Forthcoming Changes in Disclosure Requirements: What should Issuers be Aware of?
The need for harmonization of Ukrainian legal requirements with European and international regulatory standards for securities offerings seems to be more than acute. This is particularly apparent in view of the exigency to lure foreign investors and vivify frustrated Ukrainian securities market, not yet recuperated after the recent financial crisis. Disclosure issues are extremely vital for investors’ decision-making and overall performance of the securities market. An adequate level of disclosure is a valuable indicator of the capital market’s maturity and the reliability of the regulatory mechanism as a whole.
On the other hand, excessive administrative burden levied on issuers in this respect may become a stumbling block on the path to raising capital and earning increased public awareness through public securities offerings.
However, the existing Ukrainian legislative provisions in this area, most of which date back to early 2006, need further refinement in order to alleviate some burdensome and obsolete obligations for companies (e.g. the need to prepare and register full prospectuses de nouveau for each issue of securities whatsoever), ensure the level playing field for all issuers and further upgrade investor protection.
In its endeavor to overhaul at least some of these provisions the Ukrainian legislator recently made an attempt to renovate the existing disclosure framework by introducing to the On Securities and Stock Market Act of Ukraine of 23 February 2006, No.3480-IV certain of the modified requirements contained in 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 (Directive). The relevant On Making Amendments to the Acts of Ukraine On Business Entities and On Securities and Stock Market Concerning the Disclosure of Information on the Stock Market Act of Ukraine (Act) was adopted by the Verkhovna Rada on 21 April 2011; the changes will take effect in 6 months after the date of promulgation.
In particular, the Act introduces significant changes to the procedure for drawing-up, approving and distributing the securities prospectus and updates certain legal rules pertaining to disclosure of regular and special information on the securities’ issuer.
This article presents an overview of the most substantial changes in the regulatory regime introduced by this ambitious legislative advancement in view of their prospective practical implications for issuers.
New prospectus requirements
The obligation to execute, approve and register the securities prospectus is crucial for the whole disclosure framework, since this “securities passport” enables investors to make an informed assessment of the assets and liabilities, profits and losses, essential risks and overall financial position and prospects of the issuer, as well as of the benefits associated with the securities. The information provided should be sufficient in scope and clear in substance to enable a customer to make a reasonable decision on purchasing the financial instruments. Legal clarity and efficiency in the prospectus regime are fundamental for protection of all major stakeholders.
Following the new requirements, the issuer will now have to prepare and file the prospectus for registration with the State Securities and Stock Market Commission of Ukraine (Commission) both in cases of open (public) and close (private) securities offerings. Thus, the right for adequate information is now practically guaranteed for any investor (whichever sophisticated or qualified it appears to be). However, an issuer arranging for the private placement of securities will not be obliged to publish the approved prospectus, but only to submit it to the participants of such placement. On the contrary, in case of public offering the full-scale prospectus disclosure is indispensably required.
The obligation contemplates publication in the Commission’s official printed media, placing the prospectus on the publicly available stock market database run by the Commission, as well as posting it on the Web-sites of the issuer and the relevant stock exchange. As before, the mandatory term for making a prospectus public is 10 days prior to the commencement of the public securities offering.
Another major innovation refers to the possible “split” of the prospectus of non-equity securities (e.g. bonds) offered to the public into two parts, namely base prospectus and prospectus of a particular securities issue, should the issuer intend to arrange for a series of such issues. Being integral parts of a single document, they fundamentally diverge in terms of contents and registration procedure. The base prospectus will contain information on the issuer and other significant data, whereas the prospectuses of each of the subsequent issues will include only information on the particular securities to be offered and other data not incorporated to the base prospectus (such supplementation will prevent the prospectus from becoming outdated). During the first issue both documents are subject to approval by the issuer and simultaneous registration by the Commission. Filing for registration will have to take place within 60 days after the date of the issuer’s resolution on approval of the base and first prospectuses (in case of the first securities issue), or resolution on particular securities offering (in cases of each of the subsequent securities issues). It is anticipated that such a bipartite format of prospectus will be convenient for frequent issuers and, indeed, it has proven successful abroad.
However, the Directive’s approach in this respect is somewhat different. It specifies that the prospectus for non-equity securities may consist of a base prospectus containing all relevant information concerning the issuer and the securities offered to the public, and a supplement with updated information on the issuer and on the securities. Such supplement should include significant new factors, material mistakes or inaccuracies revealed in information from the prospectus that might affect the assessment of securities (a supplement is similar to the amendments to the prospectus stipulated by Ukrainian law). At the same time, any securities prospectus may be composed of three documents: a registration document containing information relating to the issuer, a securities note with the information concerning securities offered to the public and a summary note. It is noteworthy that only securities and summary notes shall be drawn up when new securities are offered to the public, both being subject to separate approval. It was nonetheless suggested that issuers engaged in multiple issuance programs and using the base prospectus for this purpose cannot make use of the tripartite format, in spite of being among the most frequent issuers of securities.
Previously the Commission had 30 days for reviewing the application and other documents submitted by the issuer for the prospectus registration.
New mandatory terms introduced by the Act will be less protracted and employed alternatively, depending on (a) availability of the registered base prospectus and (b) inclusion of the issuer’s securities in the stock exchange register. In particular, in case of:
— both conditions (a) and (b) being met, registration will take no longer than 10 business days;
— only condition (a) satisfied, will the Commission have 20 business days for consideration of documents;
— no base prospectus has been previously registered, then the extended term will consist of 25 business days.
As a general rule, no amendment should be introduced to the prospectus upon commencement of the offering. This provision is ultimately aimed at preventing arbitrary changes by the issuer of the terms and conditions of the securities offering, sale and redemption, payment of dividends, etc., after the investors have purchased the securities relying on initial conditions. In case of any changes of the information contained in the prospectus prior to securities offering, the issuer will have to submit the amendments to the Commission for registration within 20 business days upon their introduction to the prospectus and publish (disclose) upon registration.
The revelation of inaccuracies in the registered base prospectus by the regulator would result in the Commission’s order compelling the issuer to eliminate such inaccuracies and then register and publish the relevant amendments to the base prospectus.
New rules for regular and special information disclosures
Disclosure of information by the issuers that offered their securities to the public is an ongoing process. The issuers should make public regular (annual and quarterly account information) and special (data on events that might affect financial and commercial position of the issuer) information within the prescribed procedure. This information is vital both for the investors that have already purchased the issuer’s securities and now track the progress, and for those who still ruminate over making such an investment.
By adopting the Act, the legislator introduced changes to the scope and procedure for disclosure of such information by the issuer. Annual information on the issuer should now contain inter alia the list of owners of substantial stock (10% or more) of the shares, together with information on the quantity, type and/or class of the owned shares. This provision corresponds with the obligation imposed by the On the Joint-Stock Companies Act of Ukraine of 17 September 2008, No.514-VI on persons intending to acquire 10% or more of ordinary shares to notify the issuer of such plans.
Under the revised legislative provisions, the disclosure of information on the stock market will be effected by:
— placing it within the publicly available stock market database;
— publishing it on one of the official printed media of the Verkhovna Rada, Cabinet of Ministers of Ukraine or the Commission; and
— submitting it to the Commission.
In addition, the issuer will now have to post its annual and special information on its own Web-site (the Internet alone is not sufficient to inform investors, and merely posting on the Internet does not constitute disclosure).
Supplementary requirements on disclosure of information by the issuers of listed securities are to be established by the Commission.
On balance, the above developments are expected to streamline the prospectus registration procedure for the issuer intending to make several issues of non-equity securities due to reduction of vexatious bureaucratic delays. In particular, such issuer will no longer have to repeat the same basic information in each of the prospectuses, and the overall routine will become a relatively fast-track one due to abridgement of the registration timeframe. Equally important, the requirement on preparation of prospectuses even in cases of private placement will enhance the transparency of securities issues and ensure keeping all investors adequately informed. However, it should be acknowledged that the improved disclosure requirements of Ukrainian legislation are still far from being as perfectly detailed as those contained in the Directive.
As in other cases of local legislative reforms, the declared rapprochement with pan-European disclosure standards remained half-faced and unattained in full scale. Furthermore, policymakers should always be aware that enhancing the disclosure framework is a moving target, and there is always room for further improvement in reshaping the regulatory structure of the Ukrainian securities market.