the prospectus must contain a comprehensible summary. What information is material, what belongs into the summary and what the format will be will have to be specified in an ordinance of the Federal Council.
Prior review: The prospectus must be reviewed by an independent review body, generally before its publication. The review body examines - as a general rule within a maximum of 20 calendar days – whether the prospectus is complete, coherent and comprehensible. However, it assumes no responsibility for the correctness of the prospectus' content. Prospectuses for domestic collective investment schemes and prospectuses which have already been approved in certain foreign jurisdictions do not have to be reviewed. The review body will keep and publish a list of these jurisdictions.
Promotional material: The promotional material for a financial instrument must mention if a prospectus has been drawn up and, if applicable, where it can be obtained. The promotional material must of course be in line with the information in the prospectus.
Selected Exceptions and Simplifications In practice, issuers focused on the European market already follow the European standards on which the FinSA is modeled. However, for smaller issuers and smaller issuances the new provisions in the FinSA will pose a challenge. With a view to the vitality of the Swiss primary market it thus makes sense that the stricter requirements are accompanied by a variety of exceptions and simplifications. The competent commission of the Swiss National Council follows the same approach: it wants certain exceptions to become more generous than currently envisaged by the Federal Council and the Council of States.
The list of exceptions in the D-FinSA is long and plentiful. Its thrust can be illustrated by the following examples in which no prospectus needs to be published:
if the public offer is made only to professional customers (financial intermediaries, insurance companies, central banks, as well as public corporations, pension funds and companies with a professional treasury function);
if the public offer is made to a limited number of private customers (less than 150 pursuant to the D-FinSA, less than 500 pursuant to the commission of the National Council);
if the public offer has a large minimum denomination (CHF 100,000) or, calculated over a period of 12 months, a low aggregate value (CHF 100,000 pursuant to the D-FinSA, CHF 2.5 million pursuant to the commission of the National Council);
in the case of employee participation programs, certain exchange offers and restructurings, provided that certain information is available elsewhere; and
in the case of medium-term notes, money market instruments (securities with a maturity of less than one year), as well as derivatives not offered by way of an issuance. Significance for practitioners
Drawing up a prospectus correctly will become more challenging under the FinSA: the proposed rules are complex, not least in their details. The requirement of a prior review of the prospectus will lead to increased costs and time to market. But the independent review body also has its benefits: it can help identify errors early on and will be vested with powers that allow for an unbureaucratic approach. Regular issuers should closely follow the further development of the FinSA, which is currently subject to parliamentary debate.
The exceptions from the prospectus requirement will become more numerous and more clearly defined than under the current law. Their significance will also increase as a result of the stricter requirements. In the future, issuers should carefully review if, and subject to which prerequisites, they do not need to draw up a prospectus. The FinSA is not likely to enter into force before 2018.